Reference no: EM13131951
Vial-tek has an existing loan in the amount of 3.5 million with an annual interest rate of 9.5%. The company provides an internal company prepared financial statement to the bank under the loan agreement. Tow competing banks have offered to replace Vial-tek's existing loan agreement with a new one. First National Bank has offered to loan vial-tek 3.5 million at a rate of 8.5% but requires Vial-tek to provide financial statements that have been reviewd by a CPA firm. City First Bank has offered to loan Vial-tek 3.5 million at a rate of 7.5 % but requires Vial-tek to provide financial statements that have been audited by a CPA firm. The controller of Vial-tek approached a CPA firm and was given an estimated cost of 20,000 to perform a review and 45,000 to perform an audit.
a. Explain why the interst rate for the loan that requires a review report is lower than that for the laon that did not require a review. Explain why the interest rate for the loan that requires an audit report is lower than the interst rate for the otehr two loans.
b. Calculate Vial-tek's annual costs under each loan agreement, including interst and costs for the CPA firm's services. Indicate whether Vial-tek should keep its existing loan, accept the offer from First National bank, or accept the offer from City First bank.
c. Assume that First National Bank has offered the loan at a rate of 8.0% with a review, and the cost of the audit has increased to 50,000 due to new auditing standards requirements. Indicate whether Vial-tek should keep its existing loan, accept the offer from First National Bank or accept the offer from City First Bank.
d. Discuss why Vial-tek may desire to have an audit, ignoring the potential reduction in interest costs.
e. Explain how a strategic understanding of the client's business may increase the value of the audit service.
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Why vial-tek may desire to have an audit
: Vial-tek has an existing loan in the amount of 3.5 million with an annual interest rate of 9.5%. The company provides an internal company prepared financial statement to the bank under the loan agreement.
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