Sarah Is an Audit Senior with Childs, Maxwell and Weaver

question 6

Short Answer

Sarah is an audit senior with Childs, Maxwell and Weaver, LLP.Sarah specializes in auditing loan loss reserve for financial institution clients.This current year she has noticed that two of her financial institutions in town have written loans off to a loan customer, Mr.T (fictional name to protect the guilty).Mr.T is well known in town as a highly successful real estate developer and businessman with many different business dealings.As Sarah is auditing on her third financial institution in town, she notices that the bank has loans of $3.5 million outstanding to Mr.T.The current loan loss reserve could not cover the losses on Mr.T's loans.Sarah has recommended a significant increase to the loan loss reserve account.The client will not discuss increasing the loan loss reserve.Ms.Childs, senior partner on the audit, wants to know how the audit firm can justify the increase loan loss reserve account.What can and should Sarah disclose about Mr.T?

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Definitions:

Working Capital

Working capital is the difference between a company's current assets and current liabilities, indicating its short-term financial health and operational efficiency.

Long-Term Liquidity

Measures a company's ability to meet its long-term financial obligations, indicating financial health over a prolonged period.

Contingent Liability

A potential financial obligation that may occur in the future, depending on the outcome of a specific event.

Financial Statements

Reports that provide an overview of a company's financial condition, including the balance sheet, income statement, and cash flow statement.