Final answer:
In audits, the existence of accounts receivable is verified first to ensure they are valid claims. Money recorded on a bank's balance sheet reflects loans and investments, not just physical cash due to the fractional reserve system. Factors such as payment history, interest rate changes, and borrower profitability affect a loan's secondary market value.
Step-by-step explanation:
The procedure in audits often requires determining the existence of assets first, such as accounts receivable. This involves verifying that the receivables listed on the balance sheet are actually owed to the company by customers. Evidence for existence can include confirmations received from clients or records of subsequent cash receipts. This procedure minimizes the risk of recording fictitious receivables.
The money listed under assets on a bank balance sheet includes loans to customers and investments, which are not physically present as cash in the bank. This is due to the fact that banks operate on a fractional reserve system, meaning they keep a fraction of deposits on hand as reserves and loan out the rest.
When considering buying loans in the secondary market, various factors affect the price. If the borrower has been late on payments, the loan is seen as riskier, leading to a lower price. If the overall interest rates have risen, existing loans with lower rates become less valuable, similarly reducing the price. Conversely, if the borrower's financial position improves, the loan is perceived as safer, potentially commanding a higher price. Lastly, if overall interest rates fall, loans with higher rates become more valuable, increasing their price in the secondary market.