Diamond Corporation has an existing loan in the amount of $ 5million with an annual interest rate of 5.4 %. The company providesan internal​ company-prepared financial statement to the bank underthe loan agreement. Two competing banks have offered to replaceDiamond ​Corporation's existing loan agreement with a new one.First Capital Bank has offered to loan Diamond $ 5 million at arate of 4.1 % but requires Diamond to provide financial statementsthat have been reviewed by a CPA firm. Money Tree Bank has offeredto loan Diamond $ 5 million at a rate of 3.1 % but requires Diamondto provide financial statements that have been audited by a CPAfirm. Diamond ​Corporation's controller approached a CPA firm andwas given an estimated cost of $ 27 comma 000 to perform a reviewand $ 62 comma 000 to perform an audit.
A. Explain why the interest rate for the loan that requires areview report is lower than that for the loan that did not requirea review. Explain why the interest rate for the loan that requiresan audit report is lower than the interest rate for the other twoloans.
The interest rate for the loan that requires a review reportis___ the loan that did not require a review because of the___information risk. A review report provides ___assurance tofinancial statement users. Compared to a review​ report, an auditprovides ___assurance and thus___information risk. As a​ result,the interest rate is ___ or the loan with the audit report.
