4. Auditors must evaluate whether debt provisions have been met as one of the au

Question

4.

Auditors must evaluate whether debt provisions have been met as one of the audit procedures for long-term debt. The bond indenture of the debt issue should be carefully studied.

a. List five items that are commonly found in a bond indenture that the auditor needs to consider.
b. List three tests that auditors might use to evaluate whether the company is in compliance with the stipulated conditions.
c. What must the auditor do if they find that the company has not complied fully with the requirements?

Explanation / Answer

No doubt, Auditors must evaluate whether debt provisions have been met as one of the audit procedures for long-term debt. The bond indenture of the debt issue should be carefully studied.

Now let’s come to all questions given one by one in detail;

(a).

As we know that bond indenture is a document which is signed between trustee and bond issuer company. So this documents contains many important factors. An auditor need to consider some main points of this bond indenture that are as follow;

1. Total permissible amount of loan

2. Rate of interest and time of interest payment

3. Maturity date of bond

4. Discount or premium on bonds

5. Other legal formalities associated with the bond issue.

(b).

There are several types of test conducted by an auditor to check the accuracy of bond related transactions. Some of important test are as follow;

1. Auditor can check ledger account for knowing the real amount payable of bond and bond issue costs.

2. Auditor can check bond transactions directly through contacting trustee.

3. Auditor can check whether company officials are monitoring compliance with debt provisions or not. So auditor can check all proper required documents of the company to know reality.

(c).

In case when auditor find that the company has not complied fully with the requirements then auditor will write down these deviations in the proper documents. Auditor also need to mention all these deviations in his audit report that will be presented for real owners of the company & directors of the company.

Auditor also need to inform higher authorities for such deviations in formal way so that higher authority can prevent future such deviations. Auditor also can suggest better way to handdle such deviations in his report.

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