Bond Indenture Covenants. The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance (the stated date is 20 years hence).Give any audit steps or reporting requirements you believe shouldbe taken or recognized in connection with each of the following:1. “The debtor company shall endeavor to maintain a working capital ratio of 2:1 at all times and, in any fiscal year following a failure to maintain said ratio, the company shall restrict compensation of officers to a total of $500,000. Officers for this purpose shall include the board chair, president, all vice presidents, secretary, and treasurer.”2. “The debtor company shall keep all property that is security for this debt insured against loss by fire to the extent of 100 percent of its actual value. Policies of insurance comprising this protection shall be filed with the trustee.”3. “The debtor company shall pay all taxes legally assessed against property that is security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills or equally acceptable evidence of payment of same with the trustee.”

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter13: Auditing Debt, Equity, And Long-term Liabilities Requiring Management Estimates

Section: Chapter Questions

Problem 27RQSC

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Bond Indenture Covenants. The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance (the stated date is 20 years hence).Give any audit steps or reporting requirements you believe should
be taken or recognized in connection with each of the following:
1. “The debtor company shall endeavor to maintain a working capital ratio of 2:1 at all times and, in any fiscal year following a failure to maintain said ratio, the company shall restrict compensation of officers to a total of $500,000. Officers for this purpose shall include the board chair, president, all vice presidents, secretary, and treasurer.”
2. “The debtor company shall keep all property that is security for this debt insured against loss by fire to the extent of 100 percent of its actual value. Policies of insurance comprising this protection shall be filed with the trustee.”
3. “The debtor company shall pay all taxes legally assessed against property that is security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills or equally acceptable evidence of payment of same with the trustee.”

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