Capital Acquisition and Repayment Transactions Flashcards
What information is of interest to an auditor on the bond indenture agreement?
maturity value
maturity date
interest rate
interest payment dates
security pledged on the debt
Why does an auditor reconcile the reported interest expense with the amount of outstanding long-term debt?
a recalculation should be fairly close to the actual amount paid
differences could be a misstatement such as
new loan not recorded
loan paid off not removed from books
interest not properly accrued
How does an auditor determine the covenants that exists in connection with a bank loan?
read debt indenture
review bank confirmation
How does an auditor determine the existence of contingent liabilities and possible future losses?
asks management for a list of contingencies
review any correspondence with attorneys
review any existing or previously in-force contracts for covenants that might have been broken
reads any correspondence with insurance companies
read the minutes of the board of directors’ meetings
examines invoices from company attorneys and searches for possible litigation issues that have not been revealed by management
read correspondence from regulatory agencies
What should an auditor do if he uncovers a number of undisclosed contingencies?
assess the following
possibility of loss
amount of loss expected for each contingency
what the effect is on the financial statements
What is the control process with an attorney’s inquiry letter?
auditor maintains control of the document after signed by a client, mailed by auditor, sent directly to the auditors office
What are some possible reporting problems that the auditor should be aware of when auditing long-term liabilities?
liabilities that may have been left off the records to improve the debt to equity position
accrued interest incorrectly calculated and recorded
loan covenants not disclosed or violated
loans in totality or in part improperly classified
What is the purpose of an attorney’s letter?
provide the auditor with substantive evidence claims against the company and the possibility of any loss
What happens when the attorney does not or refuses to respond to the attorney’s inquiry letter?
the auditor lacks substantive evidence and the scope of the audit is impacted
