Can you help me with this question please... 15.22 Erik Rekdahl, senior-in-charg

Question

Can you help me with this question please...

15.22 Erik Rekdahl, senior-in-charge, is auditing Koonce Katfor e, is auditing Koonce Katfood. Inc long-term debt for the year ended July 31, 2003 Long-tem composed of two bond issues, which are due in 10 and 15 ea spectively. The debt is held by two insurance companies. Rek examined the bond indentures for each issue. The indentures that if Koonce fails to comply with the coven the debt becomes payable immediately. Rekdahl identified the fol- lowing covenants when reviewing the bond indentures 1. "Th years, re. ants of the indentures e debtor company shall endeavor to maintain a working capital ratio of 2 to 1 at all times, and in anv fiscal vear following a failure to maintain said ratio, the company shall restrict com officers to a total of $650,000. Officers include the chairperson of the board and the president. pensation of 2. "Th e debtor company shall keep all property that is security for these debt agreements insured against loss by fire to the extento 100 percent of its actual value. Policies of insurance comprising this protection shall be filed with the trustee. 3. "The company is required to restrict 40 percent of retained earn- 4. "A sinking fund shali be established with the First Morgan Bank of ings from availability for paying dividends." Austin, and semiannual payments of $500,000 shall be deposited in the fund. The bank may, at its discretion, purchase bonds from either issue." Required: a. Provide any audit steps that Rekdahl should conduct to determine if the company is in compliance with the bond indentures. b. List any reporting requirements that the financial statements or footnotes should recognize.

Explanation / Answer

a. To verify the compliance with bond indentures, Rekdahl should follow the below audit procedures to verify:

i. Bond indentures to identify the obligations of Koonce and benefits owed to the bond holder.

ii. Working capital ratio of Koonce throughout the audit period

iii. Salary statement of the officers of Koonce should be cross verified with the payment entries visible in bank statements. It should be confirmed that salary has not been paid in any other form to the officers of Koonce.

iv. Insurance policies of sercuity for debt agreements. Letter of confirmation from trustee that insurance policies are lying with them and are in compliance with bond indentures.

v. Sinking Fund Agreement with First Morgan Bank and the bank balance confirmation for sinking fund.

2. Reporting Requirements that the financial statements or footnotes should recognize:

a. A certificate to the effect that no default has been occured under the indenture should be given by Koonce.

b. SEC Reporting requirements should be fulfilled.

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