The auditor should review the bond indenture at the time a bond is issued and an
ID: 2515530 • Letter: T
Question
The auditor should review the bond indenture at the time a bond is issued and any time subsequent changes are made to it. REQUIRED: (1)Briefly identify the information the auditor would expect to obtain from a bond indenture agreement. List at least five specific pieces of information that would be relevant to the conduct of the audit. A company issued a bond at a discount. Explain how the amount of the discount is computed, and how the auditor could determine whether the amount is properly amortized each year. (2) 3 Explain how the auditor could verify that semiannual interest payments are made on the bond each year.Explanation / Answer
1. The information the auditor would expect from a bond indenture agreement are listed below
a. Interest rate Stated.
b. Maturity Date of the Bond
c. Callable Provisions
d. Amount to be Repaid
e. Time period Before payment
2. For calculation of discount on bond we need to identify the market rate of return or yield to maturity and then calculate the present value of the outflows on the Bond discounted with the market rate. The present value of Bond Outflow is the sum of present value of periodic interest to be paid on the bond as well the present value of the face value payment on maturity date.
From audit perspective, the auditor shall review the Bond amortization schedule in line with the terms and parameters laid down in the Bond. As well as recalculate the amortization of the discount along with the interest charge to the Income statement as well as from the balance sheet. Un-amortized discount on the balance sheet shall conform to the bond amortization schedule prepared and presented by client or the same can be recalculated by the audit team to en-sure compliance and conformity with the bond terms. Also in depth review of the journal passed for accounting for interest charge as well the underlying document substantiating the entry in the books.
3. For the verification as to whether the semi annual interest payment has been made on time or not, an auditor can verify the Bank statement for the organization to check whether the payment has been made or not. Also verification of Journal entry for the verification as to whether the interest charge has been accounted for in the books or not as well as posting to Interest Payable GL. In most of the cases the entry back up document will have details of Bond Holder and amount owed as interest to each of the bond holder can be verified from there so as to check the conformity as regard to names on the bond holder register's.
As part of reducing the audit risk as well as to build a reliability on the facts presented it is prudent to take confirmation from the Bond Holder itself as part of audit procedure for obtaining third party confirmations.
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