1. The company has substantial long-term debt of $14,000,000. While reviewing the loan agreements in the permanent file, you note covenants which restrict the payment

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1. The company has substantial long-term debt of $14,000,000. While reviewing the loan agreements in the permanent file, you note covenants which restrict the payment of dividends, restrict additional borrowings, and require the borrower to maintain a current ratio of no less than 3:1. During your audit of long-term debt, you verify that the Company is in compliance with all of the loan covenants except the current ratio @ December 31, 2020 is 2.65:1. The companys controller agrees with your computation. The loan documents make it clear that if the borrower violates any of the loan covenants, the debt can be called (in other words, the bank can demand payment in full immediately). What should your audit team do?

a)	Disclose this matter in the footnotes to the financial statements.

b)	Evaluate whether there is a Going Concern situation.

c)	Work with the client and Bank to obtain a written loan covenant waiver letter from the Bank.

d)	Encourage your client to move its business to a different Bank.

2. You are auditing a clients long-term debt. You obtain a schedule of long-term debt and interest expense in a traditional 8 column format from the client. The long-term debt was constant throughout the year at approximately $10,000,000. The interest rate the company was charged in 2020 was fairly constant at about 6%. When you review the schedule, you notice the interest expense for this debt was only about $500,000; further, this $500,000 was the balance in interest expense for this loan in the General Ledger. You of course were expecting approximately $600,000 in interest expense. How would you proceed in resolving this audit situation?

a)	Notify the companys president and board of directors.

b)	Disclose this in the footnotes to the clients financial statements.

c)	Since interest expense should be $50,000 per month, review the clients adjusting journal entries to find the possible misclassifications in recording the monthly interest expense.

d)	Post the difference of $100,000 to the audit scoresheet or audit summary of unadjusted differences.