13-59, Auditing Bond Indenture

The auditor should review the bond indenture at the time a bond is issued and anytime subsequent changes are made to it.

a. Briefly identify the information the auditor would expect to obtain from a bond indenture. List at least five specific pieces of information that would be relevant to the conduct of the audit.

b. Because auditors are especially concerned with the potential understatement of liabilities, should they confirm the existence of the liability with individual bondholders? State your rationale.

c. A company issued bonds at a discount. Explain how the amount of the discount is computed and how the auditor could determine whether the amounts are properly amortized each year.

d. Explain how the auditor could verify that semiannual interest payments are made on the bond each year.

e. The company has 15 years, $20 million loan that is due on September 30 of next year. It is the companys intent to refinance the bond before it is due, but it is waiting for the best time to issue new debt. Because its intent is to issue the bond next year, the company believes that the existing $20 million bond need not be classified as a current liability. What evidence should the auditor gather to determine the appropriate classification of the bond?