During the audit of your client's financial statements for the December 31, 2016 year-end the balance sheet showed one note payable outstanding for $3,500,000 that pays annual interest of 6% on December 31 of each year and has 4-years remaining. Your analysis of the interest expense for this year showed a total of $375,240. You sent a confirmation letter recently to the bank regarding this note but have not received a reply as yet. Your client has never missed an interest payment on this note and is therefore in good standing with the covenants that it must never be late with interest payments and maintain a 0.6:1 debt-to-equity ratio or lower (which is at 0.58:1 based on the current balance sheet). What concern(s) do you have (if any) regarding the note, interest and/or covenants. (3 marks)

Question 21 options:

	There is no issue or problem
	The interest expense is correct
	The company has committed inventory fraud
	There may be more loans than shown on the Balance Sheet