Part B (45 marks total) You are the senior audit partner auditing Abdul Wahab Enterprises long-term debt for the year 30 June 2019. Long-term debt is composed of two bond issues, which are due in 10 and 15 years, respectively. The debt is held by two insurance companies. You have examined the bond indentures for each issue. The agreement provides that if Abdul Wahab fails to comply with the covenant of the indentures, the debt becomes payable immediately. You identified the following covenants when reviewing the bond indentures:

1. The debtor company shall endeavor to maintain a working capital ratio of 2 to 1 at all times, and in any fiscal year following a failure to maintain the said ratio, the company shall restrict compensation of officers to a total of AUD 650,000 Officers include the chairperson of the board and the president

2. The debtor company shall keep all property that is security for these debt agreements insured against loss by fire to the extent of 100 percent of its fair value. Policies of insurance comprising this protection shall be filed with the trustee.

3. The company is required to restrict 40 percent of retained profits from the availability of paying dividends. 4. A sinking fund shall be established with the NAB Bank, and sem-annual payments of AUD 500,000 shall be deposited in the fund. The bank may, at its discretion, purchase bonds from either issue.

Required:

a. Identify the audit procedures you should conduct to determine if the company is in compliance with the bond agreements. (30 marks)

b. What are the disclosure requirements for the debt in the notes to the financial statements? (15 marks) 1