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Question 3. An audit engagement team is planning for the upcoming audit of a client who recently underwent a significant restructuring of its debt. The
Question 3. An audit engagement team is planning for the upcoming audit of a client who recently underwent a significant restructuring of its debt. The restructuring was necessary as economic conditions hampered the client's ability to make scheduled repayments of its debt obligations. The restructured debt agreements included new debt covenants. In auditing the debt obligation in the prior year, (before the restructuring), the team established materiality specific to the financial statement debt account (account level materiality) at a lower amount than overall financial statement materiality. In planning the audit for the current year, the team plans to use a similar materiality level. While such a conclusion might be appropriate, what judgment trap(s) might the team fall into and which step(s) in the judgment process are most likely affected
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