An entity has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The entity refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must:
A)require classification of bonds payable as a current liability.
B)contact the bond trustee directly.
C)evaluate whether there is substantial doubt about the entity's ability to continue as a going concern.
D)obtain an opinion from the company's attorney as to the likelihood of the trustee's enforcement of the requirement.

Question

Quizplus · Accepted Answer

The violation of a minor requirement in the bond indenture that may lead to immediate payment of the principal due is a significant issue for the entity's ability to continue as a going concern. Therefore, the auditor should evaluate whether there is substantial doubt about the entity's ability to continue as a going concern, as required by auditing standards. The auditor should review the nature and severity of the violation, assess the likelihood of the trustee requiring immediate payment, and consider the entity's ability to pay if such a request is made. The other options are not relevant or necessary in this situation. A is inappropriate because the violation of the bond indenture requirement does not automatically make bonds payable current. B is inappropriate because the auditor may not contact the bond trustee without the client's permission, and such contact may not be necessary or helpful in this situation. D is not necessary because obtaining an opinion from the company's attorney does not relieve the auditor of their obligation to assess going concern.

An Entity Has Violated a Minor Requirement of Its Bond