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) Disclose the situation in the auditor's report.
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 auditor must disclose the situation in the auditor's report to inform the users of the financial statements about the potential risk involved. This is in accordance with auditing standards for reporting situations that could have a material effect on the financial statements, even if they have not yet occurred. Contacting the bond trustee directly or obtaining an opinion from the company's attorney may be helpful, but they are not required actions. Classifying bonds payable as a current liability is not appropriate because the violation is minor and does not indicate that the bond is likely to be called immediately.

An Entity Has Violated a Minor Requirement of Its Bond