Bengston, CPA, is conducting the audit of Pollution ControlDevices, Inc. In addition, a supplemental negative assurance report is required to a majormortgage holder. The supplemental report concerns indenture agreements to keep theclient from defaulting on the mortgage. Total assets are $14 million and the mortgage isfor $4 million. The major provisions of the indentures are as follows:1. The current ratio must be maintained above 2.3 to 1.2. The debt/equity ratio must be maintained below 3.0.3. Net earnings after taxes must exceed dividends paid by at least $1 million.a. Write the appropriate supplemental report if all three indenture agreement provisions have been satisfied.b. How would the supplemental report change if net earnings after taxes were $1,010,000and dividends paid were $60,000?c. Assume the same situation as in part b. and also assume that the client refuses tomodify the financial statements or disclose the violation of the indenture agreementprovisions on the grounds that the amount is immaterial. What is the nature of theappropriate auditor’s report?d. What is the nature of the appropriate supplemental report if all the indenture agreement provisions have been satisfied but there is a lawsuit against the company thathas resulted in disclosure of the lawsuit in a footnote to the financial statements?
Bengston, CPA, is conducting the audit of Pollution Control
Devices, Inc. In addition, a supplemental negative assurance report is required to a major
mortgage holder. The supplemental report concerns indenture agreements to keep the
client from defaulting on the mortgage. Total assets are $14 million and the mortgage is
for $4 million. The major provisions of the indentures are as follows:
1. The
2. The debt/equity ratio must be maintained below 3.0.
3. Net earnings after taxes must exceed dividends paid by at least $1 million.
a. Write the appropriate supplemental report if all three indenture agreement provisions have been satisfied.
b. How would the supplemental report change if net earnings after taxes were $1,010,000
and dividends paid were $60,000?
c. Assume the same situation as in part b. and also assume that the client refuses to
modify the financial statements or disclose the violation of the indenture agreement
provisions on the grounds that the amount is immaterial. What is the nature of the
appropriate auditor’s report?
d. What is the nature of the appropriate supplemental report if all the indenture agreement provisions have been satisfied but there is a lawsuit against the company that
has resulted in disclosure of the lawsuit in a footnote to the financial statements?
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