Question

You are aware that your nonpublic audit client is under pressure to meet financial covenants from its lenders; specifically, the lenders review the company’s interest coverage ratio and debt-service coverage ratio annually. In performing year-end audit procedures, you notice a formula error in the client’s spreadsheet used to cal- culate its inventory costs, and it appears that general and administrative (“G&A”) expenses (unrelated to production) are being capitalized into the reported cost of the inventory. You compute the magnitude of these capitalized G&A costs and realize that these costs make the difference between the company meeting its lender-required covenants and failing those covenants.

          You are aware that your nonpublic audit client is under pressure to meet financial covenants from its lenders; specifically, the lenders review the company’s interest coverage ratio and debt-service coverage ratio annually. In performing year-end audit procedures, you notice a formula error in the client’s spreadsheet used to cal- culate its inventory costs, and it appears that general and administrative (“G&A”) expenses (unrelated to production) are being capitalized into the reported cost of the inventory. You compute the magnitude of these capitalized G&A costs and realize that these costs make the difference between the company meeting its lender-required covenants and failing those covenants.

Added by Gina M.

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