Explorer

During the year the issuer entered into a convertible debt agreement that included an embedded conversion option; the issuer accounted for this option as a derivative liability. The following deficiency was identified: · The issuer engaged a specialist to determine the fair value of this liability at issuance. The firm's approach for substantively testing the fair value of this liability at issuance was to test the issuer's process and the firm used an auditor-employed specialist to evaluate a significant assumption the company's specialist developed using a range of potential assumptions from comparable companies. The firm did not identify that the work of the auditor-employed specialist did not provide sufficient appropriate audit evidence because the auditor-employed specialist's procedures were limited to determining that the assumption was among the higher end of the range of potential assumptions. (AS 1105.A8b; AS 1201.C6 and .C7)

The firm did not identify and test any controls that addressed the reasonableness of a significant assumption that the issuer used to value commodity derivatives for which monthly price quotes were not available. (AS 2201.39)

The firm did not perform any substantive procedures to evaluate the reasonableness of the significant assumption discussed above. (AS 2502.26 and .28)

During the year the issuer entered into certain equity-related agreements; the issuer accounted for each of these agreements as one or more derivatives. The following deficiencies were identified: · The firm's approach to substantively test the fair values of these derivatives at issuance and year end was to test the issuer's process. The firm did not perform procedures to evaluate the reasonableness of certain significant assumptions used in the valuation of these derivatives at issuance and year end beyond reading an issuer-prepared memorandum and inquiring of management and for one of the agreements a counterparty. (AS 2501.16)

The firm did not evaluate the reasonableness of significant assumptions used to determine the fair value of derivative liabilities. (AS 2502.26 and .28)

In its restated financial statements the issuer recorded these warrants and the derivative instrument as liabilities and engaged a specialist to determine the fair value for certain of these warrants and the derivative instrument. The firm's approach for substantively testing the fair values of these certain warrants and the derivative instrument was to test the issuer's process and the firm used an auditor-employed specialist to evaluate the significant assumptions the company's specialist used. The firm did not sufficiently evaluate the reasonableness of these significant assumptions because it did not identify that the auditor-employed specialist did not (1) perform any procedures to evaluate certain significant assumptions and (2) evaluate whether external data that the company's specialist used to develop other significant assumptions were relevant and reliable and whether those assumptions were consistent with other relevant information. (AS 1105.A8a and .A8b; AS 1201.C6 and .C7)