Explorer

The firm's approach for substantively testing the fair value of the derivative liability was to review and test management's process. The firm did not perform any procedures beyond inquiring of management to evaluate whether the model the issuer used to estimate the fair value of the derivative liability was appropriate. (AS 2502.26)

The issuer recorded a derivative liability and determined the fair value of the derivative liability using an option pricing model. The firm did not consider the variability of a certain provision and the issuer's ability to settle the transactions in evaluating whether the use of this model was appropriate and consistent with GAAP and related SEC guidance. (AS 2502.18)

With respect to the firm's control testing over and substantive procedures related to the consideration of the contract terms and the implications of these terms on revenue recognition the following deficiencies were identified: · The firm did not evaluate the accounting implications of the changes to the contract terms on revenue recognition and as a result did not identify that (1) the issuer used an incorrect contract-end date to determine the estimated volume payment that it used to evaluate revenue recognition and (2) the revenue derived from the contract included an element of variable consideration that may have required the issuer to constrain revenue and record a contract liability under FASB ASC Topic 606. (AS 2810.30)

The firm's approach to testing the fair value of derivatives was to develop an independent eat mate. With respect to its Independent estimate the firm did not (1) evaluate the appropriateness of the model It used given the complexity of the instruments; (2) obtain evidence to establish the reasonableness of the volatility rate used; and (3) evaluate the significant difference between the firm's estimate and the issuer's estimate because the firm's evaluation relied solely on the view that the issuer's estimate was more conservative. (AS 2502.18 and 40)