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The issuer was party to a contract with one of its customers that required the issuer to provide a minimum monthly volume of oil produced from a defined area within one of its properties. The issuer determined that the contract represented a derivative contract and qualified for the scope exception for normal purchases and normal sales under FASB ASC Topic 815 Derivatives and Hedging. The contract included a provision that allowed the issuer to defer any payments owed to the customer for any production below the minimum monthly volumes over the life of the contract ('volume payment') until the end of the contract. Subsequent to year end but prior to the issuer filing its financial statements the issuer renegotiated certain terms of the contract and determined that these changes were enforceable as of year end. With respect to the firm's control testing over and substantive procedures related to whether the contract qualified for the derivative accounting scope exception for normal purchases and normal sales the following deficiencies were identified: · The firm did not identify and test any controls over the issuer's ongoing evaluation of whether its physical delivery of the contractually required volumes of oil to the customer would be probable. (AS 2201.39)

The issuer was party to a contract with one of its customers that required the issuer to provide a minimum monthly volume of oil produced from a defined area within one of its properties. The issuer determined that the contract represented a derivative contract and qualified for the scope exception for normal purchases and normal sales under FASB ASC Topic 815 Derivatives and Hedging. The contract included a provision that allowed the issuer to defer any payments owed to the customer for any production below the minimum monthly volumes over the life of the contract ('volume payment') until the end of the contract. Subsequent to year end but prior to the issuer filing its financial statements the issuer renegotiated certain terms of the contract and determined that these changes were enforceable as of year end. With respect to the firm's control testing over and substantive procedures related to whether the contract qualified for the derivative accounting scope exception for normal purchases and normal sales the following deficiencies were identified: · The firm did not perform any substantive procedures to evaluate whether considering the issuer's past production trends and expected future production the minimum monthly volumes per the contract could reasonably be met. (AS 2301.08)

The issuer was party to a contract with one of its customers that required the issuer to provide a minimum monthly volume of oil produced from a defined area within one of its properties. The issuer determined that the contract represented a derivative contract and qualified for the scope exception for normal purchases and normal sales under FASB ASC Topic 815 Derivatives and Hedging. The contract included a provision that allowed the issuer to defer any payments owed to the customer for any production below the minimum monthly volumes over the life of the contract ('volume payment') until the end of the contract. Subsequent to year end but prior to the issuer filing its financial statements the issuer renegotiated certain terms of the contract and determined that these changes were enforceable as of year end. With respect to the firm's control testing over and substantive procedures related to whether the contract qualified for the derivative accounting scope exception for normal purchases and normal sales the following deficiencies were identified: · The contract included a provision that required the issuer to make a partial payment if at any time the issuer's estimate of the volume payment at the end of the contract exceeded a certain amount. In the year under audit the issuer's estimate of future forecasted production indicated that the volume payment would exceed this amount in the following year. The firm did not perform any substantive procedures to evaluate whether this potential partial volume payment would contradict the issuer's assertion that it was probable that the contract would not result in a net settlement. (AS 2810.03)

The issuer was party to a contract with one of its customers that required the issuer to provide a minimum monthly volume of oil produced from a defined area within one of its properties. The issuer determined that the contract represented a derivative contract and qualified for the scope exception for normal purchases and normal sales under FASB ASC Topic 815 Derivatives and Hedging. The contract included a provision that allowed the issuer to defer any payments owed to the customer for any production below the minimum monthly volumes over the life of the contract ('volume payment') until the end of the contract. Subsequent to year end but prior to the issuer filing its financial statements the issuer renegotiated certain terms of the contract and determined that these changes were enforceable as of year end. With respect to the firm's control testing over and substantive procedures related to whether the contract qualified for the derivative accounting scope exception for normal purchases and normal sales the following deficiencies were identified: · The firm did not perform any substantive procedures to evaluate whether a change to certain terms of the contract that would allow the issuer to reduce any volume payment would be a form of net settlement. (AS 2301.08)

The issuer was party to a contract with one of its customers that required the issuer to provide a minimum monthly volume of oil produced from a defined area within one of its properties. The issuer determined that the contract represented a derivative contract and qualified for the scope exception for normal purchases and normal sales under FASB ASC Topic 815 Derivatives and Hedging. The contract included a provision that allowed the issuer to defer any payments owed to the customer for any production below the minimum monthly volumes over the life of the contract ('volume payment') until the end of the contract. Subsequent to year end but prior to the issuer filing its financial statements the issuer renegotiated certain terms of the contract and determined that these changes were enforceable as of year end. With respect to the firm's control testing over and substantive procedures related to whether the contract qualified for the derivative accounting scope exception for normal purchases and normal sales the following deficiencies were identified: · The firm did not evaluate whether the issuer's determination of the contract-end date was appropriate and whether the issuer's physical delivery of the contractually required volumes of oil to the customer by this date would be probable. (AS 2301.08)

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 selected for testing certain controls over the issuer's evaluation of contracts including changes to existing contracts for revenue recognition under FASB ASC Topic 606 Revenue from Contracts with Customers. The firm concluded that these controls were designed and operating effectively but it did not identify that the issuer did not evaluate (1) the accounting implications of the changes to the terms of the contract and (2) whether 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. (AS 2201.42 and .44)

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 perform any substantive procedures to test the forecasted production that the issuer used to determine the estimated volume payment. (AS 2501.11)

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 perform sufficient substantive procedures to evaluate the estimated volume payment at the end of the contract. Its procedures to test the forecasted production for the defined area were limited to (1) comparing the issuer's prior-year estimate of forecasted production for the overall property for the current year to the actual production and (2) comparing the forecasted production for the defined area to the total forecasted production for the overall property. (AS 2501.11)

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 issuer recorded oil revenue based on volumes produced from each well; the issuer's ownership interest in each well varied from well to well. The firm did not identify and test any controls over the accuracy of the volume data by well used to record revenue. (AS 2201.39)

The firm used the volume data in its substantive testing of this revenue but did not perform any procedures to test or in the alternative test any controls over the accuracy of the data. (AS 1105.10)

The firm did not identify and test any controls over the observability of the pricing inputs at the individual instrument level that the issuer used to determine the categorization of its investments and derivatives within the fair value hierarchy as set forth in FASB ASC Topic 820. (AS 2201.39)

The firm performed substantive procedures to evaluate the categorization of the issuer's available-for-sale securities within the fair value hierarchy and to test the valuation of these securities. The firm did not evaluate evidence obtained through these procedures that may have suggested that certain securities categorized as level 2 within the fair value hierarchy lacked observable market data. (AS 2502.43; AS 2810.03)

The firm selected for testing a control that consisted of the issuer's validation of the models that the issuer used in the valuation of certain of its investment securities and derivatives. The firm did not evaluate the specific review procedures that the control owners performed to assess the results of the testing of these models. (AS 2201.42 and .44)

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)

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

The firm did not perform any substantive procedures to test or in the alternative identify and test controls over the accuracy and completeness of data used in this determination. (AS 2502.39)

During the audit the firm did not identify and appropriately address that the issuer's accounting for warrants and another derivative instrument as equity was not in conformity with FASB ASC Topic 815 Derivatives and Hedging. (AS 2810.30) Unrelated to our review the issuer reevaluated its accounting for these warrants and the derivative instrument and concluded that a material misstatement existed that had not been previously identified. The issuer subsequently corrected this misstatement in a restatement of its financial statements and the firm revised and reissued its report on the financial statements.

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)