**PLEASE READ THE ENTIRE POST** I do not need the case study answereed. I recent

Question

**PLEASE READ THE ENTIRE POST** I do not need the case study answereed.

I recently used CHEGG TO ANSWER this case study below, I am being asked to expand on one of the comments, Case study: Salvador Corporation made an investment in Letter.com, Inc., in exchange for 100,000 options to purchase Letter.com’s stock at $20 per share. Since the stock options are not marketable, Salvador’s management has this derivative valued by a security appraiser. The appraiser uses an option-pricing model to determine the fair value of the derivative for the financial statements. Describe how you would audit the valuation of the stock options.

***FOLLOW UP QUESTION PLEASE*** Can you please discuss further the quote, cited by you: "The auditor should assess the reasonableness and appropriateness of the model and also evaluate the reasonableness of the assumption used in the valuation model" in light of many assumptions in valuation of not marketable stock options. How to increase its preciseness, when there are no published quotes?

Chegg Answer: In accoradnce with SAS73, auditors should consider the work of a specialist or appraiser for the option valuation. The auditor should follow the following procedure in valuation of the stock options.

1. The auditor should access the reasonableness and appropriateness of the model and also evaluate the reasonableness of the assumption used in the valuation model.

2. The auditors should also ensure that the valuation model considers all the present aspects of risks, such as risk of adverse changes in market factors, risk of legal action, risk of regulatory action and counterparty credit risk.

3. The auditor should perform the test for any significant information provided by the appraiser with regard to the option assessment.

****PLEASE ASSIST WITH THE FOLLOW UP QUESTION LISTED ABOVE***** Thank you!

Explanation / Answer

The auditor audit the stock valuation by crosschecking the calculation of firm's stocks. This is done to anticipate future market prices. They examine and crosscheck deliberately all the stocks which are undervalued as well as overvalued. They deliberately review the volume of inventories(stock). The auditor identify the areas of inventory control. In case, the nature of inventory is highly specialized, they take expert help.

In general, when auditing the fair value of employee share options, the auditor should: • Obtain an understanding of the process used to develop the estimated fair value of employee share options; • Assess the risk of misstatement related to the fair value of employee share options; and • Perform testing on the company's estimated value of employee share options. Testing includes: – Evaluating the consistency of the process, – Evaluating the reasonableness of (1) the company's model and (2) the assumptions used in the model, such as expected term and expected volatility, and – Verifying the accuracy and completeness of the data underlying the fair value measurements. The auditor also should evaluate whether he or she possesses the necessary skills and knowledge to plan and perform the audit procedures.

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