In performing tests for the appropriateness of the SFAS 159 fair value option for the financial assets and liabilities introduced in Problem 29, you ask Pear Computer’s accountant for a detailed list of the items that that the company decided to carry at fair value in accordance with SFAS 159. When you received the list, you found that Pear utilized the option for all derivatives, firm commitments, and employee stock options.
a. Did Pear Computer appropriately apply the fair value option in accordance with SFAS 159? Why or why not?
b. Assume that upon examining the list you conclude that Pear Computer fair valued certain assets that are not permitted according to SFAS 159. Prepare a list of the audit steps that you carry out subsequent to this discovery.