Question: You are a partner in the Denver office of a

You are a partner in the Denver office of a national public accounting firm. During the audit of
Mountain Resources, you learn that this audit client is negotiating to sell some of its unproved
oil and gas properties to SuperFund, a large investment company. SuperFund is an audit client
of your New York office.
Mountain Resources acquired these properties several years ago at a cost of $15 million.
The company drilled several exploratory wells but found no developable resources. Last year,
you and Mountain Resources agreed that the value of these unproved properties had been
“impaired” as defined in Accounting Standards Codification, section 932-360-35-11. The
company wrote the carrying value of the properties down to an estimated realizable value of
$9 million and recognized a $6 million loss. You concurred with this treatment and issued an
unqualified auditors’ report on the company’s financial statements.
You are now amazed to learn that the sales price for these properties being discussed
by Mountain Resources and SuperFund is $42 million. You cannot understand why Super-
Fund would pay such a high price and you wonder what representations Mountain Resources
may have made to SuperFund concerning these properties. The management of Mountain
Resources declines to discuss the details of the negotiations with you, calling them “quite
delicate” and correctly pointing out that the future sale of these properties will not affect the
financial statements currently under audit.
a. Summarize the arguments for advising SuperFund (through your New York office) that
you consider the properties grossly overpriced at $42 million.
b. Summarize the arguments for remaining silent and not offering any advice to SuperFund
on this matter.
c. Express your personal opinion as to the course of action you should take. Indicate which
arguments from part (a) or part (b) most influenced your decision.

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  • CreatedOctober 25, 2014
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