Dandelion Company (the “Company”) is a public entity with a December 31 fiscal year-end. The Company is an accelerated filer that issues annual and quarterly consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). We are engaged to perform an integrated audit of the Company’s annual U.S. GAAP consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB).

The Company has an investment portfolio that is 70 times materiality. The portfolio consists of (1) exchange-traded equity securities and U.S. treasuries that are classified as Level 1 in accordance with the ASC 820 fair value hierarchy and (2) mortgage-backed securities, asset-backed securities, and corporate debt securities that are classified as Level 2. The Company does not have any Level 3 securities. The classification of investment types as of September 30, 20Y2 (see Figure 1 below), is consistent with the classifications as of December 31, 20Y1 (e.g., agency securities as of September 30, 20Y2, remained classified as agency securities as of December 31, 20Y1). In addition, the classification of investment types by level as of September 30, 20Y2 (see Figure 2 below), is consistent with the classifications as of December 31, 20Y1 (e.g., agency securities were classified as Level 2 as of September 30, 20Y2, and December 31, 20Y1).

We plan to use a “control reliance” approach to address the risks of material misstatement and assertions related to the Company’s investment account balance, including identifying and testing operating effectiveness of the controls that address the risks of material misstatement. The Company’s investment professionals are very experienced and have the appropriate skills and capabilities to price and monitor the Company’s investment activities. On the basis of interactions during our audit procedures, we believe the vice president of treasury and the risk manager are competent and have the relevant experience.

Fiscal Year 20Y2 Audit Materiality (in millions)

1. Materiality = $150

2. Performance Materiality = $105

The classification of investment types by level as of September 30, 20Y2, is consistent with the classifications as of December 31, 20Y1 (e.g., agency securities were classified as Level 2 as of September 30, 20Y2, and December 31, 20Y1).

Prior audit results indicate no history of errors related to the valuation and presentation of investments, and the portfolio composition (e.g., asset class, level) has remained relatively stable in the current year. On the basis of our inquiries of management and our knowledge of the business, we do not expect any significant changes in the Company, market environment, or the portfolio composition between the interim date and year-end. We considered the risk of fraud, as documented in workpaper XXXX, and do not believe a fraud risk is present.

NOTE:  

The audit manager has informed you that the following risk of material misstatement (RoMM) related to the valuation assertion associated with the investments has been identified:

- Assumptions, inputs, or methods used to determine the fair value of the security are inappropriate on the basis of assumptions or observable or unobservable inputs in the marketplace and are significant to the valuation (Level 2 securities). 

- In addition, the following risk of material misstatement related to the presentation and disclosure of investments has been identified: The Company’s classification of securities is inconsistent with the fair value hierarchy (e.g., it classifies a security as Level 2 rather than Level 3). 

Questions:

1. what you learned about Dandelion and its investments.  

2.  what's wrong / problem on Dandelion investment

3. Possibility on risk assessment

4. what's wrong with the fair value of Dandelion investment

Transcribed Image Text:

Figure 1. Company's investment balances as of September 30, 20Y2 (in millions) Book Unreal Unreal Value Gains Losses Fair Value Description Debt securities U.S. treasury $ 733 $ 2 $0 $ 735 Agency 5,979 98 (1) 6,076 Residential mortgage-backed 866 13 (5) 874 Mortgage-backed 306 1 (1) 306 Asset-backed 707 4 (1) 710 Corporate debt 1,543 35 1,575 Total debt securities $10.134 $153 ($11) $10.276 403 (58) 349 Total debt and equity securities $10.537 $157 ($69) $10,625 The classification of investment types as of September 30, 20Y2, is consistent with the classifications as of December 31, 20Y1 (e.g., agency securities as of September 30, 20Y2, remained classified as agency securities at December 31, 20Y1). Equity securities Figure 1. Company's investment balances as of September 30, 20Y2 (in millions) Book Unreal Unreal Value Gains Losses Fair Value Description Debt securities U.S. treasury $ 733 $ 2 $0 $ 735 Agency 5,979 98 (1) 6,076 Residential mortgage-backed 866 13 (5) 874 Mortgage-backed 306 1 (1) 306 Asset-backed 707 4 (1) 710 Corporate debt 1,543 35 1,575 Total debt securities $10.134 $153 ($11) $10.276 403 (58) 349 Total debt and equity securities $10.537 $157 ($69) $10,625 The classification of investment types as of September 30, 20Y2, is consistent with the classifications as of December 31, 20Y1 (e.g., agency securities as of September 30, 20Y2, remained classified as agency securities at December 31, 20Y1). Equity securities

Answer rating: 100% (QA)

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