Case 19-9: Dandelion Company — Handout 1
Discussion 1
Read the following excerpt from the Investment Risk Assessment Memorandum of Dandelion
Company. This memo was prepared by the audit engagement team just after the close of Q3 (as of
September 30, 20Y2) in order to plan its approach for the year-end audit (as of December 31, 20Y2).
Key:
(Note that the current year and prior year are represented by 20Y2 and 20Y1, respectively.)
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)
Materiality Performance Materiality
$150 $105
Case 23 — Handout 1: Dandelion Company Page 2
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Figure 1. Company’s investment balances as of September 30, 20Y2 (in millions)
Description
Book
Value
Unreal
Gains
Unreal
Losses Fair Value
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 (3) 1,575
Total debt securities $10,134 $153 ($11) $10,276
Equity securities 403 4 (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).
Figure 2. Fair value (FV) footnote as of September 30, 20Y2 (in millions). This is a partial FV
footnote disclosure that excludes other assets, derivatives, and liabilities and shows only the amounts
related to the investment portfolio.
Description Level 1 Level 2 Level 3 Total
Debt securities
U.S. treasury $ 695 $ 40 $0 $ 735
Agency 0 6,076 0 6,076
Residential mortgage-backed 0 874 0 874
Mortgage-backed 0 306 0 306
Asset-backed 0 710 0 710
Corporate debt 0 1,575 0 1,575
Total debt securities $ 695 $9,581 $0 $10,276
Equity securities 349 0 0 349
Total debt and equity
securities
$1,044 $9,581 $0 $10,625
Case 23 — Handout 1: Dandelion Company Page 3
Copyright © 2019 Deloitte Development LLC
All Rights Reserved.
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: To increase consistency and comparability in fair value measurements and related disclosures,
ASU 2011-04, Fair Value Measurements (Topic 820), establishes a fair value hierarchy that
categorizes the inputs to valuation techniques used to measure fair value into three levels. Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity can access at the measurement date. Level 2 inputs are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 3 inputs are unobservable inputs for the asset or liability. In other words, a reporting
entity may develop an internal model using the best information available in the circumstances.