Description
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.
Explanation & Answer
Attached.
Running Head: AUDITING THE VALUATION OF STOCK OPTIONS
Auditing the Valuation of Stock Options
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AUDITING THE VALUATION OF STOCK OPTIONS
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Share options are complex financial instruments, and their valuations are accounting
estimates which the auditors must be able to verify. Companies often use option pricing model to
determine the fair value o...
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