Simmons Company, Inc. has among its assets an investment in Shark Software, a private startup company located in Boston that makes software solutions for the medical industry. As a private company, Shark Softwares shares are not publicly traded, so Simmons needs to use alternative means to estimate the value of the investment for financial reporting purposes.

Shark Software is just 2 years old and has yet to have a final product for sale. As a result, Shark has not reported any profits since its founding; in fact, it has lost several hundred thousand dollars and has negative retained earnings. Simmons controller has chosen to estimate the value using the discounted cash flow model (by forecasting future cash flows and discounting them to the present using an appropriate discount rate). Simmons invested $1 million in Shark Software. The DCF estimate of value at the balance sheet date is $1.5m.

Required:

1. What level of the fair value hierarchy would Simmons controller appropriately classify this investment in Shark Software?
2. As an auditor, what risks of material misstatement would you be concerned about?
3. What would you do as the auditor to address the risks you identified in (2)?
4. What kinds of controls should Simmons have in place that would help to mitigate the risks identified in (2)?