Audit Method: Oil & Gas Industry

The Oil & Gas Industry comprises of three sectors:

The Upstream sector: This is also called the exploration and production sector (E&P). It involves the search for potential underground or underwater crude oil and natural gas.

The Midstream sector: This sector involves the transportation, storage and marketing of petroleum products.

The Downstream sector: this sector is involved in the refining of crude petroleum products and processing and purification of the raw natural gas.

Accounting for oil and gas companies is a bit complicated because it has to reflect the company’s principal assets; the oil and gas reserves, with ownership rights often based on contractual relationships between the oil and gas producing entities and the owners of the mineral rights. 

Some of the specific accounting issues which arise in the Oil and gas sector are as follows: 

• Joint Arrangements: It is a common term for oil & gas companies to share the risks and costs of exploration and production activities. A separate Joint Venture Account statement is prepared which shows the advances received from working interest owners and how the amount is spent.
• Revenue recognition: The revenue arising from each transaction is recognized based on the terms of the underlying sales agreement.
• Exploration & Evaluation Assets and Development Assets: IFRS 6 - Exploration for and Evaluation of Mineral Resources explain the complete accounting for these assets.
• Depletion, depreciation and amortization (DD&A): The unit of production method is most commonly used to deplete upstream oil and gas assets.
• Impairment of non-financial assets: IFRS 6 relaxed the rules of annual impairment testing for exploration and evaluation (E&E) assets. IFRS 6 requires these assets to be tested for impairment only when the facts and circumstances suggest that the carrying amount may exceed its recoverable amount and on the transfer of E&E asset to development assets. 
• Reserves Reporting: The purpose of reserve reporting is to make available information about the oil and gas reserves which are controlled by the company. This information helps to assess the companies’ current performance and future prospects.
• Provisions for Decommissioning Costs: Due to exploration and evaluation activities oil and gas companies often are required to create a provision for meeting the costs of site restoration, decommissioning and dismantling of assets. It is covered by IAS 37.

Practice

While conducting the audit of oil & gas companies, the auditor should gain thorough and deep understanding of the industry and the practices followed by the oil & gas companies. Audit requirements may vary depending on whether the company is operating in an upstream, midstream or downstream sector. Moreover audit procedures in upstream sector also vary depending on whether the company is an operator or non-operator of and oil or gas well or lease. 

Audit Firm: Personality of Auditor

There are a few personal characteristics that are important for an auditor to have:

• Auditors should possess a strong ethical framework and report on issues (or anticipated issues) as they come across them. There is a temptation to "let things go" as further investigation may require more work or reveal embarrassing processes, performance and/or fraud.

• Good communication skills allow auditors to have a rapport with a variety of employees, managers, directors and external parties. As auditors establish good rapport with a variety of individuals, however, they should keep in mind the objectives of the audit (for instance, the reliability, verifiability, accuracy and timeliness of information), as they can often be tempted to not report on issues discovered.

• Strong interpersonal skills are important, due to the variety of informational requests - and often, resistance to those requests - required from a variety of sources. Strong and/or ambitious types may attempt to dissuade auditors from revealing embarrassing findings.

• Auditors need to be team players. As the scope of the audit can be fairly large, it is beneficial to help in other areas of an audit when resource constraints warrant it.

• Finally, "professional skepticism" is an important trait to have, especially when reviewing a company's internal controls. One needs to assess how perpetrators of fraud can beat a company's controls, and auditors need to design and implement a system that can effectively protect the organization's assets.

Audit Method: Telecom, Media and Entertainment

Media and Entertainment business include companies for movie studios, TV station groups, Cable distribution companies, Radio broadcasting companies, Advertising companies, Interactive gaming companies, Book publishing companies, Newspaper publishing companies and Internet companies. Media and Entertainment businesses live or die based on how well they identify and manage trends.

Telecommunications is a general term and include a vast array of technologies that transmit and receive voice, data, and video information over varying distances through electronic means. Telecommunications is a huge industry, comprising companies that make hardware, produce software and provide communication services.

The main area of concern for auditors while conducting the audit of a telecom media or entertainment company is to verify their revenue. Telecom operators continue to lose billions of dollars every year due to revenue and fraud leakage. Most telecom companies principally obtain revenue from providing the following telecommunication services: access charges, airtime usage, messaging, interconnect fees, data services and information provision, connection fees and equipment sales. Products and services may be sold separately or in bundled packages. The fast pace of change and intense commercial competition increase the likelihood of mistakes. There is significant complexity in determining the combined effect of interacting systems and processes; and the high-volume, low-value nature of transactions amplifies the financial implications of "small" errors.

Another area of concern for auditor is to verify the license fee paid by media and telecom companies to the government and compliance of companies with the regulations imposed under the provisions of these licenses by the government.

Fixed assets verification particularly in telecom service provider companies is also an area which requires auditor’s significant attention. Telecommunications is a very capital-intensive industry, with the fixed assets of network infrastructure forming a large part of a telecom company’s balance sheet whether it is a fixed line, mobile or fiber network. Fixed assets management remains an important competitive differentiator as it presents significant operational and internal control challenges. Auditor should be diligent in reviewing asset lives manually, as well as in a more sophisticated manner with the use of client integrated ERP systems generated reports.

Additional Thoughts

While conducting the audit of a telecom media or entertainment sector company; the principal rules remain the same for the auditor. The auditor should understand the entity and its environment, in which it is operating and identify and assess the risks of material misstatement. On the basis of this understanding the auditor should frame audit procedures to minimize the audit risk to an acceptable level. 

Audit News Briefing: 12 October 2015

Audit-is-cool is pleased to accumulate and provide its readers with the news on audit and related topics:

October 9, 2015

Accountancy Live

MEPs call for mandatory equal pay audits

Based on principles of respect to wage equality, Members of the European Parliament are calling for the European Commission to strengthen equal pay legislation - with proposals including mandatory pay audits with possible sanctions at EU level in cases of non-compliance. MEP Anna Záborská who proposed tightening up the rules said: ‘Equal pay for equal work is a fair principle that must be valued by all employers… ‘Today, this is not the case, which is why we need better legislation.’

Please follow link for details: https://www.accountancylive.com/meps-call-mandatory-equal-pay-audits

October 9, 2015

Journal of Accountancy

Audit fees rose in 2014 for SEC filers, private companies

According to a new survey by the Financial Executives Research Foundation (FERF), audit fees paid by SEC filers and private companies increased in 2014 - SEC filers reported a median increase of 3.4% over the fees they paid to external auditors the previous year.

Please follow link for details: http://www.journalofaccountancy.com/news/2015/oct/audit-fees-rise-in-2014-201513163.html

October 8, 2015

Accounting Web

Clarified Auditing Standards: Audits of Group Financial Statements

Larry Perry CPA recently published Part 2 of his column that featured the significant key definitions of AU-C Section 600 or Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors).

Here are the three majorly discussed group audit pre-engagement planning procedures:

1. The group engagement team should obtain an understanding of the business environments of the group and its components, and identify those that are significant.

2. The group audit partner must evaluate whether sufficient audit evidence can be obtained to report on the group financial statements.

3. The group audit partner must consider the information on the Client Acceptance and Continuance Forms for the group and component entities, and determine that sufficient evidence can be obtained to express an unqualified opinion on the group financial statements.

Please follow link for details: http://www.accountingweb.com/aa/auditing/clarified-auditing-standards-audits-of-group-financial-statements-part-2

Part 1: http://www.accountingweb.com/aa/auditing/clarified-auditing-standards-audits-of-group-financial-statements-part-1

Week-End: The Importance of Networking

Know that most things in life come from other people.

Every interaction you have is an opportunity to create a new friend.

Find out more about people’s interest and concerns.

Aim to keep in touch as the relationship will fade if you don’t.

Be willing to invest time talking with people.

Learn to enjoy it – people are endlessly fascinating.

Aim to leave people in better emotional shape than you found them.

The practice of networking (online and offline) will become even more important in the future. And think how important Facebook, LinkedIn, Branchout etc. are now! You’ll also find that income opportunities will arise due to the people you meet. Business is built on relationships. And seeking a high quality network may open the doorways that will surprise you. Remember, that the networks you are a part of can contact any person on the planet in only 6 steps. Whether president or pop star. Somebody knows somebody who knows somebody etc.

From the Book: LIFE: you can't stop the waves but you can learn how to surf!
By: Martin Shervington, John Seymour

Audit Firm: Big4 Interview Questions

Here is a list of top 10 interview questions for all the young specialists who wish to join any of the Big four audit firms (in fact any consulting firm) in their future career.

1. Tell me a little about yourself or background?
2. Why KPMG/Deloitte/PwC/E&Y?
3. Why audit/tax/advisory?
4. Are you interviewing with other firms? What’s the response from them?
5. Where do you see yourself in 5 to 10 years?
6. If your friends could pick three words to describe you, what would they be?
7. Do you prefer to travel?
8. What is your biggest weakness/strength?
9. Tell me about a time when you improved a process (or came up with a creative solution)?
10. What do you like best about a career in accounting/auditing?

Audit News Briefing: 08 October 2015

Audit-is-cool is pleased to accumulate and provide its readers with the news on audit and related topics:

October 2, 2015

Accountancy Live

Audit updates: October 2015

Audit tender: KPMG replaces PwC as auditor to Experian

KPMG is the new auditor of consumer credit check company, Experian plc – to replace PwC who have been pioneer external auditors from October 2006.

EU rules: BIS set to issue further consultation on EU audit directive

In accordance with the implementation of the EU Audit Directive and Regulation on 17 June 2016 – the Department for Business, Innovation and Skills (BIS) will publish a formal consultation this autumn focusing on the definition of a public interest entity (PIE), Financial Reporting Council (FRC) powers and the responsibilities of professional bodies. It will also consider issues around the introduction of mandatory retendering and rotation of PIE auditor appointments.

The practical application of the following requirements of the regulations need to be resolved: the types of entities in scope; prohibited non-audit services (NAS) to audit clients; application of independence principles across global accounting firms’ networks; and audit firm and key audit partner rotation.

KPMG ousts PwC as auditor of listed Premier Foods

KPMG will replace PwC after 11 years with Premier Foods. The latter’s statement explains: ‘The audit committee considered an audit tender in 2013 and it was agreed a formal tender exercise would be deferred until 2015, which represents the 11th year of the current auditor’s appointment.’

Please follow link for details:

https://www.accountancylive.com/audit-updates-october-2015

September 30, 2015

Accountancy Age

FRC consults in readiness for EU audit rules

The Financial Reporting Council (FRC) Chief Executive Stephen Haddrill’s statement reads: "The Audit Regulation and Directive is large and complex. We are working closely with professional bodies to make sure the new regulatory regime works as effectively as possible… We must ensure that it builds on the progress made in the UK in recent years in terms of the quality of audit, that competition in the audit market is strengthened in a way that supports innovation, and that the regulatory regime that emerges provides confidence to investors and to firms by being fair, understandable and independent." Please follow link for details: http://www.accountancyage.com/aa/news/2428095/frc-consults-in-readiness-for-eu-audit-rules

September 29, 2015

ICAEW

Press Release: Organise your financial filing says ICAEW

The Institute of Chartered Accountants in England and Wales (ICAEW) thru Tax Faculty Technical Manager Anita Monteith provided guidelines for financial filing, as published in their September 29 press release.

 

These are some of the most common items you should keep on file to keep on top of your financial paperwork:

    Payslips

    P45s/P60

    Dividend statements

    Records of charitable giving

    Bank statements and interest certificates

    Pension letters

    Pension contributions record

    Utility bills

    Mortgage statements

    Tax credit award notices

Please follow link for details: http://www.icaew.com/en/about-icaew/newsroom/press-releases/2015-press-releases/organise-your-financial-filing-says-icaew