AUDITING AND COMPLIANCE STRATEGIES, PROCEDURES, AND POLICIES

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management
(Feb 2007)
CHAPTER 6B
AUDITING AND COMPLIANCE STRATEGIES, PROCEDURES, AND POLICIES
Michael Geesey
Director, Department of Audit
State of Wyoming
Cheyenne, Wyoming

MICHAEL GEESEY

Michael Geesey was appointed Director of the Department of Audit in 1995 and reappointed in 2001. He is responsible for the State's independent audit agency, directing audits to ensure compliance with the revenue functions of other state agencies, fiscal examination of all state and local governmental agencies, and audits of data collection for education. He also oversees the regulation of state chartered financial institutions and other credit offering entities. He is a member of the Governor's Cabinet, State Financial Advisory Council, and Ex Officio Member of the Wyoming State Banking Board.

He previously worked in the banking industry; as Vice President of Rocky Mountain Bank he established and managed the bank's credit department with responsibility for commercial and purchased loan portfolios. He worked for the State of Wyoming as an economist with the Public Service Commission, as a bank examiner for the State Examiners Office, and as an auditor for the Department of Revenue and Taxation. Michael also taught college courses in banking and finance at both Laramie County Community College and Chapman University.

Michael graduated from the University of Wyoming with a Master's Degree in Finance and a Bachelor's of Science Degree in Business. He also earned an Associate's Degree in Business from Casper College. He is a Certified Examination Manager (CEM) with the Conference of State Bank Supervisors. Mike also co-authored "An Empirical Study of Driver Characteristics in Automobile Accidents and Its Relevance for Insurance," published in the Journal of Insurance, Vol. 3, No. 3 (1980).

Michael is the treasurer of the Rotary Club of Cheyenne and a board member of the University of Wyoming Alumni Association. He is also a member of the Veterans of Foreign Wars, American Legion and American Association of Individual Investors.

AN OVERVIEW OF ROYALTY AUDIT PROCESS AND GENERAL ISSUES

I. INTRODUCTION

This overview of the audit process and general issues regarding findings was extracted from an audit manual. This paper is structured to give the reader a quick outline and overview of the audit process from planning to final report. These processes are designed to help the auditors developed a logical flow in their job of ensuring compliance with applicable federal leases, rules, regulations, and laws covering the payment of federal royalties.

II. THE AUDIT PROCESS

A. Preliminary Research

OPENING

The purpose of the pre-audit review is to provide the framework for planning and examining the activities and operations related to reporting and payment of federal royalties. The importance of pre-audit work in the planning stage of an audit engagement cannot be over emphasized. A well thought out plan for conducting an audit will result in an efficient audit. Therefore, planning and pre-audit review is essential before starting any fieldwork.

Proper planning enables the auditor to develop the audit program. The audit program is a guide for the auditor to examine the activities and operations related to reporting and payment of federal royalties. The initial development of the audit program starts in the office, well before any fieldwork begins. Yet, some fieldwork, consisting of the review and evaluation of the management control structure, should be performed at the auditee location before the audit program can be completed. Even so, the program may still be changed or revised throughout the audit, as information is known. Accordingly, this section outlines the necessary procedures for developing an audit program and for completing the planning and pre-audit review stages of the audit.

B. Planning & Pre-Audit Review

PURPOSE OF PLANNING

According to GAGAS, "work is to be adequately planned" and, "staff are to be properly supervised." Planning is conducted prior to fieldwork in order to increase productivity during fieldwork. Gathering and analyzing information about the

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auditee are the first activities conducted after receiving an assigned audit. Proper documentation of the planning stage is essential and may be accomplished by using narratives, summary spreadsheets and flowcharts.

PRE-AUDIT REVIEW

The purpose of the pre-audit review is to:

1. Research Company Background

2. Determine Leases to be audited

3. Modify the audit program to consider possible non-compliance issues.

4. Prepare a list of Standard Tick Marks and Acronyms

5. Prepare Audit Planning Memorandum

6. Company Contact

7. Prepare Audit Engagement Letter

1. RESEARCH COMPANY BACKGROUND

This section contains the procedures for obtaining sufficient background information to understand the auditee's business practices or operations relating to mineral production. The steps are not all-inclusive; they represent the basic guidelines to be followed in each royalty audit. These steps may be revised and additional steps may be added based on the professional judgment of the auditor and the circumstances.

1. Obtain Company Information

a. Legal Name and Address

b. Payor Number

c. Key Contacts

d. Company Overview

i. Minerals/products extracted

ii. Company Operations

e. Affiliates

i. Marketing Affiliate

ii. Affiliate

f. Sources for Information

i. Federal Computer Database

ii. MTS II

iii. LR2000

iv. Internet-Company Website

v. SEC Filings (10K, www.edgar-online.com)

2. Review Prior Audits

a. Past Issues

b. Pending Refund Requests

c.

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2. DETERMINE LEASES TO BE AUDITED

Audit sampling is a tool that the auditor can use to conduct an efficient audit. The sample must be representative of the population based on sampling techniques and auditor judgment. For the purposes of mineral audits, statistical or non-statistical techniques are acceptable sampling methods and it is up to the in-charge auditor in consultation with the supervisor as to which method to use.

After choosing the leases selected for audit the following steps should be performed:

1. Gather and summarize lease, serial register pages and federal royalty computer database information for leases selected for audit.

2. Prepare schedules summarizing data obtained from MMS 2014's and other available sources of production and sales.

3. Document operating agreements, unit agreements, and C.A. agreements.

4. Document area maps and other pertinent information relating to the property.

3. MODIFY AUDIT PROGRAM

The information gathered in the planning stage will produce audit steps or raise questions in areas that should be covered during fieldwork. Many of the audit steps are incorporated into the standard audit program(s). However there may be other areas of concern that are not specifically addressed must be added to the standardized audit program(s). Modify the Standard Audit Programs and determine which programs will be used for the audit.

4. LIST OF STANDARD TICK MARKS AND ACRONYMS

Prepare a list of Standard Tick Marks and Acronyms that the auditor plans on using throughout the audit. The auditor may want to include acronyms specific to each individual audit.

5. AUDIT PLANNING MEMORANDUM

Upon completion of the preliminary audit work, prepare an Audit Planning Memorandum to be submitted to the supervisor. The completed memorandum will include background information, the audit objectives, the scope of the audit, and the methodology planned for the audit. The memorandum will also address problem areas, planning materiality, staffing levels, estimated hours and completion dates of the audit work. An Independence Statement will be included along with the Supervisory Approval form and Addendums as needed.

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Background Information

This section contains a summary of the background information completed in the Pre-Audit Review.

Audit Objectives

1. Determine if the sales, production and royalty payments were accurately reported to the MMS.

2. Ascertain that the computation of royalties due was made in accordance with federal laws, regulations, directives and the lease agreements.

3. Determine the validity and accuracy of commodity unit volumes used by the auditee in royalty computations.

Audit Scope

The audit scope includes:

1. The time period of the audit.

2. The Leases selected for audit

3. Total company royalty value

4. Percent of royalty value audited

Audit Methodology

Explain how the audit objectives will be accomplished, including the evidence gathering and analysis techniques to be used, in sufficient detail to allow knowledgeable users of these reports to understand the work. Include a statement that the audit will be conducted in accordance with GAGAS.

Problem areas

Problem areas are defined as conditions surrounding the auditee that would indicate an increased possibility of non-compliance with lease terms and Federal Regulations regarding the extraction of minerals. For planning purposes, the auditor must evaluate and explain the problem areas associated with the auditee.

The following is a list of possible non-compliance issues:

1. Presence of affiliated companies

2. Multiple interest owners

3. Royalty rate variances

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4. Transportation allowances

5. Processing allowances

6. Merger, acquisitions, or the sale of company or properties.

Staffing

The supervisor provides staffing assistance needed for an audit in terms of number of auditors and experience level.

Estimated Hours

The supervisor provides the in-charge auditor with a budgeted number of hours for the audit to complete the Estimated Hours Table.

Estimated Completion Dates

The in-charge...