Semester-long Audit of a Pipeline Company | Objectives, Tasks & Instructions

Natural Gas

I have highlighted the required section to be done one page 17. The interview questions needed are in APPENDIX 3 on pages 25-30. also pages 5-7 gives a general idea about the company.

The overall goal of this project is to provide you with a semester-long simulation of an audit of the financial statements of a pipeline company. There are three main objectives behind this simulation:

1.To help you better understand the concepts presented in the external audit course by giving you some hands-on practice related to those concepts;
2. To provide you with examples of the type of work you could see in a real audit firm during the first couple of years of your audit career;
3. To help you understand and appreciate some of the other activities and work done behind the scenes by the partners and managers of an audit firm. The case is broken into five tasks, submission of which will be staggered throughout the semester. The five

Task One: Your group will prepare a group Code of Conduct to establish the rules for your group and guide your interactions over the course of the semester.

Task Two: Your group will conduct research into the current economy and the natural gas pipeline industry to gain familiarity with the company you will be auditing. You will evaluate the financial statements, assess risk, and recommend materiality.

Task Three: Your group will review the results of interviews with select staff of the client company in order to familiarize yourselves with the client’s internal controls. You will then document the client’s internal controls. You will conduct testing of controls on a random sample of source documents provided by the company. For the purpose of this simulation, assume the majority of the testing has already been completed. Your group will complete only the last few samples.

Task Four: Your group will conduct substantive testing (testing of details) on a random sample of source documents provided by the company you will be auditing. For the purpose of this simulation, assume the majority of the testing has already been completed. Your group will complete only the last few samples.

Task Five: Your group will evaluate a series of events that took place after the end of the fiscal year, but prior to the end of your audit (subsequent events). Your group will also evaluate the evidence you have gathered during the course of your audit, and recommend an opinion
on the financial statements of the company. More detailed explanations of each task are provided in Appendix 1. Due dates for each task, more detailed instructions, and the process for submitting each task will be provided by your instructor as the semester progresses.

Task One – Code of Conduct Purpose

As with many educational cases, many of the situations depicted in this case are inspired by actual companies the author has worked with during his career. However, the company depicted in the case is fictional, as are the situations and individuals contained therein, and any similarity to real individuals or specific companies is unintentional.

Natural gas is a fossil fuel, like coal and oil. Fossil fuels are formed when the remains of a plant or animal (organic matter) become trapped underground at very high pressure for very long periods of time. Over time, mud, sediment, and other deposits build up over top of the plant or animal remains. The more material builds up, the greater the pressure. Over millions of years, the organic matter decomposes and produces
one or more of the fossil fuels.

Because of their common origin, oil and natural gas are often found in close proximity to each other, and often the search for one yields deposits of both. The earth’s temperature increases in relation to depth; the deeper one goes into the earth, the higher the temperature. Shallower deposits of organic matter are at lower temperatures; more oil is produced relative to natural gas at shallow depths. At deeper levels, where the temperature is much higher, more natural gas is produced than oil. Typical natural gas deposits are found at depths of two to three kilometers below the surface.

Natural gas is primarily made up of methane (CH4). Drawn from the ground, natural gas typically consists of between 70% and 90% methane, up to 20% ethane (C2H6), up to 8% carbon dioxide (CO2), and small amounts of propane, butane, oxygen, nitrogen, and other gases. Industry terminology refers to natural gas as “wet” when it contains other hydrocarbons such as propane and butane; “dry” natural gas is almost pure
methane. In most cases, “dry” natural gas is the result of human processing after extraction; however, very deep deposits of natural gas (often greater than three or four kilometers) are, in many cases, pure methane.

In its natural state, natural gas is colourless, odourless, tasteless … and highly flammable. This makes it very desirable for use in heating, cooking, and generating electricity; however, undetected leaks of natural gas can be very hazardous, especially in the vicinity of sparks or open flame. As a safety feature, a chemical called mercaptan is added to natural gas before the gas is distributed commercially. Mercaptan has a
distinctly unpleasant smell, similar to that of rotten eggs. This makes detecting leaks much easier, and the use of natural gas much safer.Natural gas is often measured in two different ways. As a gas, it can be measured by the volume it takes up at certain specified temperatures and pressures.

Task Two

Volume is typically expressed in cubic feet (cf), millions of cubic feet (MMcf), or trillions of cubic feet (Tcf) in the United States, or by cubic meters (m3) in Canada. Natural gas can also be measured by its potential energy output, expressed in British thermal units (Btu), where one Btu is the amount of natural gas required to heat one pound of water by one degree at normal pressure. One cubic foot of natural gas contains about 1,027 Btus. The Canadian equivalent is the gigajoule (GJ), where one gigajoule is approximately equal to the energy output of half a barrel (250 lbs) of oil.

There is some dispute over which country has the largest proven reserves of natural gas, but the largest producers include Iran, Russia, Qatar, Canada, and the United States. Canada and the United States are also large consumers of natural gas. In 2010, the United States consumed 24.1 Tcf of natural gas. The United States typically accounts for 20% to 25% of the total worldwide consumption of natural gas annually. Although the United States is also one of the world’s largest producers of natural gas, approximately 17% of its needs are provided by importing natural gas.

As the vast majority of audits are done as part of a team, the first task will be to prepare a Code of Conduct to guide your team’s interactions over the course of the semester.
Required

Prepare a report in Microsoft Word that outlines a Code of Conduct that your group will adhere to over the course of the semester. Your submission should contain:
• Cover page.
• Introduction.
• Brief summary of how your group will divide the required tasks between group members over the course of the semester.
• Brief summary of how your group intends to communicate while working on tasks (i.e. email, text, face-to-face meetings, Google Docs, etc.)
• Brief summary of how your group will resolve any disputes which may arise between members.
• Brief summary of how your group will address suspected cases of plagiarism or academic misconduct within your group. Refer to your institution’s Student Code of Conduct, as well as the CPA Rules of Professional Conduct for your region.
• Agreement by all group members to abide by the Code of Conduct, as well as an acknowledgement by all group members that all group members are responsible for the work submitted, regardless of which group member(s) worked on the task.
• Bibliography / Works cited (if required). Your report should be written in proper business language, and in your own words (i.e. don’t just
repeat what’s written in the textbook or lesson notes, or copy and paste from the Internet). Your report should be properly referenced (any words or ideas other than your own should have a reference to the source. All websites used in your research should be referenced.) The length of your report will vary, but should be between 4 and 6 pages (not including cover page or bibliography).

Task Three

Refer to the course schedule for the exact due date for this assignment. Your instructor will provide
specific instructions on the process for submitting this task.

Purpose:

In order to properly audit the financial statements, it is important for the auditor to become familiar with the company being audited, as well as the industry in which it operates. The auditor also needs to consider who the end users of the financial statements will be. Understanding who will use the financial statements, and what information those users will be relying on, helps the auditor to better plan the audit. Identifying the potential risks associated with the financial statements and determining planning materiality are key tasks when planning an audit.
Required:
Prepare a report in Microsoft Word that addresses the following tasks. Your submission should contain:
• Cover page.
• Introduction.
• Conduct research on-line and prepare a report in Microsoft Word that summarizes the current state of the natural gas industry in Canada and the current economic environment facing Canadian pipeline companies. All websites used in your research should be referenced. Remember that ColAlta is not a real company: the purpose is not to try to identify which real-life companies ColAlta is based on, but to gain an understanding of the current environment in which a company like ColAlta operates.
• Insert a table into your Word document to recreate the “Identification of significant financial statement risks” working paper found on page 14. Complete the working paper:
• Identify what you believe are five (5) significant risks related to the financial statements of ColAlta Pipeline. Focus on the risk of a potential  error or fraud in the financial statements (i.e. do not be distracted by business risks facing the company).
• For each significant risk, identify the financial statement account or accounts that would be impacted should the risk event take place.
• For each significant risk, explain / justify why you believe this is a risk could cause material misstatement of financial statements, and why you believe this is one of the five significant risks facing the company.
• Assess the level of risk (high, medium, or low) associated with the risk you have identified. Consider both the likelihood of the event happening, as well as the impact on the financial statements if it does take place.
• Recommend to Melissa Stuart, the Audit Manager, what level of inherent risk that you believe should be associated with this audit.
• Insert a table into your Word document to recreate the “Identification of financial statement users” working paper found on page 15. Complete the working paper.

• Not every financial statement user is equally interested in all areas of the financial statements; each person or group is more interested in specific areas. For each financial statement user that you have identified, specify which account(s) or financial statement area would be of particular interest to that financial statement user.

• For each area of interest, explain why you believe the user would be interested in this account or area (i.e. why this would be important to the       user).
• Insert a table into your Word document to recreate the “Calculation of recommended overall materiality” working paper found on page 16.  Complete the working paper:
• Using the general accepted materiality formulas provided, and the unaudited financial statements of ColAlta Pipeline provided by your instructor, calculate the various potential threshold amounts for materiality in the table.
• Melissa Stuart, the Audit Manager, has asked you to recommend what amount you would use as a threshold for overall materiality for this audit. Recommend a materiality threshold for this audit.
• Bibliography / Works cited (if required). Written portions of your submission should be written in proper business language, and in your
own words (i.e. don’t just repeat what’s written in the textbook or lesson notes, or copy and paste from the Internet). Your report should be properly referenced (any words or ideas other than your own should have a reference to the source. All websites used in your research should be referenced.) Working papers should be completed neatly and professionally, just as they would be submitted to the Audit Manager for approval. The length of your submission will vary, but should be between 4 and 7 pages (not including cover page or bibliography).

Refer to the course schedule for the exact due date for this assignment. Your instructor will provide specific instructions on the process for submitting this task.