ColAlta Pipeline

An External Auditing Simulation

The Audit Firm

The audit firm of Stark Lannister LLP, Chartered Professional Accountants, has been the audit firm for ColAlta Pipeline for the past four years. The working relationship between Stark Lannister and ColAlta has been very positive to date; no major accounting issues have come to light in previous audits, and an unmodified audit opinion has been issued every year. Stark Lannister is a mid-size accounting firm headquartered in Calgary. The firm employs 83 people, ranging from clerical support staff through junior accountants to supervisors and senior managers. The firm currently has 18 partners.

It is the practice of Stark Lannister to rotate audit partners every three years to maintain independence and objectivity during the audit process. Melissa Stuart, CPA, CA is the audit manager assigned to this years audit of ColAltas financial statements. Although Stark Lannister has been the auditor for ColAlta for several years, this will be Melissas first year as the audit manager for this client. You and your teammates are junior accountants in the firm, and you have been assigned to conduct the audit.

Appendix 2 Unaudited Financial Statements

At the conclusion of the most recent fiscal year, ColAlta Pipeline completed its year-end processes and prepared its financial statements. The financial statements have been prepared by the Supervisor, Financial Reporting, and have been reviewed by the Controller and the Chief Financial Officer. Your audit firm will be reviewing and auditing these completed financial statements. As is typical of most companies, ColAltas books are now closed to transactions by most of the accounting staff, to prevent accidental posting of transactions to the incorrect fiscal period. The Controller and the CFO still have the ability to make corrections to the past years financial records, in the event that the audit discovers significant misstatements that must be corrected.

Your instructor will provide you with copies of the financial statements that you will be auditing, along with comparative (audited) statements from the previous fiscal year.

Appendix 3 Transcripts of Interviews with ColAlta Personnel

As with most companies, ColAlta Pipeline has specific policies and procedures regarding the measurement and recognition of transactions in its accounting cycle. Adhering to these procedures results in financial statements that fairly represent the underlying transactions that took place, and communicate the overall financial condition of the company.

Your audit team has interviewed key ColAlta personnel in order to obtain an understanding of the key internal controls throughout the organization as they relate to financial reporting. To give an example of this process, the following are transcripts of interviews that your team conducted with three of ColAltas personnel: the Contracts Manager, the Finance Manager, and the Accounts Receivable / Billings Clerk.

Your group will use this information to document the revenue recognition process for ColAlta in the form of a process flowchart. In an actual audit, your team would repeat this task for all the major financial-statement-related processes within the company; here, you will only address the revenue recognition process.

Contracts Manager Kari Mae Kerr

Auditor: Thank you for taking the time to speak with me.

Kari Kerr: No problem. My name is Kari Kerr. Im the Contracts Manager for ColAlta Pipelines. Basically, Im responsible for keeping track of all the various contracts that ColAlta enters into.

Auditor: So, starting at the beginning how does a sales transaction begin?

Kerr: It all begins when a customer delivers a load of natural gas to one of the connection points along the pipeline. There are seven connection points along the pipeline: five in Alberta and two in Montana. The price a customer pays for the shipment of the gas depends on whether or not they have a long-term contract with us, and how far we transport the gas. The rates are all pre-determined, and published on our website.

Delivery is usually from a tanker truck, although we have a couple of connection points that have railway access, and a couple of connection points link up with other pipeline systems, so the natural gas can arrive in a number of different ways.

Auditor: How many receipts take place each day?

Kerr: It really varies. Some connection points are busier than others, of course. Some connection points will have two or three deliveries a day, others might have ten or fifteen. I think the busiest day Ive ever seen had about twenty deliveries to one connection point, but thats rare.

Auditor: How do you measure how much natural gas is delivered?

Kerr: The connection points are all metered: theres a device on the connection between the supplier and the pipeline that measures the volume of gas thats entering the pipeline system. Of course, the volume of a gas changes depending on the outside temperature and air pressure, so the metering device adjusts for those variables to give a standard measure.

Auditor: How do you know the volume is accurate?

Kerr: The meters are inspected annually by a representative from the Government of Alberta, or the State of Montana, depending on where the meter is located. Its all government regulated, and the meters are subject to industry standards.

Auditor: Who records the gas received? And how?

Kerr: The staff at the connection point complete a form called a delivery receipt. The delivery receipt records information like the date, time, customer name, contract number if theyre a contract customer, or PO number if theyre a one-off customer.

Auditor: What do you do if theres no contract number or PO number written on the delivery receipt?

Kerr: If the contract number is missing, I fill it in myself. If its a one-off customer, then I have to contact them to get a PO number before we can proceed.

Auditor: Is the volume received also recorded?

Kerr: Yes, of course. Our staff at the connection point record the volume received. The customers representative signs the delivery receipt, indicating that they agree with the volume recorded. Our staff also sign the delivery receipt. One copy of the delivery receipt is given to the customers representative.

Auditor: What happens to those delivery receipts?

Kerr: At the end of each day, the receipts from each connection point are compiled, scanned to a pdf file, and sent to me by e-mail. I print all the receipts for each day, and save the file for our records.

Auditor: So what do you do with the printed delivery receipts?

Kerr: Remember, about 90% of the pipelines capacity is committed by contract to our major customers, and theres only a couple dozen of those. When I print out the daily batch of delivery receipts, I sort them into two piles: one pile for contract customers, and one pile for one-offs. For the contract customers, I go through the pile and confirm the correct contract number has been written on each delivery receipt. I initial beside the contract number to indicate that its correct. Since theres not that many contracts, it usually goes pretty quickly. I then forward all those delivery receipts to the Billing department, so they can create invoices for them.

The rest of the delivery receipts, the one-off customers, I forward to the Finance Manager. Since we dont have contracts with those customers, the Finance Manager has to decide on credit terms for those customers.

Auditor: Shouldnt the Finance Manager decide on approving credit before the gas enters the pipeline, not after?

Kerr: You might think so. However, remember that natural gas is highly flammable: its not the sort of thing you want to leave sitting around while we decide on credit terms. For safety reasons, its better to have the gas flowing through the system rather than sitting around. Also, remember that were shipping the gas to a processing and safe storage facility in Colorado, where we release the processed gas back to our customers. If someone doesnt pass credit checks, we simply dont release the processed gas to them in Colorado until we receive payment. The Finance Manager can explain more to you about that.

Auditor: What about pricing do you check to make sure the price is correct?

Kerr: The price isnt recorded on the delivery receipt, only the volume. Our pricing is set based on whether or not a customer has signed a long-term contract or not. The contract customers get a lower price per cubic meter than one-off customers do. The rates also differ between the connection points: basically, the further distance the gas has to go, the higher the price.

All the rates are set up in the computer system. When Billing creates an invoice, they pull the price from the on-line file.

Auditor: How often are prices changed?

Kerr: That depends on which type of customer youre talking about. For the vast majority of our customers, the pricing never really changes. Theyre locked in to long-term contracts of ten years or more, so the prices theyre charged never change. The prices for our one-off customers are reviewed about once a year, and adjusted based on market conditions. Again, remember that the one-off customers are a very small volume compared to the contract customers.

Auditor: I think thats all I need for now. Can I come back to see you if I have any follow-up questions?

Kerr: Of course.

Questions

A- Identification of significant financial statement risks

December 31, 20____

Description of Potential Financial Statement Risk (full description do not name the type of risk	Financial Statement Account(s) Affected if applicable or Pervasive in nature	Financial Statement Assertion(s) if applicable or Overall (overall only applicable if the risk is pervasive)	Explanation of why a risk/ Justification
Risk1 :
Risk 2:
Risk 3: