The financial audit process involves having auditors evaluate the financial transactions and statements of oil and gas company. In general, an audit of the financial statements of an oil and gas company is the same as the phases of an audit of the financial statements of companies in other industries. A typical business financial audit has four main phases: planning, setting internal controls, testing, and reporting. Risk-based audit remains a general audit approach as regulated in audit standards.
There are some audit considerations when conducting oil and gas company. Revenue recognition, inventory valuation, impairment analysis, also reserve of oil and gas measurement will be the primary audit considerations. The other considerations including exploration and evaluation, royalty, also depreciation, amortisation, and depletion.
In auditing, to enable providing value added services to the client, there are several matters need to be considered for the external auditors as follows:
1. Auditor Skills and Experience
Auditors who audit oil and gas companies must have sufficient knowledge and experience in this industry. They must understand the technical and operational aspects of the oil and gas business, as well as applicable regulations.
2. Understanding of Risk
Auditors must have an in-depth understanding of the risks faced by oil and gas companies and must be able to identify potential risks that could affect the company’s operations.
3. Use of the Latest Technology
The oil and gas industry is increasingly adopting the latest technology and data analysis to increase efficiency and monitor operations. Auditors must understand and mitigate risks in this technology by carrying out a series of procedures and involving the IT specialist if needed.
4. Involvement of Reserve Specialist
Reserve information is used as a basis for calculating depreciation and impairment valuation in the oil and gas companies. The estimating and auditing of Reserve Information is predicated upon certain historically developed principles of petroleum engineering and evaluation, which are in turn based on principles of physical science, mathematics and economics. Although these generally accepted petroleum engineering and evaluation principles are predicated on established scientific concepts, the application of such principles involves extensive judgments and is subject to changes in (i) existing knowledge and technology, (ii) economic conditions, (iii) applicable statutory and regulatory provisions and (iv) the purposes for which the Reserve Information is to be used. The management need to consider the involvement of specialist to evaluate those reserves. External auditors will perform the procedures related to work of specialist and may involve auditor’s specialist to help the review of the valuation if needed.
5. Abandonment and Site Restoration
An oil or gas well is plugged and abandoned when it reaches the end of its useful life or becomes a dry hole. In addition, for the facilities associated with oil and gas production, the operators must make sure that they are safely and properly shut down. Management calculates the provision for assets restoration and abandonment and capitalized it as ARO assets. The calculation may involve technical experts. External auditors need to have sufficient knowledge and experience related to the calculation and may involve the auditor’s expert to assist in the preparation of audit procedures.
A company that operates in oil and gas usually has many unique business model or condition related to its business. Some key issues may be discovered by the auditor on a case-by-case basis. These key issues include side tracks, suspended wells, overlifts and underlifts, line fill and cushion gas, farm outs, unitisation agreement, production sharing agreement, decommissioning liabilities, and joint activities.
It is important to remember that the emphasis on auditing in Oil and Gas companies is not just about issuing the audit opinion, but it can also provide value added services by ensuring regulatory compliance, managing risk and achieving greater efficiency. By carrying out audits carefully and paying attention to the key factors mentioned, auditor can maintain and build strong relationship with client management.
