WHAT YOU ALWAYS WANTED TO KNOW ABOUT AUDITING BUT WERE AFRAID TO ASK

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WHAT YOU ALWAYS WANTED TO KNOW ABOUT AUDITING BUT
WERE AFRAID TO ASK

• PASPB Technical Session
• October 31, 2006

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WHY

• Dollars
• Unique Agreements
• Trust
• History
• Interest
• Cost to conduct audit
• Just because we can

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AUDIT PROVISIONS

• Contained in the Accounting Procedure
• 24-month limitation on auditing
• Non-Operators will join together
• Operator bears no portion of cost

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NON-OPERATORS RESPONSIBILITY

• Determine time needed for field work
• Contact the operator and schedule
• Authorize someone to conduct audit
• Confirmation letter to operator
• Request documentation
• Prepare ballot letter to other non-operators

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NON-OPERATORS INTERNAL PREPARATION

• Joint Operating Agreement
• Review Accounting Procedure
• Joint Interest Billings
• Drilling Report, if applicable
• Authority for Expenditures
• Any other agreements with operator

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OPERATORS RESPONSIBILITY

• Work with audit team to schedule time
• Provide confirmation letter
• Provide a list of current Working Interest Owners
• Provide JADE
• Make documentation available to auditors upon
  arrival
• Have adequate facilities

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AUDITORS RESPONSIBILITIES
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SCOPE

• Capture as much as possible
• Dont spend a dollar to chase a dime
• Dont go under scope unless a systemic problem
• Be as fair as possible to both sides

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REVIEW AGREEMENT

• Look for changes to basic JOA
• Note date of agreement
• Check for how to handle title opinions
• Check for version of Accounting Procedure
• Check insurance provisions

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ACCOUNTING PROCEDURE

• Look for changes to basic procedure
• Check offsite technical election
• Check overhead rates
• Look at overhead terms
• Check major construction overhead

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DRILLING REPORT

• Note dates
• Operations
• Bits
• Tubulars
• Vendors
• Tour report
• Completion report if available

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GETTING STARTED

• Compare JADE to JIBs
• Keep original JADE and just copy workpapers over
• Eliminate offsets
• Eliminate under scope

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VERIFY CHARGES

• Verify invoices over scope
• Property
• Dates
• Activity
• Comply with JOA
• Comply with Accounting Procedure
• Note invoice number
• Make sure amount agrees with charge

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ADDITIONAL VERIFICATION

• Double check large invoices against drilling
  report
• Look for duplicate payments
• Check field tickets supporting invoices
• Check drilling charges against drilling contract

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OVERHEAD

• Drilling overhead
• Check spud or on location dates
• Calculate escalation
• Producing overhead
• Check month of first production
• Calculate escalation

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RECONCILIATIONS

• Bits
• Pull from tour reports
• Verify serial numbers against invoices
• Tubulars
• Pull from drilling reports or completion reports
  filed with authorities
• Gather information from transportation invoices

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RECONCILIATIONS

• Diesel
• Charges while rig on location
• In Texas, check sales tax
• Offshore transfers
• Chemicals
• Look for credits from mud company
• Offshore transfers

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RECONCILIATIONS

• Surface equipment
• Reasonable
• Put together the story
• Boats
• Property noted
• How allocated
• Helicopters
• Property notes
• How allocated

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PERSONNEL

• Payroll records
• Timesheets if time is allocated
• Employee benefits rate
• Vehicle expense
• Tech labor
• On site off site
• Qualifications
• Specific condition or problem

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OTHER

• Insurance
• Complies with JOA
• Operator owned facilities
• Complies with Accounting Procedure
• Legal
• Generally no in-house attorneys chargeable
• Unusual
• Helicopter charges for a West Texas property

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INFORMATION REQUESTS

• Be specific
• Adequate documentation
• Follow Operators guidelines
• Electronic
• Hard copy
• Copy of JADE

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Exceptions

• Be specific
• Quote JOA, Accounting Procedure, contracts as
  applicable
• Adequate documentation
• Copy of JADE the Operator furnished as support
• Leave field exception with Operator before
  leaving location

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AUDIT REPORT

• Actual Report
• Send out within 90 days of field work
• OR by December 31st if late in year
• Note amount of s audited
• OK except for......
• Operators Response
• With 180 days of receipt or in violation of most
  agreements

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CONTINUING PROBLEMS

• Materials
• Miscodes
• Technical Labor
• Legal
• Outside Landman Charges
• Overhead Charges

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TOOLS

• Computer
• Printer
• Lots of Office Supplies
• COPAS CD
• Flash Drive
• Cell Phone
• Sense of Humor !!!

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TAKE TIME FOR SOME FUN
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THE END