WHAT YOU ALWAYS WHAT YOU ALWAYS WANTED TO KNOW WANTED TO KNOW

ABOUT AUDITING BUT ABOUT AUDITING BUT WERE AFRAID TO ASKWERE AFRAID TO ASK

PASPB Technical SessionPASPB Technical Session

October 31, 2006October 31, 2006

WHYWHY

DollarsDollars Unique AgreementsUnique Agreements TrustTrust HistoryHistory InterestInterest Cost to conduct auditCost to conduct audit Just because we canJust because we can

AUDIT PROVISIONSAUDIT PROVISIONS

Contained in the Accounting Contained in the Accounting ProcedureProcedure

24-month limitation on auditing24-month limitation on auditing Non-Operators will join togetherNon-Operators will join together Operator bears no portion of cost Operator bears no portion of cost

NON-OPERATOR’S NON-OPERATOR’S RESPONSIBILITYRESPONSIBILITY

Determine time needed for field workDetermine time needed for field work Contact the operator and scheduleContact the operator and schedule Authorize someone to conduct auditAuthorize someone to conduct audit Confirmation letter to operatorConfirmation letter to operator Request documentationRequest documentation Prepare ballot letter to other non-Prepare ballot letter to other non-

operatorsoperators

NON-OPERATOR’S INTERNAL NON-OPERATOR’S INTERNAL PREPARATIONPREPARATION

Joint Operating AgreementJoint Operating Agreement Review Accounting ProcedureReview Accounting Procedure Joint Interest BillingsJoint Interest Billings Drilling Report, if applicableDrilling Report, if applicable Authority for ExpendituresAuthority for Expenditures Any other agreements with operatorAny other agreements with operator

OPERATOR’S OPERATOR’S RESPONSIBILITYRESPONSIBILITY

Work with audit team to schedule timeWork with audit team to schedule time Provide confirmation letterProvide confirmation letter Provide a list of current Working Provide a list of current Working

Interest OwnersInterest Owners Provide JADEProvide JADE Make documentation available to Make documentation available to

auditors upon arrivalauditors upon arrival Have adequate facilitiesHave adequate facilities

AUDITOR’S AUDITOR’S RESPONSIBILITIESRESPONSIBILITIES

SCOPESCOPE

Capture as much as possibleCapture as much as possible Don’t ‘spend a dollar to chase a Don’t ‘spend a dollar to chase a

dime’dime’ Don’t go under scope unless a Don’t go under scope unless a

systemic problemsystemic problem Be as fair as possible to both sidesBe as fair as possible to both sides

REVIEW AGREEMENTREVIEW AGREEMENT

Look for changes to basic JOALook for changes to basic JOA Note date of agreementNote date of agreement Check for how to handle title Check for how to handle title

opinionsopinions Check for version of Accounting Check for version of Accounting

ProcedureProcedure Check insurance provisionsCheck insurance provisions

ACCOUNTING PROCEDUREACCOUNTING PROCEDURE

Look for changes to basic procedureLook for changes to basic procedure Check offsite technical electionCheck offsite technical election Check overhead ratesCheck overhead rates Look at overhead termsLook at overhead terms Check major construction overheadCheck major construction overhead

DRILLING REPORTDRILLING REPORT

Note datesNote dates OperationsOperations BitsBits TubularsTubulars VendorsVendors Tour reportTour report Completion report if availableCompletion report if available

GETTING STARTEDGETTING STARTED

Compare JADE to JIB’sCompare JADE to JIB’s Keep original JADE and just copy Keep original JADE and just copy

workpapers overworkpapers over Eliminate offsetsEliminate offsets Eliminate under scopeEliminate under scope

VERIFY CHARGESVERIFY CHARGES

Verify invoices over scopeVerify invoices over scope– PropertyProperty– DatesDates– ActivityActivity– Comply with JOAComply with JOA– Comply with Accounting ProcedureComply with Accounting Procedure– Note invoice numberNote invoice number– Make sure amount agrees with chargeMake sure amount agrees with charge

ADDITIONAL VERIFICATIONADDITIONAL VERIFICATION

Double check large invoices against Double check large invoices against drilling reportdrilling report

Look for duplicate paymentsLook for duplicate payments Check field tickets supporting Check field tickets supporting

invoicesinvoices Check drilling charges against drilling Check drilling charges against drilling

contractcontract

OVERHEADOVERHEAD

Drilling overheadDrilling overhead– Check spud or “on location” datesCheck spud or “on location” dates– Calculate escalationCalculate escalation

Producing overheadProducing overhead– Check month of first productionCheck month of first production– Calculate escalationCalculate escalation

RECONCILIATIONSRECONCILIATIONS

BitsBits– Pull from tour reportsPull from tour reports– Verify serial numbers against invoicesVerify serial numbers against invoices

TubularsTubulars– Pull from drilling reports or completion Pull from drilling reports or completion

reports filed with authoritiesreports filed with authorities– Gather information from transportation Gather information from transportation

invoicesinvoices

RECONCILIATIONSRECONCILIATIONS

DieselDiesel– Charges while rig on locationCharges while rig on location– In Texas, check sales taxIn Texas, check sales tax– Offshore transfersOffshore transfers

ChemicalsChemicals– Look for credits from mud companyLook for credits from mud company– Offshore transfersOffshore transfers

RECONCILIATIONSRECONCILIATIONS

Surface equipmentSurface equipment– ReasonableReasonable– Put together the storyPut together the story

BoatsBoats– Property notedProperty noted– How allocatedHow allocated

HelicoptersHelicopters– Property notesProperty notes– How allocatedHow allocated

PERSONNELPERSONNEL

Payroll recordsPayroll records– Timesheets if time is allocatedTimesheets if time is allocated– Employee benefits rateEmployee benefits rate– Vehicle expenseVehicle expense

Tech laborTech labor– On site & off siteOn site & off site– QualificationsQualifications– Specific condition or problemSpecific condition or problem

OTHEROTHER

InsuranceInsurance– Complies with JOAComplies with JOA

Operator owned facilitiesOperator owned facilities– Complies with Accounting ProcedureComplies with Accounting Procedure

LegalLegal– Generally no ‘in-house’ attorneys chargeableGenerally no ‘in-house’ attorneys chargeable

UnusualUnusual– Helicopter charges for a West Texas propertyHelicopter charges for a West Texas property

INFORMATION REQUESTSINFORMATION REQUESTS

Be specificBe specific Adequate documentationAdequate documentation Follow Operator’s guidelinesFollow Operator’s guidelines

– ElectronicElectronic– Hard copyHard copy– Copy of JADECopy of JADE

ExceptionsExceptions

Be specificBe specific Quote JOA, Accounting Procedure, Quote JOA, Accounting Procedure,

contracts as applicablecontracts as applicable Adequate documentationAdequate documentation Copy of JADE the Operator furnished Copy of JADE the Operator furnished

as supportas support Leave field exception with Operator Leave field exception with Operator

before leaving locationbefore leaving location

AUDIT REPORTAUDIT REPORT

Actual ReportActual Report– Send out within 90 days of field workSend out within 90 days of field work– OR by December 31OR by December 31stst if late in year if late in year– Note amount of $’s auditedNote amount of $’s audited– OK except for......OK except for......

Operator’s ResponseOperator’s Response– With 180 days of receipt or in violation With 180 days of receipt or in violation

of most agreementsof most agreements

CONTINUING PROBLEMSCONTINUING PROBLEMS

MaterialsMaterials MiscodesMiscodes Technical LaborTechnical Labor LegalLegal Outside Landman ChargesOutside Landman Charges Overhead ChargesOverhead Charges

TOOLSTOOLS

ComputerComputer PrinterPrinter Lots of Office SuppliesLots of Office Supplies COPAS CDCOPAS CD Flash DriveFlash Drive Cell PhoneCell Phone Sense of Humor !!!Sense of Humor !!!

TAKE TIME FOR SOME FUNTAKE TIME FOR SOME FUN

THE ENDTHE END