The audit firm of Stark Lannister LLP, Chartered Professional Accountants, has been the audit firm for ColAlta

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Question:

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 year’s audit of ColAlta’s financial statements. Although Stark Lannister has been the auditor for ColAlta for several years, this will be Melissa’s 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.

Transcripts of Interviews with ColAlta Personnel

Finance Manager – Timothy Janzen

Auditor: Thank you for taking the time to discuss your role in the revenue recognition cycle with me.

Timothy Janzen: Happy to oblige. I’m Timothy Janzen, and I’m the Finance Manager for ColAlta. I make arrangements for raising money for the company, either through borrowing or issuing shares. When we have extra cash on hand, I’m responsible for investing that cash. And I’m also responsible for credit and collections. I review customers to determine whether we should grant credit to them, and I’m also responsible for following up to make sure our customers pay their bills on time.

Auditor: And what is your role in relation to the revenue recognition cycle?

Janzen: The vast majority of our customers have signed long-term contracts that obligate them to transport a certain volume of natural gas at a specified price. Once the contracts have been signed, I’m no longer involved with those customers.

The customers I get involved in are the “one-off” customers. Periodically, someone will want to transport gas in our pipeline, but they haven’t signed a long-term contract with us. The price for this service is pre-determined. I get involved to determine whether the “one-off” customer is able to pay for the service.

Auditor: How does that process start?

Janzen: Delivery receipts are sent each day from the various connection points to the Contracts Manager. She sorts the receipts between contract and “one-off” customers. The delivery receipts for contract customers go directly to the Billing department. The receipts for the “one-off” customers come to me.

Auditor: How often do you get “one-off” delivery receipts?

Janzen: Not that often. The vast majority of our pipeline’s capacity, better than 90%, is committed to our contract customers. Most upstream producers already have similar arrangements with other pipelines. We get maybe one or two customers a week who have a load of natural gas they’d like to ship on our pipeline. Often, it’s because their regular pipeline isn’t available, and they need to get the gas moving.

Auditor: So, what do you do when you get one of these receipts?

Janzen: The first thing I do is check to see if we’ve recently done a credit review of the same customer. If I’ve already reviewed their credit in the last three-to-six months, there’s no reason to reevaluate them. If I haven’t done a review recently, I get copies of their most recent annual report, and ask for three credit references from them. I analyze that information to decide whether or not they have the liquidity to pay for the transportation charges. The amount of analysis I do depends on the volume of gas they’ve delivered to the pipeline; if it’s a very small load, there’s no reason to do an extensive amount of research.

Auditor: How do you decide if the customer is credit worthy?

Janzen: Fairly typical methods: their current ratio, strength of their cash flow statement, credit ratings through various agencies, company reputation, that sort of thing. In the end, it comes down to professional judgement and experience.

Auditor: As I understand, the customer delivers the gas to the connection point, and it’s only after the gas has entered the pipeline that you check to see if a customer can pay for the transportation.

Janzen: That’s correct. I know it sounds strange to provide a service before knowing whether the customer can pay for it. However, there’s a couple of things you need to understand. First of all, bear in mind that natural gas is very flammable. It’s too dangerous to have the gas sitting around at the connection point while we evaluate a customer’s credit. It’s actually safer to transport the gas to the processing plant in Colorado: they have the storage facilities there to safely keep the gas after it’s been processed.

Another thing to remember is that the reason the upstream customer is sending the gas through the pipeline is because they have a downstream customer waiting to buy the processed gas on the other end. We can always keep the processed gas in storage at the processing plant until we receive payment. Even if the upstream customer is unable to pay us for the transportation charges, we have the option of negotiating a sale with the downstream customer at the other end, and recovering the transportation charges that way.

Auditor: So when you decide the customer is able to pay for the transport, what next?

Janzen: I initial the delivery receipt to indicate that I have approved the customer’s credit, and I forward the delivery receipt to the Billings department for them to create an invoice.

Auditor: Do you decide on the price to be charged to the customer?

Janzen: No, the pricing is all predetermined. For the non-contract customers, there is a set list of rates, depending on which connection point the gas is delivered to.

Auditor: Who is responsible for maintaining the pricing on the system?

Janzen: The Contracts Manager is the only person with access to the pricing file. She maintains the pricing table and makes sure the prices agree to the established rates.

Auditor: I think that gives me what I need. Can I follow up with you further if I’ve missed anything?

Janzen: Absolutely, my door’s always open.

Question:

1- Identification of significant financial statement risks

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: