Audit risk assessment at Chevron Corporation Essay

Contentss

I.Introduction

II.Overview of Chevron Corporation

III.Audit Risk Assessment

1.The possible hazard in Sale and Collection rhythm

2.The possible hazard in Acquisition and Payment Cycle

3.The possible hazard in Payroll

4.The possible hazard in Inventory

5.The possible hazard in Capital acquisition

IV.Recommendation

V.Conclusion

Appendix

Figure 1: Grosss

Figure 2: Entire Assetss

Figure 3: Effective revenue enhancement rate

Figure 4: Key Executive Compensation

Figure 5: Fiscal Highlights

Figure 6: Inventories

Oil majors’ R & A ; D into conventional and renewable energy at hazard

Cost Method & A ; Equity Method, Cam Merritt, Demand Media

Chevron CEO ‘s wage jumps 30 per centum to $ 32.2 million

I. Introduction

Gas and Oil industry is one of the sectors which promise a great trade of benefit. It is besides evaluated as a composite sector which blends of diversified minutess. Consequently, as its complicated nature, such a figure of unmanageable events are the consequence of this sort of industry. Following is the short overview of Chevron Corporation which illustrates that there are some potentially hazards in measuring this entity’s fiscal wellness.

This paper provides the designation of built-in hazards tie ining with the transnational energy giant as Chevron during its audit appraisal. Particularly, this study will reflect the innate hazards which impact to five cardinal dealing rhythms: Gross saless and aggregation, acquisition and payment, paysheet and forces, stock list and repositing, capital acquisition and refund. If many minor misstatements remain undiscovered in these rhythms, the combined sum could be important ( Arens, 2010 ) . From this, analysing these hazards is besides drawn every bit good as some recommendations are suggested with respect to extenuate related hazards.

This paper is based on cognition about gas and oil sector, resources from academic stuffs, fiscal magazines and newspaper, analytical articles.

II. Overview of Chevron Corporation

Chevron is a elephantine American multinational energy entity based in San Ramon, California. It is one of the universe biggest oil company with approximately 62,000 employees in 180 states. Every facet of oil and gas industry is optimized in Chevron concern. They can be listed as geographic expedition and production ; refinement, selling and conveyance ; chemicals fabrication and gross revenues ; and power coevals. In short, its spreading operation is concluded within three chief cardinal concerns: upstream, downstream and alternate energy. These significant concern activities bring net income of $ 19.2 billion on gross revenues and other grosss of $ 200.5 billion to Chevron Group in 2014.

Figure 1 shows grosss are made of about half from USA and over half from international. This reflects the fact that aggregative gross is recognized from assorted states which have different policies and criterions. Therefore, the degree and frequent of reading and accommodation of describing from subordinates and affiliates to the parent company is rather important.

Harmonizing to anterior year’s audit, Chevron is audited with unqualified sentiment by Independent Registered Public Accountant Firm ( Annual Report, 2014 ) . However, it can be clearly seen that when large entity as Chevron operates, there evidently day-to-day complex minutess and events would keep the built-in hazards in entering. It requires a good and thorough analysis every bit good as strategic proving program to guarantee that all the minutess to be shown in a true and just position.

III. Audit Risk Assessment

1. The possible hazard in Sale and Collection rhythm

As Ernst & A ; Young has stated inRevised proposal for gross from contracts with clients“There are many complex contracts in oil and gas industry and diverseness presently exists in how these are accounted for” . Therefore, it is non excessively overdone to state that gross acknowledgment is the most hazardous country for scrutinizing in Sale and Collection rhythm attack. Chevron records gross by entitlement method which means that gross reflects each owner’s contractual portion of production regardless that who really made the sale and invoiced the volume ( Chevron one-year study, 2014 ) . The instability between the existent sale and entitlement will be made up in a peculiar clip and adjusted at the terminal by seting gross or seting cost of gross revenues ( Accounting standard ASU 2014-09, IFRS 15 ) . Therefore, it causes the fact that there is possible issue as at any given clip, the sum of oil or gas really sold by each proprietor may differ from its working involvement per centum ( Earns & A ; Young, 2012 ) . This issue can be seen in the historical instance of Chevron vs Belco Petroleum Corporation ( 1985 ) . Although this instance helped Chevron increased its influx by reserving its working involvement.

In add-on, in service contract the benefit is raised with spouses will be non counted as gross. However, it still lacks specific counsel from IFRS in finding counterparty or client.

All above factors reflect that there bears concealed hazards in entering gross. Particularly, gas and oil industry maintains the high degree of diverse reading for gross.

2. The possible hazard in Acquisition and Payment Cycle

Some analysts suggest that disbursement on Research and Development is a manner for oil and gas companies to prolong in their nucleus concerns ( Ed Crooks, 2014 ) . It could be sensible for Chevron to maximise their disbursement on R & A ; D to increase productiveness. Consequently, it raises an of import facet in entering these costs in appropriate manner.

Harmonizing to Property, Plant and Equipment ( PPE ) accounting Policy ( IASB ED6 ) , all costs for development Wellss, related works and equipment, proved mineral involvements in petroleum oil and natural gas belongingss, and related plus retirement duty ( ARO ) assets are capitalized. Costss besides are capitalized for exploratory Wellss that have found rough oil and natural gas militias. From that, it means that rating of costs to find whether they are assets or disbursals is rather important to reflect the accurate study of plus.

However, these militias merely base on the appraisal of future production every bit long as the measure of militias justify its appraisal with sensible certainty of producible hereafter ( US Geological Survey and SPE Prospective Resources ) . Therefore, it could non deny the fact that this fact can impact to the assets and disbursals histories. This can be an built-in hazard in acquisition an payment rhythm as a consequence of appraisal.

This is particularly necessary for Chevron as PPE is a dominant part of entire assets, busying 68.9 % ( Figure 2 ) . Hence, it is obvious that if there is any misstatements in place the cost of R & A ; D, it will extremely consequence to the entire assets acknowledgment.

Next, the 2nd event would decently impact to the payment rhythm with the issue of revenue enhancement income payment. Recently, there are some groundss to province that Chevron Group used a complex web of payment to derive tax-exempt involvement on inter-company loans from Delaware — known as a US revenue enhancement oasis. It has been able to borrow about $ 2.5 billion at a low 1.2 % , but claimed at 9 % . Therefore, Chevron can dodge $ 258 million in Australia revenue enhancements ( Taxpayers Australia Limited, 2014 ) . It can be a sensible uncertainty when the consequence income revenue enhancement rate from international operation in 2014 diminutions every bit double as its 2013 ( Figure 3 ) . Chevron may be apt for a $ 322 million payback including punishments if it executed this illegal action. Therefore, payment rhythm will be effected when hard currency and disbursals histories are changed.

3. The possible hazard in Payroll

Chevron’s executive compensation plan consists of four elements: Base Pay, Short-Term Incentives, Long-Term Incentives and Benefits ( IAS 24 ) . These factors consist of two parts: fixed compensation ( basal wage and benefits ) versus variable compensation ( short-run and long-run inducement grants ) . As Mae Lon Ding, president of Anaheim-based Personnel Systems Associates said “ What is good about the current compensation program at Chevron is when the shareholders do good, the Chief executive officer does good besides, ” which tracks executive wage. However, the variable compensation can take to a fraud since this can trust on many premise and judgement to find. There was a issue in 2012, although the main executive officer – John Watson ‘s fillip was cut, he still received compensation of 30 % more than old twelvemonth. This fact raises a concern whether the board was findings manner to do it up with stock options and grants while wages and fillips were moderated ( Corey Rosen, 2012 ) . If this is true, even though the wages are seen to be lessening when the company runs non good but in fact they can acquire more with the stock options. Figure 4 shows that the top executive compensations went up by 14.02 % ( Morningstar, 2014 ) even though the net income and grosss declined about 10.2 % , and 8.9 % severally in 2014 ( figure 5 ) .

4. The possible hazard in Inventory

It can be seen that stock list occupied 15.4 % of all current assets harmonizing to Chevron one-year study 2014. Therefore, the mistake in stock list records will demo the incorrect contemplation of current assets. Chevron’s stock lists comprise barbarous oil and crude oil merchandises ; chemicals ; stuffs, supplies and other which is accumulated from multiple locations. Hence, there is a possible tendency of built-in hazard as the physical stock-taking processs in all subordinates are impossible.

Furthermore, Chevron still applies Last-in-First-out stock list method while LIFO has been strongly opposed in the fiscal community and non allowed by IFRS, except for U.S. GAAP. This method can be use as a “tax loophole” . Shackelford and Sheulin ( 2001 ) have documented the revenue enhancement motivated consequence of LIFO. LIFO will increase the cost by using the most current cost, therefore entire gross will be lower comparing with the other methods. In add-on to this, stock lists of Chevron are made up from many international subordinates which do non used LIFO method. Therefore, it requires a transition to LIFO when it reports in the amalgamate statement. Consequently, it needs accommodation to stock lists as figure 6. Built-in hazard is by and large considered to be higher where a high grade of accommodation is involved.

5. The possible hazard in Capital acquisition

Properly combine and unwraping minutess between subordinates in different states have become progressively complex and hence more hard to enter decently ( Arens, 2010 ) . Chevron Corporation is non an exceeding instance with its equity method. Investings in and progresss to affiliates which Chevron has involvement of approximately 20 % -50 % usage equity method ( Chevron, 2014 ) . It is explained that with equity method, the balance-sheet value of the investing alterations harmonizing to the net income ( the net income ) of the “ owned ” company ( Cam Merritt, 2015 ) .

Therefore, it requires a frequent accommodation harmonizing to the alterations in net incomes of subordinates and affiliates ( IAS 27 ) . As a regulation of pollex, where there is a higher degree of accommodation, there is a higher opportunity of misstatement. It is particularly true for Chevron while it has subordinates over 180 states. In add-on to this, this built-in hazard is increasing when the investment‘s addition or loss from other states convert to its functional currency. This fact can be reflected via Figure 7

IV. Recommendation

All the above issues confirm that there are ever built-in hazards in every dealing if the company does non hold a good internal control. This can take to the stuff deceitful fiscal coverage and embezzlement of assets and direct-effects illegal Acts of the Apostless. The consequences of recent fraud study indicate that about half of typical frauds are detected by internal control. Therefore, an entity should plan and implement an equal internal control to forestall or observe cases of fraud by promoting an efficient and effectual usage of its resources, forces.

The accurate information can be reached as ethical and moral attitude from the top direction to the employees. Every person has to obey the policies, processs which are set by the company. Obviously, these policies have to be in conformity with the applicable Torahs and ordinances such Internal Control – Integrated Framework ( 2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ) .

The healthy control environment is built by crystalline communicating, interaction between beds of employees. The duty of keeping the honest and truth of the inputs and treating dealing belongs to every member of the organisation. However, the management’s ethical value plays an of import function in actuating the consciousness of employees about following the codification of behavior. Internal auditing is besides a class of action to do the internal control more effectual.

There are some control activities which are suggested in order to extenuate the impact of those above identified hazards: Adequate separation of responsibilities, Proper mandate of minutess and activities: Adequate papers and records, Physical control over assets and records, Independent cheques on public presentation. ( Arens, 2010 ) .

V. Conclusion

Appendix

Figure 1: Grosss

D:DropboxScreenshotsScreenshot 2015-04-30 16.17.43.pngFigure 2: Entire Assetss

D:DropboxScreenshotsScreenshot 2015-04-26 13.57.56.png

D:DropboxScreenshotsScreenshot 2015-04-24 01.41.50.pngFigure 3: Effective revenue enhancement rate

D:DropboxScreenshotsScreenshot 2015-04-27 14.23.02.pngFigure 4: Key Executive Compensation

Figure 5: Fiscal Highlights

D:DropboxScreenshotsScreenshot 2015-04-30 16.25.02.png

Figure 6: Inventories

D:DropboxScreenshotsScreenshot 2015-04-27 13.14.56.png

D:DropboxScreenshotsScreenshot 2015-04-27 13.15.28.png

D:DropboxScreenshotsScreenshot 2015-04-27 13.15.40.png

Figure 7: Fiscal Adjustments

D:DropboxScreenshotsScreenshot 2015-04-27 13.13.54.png

D:DropboxScreenshotsScreenshot 2015-04-30 15.56.25.png