VINAND PETROLEUM CASE
Financial statements could be examined with varied degrees, as part of the client acceptance procedures Paige CPA got to perform a horizontal and vertical analysis, and financial ratio analysis of Vinand Petroleum financial statements. These procedures are not as in depth as other procedures used by auditors on financial statements, but these procedures may show areas of concern for auditors. From 2006 to 2007, Vinand’s long term debt tripled and its interest expense paid for the year did not reflect this drastic increase. This could mean that Vinand has taken on a large amount of debt with a low interest rate, which will not bode well for the financial health of the company in the future. In the same breadth, accounts payable account did not increase from 2006 to 2007 despite a substantial increase in the inventory account. Revenue increased by a large margin in 2007, and the increase in the account receivable account was pale in comparison with sales, but even with both these developments the taxes payable account decreased.” Other liabilities” account usually denotes miscellaneous liabilities which are usually immaterial, from 2006 to 2007 this account increased from $50,000,000 to $466,000,000, the cause of this steep increase has to be investigated. Looking at Table 2 which gathers information of Oil and Gas companies from 2005 to 2007, Vinand consistently beats out the industry average by astronomical margins except in the return on sales category where Vinand sits at the industry average. In one particular instance Vinand had a percentage increase of 53.06% compared to its closest competitor which had an increase of 7.56% while the industry average was a decline of 12.75%. All these raise concerns as to how in an industry as volatile as the oil and gas, how Vinand consistently overwhelmed industry expectations. For all its exceptional performance, Vinand’s return on sales ratio borders right on the industry average.
Paige CPA found a couple of issues that hindered its acceptance, the contract bidding process which Paige CPA found out that contained hand written markups, which completely leaves it open to fraud by any of the bid committee members. Another issue that Paige CPA should have issued was the previous auditors concerns about valuation of crude and oil reserves, because despite increase in revenues and product sales inventory levels have stayed relatively low. Paige CPA is “low-balling” the audit fees, because according to the extract there is a “significant learning curve” related to the audit but Paige CPA is charging a fee identical to that of last year’s audit performed by Big 4 CPA. Vinand’s process of awarding contracts seems quite suspicious and this leads one to assume there may be some sort of illegal activity and fraud being perpetuated. According to AU 317, it is stated that “Although fraud usually is concealed and management's intent is difficult to determine, the presence of certain conditions may suggest to the auditor the possibility that fraud may exist. For example, an important contract may be missing” Vinard’s contract awarding process seems to be quite secretive. It is centralized to five members of the board who secretly decide on who to award the contract to. This lack of openness in the process of selection grants the committee members the opportunity to award contracts unfairly. There also seems to be improper documentation of the number and identification of contracts awarded. This inability to show records of processes being undertaken suggests lack of efficient controls which leave the bidding process at the mercy of fraud. In addition, it appears that very little information is being released to the public and to prospective contract bidders about the contracts and the bidding process. This lack of public information may be a result of a conniving fraudulent act which needs to be investigated. However, Vinand’s impressive management team seems to strive...
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