Present Value Of Reserves Case Study

1169 Words 5 Pages
Present Value of Reserves
One of the issues regarding present value of reserves is to consider who performed the valuation. If the reserves were calculated internally, there are is a lower level of reliability since there is motivation to alter the valuation. If Chesapeake hired outside contractors that were independent, there would be more reliance to the present value of reserves and other estimates related to assets. There should be further tests to examine if the estimates of reserves are correct that relate to economic, environment, and other related factors. If the rates for present value are drastically incorrect by market standards, it would have the ability to raise the present value of reserves. Sampling should be done to gain evidence
…show more content…
Regardless of which companies utilize, auditors and valuation experts should realize that the estimates of present value are based on historical values. In result, valuations tend to differ from the economic value. Chesapeake Energy practices the full cost accounting method in which companies capitalize all of their expenses relating to exploration- whether successful or not. One critical issue this raises for auditors such as PwC is that the full cost method enables Chesapeake Energy to carry reserves on their balance sheet at a higher valuation, since they capitalize all costs, even ones where the exploration was not successful. Auditors will have to take a closer look when examining values of Chesapeake Energy’s reserves due to the more aggressive accounting. Thus, having an increased chance of present value being at a higher …show more content…
Many times this is due to outside factors that the business cannot control. The same goes for Chesapeake Energy where oil prices, regulatory changes for example can impact their revenues and expenses. Due to the possibility that profits may not meet expectations, auditors must check that Chesapeake’s accounting reflects GAAP appropriately. There is a possibility that expenses may be understated, or revenues can be altered and overstated to increase profits resulting from unprofitable financial years. Expenses should not be delayed to subsequent years, and should match the revenues from the financial year. Revenue should not be recorded from contracts if the service has not been performed. Auditors should take steps such as digging deeper into the contracts with clients to make sure the revenues from such contracts are not recorded if the service has not been

Related Documents

Related Topics