AUDITING LIQUID MEASUREMENT

Class Number 7050

Linda A. Larson, CIA

Internal Auditing Manager- Transportation, Equiva Services LLC
1100 Louisiana Street, Room 2368, Houston, TX 77002
e-mail: [email protected]

INTRODUCTION designed to add value and improve an

organization's operations. It helps an
An effective audit of liquid hydrocarbon organization accomplish its objectives by
measurement is dependent upon a solid bringing a systematic, disciplined approach
understanding of the measurement process to evaluate and improve the effectiveness
combined with the application of sound internal of risk management, control, and
auditing principles. The quality of liquid governance processes."
measurement activities is contingent upon (1) the
reliability of the measurement equipment and In addition to the internal auditing function,
instrumentation used; (2) the specific procedures companies may also develop a program for
and practices followed in performing the conducting liquid measurement field surveys. These
measurement activities; (3) the adequacy of training surveys typically provide a more thorough in-depth
and proper performance of the measurement review of measurement equipment and activities,
technician; and (4) the proper documentation of and are commonly performed by trained
transactions based on a measured value. All four measurement specialists. In contrast to "corporate
components must be taken into consideration when audits", liquid measurement field surveys typically
auditing liquid measurement. In addition, to ensure include evaluations of the appropriateness of
the efficiency of the audit process, auditors must equipment used, review for proper installation of
identify those areas which present the greatest risk equipment, and tests to determine whether
to the organization to achieving its goals, and equipment installation and operation is in
concentrate audit effort on those areas. compliance with API standards. Because the field
survey team possesses an extensive level of
"CORPORATE AUDIT" OR FIELD measurement expertise, their review may involve
MEASUREMENT SURVEY? more in-depth testing and evaluation in comparison
to what the "corporate audit" may entail. See ISHM
The audits performed by "corporate" auditors Paper 2220 "Liquid Measurement Field Surveys" for
typically focus on auditing business processes and a discussion of topics to include in a liquid
operational activities for compliance with corporate measurement field survey.
policies and procedures, industry and government
standards, and sound management principles. The extent of in-depth knowledge corporate auditors
Additionally, accounting and financial transactions have in the area of liquid measurement will be
are reviewed for accuracy, completeness and dependent upon the resources used to staff the
timeliness. Other objectives are to assure internal auditing organization, and the level of
management that company assets are safeguarded, training provided regarding measurement
and that resources are being utilized economically techniques. Measurement specialists, on the other
and efficiently. The internal auditing organization hand, are typically trained experts in this field. A
should report to an individual within the organization strong working relationship between the two groups
who has sufficient authority to promote can benefit the company directly through
independence, to ensure broad audit coverage, and coordination of work effort, information sharing and
to make certain that appropriate action is taken on support. A clear understanding of what each
audit recommendations. The value of having group's objectives are and what their program
internal auditing organizations perform audits may consists of may lead to a more effective company-
be best explained by reviewing the definition of wide assurance program regarding measurement
Internal Auditing as established by the Institute of practices. Additionally, it is possible that synergies
Internal Auditing (1): may be realized and audit effort reduced by reliance
upon work performed in a measurement field survey
"Internal auditing is an independent, program.
objective assurance and consulting activity

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DETERMINING WHAT TO AUDIT potential investors, liquid measurement data may be
used internally by management as a basis for
In determining the specific topics to be covered in an making business decisions. Thus, the accuracy of
audit (also known as the "audit scope"), it is liquid measurement activities impacts a company
necessary to identify those activities that are critical both internally and externally.
to achieving organizational objectives efficiently and
economically. An effective audit will focus on those DESCRIPTION OF THE AUDIT PROCESS
critical objectives and an evaluation of the adequacy
of controls to ensure those objectives are achieved. The audit process consists of the following basic
This process involves determining the answer to the steps as defined in the Standards for the
following questions: Professional Practice of Internal Auditing (2):

1. What are the relevant business objectives? . Plan the audit. The auditor must determine
the audit objectives, which define the
. What are the risks which may prevent the intended audit accomplishments. These
organization from achieving these objectives should address the risks
objectives? associated with the activity being audited.
Once the audit objectives are determined,
3. What internal controls are in place to specific audit procedures for collecting,
mitigate these risks? analyzing, interpreting, and documenting
information during the audit should be
As an illustration of this analysis, let's assume the identified. These documented steps provide
identified business objective is to ensure that month- a plan for achieving the audit objectives.
end product inventory is accurately measured and
reported according to the corporate policy. The 2. Examine and evaluate information.
associated risks and various internal controls which Information must be collected, analyzed and
may mitigate those risks are then identified. For an interpreted in order to provide the basis for
example of some of the risks and internal controls audit findings. Auditors must also document
that may be identified using this process, see Exhibit this work as support for audit conclusions.
1 at the end of this paper. Once completed, the The extent of testing performed during this
auditor can use this framework to help structure the stage of the audit process will be determined
audit program and ensure that the critical business by several factors including the reliability of
activities are included in the review. data obtained and the level of risk
associated with the process being audited.
Since audit time and resources are limited, the However, audit tests must provide sufficient
auditor must determine which specific areas present data in order for the auditor to make sound
the greatest risk to achieving business objectives, audit conclusions.
and focus his audit efforts on those areas. For
companies in the oil industry, perhaps one of the 3. Draw an audit conclusion and report results.
most significant operational activities is the accurate Based upon the testing performed, the
measurement of hydrocarbons - the very lifeblood of auditor draws a conclusion and reports
these organizations. Some examples of financial those results. If significant control
data directly impacted by measurement practices weaknesses are detected, the auditor will
include: recommend corrective action to be taken to
address these issues. Audit reports should
• Oil inventories, a significant balance sheet communicate effectively the audit results,
item; and must be appropriately distributed to
• Oil loss / gain expense; management. Reports should be objective
• Sales and purchases of crude oil and (clear from bias and distortion), clear,
products; concise, constructive and timely.
• Transportation revenue (both gathering and
trunk) for pipeline companies; and . Follow up on reported audit findings. Once
• Terminalling fees which are based upon the audit report is issued, internal auditors
volumes handled. should follow up on outstanding audit
findings to ensure that appropriate action is
In addition to affecting the company's financial taken in a timely manner. While
statements which are available to shareholders and management is responsible for deciding

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 what action to take in response to an audit proving frequency requirements. However, a review
finding, it is the internal auditing of meter proving reports will determine what actual
organization's responsibility to assess the historical practice has been, and whether that
adequacy and timeliness of that action. practice conforms to company or industry standards.
Physical evidence may be the most persuasive;
AUDIT EVIDENCE however, its validity may be impacted as personal
behavior may be modified given the individual's
Audit evidence forms the basis of audit conclusions, awareness that he is being observed or "audited".
opinions, findings and recommendations. It should Finally, analytical evidence may indicate when
be substantial and persuasive enough that another further audit testing is warranted, but in itself is not
knowledgeable person would come to the same sufficient for drawing an audit conclusion.
logical conclusion. In her 2000 ISHM paper
"Auditing Liquid Measurement" (3), Grace Barrett- CONCLUSION
Smith describes audit evidence as including
documentary, physical, testimonial and analytical A combination of sound internal auditing principles
evidence. and a solid understanding of the liquid measurement
process are essential elements of an effective audit
o Documentary evidence is the recorded of liquid measurement. The auditor must identify
information relevant to the audited process. business objectives, the associated risks, and
It may include such items as tank gauge or internal controls which help to mitigate these risks.
meter tickets, meter proving reports, and Using the resulting analysis, the auditor is able to
measurement equipment calibration records. develop an audit program which will include testing
of the company's critical internal controls. The
. Physical evidence is data obtained by the auditor must also determine the extent of testing and
auditor through personal observation and type of audit evidence necessary to provide an
inspection. Examples may include accurate assessment of the internal control
observing such activities as the physical environment. This evidence is used to support audit
gauging and sampling of a tank, meter findings, opinions, and recommendations to
proving, or verification of automatic tank management for corrective action.
gauging and temperature devices.
REFERENCES
, Testimonial evidence is information
gathered by interview or written statements (1) June 1999 International Conference of the
from individuals knowledgeable of the Institute of Internal Auditors
process under review. For example, an (2) Standards for the Professional Practice of
auditor may interview a measurement Internal Auditing, "Performance of Audit Work"
technician about how meters are calibrated (3) 2000 ISHM paper "Auditing Liquid
or tanks are gauged in an effort to determine Measurement" by Grace Barrett-Smith
whether the individual's understanding of the
process is consistent with company and
industry standards.

. Analytical evidence is information developed

through analysis of the relationship of data
and trends noted. Examples of analytical
data are meter factor control charts and
daily stock inventory balancing reports.

The type of audit evidence selected should be

consistent with the audit objective, and must provide
a reliable basis for audit conclusions. The auditor
must also recognize the inherent limitations of each
type of evidence used, and should select that
method which provides the best level of assurance
for the process being audited. For example,
testimonial evidence may be used to determine a
measurement technician's understanding of meter

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 EXHIBIT 1

Objectives Risk Factors Internal Controls

Ensure that month-end product Measurement equipment Establish procedures to require

inventory is accurately such as gauge tapes and verification of gauge tapes and
measured and reported bobs may not be reliable. bobs against an NIST traceable
according to the corporate standard, and document
policy. verification of equipment.

At least annually, review the

verification documentation for
completeness. Visually inspect
gauge tapes and bobs to ensure
they have been verified and that
they are in good condition.

The procedure used to take the Establish procedures including

temperature measurement may specific steps to be followed
not result in an accurate reading. when using either a cup-case
thermometer or PET.
Instructions to be included are:
(1) the number of readings which
must be taken, (2) the location
and depth for each reading, (3)
the length of immersion time, and
(4) when ambient temperature
must also be considered.

Measurement technicians may Communicate measurement

not be properly trained. policies and procedures to all
measurement personnel.

Provide measurement training

classes and refresher courses to
all measurement personnel.

Establish a resource for providing

information and on-going support
regarding measurement issues.

Tank gauge and temperature Establish precision requirements

readings may not be properly for recording tank gauge and
recorded. temperature readings.

Perform a monthly inventory

analysis and determine total
monthly variations. Determine a
tolerance level for monthly stock
variations, and establish
procedures for investigating
excessive variations.

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