1. Royalty Audit OUTLINE Types of Audits
Difference between Field and Desk Audits
Pre-Audit
Audit Timeline
Initial Contact
Audit Challenges
Common issues that can lead to an audit
Common issues when conducting an audit
Deductions

2. Goals of the Audit
Working together with industry to ensure that all beneficiaries receive their fair share of royalties.
Who are our Beneficiaries?
Hospitals, Common Schools, and
Universities….
Beneficiaries are defined by the type of Lease
Compliance with Lease Terms
Customer Education/Support
Goal is to audit 80% of our royalties in 4 to 5 year cycles

3. Both Field and Desk Audits follow the same pre-audit procedures.
Types of Audits
Field Audit
Scope large enough to warrant travel to the company
Auditors on site for one or two weeks
Desk Audit
Company identified through a prior field audit on another company.
Scope not large enough to warrant travel to the company
Letter issued to company reporting audit findings as well as any schedules to support audit findings.
Both Field and Desk Audits follow the same pre-audit procedures.

4. Time Line
Pre-Audit
One to three weeks
Field Work
One to two weeks
Post Audit
Two to four weeks

5. Pre - Audit Scope Selection Volume Review
Review volumes reported on the C-115 and Severance Tax returns to volumes reported on the OGR2
Value Review
Review of gross/net values reported to the New Mexico Taxation and Revenue Department to gross/net proceeds reported to the New Mexico State Land Office.
W/H Price Review (Comparison to other remitters and other properties in same field or area).
Deduction Review (% of Gross Proceeds, comparison to other remitters and other properties in same field or area).

6. Pre - Audit
Unit/Communitization Agreements Review
Review all Unit and State Communitization agreements on file with the New Mexico State Land Office.
Compare tract allocations to remittance percentages
Approximately 70% of royalties that the SLO collects are from Unit or Communitization properties.

7. Volume Comparison
Volume Comparison Report

8. Value Review POSSIBLE AUDIT EXAMPLE
1.) Tax remitted price $2; royalty remitted price $2.67.
2.) Tax remitted price $2; royalty remitted price $2.
Results: 1.) Volumetric discrepancy with no audit finding
2.) Volumetric discrepancy with audit finding
Cause: 1.) Royalty return, -0- mcf reported on product code 7 line 2.) Various

9. Initial Contact
The Auditor will contact the Company to inform the Company that they have been selected for audit and to develop a schedule of tentative field audit dates.
Engagement Letter
Objective of the audit
Number of auditors
Request for sample package
Confirmation of field audit dates
Attachments
Listing of documents to made available for review

10. Field Audit Testing Closing Conference Field Work Opening conference
Explanation of tests
Business practice questions
Sample packet questions
System walkthrough
Testing
Volume, proceeds, deduction
Closing Conference
Explanation of tests performed
Explanation of findings
Questions/concerns

11. Issue letter Report Contents Audit Schedules Post Audit
Indicated the completion of the field audit
Deadline for response (30 days).
Instruction on amendments
Report Contents
Company Information
System summary
Audit procedures performed
Conclusion
Audit Schedules
Summary of Exceptions
Detailed audit schedules

12. Affiliated Sales & Midstream Costs
Audit Challenges
Unit Accounting
P/A Wells
N/P Wells
Unit/Com Wells
Consent/Non-consent Wells
CPD’s
Settlement statements
Allocation spreadsheets
Netback Pricing
Supply pools
WASP calculations
Affiliated Sales & Midstream Costs
Tracing – First Arm’s length Sale
Reasonable Costs (Actual Cost + ROI)

13. Reporting to Incorrect PUN(s)
Audit Challenges
Takes vs. Entitlements
Uniform Land Owner, Royalty Rate, & Beneficiary
Reporting to Incorrect PUN(s)
Suspended money
Volume comparison imbalances
Operator Changes
Effective dates of royalty burdens

14. Reporting: Value & No Volume, Incorrect Pressure Base
Audit Challenges
Reporting: Value & No Volume, Incorrect Pressure Base
Volume comparison imbalances
NM standard pressure base =
Product Code 7 reporting = Wellhead Mcf – Residue Mcf

15. Deductions
Allowable
Post production costs to make the product merchantable
Non Allowable
New Mexico Gas Processors Tax
Low Volume Fees
Penalties
Marketing fees
Any other costs not incurred to make product merchantable

16. Angela Romero - Audit Manager
Royalty Audit
Angela Romero - Audit Manager
(505)
Melissa Chavez Royalty Auditor
(505)
Carmen Mora Royalty Auditor
(505)
James Romero
Royalty Auditor
(505)