Oil Search Limited Audit Report

This comprehensive report provides a detailed audit of Oil Search Limited, a major oil and gas company. It begins with an executive summary and introduction, followed by a thorough examination of the company's business operations, investment activities, financing, and financial reporting practices. The report then delves into an industry analysis, covering industry size, growth, supply chain, major players, market share, critical success factors, and major threats. A legal and regulatory environment analysis is included, along with an external environmental analysis using PEST, SWOT, and Porter's Five Forces frameworks. The report assesses business risks, performs analytical procedures to understand the entity's performance using ratio analysis, and examines management and governance. The conclusion summarizes the findings and emphasizes the importance of risk management for companies in the energy sector. The report includes financial statements and formulas in the appendix and cites numerous references.

AUDITING
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Contents
EXECUTIVE SUMMARY.............................................................................................................4
INTRODUCTION...........................................................................................................................5
PART 1 UNDERSTANDING NATURE OF ENTITY..................................................................6
Business Operations.....................................................................................................................6
Investment and Investment Activities..........................................................................................6
Financing and Financing Activities.............................................................................................7
Financial Reporting Practices......................................................................................................7
PART 2 UNDERSTANDING THE INDUSTRY...........................................................................9
Industry Size................................................................................................................................9
Industry Growth...........................................................................................................................9
Industry Supply Chain...............................................................................................................10
Major Players in the Industry.....................................................................................................10
Market Shares and Industry Players...........................................................................................11
Critical Success Factors.............................................................................................................12
Major Threats.............................................................................................................................12
PART 3 UNDERSTANDING THE LEGAL ENVIRONMENT..................................................13
PART 4 UNDERSTAND EXTERNAL ENVIRONMENTAL FACTORS.................................14
PEST Analysis...........................................................................................................................14
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SWOT Analysis.........................................................................................................................15
Porter’s Five Forces...................................................................................................................16
PART 5 UNDERSTAND OBJECTIVES, STRATEGIES AND ASSESSING BUSINESS
RISKS............................................................................................................................................17
PART 6: Performing analytical procedure to understand Entities’ Performance..........................19
PART 7 UNDERSTAND MANAGEMENT AND GOVERNANCE..........................................20
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................23
Appendix........................................................................................................................................26
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EXECUTIVE SUMMARY
Risk analysis is one of the most important aspects required to be focused upon by an
organisation. Analysis of the risk helps the organisations in gathering information related with all
the aspects which could have a huge impact on the progress of it. Oil Search Limited is a largest
oil and gas exploration and development company incorporated in Papua New Guinea which was
founded in 1929. Company is working on a huge level in which it is required that the same
should work towards to gather proper set of information related with the risk factors which could
have a huge impact on the progress and the position of the company in a market. Hence, a report
is developed which will include information related with the risk factors which could occur in
near future and will include information related with why it is required to evaluate all the risk
factors for an organisation.
4

INTRODUCTION
Auditing is the aspect which helps in evaluating the key performance indicators of an
organisation. For every organisation working in a competitive market it is required that a proper
focus should be developed towards the risk factors which could have a huge impact on the
business processes (De Marco and Mangano, 2017). It is required that a business should work
towards to gather appropriate set of information related with all the aspects which could affect it
in near future. Gathering relevant set of information will help in developing the strategies with
the effect of which smooth functioning of the business could be guaranteed. Hence, a report is
developed which will help Oil Search Limited in gaining relevant set of information related with
the internal as well as external risk factors which could affect the business processes. The report
will also include analysis of the external as well as internal environmental analysis so that in
depth information related with all the risk factors could be availed (Banumathy and Azhagaiah,
2015). Internal analysis will include SWOT analysis whereas external environmental analysis
will include PESTEL analysis. Internal and external environmental analysis of the business will
be followed by various risk factors which could affect the progress of the business and strategies
will be developed so as to mitigate the risk factors and to ensure that the business could attain
success in managing all the internal as well as external work related process and could manage
its success in the market.
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PART 1 UNDERSTANDING NATURE OF ENTITY
Business Operations
Oil Search Limited is one of the largest oil and gas exploration and development companies
which are incorporated in Papua New Guinea. Company was founded in 1929 and is one of the
largest companies in Papua. Oil Search Limited is indulged in the business of developing and
exploring oil and gas and prefers to supply the same in the market (Bianconi and Yoshino, 2014).
Sales and distribution of oil and gas and various other related products is being done. Company
is working in the international market and handles many of the operations with the effect of
which it could generate effective set of revenue and remain stable in the market. Hence,
managing the production of oil and gas and handling all the operations related with its sale in the
domestic as well as international market is a tough task. It is necessary that all the risk factors
related with the operations of the company should be focused upon by the company and final
decision related with the same should be made (Burgherr and Hirschberg, 2014).
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Investment and Investment Activities
Investment is one of the major aspects which is required to be focused upon by an organisation.
It is necessary that the company which is working on such a huge level should take appropriate
investment decisions. In the same manner Oil Search Limited focus upon such type of decisions
and prefer to assure that appropriate and accurate decisions could be made. Oil Search Limited is
the company which prefers to invest the money in right things and develop a proper and relevant
set of deadline for the return that the company will get by investing the money. Such type of
positive attitude of the company helps the same in making appropriate investment decisions and
ensures that it could sustain in near future (Criscuolo and Menon, 2015). Presently company is
investing in the risk management aspects so as to ensure that all the risk factors could get
removed and sustainability could be obtained.
Financing and Financing Activities
Availability of funds is one of the most important aspects required to be taken into consideration
by the organisations. Financing is the concept which provides a relevant set of support to the
companies working in a competitive world. Financing and financing activities of the companies
helps in developing the understanding with the market from where a company should approach
the funds and the amount of funds required to be invested (De Marco and Mangano, 2017). Oil
Search Limited is the company which ensures that a proper financial framework should be
developed and evaluation of the strategies should be done so that appropriate amount of fund
could be gathered within the required deadlines only.
(Elleithy and Sobh, 2013)
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Above graph is showing the status of the revenue generated by Oil Search Limited each year. It
could be seen that the company has earned an effective amount of revenue every year. But a
downfall in the generation could be seen which requires that company should take appropriate
decisions to develop the strategies and should work towards to manage the things in a proper
way (Energy policies of IEA countries, 2012).
Financial Reporting Practices
Financial reporting is a practice which should be followed in an appropriate way. It is required
that every single entity working in the market should work towards to manage the financial
activities and should try to manage the things in an appropriate way (Fiorenzani, Ravelli and
Edoli, 2012). Working towards to develop a proper financial system will help the companies in
maintaining sustainability and will provide an opportunities to develop a proper and relevant set
of financial plans. Oil Search Limited is a company which ensures that every single entry related
with its fund as well as cash should be recorded in a proper manner and all the records should
show a proper track record of the inflow as well as outflow of the company’s cash.
Balance Sheet in USD
(Furlonge, 2011)
Cash Flow in USD
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(Grandell and Thorenz, 2014)
The above graphs are showing the details related with the financial activities of an organisation.
The graphs will help in developing an understanding with the current financial position of the
company and will provide a better path for the success. Oil Search Limited is the company which
keeps an eye on every single activity of its funds and ensures that it could develop appropriate
strategies in relation with is financial growth and could manage its success in the market
(Harčariková and Šoltés, 2016).
PART 2 UNDERSTANDING THE INDUSTRY
Industry Size
Oil Search Limited is a working in the industry which has a huge potential for growth. For a
company working in such type of industry it is required that the same should take care of every
single aspect which could help it in managing its success and growth in the market (Levine and
Waters, 2012). Oil and gas is the industry which provides ample of opportunities for the growth
and helps the companies in growing. Industry has a huge potential to succeed in the international
market as there are many of the countries which prefer to take oil and gas supplies from other
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countries. Outsourcing is one of the best medium which provides a huge potential for the growth.
Hence, it could be evaluated that by developing appropriate set of plans and by indulging in the
activities.
Industry Growth
A rapid growth could be seen in the market which is helping various companies in making an
effective set of growth (Mathew, 2009). There were various set of ups and downs which were
noticed by oil and gas industries. Long term impact of the downturns was seen in the market of
oil and gas industry was seen. The survival mentality in the oil and gas industry seems to have
resulted in the shift of the mindset towards the shorter cycle projects. Growth in the market of
Oil and gas industry is estimated till 2020 which is good news for the companies working in the
market. In 2014 one of the major challenges faced by the industry was talent. Lack of talent was
affecting the industry growth but with the change in time many of the talented business partners
entered into the market and helped in the sustainability of the same (Muralidhar, 2010). Hence, at
the end it could be seen that industry of oil and gas has a huge potential for growth will provide
an effective set of support to the companies working in it.
Industry Supply Chain
Oil and gas supply chain works on three variables which are up stream, Mid Stream and
Downstream (Rousek, 2010). At the upstream level there are various set of aspects which are
taken into consideration these factors are exploration, field development, production and
operation of the oil and gas. At the midstream level factors which are focused upon by the
industry are transportation, processing, storage and distribution of the products and services
produced by the industry. Lastly at a downstream level manufacturing, refining, petrochemical
wholesale and marketing of the produced product is done. Various supporting industries remain
available in the market which helps in managing the supply chains and Oil Search Limited is one
of the companies which plays a supporting role in managing the supply chains of the industry
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(Sidortsov, 2014).
(Wagner, 2012)
Major Players in the Industry
Oil and Gas is the industry which is growing rapidly in the market (Energy policies of IEA
countries, 2012). There are several major players who are performing effectively in the market
and helping the same in managing the growth of the industry. Some of the major players are:
Apache Corporation
Arrow Energy
Australian Worldwide Exploration Ltd
BHP Billiton Petroleum
Oil Search Limited
These are some of the major players who are performing effectively and are providing relevant
set of help to the oil and gas industry.
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Market Shares and Industry Players
According to the market report it is being evaluated that oil and gas industry holds 10% of the
market share in the market of Australia. Holding a 10% of the market share and ensuring that the
requirement of all the people available in the market could get fulfilled is a tough task
(Balasundaram, 2012). It could be seen that oil and gas is the industry which is providing a
positive response to the market and is helping the people in managing their day to day life in a
proper way.
(Hang et al., 2017)
Critical Success Factors
Oil and gas industry is growing and is providing opportunities to the companies with the effect of
which they can grow in this situation it has become important that the critical success factors
related with the oil and gas industry should be undertaken. These factors are:
 Quality of the reserves and replacement strategy are being followed by the industry so as
to ensure that success could be obtained (Stoutenburg, 2015).
 Diversification is another aspect which is applied by the industry. This helps the industry
in growth aspects and helps in managing things in a proper way.
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 Operating management which works at the operational level of the company ensures that
all the processes could be operated in a proper way and support system could be
developed for the growth of the industry (Banumathy and Azhagaiah, 2015).
 Financial policies of oil and gas industry is also effective which helps in providing up to
date information to the industry and helps in remaining up to date.
Major Threats
Industry working on a huge level should take every single aspect into consideration in the same
manner it is necessary that oil and gas industry should work towards to undertake all the
opportunities as well as threats available in the market. Hence, the threats which could have a
huge impact on the growth of oil and gas industry are:
Global volatility which includes operating risk is one of the threats which could have a huge
impact on the progress of the oil and gas industry (Bhattacharya and Kojima, 2012).
Fluctuations in the threat have a huge impact on the pricing of oil and gas and so the same affects
the customers of oil and gas.
Operational blowouts, natural disasters, inaccurate reserve estimates, inadequate liquidity or
access to the capital, environmental or health restrictions, industry competition and domestic and
international economic fluctuations are some of the major threats which could have a huge
impact on the progress of oil and gas industry (Bhattacharyya and Dey, 2011).
PART 3 UNDERSTANDING THE LEGAL ENVIRONMENT
Oil Sear5ch Limited is working in the industry which is controlled by the government. There are
various set of legal and regulatory factors attached with processing of the organisation (Bianconi
and Yoshino, 2014). For the organisations doing business in such a restricted it is necessary that
all the regulatory factors should be focused upon and should apply the same at the workplace.
Doing so will provide better opportunities for growth and will help the industry in providing a
relevant set of support for the growth of the economy.
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It is being evaluated by the oil and gas industry that there are various federal legal requirements
which are applicable to the specific activities associated with oil and gas production. There are
huge number of federal laws, regulations and executive orders which are applicable to the
production of oil and gas (Burgherr and Hirschberg, 2014). There are several parts at which the
state laws and regulations do not apply to the oil and gas production on the tribal land. There are
various set of regulations which were provided in 1959 in relation with the production of oil and
gas these regulations are:
Hydrocarbon Vision
A proper set of framework is being developed by Hydrocarbon Vision 2025. It was developed so
as to provide a relevant set of help and support to the oil and gas industry (Caputo, Pelagagge
and Salini, 2011). In Hydrocarbon vision, Petroleum Act was introduced which helped the oil
and gas industry in resolving the issues related with the import, transport, storage, production,
refining and blending of the petroleum. Issues related with the refining, marketing, security of
the petroleum and various external policies were resolved with the help of Hydrocarbon Visions.
Eleventh Five Year Plan
Oil and gas industry as well as various other industries working in the energy sector are termed
as the catalysts for the economic growth. The eleventh five year plan helps in managing the
growth of the industries working in the energy sector and takes care that the same should provide
an effective set of support to the economy and should help in the growth of the same. It helps in
maintaining the decorum of the economy and ensures that the fair trade could take place among
the companies working in the energy sector (Criscuolo and Menon, 2015).
NELP (New Exploration Licensing Policy)
New Exploration Licensing Policies contains various set of rules and regulations in relation with
the production of petroleum and gas. NELP helps in providing acceleration to the hydrocarbon
reserves and helps in maintaining the decorum of the market of oil and gas industry.
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There are various other rules and regulations which were introduced by the regulatory bodies in
relation with the oil and gas companies some of these are policy for change in the price of
petroleum products, policy for the development of the natural gas pipelines and city or the
Natural Gas Distribution Network, etc. It is important that all the policies and procedures should
be followed in an appropriate way so that success could be obtained and fair trade could take
place in the competitive market (De Marco and Mangano, 2017).
PART 4 UNDERSTAND EXTERNAL ENVIRONMENTAL FACTORS
PEST Analysis
Political Factors: Oil Search Limited is working in the industry which is governed by the
political and regulatory bodies. In this situation it becomes important that the company working
in the industry should focus upon all the rules and regulations in a proper way. Political parties
changes and so they prefer to develop their own rules and regulations (Elleithy and Sobh, 2013).
Therefore, to ensure that the company could sustain it should ensure that its internal policies
should get synchronized with the policies developed by the political parties.
Economical Factors: Economic growth rate keeps in fluctuating which have a direct impact on
the progress of the companies working in the oil and gas industry. It is required that Oil Search
Limited should work towards to develop proper set of strategies to deal with the economic
fluctuations so that it could sustain in the market (Energy policies of IEA countries, 2012).
Social Factors: Oil Search Limited is the company which is working on a huge level. In this
situation it becomes the responsibility of the company to ensure that a proper set of support
should be provided to the society attached with the company. It is a corporate social
responsibility of the company to ensure that the society under which the company is working
should grow so that economy of the country could develop in a proper way.
Technological Factors: Oil Search Limited should focus upon technological growth and should
try to work upon the activities which could help in managing the things in a proper way
(Fiorenzani, Ravelli and Edoli, 2012). Working towards to apply new and innovative technology
15

at the workplace helps the organization in providing an appropriate set of support and help in
processing the work in a more frequent way.
SWOT Analysis
Strengths Weaknesses
Strong economic growth is one of the strengths
attached with oil and gas industry.
There are various set of alternative options
available with them.
High scope of conservation is there
Demand of oil and gas can never decline in the
market (Furlonge, 2011).
Import dependence is high in an oil and gas
industry.
Late start could lead to acquisition
Geo political disturbance has a huge impact on
the progress.
Self defeating policies could affect the growth
of the companies.
Opportunities Threats
Creating strong supply chain will help in
creating huge opportunities and will provide a
better scope for the progress in the market.
Interdependency among the nations helps in
creating huge scope for the opportunities.
Applying innovative and up to date
technologies will provide proper set of help
and support in the growth aspects.
Collaborating with other companies will also
provide a scope of growth in the industry.
Production stagnation is one of the threats
related with the oil and gas companies.
Increasing demand in the market is also
increasing threat for the oil companies.
Increasing competition is also creating threat
for the oil companies working in the industry.
Terrorism is another threat which remains
attached with the oil company. Such type of
threat could affect the whole society in which
the company is working (Grandell and
16

Thorenz, 2014).
Porter’s Five Forces
Threat of potential entrants is one of the aspects which is required to be taken into consideration.
It is necessary that all the new entries entering or trying to enter into the oil and gas market
should be taken into consideration. This will help Oil Search Limited in growing into the market
and will help in managing the things in a better way (Harčariková and Šoltés, 2016).
Bargaining Power of the Buyers is the second aspect which is required to be taken into
consideration. It is necessary that strategies should be developed with the effect of which proper
amount of supplies could be managed and needs and wants of the people available in the market
could get fulfilled.
(Jarvis, 2009)
Threat of Substitute Products is the third aspect required to be focused upon by the organisation.
It is necessary that organisation should take care of the substitutes of oil which are available at
17

the lower rates and should try to avail the products and services at the attractive prices (Levine
and Waters, 2012).
Rivalry among industry is extremely high for which it is required that Oil Search Limited should
focus upon differentiation so that competitive advantage could be obtained.
Bargaining power of the suppliers is low in the oil and gas industry. Reason behind it is that
people cannot negotiate in relation with the price of the product as all the prices of the product
are set by the government (Mathew, 2009).
PART 5 UNDERSTAND OBJECTIVES, STRATEGIES AND ASSESSING
BUSINESS RISKS
Oil Search Limited is working in the industry which is really competitive and is growing rapidly
in the market. In this situation it becomes important that all set if risk factors should be
considered by the company. Doing so will provide a better opportunity for the growth and will
help in developing the strategies with the effect of which chances of the occurrence of the risk
factors will get reduced (Muralidhar, 2010).
Industry development could get affected if personnel and expertise knowledge related with the
deals will not be there. It will have a huge impact on the development and growth of the industry
as no innovative ideas will be introduced for the growth perspectives.
In case of the product liability will increase then the introduction of new product and services in
the market will get affected. In this case it is required that product liability should get reduced
and its viability in the market should be increased (Rousek, 2010).
Incomplete or improper implementation of the cost is another risk factor which could have a
huge impact on the progress of the company. It is necessary that relevant cost of the product and
services should be charged so as to ensure that more and more people could get attracted towards
the products and services of the company.
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Increase in the legal exposures in the oil and gas industry will have a huge impact on the
progress of the same. It is necessary that all the regulatory requirements should be fulfilled so
that risk related with the regulatory aspects could get reduced (Sidortsov, 2014).
It is necessary that current and prospective financing requirements should be considered and
assurance should be made that loss of all the financing dues could be recovered as soon as
possible and all the financing requirements could be met.
Using appropriate set of Information technological equipments and applying up to date
technology at the workplace will help in reducing the risk of uncertainties (Wagner, 2012).
Unavailability of the effective set of technology could affect the work and could lead to
incompletion of the same. Therefore to complete the work with quality it is necessary that proper
set of information technology which is compatible should be applied at the workplace.
Application of the inappropriate and incompatible strategy at the workplace could create working
issues. It is necessary that the strategies should be developed in a proper way and should be
applied in an effective way; this will help Oil and gas companies to cope up with the losses and
will help in managing the work process in an effective way (Energy policies of IEA countries,
2012).
PART 6: Performing analytical procedure to understand Entities’
Performance
Statement showing calculation of ratios for the year 2015 and 2016:
Ratios 2016 2015
Current ratio 2.055023 times 1.980432 times
Quick ratio 1.840145 times 1.719658 times
Gross Profit ratio 37.62 % 50.70 %
Net Profit ratio 7.27 % -2.48 %
Asset Turnover ratio 12.21 % 15.33 %
Debt-Equity ratio 1.02617 times 1.073792 times
(Please find appendix for financial statements and formula)
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Analysis
Ratio analysis is the best technique for analytical procedure of any business entity as it uses
financial statements in the calculation and helps management or auditor to analyse deeply. Ratio
analysis is used to analyse financial performance and financial performance of business entity by
analysing their income statement, statement of financial position and cash flow statement of the
period in consideration. In present case of Oil Search Limited, same has been used to analyse
profitability, liquidity and solvency during last two financial years.
From the above ratio analysis statement it can be analysed that for Oil Search Limited, liquidity
in the in the working capital and in business operations is not an issue. In other words, they have
more than sufficient current assets to manage and repay or their current obligations. Current ratio
shows adequate results i.e. Oil Search Limited effectively managed their business operations and
working capital. On the other hand, solvency ratios i.e. asset turnover ratio and debt equity ratio
suggests good solvency position of Oil Search Limited during 2015 and 2016. Oil Search
Limited is able to generate adequate level of sales revenue by using total assets of the
organisation. Debt equity ratio is the solvency ratio that is used to analyse relationship between
use of debt and equity in the overall capital structure. In case of Oil Search Limited, they are
using more debt as compared to their equity. On the other hand, profitability of Oil Search
Limited has not been at good side. It can be observed from the profitability ratios (net profit ratio
and gross profit ratio) that Oil Search Limited is not efficient in terms of managing their
operating and administrative expenses in the business operation. Since in both the years i.e. 2015
and 2016, gross profit of Oil Search Limited is at higher side but their net profit ratio is less and
at negative side.
PART 7 UNDERSTAND MANAGEMENT AND GOVERNANCE
Understanding management and governance is one of the most important aspects attached with
any business. In the same manner it is necessary that companies working under energy sector
should focus upon communication and enforcement of integrity and ethical values. It is
20

necessary that all the ethical aspects like providing opportunities to the society should be
considered by Oil Search Limited (Balasundaram, 2012).
Oil Search Limited should remain committed to the competence and ensure that it should indulge
in the practices of fare trade.
Organisational Structure
(Hang et al., 2017)
Assignment of Authority and Responsibility
Authority to manage the work and to provide appropriate set of orders is provided to the director
of the company. Research and development committee of the company indulge in the meeting so
as to provide appropriate set of direction in relation with the marketing activities and provides
the opportunity to the company so as to attain success and sustainability in the market
(Stoutenburg, 2015).
21

CONCLUSION
At the end it could be concluded that the companies should focus upon the risk factors which
could have a huge impact on the growth of the companies. The report developed includes the
information of the nature of the entity and information related with the industry is also being
availed. Information related with the internal and external environmental analysis is also availed
which will include PEST analysis, SWOT analysis and Porter’s Five Forces analysis. At the end
information related with strategies and assessment of the business risk will be done, analytical
procedure to understand the entity’s performance is done and understanding with the
management and governance is done which will help organisation in evaluating all the important
aspects and focus upon the key matters which could have a huge impact on the progress of the
business. Working upon all the aspects provided in the report will help in the growth of the
companies working in the energy sector.
22

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Appendix
INCOME STATEMENT
26

STATEMENT OF FINANCIAL STATEMENT
27