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Read these interview responses and create a flowchart for the revenue recognition cycle.

Auditor: Thank you for taking the time to speak with me.

Kari Kerr: No problem. My name is Kari Kerr. Im the Contracts Manager for ColAlta Pipelines. Basically, Im responsible for keeping track of all the various contracts that ColAlta enters into.

Auditor: So, starting at the beginning ... how does a sales transaction begin?

Kerr: It all begins when a customer delivers a load of natural gas to one of the connection points along the pipeline. There are seven connection points along the pipeline: five in Alberta and two in Montana. The price a customer pays for the shipment of the gas depends on whether or not they have a long-term contract with us, and how far we transport the gas. The rates are all pre- determined, and published on our website. Delivery is usually from a tanker truck, although we have a couple of connection points that have railway access, and a couple of connection points link up with other pipeline systems, so the natural gas can arrive in a number of different ways.

Auditor: How many receipts take place each day?

Kerr: It really varies. Some connection points are busier than others, of course. Some connection points will have two or three deliveries a day, others might have ten or fifteen. I think the busiest day Ive ever seen had about twenty deliveries to one connection point, but thats rare.

Auditor: How do you measure how much natural gas is delivered?

Kerr: The connection points are all metered: theres a device on the connection between the supplier and the pipeline that measures the volume of gas thats entering the pipeline system. Of course, the volume of a gas changes depending on the outside temperature and air pressure, so the metering device adjusts for those variables to give a standard measure.

Auditor: How do you know the volume is accurate?

Kerr: The meters are inspected annually by a representative from the Government of Alberta, or the State of Montana, depending on where the meter is located. Its all government regulated, and the meters are subject to industry standards.

Auditor: Who records the gas received? And how?

Kerr: The staff at the connection point complete a form called a delivery receipt. The delivery receipt records information like the date, time, customer name, contract number if theyre a contract customer, or PO number if theyre a one-off customer.

Auditor: What do you do if theres no contract number or PO number written on the delivery receipt?

Kerr: If the contract number is missing, I fill it in myself. If its a one-off customer, then I have to contact them to get a PO number before we can proceed.

Auditor: Is the volume received also recorded?

Kerr: Yes, of course. Our staff at the connection point record the volume received. The customers representative signs the delivery receipt, indicating that they agree with the volume recorded. Our staff also sign the delivery receipt. One copy of the delivery receipt is given to the customers representative.

Auditor: What happens to those delivery receipts?

Kerr: At the end of each day, the receipts from each connection point are compiled, scanned to a pdf file, and sent to me by e-mail. I print all the receipts for each day, and save the file for our records.

Auditor: So what do you do with the printed delivery receipts?

Kerr: Remember, about 90% of the pipelines capacity is committed by contract to our major customers, and theres only a couple dozen of those. When I print out the daily batch of delivery receipts, I sort them into two piles: one pile for contract customers, and one pile for one-offs. For the contract customers, I go through the pile and confirm the correct contract number has been written on each delivery receipt. I initial beside the contract number to indicate that its correct. Since theres not that many contracts, it usually goes pretty quickly. I then forward all those delivery receipts to the Billing department, so they can create invoices for them. The rest of the delivery receipts, the one-off customers, I forward to the Finance Manager. Since we dont have contracts with those customers, the Finance Manager has to decide on credit terms for those customers.

Auditor: Shouldnt the Finance Manager decide on approving credit before the gas enters the pipeline, not after?

Kerr: You might think so. However, remember that natural gas is highly flammable: its not the sort of thing you want to leave sitting around while we decide on credit terms. For safety reasons, its better to have the gas flowing through the system rather than sitting around. Also, remember that were shipping the gas to a processing and safe storage facility in Colorado, where we release the processed gas back to our customers. If someone doesnt pass credit checks, we simply dont release the processed gas to them in Colorado until we receive payment. The Finance Manager can explain more to you about that.

Auditor: What about pricing ... do you check to make sure the price is correct?

Kerr: The price isnt recorded on the delivery receipt, only the volume. Our pricing is set based on whether or not a customer has signed a long-term contract or not. The contract customers get a lower price per cubic meter than one-off customers do. The rates also differ between the connection points: basically, the further distance the gas has to go, the higher the price. All the rates are set up in the computer system. When Billing creates an invoice, they pull the price from the on-line file.

Auditor: How often are prices changed?

Kerr: That depends on which type of customer youre talking about. For the vast majority of our customers, the pricing never really changes. Theyre locked in to long- term contracts of ten years or more, so the prices theyre charged never change. The prices for our one-off customers are reviewed about once a year, and adjusted based on market conditions. Again, remember that the one-off customers are a very small volume compared to the contract customers.

Auditor: I think thats all I need for now. Can I come back to see you if I have any follow- up questions?

Kerr: Of course.

Finance Manager

Timothy Janzen

Auditor: Thank you for taking the time to discuss your role in the revenue recognition cycle with me.

Timothy Janzen: Happy to oblige. Im Timothy Janzen, and Im the Finance Manager for ColAlta. I make arrangements for raising money for the company, either through borrowing or issuing shares. When we have extra cash on hand, Im responsible for investing that cash. And Im also responsible for credit and collections. I review customers to determine whether we should grant credit to them, and Im also responsible for following up to make sure our customers pay their bills on time.

Auditor: And what is your role in relation to the revenue recognition cycle?

Janzen: The vast majority of our customers have signed long -term contracts that obligate them to transport a certain volume of natural gas at a specified price. Once the contracts have been signed, Im no longer involved with those customers. The customers I get involved in are the one-off customers. Periodically, someone will want to transport gas in our pipeline, but they havent signed a long-term contract with us. The price for this service is pre-determined. I get involved to determine whether the one-off customer is able to pay for the service.

Auditor: How does that process start?

Janzen: Delivery receipts are sent each day from the various connection points to the Contracts Manager. She sorts the receipts between contract and one-off customers. The delivery receipts for contract customers go directly to the Billing department. The receipts for the one-off customers come to me.

Auditor: How often do you get one-off delivery receipts?

Janzen: Not that often. The vast majority of our pipelines capacity, better than 90%, is committed to our contract customers. Most upstream producers already have similar arrangements with other pipelines. We get maybe one or two customers a week who have a load of natural gas theyd like to ship on our pipeline. Often, its because their regular pipeline isnt available, and they need to get the gas moving.

Auditor: So, what do you do when you get one of these receipts?

Janzen: The first thing I do is check to see if weve recently done a credit review of the same customer. If Ive already reviewed their credit in the last three-to-six months, theres no reason to reevaluate them. If I havent done a review recently, I get copies of their most recent annual report, and ask for three credit references from them. I analyze that information to decide whether or not they have the liquidity to pay for the transportation charges. The amount of analysis I do depends on the volume of gas theyve delivered to the pipeline; if itsa very small load, theres no reason to do an extensive amount of research.

Auditor: How do you decide if the customer is credit worthy?

Janzen: Fairly typical methods: their current ratio, strength of their cash flow statement, credit ratings through various agencies, company reputation, that sort of thing. In the end, it comes down to professional judgement and experience. Auditor: As I understand, the customer delivers the gas to the connection point, and its only after the gas has entered the pipeline that you check to see if a customer can pay for the transportation.

Janzen: Thats correct. I know it sounds strange to provide a service before knowing whether the customer can pay for it. However, theres a couple of things you need to understand. First of all, bear in mind that natural gas is very flammable. Its too dangerous to have the gas sitting around at the connection point while we evaluate a customers credit. Its actually safer to transport the gas to the processing plant in Colorado: they have the storage facilities there to safely keep the gas after its been processed. Another thing to remember is that the reason the upstream customer is sending the gas through the pipeline is because they have a downstream customer waiting to buy the processed gas on the other end. We can always keep the processed gas in storage at the processing plant until we receive payment. Even if the upstream customer is unable to pay us for the transportation charges, we have the option of negotiating a sale with the downstream customer at the other end, and recovering the transportation charges that way.

Auditor: So when you decide the customer is able to pay for the transport, what next?

Janzen: I initial the delivery receipt to indicate that I have approved the customers credit, and I forward the delivery receipt to the Billings department for them to create an invoice.

Auditor: Do you decide on the price to be charged to the customer?

Janzen: No, the pricing is all predetermined. For the non-contract customers, there is a set list of rates, depending on which connection point the gas is delivered to.

Auditor: Who is responsible for maintaining the pricing on the system?

Janzen: The Contracts Manager is the only person with access to the pricing file. She maintains the pricing table and makes sure the prices agree to the established rates.

Auditor: I think that gives me what I need. Can I follow up with you further if Ive missed anything?

Janzen: Absolutely, my doors always open. Accounts Receivable / Billings Clerk Aminah Ahmed

Auditor: Thank you for taking the time to speak with me.

Ahmed: Youre welcome.

Auditor: Just for the record, can I get your name and position?

Ahmed: My name is Aminah Ahmed, Im one of the Accounts Receivable / Billings Clerk for ColAlta Pipelines.

Auditor: Are you the only person who can create invoices to charge the customers?

Ahmed: No, theres two of us: myself and Dawn Perry. We both have the same access to the computer system to create invoices. We both follow the same process.

Auditor: As I understand, your role is to generate invoices to ColAltas customers for the natural gas that the pipeline transports.

Ahmed: Thats correct. Each day, I receive delivery receipts, and I enter those into the computer system to create the invoices.

Auditor: Where do the delivery receipts come from?

Ahmed: Theyre filled out at each collection point as the gas is delivered into the pipeline. Each collection point sends a pdf copy of their receipts each day to the Contracts Manager. She sorts them between contract customers and non- contract customers. She sends the ones for the contract customers directly to me. The one off customers go to the Finance Manager first, and then to me after credit terms have been arranged.

Auditor: What do you do with the delivery receipts once you get them?

Ahmed: I use the information on the receipts to create an invoice. Invoice numbers are automatically generated by the computer. Each customer has a unique customer number. I input the customer number, contract number, and date and volume received.

Auditor: How many invoices do you usually create each day?

Ahmed: It depends on the volume of deliveries to the various connection points. On a slow day, I might create a half dozen invoices; on a busy day, there might be a couple dozen.

Auditor: How does the price get assigned to each invoice?

Ahmed: The prices are all stored in the computer system. I dont have access to the price files. The pricing table is set up for contract or one- off customers, and the price depends on which connection point initiated the process. When I enter he information from the delivery receipt, the system automatically assigns the right price for the customer and location.

Auditor: Who sets up the prices on the system?

Ahmed: The Contracts Manager maintains the pricing table based on the contracts negotiated with the customers.

Auditor: Once everything is entered, how do the invoices get sent out to the customers?

Ahmed: Every day at 4:00, we run a program on the system that prints out all the invoices for the day. Some of our customers want physical copies of the invoices, some prefer having electronic copies of the invoices e-mailed to them. I sort through all the printed invoices, and split out the ones that want electronic copies. I scan those to a pdf and e-mail them to the appropriate customers. The rest I give to the Receptionist; she makes sure the invoices go in the mail the following morning.

Auditor: Do you keep a copy of the invoices on file?

Ahmed: Not a paper copy, no. Once the invoice is created, we can look it up on the system at any point in time. The file is write-protected, so that the invoices cant be edited or changed once theyre posted to the system.

Auditor: What about payment ... do the customers pay the invoices on time?

Ahmed: That, I cant help you with. Im not involved with recording the receipt of payment at all. Something about segregation of duties.

Auditor: I think that gives me what I need to know about invoicing. If I think of any other questions, can I come back to see you?

Ahmed: No problem, happy to help.

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