Question

A Lump of Coal for Christmas You have recently been promoted to audit senior at an international accounting firm, lontana Power Company (MPC), a NYSE client. You were asked to a major portion of the work at Western Energy Co. (WECо), a wholly-owned subsidiary of MPC. Most of the audit work has already been done, but you must stu trip to the site to complete a few procedures. There are some serious audit issues to contend with this year, but as you work on a memo to the engagement partner you are distracted by thoughts of the harsh winter weather conditions you will likely encounter in the remote town of Colstrip. As its name suggests, Colstrip, Montana has been associated with the production and mining of coal throughout its history. Located near the Montana-Wyoming border, Colstrip is in the heart of the Powder River Basin, one of the largest supplies of sub-bituminous coal in the world. The town was founded in 1923 by the Northern Pacific Railroad to supply coal for steam locomotives. The mine shut down in the 1950's, and the town's population dwindled to about 100 residents, until the mine was reopened by WECo in the late 1960's. Montana's coal reserves are estimated to exceed 120 billion tons, more than one- fourth of the U.S. total, ranking it first among the 50 states. The State ranks eighth in actual coal production, however, with less than one-fifth of the output of its Wyoming neighbor. Hyperactive environmentalism, complex Federal, State, and Tribal jurisdictions, and the nation's highest severance tax have combined to limit the development of coal resources in Montana. MPC's interest in the Colstrip development piqued when the U.S. experienced it's first serious energy shortage, in the 1970's. Everyone was scurrying to build new power plants. "All of a sudden, things are urgent," says John Brower, geologist and mineral economist at Montana Tech, in Butte. "The need for more electricity is painfully clear. The fuel that can respond quickest is coal.” About 56% of the electricity in the U.S. comes from coal-fired plants, compared to about 24% from nuclear plants and only 8% from hydroelectric dams. With the serious environmental obstacles to development of the latter two sources, MPC officials viewed the billions of unmined tons of Powder River coal as a tremendous opportunity. In that enthusiastic frame of mind, they launched the construction projects that would bring the company to the brink of ruin: four coal-fired generating plants known as Colstrip 1 -4. Originally estimated at $500 million, the projected cost of the four plants had nearly doubled by the time ground was broken, seven years after the first permit was requested. This was only the beginning of what became known as the 'Colstrip curse.' Cost overruns were routine, and construction was repeatedly halted by litigation from the Environmental Protection Agency, neighboring Indian Tribes, and by the Environmental Defense Fund. At the same time, the Montana Public Service Commission (PSC) began questioning MPC's relationship with WECO, which was selling coal to the parent company at a profit. Although these transactions have no effect on MPC's consolidated financial statements, the PSC's obiections make it difficult to predict what future rates will be. Colstrip 1 & 2, each with 330 megawatts of generating capacity came 'on-line' after neroy crisis had subsided. The rush to build new generating plants had led to a glut in When MPC finally went before the PSC, requesting a 55 percent rate hike to cover

Answer 1

Cost and time over run of the project has significant effect over estimated project deliverables of generating future economic benefits. Auditor should provide the note on the  financial statements over the uncertainties and risks involved in the project (1&2) that are completed considering the possibility of the impairment likely if the project is stalled.

Auditor should conduct the examination of the records to review the ability of the MPC co to continue as going concern in future. He should look for the reasonableness and commitment of the management plan to completing the projects with additional funds authorized to be borrowed through issue of new bonds. based on these testing auditor if there is reasonable assurance that in the next one year there is proper mitigation plans with the management, auditor need not quality on the ability of the going concern  of the organization.

Financial statement should have all necessary information by way of notes on the views of the outcome of the litigation along with the financial impact details.