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Case 2.9 Powder River Petroleum International, Inc
1. Primary audit risk factors that were evident within Powder River’s operations are:
• Fraudulent Financial Reporting Risk for Revenue
• Other Areas of Fraud Risk. From year-end 2004 through the first-quarter 2008, defendant Brian Fox misled the investing public by fraudulently inflating the revenue and assets and fraudulently omitting major liabilities, of Powder River Petroleum International, Inc. (“Powder River” or the “company”) in the company’s Commission filings, and by making other false and misleading public disclosures. From year-end 2004, Powder River conveyed working interests in oil and gas leases to investors in Asia for over $43 million. Because Powder River promised full repayment of the working interest investors’ initial investment, with a 9% guaranteed annual return of principal, these transactions were, in reality, loans. But Powder River, with Fox as chairman, president, Chief Financial Officer (“CFO”) and Chief Executive Officer (“CEO”), improperly recognized the loan proceeds as revenue in the company’s financial statements. These bogus revenues were incorporated in Powder River’s quarterly and annual public filings with the SEC.
2. Because Powder River promised full repayment of the working interest investors’ initial investment, with a 9% guaranteed annual return of principal, these transactions were, in reality, loans. So it should be recorded as Liability and Payable interest.
3. Management assertions relevant to (a) Sales of working interest were having negotiated the contracts providing for the guaranteed minimum payments to the Asian investors, Fox was aware, or severely reckless in not knowing, that the investor proceeds from the working interest conveyances constituted, in substance, a loan to Powder River. Fox also knew, or was severely reckless in not...

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