Specialized

Exploration Phase Production Phase
Locate Evaluate Establish Mine Beneficiate Transport Market Divest
Development Phase Closure Phase

Underground mining
• Supported
Surface mining • Unsupported
• Open pit • Caving
• Strip
Legal framework of the Philippine Mining Industry Land Area and Mineral Potential
Republic Act No. 7942 • The Total Land Area of the Philippines is 30M
• Philippine Mining Act of 1995 (“Mining Hectares
Act”) • Approximately 2.42% or 727,372.18 Hectares is
• Governs the exploration, development, covered by mining contracts/permits
utilization, and processing of all mineral
resources
• Provides the requirements for the
acquisition of mineral rights.
Operating Mines Mineral Statistics
Total of 50 operating metallic mines, which 24.7 Billion pesos

include: • In Q1 2020, the total estimated production
• 29 nickel mines value for metallic mineral is Php 24.7 Billion,
• 11 gold mines (with silver) down by 81.10% or Php 106 billion vis-à-vis
• 4 chromite mines 2019’s PhP130.7 Billion.
• 3 copper mines (with gold and silver)
• 3 iron mines 25.1 Billion pesos
Total of 5 processing plants, which include: • Estimated Gross Value Added (GVA, excluding
• 2 gold processing plants crude oil) in mining at current prices inQ1
• 2 nickel processing plants 2020.
• 1 copper smelter plant
Mineral Exports
US$ 1.31 Billion in Q1 2020
Exports of metallic, non-metallic minerals and mineral products in 2020. Copper, gold and nickel are
the country’s top mineral exports. Japan, Australia, Canada and China are the major countries of
destination.
Mining Companies in the Philippines
- The Philippines is the fifth most mineralized country in the world, with the third largest deposits of gold,
fourth for copper, fifth for nickel and sixth for chromite. The nation’s mineral resource assets are valued at
around A$1.32 trillion, but those remain largely untapped. The country’s total land area covered by mining
tenements is only 0.872 million hectares or 2.91 per cent of the country’s 30 millio total land area. In terms
of non-metallic minerals, the country has untapped coal resources estimated at about 2.4 billion tones.
- The country has 44 mining companies of which 37 are operating mines - six gold mines, three copper mines
and 28 nickel mines – as well as 65 non-metallic mining companies. The Department of Environment and
Natural Resources has been undertaking an audit to ensure these companies are ISO14001 compliant.
Australian and Canadian standards have been named by Philippine President Rodrigo Duterte as the
reference point.
• Some of the current Major Mining Projects in the Philippines are:
• Didipio Copper Gold (OceanaGold Philippines): copper, gold, silver (FTAA)
• Carmen and Lutopan (Carmen Copper Corporation): copper, gold, silver (MPSA
• Coral Bay HPAL (Coral Bay Nickel): mixed nickel-cobalt sulphide (MPP)
• Padcal Copper-Gold (Philex Mining): copper, gold, silver (MPSA)
• Masbate Gold (Filminera Mining): gold, silver MPP
• Taganito HPAL (Taganito HPAL Nickel Corporation): mixed nickel-cobalt sulphide (MPP)
• Mindanao Mineral Processing and Refining (Philsaga Mining Corporation/Mindanao Mineral
Processing): gold, silver (MPP)
• Cagdianao Nickel (Platinum Group Metals): nickel (MPSA)
• Rio Tuba Nickel (Rio Tuba Nickel): nickel (MPSA)
Resources can be mine in the Philippines:
• The Philippines’ top mineral exports are copper, gold and nickel. Other target minerals include
quartz, mica, iron, gypsum, feldspar, chromite, calcite and Sulphur. Some target non-metallic
minerals are sand and gravel, limestone, marble, clay and other quarry materials.
• Cobalt is the main factor for the increased interest in minerals used in battery technology in the
Philippines. The Philippines has the fourth-largest cobalt reserves worldwide, at an estimated
280,000 tonnes.
• The MGB has noted that the production value of mixed nickel-cobalt sulfide went up by 1.01 billion
pesos, from 3,804 billion pesos in the first quarter of 2016 to 4,815 billion pesos in the first quarter
of 2017. The MGB additionally noted that from 2012 to 2015 the joint production value of nickel
direct shipping ore and mixed nickel-cobalt sulfide consistently took the top spot with a four-year
average of about 49 per cent of the total metallic production value.
Reducing
carbon
footprint
Future Digital and

data
workforce optimization
Replacement Maximizin
Rising cost of g portfolio
production returns
License to Cyber
operate
High
impact Innovation
risks
Exploration Phase

Exploration
Search for a mineral deposit which appears capable of
commercial exploitation by an extractive operation and
includes topographical, geological, geochemical and
geophysical studies and exploratory drilling.
Evaluation
Determination of the technical feasibility and commercial
viability of a particular prospect.
Reserves and Resources
Mineral reserves and resources are the most significant source of value for mining entities. They are the
most important economic asset for a mining entity. The reserves and resources, along with the ability of
management to successfully transform reserves and resources into cash inflows, are the key drivers of
value. Reserves and resources also provide the basis for acquiring funds through borrowings and equity
financing.
Reserves and resources have a pervasive impact on a
mining entity’s financial statements, namely the:
• charge for depreciation and amortization;
• calculation of stripping adjustments;
• determination of impairment charges;
• expected timing of future decommissioning and
restoration, termination and pension benefit cash flows
(which impacts on discounted value of those
obligations);
• allocation of the purchase price in business
combinations;
• capitalisation of exploration and evaluation costs; and
• accounting for financial instruments.
Application Renewal
Who is qualified to (1) Filipino citizen or (2) Filipino-owned (1) Filipino citizen or (2) Filipino-owned
apply? Corporation or (3) Foreign-owned corp. Corporation or (3) Foreign-owned corp.
How much area is (1) 32,000 onshore; (2) 81,000 offshore (1) 32,000 onshore; (2) 81,000 offshore
granted?
What is the term? 2 years 4 years for non-metallic mineral exploration;

6 years for metallic mineral exploration
Application Renewal
What are the ✓ Application form (MGB Form No. ✓ Audited financial statement/s
requirements? 5-1) covering the entire term of the
exploration permit
✓ For corporation/ partnership/
association/cooperative: ✓ 2 year exploration work program
SEC/CDA-certified certificate of (MGB Form No. 5-4), duly prepared,
registration, articles of signed and sealed by a licensed
incorporation/partnership/ Mining Engineer or Geologist
association and by laws; or a
certification from MGB CO/RO ✓ Environmental Work Program
concerned that such documents are (MGB Form No. 16-1), duly prepared,
duly registered in that office. signed and sealed by a
licensed Mining Engineer or Geologist
✓ Affidavit of Undertaking (using
MGB form)
Application Renewal
What are the ✓ Location map/sketch plan showing ✓ Certification of Regional Office
requirements? coordinates/boundaries with major concerned as to the level of
environmental features/other projects implementation of the Work Program
and compliance of the Permittee with
✓ 2 years exploration work program the terms and conditions of the
(MGB Form No. 5-4), duly prepared, exploration permit, including
signed and sealed by a licensed reporting and fiscal obligations
Mining Engineer or Geologist
✓ Proof of technical competence
✓ Proof of financial capability

Securing of Orders of Payment
Filing, pre-plotting, and Review/Clearance by DENR-MGB
from the MTMD and Payment of
preliminary evaluation of Central Office, and issuance by
Renewal and Verification Fees by
application in Regional Office Regional Office
the Permittee in the Cashier
Area Status and

Clearance/Consent by DENR Filling of the application by the
Signing of Renewed Permit by the
Sectors and/or other Government Permittee in the Record Section/
MGB Director and Permittee
Offices; Processing of Request for MGB Central Office
NCIP Certification
Publication, posting and radio Payment of Occupation and

Mining Tenements Management
announcement; Certification of Registration Fees by the Permittee
Division (MTMD) / FTAA
publication, etc., and of any and Release of the Renewed Permit
Evaluation Section
adverse claim/protest/opposition by the Regional Office
(Checking of mandatory acceptance

Final Evaluation by MGB Regional requirements, i.e., audited financial statement
& 2-year Exploration Work Program;
Office preparation of letter to the Permittee re:
payment of Renewal and Verification Fees
- Presents the plan of major mining operations and corresponding
2-Year Exploration
expenditures of the contractor in its contract area during a given
Work Program period of time
- Comprehensive and strategic environmental management plan to

Environmental Work achieve the environmental management objectives, criteria and
Program commitments including protection and rehabilitation of the disturbed
environment during the exploration periods
- Required to be prepared for any project that significantly affects the

quality of the environment
- A comprehensive study of the significant environmental impacts
(physical, biological, socio-economic) of a project
- Includes environmental management plan and social development
plan
- Serves as an application for an environment compliance certificate
(ECC)
- Submitted if the EP holder determines that mining operations are
Declaration of Mining feasible within the EP area and apply for either a Mineral Production
Project Feasibility Sharing Agreement (MPSA) or a Financial or Technical Assistance
Agreement (FTAA)
Community Development - Mandatory requirement for the acceptance of application for EP

Program renewal and renewal of exploration period for MPSA and FTAA.
Environmental Protection - Equivalent to 10% of total project cost and must describe the expected
and Enhancement Program and considered acceptable impact and shall set out the life-of mine
(EPEP) environmental protection and enhancement strategies.
- Conducted to determine the possible impacts of a proposed project on

Environmental impact
the environment and community and result of the study are reported
assessment
in the environmental impact statement system.
- Required to be prepared for any project that significantly affects the
Environmental Impact
quality of the environment, and comprehensive study of the significant
Statement (EIS) System
environmental impacts of a project.
- Certifies that the project will generate minimal effects on the

Environmental Compliance environment and community and that the proponent has complied
Certificate with all the requirements of the EIS system and has committed to
implement its approved EMP.
- Stated at cost less accumulated amortization and impairment losses

Mining rights and are amortized based on the units of production method utilizing
only recoverable coal reserves as the depletion base.
- Stated at cost less impairment losses. Cost of the exploration rights are
Exploration rights transferred to mining rights upon the government's approval of the
mining license and the commencement of the mining activities.
Key Stages of Exploration and Evaluation:
Area selection Target Identification Target testing Resource evaluation
Physical exploration Feasibility analysis

Pre-physical work-up
involves: and determination of
involves:
proved and probable
• Geophysical surveying –
• Drilling, core reserves
either aerial for or ground
sampling
surveys; finding major
• Assaying • Activities in
structural features and
• Environmental relations to
potential locations of an
and access evaluating the
ore body for targeting
technical
feasibility and
commercial
• Geological work – studying
viability of
the composition of the earth,
extracting a
mapping and including some
mineral resource
extraction activities
Reserve Framework Competent Person
The Philippine Mineral Reporting of A competent person as defines in the revised PRMC
2007 (PMRC) sets out the minimum section 10, as a person who is duly-licensed professional
standards, recommendations and and is an active member or fellow of Philippine Society of
guidance for public reporting in the Mining Engineers (PSEM) and/or Geological Society of
Philippines of company’s: the Philippines (GSP)
• Results of exploration A competent person must have a minimum of the 5 years

• Mineral resources experience which is relevant to the style of mineralization
• Mineral reserves and the type of deposit under consideration and to the
activity that person is undertaking
He/she responsible for the preparation of PMRC report

PFRS 6, Exploration for and Evaluation of Mineral Resources-Overview
Exploration for and evaluation of mineral resources is "the search for mineral resources, including
minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to
explore in a specific area, as well as the determination of the technical feasibility and commercial viability of
extracting the mineral resource."
Exploration and evaluation expenditures are "expenditures incurred by an entity in connection with
the exploration for and evaluation of mineral resources before the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable."
• Allows an entity to develop an accounting policy for E&E expenditure without specifically considering
requirements of IASB framework.
• Determine an accounting policy, specifying which expenditures to be recorded as assets and which to be
expensed
• Chosen policy must be relevant and reliable and it must be applied consistently
• Provides specific guidance impairment testing.
Applies to mineral resources only-does not apply to:

• Pre-exploration activities.
• Expenditures incurred on activities after the technical feasibility and commercial viability of extracting
the resource is demonstrated. Such expenditures are part of the development phase.
After legal rights are obtained but
before technical feasibility and After technical feasibility and
Before legal rights to explore are commercial viability are commercial viability are
obtained demonstrable demonstrable
PFRS 6 is not applicable PFRS 6 is applicable PFRS 6 is not applicable
Exemption from Hierarchy of reporting standards under PAS Hierarchy of reporting standards (PAS 8)
1. PFRSS
2. Judgment
When making the judgment:
management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
management may consider the following:
a. Other accounting literature and industry practices
b. Pronouncements issued by other standard-setting bodies
There is a choice of policy:
• Expense all exploration costs - companies may choose to start capitalizing at the point where they have
a project. The majors tend to use this approach.
• Expense all costs until there is a specific level of confidence that this will turn into a project - this
subjective, and companies need to articulate how they determine the point of capitalization.
• Capitalize everything - from the stage where the license is obtained, and only write-off costs where the
exploration rights are relinquished or no furth significant exploration activities are planned
Measurement and Presentation
Measurement
• Initial Recognition - At Cost

• Subsequent Measurement - Either Cost or Revaluation Model
Presentation
Classification of exploration and evaluation assets shall be made in accordance with the nature of the
assets acquired:
• Intangible
• Tangible
Elements of Cost of Exploration and Evaluation Assets
An accounting policy shall be determined specifying which expenditures are recognized as exploration and
evaluation assets
Examples of expenditures that might be included in the initial measurement of exploration and evaluation
assets:
• acquisition of rights to explore; topographical, geological geochemical and geophysical studies;
• exploratory drilling, trenching and sampling;
• and activities in relation to evaluating the technical feasibility and commercial viability of extracting a
mineral resource.
Impairment Facts & Circumstances
• Exploration and evaluation assets shall be
assessed for impairment when facts and
circumstances suggest that the carrying Expired Budget
amount of an exploration and evaluation
asset may exceed its recoverable amount
• If an impairment test is required, any

impairment loss is measured, presented Discovery Recovery
and disclosed in accordance with PAS 36,
Impairment of Assets.
Disclosure Requirements
An entity shall disclose information that identifies and explains the amounts
recognized from the exploration for and evaluation of mineral resources
• Its accounting policies for exploration and evaluation expenditures including the
recognition of exploration and evaluation assets; and
• The amounts of assets, liabilities, income and expense and operating and
investing cash flows arising from the exploration for and evaluation of mineral
resources.
Development Phase
Mineral Agreements Financial or Technical Assistance
Definition Contract between the government and a Contract involving financial or technical
contractor, involving mineral assistance for large scale exploration,
production-sharing agreement, development, and utilization of mineral
co-production agreement, or joint-venture resources
agreement
Who is qualified to (1) Filipino citizen or (2) Filipino-owned (1) Filipino citizen or (2) Filipino-owned
apply? Corporation, Partnership, Association or Corporation, Partnership, Association or
Cooperative Cooperative or (3) Foreign-owned
Corporation, Partnership, Association or
Cooperative
How much area is 10 meridional blocks (Block) up to 500 1,000 blocks up to 4,000 blocks
granted? blocks
What is the term? 25 years from the date of its issuance and 25 years from the date of its issuance and
renewable for another term not exceeding renewable for another term not exceeding 25
25 years years
Pre-feasibility Study Feasibility Study Strategic Plan
An execution plan is developed with a - This study begins the process of Determine the business value of the mine
budget of required work to advance the long-term planning and develops • What questions should be asked?
project. This study uses estimates to a significantly higher level of
determine viability of the project. detail than the previous study.
- Consider the following risks:

• Geological
• Metallurgical
• Economic
• Dilution
• Others
Mine Design Mine Scheduling Operational Mine Plan
Establish a logical work-flow The sequence of mining activities Translation of mine design into
system which takes into and the interval between activities practical operational instructions.
consideration extraction sequence are planned.
and various constraints such as
production capacity and plants
limits.
PFRS 6, Exploration for and Evaluation of Mineral Resources
Development Costs
Design Procurement Construction Construction

Development Costs
Categories of Property, plant and Equipment
∙ Fixed Assets – Mining Equipment and Trucks
∙ Mine Infrastructure – Access Roads and Tailing Ponds
∙ Mine Development-Related Assets – Capitalized Development Costs
Production During Mine Development
Instances where revenue is generated during the development phase
∙ During mine trial
∙ When developing a mine itself
∙ When testing the individual plant component to ensure that it is with the correct standard
∙ Sale of product during the ramp-up phase
Production During Mine Development

∙ How should proceeds from selling any items produced while bringing an item of property,
plant and equipment to the location and condition necessary for it to be capable of operating
in the manner intended by management be treated?
∙ How should the cost related to the proceeds from selling any items produced while bringing
an item of property, plant and equipment to the location and condition necessary for it to be
capable of operating in the manner intended by management be allocated?
Borrowing Costs
Treatment of borrowing costs during development phase
∙ Capitalize if they are directly attributable to the acquisition, construction or production of a
qualifying asset.
∙ Commencement of capitalization, should meet all:
o it incurs expenditures for the asset
o it incurs borrowing costs
o it undertakes activities that are necessary to prepare the asset for its intended use or sale
Production Phase

Translation of mine design into practical
operational instructions
∙ Extraction of minerals from the Earth through

production lines
∙ Developed ones and minerals are being

produced for commercial purposes rather than
development of additional ores or minerals for
mining
The following activities commence during the production phase
• Start of Life-of-Mine (LOM)
• Recognition of revenue from sales of minerals and

connections
• Recognition and measurement of depletion (mine and mining

properties) and depreciation (mining and production
equipment)
• Recognition of and measurement of mine product

inventories
EXTRACTION AND PROCESSING:
Depreciation, depletion,
Specialist Operating Agreements
and amortization
• Resource estimate (e.g., • Will allow the mining entity
Geologists) to occupy, explore, develop,
• Reserve Estimate (e.g., utilize, mine, mill, beneficiate
Mining Engineer) and undertake activities and
• Mineral Assay (e.g., others as specified in each
Metallurgical Engineer) contract/agreement within
the areas covered by MPSA. Typical assets for depreciation,
• Ore survey or stockpiling depletion, and amortization
(e.g., Geodetic Engineer and • Mine and mining properties
Surveyors) • Mining rights
• Asset retirement obligation
• Processing Plants
• Warehouse
• Mining Equipment (dump
trucks, excavators, tractor)
Depreciation - property, plant, and equipment is deprecated over its useful life, or over the remaining
life of the mine that is shorter and there is no alternative use for the asset. The useful lives of the major
assets of a cash-generating unit are often dependent on the life of the ore body. to which they relate.
Depletion is the exhaustion that results from the physical removal of a part of a natural resource. In
each accounting period, the depletion recognized is an estimate of the cost of the natural resource that
was removed from its natural setting during the period. The depletion of complex ores is a particularly
difficult issue because not all valuable components of such ores are used due to various reasons. Some
mineral resources are fully consumed, while others are characterized by the opportunity to be partially
recovered after consumption through recycling. For the first category of resources, depletion factors
include changes in demand, new technologies, and the development of substitutes. For the second
category, they include improvements in both the recycling process and the quantitative and qualitative
characteristics of the components used in the production process after recycling.
Cost and expenses
Classification of Costs and Expenses
Cost of Directly attributable to production/sales

sales
Indirect expenses (e.g., administrative,

Operating selling, and other office expenses)
expenses
✔ Stockpiling
Mine Inventories
Types:
∙ Mineral ore Inventory
∙ In-process (e.g., crushed ore)
∙ Mineral Products (e.g., DSO, concentrates, bullions)
∙ Raw Materials and supplies
Valuation:
∙ Lower of cost and net realizable value
✔ Stockpiling
Mine Inventories
Types:
∙ Mineral ore Inventory
∙ In-process (e.g., crushed ore)
∙ Mineral Products (e.g., DSO, concentrates, bullions)
∙ Raw Materials and supplies
Valuation:
Permits Demurrage, Dispatch and Dead Freight
• Ore Transport Permit

• Mineral Ore Export Permit
cost incurred as a result of a contractual breach
• Export Declaration from BOC
Demurrage (i.e., load commodity within agreed time)
income recognized as a result of the earlier completion

Dispatch of loading of ore as compared to the agreed laytime
damages incurred as a result of a contractual

Dead breach (i.e., load in full to the vessel)
Freight
Tax on the production, sale or consumption of commodity in a country
Excise tax on mineral products

• Domestic or imported coal and coke -150 pesos per metric ton
Excise • All metallic and nonmetallic minerals and quarry resources four percent (4%) based on the actual market
Tax value of the gross output thereof at the time of removal, in the case of those locally extracted or produced; or
the value used by the Bureau of Customs in determining tariff and customs duties, net of excise tax and
value-added tax in the case of importation.
Tax paid to the government which shall not be less than five percent (5%) of the market value of the
gross output of the minerals/mineral products extracted or produced from the Mineral Reservations
exclusive of all other taxes
Royalty Royalty to indigenous peoples or indigenous cultural communities

Tax • payment, upon utilization of the minerals shall be agreed upon by the parties which shall form part of
a trust fund for the socioeconomic wellbeing of the indigenous cultural community.
Reserves
∙ The life of mine is based on an estimate of mineable mineral reserves
∙ Reserve estimates are key inputs for financial estimates/calculations i.e., depletion
expense
∙ Follow SPECIALIST: Using the work of specializing guide which primarily involves
assessing expertise of speciation.
Changes in reported reserves may affect the Group's financial results and financial position in a number of ways, including
the following:
• Asset carrying amounts may be affected due to changes in estimated future cash flows.
• Depreciation, depletion and amortization charged in the income statement may change where such charges are
determined by
• The units of production basis, or where the useful economic lives of assets change.
• Overburden removal costs recorded on the balance sheet or charged to the income statement may change due to changes
in stripping ratios or the units of production basis of depreciation.
• Decommissioning, site restoration and environmental provisions may change where changes in estimated reserves affect
expectations about the timing or cost of these activities.
• The carrying amount of deferred tax assets may change due to changes in estimates of the likely recovery of the tax
benefits.
Property Plant and Equipment
∙ The accumulated capitalized costs from development phase amortized over the expected
total production using a unit of production basis
∙ Several methods used in Unit of Production Basis
✔ Total quantity of material extraction from the mine (including waste)
✔ Total quantity of ore extracted from the mine
✔ Total Output
Inventories
∙ Recognition and measurement
∙ When the ore/product is extracted from the earth
Inventory usually includes
∙ Raw material
∙ Work in Progress
∙ Finished Goods
Costing of Inventory
∙ Cost comprises all cost of purchase costs of conversion and other costs incurred in bringing the
inventories to their present location and condition
∙ In mining, we also identify the cost of production per relevant unit of production (per ton/ounce
depending on the type of commodity)
∙ Inventory stockpiles are most commonly valued using weighted average costing method.
∙ During our audit, we verify whether the value of inventory applies to be consisted with our knowledge of
the operations of the mine
Work In Progress Net Realizable Value (NRV) of The basic principles of the
✔ For mining companies, it is Inventory calculations are
become accepted practice to ✔ NRV is the estimated selling price in ✔ To determine the tones /
recognize work in progress at the the ordinary course of business less ounces of the commodity
point at which ore is broken and the estimated costs of completion and that is recoverable from the
the entity can make a reasonable the estimated costs necessary to make existing stockpiles using
assessment of quantity, recovery the sale. The objective of calculating survey of tonnes and head
and cost the NRV of stock is to ensure that the grades.
inventory is not overvalued.
Joint Products and By-products Stockpiles of low grade are
∙ In extractive industries is common for more ∙ Mining companies often stockpile low grade ore
than one product to be extracted from the that cannot be economically processed at current
same reserve e.g., is often found together prices or to give priority to the processing of
with gold and silver. higher-grade ore. If and when processing of low
∙ Joint products are all significant in value and grade ore becomes viable and management
require that an entity allocatee on a rational intends to process the stockpile and the ore is
and consistent basis the costs of conversion often presented as non-current inventory
that are not separately identifiable for each
product characteristics or allocation on the
basis of relative value.
∙ By-products that are significant in value
should be accountable as joint products
otherwise they are often treated as a negative
cost.
Revenue
Recognize revenue at amount that reflects the consideration to which the entity expects to be entitled
in exchange for transferring goods or services to a customer.
Key aspects of IFRS 15 that are particularly relevant mining companies:

- Commodity-based contracts
- Bill-and-hold arrangements
- Provisionally priced sales contracts
- Provision of shipping services
Revenue
Shall disclose:
• Accounting policies
• Contract with customers
• Disaggregation of revenue
• Contract balances
• Performance obligations
• Significant judgments
• Identification of performance obligation
• Determination and allocation of transaction price
Asset recognized from the cost to obtain or fulfill a contract

Impairment of Assets
An asset is impairment when the carrying
1 amount is higher than the recoverable

amount. FVLCD Value in use
The recoverable amount is the higher of the
2 asset’s fair value less costs of disposal and its

value in use.
Recoverable
amount (1)
Carrying
amount (2)
• Events and information received after the reporting

period should be considered in the impairment Impairment
assessment ONLY IF they provide additional evidence of
conditions that existed at the end of the reporting
period.
• Determination of the recoverable amounts of an asset
should ONLY consider the information obtained after
the reporting date if such information relates to
conditions existing as of the reporting period end.
Impairment Indicators:
External indicators
Internal indicators
Market capitalization is less than the

Economic performance of the asset is
carrying value of the net assets
worse than expected
Significant decline in commodity prices
Plant shutdowns/store closures
Decrease in market interest rates/rates
Reduced demand and selling prices
of return on investment
for goods and services
Significant technological, market or
Changes in the use of the asset
legal environment changes with
Obsolescence or physical damage
adverse impact
Common issues on impairment testing – Mining and Metals
Cash Flows Discount Rate
Other income and expenses No basis/parameters of discount rate provided

Inclusion of non-operating income and expenses Period of government debt used as basis of RFR (i.e.,
BVAL) is shorter that of the EFP (but not exceeding
Taxes 10-year)
Non-normative tax rates (e.g., effective tax
rate)
Non-inclusion of taxes forecast
Net working capital

No changes in NWC and on the forecast and
FCF computation
Capital Expenditure
No assumption of maintenance capex
Inclusion of mine development capex
(enhancement capex)
Net working capital

No changes in NWC and on the forecast and
FCF computation
Other Issues on Impairment Testing
Consideration of facts and circumstances

Linking error or sliding error
after valuation date
Book value of debt-to-equity ratio Mathematical Accuracy
No access to Bloomberg, Reuters, and

other terminals or analyst’s report
Closure Phase
Mine Rehabilitation
Section 71 of Republic Act No. 7942
Contractors and permittees shall

technically and biologically rehabilitate the
excavated, mined out, tailings covered and
disturbed areas to the condition of
environmental safety, as may be provided in
the implementing rules and regulations of this
Act.
Failure to fulfill the above obligation shall
mean immediate suspension or closure of the
mining activities of the contractor/permittee
concerned.
Main Types of Reclamation and Closure Activities
REMEDIATION
Cleaning up contaminated areas by removing/isolating contaminants.
RECLAMATION
Physically stabilizing the terrain, landscaping, restoring topsoil, and returning land to a
useful purpose.
RESTORATION
Rebuilding the ecosystem that existed at the site before it was disturbed.
REHABILITATION
Establishing a stable/self-sustaining ecosystem
Progressive Rehabilitation
• The implementation of rehabilitation and

closure activities during the operating life of
the mine.
• It is the key strategy used by the mining

industry to minimize mine closure costs and
environmental risks.
> Submitted to the MRF Committee five (5) years before the final
decommissioning of the contract/mining area to the MRF Committee
through the Regional Office and to the CLRF Steering Committee through
Final Mine Rehabilitation/
the Bureau
Decommissioning Plan
> The plan shall be reviewed and/or revised at a date not exceeding two (2)
years after its approval and every two (2) years thereafter.
> Shall be established by each operating Contractor/Permit Holder as a trust

fund in a government depository bank to ensure that the full cost of the
approved FMR/DP is accrued before the end of the operating life of the mine,
Final Mine Rehabilitation/ in accordance with Section 71 of the Philippine Mining Act.
Decommissioning Fund
> Annual cash provisions shall be made by Contractors/Permit Holders to the
fund based on a pre-determined percentage of the cost of implementing the
approved FMR/DP.
Mine Rehabilitation Fund (MRF) REHABILITATION CASH FUND MONITORING TRUST FUND
A reasonable environmental deposit to > Shall cover the various > Shall cover the various costs to be
ensure availability of funds for the rehabilitation activities, including incurred by the monitoring team
satisfactory compliance with the research programs, as defined in the such as transportation and travel
commitments and performance of the EPEP/AEPEP. expenses, cost of laboratory
activities stipulated in the EPEP/AEPEP analysis, and others.
during specific project phase. > Shall be equivalent to ten percent
(10%) of the total amount needed to > Shall not be less than One
Shall consist of the Monitoring Trust implement the EPEP or Five Million Hundred Fifty Thousand Pesos
Fund and the Rehabilitation Cash Pesos (PhP5,000,000.00), whichever (PHP 150,000).
Fund. is lower.
Accounting for Mine Rehabilitation
PAS 16, Property, Plant and Equipment states that the cost of an item of PPE should
include a reasonable estimate of the cost of dismantling and removing the item and
restoring the site on which it was located.
> A mine closure obligation arising from mine development activities or asset
dismantling should be capitalized as part of the cost of the associated asset.
> The rehabilitation asset is depreciated over the future production from the operations
to which it relates.
Factors to be considered when determining the best estimate include:
> Expected inflation;

> Advances in technology;
> Any internal costs expected to be incurred by the Company;
> Productivity improvements;
> Particular circumstances faced by the operation or mine; and
> Appropriate discount rate to calculate the Net Present Value (NPV) of the liability.
• Provisions for mine rehabilitation are measured at the present value of the expected
future cash flows that will be required to perform the decommissioning.
• The "best estimate" may be determined by taking into account all possible outcomes and
using probabilities to weigh these outcomes.
Accounting for Changes in the Provision for Mine
Rehabilitation
• Philippine Interpretation IFRIC 1, Changes in Existing Decommissioning, Restoration

and Similar Liabilities applies to changes in the measurement of any existing
decommissioning, restoration or similar liability that is both:
Recognized as part of the cost of an item of property, plant and equipment or right-of
use asset in accordance with PAS 16 and PFRS 16; and
Recognized as liability in accordance with PAS 37.
If the related asset is measured using the cost model:
a) Subject to (b), changes in the liability shall be added to, or deducted from, the cost of the
related asset in the current period.
b) The amount deducted from the cost of the asset shall not exceed its carrying amount. If a
decrease in the liability exceeds the carrying amount of the asset, the excess shall be
recognized immediately in profit or loss.
c) If the adjustment results in an addition to the cost of an asset, the entity shall consider
whether this is an indication that the new carrying amount of the asset may not be fully
recoverable.
If the related asset is measured using the revaluation model:
a) Changes in the liability alter the revaluation surplus or deficit previously recognized on that
asset, so that:
i. A decrease in the liability shall (subject to (b)) be recognized in other comprehensive

income and increase the revaluation surplus within equity;
ii. An increase in the liability shall be recognized in profit or loss.
b) In the event that a decrease in the liability exceeds the carrying amount that would have been
recognized had the asset been carried under the cost model, the excess shall be recognized
immediately in profit or loss.
Accounting for Leased Asset in the Provisions for Mine
Rehabilitation
• Recognition of the lease liability will not result in the derecognition of the provision for
mine rehabilitation recognized.
• Accordingly, subsequently acquiring the right-of-use of asset does not result in the
derecognition of the provision for mine rehabilitation.
• The remediation activity undertaken would ultimately settle the liability.

Types of Mining Industry Assets
1. Projects
Projects in the mining industry can be broken down into the exploration and feasibility stage, and the planning and
construction phase.
Exploration and Feasibility

o The purpose of exploration is to find ores that are economically viable to mine. It begins with locating mineral
anomalies, after which discovering, and sampling confirms or denies that there is a find. It can be further proven
through drilling programs and resource definition.
Planning and Construction
o Once a potential mine is proven to be viable, the planning and construction phase begins with applying for and
obtaining permits, continuing economic studies, and refining mine plans. Infrastructure development also takes
place at this stage as mines are often located in remote areas that require constructions of roads and electricity.
2. Operating Mines
Once the operation is ready to begin, the asset officially becomes an operating mine. During this phase, the ore is
extracted, processed, and refined to produce metal. This section forms the bulk of the focus of the financial model for
an operating mine. Once all the ore has been extracted, the mine closure process begins, which can last for several
years. The process includes clean-up, reclamation, and environmental monitoring.
Term Definition
Ore Rock containing the metal that is economic to mine (measured in metric tons)
Grade The amount of metal contained per unit of ore (grams/ton or %)
Recovery The percentage of metal that is recoverable from ore after the extraction process (%)
Production The amount of metal produced (oz/year)
Payability Based on smelter terms, refers to the amount of money that is paid or the percentage of
the metal that is paid full price for.
Cash costs Mine site operating costs include mining, milling, labor, energy, and consumables
(measured in cot per ton of material)
All-in sustaining Mine site costs + corporate G&A + sustaining capital to maintain the mine +
costs capitalized exploration to continue to explore for reserves and resources (exclude
interest or taxes)
Revenue Ore (tons) x Grade (g/t) x Recovery c Payability x Metal Price
Royalties Properties often have royalties on them (e.g., 2% Net Smelter Return)
Operating costs Per ton basis (e.g., ₱2.50/ton for mining)

Capital costs Includes initial capital (construction of mine) and sustaining capital (ongoing
equipment, etc.)
Reclamation costs Takes place at the end of a mine’s life; accrued for accounting purposes but not
accrued in a cash flow model
Depreciation A percentage of production bases over the entire life of the mine
Taxes Can often be complicated with mining companies operating in several countries;
mining specific taxes and royalty agreements need to be considered
Changes in Changes in accounts receivable, inventory, and accounts payable should be
working capital factored into a cash flow model
Audit Selection
Planning
Examination
Reporting
Audit Selection
❖ Selection of audit topics is considered part of the overall performance audit process. Often,
audit topic selection is done as part of an office’s strategic planning process. Strategic
planning is usually led by senior executives and is informed by an audit office’s knowledge
of business about its “audit universe” and analyses of materiality, significance, risks, and
known problems. Other important considerations include the audit office’s mandate, the
availability of skilled auditors and resources, and the auditability of potential audit topics.
The audit selection process normally results in a list of planned audits to be carried out over
time.
Determining the Audit Focus
o Once auditors have a good understanding of mining sector activities in their jurisdiction
and have identified all important government responsibilities in this sector, they have to
determine where the key risks are and narrow down options to eventually arrive at a
manageable audit focus.
o To determine the audit focus, auditors have to conduct further research in the areas that
they have identified as relevant and important. While these areas may include
environmental management, enforcement activities, or other aspects of mining activities.
Planning
❖ It is organized according to the key actions and decisions that need to be made when
conducting detailed planning for the audit:
a) Acquiring knowledge of business and assessing risk
b) Drafting audit objectives
c) Selecting audit criteria

Acquiring knowledge of business and assessing risk
• Audit procedures typically require auditors to acquire knowledge of the organization and
subject matter. Once the audit focus is decided, the audit team needs to start conducting
research and interviewing officials to acquire or further develop a sound knowledge of
business and an understanding of the risks facing the organizations being audited. The
information collected will be used to determine what the main risk areas are and where
audit efforts should be directed.
• Audit procedures typically require auditors to acquire knowledge of the organization and
subject matter. Once the audit focus is decided, the audit team needs to start conducting
research and interviewing officials to acquire or further develop a sound knowledge of
business and an understanding of the risks facing the organizations being audited. The
information collected will be used to determine what the main risk areas are and where
audit efforts should be directed.
Drafting audit objectives
• All performance audits need clearly stated objectives that are worded in a manner that
allows auditors to conclude against them. Audit objectives should be realistic and achievable
and give sufficient information to audited organizations about the focus of the audit.
• An audit can have one or several objectives depending on its breadth. Office practice will
also influence the number of objectives and whether or not sub objectives are used. (Some
audit offices never use subobjectives.) Sub-objectives can be included in audit plans (for
example, one for each line of enquiry), but auditors who decide to do so will still be expected
to conclude on their main audit objective(s).

Selecting audit criteria
• Audit criteria represent the standards that audited organizations are expected to meet. Audit
criteria are a key contributor to an audit’s strength and potential impact. Audit procedures
focus on determining whether criteria are met or not met. Suitable criteria are relevant,
complete, reliable, neutral, and understandable. Finding suitable criteria is a challenge for
any performance audit, especially where there is no recognized source of accepted criteria.
Examination
❖ During the examination phase of a performance audit, audit teams must conduct procedures that will yield sufficient
appropriate evidence to:
• determine whether audit criteria are met,
• conclude on audit objectives, and
• document and support these conclusions.
❖ During the planning phase, auditors carefully consider which audit tests and procedures to include in their detailed
audit program and make decisions based on
• the type of evidence required to reach audit conclusions against their audit criteria and
• an assessment of the time, expertise, and resources required to conduct each test or procedure.
• Ultimately, the audit team has to plan audit procedures that will provide sufficient and appropriate evidence
while respecting the audit’s budget.
Reporting
• During the reporting phase of a performance audit, auditors produce a report that presents their
audit observations and conclusions. Audit reports vary considerably in scope and nature. In
addition, the formats and writing styles of performance audit reports are specific to individual audit
offices. As a result, there is no standard way to present audit findings. However, performance
auditors can apply some common principles and good practices to improve the readability and
impact of their audit reports.
Drafting Recommendations
❖ Drafting effective audit recommendations is a challenging task that requires much thought, discussion,
and professional judgment. When drafting a recommendation, auditors can ask themselves the following
questions:
• Is the recommendation addressed to the right organization (that is, the one that can actually
implement it and make change happen)?
• Is the recommendation aimed at the root cause of the issue or at its symptoms? (See our Discussion
Paper on root cause analysis for guidance on this topic.)
• Does the recommendation clearly identify the risk(s) being addressed?
• Is the recommendation consistent with the audit observations?
• What is the cost and feasibility of implementing the proposed action? Are there alternative courses of
remedial actions that would be easier to implement or be more affordable?
• What would be the impact on results, both positive and negative, if the recommendation were
adopted?
• Could successful implementation of the recommendation be reasonably determined in a follow-up
audit?
• Furthermore, auditors can inform their decisions on audit recommendations by seeking
the audited organization’s views on the actions that would be necessary to correct the
identified deficiencies. By discussing audit recommendations with audited organizations
before completing audit reports, auditors can increase the likelihood that their
recommendations will be implemented and will lead to positive change.
OIL & GAS
• Audit objectives
To examine and assess whether the government and the mining company maintain
adequate internal control system 97 according to rules and laws. The audit also examined
whether governments and companies comply with laws, contract of work and impact control
documents.
• Audit criteria
Law Number 11 of 1967 regarding of Mining Rules and Law Number 23 of 1997 regarding
Environmental Management, impact analysis and others concerned with mining and
standard operational procedures as well.
• Audit Method
The audit assesses budget expenditures and intern control system, as well as disclosure of financial and
environment process, conducted with following methods:
1. Risk method. The implementation method based on review and examination of effectiveness of the internal
control system. The result influences the reliability of intern control system level according with the laws,
and finally guides in determining audit object.
2. Materiality. The audit applies low level of materiality considering that user will give attention on legality
and lawfulness on mining‘s rules. Besides that, materiality on environment management refers to
important effects resulted from mine business according with the Environmental Impact Assessment.
3. Audit sampling. The three methods in collecting audit evidences are: Interview and observation Testing
sampling Document review
• Audit Scope
1. Oil and Gas Regulatory Agency (BP Migas);
2. PT. Chevron Pacific Indonesia;
3. Other related institutions
• Audit Findings:
The audit found weaknesses in controlling the environmental impacts and incompliance to applicable rules as
follows.
1. No further decision regarding long-term management of Darling mixing cells and stockpiles.
2. Inadequate handling of hydrocarbon-contaminated soils.
3. Inadequate facilities in the toxic waste temporary storage.

4. Inadequate monitoring and maintenance efforts of hot water pipeline network and hydrocarbon
transport shipping line.
5. Gas emissions above tolerable limit.
6. Incompliance of liquid waste and gas emission management in CGS-5 Duri facility with
government‘s rules.
7. Water waste in Duri Canal is above tolerable limit.
8. Emergency waste management is incompliance with SOPs.
9. The company fails to conduct reclamation in its plug and abandoned sites.
GROUP
REPORT
IN
AUDITING AND ASSURANCE:
SPECIALIZED INDUSTRIES
“FUEL AND ENERGY INDUSTRY”
BSA 3B
GROUP 5
Prepared and submitted by:
Busaing, Ma. Christina A.
Dela Costa, Lorraine Jane T.
Galam, Marlyn P.
Hernandez, Flowny M.
Lazatin, Rose Ann E.
Submitted to:
Prof. Amor B. Sande

PAMANTASAN NG LUNGSOD NG PASIG
1st Reporter Assigned: BUSAING, Ma. Christina

Background
The energy sector in ancient times consisted of burning wood and specific oils for heat. It has
been constantly changing and evolving since then due to changes in demand. James Watt
patented the world's first coal-powered steam engine in 1769 was the first major revolution in the
energy industry. Whale oil was used as a source of energy for lighting and cooking. Oil was also
extracted from coal, foreshadowing the industry's next evolution. Petroleum and natural gas
became valuable resources as techniques for collecting and refining fossil fuels improved and
technology-driven demands grew. Oil-exporting countries were more protective of their
resources and were more interested in profiting from the wealth of the oil industry.
Oil and natural gas, as the world's primary fuel sources, are currently the most important
industries in the energy market, with a significant impact on the global economy. Oil and gas
production and distribution processes and systems are extremely complex, capital-intensive, and
require cutting-edge technology. Natural gas has historically been tied to oil due to the
production process or upstream part of the industry. For much of the industry's history, natural
gas has been regarded as a nuisance, and it is still flared in large quantities in some parts of the
world. The energy industry has been a major driver of industrial growth over the last century,
providing fuel for the rest of the economy.
What is the Fuel and Energy Industry?

The fuel and energy sector or industry includes companies involved in the exploration and
development of oil and gas deposits, oil and gas drilling, and refining. The energy industry also
includes integrated power utility firms such as renewable energy and coal. The energy sector is a
broad and all-encompassing term that refers to a complex and interconnected network of
businesses involved in the direct and indirect production and distribution of energy to power the
economy and facilitate production and transportation. Companies in the energy sector use a wide
range of energy sources. Energy companies are frequently divided into two categories based on
the source of the energy they produce: nonrenewable or renewable.
Kinds of Fuel and Energy they offer in the market

Various sorts of commercial fuel and energy are accessible all around the world. They are as
follows:
Natural gas
Natural gas is a versatile, efficient, and clean-burning fuel that is readily available in many
nations. It has no aroma, no color, and no taste. Natural gas is one of the most environmentally
friendly fossil fuels. Natural gas is used in vehicles with specially constructed engines because it
emits fewer hazardous emissions than gasoline or diesel. It can also be used to generate heat for
burners in the kitchen.
Solid Fuel
1
The term fuel refers to a variety of solid materials that are utilized as a source of energy and heat,
and are usually released by burning. Wood, charcoal, peat, coal, hexamine fuel tablets, and wood
pellets are examples of solid fuels. Due to hazardous levels of toxic emissions, the use of some
solid fuels, such as coal, is restricted or forbidden in some metropolitan areas. As heating
technology advances and the availability of high-quality fuel improves, the usage of alternative
solid fuels such as wood is diminishing. Smokeless coal is frequently the only solid fuel utilized
in some locations
Chemical fuels
They are compounds that release energy by reacting with the substances in their environment,
most notably through the combustion process. The weak double bond of molecular oxygen stores
the majority of the chemical energy released in burning, rather than the chemical bonds of the
fuel.
Liquid fuels
They are flammable or energy-producing compounds that can be used to generate mechanical
energy, mainly kinetic energy. They must also conform to the geometry of their container; liquid
fuel fumes, not fluids, are combustible. The majority of liquid fuels in use today are made from
the fossilized remains of deceased plants and animals that have been exposed to heat and
pressure deep inside the Earth's crust. However, there are various sorts of liquid fuels, including
hydrogen fuel, ethanol, jet fuel, and bio-diesel. Conventional diesel is a combination of aliphatic
hydrocarbons derived from petroleum, similar to gasoline. Kerosene is used as a fuel for
cooking, heating, and small engines, as well as in kerosene lamps.
Fuel and Energy Companies in the Philippines

Petron Corporation, Chevron Philippines Inc, PTT Asia Pacific, Pilipinas Shell Petroleum, and
Manila Electric Company are the five prominent firms in the Philippines' fuel and energy market.
1. Petron is the largest oil and gas company in the Philippines, with operations in petroleum
exploration, production, refining, and marketing.
2. Shell Petroleum is the second largest oil and gas company in the Philippines, with operations
in petroleum exploration, production, refining, and marketing.
3. Chevron Philippines Inc. is the third largest oil and gas company in the Philippines, with
operations in petroleum exploration, production, refining, and marketing. Chevron is a
multinational corporation with a significant presence in the Philippines, where it is known as
Caltex. They buy crude oil from both international and domestic suppliers and process it before
distributing it to their nationwide network of outlets. They sell lubricants and chemicals for
industrial applications in addition to consumer products such as gasoline, diesel, and jet fuel.
4. Manila Electric Company is the Philippines' largest electric utility, producing, transmitting,
and distributing electricity.
5. PTT Asia Pacific is a regional subsidiary of Thailand-based PTT Group, which operates as an
integrated energy company throughout Southeast Asia, including the Philippines. In addition to
retail services, they also offer wholesale services such as fuel delivery to businesses and aviation
fuel for commercial airlines. They also buy crude oil for their parent company, which owns one
of Thailand's two refineries.
Ranking (Based on the GDP or Profitability)
2
1.Petron Corporation-This is the largest oil company with the largest market share. It serves the
largest market in the Philippines and has a large number of service stations. It is estimated to
hold approximately 26.36 percent of the market. Having the highest GDP
2.Pilipinas Shell-The second largest corporation in the Philippines in the fuel and oil business,
with an estimated 19% market share in the Philippines.
3.Chevron Philippines-The third largest company in the Philippines, with an approximate 8%
market share.
4.Phoenix Petroleum-It is one of the fastest growing companies in the Philippines, with a
market share of about 7%.
5.Sea Oil Philippines-This is the fifth largest company in the Philippines, with a market share of
5% that generates a good profit for the company.
Current trends in the fuel industry
Big time oil price hike greets consumers in the first week of 2022. Effective 04 January 2022,
the oil companies implemented a price increase in domestic oil products. Both gasoline and
kerosene have increased by P1.85 per liter while diesel has increased by P2.40 per liter.
And effective 01 February 2022, the oil companies implemented a price increase in
domestic oil products. Both gasoline and diesel have increased by P0.75 per liter while P0.45 per
liter increase has been affected on kerosene.
Reasons for the Price Adjustment
● Crude prices carried their strong bullish momentum from last week and rallied past the
$84/bbl. mark on prospects of a tighter supply outlook and buoyant demand projections
despite omicron concerns amid lower oil inventories.
● Asian gasoline market remained stable as thin supply prospects from China on slashed
product export quota balanced the weakness in mobility metrics of some key consuming
nations.
● Crude oil complex extended its run amid rising geopolitical tensions on the
Russia-Ukraine border and supported by a solid demand outlook.
● Ukraine is a key oil and gas transit hub between Russia and Europe and any further
escalation has the potential to send crude and gas prices higher.
● Low regional inventories, limited spot availability and looming concerns on slashed
gasoil/diesel exports from China amid improving regional demand continue to fuel the
Asian gasoil complex.
● Amid supply crunch in Asian region and steady demand from Australia and Southeast
Asia, swing barrels from India and Persian Gulf continued to be pulled to the region with
buyers shelling out higher cash premiums for gas oil cargoes.
On March 15, 2022, oil and fuel firms set their biggest increase in fuel prices for this
year. Price increase for diesel would be P13.15 a liter, P7.10 a liter for gasoline and P10.50 a liter
for kerosene, effective midnight Tuesday. This would bring local pump prices to as much as P84
for diesel and P94 for gasoline.
Impact of Oil Price Hike
3
What does this mean on a household level?
Lower Purchasing Power
When commodity prices are high, and the household income remains unchanged, it
means lower disposable income for that family.
Higher Cost of Commodities
Price hikes also mean a higher cost of living. Aside from paying more for the same
amount of gasoline, prices of food, fares, and other daily expenses may also rise.
Changes In SRPs
However, according to Trade Secretary Ramon Lopez, there should be no changes in the
suggested retail prices (SRPs) of essential commodities for now.
Higher Fares
Furthermore, the oil price hikes directly hit the transport sector.
Impacts of Oil Price Hikes on The Philippine Economy
High Inflation
According to the Philippine Statistics Authority, the share of oil as a non-renewable

resource rent is 0.19% of the gross domestic product (GDP) for the last 20 years. In
addition, oil is also one of the most significant contributors to manufacturing costs. In
fact, Bloomberg predicts that a “10% rise in oil prices could add a 0.4 percentage points”
to Philippine inflation. To add, Bangko Sentral ng Pilipinas (BSP) governor Benjamin
Diokno also sees the high oil prices to drive inflation as high as 5.5% to 6%. This is
above BSP’s expected rate, which is between 2% to 4%
Economic Slowdown
In the long run, sustained oil price hikes can slow down the growth of an economy.
Production, transportation, and manufacturing costs are also driven up by high oil prices.
Furthermore, a Bloomberg article from this February sees the Philippines and India
among the Asian countries taking the worst hit from the oil war spike.
How Will These Soaring Oil Prices Affect Investments?
With an expected slowdown of economic growth and the rising production costs,
companies also adjust their revenue expectations. As a result, stock prices also decrease. Unless
you are investing in oil company stocks, trading prices are less likely to recover their
pre-pandemic values.
Common fuel and energy industry terms used in their accounting
4
Authorization for Expenditure (AFE) – A document shown to investors in a well that will
estimate drilling and completion costs. Barrel (BBL) – The basic unit for measuring oil. A
barrel is equal to 42 U.S. gallons.
Crude Oil – Liquid petroleum as it comes out of the ground. Crude oil varies radically in its
properties, such as specific gravity and viscosity.
Delay Rental – Paid to the lessee (person or company who leased the land to be drilled upon).
Intangible Drilling Costs (IDC) – All costs incurred in drilling a well other than equipment or
leasehold.
Intangible Completion Costs (ICC) - Costs incurred with completing a well that are
non-salvageable if the well is dry or not including labor, materials, rig time, etc.
Joint Interest Billing Statement – The monthly statement sent from the operator to all the
working interest holders within an oil and gas property detailing the expenses charged each
month.
Leasehold Costs – The costs associated with obtaining and keeping a lease on a parcel of land
on which a well is drilled.
Legal Suspense – Amounts held in suspense instead of being paid to an owner. MCF –
Thousand Cubic Feet. The standard unit for measuring the volume of natural gas.;
Natural Gas – Hydrocarbons, which at atmospheric conditions of temperatures and pressure,

are in a gaseous phase.
Owner Deficit – Amounts held in suspense when a working interest owner, who’s expenses are
being netted from their revenue, has expenses that exceed their revenue.
Payout – When the costs of drilling, producing, and operating a well have been recouped from
the sale of the products of the well.
Production Tax – A tax levied by the residing state on production in that state. Normally
withheld from royalty and working interest checks.
Royalty – The landowner’s share of production before the expenses of production.
Severance Tax – A tax on the removal of minerals from the ground.
Spudding In – The first boring of the hole in the drilling of an oil well.
Tangible Completion Costs – Lease and well equipment costs incurred from completing a well.
Tangible Drilling Costs – Actual costs of drilling equipment.
5
Well – A hole drilled in the earth for the purpose of finding or producing crude oil or natural gas
or providing services related to the production of crude oil or natural gas.
Working Interest – An interest in an oil and gas well that shares the expense associated with
drilling, completing, or operating a well, as well as the share in the revenue made on the well.
FUEL INDUSTRY
Part 1 Concepts and Context
Revenues from Oil and Gas Extraction
Nations that have vast oil and gas reserves and that effectively oversee their development can
derive many benefits from their extraction. Not only can extractive industries create numerous
jobs and contribute significantly to economic growth, they can also be a significant source of
revenues for governments. These revenues, in the form of royalties, lease payments, and other
fees paid by private companies, can be spent to support government programs or to reduce public
debt, or they can be saved for future generations.
Royalties
Royalties are the price that the owner of a natural resource charges a private company or
consortium for the right to develop this resource.
Royalties apply once production has begun at a new site. There are different types of
royalties, the main ones being:
● Volume-based (or specific) royalties: a regulated price per unit of production. This type
of royalty requires controls to monitor production and to ensure there is no illegal
(unrecorded) extraction.
● Value-based (ad valorem) royalties: based on the value of the extracted commodities.
The value is volume multiplied by price (set by the market), so the difficulty of
establishing price (which varies day to day) is added to the difficulty of establishing
volume.
● Profit-based royalties: based on a company’s profits. While this is in many ways similar
to an income tax, it is an additional charge for the extraction of public natural resources.
Like an income tax, this type of royalty requires government departments with strong
financial, technical, and administrative capacity to regulate and collect the royalties while
minimizing the risk of tax evasion. (Transfer mispricing is a common example of tax
evasion in the natural resources sector) The challenge is substantial because many
extractive companies are global market players that are not regulated by any single
government.
Other Sources of Revenues

In addition to royalties, governments can collect other revenues at different phases of the life
cycle of oil and gas projects.
Leases
During the exploration phase of an oil and gas project, it is usual for governments to require
proponents to pay a set rate for the lease of each unit of land over which they intend to conduct
exploration activities. Alternatively, governments can auction exploration rights over certain
6
territories. In both cases, proponents pay to secure the exclusive rights to conduct exploration
activities over a piece of land (or sea) for a determined period of time. Depending on the location
and size of land (or sea) parcels, the type and market value of natural resources, and general
economic circumstances, lease fees and auctions can generate significant revenues for
governments.
License and permit fees

Through the successive phases of oil and gas projects, project proponents may be required by
regulations to obtain a number of licenses or permits to conduct specific exploration, production,
or decommissioning activities (a well- drilling license, for example). A fee may be charged for
these licenses and permits. However, these fees are usually small and often do not yield
significant revenues for governments.
Bonuses
Bonuses are one-time payments made upon the signature of a contract, the launch of activities at
a project site, or the achievement of certain goals laid out in regulations or in contracts. Being
one-time payments, collecting bonuses does not require as much administrative capabilities as
collecting royalties. Bonuses also do not generate as much revenues as royalties. Bonus
payments are often negotiated on a case-by-case basis, taking into consideration the
characteristics of each project.
Penalties and fines

Leases and licenses grant certain rights to project proponents, but they also bestow obligations
on them. For example, leaseholders may be required to carry out a minimum amount of work
each year on a parcel of land or to hire a minimum number of workers. Penalties (or “cash in
lieu”) may apply when these requirements are not met and leases may be rescinded under certain
conditions. While such penalties will rarely yield significant revenues for governments, they
should be set high enough to effectively deter undesirable behavior.
Revenue Framework: How Royalties and Fees Are Set and Collected
In designing revenue frameworks for oil and gas extraction, governments must establish their
fiscal objectives (such as revenue stability, revenue maximization, economic efficiency, and
administrative efficiency) and make a number of key decisions about which revenue sources to
adopt and how each one will operate. Different revenue frameworks will accomplish different
goals and will fit different circumstances. For example, a strictly volume- based royalty regime
will provide predictable revenues from the start of production at a new site, but will not allow a
government to benefit fully from large price increases in energy markets. On the contrary, a
profit-based royalty regime can allow governments to benefit from sharp price increases, but will
not generate revenue until a company declares profits and will provide less revenue when
resource prices are very low. Governments must carefully consider which regime (the
volume-based and profit-based regimes are only two possibilities) will be more likely to achieve
their fiscal objectives.
Governments must also ensure that their royalty regime and other fees are reviewed and
updated from time to time, to ensure that the rates they charge for resource extraction are
still:
7
● competitive compared with other jurisdictions;

● aligned with fiscal objectives;
● reasonable, considering factors that may affect profitability, including evolving extraction
technologies and environmental requirements; and
● adapted to prevailing circumstances in the energy sector
While this collection process may seem simple at first glance, it can be quite complex in
practice.
● Royalty payments are required from the owners of each production site. In practice, a site
can have many owners, each with a different share of the project. Royalties must then be
paid in proportion to the ownership share.
● Royalties are often calculated after allowable expenses have been deducted. The rules
about what is and what is not an allowable expense can be quite elaborate and, in many
jurisdictions, expenses for one project can be used to lower royalties owed on another
project.
● Royalties owed are assessed on the basis of information provided by private companies.
To ascertain that they are receiving the correct amounts, governments must verify this
information and conduct audits of production and expense data.
Financial Assurances for Site Remediation

The development and operation of an oil or gas field can take several decades. Over this time,
exploration and extraction activities can significantly change local ecosystems. Vegetation cover
will often be removed, local drainage patterns can change, species diversity may be reduced, and
soils and waters may be contaminated.
Nowadays, at the end of an oil and gas project, the proponents are usually required by
regulations to return operation sites to their natural state or to a state that meets established
standards. However, years ago, before such regulations existed, many sites were abandoned once
operations ceased and were not rehabilitated. In many cases, governments inherited the
responsibility for cleaning up these sites and for the costs of doing so. Governments can also
remain responsible for the ongoing maintenance, monitoring, and management of certain sites
over long periods.
In addition, liabilities may increase over time due to more stringent environmental standards. In
such an instance, lands that had previously been remediated to existing standards may require
additional remediation work if they do not meet new standards. The question of who is
responsible for these new liabilities may be difficult to resolve. Ultimately, governments may
have to assume partial or full responsibility for these costs.
Managing Liabilities for Site Remediation

To prevent governments from becoming responsible for the remediation of oil and gas wells and
facilities and to reduce the financial burden on taxpayers, many governments have taken
measures to ensure that leaseholders fulfill their responsibilities for decommissioning and
remediating their oil and gas production sites.
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The Main Steps of the Financial Assurance Process Over the Life of an Oil and Gas
Extraction Site
● An oil and gas company prepares and submits a remediation plan for an extraction site,
complete with a remediation cost estimate.
● A government agency validates the remediation plan and the cost estimate.
● The government agency collects the Financial Assurance (cash, bond, letter of credit or
other form) for the remediation of the extraction site.
● Over the operational life of the extraction site, the government agency may periodically
inspect the site, update the cost estimate and collect additional financial assurance as
needed.
● Once the company decommissions and cleans up the extraction site, a government
agency inspects the site. If the remediation standards are met, a certificate of remediation
is issued and the financial assurance is released back to the company.
The main difference between remediation funds and financial assurances is that a fund can be
used to clean up any decommissioned oil and gas site, whereas a financial assurance provided by
a company can only be used to clean up a particular site leased by that company if it cannot meet
its remediation responsibilities. Another difference is that financial assurances are returned to
companies once they have met their remediation obligations, whereas fund contributions are not
refundable.
While financial assurances do not provide a revenue stream, they do mitigate the risk of
governments inheriting financial liabilities for sites abandoned by private companies. By
establishing financial assurance requirements, governments can protect taxpayers from new
liabilities for site remediation.
The effectiveness of remediation funds and of financial assurance programs depends on a

number of design and implementation factors. The funds or programs must be based on adequate
risk assessments and on reliable estimates of remediation costs. They must also be well-adapted
to each natural resource sector (for example,
traditional oil and gas wells, “fracking” wells, oil sands, and offshore wells).
Sufficient resources must also be made available to:

● collect financial assurances,
● assess the adequacy and completeness of remediation plans submitted by private
companies,
● monitor progress on remediation work,
● attest that remediated sites have met all applicable standards and requirements, and
● regularly update estimates of future remediation costs.
The Life Cycle of Oil and Gas Projects

The oil and gas industry is one of the sectors of the economy in the Philippines and in many
other countries around the world. Oil and gas extraction projects are usually capital-intensive,
long-term, and potentially very lucrative. The revenues they generate are significant for both
private companies and governments. However, not all oil and gas extraction projects come to
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fruition and, when they do, it is only after many years of planning, exploration, and development
activities.
Phases of an Oil and Gas Project

The typical life cycle of an oil and gas project includes five phases:
1. Exploration,
2. Appraisal,
3. Development,
4. production, and
5. decommissioning.
Typical Life Cycle of an Oil and Gas Extraction Project (from an industry perspective)
Ensure Safety of Operations and Protect the Environment
Explorations ● Site surveys (geologic, seismic)

● Exploration Drilling
● Estimate reserve and potential production
Appraisal ● Appraisal Drilling

● Assess Economic Viability
● Environmental impact assessment
Development ● Well Drilling

● Construction of facilities, roads, pipelines, terminals, etc.
● Prepare decommissioning plan and estimate site remediation costs
Production ● Production management

● Transport oil and gas to processing facility
● Maintenance
Decommissioning ● Plugging wells

● Site remediation
● Removal of facilities and equipment
● Site monitoring
Revenues from Phases of an Oil and Gas Project

In terms of government revenue, there are significant differences between the pre-production
(exploration, appraisal, and development), production, and decommissioning phases.
The pre-production phases

Revenues from the pre-production phases come from the lease and licensing fees paid by the oil
and gas companies for the right to conduct exploration and development activities in specific
areas, on land or at sea. These revenues vary by jurisdiction based on how licenses are allocated
(whether through auctions or an application process), the resource potential of each region, and
general economic circumstances.
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Revenues may also be derived from penalties (or “cash in lieu”) imposed on leaseholders when
they fail to comply with regulations that require them to carry a minimum amount of exploration
work every year on their allocated lands. These penalties are relatively small for each hectare or
acre of land, but can add up if the lease covers large territories.
The production phase

It is during the production phase that leaseholders can finally realize a profit on their investment.
It is also during this phase that governments can receive large sums of money through royalty
payments. The general trends in leaseholder’s revenues and expenditures over the life cycle of a
typical oil and gas project are presented.
The production period usually lasts from 10 to 30 years from first oil to abandonment, but can be
as long as 50 years for the largest fields. Over that time, production may vary depending on
available reserves, the number of active wells, market prices, and other factors.
The decommissioning phase

When an oil well or a gas well is no longer profitable or productive, it needs to be
decommissioned. Closing a site involves plugging the well, removing all structures and
equipment, and returning the site to its natural condition or to a condition that meets regulatory
standards. Soil decontamination may be required and, in some circumstances, ongoing
monitoring and site maintenance may be needed over many years or in perpetuity.
Government Responsibilities in the Oil and Gas Sector

To be able to make sound scoping decisions for a performance audit of the oil and gas sector,
auditors need to clearly understand the diversity and extent of government responsibilities in
overseeing the sector.
2nd Reporter Assigned: DELA COSTA, Lorraine Jane

1. Evaluating oil and gas development options: This involves processes that help governments
to make policy decisions on whether to develop a particular sector or not including
environmental impact assessments, socio- economic impact assessments, strategic environmental
assessments, and cumulative impact assessments.
2. Ensuring the responsible development of natural resources: This involves putting in place
laws and regulations that will set clear requirements. For example, regulations may prohibit
certain extraction practices, set site remediation standards, or establish limits on the release of
contaminants in the air, soil, and water.
3. Monitoring natural resource extraction: This involves oversight activities carried out by
government departments and agencies.This involves, among other tasks, conducting compliance
inspections, issuing fines and remediation orders when necessary, and certifying that
decommissioned extraction sites have been properly remediated.
4. Collecting revenues from natural resource extraction: This involves setting rates and
collecting all fees, leases, bonuses, penalties, and royalties related to the extraction of oil and gas,
and conducting audits to ensure that all due payments have been received in full.
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5. Collecting financial assurances for site remediation and monitoring financial liabilities:
This involves collecting financial assurances from leaseholders, assessing the adequacy and
completeness of remediation plans submitted by private companies, monitoring progress on
remediation work, attesting that remediated sites have met all applicable standards and
requirements, and regularly updating estimates of future remediation costs.
A Government’s Responsibilities in the Oil and Gas Sector

Evaluating natural ● Socio-economic assessments
resource development ● Environmental assessments
options ● Decisions on acceptability of resource development
● Consultations with stakeholders and local communities
Ensuring the Laws and regulations about:

responsible - Extraction practices
development of - Limits on pollution and emissions
natural resources - Site remediation requirements
Monitoring natural ● Compliance inspections

resource extraction ● Issuance of fines and remediation orders
operations
Collecting revenue ● Collecting royalties

from natural resource ● Collecting fees and fines
extraction ● Auditing the accuracy and completeness or revenues
Collecting financial ● Collection and management of contributions to remediation

assurances for site funds
remediation ● Collection and management of financial assurances for site
remediation
● Review of remediation plans and costs estimates
● Certification of remediated extraction sites
The Importance of Auditing Revenues and Financial Assurances

The revenues that governments derive from natural resources are significant and are used to
finance valuable social programs, services, and infrastructure. When governments are not
collecting all revenues they are entitled to, their ability to pay for existing programs, to repay
debts, and to create new initiatives may be diminished. Financial and performance auditors can
play a key role in ensuring governments receive all the revenues from their natural resources
they are entitled to.
For example, this can happen in the following situations:

● The right to operate is granted to companies that are financially unstable (higher
risk of unfunded liabilities for site remediation).
● The list of operating companies has not been updated and is incomplete (risk of
unreported extraction).
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● Companies’ declarations of production volumes are understated.

● Companies’ declarations of production value are understated.
● Claims for allowable expenditures (which reduce amounts payable) are
overstated.
● Producers use tax avoidance practices to reduce amounts otherwise owed to
governments.
● Companies resort to fraud or corruption of officials.
● Unclear or misunderstood legislation and regulations result in incomplete
payments.
● Audits of royalty payments are not completed within the time allowed by
regulation, making adjustments to royalty payments and additional revenue
collection impossible.
● Royalty rates are out of date and do not reflect changing market values of
extracted resources or changing government policy objectives.
These controls are of particular importance in the natural resource sector because governments
tend to rely heavily on data provided by industry to determine what sums are to be paid for the
extraction of public resources.
Controls are also useful to protect the government from liabilities associated with the
remediation of decommissioned oil and gas wells. For example, governments can take the
following steps to reduce their exposure to future liabilities:
● Establish documented standards on how site remediation cost estimates should be
conducted.
● Have access to sufficient expertise to review cost estimates provided by operating
companies.
● Periodically visit operational sites and update remediation cost estimates in
accordance with current circumstances (such as site condition, operational plans,
new technologies, and new regulatory requirements).
Through their annual audits of natural resource revenues and financial assurances, financial
auditors also play an important role. Performance auditors can leverage this work to develop
their knowledge of business and identify risk areas, gaining insight from the prior analysis
performed by financial auditors. Collaboration between performance and financial auditors can
lead to more efficient and better-targeted audits.
In many audit offices, the auditors conducting performance audits will have a financial audit
background and may be the same auditors that conduct the annual audits. However, in other
offices, performance auditors will have more diversified backgrounds. In such circumstances, it
can be beneficial for an office to create an oil and gas group where financial and performance
auditors will regularly meet and share their knowledge and experiences with each other.
Mitigating the Risk of Fraud and Corruption

Fraud and corruption in the oil and gas sector can vary widely in scope and can involve officials
with varying levels of authority.
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Frauds can take place in jurisdictions where controls are minimal, but they can also take place in
jurisdictions that have a well-developed regulatory environment. There is always a risk of fraud
and corruption and this risk is higher when there is a strong reliance on data self-reported by the
industry and much room for judgment and discretion in the application of existing regulatory
processes.
Performance auditors can play a role in the worldwide fight against fraud and corruption in the
natural resources sector. While the mandate of audit institutions regarding fraud and corruption
may often be limited, performance auditors may detect instances of fraud and report these to the
appropriate authorities. Furthermore, performance auditors can design their audits of public
sector entities to include the examination of controls in place to prevent and detect fraud and
corruption.
Fraud: An intentional act by one or more individuals among management, those charged with
governance, employees, or third parties, involving the use of deception to obtain an unjust or
illegal advantage.
Corruption: An abuse of public power, authority, trust, and resources for private or political
gain. Corruption happens through the offering, giving, receiving, or soliciting, directly or
indirectly, of anything of value to influence improperly the actions of another party.
When it comes to fraud and corruption, the management of natural resources, including oil
and gas, is a high-risk sector. This is mainly because of three factors:
1. The very large revenues that can be derived from natural resources by governments can
provide significant financial rewards for individuals and companies that commit fraud.
2. In many countries, there is limited information available to the public about natural
resource revenues.
3. Governments often have exclusive control of this sector and put in place a complex
regulatory environment that allows for significant professional judgment in evaluating
compliance.
The allocation of exploration and exploitation rights, for example, gives rise to opportunities
such as the bribing of officials to rig bidding processes or to allocate rights without following
due process. Similarly, the production phase, during which much revenues are generated, can
lead to various abuses, including illegal extraction (operating without a license), underreporting
of production, tax evasion, invoice kickbacks, and bribing officials to turn a blind eye on
instances of non-compliance, to name a few.
Overall, fraud and corruption in the natural resource sector deprives governments all around the
world of significant revenues every year, especially in developing countries with weak
institutions and little oversight.
Part 2 Audit Methodology

Introduction to Auditing the Oil and Gas Sector
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Performance audits of extractive industries, including the oil and gas sector, follow the same
standards and general process as all performance audits. Auditors are required to follow the
standards and audit processes applicable to their body of practice and office mandate.
Overview of the Performance Audit Process

AUDIT SELECTION ● Strategic Planning
● Knowledge of business and risk assessment
PLANNING ● Knowledge of business and risk assessment

● Audit Focus
● Audit Approach
● Audit Objectives
● Audit Criteria
EXAMINATION ● Evidence collection

● Subject matter experts
● Consultation
● Results analysis
● Cause and effects analysis
REPORTING ● Conclusions and recommendations

● Clearance
● Final Report
● Communications
Audit Selection
Selection of audit topics is considered part of the overall performance audit process. Strategic
planning is usually led by senior executives and is informed by an audit office’s knowledge of
business about its “audit universe” and analyses of materiality, significance, risks, and known
problems. Other important considerations include the audit office’s mandate, the availability of
skilled auditors and resources, and the auditability of potential audit topics.
There are many compelling reasons why audit offices would include audits of the oil and gas
sector in their long- term plans, from concerns about environmental impacts to the significant
economic role that this sector plays in many jurisdictions.

This phase involves acquiring knowledge of business, assessing risks, and conducting analysis in
order to determine the audit focus and set the stage to prepare a detailed audit plan that will
include the audit objective(s), criteria, evidence collection methods, and analytical techniques.
The first step in this audit planning process is to determine what exactly should be audited in the
oil and gas sector (that is, the audit focus).
● Acquire knowledge of business by gathering and analyzing relevant information on the
oil and gas sector and on government responsibilities in regulating, monitoring, and
overseeing the sector.
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● Identify and assess risk factors that could prevent the government from carrying out its
responsibilities in this sector effectively and meeting its objectives.
At this stage, auditors can also review audits on the oil and gas sector that have been previously
published by their office or other jurisdictions.
Detailed Audit Planning

Once it is decided that the audit will examine revenues from oil and gas extraction or financial
assurances for site remediation, auditors can begin detailed planning work to further define their
audit focus and audit procedures.
Detailed planning involves deciding which programs and controls to audit. To make these
decisions, auditors will need to complete two tasks.
● Acquire further knowledge of business, by gathering and analyzing relevant information

on the different types of revenues or financial assurances that the government is
collecting and managing, and on the systems and practices it uses to do so.
● Identify and assess risk factors that could prevent the government from collecting all the
revenues it is entitled to or all the financial assurances it needs to ensure that
decommissioned oil and gas production sites will be properly remediated.
Once these decisions are made, auditors will be in a position to:

● draft their audit objectives,
● select their audit criteria, and
● prepare plans with detailed audit procedures.

Once auditors have a good understanding of the oil and gas sector in their jurisdiction and have
identified all important government responsibilities in this sector, they have to determine where
the key risks are and narrow down options to eventually arrive at a manageable audit focus.
The Planning Phase

At this stage of the audit process, it is assumed that auditors have decided to include revenues
from oil and gas extraction in their audit. However, they may not yet know exactly which
revenues and which controls to audit, nor which audit objectives and criteria to use in their
detailed audit plan.
It is organized according to the key actions and decisions that need to be made when conducting
detailed planning for the audit:
● Acquiring knowledge of business and assessing risk
● Drafting audit objectives
● Selecting audit criteria

Audit procedures typically require auditors to acquire knowledge of the organization and subject
matter being audited and to prepare a risk-based audit plan.
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In practice, this means that, once the decision to audit the completeness of revenues from oil and
gas extraction has been made, the audit team needs to start conducting research and interviewing
officials in order to acquire a sound knowledge of business and an understanding of the risks
facing the organizations being audited. The information collected will be used to determine what
the main risk areas are and where audit efforts should be directed.
In order to develop their plan for auditing the completeness of oil and gas revenues, auditors will
need to answer three main questions:
● What are the sources of revenues?
● Which revenues to audit?
● Which controls to examine?
Revenues from oil and gas come from the exploration and production phases of extraction
projects. Revenues from the exploration phase come from the fees charged for leases and
licenses, plus any penalties that can be applied when leaseholders do not meet their lease
obligations. Lease revenues can come from fixed rates for every unit of land (or sea floor) or are
determined by the results of lease auctions. Auditors need to determine which option is used in
their jurisdiction and obtain information on the annual revenues generated by lease payments.
Exploration phase revenues can also come from the auction of exploration rights. Such auctions
can generate very large revenues in certain jurisdictions when economic conditions are favorable.
Given their importance and competitive nature, there is a risk of fraud and corruption in auctions
of exploration rights.
Revenues from the production phase of oil and gas projects come from royalties. As discussed
previously, the revenues from royalties can be very substantial in many jurisdictions. As such,
materiality will often be enough to justify inclusion of royalty payments in the audit.
Finally, some revenues may also come in the form of fines paid by private sector companies due
to noncompliance with a federal or provincial regulation on oil and gas extraction. This source
of revenue will often be small compared with lease payments and royalties and may not be
material enough to include in the audit (unless there are indications that a government is losing
significant revenues due to ineffective enforcement).
For each source of revenues selected for audit, a number of areas can be examined, including:
● the design of the revenue framework,
● the processing of payments
● the internal review and auditing of payments, and
● the measures adopted to increase the transparency of payments and to prevent and
detect fraud.
Auditors should consider including the processing of payments for oil and gas extraction in their
audit plan if their preliminary audit work indicates the following:
● The legal framework that supports the revenue framework, or the revenue
framework itself, has not been updated in a very long time and this has drawn
criticism from the industry or other stakeholders.
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● The revenue framework has not been updated to take into account new types of
extracted resources in a jurisdiction (natural gas from fracking, for example) or
significant changes in market resource prices.
● The revenue framework had been updated, but the guidance provided to the
industry to calculate royalties or other payments does not reflect these changes.
● The decisions leading to the revenue framework were poorly documented or there
are indications that the decisions were not based on evidence and a sound analysis
of available options.
● The revenue framework is unnecessarily complex, or includes vague terms that
are open to interpretation, which results in many implementation problems.
● The revenue framework relies heavily on reporting by oil and gas producers with
limited or no provisions for independent review and audits.
The processing of payments: This area includes the routine systems and processes to identify
all leaseholders, process their royalty returns, and collect their payments, including arrears and
any penalties applicable for late payments. However, this area does not include additional
internal controls over payments, like audits and inspections, which are covered in the next
section.
Auditors should consider including the processing of payments for oil and gas extraction in their
audit plan if their preliminary audit work indicates the following:
● There is a lack of internal guidance on how to collect royalty payments (and other
fees) and manage payments in arrears.
● There is evidence that internal rules are not applied properly and consistently.
● Penalties for late payments are not applied and interest is not being collected.
● Internal audits have identified persistent issues with the collection of payments.
● In cases where responsibilities for collecting payments are shared between two or
more organizations, there is no formal agreement that defines the respective roles
and responsibilities of each organization and the information they need to share
with each other.
● The collection and processing of royalty payments or other fees is performed by a
service provider on behalf of the government.
Internal review and auditing of payments: This area includes all the systems and processes to
ensure the accuracy and completeness of all royalty payments made by leaseholders. While these
controls are not necessarily applied to all payments and usually require specialized expertise for
their execution, they complement the routine controls over the processing of payments and
together they form an integrated system.
Royalty payments are usually based on production and/or profit data provided by leaseholders.
Many factors can enter into the calculations of royalties payable, such as production volumes,
market prices, exchange rates, and various deductions. Governments have an incentive to ensure
that this data is complete and accurate in order to receive the full amounts they are entitled to.
For this purpose, governments may regulate measurement equipment and practices to ensure
accuracy and consistency in production measurement. They may also conduct regular inspections
to ensure requirements are met and reduce the risk of fraud.
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The assessment of royalties can therefore be complex. In the absence of robust internal controls,
there is a risk that governments will not receive all the amounts they are entitled to for the
extraction of oil and gas resources in their jurisdiction.
Auditors should consider including the completeness of revenues from oil and gas extraction in
their audit plan if their preliminary audit work indicates the following:
● The data provided by oil and gas companies is not validated by the responsible
organization or by an independent third party (there is significant reliance on
self-reported data from the private sector).
● There are significant data validation, audit, or inspection backlogs.
● Audits and inspections are not conducted on a timely basis because of staffing
issues (for example, high turnover, long recruitment processes).
● Auditors in responsible organizations are not receiving all the information from
oil and gas companies they are entitled to.
● The site inspection strategy is not risk-based.
Fraud prevention and transparency: Because the revenues that can be generated from oil and
gas extraction are very significant, this sector has been a frequent target of fraud and corruption
in many jurisdictions, especially in developing countries. Rigged lease auctions, diversion of the
resource before production measurement points, false production declaration, and
misappropriation of revenues are some of the most common frauds observed in the sector.
Auditors should consider including fraud prevention and/or transparency in their audit plan if
their preliminary audit work indicates the following:
● Responsible organizations have not assessed the risk of fraud in relation to the
collection of oil and gas revenues.
● Responsible organizations have failed to adopt basic policies on ethics and
independence.
● Responsibilities for assessing royalties and collecting payments have not been
segregated, creating a risk of fraud with regard to the collection of royalties.
● A government has committed to publish the payments it receives from oil and gas
companies but has taken no concrete steps to make this happen.
● Legislation requiring a government to publish the payments it receives from oil
and gas companies is not being complied with.
● Potential conflicts of interest or inappropriate relationships amongst key decision
makers.
Drafting audit objectives

Audit objectives should be realistic and achievable and give sufficient information to audited
organizations about the focus of the audit.
An audit can have one or several objectives depending on its breadth. Office practice will also
influence the number of objectives and whether or not sub-objectives are used. Sub-objectives
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can be included in audit plans (for example, one for each line of enquiry), but auditors who
decide to do so will still be expected to conclude on their main audit objective(s).
The objective of an audit that will look at the completeness of revenues from oil and gas
extraction will depend on whether that is the sole focus of the audit. If the audit will broadly
examine the development of the oil and gas sector, including the collection of royalties or other
fees, then a general objective will be appropriate.
For example:
● To determine whether the responsible organizations have taken steps to ensure that shale
gas extraction activities are developed in accordance with government’s policy and
objectives.
This objective could be supported by sub-objectives related to the main areas included in the
audit. One of these sub-objectives could be about the collection of royalties:
● To determine whether the department has effective controls in place to ensure the
completeness of royalties payable.
If an audit has a compliance focus, the same principles will apply. In this case, the broad
objective could be:
● To determine whether the department has managed oil and gas resources in compliance
with The Oil and Gas Act and regulations.
A sub-objective on revenues could be added to support the main objective:

● To determine whether the control of oil and gas production measurement performed by
the responsible organization ensures the reliability and integrity of oil and gas production
data used to assess royalty payments.
If the audit is strictly about the collection of revenues from oil and gas extraction, then the audit
objective can be narrower.
For example:
● To determine whether the government has designed and implemented control systems
that provide assurance that it is collecting all oil and gas royalties payable from
leaseholders.
Auditors could also decide that the four areas detailed in the previous section are adequate in
their context and adopt an overall audit objective about the collection of revenues supported by a
sub-objective for each of the areas:
● the design of the revenue framework,
● the processing of payments,
● the internal review and auditing of payments, and
● the fraud prevention and transparency measures adopted to increase the
transparency of payments and reduce the incidence of fraud and corruption.
Selecting audit criteria
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Audit criteria represent the standards that audited organizations are expected to meet. Audit
criteria are a key contributor to an audit’s strength and potential impact. Audit procedures focus
on determining whether criteria are met or not met. Suitable criteria are relevant, complete,
reliable, neutral, and understandable.
Finding suitable criteria is a challenge for any performance audit, especially where there is no
recognized source of accepted criteria. There is no such recognized source of criteria for auditing
the completeness of revenues from oil and gas extraction (and related questions).
3rd Reporter Assigned: GALAM, Marlyn

The Examination Phase
During the examination phase of a performance audit, audit teams must conduct procedures that
will yield sufficient appropriate evidence to:
● determine whether audit criteria are met,
● conclude on audit objectives, and
● document and support these conclusions.
Evidence sources and audit tests

Documentary, testimonial, physical, and analytical evidence can all play a role in audits of oil
and gas revenues. The main sources of evidence that will be useful in this context are:
● a review of relevant documents,
● interviews,
● testing of controls and IT systems, and
● site visits.
Review of relevant documents: By their nature, performance audits rely heavily on

documentary evidence, and audits of oil and gas revenues are no exception. Auditors need to
consider everything from evidence of the rules that government organizations and oil and gas
companies have to meet to evidence that controls have been put in place and are functioning as
intended. Documentation needs to be gathered, reviewed, and analyzed by auditors, then added
to the audit file if it is deemed relevant to support audit observations and conclusions.
Interviews: Interviews with key managers and staff in the organization(s) responsible for
collecting oil and gas revenues can be valuable testimonial evidence in an audit of oil and gas
revenues. Interviews of industry association members, relevant stakeholders, and representatives
of other jurisdictions may also be useful, depending on the specific audit focus.
While testimonial evidence is usually considered weaker than documentary evidence, interviews
can be useful to:
● confirm information obtained from other sources of evidence (thus strengthening
the support for audit observations and conclusions),
● confirm the absence of something that was expected to exist,
● place documentary evidence in its proper context, and
● open new leads in an audit and identify further sources of evidence.
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When testimonial evidence from an interview is to be used to support audit observations and
conclusions, it is good practice to document the interview and to have the interviewee either
approve the minutes or confirm in writing (by email or letter) the accuracy of the key statements
intended to be used as evidence.
Testing of controls and IT systems:
Depending on the nature and complexity of the IT systems used by responsible departments and
agencies, audit teams may need the help of an IT expert to complete their audit procedures. This
may be particularly useful when there is a highly automated royalty process in place. In such a
case, an IT expert can review IT general controls and validate application controls for the
calculation of royalties. A review of audit trail functions may also help auditors to identify higher
risk areas.
Whatever control testing auditors decide to conduct, they should document all the steps they took
as part of the process so that another auditor could replicate their work and arrive at the same
conclusion.
Site visits: Site visits are key to understanding how things work in a jurisdiction. They give
auditors a chance to meet many individuals who have direct knowledge of key processes and to
observe first-hand the workings of important systems. Site visits can be even more valuable if an
audit team is accompanied by an independent expert.
In terms of evidence, site visits can help auditors to map out processes in detail. They may also
provide opportunities to test key controls and perform substantive tests of details. Finally, they
are a good way to obtain testimonial and documentary evidence.
Access to information: There may be some situations where auditors will have difficulty
obtaining the required information to reach a conclusion on an audit criterion.
Auditors will not usually need to access the records and data of private oil and gas companies to
conduct their audit, but should this need arise, they should not take for granted that private
companies will collaborate with their audit, especially if the audit office does not have a clear
legal mandate to access such information.
The Reporting Phase

During the reporting phase of a performance audit, auditors produce a report that presents their
audit observations and conclusions. Audit reports vary considerably in scope and nature. In
addition, the formats and writing styles of performance audit reports are specific to individual
audit offices. As a result, there is no standard way to present audit findings.
However, performance auditors can apply some common principles and good practices to
improve the readability and impact of their audit reports.
● the use of diagrams and charts to provide context information in audit reports on
oil and gas revenues and financial assurances and
● good practices for drafting effective audit recommendations.
22
Doing so will provide an answer to the “so what?” question that readers might pose and will let
the readers know why they should care about the audit topic.
Sample Internal Audit of Petron Group

Roles, Scope, and Internal Audit Function from Petron:
Role Scope Indicate Name of Reporting Process
whether Chief
Inhouse or Internal
Outsource Auditor/
Internal Auditing
Audit Firm
Function
The Internal The scope of work of In-house Audit The Internal Audit
Audit the Internal Audit with Head: Department reports
Department of Department is to outsourcing Ronaldo T. functionally to the
the Company assist the Board and of selected Ferrer Audit Committee
provides Management in operating to ensure and
independent, determining whether depots maintain the
objective the risk management, independence of
assurance and control, and internal audit
consulting governance processes function. The
services within the Petron Internal Audit
designed to add Group, as designed Department (i)
value and and represented by conducts audit
improve the Management, are activities in
operations of the adequate and effective accordance with
Company and its in a manner to ensure the International
subsidiaries, and that: Standards for the
help the Petron ● significant Professional
Group exposures to risks Practice of Internal
accomplish its are appropriately Auditing
objectives by identified and formulated by The
bringing a adequately Institute of Internal
systematic, managed; Auditors, (ii)
disciplined ● significant conducts assurance
approach to financial, services by
evaluate and managerial, and evaluating and
improve the operating contributing to the
effectiveness of information is improvement of
risk accurate, reliable, risk management,
management, and timely; internal control and
control, and ● employees’ and the governance
governance Company’s actions systems, (iii)
processes. are in compliance reports the results
23
with policies, of review to

standards, concerned
procedures, and members of
applicable laws and Management who
regulations; are held
● resources are responsible for
acquired ensuring that
economically, used corrective action is
efficiently, and taken within a
adequately reasonable period
protected; after a deficiency is
● objectives and reported, (iv)
goals for reports
operations or to the Audit
programs are Committee, the
achieved; and Chairman and the
● effectiveness, President the status
efficiency and of audit activities,
continuous major observations
improvement are and
promoted in the recommendations,
Company’s and all identified
operating systems potential conflicts
and processes. of interest, (v)
submits annual
audit plans to the
Audit Committee
and Management
for their approval,
and (vi)
coordinates with
the external auditor
to ensure adequate
audit coverage and
to minimize
duplicate efforts.
Appointment/Removal of Internal Auditor
All Internal Audit projects to be outsourced are approved by the Audit & Risk Management
Committee. Any award to winning service provider/s is endorsed by the Internal Audit Head
during the Audit Committee meeting for the members’ approval.
Reporting Relationship with the Audit Committee

The internal auditor has direct and unfettered access to the Board and the Audit Committee and
to all records, properties and personnel of the Company. This is embodied in the CG Manual and
the Internal Audit Charter that both require the Audit Committee to perform oversight functions
24
over both the Company’s internal and external auditors to ensure that they act independently
from each other or from interference of outside parties and that they are given unrestricted access
to all records, properties and personnel necessary in the discharge of their respective audit
functions.
The CG Manual also provides that the Internal Audit Department report functionally to the Audit
& Risk Management Committee. Further, the Internal Audit Head, the Controller and the
external auditor are each authorized to report directly to the Audit Committee without
interference or censorship by Management as to any and all matters which they believe fall
within the jurisdiction or concern of the Audit & Risk Management Committee, including
significant accounting, reporting and tax issues and irregularities, control deficiencies, and
Management plans for corrective action.
In pursuit of the duties and responsibilities of the Audit & Risk Management Committee in
respect of the internal auditor as provided in the Audit & Risk Management Committee Charter,
the Audit & Risk Management Committee performed the following activities for the years 2012,
2013 and 2014 to ensure the independence of the internal auditor through direct and unfettered
access to the Board, as well as to Company records, properties and personnel in the conduct of
internal audit function:
● reviewed and discussed with Controllers management the quarterly and annual financial
statements of Petron Corporation and Subsidiaries and endorsed these for approval by the
Board;
● endorsed the re-appointment of R. G. Manabat & Co./KPMG as the company’s
independent auditors for 2013;
● reviewed with R. G. Manabat & Co./KPMG the scope and timing of their annual audit
plan, audit methodology, and focus areas related to their review of the financial
statements;
● reviewed with R. G. Manabat & Co./KPMG, the audit observations and
recommendations on the Company’s internal controls and management’s response to the
issues raised;
● reviewed with the Internal Audit Head and approved the annual internal audit plan and
satisfied itself as to the independence of the internal audit function;
● reviewed on a quarterly basis Internal Audit’s report on the adequacy and effectiveness of
the internal control environment in the areas covered during the period;
● and reviewed and approved the proposal for the Internal Audit to provide the audit
service requirements of Petron Malaysia
Resignation, Re-assignment and Reasons

Disclose any resignation/s or re-assignment of the internal audit staff (including those employed
by the third-party auditing firm) and the reason/s for them.
Name of Audit Staff Reason
Ma. Isabel L. Dyangko (with resignation effective August 10, Resignation due to migration
25
2012)
Francis F. Bulaun (with resignation effective July 1, 2013) Resignation due to transfer to
another company in the San
Miguel Group
Jon Stephen T. Lazol (with resignation effective June 30, Resignation to transfer
2013) employment
Shella P. Malabanan (with resignation effective November Resignation to transfer

18, 2013) employment
Rowela B. Lascano (with resignation effective December 31, Resignation to start own
2013) business
Lady Roseleen B. Ramos (with resignation effective June 11, Resignation to due to personal
2014) reasons
Justine R. Santiago (with resignation effective August 22, Resignation

2014)
Progress against Plans, Issues, Findings and Examination Trends

Progress Against Plans Completed the 2012, 2013 and 2014 projects in the Audit Plan
Issues There were no significant issues noted that had a material effect on
the Company's financial statements and its operations.
Findings There were no significant findings noted that had a material effect
on the Company's financial statements and its operations. Findings
in general though are documented in the quarterly Internal Audit
Report to the Audit Committee
Examination Trends Generally adequate and effective internal control
The relationship among progress, plans, issues and findings should be viewed as an internal
control review cycle which involves the following step-by-step activities:
1) Preparation of an audit plan inclusive of a timeline and milestones;
2) Conduct of examination based on the plan;
3) Evaluation of the progress in the implementation of the plan;
4) Documentation of issues and findings as a result of the examination;
5) Determination of the pervasive issues and findings (“examination trends”) based
on single year result and/or year-to-year results;
6) Conduct of the foregoing procedures on a regular basis.
Audit Control Policies and Procedures
26
Disclose all internal audit controls, policies and procedures that have been established by the
company and the result of an assessment as to whether the established controls, policies and
procedures have been implemented under the column “Implementation.”
Policies & Procedures Implementation
Policies and Guidelines on Revenue Cycle Generally in order
Policies and Guidelines on Procurement Cycle Generally in order
Policies and Guidelines on Supply Chain – Generally in order

Logistics Cycle
The Internal Control Policy of the Company was formalized and endorsed by the Audit
Committee for the signature of the Chairman and President for dissemination to all offices of the
Company.
Mechanisms and Safeguards

Auditors (Internal and External)
The Audit & Risk Management Committee, through the functions and powers granted to it under
the CG Manual and the Audit & Risk Management Committee Charter, performs oversight
functions over the Company’s internal and external auditors to ensure that they act independently
from each other or from interference of outside parties, and that they are given unrestricted
access to all records, properties and personnel necessary in the discharge of their respective audit
functions.
The Audit & Risk Management Committee reviews and confirms the independence of the
external auditors by obtaining statements from the auditors on relationships between the auditors
and the Company, including non-audit services, and discusses the relationship with the auditors
Financial Analysts
The Company obtains the relevant board approvals for the engagement of financial analysts and
the Company engages only reputable financial analysts with proven independence and expertise
in their field of practice.
Financial analysts form part of the public. They are not given non-public information concerning
the Company until such information is disclosed by the Company to the public in general. In the
event a financial analyst is engaged by the Company for a particular transaction, such analyst is
obliged to keep the transaction confidential until disclosed by the Company.
Investment Banks
The Company obtains the relevant board approvals for the engagement of investment banks and
the Company engages only reputable investment banks with proven independence and expertise
in their field of practice.
Investment banks form part of the public. They are not given non-public information concerning
27
event an investment bank is engaged by the Company for a particular transaction, such bank is
obliged to keep the transaction confidential until disclosed by the Company.
Rating Agencies
The Company obtains the relevant board approvals for the engagement of rating agencies and the
Company engages only reputable agencies with proven independence and expertise in their field
of practice.
Rating agencies form part of the public. They are not given non-public information concerning
event a rating agency is engaged by the Company for a particular transaction, such agency is
obliged to keep is obliged to keep the transaction confidential until disclosed by the Company
Risk Management System of Petron Group

Statement on Effectiveness of Risk Management System
Overall Risk Management Philosophy of the Company
Part of the mandate of the Audit & Risk Management Committee is to review the report of the
Internal Audit Department on the adequacy and effectiveness of the internal and control
environment of the Company.
Under the Corporate Policy Manual, Management recognizes that the Company faces risks that
have consequential losses. For this reason, the Company has adopted the policy of having a risk
management program consistent with its corporate objectives as well as its financial resources.
As disclosed in its Definitive Information Statements and annual reports (SEC Form 17-A),
Petron follows an enterprise-wide risk management framework for identifying, mapping and
addressing the risk factors that affect or may affect its businesses.
The Company’s risk management process is a bottom-up approach, with each division mandated
to conduct regular assessment of its risk profile and formulate action plans for managing
identified risks. As Petron’s operation is an integrated value chain, risks emanate from every
process and some can cut across divisions. The results of these activities flow up to the
Management Committee and eventually the Board through the Company’s annual business
planning process.
Oversight and technical assistance is likewise provided by corporate units and subsidiaries with
special duties. The Risk and Insurance Management Group is mandated with the overall
coordination and development of the enterprise-wide risk management process. The Financial
Risk Management Unit of the Treasurer's Department is in charge of foreign exchange hedging
transactions while the Transaction Management Unit of the Controller’s Department provides
backroom support for all financial transactions. The Corporate Technical & Engineering Services
Group oversees compliance with the domestic and international standards set for health, safety
and environment. The Internal Audit Department is tasked with the implementation of a
risk-based process-focused audit approach. Petron Singapore Trading Pte. Ltd. executes the
hedging transactions involving crude and product imports on behalf of the Company.
Control System
28
Risk Exposure Risk Assessment Risk Assessment

(Monitoring and (Monitoring and Measurement
Measurement Process) Process)
Company
Key risks Bottom up approach Petron follows an enterprise-wide

with each division risk management framework for
conducting a regular identifying, mapping and
self-assessment of its addressing the risk factors that
risk profile affect or may affect its businesses.
The Company’s risk management
process is a bottom-up approach,
with each division mandated to
conduct regular assessment of its
risk profile and formulate action
plans for managing identified risks.
As Petron’s operation is an
integrated value chain, risks
emanate from every process and
some can cut across divisions. The
results of these activities flow up to
the Management Committee and
eventually the Board of Directors
through the Company’s annual
business planning process.
Oversight and technical assistance
is likewise provided by corporate
units with special duties. The Risk
and Insurance Management Group
is mandated with the overall
coordination and development of
the enterprise-wide risk
management process. The
Financial Risk Management Unit
of the Treasurers Department is in
charge of foreign exchange
hedging transactions While the
Transaction Management Unit of
the Controller’s Department
provides backroom support for all
financial transactions. The
Corporate Technical &
Engineering Services Group
oversees compliance with the
29
domestic and international

standards set for health, safety and
environment. The Internal Audit
Department implements the
risk-based process-focused audit
methodology and conforms with
the International Standards for the
Professional Practice of Internal
Auditing, having rated as
“Generally Complying” by KPMG
in the Quality Assurance Review
conducted. Petron Singapore
Trading Pte Ltd executes the
hedging transactions involving
crude and product imports on
behalf of the Company
Group
Key risks Bottom up approach Petron follows an enterprise-wide

with each division risk management framework for
conducting a regular identifying, mapping and
self-assessment of its addressing the risk factors that
risk profile affect or may affect its businesses.
The Company’s risk management
process is a bottom-up approach,
with each division mandated to
conduct regular assessment of its
risk profile and formulate action
plans for managing identified risks.
As Petron’s operation is an
integrated value chain, risks
emanate from every process and
some can cut across divisions. The
results of these activities flow up to
the Management Committee and
eventually the Board of Directors
through the Company’s annual
business planning process.
Oversight and technical assistance

is likewise provided by corporate
units with special duties. The Risk
and Insurance Management Group
is mandated with the overall
30
coordination and development of

the enterprise-wide risk
management process. The
Financial Risk Management Unit
of the Treasurers Department is in
charge of foreign exchange
hedging transactions. The
Transaction Management Unit of
the Controller’s Department
provides backroom support for all
financial transactions. The
Corporate Technical &
standards set for health, safety and
environment. The Internal Audit
Department is tasked with the
implementation of risk-based
auditing. Petron Singapore Trading
Pte Ltd executes the hedging
transactions involving crude and
product imports on behalf of the
Company.
Committee
Committee/Unit Control Mechanism Details of its Functions
Board of Directors and its Review of the annual Reviews and evaluates the annual
Audit & Risk Management business plan and the plan of the Company, which
Committee effectiveness of the includes the report of the
Company’s internal Management Committee on the
control system risk profile of the Company and
the proposed action plans; through
the Audit & Risk Management
Committee, considers the
effectiveness of the Company’s
internal control system
Management Committee Review of the report of Presents to the Board the risk
the Risk and Insurance profile of the Company and
Management Group recommends action plans for
managing identified risks
Internal Audit Provision of Undertakes independent regular
31
independent evaluation audit reviews of the Company’s

internal control system to provide
reasonable assurance that such
systems are operating effectively
Corporate units and Provision of technical ● The Risk and Insurance

subsidiaries with special assistance and Management Group provides
duties (Risk and Insurance coordination and the overall coordination and
Management Group, development of the
Financial Risk Management enterprise-wide risk
Unit of the Treasurers management process.
Department, Corporate ● The Financial Risk
Technical & Engineering Management Unit of the
Services Group and Petron Treasurers Department is in
Singapore Trading Pte. Ltd.) charge of foreign exchange
hedging transactions.
● The Transaction Management
Unit of the Controller’s
Department provides backroom
support for all financial
transactions.
● The Corporate Technical &
standards set for health, safety
and environment.
● Petron Singapore Trading Pte
Ltd. executes hedging
transactions involving crude
and product imports on behalf
of the Company.
Each division as risk owner Self-assessment Conducts a regular assessment of

its risk profile and formulates
action plans for managing
identified risks
4th Reporter Assigned: HERNANDEZ, Flowny

ENERGY INDUSTRY
Auditing Power, Water, and Telecommunications Industry
Overview:
To define briefly, the power industry covers the generation, transmission, distribution and
sale of power to the general public and industry. Meanwhile, the water industry provides
drinking water and wastewater services including sewage treatment to residential, commercial,
32
and industrial sectors of the economy. Typically, public utilities operate water supply networks.
Lastly, the telecommunication sector is made up of companies that make communication
possible on a global scale, whether it is through the phone or the Internet, through airwaves or
cables, through wires or wirelessly.
Utilities and telecommunications are essential services that play a vital role in economic
and social development. Quality utilities are a prerequisite for effective poverty eradication.
Governments are ultimately responsible for ensuring reliable universal access of service under
accountable regulatory frameworks. Increased competition in the utilities sectors in recent years
has entailed changes in regulatory frameworks and ownership structures of enterprises, in
addition to business diversification.
Further, remarkable progress in telecommunications technology has had, and will

continue to have, an enormous impact on telecommunications manufacturing and service
industries. In particular, digital technology that integrates transmission, switching, processing,
and retrieval of information provides opportunities to merge various service modes into an
integrated whole. This digitalization, merging the communications and computation functions,
has been made possible by dramatic advances in device and material technology, including
integrated circuits and optical fibers. As the role of digital processing increases, systems and
services become more intelligent and labor-saving on the one hand, and more software-intensive
on the other.
These industries are highly interdependent, highly regulated, and any risk imposed on its
continuance will not only mean a threat to its own and related industries, but a peril to the whole
economy as well.
Nature, Background, and Overview of Specialized Industry

Power Industry
The electric power industry started in the Philippines as a private sector-led industry in
1890 and remained so until the late 1960s; the government pursued rural electrification through
the cooperative business model starting in 1969; the monopoly of generation by the National
33
Power Corporation (NPC) started in 1973; and then the re-entry of private sector in the
generation sector through independent owner producers (IPPs) started in 1987. Prior to the 2001
restructuring under the Electric Power Industry Reform Act (“EPIRA”), the electric power
industry had a vertically integrated generation and transmission sector through the NPC and
wholesale power purchases from the IPPs were predominantly through the NPC (see diagram
below). Distribution utilities were local monopolies in their respective service areas.
On August 14, 1969, Republic Act 6038 created the National Electrification
Administration (NEA) and laid the groundwork for accelerated electrification in the countryside.
The law provided a framework for rural electrification through not-for-profit cooperatives as a
business model and loans and technical assistance from the NEA. In 1972, then President
Ferdinand Marcos imposed Martial Law and shortly thereafter, the Marcos administration seized
the assets of Meralco.
After almost one and a half decades of government dominance in the electric power
industry, in 1986, the administration of then president Corazon Aquino reverted Meralco to
private ownership. The administration then decided not to operate the Bataan Nuclear Power
Plant “for reasons of safety and economy” (EO 55 s. 1986). In 1987, Aquino issued Executive
Order (EO) 215 reversing the policy of granting generation monopoly to NPC and entertained
proposals from independent power producers (IPPs) for build-operate-transfer (BOT) and
build-own-operate (BOO) arrangements for new generating capacity. EO 215 s. 1987 amended
PD 40 to specifically allow the private sector to generate electricity and categorically state that
"the generation of electricity, unlike the transmission and distribution of electricity, is not a
natural monopoly and can be undertaken by more than one entity." The first BOT contract for a
power plant was then signed in 1989 by the NPC and Hopewell Energy Management, Ltd.
To facilitate the privatization process, the EPIRA provided for the creation of the Power
Sector Assets and Liabilities Management Corporation (PSALM) to take over all existing
generation assets and liabilities of the NPC. PSALM was also tasked to use the revenue
34
generated to pay the outstanding debt of the NPC. Furthermore, Executive Order No. 215 series
of 1987, which allows private sector to generate electricity, classifies four types of generating
plants: (1) co-generation units or the simultaneous generation of both electricity and heat from
the same fuel, (2) electric generating plants intending to sell their production to the grids, (3)
electric generating plants intended primarily for the internal use of the owner, and (4) electric
generating plants outside the NPC grids.
The latest EPIRA status report released by the Department of Energy (DOE), which
covers November 2014 to April 2015 period, highlights the privatization of the remaining
generation assets, particularly the Power Barges (PBs) 101-104 as well as the transfer of contract
to an Independent Power Producer Administrator (IPPA) of Unified Leyte Geothermal Power
Plant (ULGPP) for the Bulk Energy. As of June 2015 4, the privatization level of NPC
generating facilities has reached 89.7%, following the successful bid of Naga Power Plant
Complex in March 2014. Meanwhile, the proposed closing and turn-over schedule of Angat
Hydro-electric Power Plant to Korean Water Resources, Inc. was officially done in October of
the same year. Another entity established by the EPIRA is the Energy Regulatory Commission
(ERC). Its main task is to promote competition, encourage market development, and enforce
regulations in the newly restructured market. This is because, contrary to PD 40, power
generation under the EPIRA was not considered a public utility operation, as stated in Section 6
of RA 9136 otherwise known as EPIRA Act of 2001. This made the generation sector of the
industry competitive and opens to other players in the market. Under the EPIRA, any person or
entity engaged in generation and supply shall not be required to apply for a national franchise;
provided that it secures a certificate of compliance from the ERC. Thus, the industry changed in
tranches and was restructured as illustrated by the diagram below.
To briefly discuss the phases the power industry’s supply chain:
1. Power Generation - Power generation in the Philippines is not considered as a public utility
operation, which means interested parties do not need to secure a congressional franchise to
operate a power generation company. However, power generation is regulated by the Energy
Regulatory Commission (ERC) who must issue a certificate of compliance to interested parties
to ensure that the standards set forth in the Electric Power Industry Reform Act of 2001 (EPIRA)
35
are followed. The ERC is also responsible for determining any power abuse or anti-competitive
behavior. Electricity in the Philippines is produced from various sources such as coal, oil, natural
gas, biomass, hydroelectric, solar, wind, and geothermal sources. The allocation of electricity
production can be seen below.
Types of source of energy are enumerated below:

a. Conventional sources – coal, gas, oil, hydropower, and nuclear power; and
b. Non-conventional sources – solar, wind, biogas (from organic wastes), and bagasse
(byproduct of sugarcane).
2. Power Transmission – this is a common carrier business (i.e. regulated by the government,
serves its franchise area without discrimination, responsible for any losses incurred during
delivery). It is regulated by the ERC who has rate-making powers and the final say in the
valuation of transmission assets. Pursuant to the Electric Power Industry Reform Act (EPIRA)
and the Transmission Development Plan or TDP, maintenance and operations of the nationwide
transmission system was subjected to competitive public bidding conducted by the Power Sector
Assets and Liabilities Management (PSALM). The National Grid Corporation of the Philippines
(NGCP) was the highest bidder. It assumed control of the national transmission system from the
National Transmission Corporation (TransCo), whom assumed the same function from the now
defunct National Power Corporation (by way of RA 9511 enacting congressional franchise for a
total of 50 years).
a. The National Grid Corporation of the Philippines (NGCP) is the transmission system
operator for three grids constituting the Philippine grid and as a franchise holder, it is in
charge of operating, maintaining, and developing the country's state-owned power grid.
The Philippine transmission system is composed of three grids, the Luzon Grid, Visayas
Grid, and Mindanao Grid. One characteristic of the grids is that most bulk generation
sites are found far from the load centers, necessitating use of long-distance transmission
lines.
b. Functions:
36
i. Operations and Maintenance - NGCP's task is to ensure that the country's

transmission assets are in optimal condition to convey safe, quality, and reliable
electricity.
ii. System Operations - NGCP acts as System Operator that balances the supply and
demand of power to maintain the quality of electricity that flows through the grid.
iii. Planning and Engineering - NGCP ensures that the grid is prepared whenever new
plants come online and when the demand for power in a certain area increases by
anticipating these scenarios and constructing new facilities.
3. Power distribution - The circulation of electricity to end-users is a controlled common carrier

business requiring a national franchise. The power to grant national franchises is exclusively
vested to the Congress of the Philippines. Distribution of electric power to all end-users or
consumers of electricity may be handled by private distribution utilities, cooperatives, local
government units presently undertaking this function and other duly authorized entities, under
the regulation of the ERC.
A distribution utility has the task to provide distribution services and connections to its system
for any end-user within its franchise area, as there are different distribution utilities available for
different areas, consistent with the distribution code. They are required to provide open and
non-discriminatory access to its distribution system to all users.
Retail rates charged by distribution utilities are subject to regulation of the ERC under the
principle of full recovery, that is, distribution utilities subdivide their retail rate into two distinct
categories, namely pass through charges and wheeling charges. Pass-through charge follows the
principle of full economic recovery where a distribution utility may pass on all the charges it
incurred in the distribution of power such as the price of the power, transmission charge, systems
loss charge, etc. to its customers. The wheeling charge is an additional premium charged to the
customer akin to a mark-up on the cost of power acquired by the distribution utility. The
wheeling charge follows the principle of reasonable return on base (RORB) which allows the
distribution utility to operate viably as determined by the ERC.
a. Electric Cooperatives (“ECs”) are entities owned by the member-consumers within the
vicinity covered by the said entity. These are controlled by a Board of Directors elected
by member-consumers and their management and operations supervised by the National
Electrification Administration.
b. Private Distribution Utilities (“PDUs”) are electric distribution companies that are
owned by private entities. As of 2018, if ranked based on output, the main distribution
utilities across the country include the following Private Distribution Utilities (“PDUs”):
37
The Manila Electric Company (“MERALCO”), the largest electric distribution utility in the
Philippines, has the 24th highest weighted average retail tariffs among 46 countries. As
compared to its neighboring countries, Philippines has higher electricity costs due to:
1. Lack of Subsidies; and
2. High Intrinsic Cost of Supply and Transmission due to:
a. Dependence on expensive imported fossil fuel for generating electricity and no
tax or tariff relief given for fuel imports used for power generation;
b. Relatively low generating capacity of the Philippines. The current supply of
electricity is forecasted to be overtaken by the demand of the country;
c. Relatively small and fragmented grid size result into transmission losses, no
economies of scale, and inefficient operations; and
d. As an archipelago, there are geographic challenges of transmission. The
Philippines relies on submarine cables to interconnect the islands.
e. Municipality Unit (“MUs") are entities that are owned by the local government.
The local government officials, who are elected by the end-users within the
municipality, regulates, controls, and manages the utilities.
Water Utility Industry

The Philippines’ water supply system dates back to 1946, after the country declared
independence. The main components of water resources management in the Philippines are
vested in the mandates of the various government agencies that undertake most of the water
resources programs and projects in the country. There are more than thirty such agencies and
38
offices, each dealing with a particular aspect of water resources development. Thus, there are
separate agencies dealing mainly with each of the sectors of water supply, irrigation,
hydropower, flood control, pollution, watershed management, etc.
Under this setting, the National Water Resources Board (NWRB) was created in 1974 as
the authoritative national organization to coordinate and integrate all activities in water resources
development and management. Its main objective is to achieve scientific and orderly
development and management of all the water resources of the Philippines consistent with the
principles of optimum usage, conservation and protection to meet present and future needs.
Fragmentation among water-related agencies is evident in three areas of concern: water

supply and distribution, economic and resource regulation, and planning and policy formulation.
The following agencies are involved in water supply and distribution:

● the Metropolitan Waterworks and Sewerage Services (MWSS) and its two
concessionaires (after it was privatized in 1997) for Metro Manila, servicing 62.68
percent of its total population;
● the Local Water Utilities Administration (LWUA) and its water district offices for other
cities and municipalities, servicing 58 percent of the total urban population within its area
of responsibility; and
● the departments of Interior and Local Government (DILG) and Public Works and
Highway (DPWH) and local governments which manage community water systems.
The water infrastructure provided is classified into three levels:

1. Level I – Stand-alone water points (e.g. handpumps, shallow wells, rainwater collectors)
serving an average of 15 households within a 250-meter distance;
2. Level II - Piped water with a communal water point (e.g. borewell, spring system)
serving an average of 4–6 households within a 25-meter distance;
3. Level III - Piped water supply with a private water point (e.g. house connection) based
on daily water demand of more than 100 liters per person
Service providers for this sector are also listed down below, by which different tariff structures
and levels according to the respective management model are imposed.
1. Local Government Units
2. Water Districts
3. Large-scale private operators
39
4. Small-scale independent providers
Common water sources and water treatment plants for this industry includes but not
limited to the following:
1. Water Sources
a. Angat Dam
b. Ipo Dam
c. La Mesa Dam
2. Water Treatment Plants - Raw water undergoes several treatment processes before it passes
the standards for potable water. Conventional water treatment consists of the following
processes: coagulation/flocculation, sedimentation, filtration and disinfection/chlorination.
a. Balara treatment plant
b. East La Mesa treatment plant
c. Cardona treatment plant
To ensure that the water delivered to the customers satisfies regulatory standards on
quality, the Company’s Laboratory Services Department processes an average of around 900
water samples from the distribution network per month. The samples are collected on a regular
basis from strategically located sampling points all over the East Zone. This number of sampling
points surpasses the regulatory requirement and all results of the sampling have been consistently
100% compliant with the Philippine National Standards for Drinking Water (PNSDW), five
percent above the requirement.
After distribution of water, the waste water (used water basically) will undergo sewerage.
Sewerage services include the operation and maintenance of networks of sewer pipelines that
collect and convey sewage to a Sewage Treatment Plant (STP) which then clean the wastewater
before safely returning it to our water bodies. Through a variety of mechanisms and processes,
these treatment plants produce treated wastewater safe enough for re-use or discharge to
receiving bodies of water.
Telecommunications Industry
The industry was deregulated in 1995 when President Fidel Ramos signed Republic Act 7925
(The Public Telecommunications Policy Act of the Philippines). This law opened the sector to
more private players and improved the provision of telecom services at better and fairer rates.
The industry was deregulated in 1995, leading to the creation of many telecommunication
service providers for mobile, fixed-line, Internet and other services.
Some of the regulatory frameworks relative to this industry are listed below:
● Republic Act No. 3846, An act providing for the regulation of radio stations and radio
communications in the Philippine Islands, and for other purposes.
● Republic Act No. 6849, An act providing for the installation, operation and maintenance
of public telephones in each and every municipality in the Philippines, appropriating
funds therefore and for other purposes.
● Republic Act No. 7925, An act to promote and govern the development of Philippine
telecommunications and the delivery of public telecommunications services.
40
● Republic Act No. 10844, An act creating the Department of Information and
Communications Technology (DICT), defining its powers and functions appropriating
funds thereof, and for other purposes.
The surge of digital users in the Philippines has been on the rise in recent years. Time spent on
the internet by Filipinos, which was the highest among other Asian countries, led to more
demands for improving fixed broadband services from the country's internet service providers
despite its growth in numbers. The lack of dependable broadband connections in the Philippines,
able to provide higher internet speed, halts better user experience, resulting to one of the lowest
fixed subscription growths among the Asia-Pacific region in 2018.
Despite several telecommunication service providers, the Philippines telecommunications

industry has long been dominated by legacy players Philippine Long-Distance Telephone
Company (PLDT) and Globe Telecom.
All players are expected to upgrade their network capabilities, install fiber-optic and sub-sea
systems and cables, purchase modern networking equipment/storage/servers, and utilize cloud
and cybersecurity services. As disruptive as this industry can get, its key players are striving to
catch up with each of the industries market segments’ new technologies.
1. Mobile Market with 126 million subscribers as of 2016;

2. Broadband Market
a. Wi-Max
b. Wi-Fi
3. Fixed Line Market
a. Fixed Line Voice
b. Fixed Line Data Market
4. International Long Distance Market
5. Hybrids
5th Reporter Assigned: LAZATIN, Rose Ann

Updates & Statistics of the Specialized Industry in the Philippines
Power Industry
As of 2021, the cost of electricity produced for coal amounts to PHP 4.18/KWh. The cost is
primarily fuel and capital recovery costs. The effect of variable and O&M costs are low. Based
on ERC rate cases that were found, geothermal energy was found to have the lowest cost of
electricity per KWh at PHP4.07/KWh, this pertains to the BACMAN geothermal plant in
Pampanga with the rate case application filed as of 2018. For the top ranking Private Distribution
Utilities per grid, see Private Distribution Utilities section.
41
Water Utility Industry

The leading companies on this industry are ranked below in terms of revenue and size:
42
Telecommunications Industry
According to Statista, the following are the fastest internet providers as of June 2020. Despite
this, PLDT and Globe Telecom remained at the top spot with a 2020 CAPEX that is above $ 1
billion. Meanwhile, a new ISP, Dito plans to spend $5 billion on the rollout of its services in the
next 5 years. All players are price sensitive and do have a bias of purchasing equipment from
China.
Key Market Trends

1. The Impact of COVID-19 on the Power, Water, and Telecommunications Industry
With the prevalent economic impact of the pandemic, the power industry is expected to have a
decline in energy demand, coal utilization in the spot market, collection efficiencies of Electric
Cooperatives, and delays in renewable energy projects. Nonetheless, the global telecom market
has shown substantial growth over 2015-2021 not only due to the adoption of advanced
infrastructures, but also as the global need for stable internet connection arose along with the
remote work setup during the pandemic.
2. Alternative Sources of Energy
a. The conventional thermal power segment held a significant market share in 2018, and it
is likely to dominate the market in the forecast period.
b. The Philippines government has planned to phase out its coal usage by 2040 and focus
more on energy production from natural gas and renewable energy. This, in turn, is
expected to create several opportunities for the power generation EPC companies in the
near future.
c. The upcoming and ongoing projects of power plants are likely to drive the power EPC
generation market in the Philippines, during the forecast period.
3. Internet of Things (IoT) - The utility industry has been witnessing a revolution of sorts
thanks to the Internet of Things (IoT). IoT, which connects previously ‘mute’ objects to the
internet, empowers consumers to be in control of the utilities they use. Yes, they can heat their
homes, switch on their lights and fill their bathtubs remotely with a few clicks from a device.
More importantly, it also allows consumers to monitor and manage the amount of the earth’s
resources they use.
a. Forging Partnerships - To offer subscribers convenience – and to secure new revenue
streams – mobile operators have forged innovative partnerships. Smart metering based on
43
M2M (Machine to Machine) technology is effectively distributing and managing the

electricity supply, i.e. Kuryente Load, a prepaid electricity service by MERALCO.
Forming strategic partnerships with telecom operators is a win-win. It strengthens the
proposition for both companies and allows both organizations to maximize the IoT
potential.
b. Mediation: Mobile operators use robust mediation solutions to manage and monitor
multiple devices that are online 24/7/365. With the advent of IoT, utility companies will
similarly have intelligent – smart – meters and multiple “always connected” devices.
Telecoms mediation solutions can effectively integrate and manage these devices for
utility companies for smarter billing.
4. New business models - Some companies in the mobile industry have launched Mobile Virtual
Network Operators (MVNOs). That is when a company sells mobile phone services by making
use of another telco’s existing network infrastructure. As telcos look to collaborate, utility-based
MVNOs may not be a far-fetched idea. The technology being utilized within the
telecommunications industry to manage subscriber databases, the HLR (Home Location
Register), can also be used by utility companies.
5. Seamless online billing - Mobile operators have deployed real-time Online Charging Systems
(OCS) to make it easy for subscribers to pay their bills. Prepaid vouchers can be purchased over
the counter and credit can be added almost instantaneously. Utility companies should look to
introduce such schemes that can add energy or water credit. The technology available in
telecoms can be adapted to match specific serial numbers to smart meters for seamless ‘topping
up’. This could be an effective solution for utility companies who have to extend their grids to
areas where post-paid billing is not an option.
6. Integrated water systems - In October 2011, a bill (commonly referred to as “the Angara
bill” after its proponent) was filed with Congress, that sought to adopt the integrated water
resources management (IWRM) approach to water supply management by dividing the country
into provincial water resource zones, within which all water utilities would be synergized and
integrated.
7. Mobile banking - Internet banking allows customers to accomplish transactions through
computers and the Internet. It was at this point that banks started to veer away from their
traditional bricks and mortar operations, integrating both online and offline operations into their
physical presence.
Audit Considerations
Industry Challenges:
● COVID 19 pandemic such as decline in energy demand, coal utilization in the spot
market, collection efficiencies of Electric Cooperatives, and delays in renewable energy
projects.
● Increasing public concerns on increasing rates and billings
● New power generation technologies, aging infrastructure
● Impact of climate change and shifting dynamics
● Managing regulatory risks
● Managing fraud
● Uncontrollable risks such as shortage of natural gas
● Land acquisitions
● Tariffs – as of June 2020, power tariffs in the Philippines are among the highest in Asia.
44
● Disclosures on industry and regulatory framework changes, rate regulations, statement of

compliance, significant judgments, accounting estimates & assumptions, segment
information, utility plant and its movements, acquisitions, and other matters. o On
September 11, 2020, President Duterte signed into law Republic Act No. 11494, the
Bayanihan to Recover as One Act (“Bayanihan 2”) which serves as the government’s
second coronavirus pandemic relief measure. In an Advisory dated September 23, 2020,
the DOE directed power sector entities to observe the grace period and staggered
payment for unpaid bills provided under the Bayanihan 2. o In an Advisory dated
February 5, 2021, the DOE directed all distribution utilities to implement a
non-disconnection policy due to non-payment of bills for all electricity consumer whose
consumption levels are within the lifeline rate set by the ERC. The policy shall apply to
all unpaid regular bills and installment payments relative to various advisories of DOE
and ERC.
● For water utility industries, Non-revenue water (NRW) is defined as the difference
between the amount of water put into the distribution system and the amount of water
billed to consumers. It is usually used as an indicator for water utility performance. High
levels of non revenue water usually indicate low-quality water utility. It has three
components:
- Physical losses, which consist of leakage from the system caused by poor
operations and maintenance, the lack of active leakage control, and poor quality
of underground assets.
- Commercial losses, caused by under-registration of water meters, errors in data
handling, and theft.
- Unbilled authorized consumption, which includes water used by a specific utility
for operational purposes (e.g. firefighting and specific consumer groups).
● Environmental concerns and institutional fragmentation - More than 30 different agencies
in the Philippines have some role in water resources and water supply and sanitation, but
there is currently no single department or body with overall responsibility for sector
policy and coordination, or for overseeing implementation of sector reforms, especially
outside Metro Manila.
● For telco companies, inability to contain and reduce costs poses a risk with revenues from
legacy services remaining either static or falling and the revenue potential of new
services uncertain, many operators need to cut costs.
● Both a challenge and an opportunity, risk of disruption of blockchain technology can be
counted as one of the industry challenges as well. Interest in the technology continues to
grow, resulting from its potential to overhaul business models while improving processes
such as roaming and identity management. As more telco companies experiment with
blockchain applications, it’s apparent that many value-added opportunities exist.
Key Audit Procedures:

1. Revenue Recognition Principles and Test of Reasonableness
a. For the power industry, distribution retail rate components, as proper billing is the key aspect
in distribution.
45
b. For water industry, the water billing components:

i. Basic charge - this covers the cost of operating, maintaining, improving and expanding the
distribution network, as well as the facilities responsible for bringing potable water to the
end-user. The Basic Charge is based on the latest approved tariff schedule.
ii. Foreign Currency Different Adjustment (FCDA) - this is a percentage of the basic charge
which accounts for fluctuations of the Philippine Peso against other countries' currencies subject
to periodic review and adjustment. The FCDA for the second quarter of 2015 is 0.18% of the
Basic Charge.
iii. Environmental Charge - this is for the mitigation of environmental impacts in the course of
water and wastewater operation. It is 20% of the Basic Charge applicable to all customers.
iv. Sewer Charge - 0% of the Basic Charge is added for Residential and SemiBusiness
customers with a sewer line connection. 30% of Basic Charge, on the other hand, is charged for
Commercial and Industrial customers.
v. Maintenance Service Charge - this covers the maintenance of the water meter. The charge
changes depending on the size of the water meter. The minimum charge is 1.50 Philippine pesos
for a 13mm-sized meter.
vi. Other charges such as VAT, prior billings, etc.
c. Tax Incentives;
d. Carbon credit-related income - Carbon credit, also known as emission permit, allows the
holder to emit a specified amount of greenhouse gasses. One carbon credit is equivalent to one
ton of carbon dioxide. The features of carbon credits do vary such that the terms and conditions
attached to them often result in a broad range of accounting issues. The revenue from carbon
credits is calculated by the amount of carbon emission that would have been emitted had fossil
fuel or other polluting power generators been used to produce the same MW of power. One of
the methods to calculate the carbon reduction emission may be based on the generation-weighted
average emission factor of all facilities generating RE, multiplied by the amount of electricity
generated by the company’s wind power plant during the year. Revenue from the sale of carbon
credits can be recognized on an accrual basis when verification and certification processes have
been completed. More importantly, the important criteria of PAS 18, Revenue, should have been
46
met, namely: that the economic benefits associated with the transaction will flow to the company
and such economic benefits can be estimated reliably. Since diverse accounting practices are
applied, management’s judgment plays a crucial role in determining the appropriate treatment of
assets, revenue and expenses of wind power companies. (Loyola, n.d.)
2. Property, Plant, and Equipment – PPE usually comprise the biggest asset account on the
balance sheet of most plant owners and project developers, since most aspects of the wind power
industry are capital intensive. Depreciation of wind turbines and sale of electricity during the
commissioning period are also important areas to consider. If any of the wind turbines is
individually capable of generating power, depreciation should start even if other wind turbines
are still under construction.
3. Cost-recovery - the operation ratio (O) of a certain water service provider reflects its cost
recovery situation, where O is the operation cost, C is the total annual cost, and R is the annual
revenue. An operation ratio under 1 means that revenues cover the costs of operation and
maintenance. In a study last 2004, only 5 out of 45 had an operating ratio of more than 1,
reflecting a poor operation ratio among the majority of the participating utilities. All the
lossmaking providers were operated directly by LGUs and were mostly characterized by a high
share of non-revenue water, poor service continuity, low tariffs, and low coverage within their
respective service areas.
4. Safety Auditing through workplace inspections, employee safety perception surveys, and
work/behavioral observations
a. Safety Management Audits - The Safety Management Audit goes beyond regulatory
compliance and assesses the safety programs the organization has in place to sustain or improve
the current level of performance. The Safety Management Audit assesses more than the mere
existence of safety policies and programs. The audit examines the quality and effectiveness of
the activities to provide a thorough evaluation of the state of safety management in the company.
5. Operational Audits
a. Generation Phase
i. Installed capacity and capacity utilization
ii. Plant load factor
iii. Planned outage
iv. Forced outage
v. Reserve outage
vi. Loss due to backing down – due grid failure, shortage of raw materials or reduced
demand from consumers
vii. Plant availability
viii. Calorific value of fuel – amount of heat released with the burning of coal
ix. Station heat rate
x. Power quantity reconciliation
xi. Fuel supply agreement
xii. Man-power deployment
xiii. Stacking loss
b. Transmission
i. Operational performance
ii. Voltage management
iii. Transmission losses
iv. Tariff determination
47
v. Grid management
vi. Material management
c. Distribution
i. Aggregate technical and commercial losses
ii. Transformer and its installed capacity
iii. Repairs and maintenance of distribution transformer
iv. Power factor (ratio between real power to do the actual work and the apparent power
supplied by circuit) and capacitor bank (develops the power factor by regulating the
current flow.
v. Tariff fixation
6. Regulatory Compliance Audits
a. Assess the applicable safety regulations, as well as the more significant national safety
standards and codes that apply to the operations.
b. Assess the level of compliance of the operations to the safety regulations, standards
and codes.
c. Include field verification samplings of operating centers.
d. Acknowledge the organization’s activities that meet the regulatory requirements.
e. Identify non-compliance issues that need to be addressed.
f. Assist in a due diligence defense in case of a serious accident.
7. Other considerations:
a. Fuel accounting;
b. Cost Centers
i. Boiler
ii. Turbine & Generator
iii. Cost Handling Plant
iv. Demineralization Plant
v. Hydrogen-generating Plant
vi. Fuel Oil Handling Plant
vii. Ash Handling Plant
viii. Maintenance Costs
ix. Instrumentation Control
c. Inventory costing method and wastage
d. Insurance;
e. High debt-to-equity ratio as a risk factor.
References:
https://www.caaf-fcar.ca/images/pdfs/practice-guides/Practice-Guide-to-Auditing-Oil-and-Gas-R
evenues-and-Financial-Assurances-for-Site-Remediation.pdf
https://www.pwc.com/gx/en/services/audit-assurance/assets/pwc-financial-reporting-in-the-oil-an
d-gas-industry-2017.pdf
https://www.camella.com.ph/oil-price-hike-what-it-means-for-the-philippine-households-and-eco
nomy/#:~:text=Economic%20slowdown,up%20by%20 high%20oil%20prices.
https://blogmain.sherware.com/2015/05/07/oil-gas-accounting-101-terminology/
48
Medical Industry
and HMO
Group 3
Submitted by:
John Darwin Pontigon
Luis Hussein Brillantes
Vyron Galit
Michael Christian Socha
Jhon Kenneth Suratos
Submitted to:
Prof. Sande Amor
Overview in Healthcare Industry
The health care industry, or medical industry, is a sector that provides goods and
services to treat patients with curative, preventive, rehabilitative, or palliative care. The
healthcare industry is composed of establishments devoted to prevention, diagnosis,
treatment, and rehabilitation of medical conditions. Such treatment may be through
providing products or services and may be provided privately or publicly. The modern
health care sector is divided into many sub-sectors and depends on interdisciplinary teams
of trained professionals and paraprofessionals to meet the health needs of individuals and
populations.
The health care industry includes establishments ranging from small-town private
practices of physicians who employ only one medical assistant to busy inner-city hospitals
that provide thousands of diverse jobs. The Healthcare industry is littered with risks and
challenges as it is an industry that requires constant innovation under increased regulations.
The health care industry is one of the largest industries in the world, and it has a direct
effect on the quality of life of people in each country. Health care (or healthcare) is the
diagnosis, treatment, and prevention of disease, illness, injury, and other physical and
mental impairments in humans. Health care is delivered by practitioners in medicine,
chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers. The
health care industry, or medical industry, is a sector that provides goods and services to
treat patients with curative, preventive, rehabilitative, or palliative care.
Importance of Healthcare Industry

The health care industry is tremendously important to people around the world. This
industry comprises of different players including hospitals, doctors, nursing homes,
diagnostic laboratories, pharmacies, medical device manufacturers, and other components
of the health care system. This article provides an overview of the healthcare industry.
Aging populations and increasingly prevalent chronic diseases are the fundamental drivers
creating demand for the expansion of lifestyle medical procedures and the healthcare
industry. There will be a huge demand for medical technology products for years to come.
Impact of Healthcare Industry on Economy
The health care industry is tremendously important to people around the world as well as
to the national economies. It is one of the fastest-growing industries in the world.
Consuming over 10 percent of gross domestic product. The health care industry also plays
an important role as being the largest employer in the global economy, if we add up the
number of people working in each sector across the world. In most countries, the
employment growth rate of the health industry is higher than that of other industries.
However, the healthcare industry as it exists today is highly fragmented and divided among
many different companies and different players. No single firm/corporation has a large
enough share/monopoly of the market to be able to influence the industry's direction or
price levels.
Industries Within the Healthcare Sector
• Medical Equipment - Medical equipment makers range from firms that

manufacture standard, familiar products—scalpels, forceps, bandages, and gloves—
to those that conduct cutting-edge research and produce expensive, hi-tech
equipment, such as MRI machines and surgical robots. Medtronic PLC is an
example of a medical equipment maker.
• Drugs - Drug manufacturers can further be broken down into biotechnology firms,
major pharmaceutical firms, and makers of generic drugs. The biotech industry
consists of companies that engage in research and development to create new drugs,
devices, and treatment methods.
• Managed Healthcare - Managed healthcare companies provide health insurance
policies.
• Healthcare Facilities - Healthcare facilities firms operate hospitals, clinics, labs,
psychiatric facilities, and nursing homes.
Example of Fields of the Healthcare Industry
1. Hospital - Hospitals employ a wide variety of workers who offer different health
care services, such as nurses, physicians, therapists, social workers, psychiatrists,
building maintenance workers and administrative clerks.
2. Nursing and residential care facilities - Nurses, psychiatrists, home health aides
and other workers in the service field usually work round the clock hours to meet their
patients’ needs. These facilities include nursing homes, convalescent homes and
rehabilitation centers.
3. Physician offices - Physicians comprise about a third of healthcare businesses.
Physicians can either work in a private office or work with other physicians- the latter
saves time and overhead costs.
4. Dentist Offices - Dentists, too, can work alone or in groups. One third of the jobs in
the dental industry are in service jobs, such as dental assistants, administrative clerks
and dental hygienists.
5. Home health care - This industry includes all home health and personal
aids/assistants. This would be an alternative to working inside a healthcare facility and
instead working with outpatients in their homes.
How the Healthcare System in the Philippines is Funded

The PhilHealth program was set up in 1995 to provide affordable universal coverage.
PhilHealth is government-controlled and funded. It is financed by local and national
government subsidies, as well as through contributions by employers and employees.
Moreover, the program offers various medical plans depending on income, age, and
circumstance.
PhilHealth has six major membership categories. They are:
• Formal Sector
• Indigents
• Sponsored membership
• Lifetime members
• Senior citizens
• The Informal economy
Overview of Health Maintenance Organization (HMO)
An individual who needs to secure health insurance may find a variety of health
insurance providers with unique features. One type of insurance provider that is popular
in the health insurance marketplace is a health maintenance organization (HMO), an
insurance structure that provides coverage through a network of physicians.
• An HMO is made up of a group of medical insurance providers that limit

coverage to medical care provided through doctors and other providers who are
under contract with the HMO.
• HMO plans require that participants first receive medical care services from an
assigned provider known as the primary care physician (PCP).
• A health maintenance organization (HMO) is a network or organization that
provides health insurance coverage for a monthly or annual fee.
How a Health Maintenance Organization (HMO) Works

Health maintenance organizations (HMOs) provide health insurance coverage for a
monthly or annual fee. An HMO limits member coverage to medical care provided through
a network of doctors and other healthcare providers who are under contract with the HMO.
These contracts allow for premiums to be lower than for traditional health insurance—
since the health providers have the advantage of having patients directed to them. They
also add additional restrictions to the HMO's members. When deciding whether to choose
an HMO insurance plan, you should take into consideration the cost of premiums, out-of-
pocket costs, any requirements you may have for specialized medical care, and whether it's
important to you to have your own primary care provider.
An HMO is an organized public or private entity that provides basic and supplemental
health services to its subscribers. The organization secures its network of health providers
by entering into contracts with primary care physicians, clinical facilities, and specialists.
The medical entities that enter into contracts with the HMO are paid an agreed-upon fee to
offer a range of services to the HMO’s subscribers. The agreed payment allows an HMO
to offer lower premiums than other types of health insurance plans while retaining a high
quality of care from its network.
Benefits of a Health Maintenance Organization (HMO)
The main benefits are cost and quality of care. People who purchase HMO plans benefit
from lower premiums than traditional forms of health insurance. This allows insured
parties to get a higher quality of care from providers who are contracted with the
organization. HMOs typically come with low or no deductibles and only charge relatively
low co-pays. HMO participants also don't need referrals to get specialty services such as
mammograms.
Advantages of Health Maintenance Organization (HMO)

The first and most obvious advantage of participating in an HMO is the low cost. You'll
pay fixed premiums on a monthly or annual basis that are lower than traditional forms of
health insurance. These plans tend to come with low or no deductibles and your co-pays
are generally lower than other plans. Your out-of-pocket costs will also be lower for your
prescription.8 Billing also tends to be less complicated for those with an HMO.
There's also a very good likelihood that you'll have to deal with the insurer itself. That's
because you have a primary care doctor you must choose from who is responsible to
manage your treatment and care. This professional will also advocate for services on your
behalf. This includes making referrals for specialty services for you. The quality of care is
generally higher with an HMO. The reason is that patients are encouraged to get annual
physicals and to seek out treatment early.
Disadvantages of Health Maintenance Organization (HMO)

If you're paying for an HMO, you're restricted on how you can use the plan. You'll have to
designate a doctor, who will be responsible for your healthcare needs, including your
primary care and referrals. This doctor, though, must be part of the network. This means
you are responsible for any costs incurred if you see someone out of the network, even if
there's no contracted doctor in your area. You'll need referrals for any specialists if you
want your HMO to pay for any visits. So, if you need to visit a rheumatologist or a
dermatologist, your primary doctor must make a referral before you can see one for the
plan to pay for your visit. If not, you're responsible for the entire cost. There are very
specific conditions that you must meet for certain medical claims, such as emergencies.
For instance, there are usually very strict definitions of what constitutes an emergency. If
your condition doesn't fit the criteria, then the HMO plan won't pay.
Accounting in Healthcare Industry
Health care accounting includes several unique aspects that don’t apply to general or
business accounting. Health care facilities large and small must deal with the intricacies of
layered economic components associated with patient payments, such as private insurance
and government-backed programs. These exist alongside traditional and routine accounting
processes such as tracking revenue and cash flow. At its core, health care accounting has
several similarities to other professional accounting roles. For instance, health care
accountants analyze reports, maintain financial records and track cash flow analyses. The
fundamental difference between health care accounting and other types of accounting
involves the complex healthcare-associated layers of these functions.
These layers represent multiple parties associated with health care, such as patients,
insurance companies, health care providers, pharmaceutical companies, and government
agencies. Each of these subsets come with their own accounting and financial nuances, and
they sometimes intertwine. Payment tracking, for instance, typically involves tracking
money from patients, providers, and insurance companies.
Accounting in health care follows generally accepted accounting principles (GAAP). This
is the adopted accounting framework of the U.S. Securities and Exchange Commission and
the Internal Revenue Service. Accordingly, many basic and advanced concepts of general
accounting apply these principles, including but not limited to the following.
In the healthcare industry, all accounting must follow the Generally Accepted Accounting
Principles (GAAP) guidelines to avoid the aforementioned fees, fines, and criminal
charges. GAAP refers to a common set of accounting principles, standards, and procedures
issued by the Financial Accounting Standards Board (FASB). GAAP-compliance is
usually determined by an external audit.
Importance of Healthcare Accounting
Every decision made in health care can, and usually does, have an impact on patient health.
This extends to health care accounting. The work can often involve finding ways to make
a facility’s patient care strategies more financially efficient without sacrificing overall care
quality. As such, the work of a health care accountant is a crucial component to a health
care organization’s ultimate goal of providing cost-efficient care that’s effective in
potentially improving patient outcomes. This component can make health care accounting
a uniquely satisfying branch of accounting to explore.
Responsibilities of a Healthcare Accountant
The balance sheet is one of the most important things healthcare accountants handles. A
balance sheet presents monetary estimates of real financial assets, along with intangible
assets the company has legal claim to. It also shows the total amount of debt the company
owes and the difference between total assets and total debt. Altogether, the statement the
balance sheet makes provides the total of the company’s assets as the combination of the
sum of its debt and the value of its net worth.
At year’s end, and generally at the close of each quarter, the healthcare accountant
estimates and reports the dollar values of everything on the balance sheet, as accurately
as possible.
Accounting Methods use in Medical Industry
• Accrual-based Accounting - The accrual method of accounting reports expenses

and revenue at the time they are incurred or earned, regardless of whether or not the
cash is on hand. The biggest advantage of the accrual method is accuracy. The
accrual method can offer a clear picture of current and projected financial
performance during a specific timeframe, such as during a given quarter. The
biggest downside to the accrual method is that it can be relatively complex. Inherent
to the accrual method are complicated functions such as accounts payable and
receivable. Because of its complexity, the accrual method is recommended for larger
companies with the ability to outsource their accounting to professionals.
• Cash-based Accounting - The cash method is much simpler than the accrual
method. Under the cash method, expenses and revenue are only recorded when the
cash is on hand. While some industries, such as the agriculture industry, prefer the
cash method, the healthcare industry lends better to the accrual method because
payments can sometimes take months to be received. It’s a simple, straightforward
method, and it can be sufficient in certain industries with less complex accounting
requirements. However, this method is normally not a good fit for health care
facilities because payments can take months to be finalized – and sometimes, they
may not ever be finalized.
Performance Reporting
As is the case with other entities following GAAP, healthcare companies are required to
produce financial reports and documentation indicating financial performance. These
reports will include cash flows, balance sheets, and statements of operations and changes
in net assets. Performance reporting provides important information for hospital trustees,
senior management, and the general public.
Tax-exempt hospitals and healthcare services must also report their performance by
itemizing uncompensated community care benefits.
Medical Service Payments and Receivables
Hospitals and healthcare services offer a wide variety of services to patients. Because of
this, there are several different ways they can be reimbursed for the services in question:
– Capitation is a payment arrangement which entails an enrolled person paying a set
amount per a specified period, such as a month or a year. The payments occur whether the
enrolled person seeks care or not. The average expected health care usage of the enrolled
person determines the payment amount.
– Per Diem is a payment that is based on the number of days a patient has received
care. The per diem amount is typically set by the payer or determined through Medicare
Severity Diagnosis Related Groups (MS-DRGs).
– Pay for Performance (P4P), also known as value-based purchasing, offers financial
incentives to hospitals and healthcare services. Key performance indicators that determine
P4P tend to be measurable, such as successfully lowering a patient’s blood pressure. P4P
can place a significant burden on accounting as it is the least standardized payment model
in the healthcare industry.
Payer Mixes
Most hospitals and healthcare services are paid by both public and private entities; large
hospitals or services may receive revenue from over a hundred different payers.
Accounting for each type of payer is imperative to big and to small business profitability
alike.
Transparency is a major facet of healthcare accounting, especially when it comes to payer
mixes; people need to know what providers charge for payers. To determine prices, some
hospitals will use a chargemaster — a comprehensive list of items billable to a patient or
provider — or MS-DRGs to determine prices. Because of the many variables that go into
healthcare costs, healthcare accounting can be an extraordinarily complex process.
Credit Balances
Sometimes, the amount collected from payers and patients is greater than the amount owed.
When this happens, credits accumulate in the accounts receivable. To alleviate the
accumulation of credit, accountants can write outstanding checks. This is not uncommon.
In certain circumstances, the intended recipients of outstanding checks have passed away
or are otherwise unable to receive the check. In this case, the accountants must turn over
the uncollected funds to the state, per unclaimed property laws.
Audit Scope
The scope of the audit of the financial statements must be sufficient to enable the auditor
to report on the following:
1. Fairness of presentation of the financial statements as to the financial position and the
results of operations in accordance with generally accepted accounting principles.
2. Compliance with applicable state and local governmental laws and regulations, as well
as applicable legal opinions and interpretations (i.e., ordinances and Attorney General's
opinions).
3. The internal control of the Hospital.
The audit should include all funds under the supervision and control of the Hospital as well
as all component units required to be included as part of the reporting entity by the
Governmental Accounting Standards Board.
Example of Audit Scope
The auditor will provide independently developed and verified information related to
oversight provided by the Department of Health Care Services (Health Care Services) of
the Health Plan of San Joaquin (Health Plan) and similar Medi-Cal health maintenance
organizations (HMO). The audit’s scope will include, but not be limited to, the following
activities:
1. Review and evaluate the laws, rules, and regulations significant to the audit objectives.
2. Determine whether Health Care Services has conducted all required audits and rate
adjustments of Medi-Cal managed health care plans, and evaluate its effectiveness in
adjusting rates.
3. Identify and evaluate the results of actions taken by Health Care Services in the most
recent two to three years to improve the quality of health care services delivered by the
Health Plan and similar HMOs, including any changes to Medi-Cal payments.
4. Identify steps Health Care Services has taken to ensure that the quality of care at the
Health Plan and similar Medi-Cal HMOs meets key state and federal standards, including,
but not limited to standards in the area of postpartum care and diabetes treatments.
5. Determine whether Health Care Services provides sufficient management and oversight
of the Health Plan and similar Medi-Cal HMOs, including, but not limited to oversight
regarding administrative costs and bonuses paid to employees.
6. Evaluate whether Health Care Services’ oversight ensures that the Health Plan and
similar Medical HMOs have sufficient controls in place to detect and prevent waste, abuse,
mismanagement, and conflicts of interest.
7. To the extent possible, determine whether the Health Plan’s administrative costs,
including its employee bonuses, are appropriate and allowable under Medi-Cal funding
conditions.
8. Review and assess any other issues that are significant to the audit.
STANDARDS OF FIELD WORK
Audits are to be performed in conformity with Generally Accepted Auditing Standards and
Generally Accepted Government Auditing Standards contained in the Yellow Book that
pertain to financial audits.
Procedures used during field work should be guided by State and Local Governments and
Government Auditing Standards and Single Audits issued by the AICPA and any
applicable Statements of Position (SOP) issued by the AICPA. The auditor is not limited
to these procedures and should use such procedures as are necessary to perform an audit of
sufficient scope according to the required standards.
The Department has adopted certain additions to the standards for field work as described
for financial audits in the Yellow Book. The Department’s additions to the Yellow Book
standards for field work are as follows:
a. Yellow Book standards require the auditor to design the audit to provide reasonable
assurance of detecting misstatements resulting from violations of provisions of contracts
or grant agreements that have a direct and material effect on the determination of financial
statement amounts or other financial data significant to the audit objectives. The Chief
Examiner of Public Accounts requires that tests of financial transactions be made to
determine compliance with state and local statutes, ordinances, regulations, and Attorney
General's opinions which pertain to financial transactions regardless of the effect on the
financial statements. The auditor should be knowledgeable about and report on the
auditee's compliance with state and local statutes, ordinances, regulations, and Attorney
General’s opinions which pertain to the auditee’s financial transactions both specifically
as a hospital and generally as a public institution.
b. The Chief Examiner requires that the Department’s Coordinator of Hospital Audits be
consulted when legal questions arise concerning the interpretation of laws and regulations.
Auditors should not release reports that involve possible noncompliance with laws and
regulations without consulting first with the Department’s Coordinator of Hospital Audits.
c. The Chief Examiner requires that the Department’s Coordinator of Hospital Audits be
notified immediately when evidence concerning the existence of fraud, abuse or illegal acts
is uncovered. The Chief Examiner will assist in determining the nature and extent of fraud,
abuse, and illegal acts and in bringing any resulting charge against officials or employees.
In addition, auditors should not release information or reports containing information on
illegal acts or indications of such acts without consulting with the Coordinator of Hospital
Audits.
d. If the auditor cannot obtain necessary records, the Coordinator of Hospital Audits should
be notified. The Chief Examiner has statutory authority to subpoena necessary records.
STANDARDS OF REPORTING
A. Financial Statements
The financial statements of the Hospital are to be presented in conformity with generally
accepted accounting principles (GAAP) for special purpose governments. The key to
determining the appropriate financial reporting model for a hospital is determining whether
it has governmental activities or business-type activities (BTA) or both. Generally,
governmental activities are financed through taxes, intergovernmental revenues, or other
nonexchange revenues. Business-type activities are financed in whole or in part by fees
charged to external parties for goods or services. Enterprise funds may be used to report
any activity for which a fee is charged to external users for goods or services (GASB
Codification 1300.109). The required financial statements for a hospital depend on whether
the hospital is engaged in more than one governmental program or has both governmental
and business-type activities or is engaged only in providing business-type activities. This
determination should be based on auditor judgment in consultation with the management
of the hospital.
Many hospitals may choose to report as an entity engaged only in BTA. A hospital may
choose to report as a special-purpose government engaged in governmental activities or
one engaged in both governmental and business-type activities. If other presentation
methods are chosen, the reporting guidance in GASB Codification should be followed. If
the hospital reports as an entity engaged only in BTA, it should present only the financial
statements required for enterprise funds. The basic financial statements and required
supplementary information (RSI) for a hospital reporting as a BTA are as follows:
● Management’s Discussion and Analysis (MD&A);
● Enterprise fund financial statements consisting of:
a. Statement of net position or balance sheet;
b. Statement of revenues, expenses, and changes in net position; and
c. Statement of cash flows;
● Notes to the financial statements; and
● RSI other than MD&A, if applicable.
Assets and liabilities of proprietary funds should be presented in a classified format to
distinguish between current and long-term assets and liabilities. Either a net position format
–assets plus deferred outflows of resources less liabilities less deferred inflows of resources
equal net position – or a balance sheet format – assets plus deferred outflows of resources
equal liabilities plus deferred inflows of resources plus net position– may be used. The
entity should also establish a policy that defines operating revenues and expenses and
disclose it in the summary of significant accounting policies.
Disclosures relating to the financial statements should be in conformity with disclosure
requirements set forth by the GASB. For additional guidance, refer to the GASB
Codification of Governmental Accounting and Financial Reporting Standards.
B. Required Supplementary Information (RSI)
Required Supplementary Information (RSI) is financial information that GASB standards
require to be presented with, but outside of, the basic financial statements. Depending on a
hospital’s specific circumstances, five types of RSI may be required:(1) Management’s
Discussion and Analysis (MD&A), (2) Required Schedule(s)—Pension Schedules and/or
Other Postemployment Benefits, (3) Budgetary Comparison Schedule(s), (4) Infrastructure
Condition and Maintenance Data (for hospitals using the modified approach for
infrastructure assets), and (5) Revenues and Claims Development Trend Data (for public
entity risk pools). The MD&A may be the most commonly applicable type of RSI for
hospitals. If the hospital reports governmental activities and presents fund financial
statements, a budgetary comparison schedule is required for the general fund and for each
major special revenue fund that has a legally adopted annual budget. More detailed
guidance regarding the other types of RSI can be found in the GASB Codification.
Normally, RSI is presented following the Notes to the Financial Statements. However,
MD&A information is the exception and should be presented preceding the financial
statements. All other applicable RSI should be presented after the Notes. Below is a brief
discussion of the MD&A.
1. Management’s Discussion and Analysis – The MD&A should be prepared by the
entity’s management and should provide an objective and easily readable analysis of the
hospital’s financial activities based on currently known facts, decisions or conditions. The
MD&A should discuss the current-year results in comparison with the prior year, with
emphasis on the current year. This fact-based analysis should discuss the positive and
negative aspects of the comparison with the prior year. The information required to be
reported in the MD&A is general rather than specific in order to encourage financial
managers to effectively report only the most relevant information and to avoid
“boilerplate” discussion. The information presented should be confined to the items
outlined in GASB Codification 2200.109.
2. Required Schedules:
Pension Schedules – If the hospital provides pension benefits under a defined benefit plan
as a single and agent employer or cost sharing employer, the following information should
be presented for a ten (10) year period (for additional guidance refer to the GASB
Codification of Governmental Accounting and Financial Reporting Standards P20):
● Single and Agent Employers – a schedule of changes in the net pension liability and a
schedule of employer contributions should be presented for each single-employer and agent
pension plan through which pensions are provided. The net pension liability information
(e.g., changes in net pension information, total pension liability, the pension plan’s
fiduciary net position, net pension liability, the pension plan’s net pension as a percentage
of the total pension liability, covered employee payroll, and net pension liability, the
pension plan’s fiduciary net position as a percentage of total pension liability, covered
employee payroll, and net pension liability as a percentage of covered payroll.) should be
determined as of the measurement date of the net pension liability and may be presented in
a single schedule. The employee contributions (actuarially determined calculation or not)
should be determined as of the employer’s most recent fiscal year-end and presented in a
10-year schedule with required elements as specified in the aforementioned GASB
Codification. Significant methods and assumptions used in calculating the actuarially
determined contributions, if any, should be presented as notes to the required schedules.
● Cost- Sharing Employers – a 10-year schedule should be presented to provide the
employer’s proportionate share of the collective net pension liability. In addition, a 10-year
schedule should be presented of statutorily or contractually required contributions. See
GASB Codification section P20 for data elements required to be included in the schedules.
Information about factors that significantly affect trends in the amounts reported in the
schedules should be reported as notes to the schedules.
● Other Postemployment Benefits (OPEB) Schedules – If the Hospital provides other
postemployment benefits other than pensions, information about those benefits is required
to be presented in the financial statements, notes and required supplementary information.
GASB Statement 75 identifies the schedules employers are required to present when
OPEBs are provided to employees as part of the OPEB Plan. The information contained in
the required schedule(s) will depend upon whether the plan is a single agent plan, a
costsharing plan, and/or whether there is a special funding situation. Practitioners should
refer to GASB 75 for additional information and/or to Sections P50 –P54 of the GASB
Codification to ensure that the required information is presented in the Required
Supplementary Information.
C. Financial and Legal Compliance Audits
Auditors should follow the guidance in this manual, generally accepted auditing standards
promulgated by the Auditing Standards Board of the American Institute of Certified Public
Accountants (AICPA), Government Auditing Standards issued by the Comptroller General
of the United States, and other applicable AICPA pronouncements and Statements of
Positions (SOPs). Auditors are required to perform tests of compliance in every audit of
hospitals.
1. Auditee’s Responsibility
Auditee Response – The auditee is required to prepare a response when deficiencies in
internal control, fraud, illegal acts, violations of provision of contracts or grant agreements
or abuse are reported by the auditor. The auditor should normally request that this response
is submitted in writing, stating the responsible officials’ view on the reported findings,
conclusions, and recommendations, as well as management’s planned corrective actions.
When the audited entity’s comments oppose the report’s findings, conclusions, or
recommendations, and are not, in the auditor’s opinion, valid, or when planned corrective
actions do not adequately address the auditor’s recommendations, the auditors should state
their reasons for disagreeing with the comments or planned corrective action.
2. Auditor’s Reports
The auditor should prepare the following reports. Examples of these reports and schedules
are included in Appendix I.
a. Independent Auditor’s Report – an opinion or disclaimer of opinion as to whether the
financial statements are presented fairly in all material respects in conformity with
generally accepted accounting principles. (See Example in Appendix I)
b. Report on Internal Control Over Financial Reporting and on Compliance and
Other Matters Based on an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards – The purpose of this report is to: (1) report any
significant deficiencies (including material weaknesses) which are identified as a result of
performing the audit of the financial statements, and (2) report occurrences of
noncompliance with provision of laws, regulations, contracts and grants which could have
a direct and material effect on the required financial statements, as well as abuse. (See
Example in Appendix I)
D. Additional Reporting Requirements
The Department has adopted the following additional reporting requirements:
1. In addition to the reporting responsibilities regarding fraud, illegal acts, violations of
provisions of contracts or grant agreements, other noncompliance with laws and
regulations or abuse contained in the Yellow Book, the Chief Examiner of Public Accounts
requires that the Department’s Coordinator of Hospital Audits also be notified.
2. A schedule of Board Members should be included. Refer to the example report in
Appendix I of this manual for guidance concerning the format and content of this schedule.
Example of Healthcare Balance Sheet:
Healthcare Balance Sheet- Asset
Asset
• Economic resources that are expected to provide future benefits such as increasing
cash inflows or reducing cash outflows
• Current is realizable in less than a year, Long Term (LT) is greater than a year
• Cash and investments are valued at market
• Inventory and property are valued at historic cost, property is depreciated over life
of asset
• Pledges and receivables are discounted to present value and what we expect to
collect
Healthcare Balance Sheet- Liabilities

Liabilities
• Economic obligations to outsiders or claims against assets

• Payables are current, due within 1 year, and relate to obligations we have in normal
course of business (accounts payable, payroll, employment taxes and benefits), PTO
Liability is paid time off accrual for time off earned but not taken
• Long term debt is paid over more than a year
Healthcare Balance Sheet – Net Assets

Net Assets
• Unrestricted = no restrictions
• Temporarily restricted = donor restricted by time or use
• Permanently restricted = donor restricted for principal; earnings used for donor
intended purpose
2018
• Without donor restrictions

• With donor restrictions
Example of Healthcare Statement of Operations
Healthcare Statement of Operation – Revenue
Where does it come from & how do we get more?
• Gross and Net revenue - Hospital inpatient, outpatient, clinic and specialty services
• Other Operating revenue – parking ramp, joint ventures, cafeteria, etc.
• Interest and Misc.
Healthcare Statement of Operation – Expenses

Where does it go & how can we spend less?
• Salaries & Benefits – 64%

• Supplies and drugs –12%
• Purchased services – 8%
• Other -16 %
Healthcare Statement of Operation – Net Assets
• Unrestricted contributions – recognized immediately in unrestricted fund

• Temporarily restricted contributions - not recognized in unrestricted fund until the
restriction is released (time or use)
• Permanent restricted contributions - not recognized in unrestricted fund – only
earnings
2018
• Without donor restrictions - recognized immediately

• With donor restrictions -- not recognized in funds without donor restriction until the
restriction is released (time or use)
INTRODUCTION
SITTIE HAYNAH YUSOPH
INTRODUCTION
An old Sanskrit adage states, “That is education which
leads to liberation – liberation from ignorance which
shrouds the mind; liberation from superstition which
paralyzes effort, liberation from prejudices which blind the
vision of the truth.”
OBJECTIVE AND SCOPE OF THE TECHNICAL
GUIDE
The objective of the technical guide is to provide guidance to members to
carry out the internal audit of educational institutions.
The institutions are providing education from the primary level to the
higher level and depending upon the level, operate as schools, colleges,
universities, and other places of learning.
The size, structure of management, the governing legislations, manner of
functioning and nature of activities may vary from one educational
institution to another. This technical guide cannot cover all the intricacies
that might be involved in different practical situations.
This guide is not intended to dwell on the basic internal audit procedures,
which are common to all types of organizations/industries.
The following table lists out the sources for collection of amount
and the different types of expenses incurred by the educational
institutions.
Main Source of Collection
• Admission fees, tuition fees, examination fees, fines, etc.
• Securities from students.
• Donations from public
• Grants from Government for building, prizes, maintenance, etc.
Types of Expenses / Payments
• Salary, allowances and provident fund contribution for teaching and non-teaching
staff.
• Examination expenses
• Stationery & printing expenses • Medical expenses
• Distribution of scholarships and stipends • Audit fees and audit expenses
• Purchase and repair of furniture & fixture • Electricity expenses
• Prizes • Telephone expenses
• Expenses on sports and games
• Laboratory running & maintenance
• Festival and function expenses
• Laboratory equipment
• Library books
• Building Repair & maintenance
• Newspaper and magazines
Financial Reporting Instruments
Presented by: Kharen Joy Rea
Financial Statements
Educational institutions are expected to provide education on a
charitable basis. As such, the provisions discussed here are in the
context of not-for-profit institutions. In view of the absence of the
profit motive, the trusts/society is not supposed to draw up financial
statements such as profit, and loss accounts normally prepared by a
commercial enterprise.
Absence of profit motive does not mean absence of deficit or surplus.
It has been upheld in several judgments delivered by various high
courts and the apex court that the charitable institutions have a right
to earn surplus, so long as such surplus is utilized for the charitable
purpose for which such institution exists and has not been distributed
to the trustees or members of the trust/society.
 As a measure of accountability and performance, they will be preparing an
Income and Expenditure Account and a Balance Sheet
 The balance sheet will reflect the state of assets and liabilities as on the
date of the balance sheet.
 Such financial statements should be accompanied with notes to accounts,
significant accounting policies, and other statements and explanatory
material that are an integral part of the financial statements.
 The financial statements should be prepared in conformity with relevant
statutory requirements, the accounting standards, and other recognized
accounting principles and practices, the basic objective being to give a true
and fair view of the surplus or deficit in the case of income and expenditure
account and the state of affairs in the case of balance sheet.
Reporting Requirements Dictated by Law
 In view of the income tax provisions, for tax purposes, the accounts in such a case, will
have to be prepared for a period of 12 months ending 31st March every year.
 To verify as to whether the institution utilized its funds for the charitable objective for
which it exists and that no part of its funds was distributed for the personal benefit of
members or trustees, etc.
 The donors of endowment funds scrutinize them to verify as to whether the funds were
spent for the purposes for which they were granted or donated.
 Such reporting may be annual or for periods less than that. In case of a society
registered under the Societies Registration Act, 1860, it is mandatory to submit
annually, the audited financial statements and list of governing bodies along with the
requisite fees. Under the Foreign Contribution (Regulation) Act, 1976, if the
educational institutions are in receipt of donations from foreign sources, Form FC-3,
Yearly account of foreign contribution received and utilized must be submitted every
year.
 The educational institutions are also required to submit audited financial
statements and other reports in the prescribed format every year, within the
due date, to the Fee Regulatory Committee of State Governments to whom
it is affiliated for renewal of registration, regulation of admission and
fixation of fees.
 The illustrative cases in respect of which disclosure as per Accounting
Standard (AS) 1, “Disclosure of Accounting Policies”, is required for
accounting policies in case of educational institutions will be in respect of
recognition of income such as, endowment grants, various fess from
students, treatment of deferred expenses, valuation of inventories.
investments. fixed assets, classification of liabilities such as endowment
funds, capital reserves, treatment of contingent liabilities, etc.
Basis of Accounting
 Under cash basis of accounting, transactions are recorded when the cash receipts or cash
payments take place.
 At the end of a period, a statement of receipt and payment is drawn, which reflects the
total receipts and payments under different heads during that period with opening and
closing balances of funds such as cash and bank balances.
 Under accrual basis of accounting, also known as ‘mercantile’ basis of accounting, the
transactions relating to assets, liabilities, revenues, and costs are recorded and reflected in
the accounts in the period in which they accrue.
 The Income Tax Act, 1961, restricts the method of accounting to be employed to
mercantile or cash basis in all cases. As a result, institutions required to file returns under
the Income Tax Act, 1961 will have to prepare their accounts for income tax purposes
keeping this in mind. Further, in case of educational institutions registered under Section
25 of the Companies Act, 1956, the books of accounts of the companies are required to be
maintained by following accrual basis of accounting only.
Fund Accounting
 Fund Accounting is a method of accounting and presentation whereby assets and liabilities
are grouped according to the purpose for which they are to be used.
 A fund is either created by law or by management or by donor. Funds are represented by the
assets whether in the form of Fixed Assets, Investments, Inventory, Bank account, etc.
 Fund Accounting does not necessarily involve opening of a new bank account for its
operations. Funds are just the restriction imposed for utilization of asset.
 Fund based accounting essentially involves preparation of financial statements fund- wise
and consolidation of those statements to represent the financial results/position of the
institution.
 The basic difference between the fund accounting for the government and private
institutions is that in the case of the government institutions, most of the funds are
earmarked, and as compared to this, in a private institution the funds may be restricted or
free depending upon the source.
The educational institution may maintain separate ledgers for each
fund.
An educational institution may receive funds the use of which is
unrestricted, i.e., these funds can be used for the general purposes of
the institution or the use of which is subject to the restrictions
imposed by the contributors, i.e., the funds can only be used for
specific purposes. An educational institution may, on their own,
earmark certain funds for specific purposes.
The different types of funds are as under:
a) Restricted Funds - When the donor or the governing body restrict the usage of the
funds or income earned from the funds or both and the funds can be used only as
per the instruction of the donor, then those funds are known as restricted funds.
b) Endowment Funds — They are a form of restricted funds which have been
received from the donor with a stipulation that the amount received should not be
used for any purpose and only the income earned from investments of these funds
can be utilized for general or specific purposes.
There may be two types of endowments — perpetual endowment and term
endowment. In the first case, such endowments are given in perpetuity and the fund
principal is never spent or repaid. Interest earned on Perpetual Endowment Fund may
be transferred directly to the Endowment fund, if specified. Term endowments are gifts
for which the donor has specified a date or event after which the funds may be spent.
c) Unrestricted Funds - It refers to funds contributed to an institution with no
specific restrictions. The unrestricted fund is augmented by the income from the
operations of the institution, such as tuition fees, income from investments, besides
unrestricted donations/gifts/grants from individuals/government or income from
auxiliary services such as, canteen, bookstores, etc. The Unrestricted funds are
utilized for the day-today operations of the institution.
The Unrestricted funds are further classified into following two categories:
i. Designated Funds — These are unrestricted funds which have been set aside by
the institutions for specific purposes or to meet future commitments e.g., library
fund for purchase of books, Development funds for acquiring building and
equipment, etc. The designated funds are self-imposed and not legally binding.
ii. General Fund - Unrestricted funds other than the designated funds are a part of
the General fund. It represents the Corpus of the Society and is not subject to any
restrictions on its utilization.
Inter-Fund Transfers
 The legal agreements or grant agreements may force the institutions to make
transfers from the revenue funds mandatorily.
 Similarly, the Governing Body also transfers funds from revenue fund to
special funds to undertake some specific activities.
 There is a peculiar practice on the treatment of capital expenditure in case the
educational institution’s income is exempt under Section 11(1) of Income Tax Act,
1961. As per this practice, many societies and trusts transfer from the income and
expenditure account, an amount equal to the cost of fixed asset purchased during
the year, to the fixed asset fund account.
 Income Tax Act, 1961 requires that the society should utilize a minimum
prescribed percentage of income during the year to fulfill conditions for
exemption of income from income tax. Purchase of fixed assets are also
considered as one of the modes of utilization of funds.
 The concept of fund accounting requires earmarking of the funds with the
objective of identifying funds as may be required for specified purposes or projects.
In such cases, the underlying idea is to park these funds in investments/specific
bank accounts for subsequent utilization for the earmarked purposes.
 In transferring the amount from the Income and Expenditure account to fund
accounts, whether to fixed asset fund or other earmarked funds
 In cases where the practice of transferring to the fixed asset fund account, an
amount equal to the amount of addition to the fixed assets during the period is
followed, the following procedure is followed for ensuring that the balance of the
fixed asset fund matches with the value of the fixed assets.
 Where the institution is following the procedure of reducing
the value of depreciation from the gross value of the fixed assets,
an amount corresponding to the depreciation charged during the
year is credited to the income and expenditure appropriation
account by debiting the fixed asset fund account with the same
amount.
 In case the institution is following the procedure of crediting
the depreciation charged during the period to the depreciation
fund account, then no adjustment is required.
Accounting is governed by the Accounting Standards and the expenses in
capital expenditure need to be capitalized under fixed assets and not charged
to the revenue accounts. To comply with the requirements of Income Tax Act,
1961, for working out the utilization of income for charitable purposes, a
separate working sheet may be attached with the computation of income in
which the cost of fixed assets purchased may be reduced for working out the
end surpluses left after making such utilization. The balances of earmarked
funds should always tally with the balances of bank accounts in which such
funds are retained or with the value of fixed assets/investments that have been
acquired against such funds.
SOURCE OF INCOME AND
EXPENDITURE OF
EDUCATIONAL INSTITUTION
Presented By: Claire Anne Caranguian
SOURCE OF INCOME
➢ Source of Income from Students
i. Tuition Fees
ii. Hostel Fees
iii. One Time Charges
iv. Other Periodic Charges
v. Fines
vi. Canteen Income
vii. Bookstores
viii. Publication
Tuition Fees
 Tuition Fees are recognized on the due date for the receipt offers.
apportioned over the term of the student on a time proportion basis.
Generally, tuition fees are received periodically.
Hostel Fees
 budget-oriented, shared-room ("dormitory") accommodation that
accepts individual students (typically backpackers) or groups for short-
term stays, and that provides common areas and communal facilities.
 The hostel may be run by the educational institution itself Or on
contract. Basis by an outside party. Normally, a consolidated fee is
charged from the students for the hostel as well as tuition fees. The
hostel fee, whether separately charged or not, is collected in advance
from the students along with the tuition and other fees.
One Time Charges
 The following ate one-time charges received from the students
Registration Fee
- Are received from the students who wish to apply for admission in the institution
and are generally charged to cover the costs involved in Taking admissions
examinations, etc.
Admission Fees
- are booked as an income of the Year in which it was received since it does not pertain
to a specific academic year but is Like a one-time fee paid at the time of admission into
the institution
Affiliation and Development Fees

-may have to be paid to the University/Affiliation body, Such fees are generally
collected on an actual basis and Paid In full to such authorities.
Other Periodic Charges
Examination fees
- This fee must be paid to the exam conducting authority in parts at the time of
conducting the exam or before
Sports fees
- The purpose of making expenditure on sports material practice schedules, safety,
medical facilities, team meetings, etc.
Income from facilities
- transportation income may be received by educational institutions by one of the
methods
• Transportation fees received from the student where the transportation facility is
provided by the institution itself,
• Contract charges where the contract of providing transportation facility has been
given to an outside party
Fines
 The list of fines imposed on the student is as under:
- Fees fine- for non-deposit or deposit of fees after the prescribed due date.
- Library Fine- for non-return or late return of books and periodicals.
- Laboratory fine- for breakage or misutilization of laboratory equipment.
- Dress fines- for non-adherence to the dress code of the institution.
- Fine for non-submission of leave applications by students.
- Fine for ragging students.
- Fine for use of mobile phones in the institution’s premises.

Canteen Income
Canteen income may be received by the

educational institution by one of the ff methods;
Sale of products where the canteen is owned and
run by the institution itself.
Contract charges, where the contract of running
the canteen has been given to an outside party.
Mess charges were received from the student living
in the hostel.
Bookstores
The educational institutions may also be running the bookstore
where the books, notebooks, and other stationery items are sold to
the students.
The bookstores may sometimes be given on a contract basis. In

such a case, there are no complicated accounting issues. However,
if the books store is run by the institution itself, a separate book of
accounts for such activity may be maintained following the
generally accepted accounting principles
Publication
Some large educational institutions are also engaged in the

publication of books and periodicals, case studies,
curriculum material, research papers, etc. the publication
may be done through the in-house printing press, or the
service may be outsourced.
➢ Income from Seminars, Workshops,
Consultancies, and Management
Development Programs
Revenue from franchise fees
Revenue from Placement Services
Sponsorship Fees
Other Miscellaneous Receipts
Recognition of Other Receipts
Development Programs –
Educational institutions, imparting higher and technical
education, engage in conducting seminars, workshops, on-the-
spot events, competitions, exhibitions management development
programs, technical festivals, and also understate industrial and
consultancies.
Example: an educational institution actively carries out research

and consultancy for various industries, including the needs of
non-corporate and under-managed sectors such as agriculture,
rural development, public system management, and health
education. These may form a significant part of the revenue of
the institution.
Revenue from franchise fees
 The franchise has emerged as a very important model for business expansion/ under the
franchise arrangement, the owner of the business model(franchisor) permits the use of
business rights to comprise in brand processes, product, etc. the franchisee against pre-
agreed monetary consideration (franchise fee) the franchisor benefits from the business
expansion without having to invest in infrastructure and establishment at off locations.
Product fee- this is the lump sum fee paid as an initial sign-up amount and is valid
for a stated period. The same should be recognized as deferred income and should
be systematically recognized in the income statement over the period for which the
product fee has been received.
Share in Revenue- the revenue share is regularly received by the franchisor as a

percentage of total revenues earned by the franchisee. The revenue on account of
share in gross receipts of the franchisee to be recognized for the period to which
receipt pertains.
Revenue from Placement Services
A placement cell for students publicizes information

about employment opportunities. The educational
institutions provide career guidance, pre-placement
training, and personality development programs to
graduates to enable them to achieve their career
growth.
Sponsorship Fees
It is received by an educational institution from the outside
parties for sponsoring the institution function or display of
banners. The educational institutions will be liable for
services tax for sponsorship fees received under the
“Sponsorship Services''.
Other Miscellaneous Receipts
 The ff are other miscellaneous receipts of an educational institution:
 Sale of Prospectus - the sale proceeds of the prospectus are booked as
income of the year in which it is received. Some of the prospectuses are
also distributed free of cost as promotional material by the institutions.
 Premises gave on rent to outside parties- Income of educational
institutions may arise from renting or premises to outside parties for
holding examinations, functions running coaching institutions on a part-
time basis.
 Other sources of income for an educational institution may arise from
the sale of handicraft items, paintings, drawings, etc. made by the
students. They may earn income from the sale of scrap which should be
accounted for on the actual receipt basis.
Recognition of Other Receipts
1) Grant in Aid
- “Accounting for Government Grants” issued by the

institute. Since several educational institutions are substantially
or partially dependent on government grants and from other
agencies. It is desirable even in cases where they don’t need to
follow the standard. Even though the standard refers only to
government grants, the principle enunciated thein can serve as a
guide for grants from other donor agencies as well.
EXPENSES
Educational and Academic Expenditure
Mess Expenses ➢ Other Staff- Related Expenses
Boarding Expenses ➢ Utilities
Laundry Expenses ➢ Promotional Expenses
➢ Repair and Maintenance
Library
➢ Financial Expenses
Discount and Scholarships ➢ Research and Development
Extra Coaching ➢ Depreciation
➢ Utilization of Grant in Aid
Salary and Allowance to Staff
➢ Donations Given to Other
Retirement benefits to Staff Societies/Trusts
Educational and Academic Expenditure.
Educational institution incurs expenditure on educational

and academic expenditure which includes all costs of
providing the faculty with the physical supplies for imparting
education to students, such as stationery, teaching aids,
computer rentals, laptops, traveling scholarship, medical
facilities, fees to visiting faculties and consultants,
recreational facilities, celebration expenses for foundation’s
Day, etc.
Mess Expenses
- The expenses incurred in the shape of dry rations, food articles,

fuel and gas, food staff, and salary may be recorded under the
main head of Mess Expenses.
Boarding Expenses
- the costs of providing residential facilities to the students. If the

residential facilities are hired by the institution, then the institution
will have to pay lump sum monthly charges to the lessor.
Laundry Expenses
- laundry expenses on behalf of the students who avail the facility

of laundry. The laundry services can be provided in-house or are
contracted to a third party.
Library
- Educational institutions incur heavy expenditure on the library

for the purchase of books, magazines, journals, periodicals, and
also receive a library grant for setting up a library for a
particular course.
Discount and Scholarships
- The fees waiver scholarship to the students be booked under a

separate head in the income and expenditure account and
should not be netted off against the fee receipts. This method
of accounting will be beneficial as a control tool in two ways.
1) It will enable the account to generate the percentage of

fee waivers granted against the total fee receipt during
the year.
2) It will enable the gross fees receipts to be recorded

without any distortions.
Extra Coaching
- Accounting records by way of registers will have to be

maintained to keep track of the extra hours/classes taken by the
teachers to arrive at the remuneration to be given to them in this
account.
Salary and Allowance to Staff
- a substantial portion of the revenue of an educational institution is

applied toward the payment of salaries, allowance, etc to staff.
- Institution also allows its employees to take advances/loans against

their salary.
Retirement benefits to Staff
For the accounting treatment, valuation, and disclosure of the

retirement benefits, an educational institution should follow the
Accounting standard “employee benefits”.
Other Staff- Related Expenses
Expenditure on staff uniform
Laundry expenditure
Staff recruitment expenses

Utilities
The educational Institution may incur expenditure on

utilities in nature of electricity charges, power, fuel,
generator running and maintenance, power consumption,
telephone expense, etc...
Promotional Expenses
The educational Institution, normally, incurs heavy

expenditure during the initial year of the set-up to promote
themselves which can take the shape of roadshows,
advertisements in print and electronic media, etc.
Repair and Maintenance
The running of educational institutions involves substantial

investment in infrastructures such as buildings, equipment,
vehicles, etc. all these items are subject to constant wear and
tear, and as such expenditure on repair and maintenance
constitutes a major outflow of funds.
Estate maintenance in an educational comprise of the

following type of expenses
 i. Maintenance of school campus
 ii. Maintenance of equipment
 iii. Landscaping
 iv. All maintenance expenses about civil, electric,

plumbing work, effluent treatment plant, water treatment
plant, swimming pools, carpentry work, etc
 v. Pest control expenses

Financial Expenses
- as the educational Institution incurs a huge amount of

expenditure on the acquisition and construction of fixed
assets. It obtains the required funds from the construction of
fixed assets from the financial institutions. The borrowing
costs that are directly attributable to the acquisition or
construction of the assets should be capitalized as part of the
cost of the assets, and other borrowing costs should be
recognized as an expense in the income and expenditure
account
Research and Development
The educational institutions impart technical education. IT

usually sets up research and development units for carrying out
research project activities in subjects of national importance.
Depreciation
 “Depreciation Accounting” enunciated principles, which can

also serve as a useful guide in cases of not-for-profit
organizations. It is often seen that charitable institutions do not
charge depreciation in their accounts. When the capital
expenditure has been considered as an application of income.
Utilization of Grant in Aid
 The Grant in aid received from the government bodies or

other agencies has conditions attached for the utilization of
the same. The Granting aid may be for specific purposes or
for meeting the regular expenditure of the educational
institution. The grant in aid received for the specific purpose
would have to be reflected as liability till such time the
conditions attached at the time of sanction are fulfilled.
Donations Given to Other Societies/Trusts
The educational Institution donates to a trust having the

same set of objectives. The donations made are to be utilized
for specific purposes. This donation is to be recognized as
an expense in the income and expenditure account of The
Educational Institution.
THINGS TO CONSIDER OF
AUDITOR IN CONDUCTING
THE AUDIT
ARCHAEL T. FERNANDEZ
Following points need to be considered by an auditor
while conducting audit for educational institutions:
•Whether internal control and internal check systems are
working efficiently
•Is there any system to physically verify the fixed asset,
stores and consumables at regular interval
•Verify the control system concerning proper authorization,
obtaining quotations, proper maintenance of accounts and
record regarding purchase of fixed assets, purchase of
material, investment, etc.
•Whether bank reconciliation statement is prepared at
regular intervals and what kind of action is taken for
uncleared cheque which were pending since long
• Whether waiver of fees is properly sanctioned by
appropriate authorities
• The person who is collecting fees and the cashier should
not be the same person
• Class wise fees receivable and actual fees received,
reconcile, or not.
• Whether collected fees are deposited in bank daily
• Fees collection. Register should be maintained daily.
• Where their approved list of supplier sports material
stationery, lab items is readily available.
• Whether control system for payment is adequate or not.
• Weather fees structure is properly authorized along with
change in fee structure, if any.
The following points need to be considered
while conducting an audit of assets and liabilities.
• Verification of assets register should be done considering
grants on purchase of assets, if any received from
government or university grants.
• Verification of depreciation is very important; it should be
according to useful life of assets or as per the Companies
Act, whichever is applicable.
• If donations are received in the form of investment, an
auditor must check all related correspondence with the
donor.
• All the applicable requirements of law should be fulfilled
for the purchase of investments and fixed assets.
• Auditor should read and note down the state code and
provisions relating to the conditions and procedure of
grants.
• Auditor should also verify the requirements of the state.
Which are to be fulfilled by educational institution for
receiving grants and for continuation of grants.
The following points need to be considered by
an auditor while conducting an audit of the
income of educational institutions
• Fees and charges received on account of admission fees,
tuition fees, sport fees, examination fees, etc. should be
verified based on the approved fee's structure.
• Verification of counterfoil copies of fees received with
fees received register should be done.
• Prescribed condition by the state government and the
University Grants Commission should be verified,
whether for field or not.
• Cashbook should be verified with counterfoil of receipt
book and fees register.
• Fees receivable and actual fees received should be reconciled.
• Charges and fees received, and receivable should be examined
on the amount of hostel accommodation, mess, housekeeping
and clothing and etc.
• Cashbook should be verified with the donation received
register.
• Donations received should be accounted for according to the
nature of the nation means careful distinction should be there
for revenue nature donation and capital nature donations: the
same procedure is to be followed for grants received.
• The purpose and utilization of grants should be the same.
• Investment register and cash book should be verified for
income received on account of interest, oil investment and
dividends etc.
The following points need to be considered by an
auditor, well, conducting audit of expense of
educational institutions.
• Electricity expenses, telephone expenses, water charges, and
printing, purchase of sports items should be properly verified
with quotation, purchase bills inward register and bills received
from service providers, etc. All purchases should be authorized
by appropriate person.
• In case where hostels purchased food items, provisions,
clothing, etc. should be properly verified.
• Verification of tax deducted at source. employees state
insurance and Provident Fund should be checked. It is also
very important that all deducted amount should be deposited in
appropriate government accounts, well within time, without
any default. these can be verified from relevant bank
• Payment made on account of salary should be verified
from terms of appointment and increment policy. Auditors
should verify the computation of salary and check whether
all required deductions are made out of it or not, like
advance salary, loan installment, absence from duty,
Employees state insurance, Provident fund. The net salary
payable amount will be verified from cashbook and past
book for salary paid.
• Terms and conditions, cash book voucher receipts should
be on the basis of verification of scholarship paid.
• Appropriate provision should be made on account of
outstanding payments.
AUDIT PROCEDURE
JAMEL HAJI SAMAN AND SITTIE HAYNAH YUSOPH
AUDIT PROCEDURE
Audit Procedures are steps performed by auditors to get all the

information regarding the quality of the financials provided by
the company, which enable them to form an opinion on financial
statement whether they reflect the true and fair view of
organization financial position.
Illustrative in nature and would require adequate modification to
address audit requirements of a particular educational
institutional depending upon the nature, size and other factors.
Revenue
system and procedures are relating to generation of revenue
including authority to fix fees structure, offer scholarships, fees
and etcetera.
accounting procedure relating to recognition of revenue
- Receipt books
issue to student in lieu of payment received
-Billing control
the system billing being followed by the educational
institution should be watertight and should ensure that bills are
raised to each in every student at the end of the term.
-
Discount/Scholarship
the educational institution may sometimes conceive a policy of
allowing discounts to poor students or scholarships to meritorious
students.
-Fee Waiver
The management, generally, has a clear policy for the defaulters
which encompasses imposing fine for late payment and more severe
consequences by way of striking of the name from the roll for the
continuous default.
Verification
-Examinations of Record
examine the adequacy and efficiency of cut off procedures to ensure that
the transactions of receipt pertaining to the period under internal audit are
recorded in that period and not in preceding/subsequent period
-Analytical Procedure
a) comparison of amount revenue for current year, class wise and batch
wise
b) comparison of ratio of concession and scholarships to total receipts
c)comparison of the amount of dividend/interest
D)copmpare the ratio of income on investments to average investments.
Procedures for specific areas
Tuition fees
- major portion of revenue of an educational institution
contributed by this.
Registration fee/sales of prospectus

- unlike tuition fees, this one cannot be verified with
referrence to the number of students. weak area , leakage can
occur.
fines
➢ check the procedure of identification of fines due and ensure
that all fines are levied and collected as per policies laid
down.
➢ check the list of fines to be charge from students.
➢ verify the no. of students and amount of due per students
➢ verify appropriateness of method of communications and
deposits of funds to the accounts of department.
Canteen Income
➢ check the records maintained for the canteen operations

to support all financial transactions
➢ verify the inventory control and the physical counts
➢ verify leakages the allocation of expenses,
➢ review the agreements and contracts in case of the
canteen is run by an outside party
➢ verify leakages that may take place
- review the approval/disapprovals of the changes in the operation
of the canteen.
-compliance with laws and regulations applicable for operations
of canteen
-review of inspection and maintenance reports
Revenue from sales of in-house Publication

-internal auditor should evaluate systems of recording sales,
maintaining inventory of publications.
Revenue from seminars, workshops,
consultancies and management.
Development programmers
should be verified by the internal auditor by charting the list
of all events organized department-wise during the relevant
period.
Revenues from franchise fees
internal auditor should examine the basic record maintained
by the franchisor in respect of the franchisee, the agreements
entered int, with them, the product fee and regular fee
chargeable.
Grants/Donations
a) check the donations received with copies of receipts
b)check sanctions letter for any conditions attached with the donations.
c)verified the grants received from Government and other authorities reference
to all the correspondence.
d)examine the statements submitted for utilization of grants
Expenses
internal control evaluation
a) review of vision, mission and ethical and organizational value system of the
institution.
b) segregation and notation of duties
c) procedures for authorization
d) maintenance of records and documents
e) accountability for, and safeguarding of asset and
f) independent check
Verification
a)test of individual transactions which are often carried out on sampling
basis, depending on the internal auditors assessment of the effectiveness
of the internal controls.
b)examine the entries in the cash books/cash payments summary with
reference to the related payment vouchers
c) in respect of payments by cheque, examine type numerical sequence
of the cheque issued during the specified period
.
d)review the cash book or cash payment summary sheet for any
unusual items and look into the same.
e) apply appropriate analytical procedures to judge the overall
reasonableness of the recorded payments.
f)examine whether the payments have been properly classified
and disclose under appropriate account in the financial statement
in accordance with the recognized accounting principle
Procedures for Specific Areas
Payroll and Benefits

a)review organization structure, payroll operations procedures, and
the sufficiency that there exists a proper separation of duties and
proper supervisory reviews in the org, to ensure that a defective
payroll function has been established by the org.
b)obtain the list of current employee information relating to name,
designation, unique employee number, payroll account number,
salary amount.
Other expenditure
 other than payroll, an educational institution incurs Educational and Expenditure.
Administrative expenditure, Occupancy expenditure and Promotional expenditure. The
internal auditor should follow the following procedures while auditing these types of
expenses.
 a) compare the balances of each significant expense account with the comparable
balance for the preceding period and with budgeted balance for the current period.
 b) compare period relationship between account with the comparable relationships for
the period and with budgets.
 c ) analyze comparative expense calculations on per unit basis. Examine unusual

fluctuations.
 d) review all expense accounts to determine whether year end accrual appropriately
recorded.
Fund Balances
 - the fund balances of institution may exist in various forms. the
internal auditing aspects to be kept in mind respect of each of these
are elaborated under.
Restricted Funds
 - restricted funds normally consist of donations received and
grants sanctioned with conditions attached to the manner of
utilization. The restriction may specify that the funds be spent only
for specified purposes, whether revenue or capital in nature. any
misutilization of funds may lead to claims against the institutions,
which may extreme cases affect the financial viability of the
institutions.
Designated funds
 -represents appropriation made by the institution with the

purpose of accumulating funds for specific purpose. The
internal auditor must evaluate evidences to establish
authority under which such appropriation was carried out
as well as the purposes for which it was done. extremely
reliable evidence in respect thereof is the minutes of the
meeting of the governing body of the institution in which
the appropriation of the funds was approved.
Liabilities
a) examination of records

b) direct confirmation procedure
c) examination of disclosure
d) analytical procedures
e) obtaining management representation
Loan and Borrowings
 for an educational institution, the major outflow of funds is for
capital expenditure. Therefore, the borrowings of an educational
institution comprised of term loans taken for construction of
buildings, infrastructure facilities, acquisition of PPE, furniture and
etc.
a. verify that the loans obtained are within the borrowings power of
the institution and in accordance with the memorandum and
articles of association/rules/by laws of the institution
b.examines the relevant records to evaluate the validity and
accuracy of the loans. the examination minute of books would
constitute an important source of audit evidence for the same
Loan and Borrowings
c. examine the reconciliation of the book balances with

the statements of the lenders.
d. examine the documents if any evidencing any charge
created in respects of loans and borrowings. he should
particularly examine the compliance with the
requirements of the applicable statute regarding creations
and registration of charges in any case of companies
formed under section 25 of the companies act, 1956
CONTINUATION OF
AUDIT PROCEDURES
SITTIE HAYNAH YUSOPH
CREDITORS AND OTHER CURRENT
LIABILITIES
The following points can be useful in internal audit of creditors and other
liabilities:
(a) The internal auditor should carry out appropriate procedures to judge the
adequacy of the relevant cut-off procedures.
(b) The internal auditor should look into the difference, if any, between the total
of the creditors balances as per creditor’s ledger with the related control
account.
(c) The internal auditor should examine the relevant correspondence /other
documentary evidence to verify the validity, accuracy and completeness of
creditors/ acceptances.
(d) The internal auditor should pay special attention to long outstanding items,
unadjusted claims for short supplies, poor quality, discount, commission, etc.,
and liabilities not correlated/adjusted against related advances.
e. The internal auditor should examine any unusual payments
around the year-end, especially if the entries have been
reversed in the subsequent period.
f. The internal auditor should review transactions in the
immediately succeeding period to identify/ confirm material
liabilities outstanding at the balance sheet date.
FEES RECEIVED IN ADVANCE
Usually, an educational institution charges fees before the semester gets started. Such fees
are received in advance from the students and as it does not relate to the period under
internal audit, it should not be treated as income but shown as liability in the financial
statements.
(a) Obtain and examine the list of students from whom fees have been received in
advance.
(b) Check the opening balance outstanding in the ‘Fees received in Advance’ account and
ensure that the said amount is reversed and charged to income and expenses account.
(c) In case where the student at the time of admission has deposited fees for more than one
year, obtain the detailed year wise list of students and examine the balance outstanding
at the ‘Fees received in Advance’ account as well as year-wise income to be
recognized.
(d) In case any student has left the institution, ensure the fees received in advance from
that student have been transferred to his/her respective student’s account.
CAUTION MONEY AND SECURITY DEPOSITS
The following are important points can be useful in audit of caution money and
security deposits:
a) Confirm that caution money and other deposits paid by the students on
admission have been shown as liability in the balance sheet and not transferred
to revenue, unless they are not refundable.
b) Examine the accounting procedure of caution money received from and paid to
the students.
c) Verify the caution money registers for entries made for receipts and payments
and ensures that the registers reconcile with the financial records.
d) Check the documentation required to be maintained for the caution money paid
to the students.
e) Examine the communication procedure between various departments of the
institution before the caution money is paid.
CAUTION MONEY AND SECURITY DEPOSITS
f) Verify whether the deposits, such as caution money, security,
laboratory security, etc. are received from the students.
g) Ensure that such deposits are not mixed up with the fees received
account.
h) Check the student’s account to whom the caution money is being
paid, to ensure that no dues like fees, fines, recoveries for on account
of lost library books, etc. are recoverable.
i) Check whether the No Dues Certificate has been obtained from all
departments of the institution.
j) Check that all the necessary approvals have been obtained from the
appropriate authority before the payment of caution money.
UNUTILIZED GRANTS
In case the grant received earlier was not utilized for the
designated purpose, then the grant may become refundable. In such
instance, the internal auditor should obtain the original donor letter
and its specification. In case, the grant becomes refundable, the
accounting treatment will depend upon the mode followed by the
educational institution at the time of receipt of income.
ASSETS
FIXED ASSETS
Fixed Assets in the shape of land, buildings, and equipment constitute
a major chunk of the assets of an educational institution. The audit
procedures with respect to verification, valuation and disclosure are
discussed in following paragraphs:
VERIFICATION
(a) examination of records
(b) review of physical verification of such assets conducted by the
management.
ASSETS
The following are important procedures in this regard:
a) The opening balances of fixed assets should be verified from relevant records.
b) Check whether the institution is in compliance with Philippine Accounting
Standard (PAS) 10, “Accounting for Fixed Assets”.
c) Acquisition of fixed assets and improvements to the existing ones should be
verified with reference to supporting documents such as, orders, invoices,
receiving reports and title deeds.
d) Review of the lease agreements, valuation and disclosure of fixed assets
acquired on lease with respect to Accounting Standard (AS) 19, “Leases”.
e) Self-constructed fixed assets, improvements and capital work-in progress
should be verified with reference to the supporting documents such as
contractor’s bills, work-order records and independent confirmation of the
work performed.
ASSETS
f) Expense accounts should be scrutinized to ascertain that new
capital assets and improvements have not been included therein.
g) Where fixed assets have been written-off or fully depreciated in
the year of acquisition/ construction, the internal auditor should
examine whether these were recorded in the fixed register before
being written-off or depreciated.
h) In respect of fixed assets retired, the internal auditor should
examine whether:
i. The retirements have been properly authorized and
appropriate procedures for invitation of quotations have been
followed, wherever applicable;
ASSETS
ii. The asset and depreciation accounts have been properly adjusted;
iii. The sale proceeds, if any, have been fully accounted for; and
iv. The resulting gains or losses, if material, have been properly adjusted and
disclosed in the profit and loss account.
The internal auditor may use the following procedures to ascertain such omissions:
a) Review of work orders/physical verification reports to trace any retirements.
b) Examination of major additions to ascertain whether they represent additional
facilities or replacement of old assets, which may have been retired.
c) Making enquiries of key management and supervisory personnel.
d) Obtaining a certificate from a senior official and/or managers that all assets scrapped,
destroyed or sold have been recorded in the books.
ASSETS
➢ Ownership of assets such as, land and buildings should be verified
by examining the original title deeds.
➢ Name of the Society/Company, where they own the educational
institutions.
➢ Solicitors or bankers hold the original title deeds.
➢ Responsibility of the management to carry out physical verification
of fixed assets.
➢ Observe the verification being conducted by the management.
ASSETS
➢ The internal auditor should examine whether the method of
verification was reasonable in the circumstances relating to each
asset. Where the fixed assets can be moved and where verification of
all assets cannot be conducted at the time, they should be marked with
distinctive numbers.
➢ The internal auditor should examine whether the frequency of
verification was reasonable in the circumstances of each case.
➢ Where the assets are numerous and difficult to verify, verification,
say, once every three years by rotation so that all assets are verified at
least once in every three years, may be sufficient.
ASSETS
VALUATION AND DISCLOSURE
The internal auditor should ensure that fixed assets have been valued and
disclosed in the financial statements according to the generally accepted bases
of accounting which are determined by law, professional pronouncements and
prevailing practices governing educational institutions.
The internal auditor should test check the calculation of depreciation. The
total depreciation arrived at should be compared with that of the preceding
years to identify reasons for variations.
Revaluation of fixed assets implies restatement of their book values on the
basis of a systematic scientific appraisal. As long as the appraisals appear
reasonable and based on adequate facts, he is entitled to accept the revaluation
made by the experts.
ASSETS
Where several assets have been purchased for a consolidated price,
the internal auditor should examine the method by which the
consideration has been apportioned to the various assets. In case this has
been done on the basis of an expert valuation, he should examine
whether the same appears reasonable and is based on adequate facts.
The internal auditor most reviews the fixed assets for impairment;
wherever changes in circumstances indicate that the carrying amount
may not be recoverable. Valuation of the impaired asset should be made
as per Philippine Accounting Standard (PAS) 28, “Impairment of
Assets”, where the assets whose carrying value exceeds the recoverable
value are written down to the recoverable amount and the impairment
loss is recognized.
INTANGIBLE ASSETS
The scope of work of an internal auditor may cover the development of an
intangible asset starting from its inception stage to its implementation in the
organization covering monitoring of operations, racking progress, recommending
improvements, etc. Some important procedures to be carried out by an internal auditor
are as follows:
(a) Review the policies and procedures relating to intangible assets
(b) Review the efficiency and effectiveness of use of intangible assets
(c) Review the systems established to ensure compliance with laws, regulations,
contracts, policies and procedures relating to intangible assets including copyrights,
trademarks, patents and designs to determine whether the institution has complied
with them or not. Monitor compliance with laws and regulations relating to
intangible assets with particular reference to unauthorized use of intangible assets
of others. Review in-house procedures for protecting intangible assets
INTANGIBLE ASSETS
(d) Review the means of safeguarding intangible assets.
(e) Review the recordkeeping and accounting of intangible assets.
The internal auditor should examine whether items included as

intangible assets in the financial statements meet the definition of,
and recognition criteria for, intangible assets as laid down in
Philippine Accounting Standard (PAS) 26, ‘Intangible Assets’.
INVESTMENTS
Investments constitute a significant portion of the assets of
an organization.
Short term investments are, normally, made to deploy
temporary surplus funds in view of the peculiar fund flow
position of an educational institution.
The decline in the value of long-term investments, other
than permanent, is normally not adjusted from the book
values.
VERIFICATION OF TRANSACTIONS
The internal auditor must verify the transactions of investments

with regards to the investment policy of the organization.
Where the organization is claiming exemption from income tax,
the internal auditor must examine whether the compliance with
the provisions of the Income Tax Act, 1961, regarding the
investment of the surplus funds is complied with or not.
Where the amount of purchase/sales of investments is substantial,
the internal auditor may check the prices paid/received with
reference to the market rate.
PHYSICAL INSPECTION
The internal auditor should carry out a physical inspection of investments in the form
of fixed deposits, shares, debentures or other securities. The physical inspection of scrip’s
should normally be carried out at the close of business on the last day of the year. The
internal auditor must check whether the investments held are in the name of the
educational institution. The internal auditor should also consider the following important
aspects:
The internal auditor must check whether the investments held are in the name of the
educational institution. The internal auditor should also consider the following important
aspects:
(a) Where a substantial number of investments are held by the institution in its custody,
the internal auditor should carry out a surprise inspection of investments in hand at least
once during the year, in addition to the year-end verification.
(b) Where investments belonging to third parties are also held by the institution besides
its own investments
PHYSICAL INSPECTION
(c) Where the scrip’s relating to shares, debentures or other securities are with a
custodial/depository organization, the internal auditor should examine the
certificate issued by it confirming the holdings of the institution. He should also
examine the reconciliation of balances as per the records of the institution and
those as per the certificate of the custodial or depository organization.
(d) Where banks on behalf of the institution hold the investments, the internal
auditor should examine the certificates/ confirmations received from the banks.
(e) Where investments are held by a third party other than banks on behalf of the
institution the internal auditor should examine whether there is a justification for
such other party to hold the scrip’s. In such a case, physical inspection of the
relevant documents may be made to the extent possible.
(f) If investments are held otherwise than in the name of the institution, the internal
auditor should ascertain the reasons therefore and examine the relevant
documentary evidence supporting real/ beneficial interest of the institution in
the investments.
VALUATION AND DISCLOSURE
The internal auditor should also examine whether the disclosure of
investments in the financial statements is in accordance with the statutory
requirements, if any. To ascertain the fair value market value of investments,
reference may be made to the official quotations of the stock exchange in
the case of quoted securities. In the case of unquoted securities, the internal
auditor should examine whether the method adopted is one of the
recognized methods of valuation of securities.
For example, as per the provisions of section 227(1A) of the Companies
Act, 1956, the internal auditor of a company (other than an investment
company or a banking company) should enquire whether so much of the
assets of the company as consist of shares, debentures and other securities
have been sold at a price less than that at which they were purchased by the
company.
INVENTORIES
An illustrative list of inventory registers maintained in an educational
institution is as under:
1) Printing and Stationery
2) Hardware
3) Sanitary
4) Electrical
5) Fixtures and Furniture
6) New Construction (for construction materials)
7) Mess Equipment and Utensils
8) General
INVENTORIES
9) Lab Equipment
10) Sports and Gym
11) Physics Lab (for items issued to Lab)
12) Chemistry Lab (for items issued to Lab)
13) Daily maintenance receipt (for items issued for maintenance)
14) Repairs (for items sent for repairing).
INVENTORIES
An internal auditor should:
(a) Examine the internal control over the receipt, issue, maintenance, leakage, etc.
of the inventories.
(b) Verify the above-mentioned inventory registers from the following documents:
i. Copy of Purchase Orders
ii. Challans/Duplicate Bills File
iii. Stores Issue Slips
iv. Material Inward Register
v. Bill Dispatch Register (for bill sent to accounts/purchase department)
vi. Issue and Received Register (for items issued but to be retuned back).
vii.Check the opening balances of the items.
INVENTORIES
(c) Verify the Gate Entry Register for items purchased or sent outside the
premises for repairs, etc.
(d) Verify the list of defective/scrapped/destroyed items and the loss to be
recognized in the income and expenditure account.
(e) Inspect reports of physical inspections carried out by the Inventory
Management Department, Accounts Department, etc.
(f) Check that the inventory has been valued and disclosed in the financial
statements according to the generally accepted bases of accounting which
are determined by law, professional pronouncements and prevailing
practices governing educational institutions. The internal auditor may refer
to Philippine Accounting Standard (PAS) 2, “Valuation of Inventories”.
CASH AND BANK BALANCES
The internal auditor should carry out the following procedures:
(a) The internal auditor should carry out physical verification of cash at the year-end.
Where this is not feasible, verification may be carried out, on a surprise basis, at any time
around the date of the balance sheet. Besides physical verification at or around the date of
the balance sheet, the internal auditor should also carry out surprise verification of cash
during the year. The following aspects of physical verification of cash may be noted:
i. All cash balances in the same location (petty cash, cash of sister concerns/ staff
societies, etc.) should be verified simultaneously.
ii. If other similar documents are found during physical verification, the internal
auditor should seek explanations from the management regarding the reasons for such
documents remaining pending. These should not be shown as cash in hand (but
classified as short-term advances).
iii. The quantum of torn or mutilated currency notes should be examined to determine
whether any provision for loss on this account is required.
(b) If the internal auditor finds that the organization is consistently maintaining
an unduly large balance of cash-in-hand, he should carry out surprise verification
of cash more frequently. The internal auditor must be familiar with the written
policies on the limits of holding cash. He should also examine the reasons for
maintaining such large balances having regard to the normal working
requirements of the organization. A large balance of cash in hand may point to
possession of unrecorded funds by members.
(c) The internal auditor should vouch the cash payments made over the limits
assigned requiring appropriate approvals.
(d) The internal auditor should advise the organization to send a letter to all its
bankers to confirm the balances directly to the internal auditor including
those relating to dormant accounts as well as accounts closed during the year.
(e) The internal auditor should examine the bank reconciliation statements as at the year end. He may also examine the
reconciliation statements as at other dates during the year. In case this is not so, he should examine whether the entries
need to be reversed. The internal auditor should pay special attention to items, which are outstanding for unduly long
periods and should consider whether such items require an adjustment/ write off.
(f) Where post-dated cheques have been shown as collections, the internal auditor should ask for reversal of the
entries.
(g) The internal auditor should examine the bank statements relating to accounts which are apparently inoperative to
ensure that no transactions have taken place in such accounts which have not been recorded in the books of
account.
(h) In case of unduly large number of deposits or issue of cheques in the last few days of the year, the internal auditor
may consider obtaining confirmations from the parties concerned. Similarly, where there are a large number of
cheques on hand at the date Audit of Educational Institutions of the balance sheet and a sizeable proportion has
subsequently remained un-deposited/ un-cleared, the internal auditor may consider obtaining confirmations.
(i) The internal auditor should examine relevant receipts/ certificate /bank advice in respect of fixed deposits or other
types of deposits.
(j) Remittances in transit should be examined with reference to their adjustments in the bank statements of the
subsequent period.
OTHER CURRENT ASSETS
FEES RECEIVABLE
An educational institution, if following an accrual-based accounting shall
charge the students for the fees due in the current financial year. Such fees if not
received can either be represented in the name of Fees receivable or the balances of
students in the Balance Sheet. The internal auditor may follow the following steps
for audit of fees receivables:
(a) Check that the opening balances of fees receivable account have been
transferred to the respective student accounts.
(b) Verify whether the fees receivable is recorded correctly during the current
periods.
(c) Examine the next year’s transactions and fees receipt books to ensure that
the current year fees have been booked.
SECURITY DEPOSITS
As stated above, an educational institution may be required to
deposit some security to other institution, government, and local
authority for conducting some course or exam. Further, an amount
may be placed before any other department/agency for obtaining
connection such as telephone connection, gas connection, etc. At
the time of giving a security deposit, the receipt should be obtained
and retained till such deposit gets refunded. A list should be
prepared for the security deposits given and should be verified with
the evidence.
CONTINGENT LIABILITIES
Some of the contingent liabilities arising in case of an educational institution
are:
a) Amount indeterminable in respect of pending income tax assessments.
b) Additional liability arising due to sales tax and service tax.
c) Amount indeterminable in respect of pending court cases by/against
ex-employees or students.
d) Claims against the institution in the courts/consumer courts not
acknowledged as debts.
e) Guarantees issued by banks on behalf of the
Institution.
f) Claim of refunds by the students.
g) Claims of retirement benefit by employees.
h) Cause of action arising out of breach of laws and
regulations under which the institution operates or due
to non-fulfillment of conditions for getting
recognitions.
i) Capital commitments.
CONTINGENT LIABILITIES
The internal auditor should:
a. Inquire the management about their knowledge of unrecorded
commitments or contingent liabilities.
b. Ascertain the amount of contingent liability as discussed with the
management.
c. Ensure that all contingent liabilities are raised or disclosed in the
financial statements.
d. Verify last year’s contingent liabilities and ensure that these have
been duly considered for the current year’s account.
THANK YOU!
Business Process
Outsourcing
Group 6
Nature and
Background of
Specialized Industry
Business process outsourcing (BPO) is the practice of contracting a
specific work process or process to an external service provider.
The services can include payroll, accounting, telemarketing, data

recording, social media marketing, customer support, and more. BPO
usually fills supplementary — as opposed to core — business functions,
with services that could be either technical or nontechnical.
BPO is often divided into two main types of services: back office and front
office.
• Back-office services include internal business processes, such as
billing or purchasing.
• Front-office services pertain to the contracting company's
customers, such as marketing and tech support. BPOs can
combine these services so that they work together, not
independently.
Based on the location of the vendor, the BPO industry is divided into
three categories. A business can achieve total process optimization by
combining the three categories:
1. Offshore vendors are located outside of the company's own country. For
example, a U.S. company may use an offshore BPO vendor in the Philippines.
2. Nearshore vendors are located in countries that neighbor the
contracting company's country. For example, in the United States, a BPO in
Mexico is considered a nearshore vendor.
3. Onshore vendors operate within the same country as the contractor,
although they may be located in a different city or state. For example, a
company in Seattle, Washington, could use an onshore outsourcing vendor
located in Seattle, Washington, or in Huntsville, Alabama.
Each BPO company will specialize in specific
services. They may be grouped as follows:
• Customer Interaction Services
• Back-office Transactions
• IT and Software Operations
• Finance and Accounting Services
• Human Resource Services
• Knowledge Services
How does BPO work?
Organizational executives decide to outsource a business process through a variety of
avenues. Startup companies, for example, often need to outsource back-office and front-office
functions because they do not have the resources to build the staff and supporting functions to
perform them in-house. On the other hand, an established company may opt to outsource a task
that it had been performing all along after an analysis determined that an outsourced provider
could do the job better and at a lower cost.
Management experts advise enterprise executives to identify functions that can be

outsourced and then evaluate that function against the pros and cons of outsourcing to determine
if shifting that task to an outsourced provider makes strategic sense for the organization. If so, the
organization then must go through the process of not only identifying the best vendor for the work
but also shifting the work itself from in-house to the external provider. This requires a significant
amount of change management, as the move to an outsourced provider generally impacts staff,
established processes, and existing workflows.
SCOPE OF WORK
As an organization moves a function to a new outsourced provider,
it must identify the scope of the work shifting from in-house staff to the
external partner. Executives should identify the workflows and processes
impacted by this shift and adjust, if necessary, those workflows and
processes to accommodate the outsourcing of the work.
Executives should also identify the key objectives for outsourcing a

function -- whether it's cost savings, increased quality, quicker turnaround,
or some other objective -- and then use those criteria to determine which
provider would be best suited to handle the work. Those objectives should
also serve as the basis for contractual obligations that can be used to help
assess the performance of the outsourced provider and success of the
function once it is outsourced.
PRESENT ACCOUNTING
METHOD
Overview, Updates, Statistics of the BPO Industry In the Philippines
Globally, the BPO sector is worth over $300 billion. BPO vendors
employ more than 3 million people in India, and more than 1 million
people in the Philippines. Millions more are employed by BPO companies
in Europe and the United States. BPO vendors are located all over the
world, especially in developing nations with low-income tax. South Africa
has shown recent dominance in the BPO market, notably in call centers.
Over the years. one of the key reasons behind the growth of BPO in
Philippines has been the extended support of the Government led
Philippines Development Plan, which ensured incentivized local and
international investments and other lax benefits. Also, there have been
other contributing factors as well which have played a huge role in how
the BPO industry has changed the face of the island nation's economy.
2000 2003 2005
The new millennium ushered in a Convergys Corp. opens two call In a short span of time,
new period of growth for the centers in Philippines along with Philippines is able to account for
country, with the BPO industry their planned expansion in India, 3% of the global BPO market.
accounting for 0.075% of the accounting for many BPO jobs.
country’s GDP.
2006 2010 2013 2016

A landmarks year, wherein ePLDT With 525,000 call center Total revenue generated At an annual growth rate of
Ventus, a subsidiary of the Philippines employees and $8.9 Billion climbs up to $15.5 Billion 17%, the BPO industry is
Long Distance Telephone Company in revenue, Philippines is on with over 900,000 full projected to generate 1.3
(PLDT) single-handedly provides jobs its way to becoming the time employees. million new jobs.
to more than 11,000 people. world’s BPO capital.
5 Key Factors that contributed to the Growth
of BPO Industry
Investors were offered a The government is always quick to pass key legislative changes
sizeable number of which favor global organizations looking to outsource to Philippines.
incentives.
1 2 3 4 5
Filipino employees are not

Bill Gates donated free Philippine focuses on
only fluent in Western-
Microsoft Apps Licenses growing industries in both
accented English but are also
to the PCPS program. voice and non-voice sectors.
more patient.
Business Process Outsourcing (BPO) Activities Preliminary
The most common examples of BPO are call centers, human resources,
accounting, and payroll outsourcing. Business process outsourcing may
involve the use of offshore resources. The major components of the BPO
industry are Contact/call centers, Software development, Animation/creative
service, Data transcription, Back-office processing, and Engineering design.
Majority of BPO activities are Call Centers

Majority of BPO activities were Call Center Activities which was almost
half (48%) of the total or 219 establishments. This was followed by Other
Software and Consultancy and Supply (or customized software development)
with 138 or 30.3 percent. Data Processing shared 8.3 percent or 38
establishments. Database Activities and On-line Distribution of Electronic
Content and Animated Films and Cartoons Production had the least number
with 6 and 7 or 1.3 percent and 1.5 percent of the total of BPO activities
respectively. Figure 1 shows the distribution of BPO establishments by
industry sub-class.
Call Center Activities employ majority of workers
Employment generated by BPO activities reached about

187,000 which was 35.2 percent of the total employment (531,044)
for Sector K (483,868) and Sector O (47,176).
The bulk of the jobs were in Call center activities, which
employed about 150,000 workers. Far second were establishments
engaged in Other Software and Consultancy and Supply with about
17,000 workers. Data Processing Activities employed around 13,
000 employees or about 6.9 percent of the total workforce for BPO
activities. Database Activities and On-line Distribution of Electronic
Content employed the least with only 410 workers.
Most workers in BPO activities are Female
More than half (52.5%) of the total workforce (187,146) for

BPO activities were female workers. Data Processing, Call Center
Activities and Medical Transcription Activities employed more
female than male workers. On the other hand, Software Publishing,
Other Software and Consultancy and Supply, Database Activities
and On-line Distribution of Electronic Content, Other Computer
Related Activities and Animated Films and Cartoons Production
employed more male than female.
Gross addition to fixed assets totaled to PhP10.8 billion
Gross addition to fixed assets (capital expenditures less

sale of fixed assets) acquired by BPO activities totaled to PhP10.8
billion, comprising more than three-fifths (63.1%) of the total gross
addition to fixed assets (PhP17.1 billion) obtained by Sector K
(PhP7.7 billion) and Sector O (PhP9.4 billion).
Call Center Activities recorded the highest gross addition to

fixed assets accounting for more than four-fifths (PhP9 billion or
83.4 percent) of the total gross addition to fixed assets acquired
by BPO activities. Other Software and Consultancy and Supply far
followed with PhP1 billion (9.7%). Meanwhile, Medical
Transcription Activities had the least with PhP19.7 million (0.2%).
Percent Distribution of Gross Addition to Fixed Assets for BPO Activities
Other Software and Consultancy and Supply
Data Processing
Other Industries
Call Center Activities
5%
2%
10%
Percent Distribution of Gross Addition to

Fixed Assets for BPO Activities
Other Software and Consultancy
and Supply
5% 2%
83% 10% Data Processing
Other Industries
83% Call Center Activities

AUDIT
CONSIDERATIONS
The Risks of Business Process Outsourcing
• Security
• Underestimating the costs of services
• Overdependence on service providers
• When outsourcing your processes and
parts of your business, you face
significant risks, depending on the type
and structure of your company.
Other possible risks associated with outsourcing include:
• Data breaches
• Quality control
• Operation restoration
• Nonlocal employees
• Maintenance of strategic alignment
• Political instability
• Changes in technology and exposure to hacking
• Specialization to the point that the niche demand is no
longer necessary
Tax Considerations
A form of government support for the Philippine BPO industry is

the Special Economic Zone Act that provides tax incentives,
exemptions, and other privileges to foreign investors.
• Income tax holiday or corporate income tax exemption for four
to eight years
• Option to pay a 5% gross income tax in place of all national and
local taxes after the tax holiday.
• Tax-free and duty-free import of capital equipment, spare parts,
supplies, and raw materials
• Permanent resident status for foreign investors (and their
immediate family members) with an initial investment of
US$150,000.
Building Audit Plan
• Never before has the Audit Universe seen so much change

• Annual Planning is fading into irrelevance
• Risk planning needs to be more immediate and short-term
• CAES are building contingencies into their planning
• Coordination with other independent risk and control
functions (3 lines of defenses)
In December, 2018, The IIA announced a yearlong project to

review and update the Three Lines of Defense, one of the best
known risk management models.
Reliance On Automated Systems
• Increased pressure to find new operational

efficiencies through IT while simultaneously
reducing downtime, improving service, and
providing adequate security.
• Industry and government regulators require
IT to comply with new or expanded sets of
controls
• Rise of Continuous Monitoring and Auditing
Use Of Data Analytics
• In recent years, there has been a vast increase in the amount of data
that is stored electronically
Types of Data Analytics
• Retrospective statistical analysis - used to gain deeper insight

into important subprocesses in financial and operational areas
of the organization.
• Forward-looking models - built to predict which areas of the
business are riskier or simply require a greater level of focus.
• Advanced visualization analytics - used to help transform the
organization by providing deep analytical insights and
actionable information.
Use Of Data Analytics
PwC's 2018 State of the Internal Audit Profession survey
Enablers In 2019
• Critical Thinking (Continuous Auditing, Automation)
• Adoption of Technology
• Utilize Data Analytics
• Increased focus on Fraud, Data and Cyber Security
Key Takeaways
• Outsourcing industry is expected to continue growing
• IT and IT-Enabled Services are expected to lead the growth in
near future
• IA Functions will increasingly require expertise of technologists,
data analytics, privacy and cyber security specialists who also
possess soft skills.
Continuation
For the last discussion…
Internal Audit of the BPO Industry
Considering the nature of the BPO Industry and the pace at which
the industry has grown over the past decade, need for ensuring proper
controls need not be over emphasized. With the increasing number of
frauds in the software field and considering the vulnerability of the sector
to modification of data, internal audit becomes significant. Internal audit
also helps in verifying the controls in place within the entity about
sufficiency and effectiveness in the light of overall business. Internal audit
also helps in assessing the risks faced by the entity and provide a method
for management of the same. Internal controls and risk management are
extremely important activities in an entity operating in the BPO Industry.
Effective Internal Audit “Internal Audit is an
provides a tool to ease out all independent management
complexities, ensures that function, which involves a
systems and processes are continuous and critical
adequate to support the growth appraisal of the functioning of
and are adapted to the changes
in various regulations, thereby
an entity with a view to
ensuring sustained growth and suggest improvements thereto
development. and add value to and
“Preface to the Standards on strengthen the overall
Internal Audit”, issued by the governance mechanism of the
Institute of Chartered entity, including the entity’s
Accountants of India defines the strategic risk management and
term Internal Audit as: internal control system.”
The definition highlights the following facets of internal audit:
❑ Internal auditor should be independent of the activities they audit. The internal
audit function is, in general, considered independent when it can carry out its work
freely and objectively. Independence permits internal auditors to render impartial
and unbiased judgment essential to the proper conduct of audits.
❑ Internal audit's role should be a dynamic one, continually changing to meet the
needs of the organization. There is often a need to change audit plans as
circumstances warrant. These changes may include coverage of new areas,
assistance to management in solving problems, and the development of new
internal audit techniques.
❑ Internal audit function constitutes a separate component of internal control with
the objective of determining whether other internal controls are well designed and
properly operated. Thus, the examination and appraisal of controls are normally
components, either directly or indirectly, of every type of internal auditing
assignment.
Technical Guide on Internal Audit of BPO Industry
Factors Contributing to the Evolution of Internal Audit

“General Guidelines on Internal Audit” issued by the
Institute of Chartered Accountants of India describes the
factors contributing to the evolution of internal audit in
India. A few such factors are as follows:
(i) Increased Size and Complexity of Businesses - Increased size and business spread dilutes
direct management oversight on various functions, necessitating the need for a full time,
independent and dedicated team to review and appraise operations.
(ii) Enhanced Compliance Requirements - Increase in the geographical spread of the businesses
has also led to crossing of political frontiers by businesses in a bid to tap global capital. This
has thrown up compliance with the laws of the home country as well as the laws of that land
as a critical factor for existence of businesses abroad.
(iii) Focus on Risk Management and Internal Controls to Manage Them - Internal auditors can carry
out their job in a more focused manner by directing their efforts in the areas where there is a
greater risk, thereby enhancing the overall efficiency of the process and adding greater value
with the same set of resources.
(iv) Stringent Norms Mandated by Regulators to Protect Investors - The regulators are coming up
in a big way to protect the interests of the investors. The focus of the latest regulations being
ethical conduct of business, and enhanced corporate governance and financial reporting
requirements, etc.
(v) Unconventional Business Models - Businesses today use unconventional models and practices,
for example, outsourcing of non-core areas, such as accounting.
Standards on Internal Audit of a BPO Industry
The Institute of Chartered Accountants of India (ICAI) has, till date, issued seventeen Standards on
Internal Audit (SIAs) and the same are as follows:
SIA 1 Planning an Internal Audit

SIA 2 Basic Principles Governing Internal Audit
SIA 3 Documentation
SIA 4 Reporting
SIA 5 Sampling
SIA 6 Analytical Procedures
SIA 7 Quality Assurance in Internal Audit
SIA 8 Terms of Internal Audit Engagement
SIA 9 Communication with Management
SIA 10 Internal Audit Evidence
SIA 11 Consideration of Fraud in an Internal Audit
SIA 12 Internal Control Evaluation
SIA 13 Enterprise Risk Management
SIA 14 Internal Audit in an Information Technology Environment
SIA 15 Knowledge of the Entity and its Environment
SIA 16 Using the Work of an Expert
SIA 17 Consideration of Laws and Regulations in an Internal Audit
These Standards are recommendatory in nature and codify
the best practices in the field of internal audit. “Framework for
Standards on Internal Audit” promotes professionalism in the
internal audit activity and comprises of four components, viz.,
the Code of Conduct, the Competence Framework, the Body of
Standards, and the Technical Guide.
Terms of Internal Audit Engagement on a BPO Company
The auditee is expected to formally communicate the appointment to the internal
auditor. Upon receiving the communication, the internal auditor should send an
engagement letter, preferable before the commencement of engagement to avoid any
misunderstanding. The internal auditor and the auditee should agree on the terms of
engagement before commencement. Standard on Internal Audit (SIA) 8, “Terms of
Internal Audit Engagement” establishes standards and provides guidance in respect
of terms of engagement of the internal audit activity whether carried out in house or
by an external agency.
The scope of the terms of the engagement, after delineating the broad areas of
function of internal audit, should clarify that any additional services that are not
encompassed by the engagement letter shall be performed only on mutual agreement
and with separate engagement letter.
The engagement letter should contain a condition that the report of the internal
auditor should not be distributed or circulated by the auditee or the internal auditor
to any party other than that mutually agreed between the internal auditor and the
auditee unless there is a statutory or a regulatory requirement to do so.
Knowledge of the BPO Business
Before the commencement of audit assignment, the internal auditor
should have or obtain the knowledge of the business and its environment.
The internal auditor should acquire sufficient knowledge to enable him to
identify and understand the events, transactions and practices that can
have significant effect on the internal audit process. Such knowledge shall
be helpful to the internal auditor in assessing the inherent risk and control
risk and in determining the nature, timing, and extent of the internal audit
procedures. Knowledge of the business assists the internal auditor in:
• Assessing the risk and identifying the problems.
• Planning and performing the internal audit effectively and efficiently.
• Evaluating audit evidence; and
• Providing better service to the client.
Standard on Internal Audit (SIA) 15, “Knowledge of the Entity
and Its Environment” establishes standards and provides
guidance on what constitutes knowledge of an entity’s business,
its importance to the various phases of an internal audit
engagement and the techniques to be adopted by the internal
auditor in acquiring such knowledge about the client entity and
it’s environment, prior to commencing an internal audit
engagement and subsequently thereafter, at all stages of the
internal audit process.
Audit Planning, Materiality and Sampling While designing an audit sample, the
After acquiring the knowledge of business internal auditor should consider the
and various laws and regulation applicable to specific audit objectives, materiality,
the BPO industry, the internal auditor should population from which the internal auditor
plan out the internal activity. Planning helps in wishes to select the sample, areas of audit
achieving the objectives of internal audit significance and the sample size. Standard
function. Adequate planning ensures that: on Internal Audit (SIA) 5.
• Appropriate attention is devoted to

significant areas of audit. “Sampling” provides that when using
• Potential problems are identified. either statistical or non-statistical
sampling methods, the internal auditor
• Skill and time of the staff are should design and select an audit sample,
appropriately utilized. perform audit procedures thereon, and
• Work is carried out in accordance with evaluate sample results to provide
the applicable pronouncements of ICAI. sufficient appropriate audit evidence to
• Work is carried out in conformity with meet the objectives of the internal audit
the applicable laws and regulation. engagement unless otherwise specified
by the client.
Internal Control
Standard on Internal Audit (SIA) 12, “Internal Control Evaluation” states that
“Internal controls are a system consisting of specific policies and procedures
designed to provide management with reasonable assurance that the goals and
objectives it believes important to the entity will be met”.
SIA 12 lays down that internal control system consists of interrelated
components as follows:
• Control (Or Operating) Environment
• Risk Assessment
• Control Objectivity Setting
• Event Identification
• Control Activities
• Information and Communication
• Monitoring
• Risk Response.
The internal auditor should obtain an understanding of the significant
processes and internal control systems sufficient to plan the internal
audit engagement and develop an effective audit approach. The internal
auditor should use professional judgment to assess and evaluate the
maturity of the entity’s internal control. The auditor should obtain an
understanding of the control environment sufficient to assess
management's attitudes, awareness and actions regarding internal
controls and their importance in the entity.
The internal auditor should examine the continued effectiveness of

the internal control system through evaluation and make
recommendations, if any, for improving that effectiveness.
Internal Audit in an Information Technology Environment
Computer Information System (CIS) environment exist when one or more
computer(s) of any type or size is (are) involved in the processing of financial
information, including quantitative data and the significance in relation to the audit,
whether those computers are operated by the entity or third party.
The data in a BPO entity operating in a CIS environment is, generally, voluminous.
The CIS automatically generates material transaction or entries and exchanges
transaction automatically with other organization as in Electronic Data Interface (EDI)
systems. Source documents, computer files and other evidential matter exist only for
short period and in machine readable form. The use of the Computer Assisted Audit
Technique (CAAT) shall increase the efficiency in the performance and enable the
internal auditor to economically apply certain procedures to the entire population or
accounts transaction.
The internal auditor should review the robustness of the IT environment and
consider any weakness or deficiency in the design and operation of any IT control
within the entity, by reviewing:
a) System Audit reports of the entity, conducted by independent
Information System auditors.
b) Reports of system breaches, unsuccessful login attempts, passwords
compromised and other exception reports.
c) Reports of network failures, virus attacks and threats to perimeter
security, if any.
d) General controls like segregation of duties, physical access records,
logical access controls.
e) Application controls like input, output, processing, and run-to-run
controls; and
f) Excerpts from the IT policy of the entity relating to business
continuity planning, crisis management and disaster recovery
procedures.
Overview of Compliance
Compliance means ensuring conformity and adherence to Acts, Rules,
Laws, Regulation, Directives and Circulars. Standard on Internal Audit (SIA)
17 “Consideration of Laws and Regulations in an Internal Audit’’ issued by
the Institute of Chartered Accountants of India requires that when planning
and performing audit procedures and in evaluating and reporting the
results thereof, the internal auditor should recognize that noncompliance
by the entity with laws and regulation may materially affect the financial
statements. The requirements in this SIA are designed to assist the internal
auditor in identifying the significant impact of noncompliance with laws and
regulations on the functioning of the entity. However, in view of the inherent
limitations on the role of the internal auditor, he is not responsible for
preventing non-compliance and cannot be expected to detect non-
compliance with all laws and regulations.
The internal auditor should plan and perform the internal audit recognizing
that the audit may reveal conditions or events that would lead to questioning whether
an entity is complying with laws and regulations. To plan the internal audit, the
internal auditor should obtain an understanding of the legal and regulatory framework
applicable to the entity and how the entity is complying with that framework. To
obtain the understanding of laws and regulations, the internal auditor would
ordinarily:
• Use the internal auditor’s existing knowledge of the entity’s industry and
business.
• Inquire of management as to the laws or regulations that may be expected to
have a fundamental effect on the operations of the entity.
• Inquire of management concerning the entity’s policies and procedures
regarding compliance with laws and regulations as well as ethical issues within the
entity.
• Discuss with management the policies or procedures adopted for identifying,
evaluating, and accounting for litigation claims and assessments.
After obtaining the understanding, the internal auditor should perform
procedures to identify instances of non-compliance with those laws and
regulations where non-compliance should be considered while preparing
financial statements, specifically:
• Inquiring with management as to whether the entity is following such
laws and regulations. Internal Audit 53
• Inspecting correspondence with the relevant licensing or regulatory
authorities.
• The internal auditor should also perform substantive tests of details of
classes of transactions, account, balances, or disclosures.
The significance of compliance are as follows:
(i) The benefits to the industry are:
• Helps in compliance with legal terms and covenants and thereby
reduces penalties and charges.
• Increased internal control.
• Reduction of internal frauds and losses.
• More time available for other core activities.
• Increases efficiency in operations.
• Customer satisfaction.
(i) Benefits to the stakeholder:
• Ensures risk containment and safer marketplace
• Better investor confidence
• Uniform practices
• Better image, hence, better value for the investor.
THAT’S ALL
THANK YOU FOR LISTENING!
Report on Cooperatives in
Auditing and Assurance:
Specialized Industry
Group 4:
Leader: Abing, Liame R.
Members:
Alabat, Jane
Alvez, Ronalyn Q.
Andal, Geraldine G.
Destriza, Glenda A.
Miguel, Rey Ann Grace S.
Cooperatives
A cooperative is a group of people who work together to achieve their common economic, social,
and/or cultural goals and objectives through a jointly owned and democratically controlled
business (enterprise). The cooperative's members are those who use its products, supplies, and/or
services. Profits are frequently returned to cooperative members; however, cooperatives are
frequently more focused on services for members than on investments.
Also, a cooperative is a legal entity distinct from its members, and employees and directors are not
personally accountable for the organization's debts. Cooperatives are based on the principle of
participatory governance, and its structure encourages resource sharing among members as well
as a democratic management style.
A cooperative's mission is to meet the economic, cultural, and social needs of its members and the
surrounding community. Cooperatives often have a strong dedication to and focus on
strengthening the community wherein they exist or serve.
Objective of a Cooperatives
The primary goal of every cooperative is to provide goods and services to its members, boosting
their income and savings, investments, productivity, and purchasing power, and to promote
equitable distribution of net surplus among them through maximum utilization of economies of
scale, cost-sharing, and risk-sharing, without, however, conducting the cooperative's affairs for
charitable purposes.
Cooperative values
Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity,
and solidarity. In the tradition of their founders, cooperative members believe in the ethical values
of honesty, openness, social responsibility and caring for others.
How Cooperatives are Structured

Cooperatives are structured to allow for shared decision-making and democratic control over every
decision made by the organization. Certain characteristics are shared by different types of
cooperatives, including:
1. Membership - New members must be allowed in accordance with the criteria agreed upon
before the entity's formation. Most cooperatives are often organized around the members'
profession, business activity, or community, and new members must share these
characteristics.
2. Governing bylaws - Each cooperative is regulated by its bylaws, which are rules of
engagement that outline how various roles and activities are to be carried out. A
cooperative's rules outline how members of the board of directors are elected, how and
when other special meetings are held, how officers and directors are compensated, when
the cooperative can be dissolved, and so on. The provisions of the cooperative's bylaws
must guide all decisions made by the executive officers and board of directors.
3. Board of directors - The board of directors is the cooperative's decision-making organ,
and board members are elected by the members for a certain term. The board of directors'
tasks and powers are described in the cooperative's bylaws. The board should have an odd
number of members so that there is a definite winner when voting on certain decisions.
7 Cooperative Principles
1. Voluntary and Open membership – Each member participates willingly and is not
subject to social, political, or religious discrimination. Anyone who meets the
qualifications established by a cooperative's bylaws and willingly accepts their
responsibilities can become a member.
2. Democratic member control – Cooperatives are democratic organizations wherein
officials and managers are elected or chosen by members. Each member has one vote,
regardless of the size of his share.
3. Member’s economic participation – Interest on a member's share capital is limited, so no
one—especially those with money—can acquire a large amount of equity. This prevents
wealthier members from dominating the coop's business at the expense of poorer members
and the organization as a whole.
4. Autonomy and Independence – It requires that surplus be distributed evenly so that no
member gains at the expense of another.
5. Education, Training, and Information – Provides for the education and training for
cooperative members, officers, and employees, as well as the general public, in cooperative
principles and techniques.
6. Cooperation among cooperatives – Promoting of cooperation between cooperatives at
local, national, and international levels.
7. Concern for community – by promoting its long-term development through policies
approved by cooperative members
Difference between Cooperative and Corporation:

Attribute Cooperative Corporation
Owners Members Shareholders or Investors
Owner’s objective Use if services provided by Earning income
cooperative
Organization’s objective Maximize members’ benefits Maximize corporate profits
from working with cooperative
Voting rights One member, one vote, Number of votes proportional
regardless of share contribution to number of shares (ex. Share
contribution)
Income distributions rule Income distributed to members in Income distributed to
proportion to participation in shareholders in proportion to
cooperative activities number of shares held.
Benefits of Cooperatives
✔ Access: Co-ops make certain products or services that would otherwise be out of reach
accessible to certain markets or communities.
✔ Business sustainability: A cooperative structure can help a business become more stable and
work through hard periods.
✔ Community commitment: Co-ops are committed to their local community and will often work
to promote community values through financial services, educational programs, or business
practices.
✔ Democratic governance and empowerment: Because co-ops are democratic, they often help
to increase people’s civic participation.
✔ Equality, diversity and inclusion: Cooperatives are often accurate reflections of a community's
diversity due to their voluntary participation. Co-ops are also inclusive because of their voluntary
membership.
✔ Financial security and advancement for workers: Cooperatives often meet the needs of its
members by offering living wages, the opportunity to advance in their professions, and financial
stability.
✔ Growth: Co-ops may grow and promote growth in the communities they serve by providing
high-quality products and services, good jobs, and investing in the local community.
Why Cooperatives Are Organized

Cooperatives are organized to:
1. Improve bargaining power.
2. Reduce costs.
3. Obtain products or services otherwise unavailable.
4. Expand new and existing market opportunities.
5. Improve product or service quality
6. Increase income.
10 important steps in organizing a cooperative:
1. Hold an exploratory meeting with individuals who share your interest to see whether you
have common needs and want to address those needs as a group.
2. Choose a steering committee to help lead the group through the formation process;
3. Conduct a survey among potential members;
4. Analyze markets for products, supplies, and services;
5. Prepare a business plan;
6. Incorporate the business;
7. Adopt bylaws and set a board of directors;
8. Find the necessary investment money, including member investment, to carry out the
business plan.
9. Employ management and employees, as well as acquire facilities and equipment;
10. Begin operations.
Advantages of a co-operative include that:

• Members have equal voting privileges.
• This structure promotes member participation and shared responsibility.
• Members' liability is limited.
• There is no restriction on the number of members.
Disadvantages of a co-operative include that:
• Members have equal voting rights regardless of investment, which may not be appropriate
for an investor-driven organization.
• Legal limitations on dividend payments on shares may not suit an investor-driven business.
Cooperative functions
• A marketing cooperative's function is to benefit members by assisting them in increasing
their margins, maintaining control of their product from point of sale to point of sale, and
securing a solid and consistent market for their goods. Marketing cooperatives may arrange
sales contracts with buyers, including prices and terms. Some marketing cooperatives
aggregate merchandise from its members in order to reach larger markets, such as
institutions and intermediaries.
• Purchasing cooperatives obtain bulk purchase discounts and pass the savings on to
members. Purchasing cooperatives on inputs benefit farmers, manufacturers, and builders.
Ace Hardware as well as other purchasing cooperatives buy in bulk and resale it in smaller
quantities to members and non-members.
• Service cooperatives provide services to their members. Credit unions provide its members
access to credit. Each day, healthcare cooperatives care for thousands of people. Insurance
cooperatives provide members risk management coverage for both businesses and homes.
Types of Cooperatives
1. Retail Cooperatives - are a type of "consumer cooperative" that assists in the development
of retail stores for the benefit of the consumers, calling the retail "our store." They enable
customers to meet their own needs, gain bargaining power, and share earnings. They are
structured as communities or other "local groups," within each retail store. Retail
cooperatives are frequently formed in small towns where local businesses have closed.
Examples: hardware, food, agriculture products, and even movie theaters.
2. Worker cooperatives - Members of worker cooperatives are both employees of the
business and cooperative owners. This is one of the fastest growing cooperatively owned
company categories. Worker cooperatives can be formed through new business start-ups,
entrepreneurs sharing business highs and lows, or by converting existing businesses.
Examples: bakeries, retail stores, software development groups, and aquaculture.
3. Producer cooperatives - are created and owned and controlled by producers. Producers
might choose to work together or separately to maximize marketing opportunities and
production efficiency. They are set up to manufacture, sell, and distribute their own goods.
This reduces prices and pressures in each sector, benefiting both producers. Examples:
agricultural products, lumber, carpentry and crafts.
4. Service cooperatives - are a type of "consumer cooperative" that help to meet a community
need. They enable customers to meet their own needs, gain bargaining power, and share
earnings. They are organized to give members more control over the services that are
offered. Examples: service co-ops such as childcare, health care clinics, and funeral
services.
5. Housing cooperatives - are a type of service cooperative that offers a distinct form of
house ownership. They allow homeowners the opportunity to share costs of home
ownership (or building). They are organized as an incorporated firm by people who want
to provide and own their own housing. The cooperatives own the units in a housing
cooperative, and they cannot be sold for profit. Examples include: condominiums, rentals,
single-family homes, market rate, and limited equity.
6. Credit unions - The credit union is another common type of cooperative. Credit unions
are financial institutions owned and managed by their members that provide traditional
banking services. Credit unions range from small community-owned banks to large entities
spread across the country.
7. Consumer cooperative - is an owned company and managed by its customers, with the
objective of meeting the needs of its members. The customers of the cooperative's products
or services are also the providers of capital used to establish or purchase the company. The
majority of consumer cooperatives include retail outlets such as food coops and bakeries.
Other types are engaged in healthcare, utilities, and insurance.
Law on Cooperatives
• 1906 - Cooperatives with more than five members might apply for registration under the
Corporation Law (Act No. 1459), which provided for the formation and organization of
economic and non-economic companies.
• 1940 - Commonwealth Act No. 565 was the first cohesive law that provided for cooperative
organization and requested the formation of a separate National Cooperative
Administration to regulate cooperatives.
• 1971 - Executive Order No. 299 created the Presidential Cooperative Development Council
to unify the existing 14 government agencies that were working with cooperatives.
• 1990 - The Philippine Cooperative Code (Republic Act No. 6938) declared it the state's
responsibility to support the creation and growth of primary cooperatives in order for them
to provide maximum economic benefits and social justice to its members.
• 2009 - Enacted in 2009, the Philippine Cooperative Code of 2008 (Republic Act No. 9520)
amended and consolidated the 1990 Cooperative Code. It defined a cooperative as an
autonomous institution founded on universally recognized cooperative principles.
Philippine Cooperative Code of 2008

• At least 15 members are required to register a cooperative.
• The minimum paid-up share capital required to register as a cooperative has been increased
from PHP 2,000 to PHP 15,000.
• Cooperatives will only be taxed on transactions with non-members.
• Before registration, multipurpose cooperatives must have been in operation for at least two
years.
• If a parent cooperative's total net value is at least PHP 50 million, it can organize a
subsidiary cooperative.
• Cooperative officers must complete a minimum of 16 hours of training on cooperative
fundamentals and another 16 hours on cooperative governance and management.
• Cooperatives have to go through a Social Audit to track their contributions to the social
welfare of their members and the community.
Sources of fund of a Cooperative

1. Share Capital
▪ The member contributes to form of shares with a par value of an amount stated in
the by-laws
▪ The member shall subscribe for a minimum number of shares in accordance with
the by-laws
2. Revolving Capital
▪ Defer payment of interest in share capital and patronage refund
▪ The board shall issue a revolving capital certificate with serial number, name,
amount, and rate of interest to be paid at the time of retirement
3. Deposits of Members
The cooperative may receive two kinds of deposits:
▪ Savings
▪ Time deposit
4. Borrowings
▪ The cooperative may borrow from members at terms comparable or less onerous
from loans outside of membership or external sources
▪ It must not compromise the cooperative/s autonomy and independence
5. Fees
▪ Membership and transfer fees, and others
6. Subsidies, Grants, and Donations

▪ The cooperative may accept subsidies, grants, and donations from members,
foreign, and domestic sources
Movements of Cooperatives
Evolution of the cooperative movement

1890-1970
• José Rizal, who traveled to Spain, founded the first agricultural marketing cooperative in
1896. Similarly, influenced by the German co-operative banking model, Theodoro Sandico
enacted the Local Credit Act in 1915.
• The first local credit unions were formed in 1916 to support farmers under the Department
of Agriculture. By 1926, there were 544 such co-operatives in 42 states. However, by 1935,
90% were inactive due to credit abuse by incompetent managers and borrowers.
• The church co-operative started in the Ilocos region in 1938, supported by the savings of
the parishioners.
• Co-operatives prospered after World War II when they were contracted by the government
to support the distribution of relief supplies. In 1947, the government integrated its
influence with the creation of the Cooperative Administration (CAO).
• In 1960, thousands of major co-operatives gathered to establish five regional co-operative
training centers.
• In 1969, a government order mandated the use of co-operatives as the primary channel for
credit, supply, and marketing services to the agricultural sector.
1971-1999
• When martial law was declared in 1972, CAO was abolished and the Cooperative
Development Bureau (BACOD) was established. All existing co-operatives had to be re-
registered and follow the pre-co-operative structure at the village level known as "Samahan
Nayon" (SN).
• From 1973 to 1975, a decree was issued to establish a cooperative for transportation,
electricity and sugar.
• The five regional centers responded to excessive government intervention by establishing
NATCCO in 1977. By 1986, only 5% of 22,000 social networks were active due to
weakened government support.
• After the People Power Revolution in 1986, co-operative leaders lobbied for more co-
operative support laws in the new constitution. Senators Aquilino Pimentel Jr. and Agapito
Aquino have drafted a co-operative bill that came into force in 1990.
• Through the 1990s, the government agencies were channelling development initiatives
through cooperatives in food distribution, family planning and employment.
• By 1993, the cooperative network had become the country's largest socio-economic
institution with 3.2 million members in 25,125 cooperatives.
• The National Association of Cooperative Education (NACE) was formed in 1996 to solve
the problem of lack of cooperative education and training at the regional, provincial, and
municipal level.
2000-present
• The cooperative sector contributed US$ 9.68 billion (PHP 517 billion) to the economy in
2003 which was 12.5% of the country's GDP.
• PCC and CDA convened the First National Cooperative Summit - the largest gathering of
Filipino cooperators - in 2004.
• The Cooperative Code was amended in 2009 to improve the state of local cooperatives.
• The Philippine Development Program (2011-2016) provided technical, financial and
institutional development assistance to micro and small co-operatives to reduce poverty in
rural areas. The CDA has also presented three agendas for establishing co-operative
membership, developing human resources and commending outstanding co-operatives.
• A national committee was set up to streamline government programs for cooperatives in
2012.
• In 2014, there was a call for reinforcing the cooperative movement and PCC was declared
the national apex.
• In 2015, the state-wide major co-operatives established Mindanao's Southeastern First Co-
operative Broadcasting Federation (COOP TV). Online TV channels promote co-
operatives and broadcast lectures by certified co-operative trainers.
• Philippines s was a signatory to the 2016 ASEAN Cooperative Business Forum Declaration
that promoted agricultural cooperatives.
• The PCDP for 2018-2022 advocated inter-government coordination to create an enabling
environment for cooperatives.
• The CDA will develop a co-operative in 2019 to organize and build a co-operative for
abandoned combatants from the conflict-affected Mindanao Bansamoro Islamic Army
(MPNCD). Launched the project. In the first phase, MPNCD provided post-harvest
facilities and livelihood support to 70 co-operatives.
Philippines and the international cooperative movement

• In 2004, VICTO National partnered with the World Credit Union Council (WOCCU) to
establish a savings and credit union in Afghanistan. As part of a five-year project, VICTO
trained Afghanistan and helped establish 40 co-operatives.
• Since 2007, NATCCO has been conducting Afratoon's social and financial education
program for young people in the Philippines. NATCCO is also partnering with the Ministry
of Education to promote financial education as part of the school's curriculum.
• Ms. Elenita San Roque, CEO of the Association of Asia Confederation Credit Union
(ACCU), won the 2014 Global Women's Leadership que, of Network's Empowerment
Grant.
• Various Filipino cooperators have won the Filene and Biden Awards, also called the 'Credit
Union Oscars, such as Ms. Roberta Verano of I-CUDE (2014), Mr. Jose Allan S. Bartolo
of Bugasong Multi-Purpose Cooperative (2015), Mr. Dudz Samson of I-CUDE (2016),
Ms. Justine Lynn Limocon of LMPC (2017), Ms. Marilou Guanzon-Apalisok for the
training programme "The Storytelling Power of Co-Operatives" (2018), Mr. Gadwin
Handumon of Paglaum Multi-Purpose Cooperative (2019), and Mr. Patrick John Rico of
ACDI Multipurpose Cooperative (2019).
• In 2017, NATCCO, ACCU, and the Philippine Credit Union Federation (PFCCO)
launched the Kaya Payment Platform, a cloud-based payment service that facilitates
transactions within and between co-operatives.
• NATCCO and the PFCCO are a part of the Interoperable Digital Financial Services for
Credit Unions project by WOCCU from 2018 2020. The project focuses on digitising the
services of credit unions so that they can be accessible to the 69 million underserved people
in the Philippines.
• Since 2015, NATCCO has partnered with Ateneo de Manila University Graduate School
of Government Ateneo Leadership, Innovation and Social Entrepreneurship Program
(ALSE OF LIFE) to reach out to Philippine expatriates and their families and improve
socio-economic security through a co-operative system.
Engagement with ICA-AP

• Filipino cooperators participated in the 2006 International Cooperative Trade Fair and
Symposium held in Iran and the 2007 International Cooperative Trade Fair in Indonesia.
• ICA members from across the world raised funds to help rebuild the cooperatives affected
by Typhoon Haiyan in 2013.
• ICA has been actively represented by Filipino cooperative leaders in its Advisory Council
(General AS Lozada) and the Regional Board (Mr. Guillermo P. Cua, Mr. Godofredo E.
Lising Jr., Ms. Divina C. Quemi, Mr. Jose Romeo B. Ebron, Mr. Efren M. Bravo, Ms.
Amneris G. Gabriel, and Mr. Adolfo A. Ibanez).
• Philippines has hosted various ICA conferences, meeting and workshops - Tagatay
Conferences on the Status of Women in Cooperatives (1997, 2006, 2016), the First Coop
Think Tank Consortium (1998), Second Asia-Pacific Cooperative Forum (2002),
Workshop on Enhancing the Role of Women in Cooperative Business (2009), and the
Second Asia Pacific Cooperative Youth Summit (2018).
• Partners in the Philippines benefit from a variety of seminars, conferences, workshops and
training such as Rural Women Enterprises (2007, 2008), ASEAN Cooperative
Development Meeting (2017) and AsiaPacific Cooperative Development Conference
(2018). And by the ICAAP Consumers, Women, Research and Youth Commission.
About International Cooperative Alliance Asia and Pacific

ICAAP is one of ICA's four regional offices. Founded in 1960 in New Delhi, India, it unites,
promotes and develops co-operatives in the region. 108 members of ICAAP from 33 countries
span a variety of sectors including agriculture, credit and banking, consumers, education, fisheries,
forestry, housing and insurance.
Who are successful?

As of September 2019, the top 20 cooperatives by asset size are listed below. The CDA dubs
these coops "billionaire cooperatives" because their total assets exceed billions of pesos.
Municipality/ Total No. of

Cooperative Type Website
City Assets members
ACDI Multi- Php
Multi-
purpose Taguig 33.47 183,125
purpose
Cooperative billion https://www.acdicoop.com
Philippine
Army Finance
Center Php
Multi-
Producers Taguig 22.43 137,548
purpose
Integrated billion
Cooperative
(PAFCPIC) https://pafcpic.ph
Cebu CFI Php
Multi- Cebu City-
Community 13.12 344,742
purpose North
Cooperative billion https://www.cficoop.com
Php
Tagum Multi-
Tagum City 6.58 99,185 https://www.tagum-
Cooperative purpose
billion cooperative.coop
PLDT
Employees Php
Multi- Metro
Credit 5.32 9,364
purpose Manila
Cooperative billion
(PECCI)
https://www.pecci.com.ph
DCCCO Php
Multi- Dumaguete
Multi-purpose 4.78 109,565
purpose City
Cooperative billion http://www.dccco.coop
AFP Finance
Php
Center Multi- Multi- Quezon City-
4.53 30,199
Purpose purpose III
billion
Cooperative http://afpfinancecoop.com
ORO Php
Multi- Cagayan De
Integrated 4.43 182,977 https://www.orointe-
purpose Oro City
Cooperative billion gratedcoop.com/products
First Isabela
Php
Cooperative Cooperative Cauayan
4.34 N/A
Bank Bank City
billion
(FICOBANK) http://www.ficobank.com
Perpetual
Help Php
Multi- Dumaguete
Community 3.93 102,961
purpose City
Cooperative billion
(PHCCI) https://www.phcci.coop
Metro South Php
Cooperative
Cooperative Makati-II 3.86 N/A
bank
Bank billion https://www.mscb.com.ph
Bureau of Jail
Management
Php
and Penology Multi- Quezon City-
3.5 17,509
Multi-purpose purpose I
billion
Cooperative
(BJMP MPC) http://www.bjmpmpc.org
National
Confederation Php
Federation- Quezon City-
of 3.36 N/A
Secondary III
Cooperatives billion
(NATCCO) https://www.natcco.coop
Ayala Multi- Php
Multi-
Purpose Makati-I 3.24 37,221 https://www.clim-
purpose
Cooperative billion bs.coop/wordpress
Sacred Heart Php
Multi-
Savings Galimuyod 3.04 60,087
purpose
Cooperative billion https://ayalacoop.com
Sorosoro
Ibaba Php
Multi- Batangas
Development 3.04 31,605
purpose City
Cooperative billion
(SIDC) https://sacredheartcoop.ph
Pangasinan
III Electric Php
Urdaneta
Cooperative Electric 2.8 177,996
City
(PANELCO billion
III) https://sidc.coop
1 Cooperative
Insurance
System of the
Php
Philippines Insurance- Quezon City-
2.57 N/A
Life and Secondary III
billion
General
Insurance (1
CISP) http://panelco3.ph
How many cooperatives

CDA Chairman Orlando Ravanera reports there are 18,581 cooperatives across the
Philippines, comprising 11.6 million members.
• Luzon: 10,234 cooperatives | 5,820,642 members
• Visayas: 3,608 cooperatives | 2,339,115 members
• Mindanao: 4,739 cooperatives | 3,395,748 members
With a total of Male 5,042,995 and Female 6,512,510.
Revised Standard Chart of Accounts for Cooperatives
ACCOUNT
ACCOUNT TITLE DEFINITION
CODE
Statement of Financial Position
are resources controlled by the cooperative as a result of
10000 Asset Accounts past events and from which future economic benefits are
expected to flow to the cooperative
Cash and other assets that are reasonably expected to be
realized in cash or intended for sale or consummation within
11000-12000 Current Assets
twelve months after the balance sheet date, or the normal
operating cycle of the business.
Cash and short term, highly liquid investments, and held to
meet short-term cash commitments rather than for
investment or other purposes.
Cash and Cash
11100-11180
Equivalents
An investment normally qualifies as a cash equivalent only
when it has a short maturity of, say, three months or less
from the date of acquisition.
This account refers to money (bills and coins) still in the
11110 Cash on Hand
possession of the cooperative’s custodian.
Checks & Other Cash This account refers to dated checks, postal money order
11120
Items (COCI) (PMO) and demand drafts awaiting deposits.
This account refers to money deposited in the bank under the
11130 Cash in Bank name of the cooperative, i.e. savings, current, time deposits,
and combo-account.
This account refers to money deposited in the federations to
Cash in Cooperative
11140 which they are affiliated, i.e. savings and time deposits
Federation
which are unrestricted and readily available when needed.
This account refers to limited amount of money set aside for
11150 Petty Cash Fund small expenditures such as stationeries, supplies and fares
maintained under an imprest system.
This account refers to the amount set aside to cover
11160 Revolving Fund disbursements for recurring transactions maintained under
an imprest system
This account refers to the reasonable amount of money set
11170 Change Fund aside by BOD to change bigger amount of bills to smaller
denomination or coins or vise versa.
This account refers to the money placed in the ATM manned
11180 ATM Fund
by the cooperative.
11200- These refer to financial assets with fixed or determinable
11300 Loans And Receivables payments that are not quoted in an active market.
Loans Receivable – This account refers to the outstanding balance of loans

11210
Current granted to the members which are not yet due.
This account refers to outstanding balance of loans to
Loans Receivable – Past
11220 member-borrowers not paid on installment due dates using
Due
the Portfolio at Risk (PAR).
This account refers to receivables from the member
Loans Receivable
11230 borrowers whose loan accounts were restructured upon full
Restructured
payment of interests due.
Loans Receivable – This account refers to receivables from member borrowers
11240
Loans in Litigation under legal action
Unearned Interests and This account refers to interest on loans deducted in advance
11241 and presented as a contra asset account.
Discounts
Allowance for This account refers to the cumulative amount of probable or
11242 impairment losses arising from non-collection of loans.
Probable Losses – Loans
This account refers to the amount due from member, non-
Accounts
member patrons and/or ATM providers resulting from
Receivables Trade
11250 services rendered and sales of related goods /merchandise
– Current
which are expected to be collected within the credit terms set
by the Board of Directors.
Accounts This account refers to total trade receivables due from
Receivables Trade members and/or non-member patrons which remain unpaid
11260
– Past Due beyond the credit terms set by the BOD.
Accounts This account refers to total Trade receivables from the

Receivables Trade member & non-member patrons whose accounts were
11270
– Restructured restructured upon full payment or settlement of interests due
and/or penalties.
Accounts This account refers to total trade receivables from member
Receivables Trade and non-member patrons under legal action. The receivables
11280
– in Litigation shall remain in this account during the pendency of the legal
proceedings and until fully settled.
Allowance for
Probable Losses –
This account refers to the cumulative amount of probable or
11281 Accounts Receivable
impairment losses arising from non-collection of accounts.
Trade
Installment
This account refers to the amount due from members and
Receivables –
11290 non-member patrons for sale of merchandise/goods on a
Current
deferred payment or installment plan.
Installment This account refers to amount due from members and non-
Receivables – Past member patrons for sale of merchandise / goods on a
11300
Due deferred payment or installment plan which remain unpaid
beyond the terms set by the cooperative.
This account refers to amount due from members and non-
member patrons for sale of merchandise / goods on a
Installment Receivables –
11310 deferred payment or installment plan that were restructured
Restructured
upon full payment or settlement of interests due and/or
penalties.
Installment
This account refers to amount due from members and non-
Receivables – in
11320 member patrons for sale of merchandise / goods on a
Litigation
deferred payment or installment plan under legal action
This account refers to the unrealized portion of the gross
11322 Unrealized Gross Margin
margin on goods sold on installment basis.
This account refers to amortized cost of the receivables
11330 Sales Contract Receivable arising from installment sale of assets acquired in settlement
of loans/obligations.
Allowance for Probable
Losses This account refers to the cumulative amount of probable or
11331 – Sales Contract impairment losses that may arise from noncollection of
Receivables payment on Sales Contract Receivables.
Accounts This account refers receivables other than accounts

11340 Receivable – nontrade receivable trade. Examples of this, income tax receivable,
and insurance claims receivable, etc.
Allowance for Probable This account refers to the cumulative amount of probable or
11341 Losses – Accounts impairment losses that may arise from non-collection of
Receivable on trade payment on Accounts Receivable on trade
Advances to
This account refers to duly approved cash advances for
Officers,
official business to officers, employees and members,
11350 Employees and
subject to liquidation in accordance with the policy of the
Members
cooperative.
This account refers to receivables arising from sale of
11370 Finance Lease Receivable
goods/property under finance lease agreement.
Allowance for This account refers to the cumulative amount of impairment
11371 Impairment – Finance loss that may arise from non-collection of payment on
Lease Receivable Finance Lease Receivables.
Other Current This account refers to transactions/adjustments not classified
11380
Receivables under any of the receivable accounts mentioned.
These are financial instruments excluding cash and cash
11400 Financial Assets equivalents, loans and receivables, investment in associates,
investment in joint ventures, and investments in subsidiaries
This account refers to financial assets with quoted price in
Financial asset at fair
11410 the form of debt or equity securities that are held for trading
value through profit or loss
purposes
This refers to financial assets in the form of debt or equity
securities which are not quoted in an active market and are
11420 Financial asset at cost
expected to be realized in cash within one year from the
reporting period (net of impairment)
These are assets: (a) held for sale in the ordinary course of
business; (b) in the process of production for such sale; or c)
11500 Inventories
in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
This account refers to cost of goods on hand out on
11510 Merchandise Inventory consignment and in-transit, available for sale at the end of
the accounting or reporting period.
This account refers to fair value of inventories previously
11520 Repossessed Inventories sold but regained as a result of the default of the payments
due from members/customers.
Spare
This account refers to spare parts/materials and other goods
11530 Parts/Materials &
on hand and in transit
Other Goods
Inventory
This account refers to cost of raw materials on hand and in

11540 Raw Materials Inventory
transit at the end of the accounting or reporting period.
Work in Process This account refers to cost of job or work in process on hand
11550
Inventory at the end of accounting or reporting period.
This account refers to cost of completed job or work orders
Finished Goods
11560 and goods manufactured/ produced/ processed on hand and
Inventory
ready for sale at the end of accounting or reporting period.
Inventory Agricultural This account refers to the harvested product of the biological
11570
Produce assets measured at cost.
Equipment for Lease This account refers to cost of equipment on hand intended
11580
Inventory for lease purchase agreement.
This account refers to allowance set aside to provide for
Allowance for impairment
11590 impairment losses on inventory. This is a contra account to
– Inventory
Inventories.
This account refers to living animals and plants that are
11600 Biological Assets
intended for sale. This shall be measured at cost.
This account refers to any other current assets not classified
12000 Other Current Assets above which are expected to be realized, consumed or used
within the year.
This account refers to value-added tax due from or paid by a
VAT registered/registrable entity on the importation or local
12110 Input Tax
purchases of merchandise/goods or services including lease
or use of property.
An amount of Value Added Tax withheld by a cooperative
12120 Creditable VAT supplier arising from sale or procurement of goods/services
from a taxable institution/cooperative.
Refers to an amount that is withheld by cooperative supplier
Creditable Withholding
12130 arising from sale or procurement of goods/services from a
Tax
taxable institution/cooperative
This account refers to the amount paid in advance to
12140 Deposit to Suppliers
suppliers.
12150 Unused Supplies his account refers to cost of supplies on hand.
Assets Acquired in
This refers to non-real properties acquired in settlement of
12160 Settlement of
loans and receivables through foreclosure.
Loans/Accounts
Accumulated
Depreciation and This account refers to the total amount of depreciation and
Impairment Assets impairment assets acquired in settlement of loans/accounts
12161
Acquired in Settlement of that are set up periodically and charged against the current
loans/accounts operations.
This account refers to payments made in advance, to be
12170 Prepaid Expenses amortized within one (1) year (e.g. insurance, interest,
rentals, etc.)
This account refers to current assets not falling in any of the
12200 Other Current Assets
above categories.
13000- All other assets not classified as current to include tangible,
NON-CURRENT
17000 intangible, operating and financial assets of a long-term
ASSETS
nature.
(Excluding cash and cash equivalents, loans and receivables,
Financial Assets Long
13100 investment in associates, investment in joint ventures, and
Term
investments in subsidiaries)
This refers to financial assets in the form of equity securities
which are not quoted in an active market and are expected to
13110 Financial asset at cost
be realized in more than one year from the reporting period
(net of impairment)
This refers to financial assets in the form of debt securities
Financial Asset at
13120 which are expected to be realized in more than one year from
amortized cost
the reporting period (net of impairment)
This account refers to the amount of the cooperative’s
investment in the equity instruments of non-cooperative
13200 Investment in Subsidiaries
subsidiaries (ownership of the more than 50% of the voting
shares)
13300 Investment in Associates investment in the equity instruments of associates.
(Ownership of the 20%- 50% of the voting shares)
Investment in Joint
13400 investment in shares of stocks of joint ventures evidenced by
Ventures
contractual agreement that gives the venturers joint control.
Investment property is property (land or a building, or part
13500 Investment Property of a building, or both) held by the cooperative to earn rentals
or for capital appreciation or both.
This account refers to cost of land that generate income or
Investment Property – capital appreciation or both, not used in production of goods,
13510
Land supply or services nor for administrative purposes or sale in
the ordinary course of business measured at cost.
Accumulated
Depreciation – This account refers to the total amount of depreciation and
13521 Investment impairment on Investment Property – Building that are set
Property-Building up periodically and charged against the current operations.
This account refers to real properties (Land and Building)

Real Properties Acquired acquired by the co-op in settlement of loans and receivables
13530
(RPA) through foreclosure or dacion enpago and/or for other
reasons.
This account refers to the cumulative amount of impairment
Accumulated Depreciation
13610 loss incurred on RPA, which shall be accounted for in
– RPA
accordance with PAS 36
These are tangible assets that:(a) are held for use in the
Property, Plant and
14000 production or supply of goods or services, for rental to
Equipment
others, or for administrative purposes.
This account refers to the acquisition cost of the land used
14110 Land
for its main operation plus all incidental costs .
Land This account refers to the cost of improvements after land
14120 Improvements acquisitions such as fencing, roadways, landscaping, etc,
that are subject to depreciation over their useful lives.
Accumulated
Depreciation– This account refers to the total amount of depreciation/
14121 Land impairment loss on land improvement that are set up
Improvements periodically and charged against the current operations.
This account refers to the acquisition/construction cost of the

Building and
14130 building and its improvement on the land owned and used
Improvements
for its main operation.
Accumulated
Depreciation– This account refers to the total amount of depreciation/
14131 Building and impairment cost on building that are set up periodically and
Improvements charged against the current operations
Building on This account refers to the cost of construction of new

Leased/Usufruct building on a leased/usufruct land and shall be depreciated
14140
Land over the estimated life of the building or the lease/usufruct
term whichever is shorter.
Accumulated
Depreciation–
This account refers to total amount of depreciation on
Building on
14141 Building on Leased/Usufruct Land based on cost that are set-
Leased/Usufruct
up periodically and charged against the current operations.
Land
This account refers to cost of property and equipment used

14150 Utility Plant in the generation of power/water and other utilities for
operation and/or for distribution to consumers.
Accumulated This account refers to total amount of depreciation cost on
14151 Depreciation – Utility Utility Plant that are set up periodically and charged against
Plant the current operations
Property, Plant &
Equipment -Under Finance This account refers to the cost determined by the fair or
14160
Lease present value of leased Property, Plant and Equipment.
Accumulated
Depreciation – Property, This account refers to total amount of depreciation on PPE –
14161 Plant & Equipment – under Finance Lease that are set-up periodically against
Under Finance Lease current operations.
This account refers to the cost of materials, labor and other

14170 Construction in Progress construction related costs incurred on unfinished
construction project, prior to occupancy/actual use.
Accumulated
Depreciation – Property, This account refers to total amount of depreciation on
14171 Plant & Equipment – Construction in Progress that are set-up periodically against
Under Finance Lease current operations.
This account refers to the cost of movable (furniture),

immovable (fixtures) properties and office / production/
Furniture, Fixtures &
store equipment used in the ordinary course of business such
14180 Equipment (FFE)
as but not limited to desks, chairs, cabinets, computers,
vaults, including incidental expenses incurred in acquiring
them, up to the time they are received and ready for use.
This account refers to the total amount of depreciation/
Accumulated impairment cost on Furniture, Fixture and Office Equipment
14181
Depreciation FFE that are set up periodically and charged against the current
operations
Machineries, Tools and This account refers to the cost of machineries, tools and
14190 Equipment equipment owned and used in producing goods, providing
services and repairs.
Accumulated
Depreciation - This account refers to the total amount of depreciation
14191 Machineries, on machineries, tools and equipment that are set-up
Tools and Equipment periodically and charged against the current operations
Kitchen, Canteen This account refers to the cost of equipment, cutleries and
& Catering Equipment/ other tools used in food preparation and serving including
14200
Utensils incidental expenses incurred in acquiring them up to the time
they are received and ready for use.
Accumulated
This account refers to the total amount of depreciation on
Depreciation – Kitchen,
14201 Kitchen, Canteen and Catering Equipment/Utensils that are
Canteen & Catering
set-up periodically against current operations.
Equipment/Utensils
This account refers to the cost of equipment owned and used
Transportation
14210 in transporting goods, services or personnel such as
Equipment
motorcycles, pick-ups, vans and other vehicles.
AccumulatedDepreciation
This account refers to the total amount of depreciation/
– Transportation
14211 impairment cost on Transportation Equipment that are set up
Equipment
periodically and charged against current operations
This account refers to the cost of linens and the uniforms
14220 Linens and Uniforms used by employees and staff including costs of tablecloth,
curtains, blankets and similar items.
Accumulated This account refers to the total amount of depreciation on
14221 Depreciation – Linens and linens and uniforms that are set-up periodically against
Uniforms current operations.
This account refers to the cost of nursery and greenhouse
14230 Nursery/ Greenhouses facilities and equipment used for seedling production and
growing of vegetables
Accumulated Depreciation This account refers to total amount of depreciation and
14231 – Nursery/ Greenhouse impairment on nursery and greenhouse that are set-up
periodically and charged against the current operations.
This account refers to the cost of improvements on premises
Leasehold Rights & under operating lease including cost of rights and concession
14240
Improvements rights which are subject to amortization over the useful life
of the property or the term of the lease, whichever is shorter.
Other Property,
Plant and This account refers to Property, Plant and Equipment not
14290
Equipment falling in any of the above categories
15000 Biological Assets

Biological Assets – This account refers to cost of breeding stock/working
15100
Animals animals owned by the cooperative.
Accumulated
This account refers to total amount of depreciation and
Depreciation – Biological
15110 impairment on Biological Assets – Animals that are setup
Assets – Animals
periodically and charged against the current operations.
This account refers to living plants that produces seeds,
15200 Biological Assets – Plants
seedlings, flowers or fruits.
Accumulated
Depreciation This account refers to total amount of depreciation and
15210 Biological Assets impairment on BA – plants that are set-up periodically and
– Plants charged against the current operations.
Identifiable non-monetary asset without physical substance

16000 Intangible Assets for which future economic benefits are expected to flow
back and amortized over the estimated useful life.
This account refers to the cost of acquiring the right and
16100 Franchise privilege to sell goods and services using the particular
trademark/ brand /logo of the franchisor.
This account refers to the cost of acquiring privilege or right
16200 Franchise Cost granted by Franchising Agencies to a cooperative to exercise
an exclusive service to a particular route or area.
This account refers to the right for the exclusive use or
16300 Copyright distribution of products or services acquired from an author
or artists.
This account refers to the exclusive rights granted by the
state to a patentee (the inventor or assignee) for a fixed
period in exchange for the regulated, public disclosure of
16400 Patent
certain details of a device, method, process or composition
of matter which is new, inventive, and useful or industrially
applicable
Other Non-
Assets which do not fit into any of the preceding
17000 Current Assets
classifications
This account refers to the cost of acquisition or development
17100 Computerization Cost of computer programs and other software excluding
upgrading of system.
This account refers to restricted funds set aside for funding
17200 Other Funds and Deposits of Statutory and other reserves such as Retirement,
Members’ Benefit and Other Funds
Due from Head This account refers to receivables from Head Office/
17300 Office/Branch/ Satellites Branches/ Satellites and should be closed at the end of the
reporting period.
Deposit on
This account refers to deposits on containers subject to
17400 Returnable Containers
refund upon its return.
This account refers to assets not falling in any of the above
17900 Miscellaneous Assets
categories.
LIABILITIES -present obligation of the cooperative arising from past events, the
20000 settlement of which is expected to result in an outflow from the cooperative of resources
embodying economic benefits.
Obligations reasonably expected to be settled within
the normal business operating cycle, that: (a) is due within
21000- CURRENT
12 months after balance sheet date; (b) is held primarily for
23000 LIABILITIES
the purpose of being traded; (c) does not have an
unconditional right to defer settlement of the liability for at
least 12 months after balance sheet date.
This account refers to deposits made by members that can be
21100 Deposit Liabilities
withdrawn at a given period.
This account refers to deposits made by members that can be
21110 Saving Deposits
withdrawn anytime at the option of the member depositors.
This account refers to deposits made by members for a
21120 Time Deposits specified period of time and withdrawable at a
predetermined date.
This account refers to obligations/indebtedness to suppliers
21200 Accounts Payable Trade
for purchase of goods and services intended for sale
This account refers obligations/ indebtedness to suppliers for
Accounts Payable Non-
21220 purchase of goods and services not intended for sale (e.g.
Trade
supplies, periodicals and etc.)
This account refers to the indebtedness to financial
institutions, federations, unions, or individuals payable
21230 Loans Payable – Current
within the accounting/fiscal period and the current portion
of the Long-Term Loans Payable.
Finance Lease Payable – This account refers to the current portion of PPE acquired
21240
current under Finance Lease Agreement.
This account refers to amount set aside for payment of
21250 Due to deployed members salaries & other statutory obligations to deployed members
of labor service cooperatives.
This account refers to amount received from
21260 Cash Bond Payable members/employees as guarantee for the use of equipment/
accessories / future losses, shortages, and damages.
This account refers to Payables not falling in any of the
21290 Other Payables
above categories.
This account refers to expenses that have been incurred but
21300 Accrued Expenses
not yet paid as of the end of accounting period.
This account refers to amount collected from members in
Due to Regulatory payment for registration, licensing, supervision, etc.
21310
Agencies with Regulatory Agencies
SSS/ECC/ Phil health This account refers to amounts withheld from the
/ Pag-ibig Premium compensation income of employees representing their
21320 Contributions premium contributions to SSS, Philhealth and Pag-ibig
Payable agencies and the corresponding share of the cooperative as
employer.
This account refers to amounts withheld from the
SSS/Pag-Ibig Loans
21330 compensation income of employees representing their
Payable
payment of loans to SSS and Pag-ibig agencies.
This account refers to all taxes withheld as prescribed by
21340 Withholding Tax Payable
law.
This account refers to value added tax on the sale of taxable
21350 Output Tax
merchandise/ goods and services.
21360 VAT Payable This account refers to excess of output tax over input tax.
This refers to amount of unpaid tax due from cooperative
21370 Income Tax Payable
arising from taxable income.
This account refers to other accrued expenses that cannot be
21390 Other Accrued Expenses classified under any of the preceding accrued expenses
accounts.
Other Current
21400
Liabilities
This account refers to deposits from customers for
21410 Deposit from Customers
containers, food or other services subject to refund.
This account refers to advance payment for delivery of
21420 Advances from Customers
goods or services.
School Program
This account refers to an amount allocated as support
21430 Support Fund Payable
mechanism to school program, which remains unpaid.
This account refers to liability to members for interest on
Interest on Share Capital
21440 share capital, which can be determined only at the end of
Payable
fiscal year
This account refers to liability e to members for patronage
21450 Patronage Refund Payable refund, which can be determined only at the end of fiscal
year.
Due to Union This account refers to the accumulated amount set aside to
21460 /Federation (CETF) be credited to the Union/Federation where the cooperative is
a member.
Other Current This account refers to other liabilities that cannot be
21490 Liabilities classified under any of the preceding current liability
accounts.
NON-CURRENT
22000 Liabilities payable beyond one year
LIABILITIES
This account refers to the indebtedness of the cooperative to
22100 Loans Payable financial institutions, federations, unions, or individuals
payable beyond one year.
This account represents the interest deducted from the loan
Discounts on Loans
22200 value/principal to be amortized over the term of the loan
Payable
using effective interest method.
The account refers to deferred payment of interest on share
Revolving Capital
22300 capital and patronage refund, which should be agreed upon
Payable
in the General Assembly.
This account refers to the accumulated retirement benefit
costs charged against the income of the cooperative over the
22400 Retirement Payable
expected remaining working lives of participating qualified
employees.
Finance Lease This account refers to the future lease payments for Property,
22500 Payable – Long Term Plant and Equipment acquired under finance lease, Net of
the Current Portion.
Other Non-Current
The totality of all other liabilities that cannot be classified
23000 Liabilities
after any of the preceding liability accounts.
This account refers to the unused portion of the
23110 Project Subsidy Fund
donation/grant for training, salaries and wages, etc.
This account refers to funds for special purposes such as
Members’ Benefit and member’s benefits, including Kilusang Bayan Guarantee
23120
Other Funds Payable Fund (KBGF) / Cooperative Guarantee Fund (CGF) not part
of the distribution of net surplus.
Due to Head The account is used to record inter-office transactions in the
23130
Office / Branch/ books of Head Office (HO)/Branch/ Satellite/
Satellite Department within the cooperative and should be closed at
the end of the accounting period.
This account refers to the 99% accumulated guarantee fund

23140 CSF Guarantee Fund
contributed by member.
Other Non
This account refers to other long-term liabilities not
23190 Current Liabilities
elsewhere classified.
The residual interest in the assets of the cooperative after
30000 EQUITY
deducting all its liabilities.
30100 MEMBERS’ EQUITY This account refers to ownership Interest of members in the
cooperative.
30110 Subscribed Share Capital- This account refers to the share capital subscribed by regular
Common members payable over a certain period of time
30120 Subscription This account refers to the total unpaid subscribed share
Receivable – Common capital of regular members.
30130 Paid-up Share Capital – This account refers to collected subscribed share capital –
Common common
30131 Treasury Shares Capital - This account refers to common shares bought back and held
Common in treasury. This account should only be used in the event
that there are no members who are willing to buy the shares
of outgoing members.
30210 Subscribed Share Capital- This account refers to the preferred share capital subscribed
Preferred by member (regular and associate) payable over a certain
period of time.
30220 Subscriptions Receivable This account refers to the total unpaid subscribed preferred
Preferred share capital of regular and associate
members
30230 Paid-up Share Capital- This account refers to collected subscribed preferred share
Preferred capital
30231 Treasury Shares Capital - This account refers to preferred shares previously issued and
Preferred reacquired and held in treasury, but not retired or cancelled,
and maybe re-issued to existing members.
30300 Deposit for Share Capital This account refers to amount paid by the members for
Subscription capital subscription equivalent to the value of less than one
share and additional subscriptions in excess of authorized
capital pending approval of the amendments to increase
Authorized Share Capital. This may also include the amount
of share capital paid but not yet covered by subscription
contract. Subsidiary ledgers shall be maintained for this
account.
30400 Undivided Net Surplus This account refers to the accumulated net surplus of the
cooperative that is allocated and distributed at the end of
each reporting period in accordance with Article 86 of RA
9520. This account is used for Interim Financial Statement
Presentation only.
30500 Net Loss This account refers to temporary account to record losses in
operations incurred during the reporting period. Net loss for
the year shall be charged against reserve fund, subject to
provisions of Article 86 of RA 9520
30600 Donations/ Grants A donation and grant is assistance by another entity in the
form of a transfer of resources to a cooperative in return for
past or future compliance with specified conditions relating
to the operating activities of the cooperative.
30700 Statutory Funds Mandatory funds established/set up in accordance with
Article 86 of RA9520
30710 Reserve Fund This account refers to the amount set aside annually for the
stability of the cooperative (equivalent to at least 10% of net
surplus) and to meet net operating losses in its operation. A
corresponding fund should be set up either in the form of
time deposit with local banks or government securities.
30720 Coop. Education & This account refers to the amount retained by the cooperative
Training Fund which shall not be more than ten percent (10%) of the net
surplus for the training, development and other similar
cooperative activities geared towards the growth of the
cooperative movement. Half of the amount allocated for the
fund annually shall be spent by the cooperative for their own
education and training purposes, while the other half may be
remitted to a union or federation chosen by the cooperative.
30730 Community Development This account refers to the fund set aside from the net surplus
Fund which should not be less than 3% for projects and/or
activities that will benefit the community where the
cooperative operates.
30740 Optional Fund This account refers to fund set aside from the net surplus not
exceeding 7%. It shall be used for acquisition of land and/or
building, machinery and equipment, replacement fund for
PPE, members’ benefits, and other necessary funds.
30800 Revaluation Surplus This account refers to the appraisal increase in the
revaluation of land which are allowed subject to
the guidelines issued by the Authority.
STATEMENT OF OPERATIONS
The income that arises in the course of the ordinary activities
of a cooperative and is referred to by a variety of names
40000 REVENUE
including sales, service income, commission, interest,
dividends, royalties and rent.
40100 Income from Credit All income derived from Credit Operations
Operations
40110 Interest Income from This account refers to income earned and collected by the
Loans cooperative from the interest charged on the loans granted to
their members.
40120 Service Fees This account refers to the fees collected by the cooperative
for loan processing/ servicing/collecting.
40130 Filing Fees This account refers to the fees collected by the cooperative
upon filing of loan applications by memberborrowers.
40140 Fines, Penalties, This account refers to the fees imposed and collected by the
Surcharges cooperative on the delayed amortization payments of the
member-borrower.
40200 Income from Service All income derived from service operations
Operations
40210 Service Income This account refers to the amount collected for various
services rendered.
40220 Interest Income from This account refers to interest earned arising from lease of
Lease Agreement assets under Finance Lease Agreement
40300 Income from Marketing/ All income derived from marketing / consumers / production
Consumers/Production operations
Operations
40310 Sales This account refers to invoice price of all merchandise/

goods sold or services rendered whether paid or on account.
(segregate sales from members and nonmembers)
40320 Installment Sales This account refers to sales to members and nonmembers of
merchandise/goods on a deferred payment plan or
installment plan
40330 Sales Returns & This account refers to deductions from the invoice price due
Allowances to returns resulting from damage, defects or errors in the
kind or quality of goods delivered/sold to
customers/members.
40340 Sales Discounts This account refers to deductions allowed to customers for
settlement/prompt payment of their accounts
40400 Other Income Income received by the cooperatives other than its main
operation.
40410 Income/ Interest from This account refers to the income earned by the cooperatives
Investment/ Deposits from deposits in banks/other institutions and investments
made in financial institutions/government/ business
organizations. This shall include interest income derived
from the deposit of statutory funds in the bank until utilized.
(refer to the accounting manual)
40420 Membership Fee This account refers to the amount collected from the
cooperative’s members-applicants upon approval of their
membership in the cooperative.
40430 Commission Income This account refers to an amount received by the cooperative
from supplier as incentives.
40440 Realized Gross Margin This account refers to income earned by the cooperative
from the installment sales of real estate.
40450 Miscellaneous Income This account refers to all other income earned by the
cooperative for which no specific account has been set up.
This may include winnings from raffle, contest, competition
resulting from income generating activity/fund raising.
50000 Cost of Goods Sold The cost/value of commodity sold as determined using
physical or perpetual inventory system.
51000 Cost of Goods Sold This account refers to account used to record cost of finished
goods sold under perpetual inventory system.
51110 Purchases This account refers to cost of merchandise/goods bought
whether paid or on account under periodic inventory system.
51120 Raw Material Purchases This account refers to gross cost of materials purchased for
the production of food for sale, for catering and canteen
operations (using periodic inventory system)
51130 Purchase Returns & This account refers to deductions from invoice cost due to
Allowances damage, defects, or errors in the kind or quality of goods
bought.
51140 Purchase Discounts This account refers to reductions in the cost of product
bought due to the early payment.
51160 Freight In This account refers to the cost of transporting merchandise/
goods from the place of purchase to storage area. Should
form part of the Cost of Good Available for Sale.
51170 Direct Labor This account refers to cost of labor directly attributed to the
production of goods.
51180 This account refers to all cost other than raw materials and
Factory/Processing direct labor used in the production/manufacturing/ process
Overhead of goods including royalties and production garments
51200 Inventory Loss This account refers to reduction in inventory due to spoilage,
breakage and variance between inventory per books and per
count
60000 Cost of Services All costs incurred that are directly related to the generation
of power, water and other services (A separate subsidiary
shall be maintained)
61000 Project Management Cost This account refers to all costs incurred that are directly
related to the projects and contract entered into by clients
like manpower servicing, construction and other
professional works, including consulting fee.
61110 Labor and Technical This account refers to amount incurred for technical and
Supervision other services ancillary to the generation of service income.
61210 Salaries & Wages This account refers to amount incurred for services rendered
by employees directly involved in providing services
including overtime pay
61230 Employees’ Benefits This account refers to benefits given to employees directly
involved in providing services other than salaries and wages
such as but not limited to 13th month pay, bonus,
allowances, and subsistence allowances including human
resource development.
61240 SSS, Philhealth, Pag-Ibig This account refers to the cooperative’s share in the
Contribution employees’ contribution to SSS, Philhealth and Pag-ibig.
61250 Retirement Benefit The cost of providing retirement benefits to employees
Expenses directly involved in providing services. The cost of
retirement benefits is recognized as an expense in the periods
during which the services are rendered.
61280 Professional and This account refers to amount incurred for professional and
Consultancy Fees consultancy services in relation to the generation of service
income
61370 Supplies This account refers to expenses incurred for various supplies
used for service activities.
61410 Power, Light and Water This account refers to the cost of electricity and water
incurred in the generation of service income.
61430 Insurance This account refers to expenses incurred to insure the
equipment used in providing services.
61440 Repairs and Maintenance This account refers to expenses incurred in the repair and
maintenance of machineries and equipment used in the
delivery of service except major repairs that prolong the life
of the asset.
61450 Rentals This account refers to expenses incurred for the
building/office spaces or facilities leased by the cooperative
for the generation of service income
61490 Gas, Oil & Lubricants This account refers to This account refers to amounts
incurred for gasoline, fuel and lubricants for cooperative’s
machineries and equipment used in the delivery of service.
61520 Miscellaneous This account refers to all other expenses incurred by the
cooperative not classified under any of the specified
expenses account.
61530 Depreciation tear of building, machineries and equipment used in the
delivery of service.
61540 Amortization This account refers to amount provided for amortization of
intangible assets.
62000 Generation Cost Cost incurred in the generation of power, water and other
utilities.
62120 Power Cost This account refers to cost of power whether purchased or
generated for distribution.
including overtime pay.
62240 SSS, This account refers to the cooperative’s share in the
Philhealth/ECC/Pag-Ibig employees’ contribution to SSS, Philhealth and Pag-ibig.
Contribution
62250 Retirement Benefit This account refers to the cost of providing retirement
Expenses benefits to employees directly involved in providing
services. The cost of retirement benefits is recognized as an
expense in the periods during which the services are
rendered.
expenses account.
income.
62410 Power, Light and Water This account refers to cost of electricity and water incurred
in the generation of service income.
62430 Insurance This account refers to expenses incurred to ensure the
equipment used in providing services.
of the asset.
for the generation of service income.
62490 Gas, Oil & Lubricants This account refers to amounts incurred for gasoline, fuel
and lubricants for cooperative’s machineries and equipment
used in the delivery of service.
62530 Depreciation This account refers to amount provided for wear and tear of
building, machineries and equipment used in the delivery of
service
intangible assets.
62590 Impairment Loss This account refers to difference between the carrying value
and the recoverable value of the assets directly used in the
delivery of services
63000 Distribution Cost Cost incurred in the distribution of power, water and other
services.
63120 Power Cost This account refers to cost of power whether purchased or
generated for distribution.
including overtime pay.
63240 SSS, Phil health, This account refers to the cooperative’s share in the
ECC, Pag-Ibig employees’ contribution to SSS, ECC, Philhealth and Pag-
Contribution ibig.
Expenses benefits to employees directly involved in providing
services. The cost of retirement benefits is recognized as an
rendered.
income.
63390 Training/ Seminars This account refers to an amount incurred for officers and
staff directly involved in providing services for attending
trainings and seminars/conducting seminars including
expenses related thereto after exhausting the CETF.
63410 Power, Light and Water This account refers to cost of electricity and water incurred
in the generation of service income.
63420 Travel and Transportation This account refers to amount incurred for fares, toll fees,
board and lodging, per diem, and meal allowance of officers,
employees directly involved in providing services while on
official travel.
equipment used in providing services including that of the
employees who are directly involved in generating service
income.
of the asset.
for the generation of service income.
63470 Communication This account refers to amount incurred for transmission of
messages such as courier, telephone, e-mail, fax, internet,
messengerial, and all other means of communication used in
the delivery of service.
63490 Gas, Oil & Lubricants This account refers to amount incurred for gasoline, fuel and
lubricants for cooperative’s machineries and equipment used
in the delivery of service.
expenses account.
building, machineries and equipment used in the delivery of
service.
intangible assets.
63590 Impairment Loss This account refers to difference between the carrying value
and the recoverable value of the assets directly used in the
delivery of services.
64000 Transport Service Cost All costs incurred that are directly related to Service Income
and Passenger’s Fee. (A separate subsidiary shall be
maintained).
64140 Driver’s This account refers to cost incurred for payment to drivers
/Conductor’s (control mechanism will be developed to recognized actual
gross receipts) – subject to 10% withholding tax.
Fees
64150 Vehicle This account refers to expenses incurred for licensing,
Registration and registration, dropping, filing, supervision, accreditation fees,
penalties, and other fees. (This account is used for
Licensing Expenses cooperatively owned units only).
64160 Toll Fees This account refers to amount paid for toll fees (SA)
64170 Incidental Expenses This account refers to expenses incurred to cover the cost of
expenditures which are not anticipated / expected such as
accidents not covered by insurance.
equipment used in providing transport services.
maintenance of transport facility and equipment except
major repairs that prolong the life of the asset.
64490 Gas, Oil & Lubricants This account refers to amounts incurred for gasoline, fuel,
and lubricants for cooperative’s vehicles and for day-to-day
operation.
property and equipment.
70000 EXPENSES -Gross outflows of economic resources and incurrence of
obligations during the ordinary activities of the cooperative
when those outflows result in decreases in surplus.
71000 Financing Cost Expenses related to borrowings of funds used for operations.
71100 Interest Expense on This account refers to interest incurred on borrowings.
Borrowings
71200 Interest Expense on This account refers to the interest incurred on savings and
Deposits time deposits of both regular & associate members
71300 Other Financing Charges This account refers to service charges, filing fees and other
fees for borrowings incurred by the cooperative.
72000 Selling/ Marketing Cost Costs incurred in the promotion/distribution and selling of
products and services of the cooperatives.
72180 Product/ Service This account refers to expenses incurred in the marketing
Marketing and Promotion and promoting the coop. products and services (expenses
Expenses related to pricing, promotion, place packaging).
72190 Product/ Service This account refers to expenses incurred in the development
Development of coop. products and services (expenses related to research
and development).
72200 Product Research This account refers to expenses incurred in the enhancement
of existing products.
by employees including overtime pay.
72220 Incentives and Allowances This account refers to amount incurred for services rendered
by sales, part-time and on-call employees.
2230 Employees Benefits This account refers to benefits given to employees other than
salaries and wages such as 13th month pay, bonus,
allowances, termination, or separation pay and others,
termination or separation pay and others.
72240 SSS, Phil health, This account refers to the cooperative’s share in the
ECC, Pag-ibig Premium employees’ premium contribution to SSS, ECC, Philhealth
Contribution and Pag-ibig.
72250 Retirement Benefit This account refers to This account refers to the cost of
Expenses providing retirement benefits to employees for their services
rendered. The cost of retirement benefits is recognized as an
rendered.
72260 Commission Expenses This account refers to amount paid to sales personnel and
others as incentives.
72270 Advertising & Promotion This account refers to expenses incurred for advertising and
promotion of cooperatives’ products.
72280 Professional Fees This account refers to fees and related expenses incurred for
professional services rendered.
72290 Royalties This account refers to the amount provided to authors for the
right to the reproduction of books and related items that is
made available for sale.
72310 Store/ Canteen/ Kitchen This account refers to expenses incurred for stationery and
and various supplies used in store/canteen/kitchen and catering
Catering Supplies for selling/trading operations.
Expenses
72320 Breakage & Losses on This account refers to expenses incurred for lost or breakage
Kitchen Utensils of kitchen/utensils after deducting accumulated
depreciation.
72330 Freight Out/Delivery This account refers to amount incurred for the delivery of
Expenses goods/services including traveling expenses of sales
personnel from the place of production/store to buyer
including lubricants.
72340 Spoilage, This account refers to expenses incurred for unavoidable
Breakage And Losses decay, breakage, expiration or losses of goods beyond the
normal condition.
72350 Storage/ This account refers to expenses incurred for temporary
Warehousing Expenses housing of merchandise/goods.
72410 Power, Light and Water This account refers to cost of electricity, water and/or
gasoline/diesel, oil and lubricants used for generators which
are incurred in business operations.
72420 Travel and Transportation This account refers to amount incurred for fares, gasoline
and fuel for service vehicles borrowed or rented by the
cooperative, toll fees, board, and lodging, per diem and meal
allowance of employees while on official travel.
assets/properties/employees of the cooperative and the
bonds of accountable officers and employees.
maintenance of each facility and equipment except major
repairs that do not prolong the life of the asset but increase
capacity and safety measures.
72450 Rentals This account refers to amount incurred for the lease or rental
of the building/office space; the utilized portion of the rent
paid in advance.
72460 Taxes, Fees and Charges This account refers to expenses incurred for taxes, fees and
charges due to government entities, both national and local.
72470 Communication This account refers to the amount incurred for courier
(letters), telephone, cell phone, e-mail, fax, internet,
mesenterial, and all other means of communication.
72480 Representation This account refers to expenses incurred related to
accommodating visitors and guests on official business.
lubricants for service vehicles, delivery vans and others.
72520 Miscellaneous Expenses This account refers to all other expenses incurred by the
expenses account.
property and equipment and amortization of intangible
assets.
intangible assets.
72550 Amortization of Leasehold This account refers to amount provided for amortization of
Rights leasehold rights and improvements.
& Improvement
72660 Periodicals, Magazines & This account refers to amount incurred for subscription or
Subscription purchase of periodicals, magazines and others.
73000 Administrative Cost Expenses incurred related to general administration and
management of the cooperative/enterprise
by employees including overtime pay.
73230 Employees Benefits This account refers to benefits given to employees other than
salaries and wages such as but not limited to 13th month pay,
bonus, allowances, and subsistence allowances including
human resource development.
73240 SSS, Philhealth, This account refers to the cooperative’s share in the
ECC, Pag-ibig employees’ premium contributions to SSS, ECC, Philhealth
and Pag-ibig.
Premium
Contributions
Expenses benefits to employees for their services rendered. The cost
of retirement benefits is recognized as an expense in the
periods during which the services are rendered.
73270 Officers’ This account refers to amount incurred for services rendered
Honorarium and by directors, committee members and officers.
Allowances
73300 Litigation Expenses This account refers to expenses incurred in judicial and
quasi-judicial cases including incidental costs where the
coop is the complainant or respondent as authorized by the
BODs.
73360 School Program Support This account refers to an amount allocated by the
cooperatives as support mechanism to school program such
as school food supplementation of identified undernourished
cases and administration contingency fund, outreach
program and school development, etc. (applicable to school-
based cooperatives for canteen activity only)
73370 Office Supplies This account refers to expenses incurred for office and
various supplies used in the administration and conduct of
business operation.
73380 Meetings and Conferences This account refers to amount incurred for the conduct of/
attendance to meetings and conferences.
73390 Trainings/ Seminars This account refers to amount incurred for officers,
directors, employees, and members, for attending trainings
and seminars including all expenses related thereto after
exhausting the CETF (local). For purposes of analysis,
amount incurred may be classified as to the recipient.
73400 Certifications and This refers to expenses incurred for certifications and
Recognitions recognitions acquired from non-government agencies.
73410 Power, Light & Water This account refers to cost of electricity and water incurred
in business operations.
73420 Travel & Transportation This account refers to amount incurred for fares, toll fees,
board and lodging, per diem and meal allowance of officers
and employees and members while on official travel.
assets/properties of the cooperative, premium of insurance
for officers and employees and bonds of accountable officers
and employees.
73440 Repairs & Maintenance This account refers to expenses incurred in the repair and
maintenance of each facility and equipment except major
repairs that prolong the life of the asset.
73450 Rentals This account refers to expenses incurred for building/office
spaces or facilities leased by the cooperative.
73460 Taxes, Fees and Charges This account refers to expenses incurred for taxes, fees, and
charges due to government entities, both national and local.
73470 Communication This account refers to amount incurred for courier
(letters), telephone, cell phone, e-mail, fax, internet,
messengerial, and all other means of communication.
73480 Representation This account refers to expenses incurred related to
accommodating visitors and guests on official business.
lubricants for cooperative’s vehicles and for day-to-day
operation
73500 Collection Expense This account refers to amount, including commissions,
incurred as incentives in effecting the collection of loans of
the cooperative.
73510 General Support Services This account refers to expenses incurred for employing the
services of security, janitors, messengers, and other support
services.
73520 Miscellaneous Expense This account refers to all other expenses incurred by the
expenses account.
73530 Depreciation This account refers to allocation of cost over the estimated
life of Property, Plant and Equipment.
intangible assets.
73550 Amortization of This account refers to amount provided for amortization of
Leasehold Rights and leasehold rights and improvements.
Improvement
73560 Probable Losses on This account refers to allocation or provision for estimated
Loan /Accounts/ losses arising from probable uncollectible loans/accounts/
Installment Receivables installment receivables.
73590 Impairment Losses This account refers to the difference between the carrying
value and the recoverable value of an asset.
73600 Bank Charges This account refers to bank fees and other charges excluding
cost of checkbooks.
73610 General Assembly This account refers to expenses incurred in the conduct of
Expenses regular/special general assembly.
73620 Members Benefit This account refers to expenses incurred in providing for
Expenses additional members’ benefits and social services
73630 Affiliation Fee This account refers to amount incurred to cover membership
or registration fees and annual dues to a federation or union.
73640 Social & This account refers to expenses incurred by the cooperatives
Community Service in its social community involvement including solicitations
Expense and donations to charitable institutions.
73650 Provision for CGF This account refers to amount set up at the option of the
(KBGF) cooperative for the provision of CGF (KBGF). This is not
part of the Statutory Fund.
80000 Other Items – Subsidy/ Special transactions arising from the operations of the
Gain (Losses) cooperatives.
80100 Project Subsidy This account refers to an amount deducted from Project
Subsidy fund to subsidize project expenses. This shall
appear in the statement of operation as a contra account to
subsidized project expenses
80200 Donation and Grant This account refers to an amount deducted from Donation
Subsidy and Grant to subsidize depreciation charges on property and
equipment funded by donation and grant.
80300 Optional Fund Subsidy This account refers to an amount deducted from Optional
Fund to subsidize depreciation charge of property and
equipment funded by Optional Fund
80400 Educational Fund Subsidy This account refers to amount deducted from Education and
Training Fund to subsidize depreciation charge on property
and equipment funded by Education and Training Fund.
80500 Subsidized Project This account refers to portion of the Project Subsidy Fund
Expenses expended for training, salaries and wages and other activities
subsidized by donations and grants and optional fund.
81100 Gains or Losses on Sale of This account refers to gains or losses derived from the sale
Property & of acquired assets/properties and equipment
Equipment
81200 Gains or Losses in This account refers to the cumulative gains (losses) arising
Financial Assets through from change in the fair value and from the disposal of
Profit and Loss financial assets through profit and loss
81300 Gains or Losses in This account refers to income earned, or losses incurred
Financial Assets at cost from the disposal of financial assets at cost.
81400 Gains or Losses on RPA This account refers to income earned, or losses incurred
from the disposal of RPA
81500 Gains or Losses on assets This account refers to income earned, or losses incurred
acquired in settlement of from the disposal of Assets acquired in settlement of loans.
loans
81600 Gains or Losses on Sale of This account refers to income earned, or losses incurred
Repossessed Item from the sale of repossessed items.
81700 Gains or Losses from This account refers to gains or Losses arising from
Foreign Exchange retirement or conversion of foreign currency exchange
Valuation rate fluctuation per actual transaction
82000 Prior Years’ Adjustment This account refers to adjustments on transactions affecting
income and expenses incurred in the previous year(s) which
are taken up on the current year.
Overview of the Co-operative Movement

A co-operative society is a commercial organization in which members work together to achieve
common goals on a voluntary and democratic basis. Each for all and all foreach is the foundation
rule of cooperative society.
In other words, a co-operative society is a form of business organization established by the
voluntary association of a certain number of persons with a spirit of service in order to achieve
self-help through mutual help, and managed in a democratic manner. The main forms of co-
operative societies are
a) Consumer co-operative societies
b) Producer co-operative societies
c) Marketing co-operative societies
d) Savings and credit co-operative societies
The co-operative movement in Kenya began in 1908, when a group of European farmers created
the Lumbwaco-operative society. The Legislative Assembly enacted a co-operative ordinance in
1945, allowing Africans to form cooperative societies. The co-operative Societies Act of 1966
replaced this ordinance after Independence. Kenya's cooperative movement has achieved great
strides. The Ministry of Co-operative Development and Marketing oversees all co-operative
societies in Kenya.
Accounting Principles are also used to keep track of cooperative accounts. There are various
characteristics of cooperative accounting that differ from those of a commercial firm. The main
characteristics of cooperative accounts are the focus of this chapter.
DEFINITION OF CO-OPERATIVE ACCOUNTING
It is the application of financial accounting principles, concepts, and policies to co-operatives in
order to determine their financial situation, ensure viable operations, promote responsibility, and
manage their financial resources efficiently.
Requirements of the Society in relation to Co-operative Accounting

According to the co-operative society Act of 2004 section 25 notes that:
1. It is a duty of every co-op society to keep proper books which shall:
a) Be prepared in accordance with international accounting standards
b) Which shall reflect the true and fair state of the co-op society affairs
c) Which shall explain co-op society transactions including:
i. All sums of money received and paid by the co-op society and the reason there to
ii. All sales and purchases of goods and services by the co-op society
iii. All assets and liabilities of the co-op society
2. The books of accounts shall be kept at the registered office of the co-op society oral such
other place as been determined by the society and shall at all times available for inspection
by members, supervisory committee and the auditors.
3. The financial statement of co-operative society includes:
a) Income statement
b) Appropriation account
c) Statement of financial position
d) Cash flow statements
Accounting concepts are broad basic assumptions which underline the preparation of periodic
financial accounts of business enterprises. The basics concepts are
a) Going concern concept- continuity of the business
b) Prudence concept- not anticipating profits until it has been realized
c) Accrual concept – not anticipating incomes until when they are received and expenses
when they have been incurred but not when they are paid out
d) Dual concept- every transaction carried in a business has two effects i.e. double entry
concept.
e) Consistency concept- a certain known order is followed
Accounting policies are the specific accounting rules that a corporate enterprise chooses and
follows regularly as being relevant to its circumstances, such as depreciation and stock valuation
policies.
Accounting principles are standards or guidelines that aid in preparation of financial statements
to achieve the set objectives of understanding, reliability and comparability.
For proper presentation of financial statements 4 basics principles of accounting are used and they
include:
a) Historical cost principle
General accounting accepted principle requires that most assets and liabilities be accounted for
and reported on the basis of acquisition i.e. items recorded at cost price
b) recognition principle
Revenue are realized when goods and services are exchanged for cash Revenue are considered
earned when an entity has substantially accomplished what it must do to be entitled to the benefits
represented by revenue
c) Full disclosure principle
This is the decision of what information to report to the general public
d) Matching principle
Cost incurred in generating of income should be accounted for at the same time the services were
given.
DEVELOPMENT OF CO-OPERATIVE ACCOUNTING

Before 1968, each co-op society had its own accounting system. The government stepped in and
devised a suitable accounting system for cooperative societies. As a result of this intervention,
several guides that provide instructions for methodical co-op operations and management were
developed and published. organization. Co-op accounting has become a need in assuring proper
management of cooperative society funds and assets, and standardization of accounting systems
was unavoidable.
The process of standardization was gradual until 1970, when the commissioner of co-op
development created the relevant manual. By standardization, we mean that similar co-op societies
should have a common way of keeping records and bookkeeping, particularly ledgers.
OBJECTIVES OF CO-OPERATIVE ACCOUNTING
The main objective is to ensure that co-op society are managed efficiently by ways of:
a) Keeping and maintaining proper books of accounts
b) Safeguarding co-op society resources and funds as well as those of members
This main objective is directed towards improvement of economic condition of members by

utilization of resources contributed by them. It also ensure members are paid as high as possible
in form of income and dividends. This can be done by:
a) Assisting the members to produce more by providing necessary inputs and training to
them.
b) Improving and maintaining the quantity and quality of the produce before it reaches the
factory
c) Reducing expenditure
d) Through investment, members leave part of their money due to them after sale of
produce in the form of shares to the society. This money should then be invested by the
society in viable projects. However, this should be done in line with the relevant
circular on policy and investment issued by the commissioner of co-op development.
IMPORTANCE OF CO-OPERATIVE ACCOUNTING

To staff
a) Once trained, the staff acquire necessary knowledge and skills that enable them to record
and maintain effectively the books of accounts
b) Once trained, the staff can be located to any department of the society to discharge book
keeping and other accounting functions
c) When systems are properly put in place, staff don’t have to spend a lot of time consulting
colleagues on what to do
d) Because of standardization, specific training to man and operate the co-op accounting
system can be offered to the staff at a central point.
e) Staff can readily account for their day to day activities and therefore justify their continued
employment.
f) The staff are able to work more efficiently in their area of specialization.
To co-operative society
a) Proper accounting is put in place and therefore the assets and liabilities of the society are
properly safeguarded.
b) Effective decision making is maintained
c) There is cost saving in auditing fee.
d) The management can justify continued members investment in the co-op society.
e) The co-op is able to meet the legal requirements especially those under co-op society Act
To members
a) It assists the members to produce more by providing the necessary input and training to
them
b) Members are well informed of their co-op transactions on timely basis
c) Members can justify i.e. rationalize the undertaking of certain co-op investment which
affect their economic welfare.
d) Each member can get a fair share of bonus or dividends in proportion of shares invested
and volume of business transacted
e) Members are happy to see that their affairs are run in a fair and transparent manner and
therefore minimize organizational politics
To trainee
➢ Co-op accounting is highly specialized in that, one can only learn it in aco-op training
course and apply it precisely in co-op society
➢ There are managers and qualified accountants who have no orientation on the subject do
not fully understand what the subject entails and they are faced with some problems in the
process of preparing the books of accounts
➢ The training thereby enables one to be useful within the co-op movement as one can fulfill
roles and obligations within the co-operative society
➢ Co-operative accounting is important to the trainee because:
a) Working as a co-op accounting trainer or co-op accounting system
implementation consultant
b) Acting as a financial adviser to any co-op society
c) Being an asset and liability management consultant in a co-op organization
d) By taking a further course in accounting especially in co-op accounting and
auditing
As a result, in today's extremely competitive economic world, thorough study and interest in the
subject, along with appropriate abilities, will considerably boost the trainee's success.
STANDARD ACCOUNTING SYSTEM

The adoption of similar accounting techniques in recoding and accounting systems is known as a
standardized accounting system. It indicates that all societies of the same sort or handling the same
kind of similar output utilize identical paperwork and books of accounts. The technique for
preparing the budget and presenting statistics is identical, making comparisons easy.
OBJECTIVES OF STANDARD ACCOUNTING SYSTEM
The following are the major objectives of a standardized accounting system in cooperatives:
a) To protect the safety of members' funds and assets
b) To improve the cooperative society's accountability and transparency.
c) To promote consistency in bookkeeping and information comparability across society.
d) To ensure effective management of cooperative resources.
e) To make effective transaction recording and accounting bookkeeping easier.
f) The systems should aid in proper cash, stock, product, and fixed asset control.
g) To enable the co- op's management to use accounting system information as a tool for
efficient management.
h) h.) To maintain a regular and up-to-date control over the co-operative's transaction and to
record these transactions in such a way that the account books accurately reflect the co-
operative's financial condition.
COMPONENTS OF STANDARDIZED ACCOUNTING SYSTEM

Three essential components make up the Standardized Accounting System. By components, we
mean the items that help construct a comprehensive accounting system. They give accountants
guidelines for recording procedures, trial balance preparation, budgeting, data analysis, and
presentation.
These are the components:
▪ The accounting plan (process) that involves account numbering
▪ Procedure for budget preparation
▪ Member Transactions (M.T.) systems such as
M.T. Coffee, M.T. Dairy, M.T. Pyrethrum, M.T. Cotton, M.T. Sugar, M.T. Fish, M.T. Handicraft,
and M.T. SACCO
ADVANTAGES OF STANDARDIZED ACCOUNTING SYSTEM

▪ Allows a cooperative organization to successfully manage its economic and financial
resources.
For each activity, the transactions of society are recorded. Budgeted and actual outcomes are
compared at the conclusion of each quarter to measure how well a society is working.
▪ Enables education and training easier
We employ standardized documents and forms that are used by co-operative societies and unions
while educating members of staff in the field and at the Co-operative College of Kenya. When the
same pre-printed and uniform materials are used to teach accounting, it is also more effective.
▪ Allows for job rotation less expensive.
It takes less time to introduce a new member of staff to the accounting department, especially if
they have previously worked in a cooperative group. Current employees are also expected to use
their prior experience to the new task.
▪ It reduces the amount of typing work since the forms are pre-printed
The same account names are presented in the same order on both the budget and trial balance
forms, for example. In fact, when creating an economic report, the time required is significantly
decreased.
▪ Allows cooperative organizations to create statistical data that is consistent.
Cooperatives will be able to produce uniform, reliable, and latest data as a result of standardization.
Management can use these data and information to make rapid and timely decisions.
▪ Makes auditing an easy
Auditing work becomes easier since the accounting documentation and processes are standardized,
resulting in clarity and neatness in the recording and presentation of accounting information. The
auditor can then comment on how the various activities performed.
DISADVANTAGES OF STANDARDIZED ACCOUNTING SYSTEM

These are some of them:
▪ Cost
The total cost of obtaining standardized material is extremely expensive, particularly for smaller
and weaker cooperatives. For small societies, pre-printed paperwork and forms may be
prohibitively expensive.
▪ The stationery's availability
Only one company created the documentation and forms (Kenya National Federation of Co-
operative Ltd.). This means that if the company does not produce or becomes insolvent, the society
may face shortages.
▪ Total training costs
Small co-operative societies cannot afford to pay for their employees' additional training; hence
they lack skilled personnel.
Reasons for Audit
Securing an annual audit of the cooperative’s financial records is the responsibility of the board of
directors. Because the board acts as the trustee of the cooperative’s assets, it is responsible for
safeguarding, auditing, and appraising the cooperative’s financial resources. The audit is a
fundamental part of this trustee responsibility, and the cost of the audit should be considered a
normal business expense.
The first step in fulfilling the obligation of the board is a complete, double-entry bookkeeping
system; second is monthly financial statements; and the third is an annual audit of the accounting
records and supporting document.
Five specific reasons why the board must provide for an annual audit of the cooperative’s
accounting records:
1. Prevent deliberate misstatement of fact. Misstatement of fact may occur for many reasons,
such as to hide poor decisions or to cover fraud.
2. Ensure the judgment decisions are not unduly biased in favor of management. It is the
board’s duty to develop and implement the accounting system, and management’s duty to
maintain the books.
3. Ensure records are dependable. Accounting methods should be accurate as well as
consistent. An audit will identify shortcomings in accuracy and/or consistency. Procedures
lacking consistency fail to be dependable for purposes of analysis and decision making.
4. Ensure generally accepted accounting principles (GAAP) have been consistently followed.
5. Ensure that the disclosure is complete. In many cases, what is not reported is often more
important than what is reported. An audit will help the board of directors ensure that full
disclosure of the financial well-being of the cooperative business has been made.
How the Audit Committee Functions

An audit committee must have four important concerns:
1. Selection of the auditor
2. Determining the scope of the audit
3. Exercising diligence
4. Ability to ask the hard questions
In preparation for the audit,

First, the auditor will prepare a contract called an “engagement letter” that will describe the
responsibilities of the auditor, the audit committee and other cooperative employees. The
committee should review the letter and resolve any questions prior to engagement.
Second, the audit committee must adopt an agenda so that it is in a position to find out what
accounting issues are of concern to management and/or the outside auditor.
Third, the audit committee agenda should include a procedure for the analysis of the internal audit
and internal audit controls so it can judge the effectiveness of the internal audit staff.
Fourth, the agenda should include participation in defining the scope of the work that the outside
auditors are to perform as a result of the assessment of the internal controls and internal audit.
Fifth, the agenda should cover the annual review of the management and corporate code of
conduct, as well as a review of its charter.
Perhaps the most important function is that the audit committee diligently discharges its function
to ensure the integrity of the issuers’ financial statements through perseverance, earnestness,
attention to detail and thoroughness. To do this, the audit committee should be proactive in
analyzing information it receives from management and have a full understanding of the key
accounting issues for that particular company.
Audit committee members must devote sufficient time to obtain an adequate understanding of
what the company’s financial statements represent. Members of the audit committee must have
enough interest and time to be in a position to consult with outside counsel and experts, if
necessary.
What the Cooperative Audit Should Include?

An evaluation of the balance sheet, income statement, and statement of cash flows should be
included in the cooperative audit. These financial statements include the underlying documents
that support the information, as well as verification of accounts receivable and payable balances
with cooperative customers and a review of inventory quality, quantity, valuation, records, and
procedures. The auditor will also verify the existence of recorded securities and analyze
justification for judgment decisions, estimates, and board of directors meeting minutes for policy
changes and management instructions.
Effective Audit Committees

Members want effective control of finances. The higher the cash inflow, the greater the need for
an effective audit committee. An effective audit committee is an essential tool in overseeing the
financial health of a cooperative. Some areas of common audit committee oversight include the
following partial list:
• Key areas of business and financial risk
• Code of ethics at the top
• Internal controls and systems
• External audit activity and relationships
• Periodic financial reporting
• Internal audit activity
• Key personal selection for critical financial/control positions
Audit process
MEMORANDUM CIRCULAR NO. 2017-05
Series of 2017
SUBJECT: GOVERNANCE AND MANAGEMENT AUDIT REPORT FOR COOPERATIVES
Section 1. Title
This Memorandum Circular shall be known as the GOVERNANCE AND MANAGEMENT

AUDIT REPORT FOR COOPERATIVES (PERFORMANCE AUDIT REPORT).
Section 2. Legal Basis
1. Article 53 of R.A. 9520, otherwise known as the Philippine Cooperative Code of 2008, to
wit:
“Every cooperative shall draw up regular reports of its program of activities, including those in
pursuance of their socio-civic undertakings, showing their progress & achievements at the end of
every fiscal year. xxx”
1. Article 80 of the same Code states:
“Cooperatives registered under this Code shall be subject to an annual financial, performance,
and social audit. xxx”
Rule 8, Section 2 (b) of the Implementing Rules and Regulations of R.A. 9520 specifies
Performance Audit Report as one of the mandatory reports to be submitted to the Authority.
Section 3. Definition of Terms
1. Governance and Management Audit Working Paper – A working paper used by the Audit
Committee or an internal auditor to analyze / evaluate the performance of a cooperative in
a format prescribed by the authorities.
2. Governance and Management Audit Report – Refers to a summary analysis / evaluation
report conducted by a cooperative based on the results of audits using means specified by
the authorities.
Section 4. Purpose
The purpose of the Governance and Management Audit Report is to establish the existence of the
documents necessary for each co-operative to operate and manage its business. In particular, the
report works as follows:
1. regulatory and supervisory tool of CDA in programming the roadmap of developmental

intervention for management and governance of cooperatives; and
2. management tool of cooperative to identify problem areas in its governance and
management practices.
Section 5. Coverage
This policy applies to all registered co-operatives, regardless of type or category, except for small
co-operatives who have the opportunity to use and / or submit reports.
Section 6. Governance and Management Audit Working Paper
This document serves as a working paper for conducting performance audits maintained and
maintained by co-operatives.
The Governance and Management Audit Working Paper must be completed by an internal auditor
or audit committee in coordination with the head of the co-operative's key departments to indicate
the existence of the requested document. The "Remarks" section is whether the document is not
the property of the correct person, is found to be incomplete in terms of content, or is not properly
signed by the responsible person. You need to show the decisions made in the document.
There are two (2) major components in the working paper. The 1st component is the Governance
Reports while the 2nd component is the Management Report/Records.
Section 7. Governance and Management Audit Report
The presentation of the Governance and Management Audit Report (see Annex A – Format
Template) shall at least include the following parts:
1. Basic Information – presents the general information about the cooperative.
2. Executive Summary – presents the overview of the objectives and scope of the audit, over-
all rating and rating per component, and the summary of the key observations and
conclusions together with the key recommendations identifying the strong points and main
areas which need to be addressed by the cooperative.
3. Objectives and Scope of the Audit – presents the objectives set and brief scope of audit
including the actions chosen for audit and broad details of the procedures carried out.
4. Observations /Findings – presents a clear and logical analysis of the identified strong points
or problems confronted by the cooperative within the auditing period. The report should
provide sufficient details of the observations and findings to substantiate the points given
5. Recommendation and Conclusion – This part should be clear and precise on the need for
appropriate action to address the issue. The recommendation shall form as basis for any
follow-up audit, evaluation or examination.
Section 8. Period of Submission and Sanctions
The Governance and Management Audit Report (see Annex B – Sample Report) shall be submitted
by the cooperative to the CDA not later than 120 days from the end of each Calendar Year as
attachment to the CAPR.
The cooperative who failed to submit the report shall not be issued Certificate of Compliance
(COC) or may also be subjected to a procedural process of cancellation.
Section 9. Consolidation, Evaluation and Submission of Governance and Management

Audit Reports
The Supervision and Examination Unit (SEU) of every CDA Extension Offices shall be
responsible in the consolidation, evaluation and analysis of the Governance and Management
Audit Report. After the sixty (60) days deadline of submission by the cooperatives, the
consolidated evaluation and analysis shall be submitted by the SEU Extension Offices to the
Extension Office Directors for possible intervention by the other operating units of CDA.
The summary report of analysis and intervention shall be submitted to SEU Central Office through
the Executive Director.
Section 10. Repealing Clause
Memorandum Circular No. 2013-15, Series of 2013 dated February 25, 2013 Re: Performance
Report Standards for Cooperatives is hereby repealed accordingly.
Section 11. Effectivity
This Memorandum Circular shall take effect upon approval of the CDA Board of Administrators
and fifteen (15) days after its publication in the Office of National Administrative Register
(ONAR).
Approved by the CDA Board of Administrators on August 15, 2017 per BOA Resolution No. 213
Series of 2017.

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Exploration Phase Production Phase

Locate Evaluate Establish Mine Beneficiate Transport Market Divest

Development Phase Closure Phase

Total of 50 operating metallic mines, which 24.7 Billion pesos

Future Digital and

Locate Evaluate Establish Mine Beneficiate Transport Market Divest

What is the term? 2 years 4 years for non-metallic mineral exploration;

✓ Proof of technical competence

✓ Proof of financial capability

Area Status and

Publication, posting and radio Payment of Occupation and

(Checking of mandatory acceptance

- Comprehensive and strategic environmental management plan to

- Required to be prepared for any project that significantly affects the

Community Development - Mandatory requirement for the acceptance of application for EP

- Conducted to determine the possible impacts of a proposed project on

- Certifies that the project will generate minimal effects on the

- Stated at cost less accumulated amortization and impairment losses

Area selection Target Identification Target testing Resource evaluation

Physical exploration Feasibility analysis

• Results of exploration A competent person must have a minimum of the 5 years

He/she responsible for the preparation of PMRC report

Applies to mineral resources only-does not apply to:

PFRS 6 is not applicable PFRS 6 is applicable PFRS 6 is not applicable

There is a choice of policy:

• Initial Recognition - At Cost

• If an impairment test is required, any

- Consider the following risks:

Design Procurement Construction Construction

Production During Mine Development

Locate Evaluate Establish Mine Beneficiate Transport Market Divest

∙ Extraction of minerals from the Earth through

∙ Developed ones and minerals are being

• Start of Life-of-Mine (LOM)

• Recognition of revenue from sales of minerals and

• Recognition and measurement of depletion (mine and mining

• Recognition of and measurement of mine product

Cost and expenses

Classification of Costs and Expenses

Cost of Directly attributable to production/sales

Indirect expenses (e.g., administrative,

• Ore Transport Permit

income recognized as a result of the earlier completion

damages incurred as a result of a contractual

Excise tax on mineral products

Royalty Royalty to indigenous peoples or indigenous cultural communities

Key aspects of IFRS 15 that are particularly relevant mining companies:

Asset recognized from the cost to obtain or fulfill a contract

1 amount is higher than the recoverable

The recoverable amount is the higher of the

2 asset’s fair value less costs of disposal and its

• Events and information received after the reporting

Market capitalization is less than the

Cash Flows Discount Rate

Other income and expenses No basis/parameters of discount rate provided

Net working capital

Net working capital

Consideration of facts and circumstances

Book value of debt-to-equity ratio Mathematical Accuracy

No access to Bloomberg, Reuters, and

Contractors and permittees shall

• The implementation of rehabilitation and

• It is the key strategy used by the mining

> Shall be established by each operating Contractor/Permit Holder as a trust