MODULE 5

Auditing Logistics and Transportation Industry

Overview:

Transportation is defined as the movement of people, animals, and goods from one location to
another. These modes of transport may include air, rail, road, sea, cable, pipeline and space. This
field is divided into infrastructure, vehicles, and operations. Transport is crucial as it enables trade
and communication between one another, which ultimately establishes civilizations.
The logistics industry can be defined as the science of obtaining, producing, and distributing material
and products to the correct place and in the correct quantities. In a military sense, where it has a
greater use, its meaning also includes the movement of personnel. Logistics includes the process of
planning, implementing, and controlling procedures for the efficient and effective transportation and
storage of goods. This includes services and related information from the point of source to the point
of consumption for the purpose of fulfilling and conforming to customer requirements.

The advancements of new technologies and improved business processes have had an enormous
impact on transforming both the logistics industry and transport industry. Technologies have allowed
real-time monitoring of flow and resources, transparency across multiple points and the seamless
exchange of operational information with key performance indicators that have had a profound
impact on the industry.

In this highly competitive market both information and physical products must move with efficient
speed and at lower cost, paired with improved service. Successful supply chain management and
logistics are often the difference between surviving and flourishing in the current marketplace. Upon
improving the supply chain will see immediate benefits in terms of lower costs and optimized
delivery.
Module Objectives:
 Know the nature and background of the particular specialized industry;
 Learn the overview, statistics, and updates of the specialized industry in the Philippine setting;
 Identify the different audit considerations and trends for the industry.

Nature and Background of Specialized Industry

The logistics industry is much broader than the transportation industry. While transportation focuses
on the movement of goods from one place to the other, the logistics industry implies a broader
spectrum and refers to the whole ‘flow’ management. This includes not only the transportation and
delivery of goods but also the storage, handling, inventory, packaging, and various other aspects.
So, what are the main differences between the logistics industry and the transportation industry?

Transportation is a function within the logistics industry operations. It is focused purely on the
definition and deployment of transportation modes, such as sea, road and air. It is also important to
differentiate between logistics and the supply chain. The supply chain refers to the entire value
chain from the suppliers to the end customer, including after sales services and reverse logistics
(recycling). Types of transportation are as follows:

1. Truck Freight — Road Transportation

2. Ship — Marine Transportation
3. Train — Rail Transportation
4. Plane — Air Transportation
5. Intermodal Transportation

Logistics requires planning, whilst transportation is the mode to execute the planning when
freighting goods from point A to B. They are not the same thing, but transportation is just simply a
part of logistics. When it comes to the logistics industry, logistics executives must make further
decisions beyond the mode of transportation to include:

 Packaging
  Containerization
 Documentation
 Insurance
 Storage
 Importing and Exporting Regulations
 Freight Damage Claims
 Working and collaborating with other executives within the supply chain
 Managing vendors and partners
 Responsible for risk mitigation

Three main directions correspond with the three logistical processes which we are going to focus on
today. These are inbound logistics, outbound logistics, and reverse logistics. The information
about these three supply chain directions is essential to know, especially to people inclined in the
logistics industry. Inbound Logistics refers to the movement of goods between businesses and their
suppliers to cut the definition short. In contrast, Outbound Logistics pertains to the flow of goods
between companies and the end-user/consumer. And Reverse Logistics means that products’
movement from the end-user/consumer back to the manufacturer or reverse supply chain.
The expansion of the global marketplace puts the concept of global logistics into the limelight.
Logistics experts must now manage all of the aforementioned logistics activities within a world-
wide arena spanning a multitude of countries, languages, cultures, governments, and regulations.
Along with this expansion of the marketplace comes the need for global channel intermediaries.

Today's global logistics manager would be familiar with the role of each of the following:

 Foreign freight forwarders—handlers of a myriad of foreign freight services: rate quotes,

vessel chartering, booking of vessel space, handling of documentation and cargo
insurance, tracing and expediting, arranging inland transportation, and providing
translation services.
 Export management companies—suppliers of expertise to those wishing to sell products
overseas but lacking the necessary resources.
 Export trading companies—locaters of overseas buyers. They also handle export
documentation, transportation, and the meeting of foreign government
requirements.
 Customs house brokers—overseers of the movement of goods through customs. They
also ensure that accompanying documents are complete and accurate.
 Ship brokers—sales representatives for ship owners and purchasing representatives
for the shipper.
 Ship agents—local representative of the ship operator that handles the ship's
arrival, berthing, clearance, loading and unloading.
 Export packers—suppliers of export packaging services.
 Port authorities—owner and operator of the port. They provide wharf, dock, and other
terminal facilities at port locations.

Overview, Updates, Statistics of the Specialized Industry in the Philippines

The Freight and Logistics market in Philippines is segmented by Function (Freight Transport, Freight
Forwarding, Warehousing, Value-added Services, Cold Chain Logistics) and by End-User
(Manufacturing & Automotive, Oil & Gas and Quarrying, Agriculture, Construction, Distributive Trade
(Wholesale and Retail Segments - FMCG included) and Other end-users (Pharmaceutical and
telecommunications)).
The Philippines freight and logistics market is expected to grow at a CAGR of around 8.2% during
the forecasted period. Currently, along with the introduction of new web technologies and surging E-
commerce operations, last mile logistics has gained popularity in the Philippines, especially amongst
domestic shipping companies in the country. Many distributions as well as warehousing centers in
the Philippines are turning to technology and robotics to help them increase efficiency, accuracy and
overall productivity in the near future. Also, the Department of Trade and Industry Philippines has
introduced a National logistics master plan which aims at advancing Philippine competitiveness
through the establishment of an efficient transport and logistics sector that will contribute towards a
robust and resilient Philippine economy.

Key Market Trends

“Build, Build, Build Program” – Government Initiative

The World Economic Forum ranks the Philippines 96th of 141 countries for the quality of its
infrastructure. To improve the transport infrastructure. The government set up a long-term scheme to
spend 9 trillion pesos ($177bn) on new infrastructure called “Build, Build, Build” program. The
government is accelerating multiple infrastructure projects under “Build, Build, Build Program” and
among those projects are three bus rapid transits, four seaports, six airports, nine railways and 32
roads and bridges. Moreover, as an initiative of the government to improve the transportation system
in the country, there will be an implementation of the “Public Utility Vehicle Modernization Program
(PUVMP).” 2.2 billion Philippine pesos has been allocated for the transport modernization plan,
which will be used to provide subsidy to drivers and operators who will be buying electric jeepneys,
as well as address the training for drivers. The training will serve as a refresher on the technicalities
of driving, safe measures, and proper etiquette in dealing with passengers.

Booming Express Delivery Market in Philippines

With expanding reach of Internet, the e-commerce industry in Philippines has been on a growth
spurt. About 71% (76 million) of the country’s population are internet users, and 70% of those
internet users are Online shoppers. With the booming e-commerce sector, the need for efficient
goods delivery is increasing. As a result, the Express Delivery market is also booming along with e-
commerce in the region. Express delivery which comprises of services for documents,
mails, parcels and couriers at a premium price for faster delivery times has gained significant
popularity amongst the Filipino population. The express delivery systems have created a door to
door linkage across domestic and international markets and have developed advanced shipment
tracking facilities to cater to the time sensitive needs of the logistics sector.

The infrastructural growth and development in the country over the past few years has
complemented the express delivery market in the country with an escalated preference of business
and consumers to transport goods in shorter amount of time. The Philippines express sector
majorly utilizes two modes of transportation, namely, air and road networks. In the year 2015, road
express systems registered the major share of the express delivery market over air express. One of
the major reasons of the lower share of air express has been the low traffic capacity and a smaller
number of orders for same day delivery due to higher logistics cost relative to reasonable cost
normal delivery/ courier/ parcel services.

For Express Delivery Market DHL was observed as the major player in terms of revenues and was
followed by FedEx. Also, a larger volume of trade has been observed to take place with the
availability of international express delivery services.

Competitive Landscape

The competition in the Philippines freight and logistics market is highly fragmented with presence of
many local and international logistics service providers. Some of the existing major players in the
market include – FedEx, UPS, DHL, Yusen Logistics, XPO Logistics, Lorenzo Shipping
Corporation, TNT, PHL Post, Nippon Express, 2GO Express, JRS Express and Maersk.
Philippine’s logistics and warehousing market has evolved in recent years with increased trade
activities in the country. Sectors such as automotive industry, electronic products, apparel and
accessories, chemicals, and pharmaceuticals with their huge demand for logistics services are
driving the logistics industry in the country.

The latest Logistics Performance Index (LPI), an interactive benchmarking tool created by the World
Bank to help countries identify the challenges and opportunities they face in their
performance on trade logistics and what they can do to improve their performance, ranks the
Philippines 60 th out of 168 countries. The Philippines’ ranking has leaped 11 notches higher than in
2016 because of the government’s efforts to simplify government transactions with the enactment of
the Ease of Doing Business Law and improve the quality of public infrastructures. LRG studies show
that the Philippine Logistics Market is a thriving industry forecasted to have 8.2% to 8.8% growth rate
for the period 2018 - 2024 and projected to be a Php 970 Billion to Php 1 Trillion market by 2023.
LRG’s brief description of the current state of the different logistics service markets in the country
allows for a better understanding of the Philippine Logistics Industry.

Freight Forwarding

21.1% of the transporting storage and establishments are freight forwarding companies. Composed
of the biggest chunk of transporting service in the country, this is largely dominated by road freight
forwarding. Projected to continue to dominate the overall Logistics Market in the Philippines, freight
forwarding is seen to grow further with the Government’s “Build Build Build” (BBB) Program.

Warehouse Market

Second biggest chunk for the Logistics Market is the Warehouse Market. With its strategic location,
right on the edge of Pacific Ocean, the Philippines is one of the most convenient docking locations
for supply routes as it essentially connects many export and import markets of different countries
across the globe. Largest contributors for Warehouse Market are Industrial and Retail warehousing,
as well as E-Commerce companies.

Opportunities for the Logistics and Warehousing Industry

The future looks promising for the country’s Logistics and Warehousing Industry given the country’s
economic numbers - from its stable GDP growth; its active participation in international trade; and,
the boom in specialized industries. There has also been a notable increase in consumer spending
because of a rising middle class, growing outsourcing industry, and OFW remittances.
Due to the growing popularity of the e-commerce market which allows for geographical ease;
eliminates travel time and cost; is available 24/7; and allows for feedback from customers, the
country is seeing an increase particularly in sales of food and beverage, clothing apparel, and
electronics, which is fueling the demand for warehouses and storage facilities expansion.

Another opportunity for the Logistic and Warehousing Industry is the expansion of both local and
international manufacturing companies in Metro Manila’s outskirts like Cavite, Laguna, Batangas,
Bulacan and Pampanga where vast sizes of land are still available and offered at reasonable prices.
Lastly, the government’s P9.2 Trillion infrastructure and transport improvement system are on the
upswing.

The Impact of COVID-19 on the Logistics and Warehousing Industry

The sudden onset of the pandemic has essentially interrupted and unsettled social and economic
activities worldwide. COVID-19 has disrupted the global supply chain and its worldwide effects on
logistics has been significant. Flights and cargos are mostly cancelled or delayed, countries on
Lockdown (or in Quarantine) delay all shipments, unemployment has spiked rapidly, and some
shipping companies have suffered Force Majeure.

But through and beyond COVID-19, LRG remains optimistic that there is a lot of room for growth in
the Philippines’ Logistics and Warehousing Market. While the pandemic has altered short term
growth forecasts for the Philippines’ economy and industries, LRG assumes that mid-term forecasts
will remain unchanged once the COVID-19 pandemic is contained.

Audit Considerations

Industry Challenges:

 COVID 19 pandemic such as flight declines and cancellations, travel bans, maritime fallout
 Maximizing revenues
 Meeting international financial reporting standards requirements
  Managing tax risks
 Managing fraud
 Mergers and acquisitions as facilitator of industry restructuring
 Opportunities in the emerging markets such as automation and blockchain
 Financing transport infrastructure and public private partnerships build-operate-transfer or
leasing agreements.
 Regulatory compliance and framework such as inefficient Custom Clearance Processes
and manual processes.
 Traffic congestions particularly in Metro Manila.

Key Audit Procedures:

Businesses in the transportation industry provide specialized distribution services to clients, including
inbound and outbound logistics. Audit procedures systematically analyze certain elements or records
of a business to ensure that quality, safety, and legal standards are consistently upheld. In the
transportation industry, companies often perform audits for revenue recognition, payroll records,
safety policies, equipment maintenance and legal compliance. Understanding the different audit
procedures employed in this industry can help you to keep your own transportation business running
efficiently, while staying on the right side of legal regulations.

1. Revenue Recognition Principles

2. Payroll Audits
Transportation companies can employ a range of non-salaried employees, such as truck drivers who
are paid a set rate per mile driven or employees paid on an hourly basis with overtime. Payroll audits
can be especially beneficial for companies that pay hourly or on a piece-rate scale, to ensure that all
employees have been paid fairly and accurately for the work they performed. Payroll audits in the
transportation industry involve systematically analyzing mileage records and hourly time sheets
against payment records, looking for discrepancies between earnings and actual payments. If a
payroll audit finds major discrepancies, it can reveal potential errors or fraud in the accounting
system.

3. Safety Policy Audits

Safety is of paramount importance in the transportation industry, for legal as well as practical
reasons. It can be beneficial to audit a transportation company's safety policies and
procedures, including vehicle inspection procedures, disaster response plans and incident report
policies, to ensure that safety plans and procedures remain relevant and effective over time. Safety
audits analyze all documentation related to policies and procedures, as well as combing through
previously filed incident reports to ensure that policies and procedures are actually being carried out.
A safety audit can compare safety plans to actual accidents and identified hazards to determine how
effective a safety policy truly is in practice.

4. Physical Equipment Audits

As service providers, transportation companies rely on their equipment to generate income and drive
profitability. Thus, it can be beneficial to conduct physical audits of productive equipment such as
trucks, trailers, refrigerated storage facilities and loading machinery. Physical audits not only ensure
that all equipment on the books is present and accounted for, but they can also audit the safety,
repair and usage records of each piece of equipment to prevent damage to over-used equipment.
Audits can identify vehicles and equipment that may need to be replaced or taken out of use for
repair. Also consider PPE impairment

5. Legal Compliance Audits

Transportation companies operate in a highly regulated industry. As such, compliance audits can be
an important activity to perform at least once per year. Legal compliance audits can ensure that
safety policies, equipment standards, accounting records and financial reporting remain in line with
state and federal mandates. Compliance audits can ensure that all vehicles maintain current
emissions tests, for example, and that accounting records comply with generally accepted
accounting principles.

The logistics audit can be framed by asking below given basic questions to any organization.

1. Are current logistics objectives consistent with current corporate, marketing and production
strategies?
2. How is the company performing with respect to customer requirements and preferences?
3. What is the true total cost of the Logistics function? And how do those costs compare with
others in the same industry or market segments?
4. Is the company using its Logistics resources and capacity effectively?
5. Is the company managing its material flow effectively through the supply chain?
6. Are the information systems and technologies meeting the needs of the users, the
business, and the consumers?
 7. How should the company plan proactive measures in reducing the cost by
optimizing the supply chains and by reducing the inventories?
8. How the present order cycle time is addressing the customer satisfaction as far
as lead time is concerned?
9. How to optimize the manufacturing operations?
10. How can we switch over to pull process from the present push process?
11. How to develop component vendors to avoid long distance buying?
12. How to react to the competition as far as innovative distribution strategies?
13. How can one optimize the resources and reduce the administrative costs?
14. What are the areas one can look into outsourcing to reduce the cost and
increase the efficiency levels?

Assessments:

1. State the nature and background of the specialized industry.

2. What are the relevant statistics, and updates of the specialized industry in the Philippine
setting?
3. Identify the different audit and accounting considerations and trends for the industry.
4. Look for at least 2-3 audited financial statements of companies under the specialized
industry in the Philippines and list down your observations from audit report to the
financial statements.