AUDITING ELECTRONIC

COMMERCE INDUSTRY
PRE4

BRANDON LEIF BIBONIA, CPA

 LESSON OBJECTIVES

• KNOW THE NATURE AND BACKGROUND OF THE LOGISTICS AND TRANSPORTATION 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
OVERVIEW
➢ ALTHOUGH TRADITIONAL COMMERCE IS STILL PRESENT IN THE PHILIPPINE MARKET, E-
COMMERCE HAS SIGNIFICANTLY PENETRATED THE COUNTRY BY STORM. IN A COUNTRY LIKE
THE PHILIPPINES, GOING DIGITAL IF YOU ARE A BUSINESS OWNER IS BENEFICIAL, AS MOST
CONSUMERS ARE INTERNET-SAVVY
➢ IN THE LAST DECADE, THE NUMBER OF INTERNET USERS IN THE PHILIPPINES HAS SURPASSED
OTHER ASIAN COUNTRIES. ACROSS THE GLOBE, FILIPINOS ARE ONE OF THE LARGEST
POPULATIONS USING THE INTERNET, SPENDING AT LEAST AN AVERAGE OF 10 HOURS A DAY
ON THE WEB
➢ IT TELLS A LOT ABOUT THE APPETITE OF ONLINE CONSUMERS, AND A LARGE PART OF THEM
GRAVITATE TO PLAY VIDEO GAMES AND SEARCH FOR FASHION TRENDS AND MAKE-UP.
➢ SALES THROUGH E-COMMERCE HAVE QUICKLY ACCELERATED IN 2020 BECAUSE OF THE LONG
LOCKDOWN PERIODS IN THE PHILIPPINES
➢ ACCORDING TO APPAREL AND FOOTWEAR E-COMMERCE PLATFORM, ZALORA, OVER NINE
TENTHS OF FILIPINO INTERNET USERS SEARCHED FOR GOODS AND SERVICES TO PURCHASE
DURING THE LOCKDOWN PERIOD THAT BEGAN IN MARCH 2020
➢ EVEN BEFORE THE PANDEMIC, E-COMMERCE WAS RAPIDLY EXPANDING IN THE PHILIPPINES,
MOSTLY DRIVE BY ONLINE MARKETPLACES. HOWEVER, IN COMPARISON TO OTHER
COUNTRIES, THE PHILIPPINES IS STILL LAGGING IN TERMS OF E-COMMERCE EXPANSIONS
NATURE AND BACKGROUND
• ECOMMERCE (OR ELECTRONIC COMMERCE) IS THE BUYING AND SELLING OF GOODS (OR
SERVICES) ON THE INTERNET. IT ENCOMPASSES A WIDE VARIETY OF DATA, SYSTEMS, AND
TOOLS FOR ONLINE BUYERS AND SELLERS, INCLUDING MOBILE SHOPPING AND ONLINE
PAYMENT ENCRYPTION
• MOST BUSINESSES WITH AN ECOMMERCE PRESENCE USE AN ECOMMERCE STORE AND/OR AN
ECOMMERCE PLATFORM TO CONDUCT ONLINE MARKETING AND SALES ACTIVITIES AND TO
OVERSEE LOGISTICS AND FULFILLMENT.
 TYPES OF E-COMMERCE BUSINESS MODELS

• BUSINESS TO CONSUMER (B2C) - B2C E-COMMERCE IS THE MOST POPULAR E-COMMERCE

MODEL. BUSINESS TO CONSUMER MEANS THAT THE SALE IS TAKING PLACE BETWEEN A
BUSINESS AND A CONSUMER, LIKE WHEN YOU BUY A RUG FROM AN ONLINE RETAILER.
• BUSINESS TO BUSINESS (B2B) - B2B E-COMMERCE REFERS TO A BUSINESS SELLING A GOOD
OR SERVICE TO ANOTHER BUSINESS, LIKE A MANUFACTURER AND WHOLESALER, OR A
WHOLESALER AND A RETAILER. BUSINESS TO BUSINESS E-COMMERCE ISN’T CONSUMER -
FACING, AND USUALLY INVOLVES PRODUCTS LIKE RAW MATERIALS, SOFTWARE, OR PRODUCTS
THAT ARE COMBINED. MANUFACTURERS ALSO SELL DIRECTLY TO RETAILERS VIA B2B
ECOMMERCE.
 TYPES OF E-COMMERCE BUSINESS MODELS

• DIRECT TO CONSUMER (D2C): DIRECT TO CONSUMER E-COMMERCE IS THE NEWEST MODEL

OF ECOMMERCE. D2C MEANS THAT A BRAND IS SELLING DIRECTLY TO THEIR END CUSTOMER
WITHOUT GOING THROUGH A RETAILER, DISTRIBUTOR, OR WHOLESALER. SUBSCRIPTIONS ARE
A POPULAR D2C ITEM, AND SOCIAL SELLING VIA PLATFORMS LIKE INSTAGRAM, PINTEREST,
FACEBOOK, SNAPCHAT, ETC. ARE POPULAR PLATFORMS FOR DIRECT-TO-CONSUMER SALES.
• CONSUMER TO CONSUMER (C2C): C2C E-COMMERCE REFERS TO THE SALE OF A GOOD OR
SERVICE TO ANOTHER CONSUMER. CONSUMER TO CONSUMER SALES TAKE PLACE ON
PLATFORMS LIKE EBAY, ETSY, FIVVER, ETC.
 TYPES OF E-COMMERCE BUSINESS MODELS

• CONSUMER TO BUSINESS (C2B): CONSUMER TO BUSINESS IS WHEN AN INDIVIDUAL SELLS

THEIR SERVICES OR PRODUCTS TO A BUSINESS ORGANIZATION. C2B ENCOMPASSES
INFLUENCERS OFFERING EXPOSURE, PHOTOGRAPHERS, CONSULTANTS, FREELANCE WRITERS,
ETC.
 EXAMPLES PER TYPES OF E COMMERCE

• RETAIL (D2C) - THE SALE OF PRODUCTS DIRECTLY TO A CONSUMER WITHOUT AN

INTERMEDIARY.
• DROP SHIPPING (ANY) - THE SALE OF PRODUCTS THAT ARE MANUFACTURED AND SHIPPED TO
CONSUMERS VIA A THIRD PARTY.
• DIGITAL PRODUCTS (ANY)- DOWNLOADABLE ITEMS LIKE TEMPLATES, COURSES, E-BOOKS,
SOFTWARE, OR MEDIA THAT MUST BE PURCHASED FOR USE. WHETHER IT IS THE PURCHASE OF
SOFTWARE, TOOLS, CLOUD-BASED PRODUCTS, OR DIGITAL ASSETS, THESE REPRESENT A LARGE
PERCENTAGE OF ECOMMERCE TRANSACTIONS.
 EXAMPLES OF TYPES OF E COMMERCE

• WHOLESALE (B2B)- PRODUCTS SOLD IN BULK. WHOLESALE PRODUCTS ARE USUALLY SOLD TO A
RETAILER, WHO THEN SELLS THE PRODUCTS TO CONSUMERS.
• SERVICES (C2B) - THESE ARE SKILLS LIKE COACHING, WRITING, INFLUENCER MARKETING, ETC.,
THAT ARE PURCHASED AND PAID FOR ONLINE.

• SUBSCRIPTION - A POPULAR D2C MODEL, SUBSCRIPTION SERVICES ARE THE RECURRING

PURCHASES OF PRODUCTS OR SERVICES ON A REGULAR BASIS.
• CROWDFUNDING (ANY)- CROWDFUNDING ALLOWS SELLERS TO RAISE STARTUP CAPITAL TO
BRING THEIR PRODUCT TO THE MARKET. ONCE ENOUGH CONSUMERS HAVE PURCHASED THE ITEM,
IT IS THEN CREATED AND SHIPPED
 BENEFITS OF E COMMERCE

➢ CONVENIENCE - ONLINE COMMERCE MAKES PURCHASES SIMPLER, FASTER, AND LESS TIME-
CONSUMING ALLOWING FOR 24-HOUR SALES, QUICK DELIVERY, AND EASY RETURNS.
➢ PERSONALIZATION AND CUSTOMER EXPERIENCE - E-COMMERCE MARKETPLACES CAN
CREATE RICH USER PROFILES THAT ALLOW THEM TO PERSONALIZE THE PRODUCTS OFFERED
AND MAKE SUGGESTIONS FOR OTHER PRODUCTS THAT THEY MIGHT FIND INTERESTING. THIS
IMPROVES THE CUSTOMER EXPERIENCE BY MAKING SHOPPERS FEEL UNDERSTOOD ON A
PERSONAL LEVEL, INCREASING THE ODDS OF BRAND LOYALTY.
 BENEFITS OF E COMMERCE

➢ GLOBAL MARKETPLACE - CUSTOMERS FROM AROUND THE WORLD CAN EASILY SHOP E-
COMMERCE SITES COMPANIES ARE NO LONGER RESTRICTED BY GEOGRAPHY OR PHYSICAL
BARRIERS.
➢ MINIMIZED EXPENSES - SINCE BRICK AND MORTAR IS NO LONGER REQUIRED, DIGITAL SELLERS
CAN LAUNCH ONLINE STORES WITH MINIMAL STARTUP AND OPERATING COSTS.
 DISADVANTAGES OF E COMMERCE

➢ LIMITED CUSTOMER SERVICE - IF YOU ARE SHOPPING ONLINE FOR A COMPUTER, YOU
CANNOT SIMPLY ASK AN EMPLOYEE TO DEMONSTRATE A PARTICULAR MODEL'S FEATURES IN
PERSON. AND ALTHOUGH SOME WEBSITES LET YOU CHAT ONLINE WITH A STAFF MEMBER,
THIS IS NOT A TYPICAL PRACTICE
➢ LACK OF INSTANT GRATIFICATION - WHEN YOU BUY AN ITEM ONLINE, YOU MUST WAIT FOR
IT TO BE SHIPPED TO YOUR HOME OR OFFICE. HOWEVER, RETAILERS LIKE AMAZON MAKE THE
WAITING GAME A LITTLE BIT LESS PAINFUL BY OFFERING SAME-DAY DELIVERY AS A PREMIUM
OPTION FOR SELECT PRODUCTS
 DISADVANTAGES OF E COMMERCE

➢ INABILITY TO TOUCH PRODUCTS - ONLINE IMAGES DO NOT NECESSARILY CONVEY THE

WHOLE STORY ABOUT AN ITEM, AND SO E-COMMERCE PURCHASES CAN BE UNSATISFYING
WHEN THE PRODUCTS RECEIVED DO NOT MATCH CONSUMER EXPECTATIONS. CASE IN POINT:
AN ITEM OF CLOTHING MAY BE MADE FROM SHODDIER FABRIC THAN ITS ONLINE IMAGE
INDICATES.
 UPDATES, STATISTICS AND
CHALLENGES OF THE INDUSTRY
 CHALLENGES FACED BY THE INDUSTRY

➢ INFRASTRUCTURE GAP
▪ NEED FOR FURTHER IMPROVEMENT IN INTERNET SPEED. ACCORDING TO OOKLA’S SPEEDTEST
GLOBAL INDEX, THE PHILIPPINES’ FIXED BROADBAND INTERNET SPEED IS 22.74 MBPS IN JULY
2020 AND RANKED 108TH OF 174TH.
▪ MOBILE BROADBAND SPEED IS 16.17 MBPS IN JUNE 2020 AND RANKED 121ST OF 138
COUNTRIES.
▪ LOGISTICS AND DISTRIBUTION ALSO POSE SIGNIFICANT CHALLENGES IN PRODUCT DELIVERY.
A LACK OF COLD CHAIN STORAGE LIMITS FOOD PRODUCTS THAT CAN BE TRANSPORTED FOR
LONG DISTANCES.
▪ TRAFFIC AND AN INEFFICIENT DELIVERY NETWORK ALSO MAKE DELIVERY EXTREMELY
UNRELIABLE IN MANY AREA
 CHALLENGES FACED BY THE INDUSTRY

➢ LOW BROADBAND PENETRATION - MANY FILIPINOS ACCESS THE WEB FROM MOBILE, HOME,
INTERNET CAFÉS AND THEIR WORKPLACE.
➢ LOW DIGITAL PAYMENT PENETRATION - BANGKO SENTRAL NG PILIPINAS (BSP) IN A 2018 REPORT
SHOWS THAT AN ESTIMATED 66 PERCENT OF FILIPINOS DO NOT USE BANKS, AND ABOUT EIGHT
PERCENT USE CREDIT CARDS. HENCE, ONLINE STORES IN THE PHILIPPINES PROVIDE CASH ON
DELIVERY PAYMENT OPTIONS OR PAYMENT CENTER
➢ SECURITY CONCERNS - THOSE WHO HAVE CREDIT CARDS ARE WARY OF TRANSACTING ONLINE,
GIVEN THE NUMEROUS INCIDENTS OF HACKING AND WEAK CYBERSECURITY EFFORTS THAT STILL
PLAGUE THE COUNTRY. THEREFORE, E-COMMERCE PLATFORMS HAVE ESTABLISHED A CASH PAYMENT
MECHANISM USING LARGE CONVENIENCE STORE CHAINS (I.E., 7/11 AND MINI STOP) AND LOCAL
EXPRESS DELIVERY SERVICE (I.E., LBC).
 CHALLENGES FACED BY THE INDUSTRY

➢ CASH BASED PAYMENTS DOMINATES IN PH - ACCORDING TO THE PHILIPPINES’ CENTRAL BANK,

CASH ACCOUNTED FOR 99 PERCENT OF ALL LOCAL TRANSACTIONS AS OF JANUARY 2018. IN
ADDITION, THE COUNTRY HAS BEEN SLOW TO ADOPT EWALLETS.

➢ LOGISTICS - CONSUMERS LIVING IN THE SPRAWLING CAPITAL OF METRO MANILA ENJOY ACCESS TO
HUGE SHOPPING MALLS, FLAGSHIP BRICK- AND-MORTAR STORES, AND EVEN SAME-DAY ONLINE
DELIVERY FROM LARGE MARKETPLACES LIKE LAZADA AND SHOPEE.
 E-COMMERCE INTELLECTUAL PROPERTY RIGHTS

➢ THE PHILIPPINES HAS PASSED ADEQUATE LEGISLATION TO PROMOTE ECOMMERCE, THE

ECOMMERCE LAW, CYBERCRIME, AND DATA PRIVACY LAWS. HOWEVER, ENFORCEMENT AGENCIES
LIKE THE DEPARTMENT OF JUSTICE AND PHILIPPINE NATIONAL POLICE AND THE LOCAL COURTS ARE
NOT YET ADEPT AT HANDLING CASES INVOLVING ELECTRONIC TRANSACTIONS.
➢ THE SYSTEM IS, HOWEVER, IN PLACE. THE NATIONAL PRIVACY COMMISSION (NPC) IS TASKED WITH
IMPLEMENTING THE DATA PRIVACY LAW, AND THEY HAVE HAD SIGNIFICANT ACHIEVEMENT
THROUGH PHILIPPINE-BASED COMPANIES DESIGNATING “DATA PRIVACY OFFICERS” OR DPOS.
➢ THE NPC IS ALSO LEADING THE PHILIPPINES TO BE COMPLIANT WITH INTERNATIONAL PRIVACY
AGREEMENTS SUCH AS THE EUROPEAN GENERAL DATA PROTECTION REGULATION (GDPR) AND
APEC CROSS BORDER PRIVACY RULES (CBPR).
 POPULAR E COMMERCE SITES

• WWW.B2BPRICENOW.COM - A TRADING PORTAL WITH CLOSE TO 8,000 MEMBERS THAT ARE

MOSTLY FROM COOPERATIVES. THE PHILIPPINE CONGRESS OFFICIALLY ENDORSES IT AS THE
PHILIPPINE E-MARKETPLACE FOR AGRICULTURE AND FISHERIES. THIS SITE IS A TRADING PORTAL
THAT PROVIDES UP TO THE MINUTE PRICE UPDATE ON MARKET INFORMATION FOR AGRICULTURE,
CONSUMER GOODS, AND INDUSTRIAL MANUFACTURES.
• HTTPS://E-ORDER.OSIORX.COM/ -CATERS PRIMARILY TO THE PHARMACEUTICAL AND
MEDICAL SUPPLY INDUSTRY THAT HAVE A REGIONAL SCOPE, MULTILINGUAL CAPABILITIES, TIGHT
REAL-TIME INTEGRATION WITH SUPPLIER
• HTTP://PHIIIPPINES.TRODEKEY.COM - A B2B MARKETPLACE CONNECTING FILIPINO
EXPORTERS WITH OVERSEAS BUYERS. IT CONNECTS TRADERS WITH GLOBAL WHOLESALERS,
BUYERS, IMPORTERS AND EXPORTERS, MANUFACTURERS, AND DISTRIBUTORS IN OVER 240
COUNTRIES
 POPULAR E COMMERCE SITES

• WWW.PHILPPINECOMPANIES.COM - A PHILIPPINE BUSINESS DIRECTORY WITH 413,282

REGISTERED COMPANIES. THIS WEBSITE BUILDS ITS DATABASE FROM PUBLICLY ACCESSIBLE
DIRECTORIES SUCH AS BUSINESS REGISTRATIONS FROM VARIOUS MUNICIPALITIES
• HTTP://PHILIPPINES.TRADEFORD.COM - PROVIDES GLOBAL IMPORTERS WITH
INFORMATION ON PRODUCTS, EXPORTERS, SUPPLIERS, MANUFACTURERS, AND
WHOLESALERS.
• HTTPS://WWW.KENRESEARCH.COM - GLOBAL INDUSTRY RESEARCH AND INFORMATION
SERVICE COMPANY. PROVIDES INDUSTRY INTELLIGENCE, EQUITY RESEARCH REPORTS AND
BUSINESS CONSULTING SERVICES COVERING SEVERAL SECTORS.
• HTTPS://WWW.COROUSEL.PH/ - GLOBAL ONLINE MARKETPLACE OPEN IN 45 COUNTRIES IN
WORLD USED FOR BUYING AND SELLING OF GOODS AND SERVICES.
 CHANGING E COMMERCE PERCEPTIONS

• A UNIVERSAL CHALLENGE FOR ANY ONLINE MERCHANT IS GAINING BUYERS’ TRUST. FOR
ECOMMERCE, THIS MEANS USING A COMBINATION OF STRATEGIES, RANGING FROM PROMPT
DELIVERY TO ACCURATE PRODUCT DESCRIPTIONS

• YOU ALSO NEED TO ACCOUNT FOR THE LOW TRUST FILIPINO CONSUMERS HAVE IN CREDIT
CARDS. ACCORDING TO A MONEYMAX SURVEY, MANY FILIPINOS ARE RELUCTANT TO GET CREDIT
CARDS BECAUSE THEY FEAR IT WILL LEAD TO OVERSPENDING AND DEBT

• CONSIDERING THE CHALLENGES IN PHILIPPINE ECOMMERCE, ONLINE MERCHANTS CAN ALSO

BUILD TRUST BY OFFERING ALTERNATIVE PAYMENT OPTIONS TO CREDIT CARDS. THIS MAY BE IN THE
FORM OF CASH-ON-DELIVERY AND LOCAL E-WALLETS.
 AUDIT CONSIDERATIONS
• THE AUDITOR'S RESPONSIBILITY TO PROVIDE AN OPINION ON THE FINANCIAL REPORT HAS REMAINED
UNCHANGED.

• ALTHOUGH COMMUNICATION AND TRANSACTIONS OVER NETWORKS AND THROUGH COMPUTERS ARE
NOT NEW FEATURES OF THE BUSINESS ENVIRONMENT, THE INCREASING USE OF THE INTERNET FOR E-
COMMERCE INTRODUCES NEW VARIABLES OF RISK AND CONTROL REQUIRING AUDIT CONSIDERATION

• THE AUDITOR REQUIRES APPROPRIATE SKILLS TO UNDERSTAND HOW AN ENTITY'S E-COMMERCE

STRATEGY ADDRESSES THE BUSINESS RISKS THAT ARISE.

• A BUSINESS MAY BE FACED WITH SEVERAL CONSTRAINTS WHEN DEVELOPING E-COMMERCE,

INCLUDING THE AVAILABILITY OF APPROPRIATE TECHNICAL AND MARKETING EXPERTISE, THE NEED FOR
CONTINUING INVESTMENT, AND THE IDENTIFICATION AND RESOLUTION OF SECURITY ISSUES

• THE MIGRATION OF BUSINESS FROM THE DOCUMENT ORIENTATION OF TODAY'S PAPER ENVIRONMENT
TO THE ELECTRONIC ENVIRONMENT OF THE FUTURE (VIA EXISTING INTERNET TECHNOLOGIES) WILL
PROMPT FURTHER CHANGE IN THE BUSINESS REPORTING-INFORMATION SUPPLY CHAIN, AND ISSUES FOR
AUDIT CONSIDERATION.
 AUDIT CONSIDERATIONS

• E-COMMERCE BUSINESS RISKS INCLUDE THOSE ARISING FROM:

1. THE IDENTITY AND NATURE OF RELATIONSHIPS WITH E-COMMERCE TRADING PARTNERS;
2. THE INTEGRITY OF TRANSACTIONS
3. ELECTRONIC PROCESSING OF TRANSACTIONS;
4. SYSTEMS RELIABILITY
5. PRIVACY ISSUES
6. RETURN OF GOODS AND PRODUCT WARRANTIES
7. TAXATION AND REGULATORY ISSUES
8. INFORMATION TECHNOLOGY
9. REVENUE ASSURANCE