Republic of the Philippines

COMMISSION ON AUDIT
Audit Team R8-06, LGS-D – Province of Northern Samar
Provincial Satellite Auditing Office
Brgy. Dalakit, Catarman, Northern Samar

AUDIT OBSERVATION MEMORANDUM (AOM)

AOM No. 2019-01-(2017-2018)

October 16, 2019

For : LORENZO N. ROSCO

Punong Barangay
Barangay Lo-Ok
Lapinig, Northern Samar

Attention: Marife Q. Pajares – Barangay Treasurer

Ricky L. Gabay - Municipal Accountant

We have audited the accounts and operation of the barangay for CY 2018 and
observed the following deficiencies and/or errors:

1. The existence and valuation of Property, Plant and Equipment (PPE) recorded at
₱1,555,037.78 and ₱1,591,174.74 for CYs 2017-2018, respectively, was not
ascertained due to failure of the LGU-Barangay to conduct inventory of PPE and to
maintain PPE ledger cards, contrary to pertinent provisions of Volume I of the
Systems and Procedures Manual on Management of Barangay Funds and Property.

Volume I of the Systems and Procedures Manual on the Management of Barangay

Funds and Property prescribed under Accounting Circular No. 2006-002 dated December
19, 2006 provides, among others the policies and procedures on Property, Plant and
Equipment:

3. Physical Count of PPE

a. A physical inventory of all Barangay property shall be conducted at least

once a year;
b. A committee headed by the Punong Barangay shall conduct the physical
count of PPE owned by the Barangay;
c. The result on the physical inventory shall be reported in the Report on the
Physical Count of PPE (RPCPPE);
d. The report, approved by the PB, shall be submitted to the BRK and the
City/Municipal Accountant for reconciliation with the recorded PPE;
e. Any unrecorded inventory shall be booked up at appraised cost; and
f. Any shortages shall be looked into and the AO shall be held accountable
for the loss.”
 The balances of the Property, Plant and Equipment (PPE) accounts appearing in
the Statement of Financial Position as of December 31, 2018 of the barangay are as
follows:

Account CY 2018 CY 2017

Land and Land Improvements ₱526,704.64 ₱535,287.18
Building and Structures 1,041,537.03 1,003,573.16
Furniture and Fixtures 22,933.08 16,177.44
Total 1064470.11 1019750.6

Evaluation of the PPE account disclosed that the barangay did not create and
Inventory Committee to conduct inventory of PPE. Furthermore, the barangay treasurer
did not maintain a property ledger card for each kind of property purchased by the
barangay which made it difficult to reconcile the recorded amount of the PPE for CY
2018.

Absence of information and records hindered the application of other procedures

to determine the value and existence of the property, plant and equipment accounts,
hence, correctness of the balance of the PPE accounts ₱1,555,037.78 and ₱1,591,174.74
for CYs 2017-2018, respectively, was not be ascertained.

We recommend that the Punong Barangay:

a. Create an inventory committee to conduct a physical inventory of the

barangay properties, and to prepare a report thereon to be submitted to
the Barangay Record Keeper and to the Municipal Accountant for
reconciliation.

b. Require the Barangay Record Keeper to maintain Property, Plant and

Equipment Register for control and monitoring purposes.

2. Labor costs amounting to ₱53,930.00 for the Expansion of Multi-Purpose Hall that
was completed on CY 2018 was not recorded as PPE, contrary to Sections 30 and 36
of PPSAS 17, hence, understating the PPE account by the same amount.

Section 30 of PPSAS 17 Property, Plant, and Equipment provides the composition

of the cost of an item of PPE, as follows:

(a) Its purchase price, including import duties and non-refundable

purchase taxes, after deducting trade discounts and rebates.

(b) Any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the
manner intended by management.

(c) Xxx

Moreover, Section 36 of the same standard states:

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 The cost of a self-constructed asset is determined using the same
principles as for an acquired asset. If an entity makes similar assets for
sale in the normal course of operations, the cost of the asset is usually
the same as the cost of constructing an asset for sale (see International
Public Sector Accounting Standard IPSAS 12, “Inventories”).
Therefore, any internal surpluses are eliminated in arriving at such
costs. Similarly, the cost of abnormal amounts of wasted material,
labor, or other resources incurred in self-constructing an asset is not
included in the cost of the asset. IPSAS 5, “Borrowing Costs”
establishes criteria for the recognition of interest as a component of the
carrying amount of a self-constructed item of property, plant and
equipment.

Verification of the Trial Balance of the Barangay as of CY 2018 revealed the

following increases/(decreases) of PPE accounts, as shown below:

Balance, Jan. 1, Balance, Dec.

Account Increase/(Decrease)
2018 31, 2018
Land Improvement ₱575,225.53 ₱575,225.53
Acc. Dep.-Land Improvement (57,522.55) 57,522.55 0
Road Networks 0 42,028.68 42,028.68
Acc. Dep.-Road Networks 0 4,202.87 (4,202.87)
Water Supply Systems 19,538.00 14,520.00 34058.00
Acc. Dep.-Water Supply
(1,953.80) 3,405.80 (5,359.60)
Systems
Building 1,115,081.29 146,070.00 1,261,151.29
Acc. Dep.-Building (111,508.13) 126,115.13 (237,623.26)
Other Structures 0 20,010.00 20,010.00
Acc. Dep.-Other Structures 0 2,001.00 (2,001.00)
Furniture and Fixtures 20,221.80 0 20,221.80
Acc. Dep.-Furniture and
(4,044.36) 4,044.36 (8,088.72)
Fixtures
Equipment 0 13,500.00 13,500.00
Acc. Dep.-Equipment 0 2,700.00 (2,700.00)
Total ₱1,555,037.78 ₱436,120.39 ₱1,591,174.75

Post-audit of transactions for CY 2018 disclosed that the barangay paid for the
materials and labor for the Expansion of Multi-Purpose Hall on August 23, 2018 totaling
₱200,000.00. However, verification of the Trial Balance of the barangay revealed that only
the payment for materials amounting to ₱146,070.00 was recorded as asset, while, the labor
cost was expensed outright.

Accounting standards dictate that for a self-constructed asset, its cost shall be
determined using the same principles of an acquired asset. Thus, its cost shall comprise the
purchase price and any directly attributable costs necessary to bring the asset to the location
and condition necessary for it to be capable of operating in the manner intended by
management. Hence, labor costs should also be capitalized, so as to bring the asset to its
intended use/function.

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 The unrecorded amount of ₱53,930.00 pertaining to the labor costs for the Expansion
of the Multi-Purpose Hall made the Property, Plant, and Equipment account understated by
the same amount.

We recommend that the Municipal Accountant adjust the “Building” account to

effect the ₱53,930.00 labor costs incurred for the Expansion of the Multi-Purpose Hall.

May we have your comments on the foregoing audit observations within fifteen (15)
calendar days from receipt hereof.

JOCELYN L. MARCELINO
OIC-Audit Team Leader

Proof of Receipt of AOM No. 2019-01

dated October 16, 2019

Name Designation Date Received Signature

1. Lorenzo N. Rosco Punong Barangay

2. Marife Q. Pajares Brgy. Treasurer

3. Ricky L. Gabay Mun. Accountant

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