GOVERNMENT

AUDITING
GROUP 4
 TOPICS TO BE DISCUSSED:

State Audit in the

Philippines;
Kinds of Audit;
The Audit Process; and
Auditing Standards and
Procedures
STATE AUDIT
IN THE
PHILIPPINES
 GOVERNMENT AUDITING

Government auditing is the analytical and systematic

examination and verification of financial transactions,
operations, accounts and reports of any government
agency for the purpose of determining their accuracy,
integrity, and authenticity, and satisfying the
requirements of law, rules, and regulations.
 AUDITING IN PUBLIC
ADMINISTRATION

State audit may be considered as the

CONTROL and ACCOUNTABILITY component
of the fiscal administration cycle.
 FISCAL ADMINISTRATION CYCLE

Auditing provides inputs to the next phase after Public

Oversight, which is planning. Audit reports contain vital
information on the results of operations of agencies and
recommendations to improve their performance. This
information are useful in formulating plans and targets.
 AUDITING AND ACCOUNTING

Auditing is an independent discipline which relies upon

the results of accounting data.
-is primarily concerned with analyzing whether or not the
financial statements reasonably represents the results of
the firm’s operations.
-analytical
-is a critical generation of judgmental information.
 AUDITING AND ACCOUNTING
Accounting is a discipline which provides financial and other
information essential to the efficient conduct and evaluation of the
activities of an organization.
- is concerned with constructing from a mass of transactions
entered into by a firm or agency during a certain period, financial
statements, results of transactions (In terms of profit and loss), and
current financial position, through interpretation, summarization, and
compilation of information.
- constructive
- involves the creative generation of financial and other data.
THE STATE AUDIT CODE OF THE
PHILIPPINES
(P. D. NO. 1445)
The Commission on Audit (COA)
COA, as the other constitutional commissions are mandated,
is headed by a chairman and two Commissioners appointed
by the President and the Commission on Appointments of
Congress.

It also enjoys fiscal autonomy which means its

appropriations must be released regularly and
automatically.
 THE COMMISSION ON AUDIT

In order to perform its audit functions, COA produces

different kinds of reports, to wit:

1. Regular Annual Audit Report of each NGA, LGU, and

GOCC.
2. Consolidated Annual Financial Report for NGAs, LGUs and
GOCCs
3. Special Audit Reports
4. Circulars and other issuances
THE COMMISSION ON AUDIT: TYPES
OF AUDIT OPINIONS

(U) Unqualified
(Q) Qualified
(A) Adverse
(D) Disclaimer
 THE COMMISSION ON AUDIT:
TYPES OF AUDIT OPINIONS
An Unqualified Opinion refers to the “clean opinion” or the
agency reflected the results of the financial statements fairly,
which means its operations and the financial condition in a
period of time based on existing government accounting
standards, and compliance with government laws, rules and
regulations.
A Qualified Opinion means that an agency reflected fairly
except for some specific transactions and/or accounts that
have been found to be problematic, either improper,
questionable or needs further explanations.
 THE COMMISSION ON AUDIT: TYPES OF AUDIT OPINIONS

Adverse Opinion Disclaimer

Opinion

An Adverse Opinion means that

A Disclaimer Opinion means that
the financial statements did not
“there is no sufficient basis to form
fairly present its results of
any opinion” for an agency does
operations and financial condition
not keep or submit its records of
of the agency, and are not in
financial accounts and
compliance with prescribed laws
transactions.
and applicable guidelines.
 THE COMMISSION ON AUDIT

An audit report has the following parts:

Audit Certificate, which shows the audit opinion, the Financial

Statements, Major Findings and Observations, which explains if
there are defects in the compliance of accounting and auditing
rules and policies, and Recommendations to the entities.

In turn, COA checks of these measures were confirmed by the

entity on the next year’s annual audit report.
 THE COMMISSION ON AUDIT:
THE LOGO
The three silver stars on blue
background represent the national
scope of jurisdiction of the Commission
on Audit;
The seven gold coins on red base
represent the seven functions of the
Commission.
 National Government Agencies (NGAs)
 Local Government Units (LGUs)
 Government Owned and Controlled
Corporations (GOCCs)
 THE COMMISSION ON AUDIT:
SEVEN PRINCIPAL DUTIES

1. Examine, audit and settle all accounts pertaining to the revenue

and receipts of, and expenditures or uses of funds and property
owned or held in trust by, or pertaining to, the government.
2. Promulgate accounting and auditing rules and regulations
including those for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant or unconscionable
expenditures, or uses of government funds and properties.
3. Submit annual reports to the President and the Congress on the
financial condition and operation of the government.
 THE COMMISSION ON AUDIT:
SEVEN PRINCIPAL DUTIES

4. Recommend measures to improve the efficiency and

effectiveness of government operations.
5. Keep the general accounts of government and preserve the
vouchers and supporting papers pertaining thereto.
6. Decide any case brought before it within 60 days.
7. Performs such other duties and functions as may be provided
by law.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 28. Examining authority

The commission shall have authority to examine books, papers,
and documents filed by individuals and corporations with, and
which are in the custody of, government offices in connection
with government revenue collection operations, for the sole
purpose of ascertaining that all funds determined by the
appropriate agencies as collectible and due the government
have actually been collected, except as otherwise provided in the
Internal Revenue Code of 1977.
 Jurisdiction, Powers and
Functions of the Commission

Section 34. Settlement of accounts between agencies.

The Commission shall have the power, under such

regulations as it may prescribe, to authorize and enforce
the settlement of accounts subsisting between agencies of
the government.
 Jurisdiction, Powers and
Functions of the Commission

Section 35. Collection of indebtedness due the government.

The Commission shall, through proper channels, assist in the
collection and enforcement of all debts and claims, and the
restitution of all funds or the replacement or payment at a
reasonable price of property, found to be due the Government, or
any of its subdivisions, agencies or instrumentalities, or any
government-owned or controlled, corporation or self-governing
board, commission or agency of the government, in the
settlement and adjustment of its accounts. If any legal
proceeding is necessary to that end,
 Jurisdiction, Powers and
Functions of the Commission

the Commission shall refer the case to the Solicitor General,

the Government Corporate Counsel, or the legal staff of the
creditor government office or agency concerned to
institute such legal proceeding. The Commission shall
extend full support in the litigation. All such moneys due
and payable shall bear interest at the legal rate from the
date of written demand by the Commission.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 39. Submission of papers relative to government obligations.

(1) The Commission shall have the power, for purposes of
inspection, to require the submission of the original of any
order, deed, contract, or other document under which any
collection of, or payment from, government funds may be
made, together with any certificate, receipt, or other
evidence in connection therewith. If an authenticated
copy is needed for record purposes, the copy shall upon
demand be furnished.
 Jurisdiction, Powers and
Functions of the Commission

(2) In the case of deeds to property purchased by any

government agency, the Commission shall require a
certificate of title entered in favor of the government or
other evidence satisfactory to it that the title is in the
government.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 41. Annual report of the Commission.

(1) The Commission shall submit to the President, the Prime

Minister, and the National Assembly not later than the last
day of September of each year an annual report of the
financial condition and results of operation of all agencies
of the government which shall include recommendations
of measures necessary to improve the efficiency and
effectiveness of these agencies.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 41. Annual report of the Commission.

(2) To carry out the purposes of this section, the chief accountant
or the official in charge of keeping the accounts of a government
agency shall submit to the Commission year-end trial balances
and such other supporting or subsidiary statements as may be
required by the Commission not later than the fourteenth day of
February.
Trial balances returned by the Commission for revision due to
non-compliance with accounting rules and regulations, shall be
resubmitted within three days after the date of receipt by the
official concerned.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 41. Annual report of the Commission.

(3) Failure on the part of any official or employee to comply with

the provisions of the immediately preceding paragraph shall
cause the automatic suspension of the payment of his salary
and other emoluments until he shall have complied there with.

The violation of these provisions for at least three times shall

subject the offender to administrative disciplinary action.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 44. Check and audit of property or supplies.

The auditor shall from time to time conduct a careful and
thorough check and audit of all property or supplies of the
agency to which he is assigned. Such check and audit shall not
be confined to a mere inspection and examination of the
pertinent vouchers, inventories, and other papers but shall
include an ocular verification of the existence and condition of
the property or supplies. The recommendation of the auditor
shall be embodied in the proper report.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 46. Seizure of office by audit

(1) The books, accounts, papers and cash of any

local treasurer or other accountable officer shall at
all times be open to the inspection of the
Commission or its duly authorized representative.
 Decisions of the
Commission

SECTION 48. Appeal from decision of auditors.

Any person aggrieved by the decision of an auditor of

any government agency in the settlement of an
account or claim may within six months from receipt of
a copy of the decision appeal in writing to the
Commission.
 Jurisdiction, Powers and
Functions of the Commission

SECTION 50. Appeal from decision of the

Commission.
The party aggrieved by any decision, order, or ruling of
the Commission may within thirty days from his receipt of
a copy thereof appeal on certiorari to the Supreme Court
in the manner provided by law and the Rules of Court
THE 1987 CONSTITUTION
OF THE PHILIPPINES
(ARTICLE IX-D THE
COMMISSION ON AUDIT
SECTION 1. (1) There shall be a Commission on Audit
composed of a Chairman and two Commissioners, who shall
be natural-born citizens of the Philippines and, at the time of
their appointment, at least thirty-five years of age, certified
public accountants with not less than ten years of auditing
experience, or members of the Philippine Bar who have been
engaged in the practice of law for at least ten years, and
must not have been candidates for any elective position in
the elections immediately preceding their appointment. At no
time shall all Members of the Commission belong to the same
profession.
SECTION 1. (2) The President may appoint the Chairman and
Commissioners for a term of seven (7) years without
reappointment. Appointment to any vacancy shall be only for
the unexpired portion of the term of the predecessor. In no
case shall any Member be appointed or designated in a
temporary or acting capacity.
SECTION 2. (1) The Commission on Audit shall have the
power, authority, and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including
government-owned or controlled corporations with original
charters, and on a post-audit basis
SECTION 2. (1)
However, where the internal control system of the audited
agencies is inadequate, it may adopt temporary or special
measures, including pre-audit, to correct deficiencies.
SECTION 2. (2)
The Commission shall have exclusive authority, subject to the
limitations in this Article, to define the scope of its audit and
examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of
irregular unnecessary, excessive, extravagant, or unconscionable
expenditures, or uses of government funds and properties.
SECTION 3.

No law shall be passed exempting any entity of the

Government or its subsidiary in any guise whatever, or
any investment of public funds, from the jurisdiction of the
Commission on Audit.
SECTION 4.

The Commission shall submit to the President and the Congress,

within the time fixed by law, an annual report covering the
financial condition and operation of the Government, its
subdivisions, agencies, and instrumentalities, including
government-owned or controlled corporations, and non-
governmental entities subject to its audit, and recommend
measures necessary to improve their effectiveness and
efficiency. It shall submit such other reports as may be required
by law.
1. Government Auditing Services

a. Financial Audit
b. Compliance Audit
c. Value for Money Audit
d. Other Audits (Fraud Audits)
KINDS
OF
AUDIT
 FINANCIAL AUDITING

Financial transactions and accounts are

scrutinized to ensure that the submitting
government agency followed all rules and
regulations, particularly the pre-agreed and
government accounting system.
 PERFORMANCE AUDITING

When budgets are linked to results or

results-based budgets, the agency's
processes are examined to see if it has met
its institutional purpose and mandate.
 COMPLIANCE AUDITING

An examination of an agency's procedures

and financial records to see if it is following
specified procedures, rules, or regulations
established by higher authority.
 INTERNAL AUDITING

As the name suggests, an internal check on

agency systems and processes.

COMPLIANCE AUDITING

Involves an outside audit body being

brought in to look at the agency.
 PRE-AUDITING

Refers to auditing by agencies before

approval of transactions.

POST-AUDITING

Refers to auditing by agencies after a

transaction.
 THE
AUDIT
PROCESS
 AUDIT PROCESS

PLANNING FIELDWORK

AUDIT
AUDIT REPORT FOLLOW-UP
 PLANNING

ANNOUNCEMENT LETTER
The agency is informed of the audit through an
announcement or engagement letter from the
Lead Auditor.
INITIAL MEETING
The agency describes the unit or system to be
reviewed, the organization, available resources
(personnel, facilities, equipment, funds), and other
relevant information.
 PLANNING

PRELIMINARY SURVEY
In this phase, the auditor gathers relevant
information about the unit in order to obtain a
general overview of operations.
INTERNAL CONTROL REVIEW
The auditor will review the unit’s internal control
structure, a process which is usually time-
consuming.
 PLANNING

AUDIT PROGRAM
Preparation of the audit program concludes the
preliminary review phase. This program outlines
the fieldwork necessary to achieve the audit
objectives.
 FIELDWORK

Is the systematic process of gathering evidence

about entity’s operations, evaluating it and
found out whether those operations meet the
acceptable standards.
CASH AND CASH EQUIVALENTS
• Obtain bank confirmations for all accounts,
including the accounts closed during the year
• Examine agency’s bank reconciliation
• Test proper cut off of cash receipts and cash
disbursements
• Test appropriate valuation
• Bank confirmation
• Bank statement
• Cash book
• General ledger
 ACCOUNTS RECEIVABLE
• Agree subledger to general control account
•Verify existence through confirmation or subsequent case
receipts
• Perform roll-forward procedures, as necessary
• Perform analytical procedures
• Evaluate adequacy of the allowance for impairment of
receivables
• Evaluate the adequacy of other adjustments to accounts
receivables
• Test valuation of balances in foreign currencies
• Inquire about or review list of credit balances and investigate
large items
INVENTORIES
• Observe the taking of physical inventories
• Review observation instructions obtained
from agency
• Review the physical inventory work program
Attend physical inventory:
• Plant tours
• Test counts
• Physical Inventory Observation Checklist and
Memo
• Conclusion
INVENTORIES CONT...

Inventory cut-off procedures

In order to ensure that the books and records are
complete, the paperwork associated with the above
must all be processed by the same count date.
 INVENTORIES CONT...
Inventory Obsolescence Review
The identification and valuation of inventory items that
are:
• Excess
• Slow moving
• Obsolete
• Defective
• Expired
• Replaced or reproduced for less than the cost current
carrying amount.
 INVESTMENTS, INCLUDING INVESTMENTS IN
AFFILIATES

• Verify the existence through confirmation or

examination of evidence of ownership
• Review minutes of meetings, agreements and
confirmation replies
• Perform valuation procedures through inspection of
market quotations
• Perform impairment testing
 PROPERTY, PLANT AND EQUIPMENT
• Obtain a schedule of property, plant and equipment,
including capitalized leases
• Examine invoices, authorizations, leases and other data
for additions and disposals
• Review and examine support for rentals under operating
leases
• Test reasonableness of depreciation, depletion and
amortization
• Assess possible indications of impairment
OTHER INCOME
Review contents of miscellaneous income and
identify unusual transactions
Test interest and dividend income
Determine that the changes in the value of
investments is properly recorded.
ACCOUNTS PAYABLE
Agree subledger to general ledger control
account.
Review subledger for unusual items
Test proper cut-off
Review subsequent events and analytic
procedures
Test valuation of balances in foreign currencies
INCOME TAXES, DEFERRED TAXES AND
RELATED INCOME STATEMENT ACCOUNTS
Test reconciliation of the current yearbook / local
GAAP / statutory and taxable income
Test computations of provisions for current and
deferred income taxes
Review movements of income tax accounts
Determine whether provision should be made for
tax positions or other tax contingencies.
Test intercompany and other related party
transactions.
PROVISIONS, ACCRUED LIABILITIES AND
DEFERRED INCOME
Review the schedule of provisions, accrued
liabilities and deferred income and agree amounts
to the general ledger accounts
Test if provisions, accrued liabilities and deferred
income were recorded at appropriate or
reasonable amounts
Review lawyers’ confirmation, minutes and other
documents for completeness of recorded liabilities
Search for unrecorded reserve / accruals (i.e.
review contracts, invoices, payments)
NOTES PAYABLE, LONG-TERM DEBT &
LEASES
Obtain confirmations from banks or other debt
holders
Inspect documents and authorization (i.e. loan
documents, minutes, lines of credit)
Test compliance with loan covenants
Identify liens, security interests, and assets
pledged as collateral for debt. Ensure proper
disclosure.
REASON FOR AUDIT DOCUMENTATION:

Supports compliance with Philippine Standard on

Auditing (PSA)
Provides the principal support for our audit opinion
Aids us in the conduct and supervision of the
engagement
Facilitates communication
TYPES OF AUDIT EVIDENCE:

Physical Examination
Third-Party Statements or Confirmation
Client Statements or Representations
Authoritative Documentations
Observation
Clerical Accuracy
Comparison & Data Relationship
EXIT MEETING
This is the meeting between audit team and the
agency the end of fieldwork.
The objective of the meeting is to share and discuss
the key noted findings.
It is the important forum for audit team to get
confirmation on the obtained / noted findings;
responses from the management and the tentative
corrective actions / action plans.
The minutes of the meeting should be well
documented and signed by both parties and these
forms parties of the working papers.
REPORTING
This refers to the communication between the
Auditor and the Client on the results of the audit
engagement (It is the product of audit
engagement).
It is the most visible output that provides feedback
to the client and other stakeholders on the results of
engagement.
It is an opportunity for audits showing how it can
add value to the organization.
It provide the management with the opinion on the
adequacy of internal controls systems.
 DISCUSSION DRAFT

At the conclusion of fieldwork, the auditor drafts the

report. Audit’s goal is to complete the audit and issue
a draft audit report within 30 days after the
completion of fieldwork. Audit management reviews
the audit working papers and the discussion draft
before it is presented to the agency for comment. This
discussion draft is submitted to the client for review
before the exit conference.
 EXIT CONFERENCE
Internal Audit meets with the unit’s management
team to discuss the findings, recommendations, and
text of the discussion draft. At this meeting, the client
comments on the draft and the group works to reach
an agreement on the audit findings.
Is an opportunity for the auditor, department
management, process owners, and other to review
and validate audit outcomes.
 FORMAL DRAFT

The auditor then prepares a formal draft, taking into

account any revisions resulting from the exit
conference and other discussions. This report is
issued to the audited requesting a written response
to any audit findings and recommendations. When
the changes have been reviewed by audit
management, the final report is issued.
 AUDIT REPORT
The principal product is the final report in which the
auditor represent the audit findings and discuss
recommendations for improvements. Once the
fieldwork is completed, Internal Audit will draft a report
to include the results of the audit including
recommendations for improvement.
After the draft report is completed, it will be
forwarded to department management for review
and discussion at a scheduled exit conference.
AUDIT FOLLOW UP

Sometimes referred as Recommendation Audit.

It assumes all steps like any other audit
engagement.
The objective is to review and verify the
Implementation of audit recommendation.
It is the last phase of audit engagement. However,
the Audit Engagement is completed/closed when
all recommendation has been fully implemented.
 FINAL REPORT
After being audited, the management is given an
opportunity to respond to the Preliminary Draft, the
Final Draft Report is presented to the Accountability
Oversight Committee for approval. Upon approval of
the Final Draft, the Final Report is issued. Auditor
distributes the final report to the Chief Financial
Officer, the Chief Accountant, the President, the Board
of Directors, and other members of senior
management. Final Reports are considered public
information and will be available to anyone.
 AGENCY RESPONSE
The audited agency has the opportunity to respond
to the audit findings prior to issuance of the final
report which can be included or attached to the final
report. In the response, the agency concerned should
explain how report findings will be resolved and
include an implementation timetable. In some cases,
managers may choose to respond with a decision not
to implement an audit recommendation and to
accept the risks associated with an audit finding.
 AUDIT FOLLOW-UP

Depending on the nature of the audit or the audit

findings, the Follow-Up procedure may formal or
informal.
Approximately one year of the final report, Internal
Audit will perform a follow-up review to verify the
resolution of the report findings.
 FOLLOWED UP REPORT

To resolve the original report findings. Unresolved

findings will include a brief description of the finding,
the original audit recommendation, the agency
response, the current condition, and the agency
condition, and the continued exposure to the board of
company.
.
 AUDITING
STANDARDS
 AUDITING STANDARD
Provide minimum guidance for the auditor that helps
determine the extent of audit steps and procedure
that should be applied to fulfill the audit objectives.

The conduct of government audit shall conform to the

auditing standards comprised of the following:
1. General standards
2. Fieldwork standards
3. Reporting standards
4. Quality control standards
GENERAL STANDARDS

1. The audit shall be performed by a person

possessed with adequate technical training and
proficiency as auditor.
2. The auditor shall maintain complete
independence, impartiality and objectivity.
3. The auditor shall exercise due professional care
and be guided by applicable laws, regulations and
the generally accepted principles of accounting.
FIELDWORK STANDARDS
1. The audit work shall be adequately planned and
assistants shall be properly supervised.
2. A review shall be made of compliance with legal and
regulatory requirements.
3. An evaluation shall be made of the system of internal
control and related administrative practices.
4. Audit opinions, conclusions and recommendations
shall be based on sufficient competent evidential
matter obtained through inspections, observations,
inquiries, confirmation and other techniques.
REPORTING STANDARDS
1. Audit opinions in the Annual Audit Reports (AARs)
shall be dated, signed manually and shall be issued
in the manner provided by the regulations of the
Commission.
2. AARs shall include the Audited Financial Statements,
findings and recommendations.
3. Audit reports shall meet the following reporting
criteria:
 3.1 Factual matter must be accurately, completely
and fairly presented.
3.2 Findings must be presented objectively and in
language as clear and simple as the subject permits.
3.3 Findings must be adequately supported by
evidence in the audit working papers.
3.4 Reports must be concise yet complete enough to
be understood by the users.
4. Put primary emphasis on improvement; present
critical comments in balanced perspective; recognize
unusual difficulties or circumstances faced by officials
concerned.
 QUALITY CONTROL STANDARDS
1. The auditor shall establish a system of quality control for
audits and reviews of historical financial information, and
for other assurance and related services engagements, in
conjunction with the code of ethics.
2. The auditor shall implement and monitor the system of
quality control to provide reasonable assurance that he
and his staff comply with professional standards and
regulatory and legal requirements, and that reports issued
are appropriate in the circumstances.
3. The auditors should ensure that audit tasks are carried out
to an acceptable level of quality by observing the above
enumerated General, Field Work and Reporting Standards.
AUDITING TECHNIQUES

Auditing techniques are the basic devices or

ways available to the auditor for obtaining
audit evidences.
 ELEVEN BASIC TECHNIQUES OR METHODS OF
SECURING INFORMATION:
1. Physical examination and count
2. Confirmation
3. Vouching of authoritative documents
4. Recomputation
5. Retracing bookkeeping procedures
6. Scanning and observation of pertinent activities and
conditions
7. Inquiry
8. Comparison and correlation with related information
9. Reconciliation
10. Analysis
11. Interview
 THANK YOU
FOR LISTENING!