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AKNOWLEDGMENT
In performing our audit case study, we had to take the help and guidelines of some respected personsof Saint Paul School of Professional Studies who deserve our greatest gratitude for the completion of this audit working paperand for giving us a good guideline for assessing our outputall throughout numerous consultations, namely: Sir Erwin Vincent G. Alcala, CPA, MIB Sir Kenneth Bryan Tegio Sir Virgil Kit Abanilla Sir Jason Chan Sir Kenneth Sajorda Maam Grace Oraller
Maam Marilou E. Malquisto Sir Albert S. Malquisto Jr. Sir Jerome C. Chavez Maam Dissa S. Resula Sir Gerald Resula
We would also like to thankthe following students for sharing their insights and skills whichmay have been directly and indirectly guided us in completing this report, namely: Aileen Sabela Jerome Macaraig Carl Nathan Aguinalde
Rick Gabrielle Gaviola Yenala Eireen Christianne Pajares Jerwin Bethoven Del Pilar
The audit team would also like to extend our deepest gratitude to Basio’s Residence in Brgy. 110 Utap, Tacloban City,through Tita Riza A. Basio and Ms. Reggie Urmeneta for the warm hospitality and accommodation. Also to our dearest merciful and compassionate instructor Maam Rosanna Romanca, CPA, who guided us during the course of our audit and for her unwavering support throughout the whole journey. Finally, we praise and glorify, our Lord God Almighty for the strength, dedication, blessings and an overwhelming divine intervention to pursue this audit working paper.
-The Authors
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INDEPENDENT AUDITOR’S REPORT To the Shareholders of MaramingPera Corporation Report on the Audit of the Financial Statements Opinion We have audited the financial statements of MaramingPera Corporation, which comprise the statements of financial positions as at December 31, 2016 and the statements of financial performance for the year ended December 31, 2016 In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the company as at December 31, 2016 and its financial performance for the eyar ended December 31,2016 in accordance with Philippine Financial Reporting Standards (PFRSs). Basis for Opinion We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of the financial statements in the Philippines, and we have fulfilled our ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matter Key audit matters are to those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
After a thorough examination of the client’s bank accounts, it has been noted that an amount of 150,000,000 has been floating from one bank to another from November 2016 to January 2017. One of the firm’s audit staff has submitted a working paper showing a material difference between the balance per book and the balance per audit of the Creditable Withholding Taxes Account.
Emphasis of Matter We draw attention to these matters on the financial statements provided by the client but our opinion is not modified in respect of this.
On February 3,2017 one of the major customers of the client has filed a bankruptcy due to its inability to recover after a wild fire destroyed their power plants in Ilocos Norte. On March 8, 2017, a litigation against the client regarding the Patent Infringement Lawsuitwas decided by the RTC in favor of the opposing party. The firm proposed an adjusting journal entry amounting to 30,000,000 to correct the recorded amount of
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Provision for Litigation Expense but the management refused on the ground that they will still be filing an appeal to Court of Appeals. On this matter, the firm proposed a new adjusting journal entry amounting to 25,000,000 since the entity’s legal counsel believed that it is highly probable that the Court of Appeals will rule in favor of the claimant and that the entity will be required to pay damages an estimated amount in the range between 20,000,000 and 30,000,000. The client has a pending case in the Court of Tax Appeals in relation with the assessment sent by the BIR last May 2016. The amount in the assessment is 80,000,000. The BIR contracted with the MaramingPera Corporation to enter into a compromise agreement paying a total judicial compromise amount of 32,000,000. CTA approved the compromise agreement in its tax deficiency case on February 15, 2017
Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with PFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with PSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit and in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
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Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based in the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on Other Legal and Regulatory Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information for the year ended December 31, 2016 required by the Bureau of Internal Revenue is presented for purposes of additional analysis and is not a required part of the basic financial statements prepared in accordance with PFRS. Such supplementary information is the responsibility of management. The supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
BERNARD ACE N. ROMANO, CPA Partner-in-Charge, LABAN NG MGA ASTIG Co. CPA Cert. No. 0098765 PTR No. 0023456, issued on January 6, 2015, Makati City SEC A.N. (individual) as general auditors 0668-AR-3, Category A; effective until March 1, 2020 SEC A.N. (firm) as general auditors 0009-FR-4, Category A; effective July 15, 2018 TIN 123-456-789 BIR A.N. 08-000745-47-2016, issued on February 15, 2015; effective until February 14, 2019 BOA/PRC Reg. No. 0142, effective until September 30, 2020
Campetic Palo, Leyte, Philippines April 10, 2017
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INTRODUCTION MaramingPera Corporation, a domestic corporation, is an industry that engages in trading of vehicles. It operates through the following segments: automotive operations, segment designs, assembles and sells passenger cars, minivans, trucks and related vehicle parts and accessories. Ever since its founding in 1988 at Campetic Palo, MaramingPera has sought to contribute to a more prosperous society through the manufacture of automobiles, operating its business with a focus on sales of vehicle. MaramingPera Corporation is one of the largest automobile industry and is known for durability, performance and incredible value for money. The company’s very early adoption of landmark technologies helped it stand apart from other leading brands and sustain in the market. For nearly 30 years of existence, the corporation now is a parent of 10 subsidiaries with diversified industry all of which are established in the Philippines: 1. BALAY-BALAY Corporation – a company engaged in the business of trading real estate properties with an ownership interest of 75% 2. MATITIG-AHAN Corporation – a company engaged in the selling of tools, parts of machines, electric devices and other hardware materials with an ownership of 75% 3. MAHUMOK-HUMOK Corporation – an industry engaged in software programming with an ownership interest of 75% 4. ROSSENCE Corporation – an industry engaged in trading of books with an ownership interest of 75% 5. MASAKIT Corporation – a company engaged in selling of medicines, vaccines and other medical products with an ownership interest of 75% 6. MARASA Corporation – an industry engaged in the trading of food products with an ownership interest of 75% 7. BROOM-BROOM Corporation – an industry engaged in trading of automobiles with an ownership interest of 75% 8. APLIAN Corporation – an industry engaged in trading of appliances with an ownership interest of 75% 9. Furfix Corporation – an industry engaged in trading of Furniture and Fixtures with an ownership interest of 75% 10. Legend Corporation – an industry engaged in trading of mobile devices with an ownership interest of 75% MaramingPeraCorporation is governed by the Board of Directors composed of independent directors, executive directors and non-executive directors. The board established three major committees to assist them in good corporate governance:
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a. Audit Committee - A committee with a duty to assist the board in the performance of its oversight responsibility for the financial reporting process, system of internal control, audit process, and monitoring of compliance with applicable laws, rules and regulations. b. Nomination Committee - A committee with a duty to review and evaluate the qualification of all persons nominated for a given position. c. Remuneration Committee - A committee with a duty to establish a formal and transparent procedure for developing a policy on remuneration of directors and officers. On the 8th day of November 2013, the company has caused its business to losealmost250 Million Pesos due to the impact of Super Typhoon Yolanda. The company took advantage of the fortuitous event to recover the loss resulting to a perceived opportunity to commit fraud. Due to the declaration by the national government of under state of calamities and the damage suffered by the entire Region VIII, the authorities neglected to examine the financial reports issued by the Maraming Pera Corporation which caused to strengthen the concealment of fraud. As the operation of the business continues on the succeeding years, this evil act was neglected. Hence, the MaramingPeraCorporation continues the malice acts in their reports since the authorities are paying attention more on the recovery of the state and less attention on the thorough examination regarding the fairness of the financial reports. Due to carelessness, this led the company to commit more frauds. BIDA Firm, was the last auditor of MaramingPera Corporation but was about to end the contract already. However, due to the misstatements discovered by them, and to protect the reputation of the firm,they did not renew the contract with the company to totally terminate their relation. Hence, the MaramingPeraCorporation asked Laban ng mgaAstig Firm to be the next auditor of the company and willing to pay 100 million for the proposed engagement.
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GLOBAL VISION To be the most successful and respected car company in the world.
CORPORATE MISSION To attract and attain customers with high-valued products and services and the most satisfying ownership experience in the world.
CORPORATE BOARD OF DIRECTORS AND SHAREHOLDERS
Dr. NEIL D. GLORIA, DBA, MiB Chief Executive Officer
JEROME C. CHAVEZ, CMA Chief Financial Officer
Dr. MARILOU E. MALQUISTO, PhD Executive Director
Dr. ALBERT S. MALQUISTO Jr, PhD Chief Operating Officer
Atty. MA. DISSA S. RESULA Director
Atty. MELVIN Y. MARAYA Non-Executive Director
Prof. GERALD R. RESULA, CMA Outside Director
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ALBERT B. BACLEA-AN, CPA Corporate Treasurer
Dr. ARLEEN A. ROCABO, PhD Corporate Secretary
Dr. KENNETH O. SAJORDA, PhD, MiB Corporate Controller
ROSBEN O. MURILLO Shareholder
Atty. GERMA D. COSEP, PhD Shareholder
Atty. JOSE P. AGUINALDE, CMA Shareholder
JASON D. BAUTISTA, CPA Shareholder
MA. FRETCYL C. BERINGUEL, CPA Shareholder
REYNALDO C. MONTECINA Jr., CPA Shareholder
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MARAMING PERA Corporation and its Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL POSTITION ASSETS
2015
2016
Current Assets: Cash and Cash Equivalents Trade Receivables Inventory Office Supplies Prepaid Expenses Total Current Assets
185,745,600.00 220,241,250.00 150,840,700.00 15,303,500.00 98,300,700.00 670,431,750.00
210,597,600.00 243,434,450.00 165,710,000.00 14,942,700.00 93,946,900.00 728,631,650.00
Non-Current Assets: Investments Acoount - Equity Method Property, Plant and Equipment Intangible Assets Deferred Tax Assets Total Non-Current Assets
213,402,900.00 471,579,400.00 222,274,100.00 245,241,250.00 1,152,497,650.00
200,256,950.00 523,029,750.00 210,459,500.00 233,434,450.00 1,167,180,650.00
TOTAL ASSET
1,822,929,400.00
1,895,812,300.00
LIABILITIES Current Liabilities: Trade and Non-Trade Payables Accrued Expenses Income Taxes Payable Total Current Liabilities
2015
2016
208,373,500.00 160,469,400.00 4,587,200.00 373,430,100.00
231,502,800.00 165,998,700.00 4,550,700.00 402,052,200.00
Non-Current Liabilities: Notes Payable Provisions Deferred Tax Liabilities Total Non-Current Liabilities
364,438,300.00 202,712,450.00 179,169,750.00 746,320,500.00
358,943,100.00 206,558,000.00 171,296,400.00 736,797,500.00
TOTAL LIABILITIES
1,119,750,600.00
1,138,849,700.00
2015 8,606,700.00 17,111,800.00 (2,617,800.00) 619,431,100.00 33,611,500.00 676,143,300.00 27,035,500.00
2016 8,606,700.00 17,111,800.00 (2,618,900.00) 671,289,400.00 35,140,600.00 729,529,600.00 27,433,000.00
TOTAL SHAREHOLDER's EQUITY
703,178,800.00
756,962,600.00
TOTAL LIABILITY and EQUITY
1,822,929,400.00
1,895,812,300.00
SHAREHOLDER's EQUITY Common Stock Capital Surplus Treasury Stock Retained Earnings Other Components of Equity Equity Attributable to Parent Non-Contolling Interests
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MARAMING PERA Corporation and its Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL PERORMANCE
Sales Revenue Cost of Sales Gross Profit
2015
2016
1,460,115,100.00
1,399,920,000.00
(1,133,239,900.00)
(1,096,584,800.00)
326,875,200.00
303,335,200.00
(276,537,600.00)
(232,764,100.00)
50,337,600.00
70,571,100.00
12,500,000.00
10,500,000.00
2,846,800.00
2,238,900.00
(424,900.00)
(343,600.00)
65,259,500.00
82,966,400.00
(1,814,600.00)
(1,247,100.00)
63,444,900.00
81,719,300.00
(22,909,200.00)
(20,759,200.00)
40,535,700.00
60,960,100.00
Operating Expenses: Selling, General and Administrative Operating Income ADD: Other Income Investment Income - Equity Method Interest Income LESS: Other Expenses Other Expenses, Net Earnings Before Interest and Taxes Finance Costs: Interest Expense Earnings Before Taxes Tax Liability: Income Tax Expense Net Income/(Loss)
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THE AUDIT PROCESS PRE – ENGAGEMENT ACTIVITIES Prior to accepting the engagement with MaramingPera, Corp., our audit team conducted a series of assessments whether to accept or reject the engagement. The following were the considerations: 1. Integrity of a client’s management and governance personnel. i.
The firm considers the client’s honesty and truthfulness. The client must have never revealed confidences, or impugned the integrity of others or their businesses. The client must be well served in maintaining control in internal and external transactions and maintain and look upon their members on performing all professional responsibilities with the highest sense of integrity. The client must not have any conflicts of interest or confidentiality issues and must be checked if there are any lawsuits pending among the owners of the business by inquiry of other third parties such as bankers and legal counsel.
ii.
iii.
2. Competence and Capabilities. Profitability of the company gives us a built-in indicator of competence, also their ability to navigate capital markets, vision, deep understanding of the company’s specialty, ability to delegate, sales and financial skills and adaptability. 3. Meeting the ethical requirements. The firm must comply with the policies and procedures designed to provide reasonable assurance relevant to ethical requirements such as integrity, objectivity and independence. In considering whether the firm has the capabilities, competence, time and resources to undertake a new engagement, the following are the matters the firm considers:
Our firm personnel have knowledge of relevant industries or subject matters, and experience with relevant regulatory or reporting requirements. Our firm has the ability to gain the necessary skills and knowledge effectively. Our experts are available, if needed. Our firm is able to complete the engagement within the reporting deadline. Our firm is already established as one of the bests in the industry.
PRELIMINARY MEETING A preliminary meeting was arranged by the audit team with the client to discuss the acceptance of the audit arrangement. Discussions were made and some information were disclosed such as the pending litigation that the client have before the acceptance of the audit. The pending litigation was filed before on the Court of Appeals between the client and the BIR regarding which was due to the tax deficiency.
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A. CORROBORATING INFORMATION AND EVIDENCES
The audit team gathered several subsequent evidences that might affect the booming performance of Maraming Pera Corporation as to their independent opinions in assessing risks.
Left: Pres. Romanca, as the cover of the Metropolitan Magazine. Right: Dr. Neil D. Gloria, CEO of MAraming Pera Corp. and Bernard Ace Romano, CPA as the person of the year for Times Magazine for being the most influential businessman and accountant of the year.
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ENGAGEMENT LETTER Laban ng mga Astig Co. 654 Gen. Santos Avenue, Campetic Rd. Palo, Leyte 6501 Philippines Phone: (639) 266093466 Fax: (955) 968 212 www.labanngmgaastigco.com.ph BOA/PRC Reg. No. 04983 September 29, 2015, valid until September 30, 2018 SEC Accreditation No. 0329-FR-4 (Category A) July 14, 2015, valid until July 15, 2018 October 1, 2016
MARAMING PERA Corporation Tacloban City, Leyte To the Board of Directors;
Gentlemen: Your company have requested that we audit the financial statement of Maraming Pera Corporation for the year 2016.We are pleased to confirm our understanding of the services we are to provide you with under this engagement. We will audit the Company's balance sheet and the related statements of income, retained earnings, andcash flows for the year then ended, for the purpose of expressing an opinion on them. The financial statements are the responsibility of the company management. Our responsibility is to express an opinion on the financial statements based on our audit. We will conduct our audit in accordance with generally accepted auditing standards established by the Philippine Auditing Standards Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit will provide a reasonable basis for our opinion. Although the audit is designed to provide reasonable assurance of detecting errors and irregularities that are material to the financial statements, it is not designed and cannot be relied upon to disclose all fraud, defalcations, or other irregularities. However, we will inform you of any material errors, and all irregularities or illegal acts, unless they are clearly inconsequential, that come to our attention. We remind that the responsibility for the preparation of financial statements including adequate disclosure is that of the management of the company. This includes the maintenance of adequate accounting records and internal controls, the selection and application of accounting policies, and the safeguarding of the assets of the company. As part of our audit process, we will request from management written confirmation concerning representation made to us in connection with the audit. Our fees will be billed as work progresses and are based on the amount of time required plus out-ofpocket expenses. Invoices are payable upon presentation. We will notify you immediately of any circumstances we encounter that could significantly affect our initial estimate of total fees. Our standard hourly rates vary according to the degree of responsibility involved andthe experience and skill level of the personnel assigned to your engagement.
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We appreciate the opportunity to be of service to you, and believe this letter accurately summarizes the significant terms of our engagement. If these comments and arrangements meets with your approval, please sign below and return the agreement to us. We look forward to a pleasant association and the opportunity to provide the services included in this engagement. If you have any questions, please let us know. This letter will be effective for future years unless it is terminated, amended, or superseded.
Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of our arrangements for our audit of the financial statements.
Yours faithfully,
BERNARD ACE N. ROMANO, CPA Partner-In-Charge CPA Cert. No. 0098765 PTR No. 0023456, issued on January 6, 2015, Makati City SEC A.N. (individual) as general auditors 0668-AR-3, Category A; effective until March 1, 2020 SEC A.N. (firm) as general auditors 0009-FR-4, Category A; effective July 15, 2018 TIN 123-456-789 BIR A.N. 08-000745-47-2016, issued on February 15, 2015; effective until February 14, 2019 BOA/PRC Reg. No. 0142, effective until September 30, 2020
We agree to the terms of this letter;
Dr. NEIL D. GLORIA, DBA, MiB Chief Financial Officer, MARAMING PERA CORPORATION
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AUDIT PLANNING Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan, in order to reduce audit risk to an acceptable low level. Planning involves the engagement partner and other key members of the engagement team to benefit from their experience and insight and to enhance the effectiveness and efficiency of the planning process. The objective of our team is to perform the following:
To ensure appropriate attention is given to all areas of the audit. To pick potential problems during audit such as weaknesses in the internal control system and may have material effects on the financial statements. To ensure proper coordination and allocation of financial resources during the audit by assigning highly and experienced staff to high risk and most important areas. To assess the effectiveness and the efficiency of the planning process.
Industry, regulatory, and other external factors, including financial reporting framework; The level of competition The nature of the relationships with suppliers and customers The level of technology used in the industry Nature of the entity, including entity’s selection and application of accounting policies Legal structure of the company (and group where relevant) The ownership and governance structure The main sources of finance used by the company Accounting policies applied are consistent with the applicable financial reporting framework Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements; To maximize market share The strategy to achieve this could be to launch a new brand or product Measurement and review of the entity’s performance; Competitor analysis Trends Period-on-period financial performance Key performance indicator Use of forecast, budgets, and variance analysis Employees performance measures and incentives compensation policies Key and operating statistics Internal Control The control environment The entity’s risk assessment procedures, information systems, control activities The monitoring of controls
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PROGRAM DESIGN The roles and responsibilities of the management and other third parties are clearly outlined and conveyed.In decision making it is vital and necessary to collect and analyse significant, appropriate and timely information.The automobiles are inspected and entered into the inventory stores department and are monitored by the superintendent.
AUDIT OBJECTIVES The objectives of the audit were: To assess whether the processes are in place to enable efficient and effective controls over processing automobile orders, invoicing and collection of fees. To determine if automobiles are appropriately allocated according to established rules. To provide assurance that automobiles processes are in compliance with applicable legislation, policies, and orders.
MATERIALITY ASSESSMENT
Balance Sheet
OVERALL MATERIALITY BASE Total Asset
Income Statement Earnings Before Tax
2015 1,822,929,400 63,444,900
Materiality Level 95% 90% 1,731,782,930 1,640,636,460 60,272,655
57,100,410
185,745,600 167,171,040
5,000,000
High Risk Moderate 90% 95% Materiality 2016 Level 172,171,040 210,597,600
220,241,250 198,217,125
5,000,000
203,217,125 243,434,450
Material
150,840,700 135,756,630
5,000,000
140,756,630 165,710,000
Material
Materiality 2016 Level Office Supplies 15,303,500 14,538,325 10,000,000 24,538,325 14,942,700 Prepaid Expenses 98,300,700 93,385,665 10,000,000 103,385,665 93,946,900 Investment 213,402,900 202,732,755 10,000,000 212,732,755 200,256,950 Equity Method Property, Plant 471,579,400 448,000,430 10,000,000 458,000,430 523,029,750 and Equipment
Results
ASSET PERFORMANCE MATERIALITY High Risk Cash and Cash Equivalents Trade Receivables Inventory Moderate Risk
Low Risk Intangible Assets
Deferred Tax Assets
2015
2015
2015
Threshold
Threshold
Threshold
Allowance
Allowance
Allowance
Materiality 2016 Level 222,274,100 217,828,618 15,000,000 232,828,618 210,459,500 245,241,250 240,336,425 15,000,000 255,336,425 233,434,450
Low Risk 98% Results Material
Immaterial Immaterial Immaterial Material
Results Immaterial Immaterial
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2015 208,373,500.00
BASE Total Asset Materiality Level 220,497,864.94
2015 1,822,929,400.00 2016 231,502,800.00
65% 1,184,904,110.00 Results Material
160,469,400.00 4,587,200.00 364,438,300.00 202,712,450.00 179,169,750.00 1,119,750,600.00
169,806,429.74 4,854,109.60 385,643,409.80 214,507,422.59 189,594,873.33 1,184,904,110.00
165,998,700.00 4,550,700.00 358,943,100.00 206,558,000.00 171,296,400.00
Immaterial Immaterial Immaterial Immaterial Immaterial
LIABILITY PERFORMANCE MATERIALITY Accounts Trade and Non-Trade Payables Accrued Expenses Income Taxes Payable Notes Payable Provisions Deferred Tax Liabilities TOTAL
BASE 2015 Total Asset 1,822,929,400 EQUITY ACCOUNTS 2015 Materiality Level 2016 Common Stock 8,606,700.00 11,073,607.81 8,606,700.00 Capital Surplus 17,111,800.00 22,016,494.38 17,111,800.00 Treasury Stock 2,617,800.00 3,368,130.70 2,618,900.00 Retained Earnings 619,431,100.00 796,976,433.19 671,289,400.00 Other Components of Equity 33,611,500.00 43,245,444.71 35,140,600.00 Non-Contolling Interests 27,035,500.00 34,784,589.21 27,433,000.00 Total 708,414,400.00 911,464,700.00 EQUITY PERFORMANCE MATERIALITY
50% 911,464,700 Results Immaterial Immaterial Immaterial Immaterial Immaterial Immaterial
Income Accounts Sales Revenue Investment Income Equity Method Interest Income
2015 1,460,115,100.00 12,500,000.00
Materiality Level 1,387,109,345.00 11,875,000.00
Income 95% 2016 1,399,920,000.00 10,500,000.00
2,846,800.00
2,704,460.00
2,238,900.00
Immaterial
Expense Accounts Cost of Sales Selling, General and Administrative Other Expenses, Net Interest Expense Income Tax Expense
2015 1,133,239,900.00 276,537,600.00
Materiality Level 1,076,577,905.00 262,710,720.00
2016 1,096,584,800.00 232,764,100.00
Results Material Immaterial
424,900.00 1,814,600.00 22,909,200.00
403,655.00 1,723,870.00 21,763,740.00
343,600.00 1,247,100.00 20,759,200.00
Immaterial Immaterial Immaterial
INCOME & EXPENSE PERFORMANCE MATERIALITY
Expense 95% Results Material Immaterial
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 18
RISK ASSESSMENT
Inherent Risk
Cash Flow System
Purchase System
Sales System
Payroll System
Fixed Assets Cycle
High
Moderate
Moderate
Moderate
Moderate
Expects many Expects some Expects some Expects some Expects some misstatements misstatements misstatements Misstatements misstatements
High Moderate Moderate Moderate Moderate ControlRisk (not effective ) (less effective) (less effective) (less effective) (less effective) (Effectiveness of Controls) Low Low Low Low Low Acceptable (Willingness) (Willingness) (Willingness) (Willingness) (willingness) Audit Risk DetectionRisk Low Medium Medium Medium Medium (Extent (High (Moderate (Moderate (Moderate (Moderate ofSubstantive Level) Level) Level) Level) Level) Testing) Preliminary Assessment of Risks 1. Cash Flow System The auditor gives no reliance on the internal control of cash due to indication of ineffective on particular assertion, setting, therefore, the control risk at a maximum level. Hence, no test of controls needs to be performed but to rely primarily on extensive substantive testing. 2. Purchase System The auditor gives only moderate reliance on the internal control of purchase system. In this regard, the auditor performs tests of control to determine the effectiveness of the policies or procedures that are likely to prevent or detect and correct material misstatement relevant to financial statement assertions. 3. Sales System The auditor gives only moderate reliance on the internal control of sales system. In this regard, the auditor performs tests of control to determine the effectiveness of the policies or procedures that are likely to prevent or detect and correct material misstatement relevant to financial statement assertions. 4. Payroll System The auditor gives only moderate reliance on the internal control of payroll system. In this regard, the auditor performs tests of control to determine the effectiveness of the policies or procedures that are likely to prevent or detect and correct material misstatement relevant to financial statement assertions. 5. Fixed Asset Cycle System The auditor gives only moderate reliance on the internal control of purchase system. In this regard, the auditor performs tests of control to determine the effectiveness of the policies or procedures that are likely to prevent or detect and correct material misstatement relevant to financial statement assertions.
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AUDIT RISK ASSESSMENT Audit Risk refers to the risk that the auditor gives an inappropriate audit opinion on the financial statements. Because of the inherent limitations of the audit, the auditor can not totally eliminate the audit risk. Inherent Risk is the susceptibility of an account balance or class of transactions to a material misstatement assuming that there were no related internal controls. This concept recognizes that some account balances, by nature, are more susceptible to misstatement than others. Control Risk is the risk that a material misstatement that could occur in an account balance or class of transactions will not be prevented or detected and corrected on a timely basis by accounting and internal control systems. Detection Risk is the risk that an auditor’s substantive procedure will not detect a material misstatement. AUDIT RISK MODEL
AUDIT RISK = INHERENT RISK x CONTROL RISK x DETECTON RISK
After a thorough examination of MaramingPera Corporation business environment, management integrity, management characteristics, operating characteristics, industry characteristics, susceptibility of the account to theft, complexity of calculations related to account, the complexity underlying transactions, and the design, implementation and operating effectiveness of the internal control, Laban ng mgaAstig Firm decided based on professional judgment and audit experience to set the audit risk at 10%. Below is the computation of the detection risk: 𝐷𝑒𝑡𝑒𝑐𝑡𝑖𝑜𝑛𝑅𝑖𝑠𝑘 =
𝐴𝑢𝑑𝑖𝑡𝑅𝑖𝑠𝑘 𝐼𝑛ℎ𝑒𝑟𝑒𝑛𝑡𝑅𝑖𝑠𝑘𝑥𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑅𝑖𝑠𝑘
𝐷𝑒𝑡𝑒𝑐𝑡𝑖𝑜𝑛𝑅𝑖𝑠𝑘 =
10% 50% 𝑥 50%
𝐷𝑒𝑡𝑒𝑐𝑡𝑖𝑜𝑛𝑅𝑖𝑠𝑘 = 40%
Hence, the audit team will design the audit to have a 90% assurance or confidence level that the financial statements are free from material misstatements.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 20
ANALYTICAL PROCEDURES IN PLANNING PHASE Analytical Procedures ASSET Current Assets: Cash and Cash Equivalents Trade Receivables Inventory Office Supplies Prepaid Expenses Total Current Assets
Vertical Analysis 2015 2016 10.19% 11.11% 12.08% 12.84% 8.27% 8.74% 0.84% 0.79% 5.39% 4.96% 36.78% 38.43%
Non-Current Assets: Investments Account - Equity Method Property, Plant and Equipment Intangible Assets Deferred Tax Assets Total Non-Current Assets
11.71% 25.87% 12.19% 13.45% 63.22%
10.56% 27.59% 11.10% 12.31% 61.57%
-6.16% 10.91% -5.32% -4.81% 1.27%
100.00%
100.00%
4.00%
TOTAL ASSET
Horizontal Analysis 2015-2016 13.38% 10.53% 9.86% -2.36% -4.43% 8.68%
Analytical Procedures LIABILITIES Current Liabilities: Trade and Non-Trade Payables Accrued Expenses Income Taxes Payable Total Current Liabilities
Vertical Analysis 2015 2016 11.43% 12.21% 8.80% 8.76% 0.25% 0.24% 20.49% 21.21%
Non-Current Liabilities: Notes Payable Provisions Deferred Tax Liabilities Total Non-Current Liabilities
19.99% 11.12% 9.83% 40.94%
18.93% 10.90% 9.04% 38.86%
-1.51% 1.90% -4.39% -1.28%
61.43%
60.07%
1.71%
TOTAL LIABILITIES
EQUITY Common Stock Capital Surplus Treasury Stock Retained Earnings Other Components of Equity Equity Attributable to Parents Non-Controlling Interests
Analytical Procedures Vertical Analysis 2015 2016 0.47% 0.45% 0.94% 0.90% -0.14% -0.14% 33.98% 35.41% 1.84% 1.85% 37.09% 38.48% 1.48% 1.45%
Horizontal Analysis 2015-2016 11.10% 3.45% -0.80% 7.66%
Horizontal Analysis 2015-2016 0.00% 0.00% 0.04% 8.37% 4.55% 7.90% 1.47%
TOTAL EQUITY
38.57%
39.93%
7.65%
TOTAL LIABILITY and SHE
100.00%
100.00%
4.00%
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 21
Analytical Procedures
Sales Revenue Cost of Sales Gross Profit
Vertical Analysis 2015 2016 100.00% 100.00% -77.61% -78.33% 22.39% 21.67%
Horizontal Analysis 2015-2016 -4.12% -3.23% -7.20%
Operating Expenses: Selling, General and Administrative Operating Income
-18.94% 3.45%
-16.63% 5.04%
-15.83% 40.20%
ADD: Other Income Investment Income - Equity Method Interest Income
0.86% 0.19%
0.75% 0.16%
-16.00% -21.35%
LESS: Other Expenses Other Expenses, Net Earnings Before Interest and Taxes (EBIT)
-0.03% 4.47%
-0.02% 5.93%
-19.13% 27.13%
Finance Costs: Interest Expense Earnings Before Taxes (EBT)
-0.12% 4.35%
-0.09% 5.84%
-31.27% 28.80%
Tax Liability: Income Tax Expense Net Income/(Loss)
-1.57% 2.78%
-1.48% 4.35%
-9.38% 50.39%
Preliminary Assessment using Analytical Procedure The audit team conducted an analytical procedure in the planning stage to enhance the understanding of the client’s business and identify areas that may represent specific risks. The method used by the auditor in making an analytical procedure is by using vertical analysis and horizontal analysis to draw attention to those accounts in the financial statements that are likely to be misstated. Based on the findings, the expected accounts that are potentially misstated are: Accounts Percentage Change Cash and Cash Equivalent 13.38% Trade Receivables 10.53% Inventory 9.86% Property Plant and Equipment 10.91% Trade and Non-Payables 11.10% The primary reason is that, only these accounts have positive percentage changes for above 10% compare to the other accounts with negative percentages. Meaning, these accounts have increased from 2016 to 2017 for at least 10%. Hence, there is a possibility that the abovementioned accounts are overstated. Because the trade Receivables, Inventory and Trade Payables are affected, there is also a possibility that the Sales Account and Cost of Sales are potentially misstate since they are related accounts.
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CONSIDERATION OF INTERNAL CONTROL CONTROL ACTIVITIES IMPLEMENTED INTERNAL CONTROL
AUDIT PROCEDURES
Receiving and warehouse function should be separated from production function.
Verify physical assets and inventory.
PROPER AUTHORIZATION OF TRANSACTION RECORDS
All transactions and activities should be carried out and approved by employees acting within their range of knowledge and proper span of control.
Inspect, examine and verify all source documents, reports or files that occurred are properly authorized by an accredited personnel.
SUFFICIENT DOCUMENTS AND RECORDS
Letter of disbursement of goods authorized by an accredited personnel, use to report that the goods are delivered to the customers by the warehouse department.
PHYSICAL CONTROL OVER ASSETS AND RECORDS
Goods received from suppliers should be inspect, check and compare it with the copy of the purchase order.
SEGREGATION OF DUTIES
AUDIT REMARKS
We identified that there were proper segregation of the vital functions of the corporation. Proper designation of their responsibility and obligation and authorization were kept by different departments.
Inspection, examining and verifying all the letters, sales receipts, reports and other pertinent documents to the day-to-day transactions that occurred to the entity. Mark invoices “Paid” with the check number when checks are issued.
The documents that were inspected, examined and verified were properly authorized and approved by an accredited personnel.
Check payment to suppliers if properly approved and authorized by the accounting department.
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RISK ASSESSMENT IMPLEMENTED INTERNAL CONTROL
We appoint information security managers and information security administrators at each department.
AUDIT PROCEDURES
.
AUDIT REMARKS
We strive to raise awareness about information security among their staff by holding workplace meeting and conducting self-checks regarding their information security practices.
Using the auditors’ judgment, assess risk appropriately and make clear links between risk assessments and the procedures they perform, the audit stands a chance of uncovering material misstatements by focusing on the right areas.
MONITORING IMPLEMENTED INTERNAL COTROL
Management and supervisory involves in assessing the design and operation of controls on a timely basis and taking necessary corrective actions.
AUDIT PROCEDURES
Regular management and supervisory activities such as preparation of timeliness and accuracy of bank reconciliation..
AUDIT REMARKS
The system of internal control should be periodically reviewed by management. By performing a periodic assessment, management assures that internal control activities have not become obsolete or lost due to turnover or other factors.
CONTROL ENVIRONMENT
IMPLEMENTED INTERNAL COTROL
AUDIT PROCEDURES
Established ethical standards that discourage employees from engaging in dishonest, unethical, or illegal acts that should materially affect the financial statements.
Promote strengthen environmental initiative led regional headquarters and distributors
AUDIT REMARKS
Environmental activities framework under way according to plans in each region
INFORMATION AND COMMUNICATION SYSYTEM IMPLEMENTED INTERNAL COTROL
Measure the value of transaction in a manner that permits recording their proper monetary value in the financial statements.
AUDIT PROCEDURES
Establishes control over client input and calculates key processing result, such as ending balance of a control account.
AUDIT REMARKS
The system provides reasonable assurance that the monetary value was properly recoded in the financial statements.
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CASH DISBURSEMENTS and CASH RECEIPTS FLOWCHART
NOTE:The audit team set the control risk with regards to internal control of cash at a maximum level because there is an indication that the internal control is not effective. Hence, no test of control is needed to be performed and the auditor will rely primarily on the substantive tests.
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PURCHASE SYSTEM FLOWCHART
PURCHASE SYSTEM TEST OF CONTROL ASSERTIONS
Occurrence
Completeness
Accuracy and Valuation
SPECIFIC CONTROL All recorded purchases are bona fide transactions, in that they relate to the specified raw materials ordered which have been authorized and received. Purchases are disclosed and classified in accordance with disclosure policies. Inventory quantities have been accurately determined.
COMMON CONTROL & PROCEDURES Raw materials received are monitored, inspected and compared to the purchase order before acceptance.
Procedures to ensure appropriate account coding on purchases documents Comparison of physical inventory counts with amounts in the accounting inventory records.
TEST OF CONTROLS Select a sample of order entries in purchase journal, trace back to vouchers and inspect for existence of supporting document including receiving report, ensuring agreement of details, indication of approval. Check the review of account coding on purchase documents, and appropriate authorization. Review and tests physical stock take procedures. Review reconciliation and inspect for sign off by senior personnel.
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ATTRIBUTE SAMPLING FOR INVENTORY Type of Sampling: Statistical Sampling Sample Selection Method: Random Sampling Audit Objective:To prove the existence, rights, accuracy and realizable value of items in a company’s inventory Audit Procedures
Description
Inquiry
Evidence obtained by clients personnel or management
Inspection
Examine business documents for approval signatures, stamps, review check marks, which indicate that controls have been performed Observe a business process in action, and in particular the control elements of the process Initiate a new transaction, to see which controls are used by the client and the effectiveness of those controls Involves checking additions and computations
Observation Re-performance Re-calculation Population Size
Sample Size
Amount of Deviations found (Sample)
30,000 invoices
1,000 invoices
15
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Rate 5% 3% 1% 1.5%
CONTROL RISK ASSESSMENT Formula: Allowance of Sampling Risk +Actual Misstatement Rate Maximum Deviation Rate < Tolerable Misstatement
Therefore:1% + 1.5% = 2.5% < 5% 𝐴𝑚𝑜𝑢𝑛𝑡𝑜𝑓𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛𝑠𝑓𝑜𝑢𝑛𝑑𝑜𝑛𝑡ℎ𝑒𝑠𝑎𝑚𝑝𝑙𝑒 𝑆𝑎𝑚𝑝𝑙𝑒𝑠𝑖𝑧𝑒 = 15 / 1,000 = 1.5%
𝐴𝑐𝑡𝑢𝑎𝑙𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 =
Through this sampling test, the audit team decided to set the tolerable deviation rate based on our professional judgment to 5% and we are expecting to have a deviation rate of 3%. Based on our actual testing, the actual deviation rate resulted to 1.5% which represents the 15 deviations from the 1000 sample documents where some of the calculations of inventory are not valid and is not accurate for the specific inventory periods. With these, we arrived our maximum deviation rate by adding the allowance of sampling risk 1% and the actual deviation rate of 1.5% totaling to 2.5% maximum deviation rate. The conclusion equates to saying that the Inventory System Internal Control is reliable. In the beginning of testing of account balances, we can tell that this internal control is reliable to limit the testing of the Inventory System Account.
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Conclusion: The control risk is assessed to be BELOW MAXIMUM based on sufficient and appropriate audit evidence obtained in performing test of control as to operating effectiveness of inventory system..
SALES SYSTEM FLOWCHART
SALES SYSTEM TEST OF CONTROL ASSERTIONS
SPECIFIC CONTROL
COMMON CONTROL POLICIES AND PROCEDURES
Existence and Occurrence
Sales transaction that are recorded for vehicles shipped to customers in good faith.
Mailed monthly customer statements.
Completeness
Occurrence
Accuracy, Classification and Evaluations
TEST OF CONTROL
Keep track of their account through monthly customer statement, examine customer credit. . Independently verified the sequence of sale invoice.
Recurring sales of vehicles shipped are billed and recorded in the accounting records accurately. Recorded cash receipts are for collection of receivables resulting from sales to customers of the entity
Shipping documents are pre-numbered and accounted for on periodic basis. Cash receipts matched to specific sales invoices in posting to accounts receivable master file.
Select sample of entries in cash receipts journal and review evidence that matched specific sales invoices.
Cash receipts are recorded at the right amounts.
Have a daily remittance report that is reconciled to the control listing of remittance advices.
Review the reconciliations
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ATTRIBUTE SAMPLING FOR SALES Type of Sampling:Statistical Sampling Sample Selection Method:Random Sampling Audit Objective:To determine if sales are fairly presented in the context of the financial statements as a whole Audit Procedures Observation Inspection Inquiry Recalculation Re-performance
Description Looking at a process or procedure being performed by others so that evidence about the actual performance is obtained Examination of documents or records, whether internal or external to provide evidence of reliability Providing appropriate information to the auditor from knowledgeable persons within or outside the entity Checking the mathematical accuracy of documents or records that can be used to verify the accuracy of the recording transactions Repeating the activity performed by the client to determine whether proper results were obtained
Population Size
Sample Size
Amount Of Deviations Found (Sample)
40,000
1,500
30
Factors considered in determining sample size: Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Rate 5% 3% 1% 2%
CONTROL RISK ASSESSMENT Formula: Allowance of Sampling Risk + Actual Misstatement Rate Maximum Deviation Rate < Tolerable Misstatement
Therefore: 1% + 2% = 3% < 5% 𝐴𝑚𝑜𝑢𝑛𝑡𝑜𝑓𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛𝑠𝑓𝑜𝑢𝑛𝑑𝑜𝑛𝑡ℎ𝑒𝑠𝑎𝑚𝑝𝑙𝑒 𝑆𝑎𝑚𝑝𝑙𝑒𝑠𝑖𝑧𝑒 = 30 / 1,500 =2%
𝐴𝑐𝑡𝑢𝑎𝑙𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 =
Through this sampling test, the audit team decided to set the tolerable deviation rate based on our professional judgment to 5% and we are expecting to have a deviation rate of 3%. Based on our actual testing, the actual deviation rate resulted to 2% which represents the 30 deviations from the 1500 sample documents where some of the sales calculations are not valid and is not accurate for the specific sales periods. With these, we arrived our maximum deviation rate by adding the allowance of sampling risk 1% and the actual deviation rate of 2% totaling to 3% maximum deviation rate. The conclusion equates to saying that the Sales System Internal Control is reliable. In the beginning of testing of account balances, we can tell that this internal control is reliable to limit the testing of the Sales System Account.
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Conclusion: The control risk is assessed to be BELOW MAXIMUM based on sufficient and appropriate audit evidence obtained in performing test of control as to operating effectiveness of sales system.
PAYROLL SYSTEM FLOWCHART
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PAYROLL SYSTEM TEST OF CONTROL COMMON CONTROL PROCEDURES AND POLICIES General payroll Training processing Timely appointment and payment processing
ASSERTION SATISFIED
SPECIFIC CONTROL
Occurrence and Completeness
Separation of duties
Computation, Classification, Accuracy and Valuation Completeness, Occurrence and Accuracy and Valuation
Payroll calculation
Automated timekeeping systems . Hours worked verification .
Time card processing
Review and approval of time cards.
Verification of payroll
System security
Occurrence and Accuracy Testing for terminated employees
Classification, Presentation and Cut-off
Presentation, Classification and Understandability
Amounts are correctly recorded in the journal andposted in the general ledger Overtime/com pensation time earning
Proper recording of entries and related adjustments
Approval of overtime
TEST OF CONTROLS Insure the proper training of departmental payroll staff Prompt payment of employees through timely preparation and submission of complete, authorized appointment and payroll documents Separate the duties of preparing personnel forms, entering payroll transactions, approving payroll entries, and distributing payroll checks Consider installing a computerize time clock. Always have a supervisor approve hours worked by employees, to prevent employees from charging more time than they actually worked. Complete time cards for hourly employees and have employee sign
Insure only appropriate and authorized employees are given update or inquiry access to payroll system panels for viewing or updating payroll data. Select a sample of the client’s terminated employees and trace them back to the payroll register. Journal entries for amounts due to, or on behalf of, employees, payroll disbursements, and related adjustments should be prepared each accounting period.
Give prior approval before employees work overtime
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ATTRIBUTE SAMPLING FOR PAYROLL SYSTEM Type of Sampling: Statistical Sampling Sample Selection Method: Random Sampling Audit Objective: To provide reasonable assurance that the payroll calculation in every pay period is valid. AUDIT PROCEDURES
DESCRIPTION Evidence obtained from inside and outside the entity. Inspection of documents and records provide varying degrees of reliability, depending on the nature and source of the documents. Observation of the application of a client or entity’s policy or procedure provides assurance of the procedure at a given point in time, but not necessarily of its performance at other times during the year. Techniques may be performed manually or through the use of computer-assisted audit techniques. Computation or recalculation provides a high level of assurance regarding arithmetical accuracy.
Inquiry Inspection
Observation
Re-performance Re-calculation
Population Size
Sample Size
Amount of Deviations Found (Sample)
10,000
500
5
Factors
Rate
Tolerable Deviation Rate
5%
CONTROL RISK ASSESSMENT Allowance of Sampling Risk + Actual Deviation Rate = Maximum Deviation Rate < Tolerable Deviation Rate 1% + 1% = 2%< 5%
Expected Deviation Rate Allowance of Sampling Risk Actual Deviation Rate
3% 1% 1%
CONCLUSION:The control risk is assessed to be BELOW MAXIMUM based on sufficient and appropriate audit evidence obtained in performing test of controls as to operating effectiveness of payroll system.
Through this sampling test, the audit team decided to set the Tolerable Deviation rate based on our professional judgment to 5% and we are expecting to have a deviation rate of 3%. Based on our actual testing, the actual deviation rate resulted to 1% which represents the 5 deviations found from the 500 sample documents where some of the payroll calculations are not valid and is not accurate for the specific pay period. With these, we arrived our maximum deviation rate by adding the Allowance of sampling risk of 1% and the actual deviation rate of 1% totaling to 2% maximum deviation rate. The conclusion equates to saying that the Payroll System Internal Control is reliable. In the beginning of testing of account balances, we can tell that this internal control is reliable to limit the testing of the payroll system account.
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Conclusion: The control risk is assessed to be BELOW MAXIMUM based on sufficient and appropriate audit evidence obtained in performing test of control as to operating effectiveness of payroll system
FIXED ASSET CYCLE
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FIXED ASSET TEST OF CONTROL Specific Control
Common Control Policies and Procedures
Test of Controls
Assertion Satisfied
Acquisition of fixed asset have been included in the accounting system
Based on the Conceptual Random physical Framework for Financial verification of fixed Reporting, fixed asset is asset. to be recognized if and only if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the asset to the entity can be measured reliably.
Existence
Acquisition of fixed assets are recorded in the right period
Assets received are sent to the accounts department
Cut-off
Fixed assets quantities have been accurately determined
Standard cost reviewed by the management
Inspect a number of assets received reports for evidence of when this was received by the accounts department Review and test the entity’s procedure of developing standard cost
All non-current assets are correctly recorded
Capital assets must be written up in the noncurrent asset register
Review non-current asset records for regularity of performance and reviews by the senior personnel and that all discrepancies are followed up and resolved timely
Completeness
Depreciation of fixed asset
All depreciation charges Recalculation of Accuracy are accurately calculated depreciation expenses and recorded in the appropriate period.
Valuation
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ATTRIBUTE SAMPLING FOR PROPERTY, PLANT, AND EQUIPMENT Type of Sampling: Statistical Sampling Samples Selection Method: Random Sampling Audit Objectives: To obtain sufficient appropriate audit evidence.
AUDIT PROCEDURES Inquiry
DESCRIPTION Evidence obtained from inside and outside the entity. Inspect documents and records provides varying degrees of reliability, depending on the nature and source of the documents.
Inspection Observation
Re-performance Re-calculation
Observe the application of a client’s or entity’s policy or procedure provides assurance of that procedure at a given point in time, but not necessarily of its performance at other times during the year. Techniques may be performed manually or through the use of computer-assisted audit techniques. Computation or recalculation provides a high level of assurance regarding arithmetical accuracy.
Population Size
Sample Size
20,000
2,000
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Amounts of Deviation Found (Sample) 30
CONTROL RISK ASSESSMENT
Rate 5% 3% 1%
Formula: Allowance of Sampling Risk + Actual Misstatement Rate Maximum Deviation Rate < Tolerable Misstatement
1.5%
Therefore: 1.5% + 1% = 2.5% < 5% 𝐴𝑚𝑜𝑢𝑛𝑡𝑜𝑓𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛𝑠𝑓𝑜𝑢𝑛𝑑𝑜𝑛𝑡ℎ𝑒𝑠𝑎𝑚𝑝𝑙𝑒 𝑆𝑎𝑚𝑝𝑙𝑒𝑠𝑖𝑧𝑒 = 30 / 2,000 =1.5%
𝐴𝑐𝑡𝑢𝑎𝑙𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 =
Through this sampling test, the audit team decided to set the tolerable deviation rate based on our professional judgement to 5% and we are expecting to have a deviation rate of 3%. Based on our actual testing, the actual deviation rate resulted to 1.5% which represents the 30 deviation from the 2000 sample documents where some of the PPE calculations are not valid and is not accurate for the specific PPE periods. With these, we arrived our maximum deviation rate by adding the allowance of sampling risk 1% and the actual deviation rate of 1.5% totalling to 2.5% maximum deviation rate. The conclusion shows that the PPE system Internal Control is reliable. In the beginning of testing of accounts balances, we can tell that this internal control is reliable to limit the testing of the PPE System Account. CONCLUSION: CONTROL RISK assessed at below maximum. Less Substantive is required. The degree of reliance on the controls is supported by the pieces of evidence gathered.
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SUBSTANTIVE TESTING AUDIT OF CASH Audit Objectives 1. To determine whether the cash on the statement of financial position is held by the entity 2. To determine whether all cash owned by the entity is included o the statement of financial position 3. To determine whether the cash is measured at realizable value and allocated properly on the statement of financial position 4. To determine whether the entity has legal right to use on all the cash on the statement of financial position 5. To determine whether the cash is properly classified, described and disclosed in the financial statement in accordance with GAAP Audit Procedures 1. 2. 3. 4. 5. 6.
Sending confirmation to banks or financial institutions Conducting cash counts Obtaining and testing bank reconciliation and preparing proof of cash Obtaining Interbank Transfer Schedule and Tracing Bank Transfers Checking the appropriate valuation of cash Performing analytical procedures to assess the reasonableness of reported cash.
Audit Findings Account
Balance Per Ledge
Cash on Hand Cash in Bank - TBH Cash in Bank - FYI Cash Fund Cash Equivalent Total
Adjustments DEBIT CREDIT
350,000.00 100,000,000.00 100,000,000.00 247,600.00 10,000,000.00 210,597,600.00
75,000,000.00 75,000,000.00
150,000,000.00
Audited Balance 350,000.00 25,000,000.00 25,000,000.00 247,600.00 10,000,000.00 60,597,600.00
After a thorough examination of the client's bank accounts, an irregularity was created by a cash transfer between bank accounts and it was found that an amount of 150,000,000 has been floating from one bank to another since November 2016 to January 2017 and this results to an overstatement of cash balance due to kiting. Corroborating Evidence 1. 2. 3. 4. 5.
Cash Count Sheets Cutoff Schedules Bank Confirmations Interbank Transfer Schedules 2-Month Bank Reconciliation (Proof of Cash)
Conclusions Therefore, the cash in bank accounts are materially misstated.
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Evidence 1: Cash Count Schedules CASH COUNT SHEET MaramingPera Corporation Client
December 31, 2016 Date
January 10, 2017 Audit Date
Cash on Hand Account Name
Bernard Ace N. Romano Counted By
9:00 A.M. Time
Denominations
Quantity
Amount
Total
1,000 500 200 100 50 20
100 200 300 400 500 600
100,000 100,000 60,000 40,000 25,000 12,000
337,000
10 5 1
500 1,000 3,000
5,000 5,000 3,000
13,000
None None None
-
-
Bills:
Coins:
Checks Vouchers Others Total
350,000
Above listed cash items in the amount of 350,000.00 were returned to me after count by a representative of Laban ng mgaAstig Firm. All cash and cash items for which I am accountable to, have been presented for inspection and count.
January 10, 2017 Date
BERNARD ACE N. ROMANO, CPA Auditor
CASSIE O. HU Custodian
Audit Findings: The audit team conducted a cash count schedule on January 10, 2017 to test the existence, valuation and allocation, rights and obligations of the cash on hand account. Based on the findings, the balance per book and the balance per audit arrived at the same amount of 350,000. Hence, the cash on hand account is reasonably presented and free from material misstatements.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 37
Evidence 2: Cash Count Schedules CASH COUNT SHEET MaramingPera Corporation Client
December 31, 2016 Date
January 12, 2017 Audit Date
Petty Cash Fund Account Name
Bernard Ace N. Romano Counted By
9:00 A.M. Time
Denominations
Quantity
Amount
Total
1,000 500 200 100 50 20
10 10 15 15 20 20
10,000 5,000 3,000 1,500 1,000 400
20,900
10 5 1
100 100 200
1,000 500 200
1,700
Checks: Officer’s Check Checks for PTC
5,000 20,000
5 10
25,000 200,000
225,000
Vouchers Others:
None None
-
-
Bills:
Coins:
Total
247,600
Above listed cash items in the amount of 247,600.00 were returned to me after count by a representative of Laban ng mgaAstig Firm. All cash and cash items for which I am accountable to, have been presented for inspection and count.
January 12, 2017 Date
BERNARD ACE N. ROMANO, CPA Auditor
PETTIE C. CANNY Custodian
Audit Findings: The audit team conducted a cash count schedule on January 12, 2017 to test the existence, valuation and allocation, rights and obligations of the Petty Cash Fund Account. Based on the findings, the balance per book and the balance per audit arrived at the same amount of 247,600. Hence, the petty cash fund account is reasonably presented and free from material misstatements.
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Evidence 3: Cutoff Schedule CUTOFF SCHEDULE MaramingPera Corporation Client
December 31, 2016 Date
January 25, 2017 Audit Date
Cash Equivalents Account Name
Bernard Ace N. Romano Counted By
9:00 A.M. Time
Investment Time Deposit Time Deposit Time Deposit Time Deposit Commercial Paper Commercial Paper Commercial Paper Commercial Paper Commercial Paper Commercial Paper Commercial Paper Treasury Bill Treasury Bill Treasury Bill TOTAL
Amount 500,000.00 500,000.00 750,000.00 750,000.00 250,000.00 450,000.00 450,000.00 350,000.00 500,000.00 500,000.00 500,000.00 1,000,000.00 1,500,000.00 2,000,000.00 10,000,000.00
Term Date Acquired Maturity Date Cash Equivalent 3-month 1-Nov-16 1-Feb-17 Yes 3-month 1-Nov-16 1-Feb-17 Yes 6-month 1-Dec-16 1-Mar-17 Yes 6-month 1-Dec-16 1-Mar-17 Yes 3-month 15-Dec-16 15-Mar-17 Yes 3-month 15-Dec-16 15-Mar-17 Yes 3-month 15-Dec-16 15-Mar-17 Yes 3-month 15-Dec-16 15-Mar-17 Yes 6-month 15-Nov-16 15-Feb-17 Yes 6-month 15-Nov-16 15-Feb-17 Yes 6-month 15-Nov-16 15-Feb-17 Yes 1-year 15-Oct-16 15-Jan-17 Yes 2-year 15-Oct-16 15-Jan-17 Yes 3-year 15-Oct-16 15-Jan-17 Yes
Above listed cash items in the amount of 10,000,000.00 were returned to me after count by a representative of Laban ng mgaAstig Firm. All cash and cash items for which I am accountable to, have been presented for inspection and count.
January 15, 2017 Date
BERNARD ACE N. ROMANO,CPA Auditor
CANE U. EDWIN Custodian
Audit Findings: The audit team conducted a lapsing schedule on January 15, 2017 to test the existence, valuation and allocation, rights and obligations of the cash equivalent account. Based on the findings, the balance per book and the balance per audit arrived at the same amount of 10,000,000. Hence, the cash equivalent account is reasonably presented and free from material misstatements.
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Evidence 4: Bank Confirmation BANK CONFIRMATION (TBH Checking Account) Attn. Tan Brandon Hu, Senior Manager TBH Bank of Tacloban Real St., San Jose, Tacloban City
TBH Bank, Inc We have provided to our auditors the following information as of the close of business on December 31, 2016, regarding our deposit balances. Please confirm the accuracy of the information, noting any exceptions to the information provided. If the balances have been left blank, please complete this form by furnishing the balance in the appropriate space below. Although we do not request nor expect you to conduct a comprehensive, detailed search of your records, if, during the process of completing this confirmation, additional information about other deposit and loan accounts we may have with you comes to your attention, please include such information below. Please use the enclosed envelope to return the original directly to our auditors, Laban ng mgaAstig Firm. At the close of business on the date listed above, our records indicated the following deposit balances: Account Name General Account
Account No. 12345678
Type of Account TBH Checking Account
JEROME C. CHAVEZ, CMA Customer’s Authorized Signature
Interest Rate None
Balance 100 000 000
January 15, 2017 Date
----------------------------------To be filled by the bank’s authorized personnel --------------------------The information presented above by the customer is in agreement with our records. Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention.
TERRENCE BILL V. ROMEO, Financial Director Financial Institution Authorized Signature
January 15, 2017 Date
Please return this form directly to our auditors: Laban ng mgaAstig Firm. P.O. Box 14344, 6500 Tacloban City
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BANK CONFIRMATION (FYI Checking Account)
Attn. Fey Yannie II, Senior Manager FYI Bank of Palo Campetic Palo, Leyte
FYI Bank, Inc. We have provided to our auditors the following information as of the close of business on December 31, 2016, regarding our deposit balances. Please confirm the accuracy of the information, noting any exceptions to the information provided. If the balances have been left blank, please complete this form by furnishing the balance in the appropriate space below. Although we do not request nor expect you to conduct a comprehensive, detailed search of your records, if, during the process of completing this confirmation, additional information about other deposit and loan accounts we may have with you comes to your attention, please include such information below. Please use the enclosed envelope to return the original directly to our auditors, Laban ng mgaAstig Firm. At the close of business on the date listed above, our records indicated the following deposit balances: Account Name General Account
Account No. 87654321
Type of Account FYI Checking Account
JEROME C. CHAVEZ, CMA Customer’s Authorized Signature
Interest Rate None
Balance 100 000 000
January 15, 2017 Date
-----------------------------------To be filled by the bank’s authorized personnel -------------------------The information presented above by the customer is in agreement with our records. Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention.
JOHN T. MANZANO, Financial Director Financial Institution Authorized Signature
January 15, 2017 Date
Please return this form directly to our auditors: Laban ng mgaAstig Firm. P.O. Box 14344, 6000 Campetic Palo
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Audit Findings: The audit team sent a bank confirmation letter on January 15, 2017 to confirm the existence, valuation and allocation, rights and obligations and presentation and disclosure of the cash in bank account. The cash in bank presented was confirmed by the bank institutions. MaramingPera Corporation provided the following information from the Cash - TBH Checking Account No. 123456789 Balance per Book, November 30 Cash Receipts for December Cash Disbursement for December Balance per Book, December 31
85,000,000 185,000,000 174,000,000 96,000,000
Details of the cash records revealed the following list of the company's receipts and disbursements for the month of December:
Receipts OR No. Amount 99 100 101 102 103 104 105 106 107 108 109 110 111 112 315 Total
5,000,000.00 8,000,000.00 4,000,000.00 20,000,000.00 7,000,000.00 4,000,000.00 5,000,000.00 8,000,000.00 40,000,000.00
5,000,000.00 4,000,000.00 75,000,000.00 185,000,000.00
Disbursements Check No. Amount 300 75,000,000.00 301 302 2,000,000.00 303 5,000,000.00 304 4,000,000.00 305 20,000,000.00 306 6,000,000.00 307 4,000,000.00 308 5,000,000.00 309 3,000,000.00 310 40,000,000.00 311 312 313 4,000,000.00 314 6,000,000.00 315 174,000,000.00
The audit team proceeded by obtaining also a copy of the bank statement for the month of December for purposes of reconciling the balance per book and balance per bank.
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Bank Statement TBH Checking Acount No. 12345678 31-Dec-16
Date 30-Nov
31-Dec
Particulars Balance Check no. 300 Check no. 301 Check no. 302 Check no. 303 Check no. 304 Check no. 305 Check no. 306 Check no. 307 Check no. 308 Check no. 309 Check no. 310 Check no. 311 Check no. 312 Check no. 313 Check no. 314 Check no. 315 Total
Debit
Credit
75,000,000.00 3,000,000.00
75,000,000.00 3,000,000.00
5,000,000.00 4,000,000.00 20,000,000.00 6,000,000.00 4,000,000.00 5,000,000.00 3,000,000.00 40,000,000.00 5,000,000.00 3,000,000.00
8,000,000.00 4,000,000.00 20,000,000.00 7,000,000.00 4,000,000.00 5,000,000.00 8,000,000.00 40,000,000.00 6,000,000.00 6,000,000.00
173,000,000.00
186,000,000.00
Balance 88,000,000.00 88,000,000.00 88,000,000.00 88,000,000.00 91,000,000.00 91,000,000.00 91,000,000.00 92,000,000.00 92,000,000.00 92,000,000.00 97,000,000.00 97,000,000.00 98,000,000.00 101,000,000.00 101,000,000.00 101,000,000.00 101,000,000.00
Audit Findings The audit team obtain the details of the cash records regarding the company's receipts and disbursements for the month of December as well as the bank statement to check the existence, completeness, valuation and allocation and rights and obligations of the cash in bank accounts. The audit team reconcile both records and found out the reconciling items that there was Deposits in Transit, Outstanding Checks, Credit Memos and Debit Memos. In this regard, the audit team make their own 2-Month Bank Reconciliation also known as Proof of Cash to check the correctness in reconciling both records during the month of November and December.
,
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Reconciling Items
Amount
Deposits in Transit: OR No. 99 – November OR No. 111 – December OR No. 112 – December Outstanding Checks: Check No. 301 – November Check No. 313 – December Check No. 314 – December Credit Memos: OR No. 100 – November OR No. 109 – December OR No. 110 – December Debit Memos: Check No. 302 – November Check No. 311 – December Check No. 312 – December
3 000 000 5 000 000 4 000 000 3 000 000 4 000 000 6 000 000 5 000 000 6 000 000 6 000 000 2 000 000 5 000 000 3 000 000
Evidence 5: Bank Reconciliation 2-MONTH BANK RECONCILIATION (PROOF OF CASH) Balance Per Book:
Reconciling Items Balance per Book Credit Memo 30-Nov 31-Dec Debit Memo 30-Nov 31-Dec Adjusted Balance
30-Nov 85,000,000.00
Receipts 185,000,000.00
5,000,000.00
(5,000,000.00) 12,000,000.00
12,000,000.00
88,000,000.00
192,000,000.00
(2,000,000.00) 8,000,000.00 (8,000,000.00) 180,000,000.00 100,000,000.00
30-Nov 88,000,000.00
Receipts 186,000,000.00
Disbursements 173,000,000.00
3,000,000.00
(3,000,000.00) 9,000,000.00
9,000,000.00
192,000,000.00
(3,000,000.00) 10,000,000.00 (10,000,000.00) 180,000,000.00 100,000,000.00
(2,000,000.00)
Disbursements 174,000,000.00
31-Dec 96,000,000.00
Balance Per Bank:
Reconciling Items Balance per Bank Deposits in Transit 30-Nov 31-Dec Outstanding Checks 30-Nov 31-Dec Adjusted Balance
(3,000,000.00) 88,000,000.00
31-Dec 101,000,000.00
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Computation of Deposits in Transit: Deposits in Transit – Beginning Add: Cash Deposited during December: Book Debits Less: November CM Total
3 000 000 185 000 000 (5 000 000)
Less: Deposits Acknowledge by Bank in December Bank Credits Less: December CM Deposits in Transit – Ending
180 000 000 183 000 000
186 000 000 (12 000 000)
174 000 000 9 000 000
Computation of Outstanding Checks: Outstanding Checks – Beginning Add: Checks Drawn during December Book Credits Less: November DM Total
3 000 000 174 000 000 (2 000 000)
Less: Checks Paid by Bank during December Bank Debits Less: December DM Outstanding Checks – Ending
172 000 000 175 000 000
173 000 000 (8 000 000)
165 000 000 10 000 000
Evidence 6: Interbank Transfer Schedule INTERBANK TRANSFER SCHEDULE November 2016 to January 2017
DETAILS
TBH Disbursing Account
FYI Receiving Account
Date Check no. Transfer No. Amount Recorded in Books Paid by TBH Bank Recorded in Book Received by FYI Bank 1-Nov 205 1 20,000,000.00 1-Nov 1-Nov 1-Nov 1-Nov 15-Nov 210 2 40,000,000.00 15-Nov 16-Nov 15-Nov 16-Nov 30-Nov 300 3 75,000,000.00 1-Dec 1-Dec 30-Nov 1-Dec 2-Dec 15-Dec 31-Dec
305 310 315
4 5 6
20,000,000.00 40,000,000.00 75,000,000.00
2-Dec 15-Dec 2-Jan
4-Dec 16-Dec 2-Jan
2-Dec 15-Dec 31-Dec
6-Dec 16-Dec 2-Jan
1-Jan 15-Jan 31-Jan
405 410 415
7 8 9
20,000,000.00 40,000,000.00 75,000,000.00
1-Jan 15-Jan 1-Feb
2-Jan 17-Jan 1-Feb
1-Jan 15-Jan 31-Jan
2-Jan 17-Jan 1-Feb
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DETAILS
FYI Disbursing Account
Date Check No. Transfer No. Amount Recorded in Books 1-Nov 205 1 20,000,000.00 1-Nov 15-Nov 210 2 40,000,000.00 15-Nov 30-Nov 300 3 75,000,000.00 1-Dec
Paid by Bank 1-Nov 16-Nov 1-Dec
TBH Receiving Account Recorded in Book Received by bank 1-Nov 1-Nov 15-Nov 16-Nov 30-Nov 1-Dec
2-Dec 15-Dec 31-Dec
305 310 315
4 5 6
20,000,000.00 40,000,000.00 75,000,000.00
2-Dec 15-Dec 2-Jan
6-Dec 16-Dec 2-Jan
2-Dec 15-Dec 31-Dec
4-Dec 16-Dec 2-Jan
1-Jan 15-Jan 31-Jan
405 410 415
7 8 9
20,000,000.00 40,000,000.00 75,000,000.00
1-Jan 15-Jan 1-Feb
2-Jan 17-Jan 1-Feb
1-Jan 15-Jan 31-Jan
2-Jan 17-Jan 1-Feb
Audit Findings: Through the support of interbank transfer schedule conducted by the auditor, it was found out that there were75 000 000amounts of cash in bank coming from TBH Bank Account and another 75 000 000 coming from FYI Bank Account have been floating from November to January and this results to an overstatement of cash in the amount of 150 000 000. Summary of Audit Procedures Classified per Assertion Assertion Category Existence
Completeness
Valuation an Allocation
Rights and Obligations
Presentation and Disclosure
Primary Audit Procedures Sending confirmation to banks or financial institutions Surprise cash count Obtaining and testing bank reconciliation and preparing proof of cash Obtaining bank cutoff statement and tracing bank transfers Obtaining and testing bank reconciliation and preparing proof of cash Obtaining bank cutoff statement and tracing bank transfers Sending confirmation to banks or financial institutions Surprise cash count Obtaining and testing bank reconciliation and preparing proof of cash Checking the appropriate valuation of cash Sending confirmation to banks or financial institutions Surprise cash count Obtaining and testing bank reconciliation and preparing proof of cash Obtaining bank cutoff statement and tracing bank transfers Sending confirmation to banks or financial institutions Checking the appropriate valuation of cash
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AUDIT OF RECEIVABLES Variable Sampling of TRADE RECEIVABLE Type of Sampling: Statistical Sampling Sample Selection Method: Random Sampling Based on: Positive Confirmation Letter Audit Objectives: 1. To determine whether trade receivable exists as of the balance sheet date. 2. To determine whether Trade receivable includes all amounts owed by customers at the reporting date. 3. To determine whether Trade receivable are owed to the entity and not pledged and subjected to other outside claims. 4. To determine whether entity has recorded items in correct amounts, accounts and time periods. Audit Procedures: 1. Obtained an aged trial balance of trade receivable and traced the total to the general ledger control account 2. Performed confirmation of receivables on a sample of year end trade receivable. 3. Reviewed bank confirmation and debts agreements for liens.
Less Than 250,000 250,000 to 500,000 500,001 to 1,000,000 1,000,001 to 1,500,000
Total Number of Accounts (Population Size) 500 90 40 30
1,500,001 and Above
10
Total
670
Trade Receivable Balances
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Sample Size (In terms of Value 15,200,000 8,800,000 10,500,000 26,700,000
(Positive Confirmation) 45 10 5 3
20, 500, 000
5
150,000
61,200,000
68
1,530,000
Sample Size
90 20 10 5 10(100% examination) 125
Rate 5% 3%
Amount 10,160,865.25
1%
-
2.5%
8,200,800.00
Amount of Misstatemen t found
Audit Procedure
(Sample Size )
650,000 500,000 230,000 None
Projected Misstatement: Formula: 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑆𝑖𝑧𝑒 × 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
Therefore: 670 × 1,530,000 = 𝟖, 𝟐𝟎𝟎, 𝟖𝟎𝟎 125
Actual Misstatement Rate: Amount of Misstatement / Sample Size (In terms of Amount) = 2.5% Projected Misstatement is less than Tolerable Misstatement 8,200,800.00<10,160,856.25 Conclusion: Therefore, Trade Receivable is free from material misstatements and reasonably presented.
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Evidence: POSTIVE RECEIVABLE CONFIRMATION January 10, 2017 Dear Sir, Please confirm directly to our auditors LABAN NG MGA ASTIG FIRM P.O Box 12322, 6501 Campetic, Palo Leyte The correctness of the balance of your accounts payable to us as shown below and on the enclosed statement at Dec 31, 2017. Further use in connection with the examination of our accounts. If the amount is correct, please sign this letter in the space provided below. If not correct, please list on the remarks portion full details of the difference. A return envelope is enclosed for your reply. No postage stamps are required. PLEASE NOTE THE DATE as of which we request confirmation. Transactions with us or payments to us between that date and the date you received this letter are not to be considered. Thank you for your cooperation.
Please fax an advance copy of your reply at 143-37562. Attention of Mr. Bernard Ace Romano, Partner-In-Charge
Very truly yours,
JUAN B. MANLANGIT Controller, Comp
THIS IS NOT A REQUEST FOR PAYMENT, BUT MERELY FOR CONFIRMATION OF YOUR ACCOUNT. ------------------------------------------------------------------------------------------------------------------------------THE FOLLOWING BALANCE DUE FROM US IS CORRECT: Due to: ABCD Company
As of: January 10, 2017
Amount: P550,000.00 Remarks: None
JESUSA B. DONAYRE Manager, Accounts Payable Department
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AUDIT OF INVENTORY and COST OF SALES Acceptable Sampling Risk 15% Tolerable Misstatement 8% Expected Misstatement 4% Actual Misstatement 0% Allowance for Sampling Risk 2% Upper Precision Limit 2% Audit Objectives: 1. To determine the existence of the account that all inventories reported on the balance sheet are held by the entity and transactions have really occurred and pertain to the entity. 2. To determine whether the inventory account is correctly valuated and allocated that inventories are carried at the lower of cost or net realizable value. 3. To determine the completeness of the record of the account and transaction, that all inventories owned by the entity at the reporting date are included on the balance sheet and all cost of sales is included in the income statement. 4. Purchases (cost of sales) have been recorded in the proper accounting period. 5. To determine the authenticity of the title or ownership of the inventory reported on the balance sheet. 6. To determine whether the inventories are properly classified, described and disclosed in the financial statements in accordance with the standard. Audit Procedures: 1. 2. 3. 4. 5. 6. 7.
Observing inventory count and performing test counts. Checking appropriate valuation in accordance with accounting policies. Trace the account from the source document to client's record. Performing lower of cost or net realizable value test. Performing purchases and inventory cut-off. Reconciling inventory summary sheet with general ledger. Perform analytical procedures.
Corroborating Evidence: 1. Inventory Countsheet 2. Cut-off Schedule 3. Tracing
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EVIDENCE 1.1.1: INVENTORY Count Sheet (Warehouse) SHEET NO: 1-A PERIOD: April-June PERFORMED BY:Coriza Joyce G. Atibula, CPA REVIEWED BY:Bernard Ace N. Romano, CPA
Date
Apr-10
Apr-20
Apr-30
May-10
May-20
May-31
Jun-10
Jun-20
Jun-30
INVENTORY COUNT SHEET (Warehouse) Type of Inventory Purchase Price Balance (units) Truck Motorcycle Bus Car
₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00
Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van
₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00
7 26 5 20 16 10 33 6 23 20 11 30 5 20 13 5 30 5 23 16 10 26 5 23 13 6 29 5 17 15 8 28 5 21 17 7 31 8 24 14 10 31 8 20 18
Total Amount ₱700,000.00 ₱520,000.00 ₱625,000.00 ₱1,500,000.00 ₱1,440,000.00 ₱1,000,000.00 ₱660,000.00 ₱750,000.00 ₱1,725,000.00 ₱1,800,000.00 ₱1,100,000.00 ₱600,000.00 ₱625,000.00 ₱1,500,000.00 ₱1,170,000.00 ₱500,000.00 ₱600,000.00 ₱625,000.00 ₱1,725,000.00 ₱1,440,000.00 ₱1,000,000.00 ₱520,000.00 ₱625,000.00 ₱1,725,000.00 ₱1,170,000.00 ₱600,000.00 ₱580,000.00 ₱625,000.00 ₱1,275,000.00 ₱1,350,000.00 ₱800,000.00 ₱560,000.00 ₱625,000.00 ₱1,575,000.00 ₱1,530,000.00 ₱700,000.00 ₱620,000.00 ₱1,000,000.00 ₱1,800,000.00 ₱1,260,000.00 ₱1,000,000.00 ₱620,000.00 ₱1,000,000.00 ₱1,500,000.00 ₱1,620,000.00
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EVIDENCE 1.1.2: INVENTORY Count Sheet (Warehouse) SHEET NO: 1-B PERIOD: October-December PERFORMED BY:Coriza Joyce G. Atibula, CPA Reviewed by: Bernard Ace N. Romano, CPA
Date
Oct-10
Oct-20
Oct-31
Nov-10
Nov-20
Nov-30
Dec-10
Dec-20
Dec-31
INVENTORY COUNT SHEET (Warehouse) Type of Inventory Purchase Price Balance (units) Truck ₱100,000.00 10 Motorcycle ₱20,000.00 30 Bus ₱125,000.00 8 Car ₱75,000.00 22 Van ₱90,000.00 17 Truck ₱100,000.00 8 Motorcycle ₱20,000.00 26 Bus ₱125,000.00 5 Car ₱75,000.00 23 Van ₱90,000.00 13 Truck ₱100,000.00 8 Motorcycle ₱20,000.00 28 Bus ₱125,000.00 5 Car ₱75,000.00 23 Van ₱90,000.00 15 Truck ₱100,000.00 7 Motorcycle ₱20,000.00 24 Bus ₱125,000.00 6 Car ₱75,000.00 20 Van ₱90,000.00 17 Truck ₱100,000.00 10 Motorcycle ₱20,000.00 30 Bus ₱125,000.00 8 Car ₱75,000.00 20 Van ₱90,000.00 19 Truck ₱100,000.00 9 Motorcycle ₱20,000.00 32 Bus ₱125,000.00 8 Car ₱75,000.00 21 Van ₱90,000.00 18 Truck ₱100,000.00 7 Motorcycle ₱20,000.00 32 Bus ₱125,000.00 5 Car ₱75,000.00 25 Van ₱90,000.00 19 Truck ₱100,000.00 7 Motorcycle ₱20,000.00 30 Bus ₱125,000.00 7 Car ₱75,000.00 24 Van ₱90,000.00 20 Truck ₱100,000.00 10 Motorcycle ₱20,000.00 31 Bus ₱125,000.00 8 Car ₱75,000.00 23 Van ₱90,000.00 17
Total Amount ₱1,000,000.00 ₱600,000.00 ₱1,000,000.00 ₱1,650,000.00 ₱1,530,000.00 ₱800,000.00 ₱520,000.00 ₱625,000.00 ₱1,725,000.00 ₱1,170,000.00 ₱800,000.00 ₱560,000.00 ₱625,000.00 ₱1,725,000.00 ₱1,350,000.00 ₱700,000.00 ₱480,000.00 ₱750,000.00 ₱1,500,000.00 ₱1,530,000.00 ₱1,000,000.00 ₱600,000.00 ₱1,000,000.00 ₱1,500,000.00 ₱1,710,000.00 ₱900,000.00 ₱640,000.00 ₱1,000,000.00 ₱1,575,000.00 ₱1,620,000.00 ₱700,000.00 ₱640,000.00 ₱625,000.00 ₱1,875,000.00 ₱1,710,000.00 ₱700,000.00 ₱600,000.00 ₱875,000.00 ₱1,800,000.00 ₱1,800,000.00 ₱1,000,000.00 ₱620,000.00 ₱1,000,000.00 ₱1,725,000.00 ₱1,530,000.00
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EVIDENCE 1.2.1: Inventory Count Sheet (Store) SHEET NO: 1-A PERFORMED BY:Coriza Joyce G. Atibula, CPA
Date
Apr-10
Apr-20
Apr-30
May-10
May-20
May-31
Jun-10
Jun-20
Jun-30
Type of Inventory
PERIOD: April-June REVIEWED BY:Bernard Ace N. Romano, CPA
INVENTORY COUNT SHEET (Store) Purchase Sold COS Price (units) (amount)
Truck Motorcycle Bus Car
₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00
3 5 2 8
₱300,000.00 ₱100,000.00 ₱250,000.00 ₱600,000.00
Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van
₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00
5 6 10 2 4 2 8 1 2 5 1 5 8 4 10 5 5 1 9 3 3 2 3 7
₱450,000.00 ₱120,000.00 ₱750,000.00 ₱200,000.00 ₱80,000.00 ₱250,000.00 ₱720,000.00 ₱100,000.00 ₱40,000.00 ₱375,000.00 ₱90,000.00 ₱500,000.00 ₱160,000.00 ₱500,000.00 ₱200,000.00 ₱450,000.00 ₱100,000.00 ₱125,000.00 ₱675,000.00 ₱300,000.00 ₱375,000.00 ₱150,000.00 ₱270,000.00 ₱630,000.00
Balance (units)
Balance Amount
5 14 3
₱500,000.00 ₱280,000.00 ₱375,000.00 ₱750,000.00
10 9 5 17 4 12 10 5 15 3 10 7 5 15 3 12 9 5 14 5 12 7 6 15 5 9 8 7 15 5 11 9 7 16 5 12 8 5 17 4 11 9
₱810,000.00 ₱500,000.00 ₱340,000.00 ₱500,000.00 ₱900,000.00 ₱900,000.00 ₱500,000.00 ₱300,000.00 ₱375,000.00 ₱750,000.00 ₱630,000.00 ₱500,000.00 ₱300,000.00 ₱375,000.00 ₱900,000.00 ₱810,000.00 ₱500,000.00 ₱280,000.00 ₱625,000.00 ₱900,000.00 ₱630,000.00 ₱600,000.00 ₱300,000.00 ₱625,000.00 ₱675,000.00 ₱720,000.00 ₱700,000.00 ₱300,000.00 ₱625,000.00 ₱825,000.00 ₱810,000.00 ₱700,000.00 ₱320,000.00 ₱625,000.00 ₱900,000.00 ₱720,000.00 ₱500,000.00 ₱340,000.00 ₱500,000.00 ₱825,000.00 ₱810,000.00
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 52
EVIDENCE 1.2.2: Inventory Count Sheet (Store) SHEET NO: 1-B PERFORMED BY:Coriza Joyce G. Atibula, CPA
Date
Oct-10
Oct-20
Oct-31
Nov-10
Nov-20
Nov-30
Dec-10
Dec-20
Dec-31
Type of Inventory Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van Truck Motorcycle Bus Car Van
PERIOD: October-December REVIEWED BY:Bernard Ace N. Romano, CPA
INVENTORY COUNT SHEET (Store) Purchase Sold COS (amount) Price (units) ₱100,000.00 2 ₱200,000.00 ₱20,000.00 6 ₱120,000.00 ₱125,000.00 3 ₱375,000.00 ₱75,000.00 12 ₱900,000.00 ₱90,000.00 ₱100,000.00 1 ₱100,000.00 ₱20,000.00 12 ₱240,000.00 ₱125,000.00 5 ₱625,000.00 ₱75,000.00 ₱90,000.00 9 ₱810,000.00 ₱100,000.00 ₱20,000.00 5 ₱100,000.00 ₱125,000.00 ₱75,000.00 5 ₱375,000.00 ₱90,000.00 ₱100,000.00 3 ₱300,000.00 ₱20,000.00 ₱125,000.00 1 ₱125,000.00 ₱75,000.00 3 ₱225,000.00 ₱90,000.00 12 ₱1,080,000.00 ₱100,000.00 4 ₱400,000.00 ₱20,000.00 ₱125,000.00 2 ₱250,000.00 ₱75,000.00 ₱90,000.00 3 ₱270,000.00 ₱100,000.00 ₱20,000.00 10 ₱200,000.00 ₱125,000.00 3 ₱375,000.00 ₱75,000.00 6 ₱450,000.00 ₱90,000.00 7 ₱630,000.00 ₱100,000.00 2 ₱200,000.00 ₱20,000.00 5 ₱100,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 3 ₱300,000.00 ₱20,000.00 ₱125,000.00 5 ₱625,000.00 ₱75,000.00 2 ₱150,000.00 ₱90,000.00 5 ₱450,000.00 ₱100,000.00 ₱20,000.00 8 ₱160,000.00 ₱125,000.00 ₱75,000.00 10 ₱750,000.00 ₱90,000.00 -
Balance (units) 5 15 4 11 8 4 14 5 12 7 5 15 5 12 9 7 13 6 10 8 5 16 4 11 10 5 14 5 11 10 6 18 5 13 10 5 15 6 13 10 5 17 4 13 8
Balance (amount) ₱500,000.00 ₱300,000.00 ₱500,000.00 ₱825,000.00 ₱720,000.00 ₱400,000.00 ₱280,000.00 ₱625,000.00 ₱900,000.00 ₱630,000.00 ₱500,000.00 ₱300,000.00 ₱625,000.00 ₱900,000.00 ₱810,000.00 ₱700,000.00 ₱260,000.00 ₱750,000.00 ₱750,000.00 ₱720,000.00 ₱500,000.00 ₱320,000.00 ₱500,000.00 ₱825,000.00 ₱900,000.00 ₱500,000.00 ₱280,000.00 ₱625,000.00 ₱825,000.00 ₱900,000.00 ₱600,000.00 ₱360,000.00 ₱625,000.00 ₱975,000.00 ₱900,000.00 ₱500,000.00 ₱300,000.00 ₱750,000.00 ₱975,000.00 ₱900,000.00 ₱500,000.00 ₱340,000.00 ₱500,000.00 ₱975,000.00 ₱720,000.00
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 53
EVIDENCE 1.3.1: RECONCILING INVENTORY COUNT TO THE LEDGER (2ND QUARTER) WAREHOUSE + STORE (Second Quarter) Date
Type of Inventory
Truck Motorcycle Apr-10 Bus Car Van Truck Motorcycle Apr-20 Bus Car Van Truck Motorcycle Apr-30 Bus Car Van Truck Motorcycle May-10 Bus Car Van Truck Motorcycle May-20 Bus Car Van Truck Motorcycle May-31 Bus Car Van Truck Motorcycle Jun-10 Bus Car Van Truck Motorcycle Jun-20 Bus Car Van Truck Motorcycle Jun-30 Bus Car Van
Purchase Price
Inventory Count Sheet Balance (units)
Stock Cards Balance (units)
Is inventory count sheet reconciles with stock card?
₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00
12 40 8 30 25 15 50 10 35 30 16 45 8 30 20 10 45 8 35 25 15 40 10 35 20 12 44 10 26 23 15 43 10 32 26 14 47 13 36 22 15 48 12 31 27
12 40 8 30 25 15 50 10 35 30 16 45 8 30 20 10 45 8 35 25 15 40 10 35 20 12 44 10 26 23 15 43 10 32 26 14 47 13 36 22 15 48 12 31 27
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 54
EVIDENCE 1.3.2: RECONCILING INVENTORY COUNT TO THE LEDGER (4TH QUARTER) WAREHOUSE + STORE (Fourth Quarter) Date
Type of Inventory
Truck Motorcycle Oct-10 Bus Car Van Truck Motorcycle Oct-20 Bus Car Van Truck Motorcycle Oct-31 Bus Car Van Truck Motorcycle Nov-10 Bus Car Van Truck Motorcycle Nov-20 Bus Car Van Truck Motorcycle Nov-30 Bus Car Van Truck Motorcycle Dec-10 Bus Car Van Truck Motorcycle Dec-20 Bus Car Van Truck Motorcycle Dec-31 Bus Car Van
Purchase Price
Inventory Count Sheet Balance (units)
Stock Cards Balance (units)
₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00 ₱100,000.00 ₱20,000.00 ₱125,000.00 ₱75,000.00 ₱90,000.00
15 45 12 33 25 12 40 10 35 20 13 43 10 35 24 14 37 12 30 25 15 46 12 31 29 14 46 13 32 28 13 50 10 38 29 12 45 13 37 30 15 48 12 36 25
15 45 12 33 25 12 40 10 35 20 13 43 10 35 24 14 37 12 30 25 15 46 12 31 29 14 46 13 32 28 13 50 10 38 29 12 45 13 37 30 15 48 12 36 25
Is inventory count sheet reconciles with stock card? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 55
NOTE: *The client's stock cards represent its general ledger of the inventory based on the proper documents provided by the client's management to the audit team. *Inventory and Cost of Sales accounts reconcile with the client's amount recorded on the financial statements. *Sample is based on the 2nd and 4th quarter of the year on every 10th, 20th and last day of the month. (Random Sytematic Sampling)
EVIDENCE 2: CUT-OFF SCHEDULE (SAMPLING EXAMINATION) CLIENT:MARAMING PERA CORPORATION PERIOD END:December 31, 2016 Purchase (Inventory) Cut-off Invoice Number
Purchase Order
Quantity Description
Goods in before and at December 31 125622-M 1226130 113342-C 1226128 102331-T 1226124 100549-V 1226123 112896-B 1226120 Goods in after December 31 125623-M 1226135 113353-C 1226133 100560-V 1226129 102337-T 1226130
20 10 5 5 3
Motorcycle Car Truck Van Bus
10 5 3 3
Motorcycle Car Van Truck
Date Received
TM*
Purchase recorded in the proper period?
12/31/2016 12/31/2016 12/28/2016 12/26/2016 12/25/2016
X X X X X
Yes Yes Yes Yes Yes
X X X X
Yes Yes Yes Yes
3/1/2017 4/1/2017 4/1/2017 5/1/2017
*Traced to goods receipts and commercial invoice. Based on the FIVE (5) days transactions BEFORE and AFTER December 31,2016 EVIDENCE 3: TRACING (SAMPLE EXAMINATION) TRACING SOURCE DOCUMENTS Invoice 126200 Invoice 126201 Invoice 126202 Invoice 126203 Invoice 126204
AMOUNT ₱2,000,000.00 ₱500,000.00 ₱700,000.00 ₱1,500,000.00 ₱1,000,000.00
ACCOUNTING DATA Journal Entry 267 Journal Entry 285 Journal Entry 301 Journal Entry 305 Journal Entry 309
Is the transaction recorded? Yes Yes Yes Yes Yes
Based on the invoice 126200 to 126204 which the auditor doubted based on the presentation of invoices.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 56
ANALYTICAL PROCEDURE Beginning Inventory Purchases Cost of Sales Ending Inventory
₱150,840,700.00 ₱550,000,000.00 ₱535,130,700.00 ₱165,710,000.00*
NOTE: Purchases are supported by proper documents provided by the client's management to the audit team. *Ending inventory reconciles with the client's recorded amount presented in the balance sheet. PAS 2 Inventories generally prescribes lower of cost or net realizable value (LCNRV) which client uses as the method of valuation of inventory and has been reasonably applied in practice based on the results of the sample tested. In performing the LCNRV test, fair market value is greater than the cost of inventory.
CONCLUSION: INVENTORY and COST OF SALES accounts are REASONABLY PRESENTED.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 57
AUDIT OF FIXED ASSETS AUDIT OBJECTIVES 1. To determine whether property, plant, and equipment exists. 2. To verify whether the proper amounts of depreciation expense is allocated. 3. To determine whether the use of acceptable methods are consistently applied. AUDIT PROCEDURES 1. Conducted physical inspections if there is actual PPE recorded in the books. 2. Obtained and recalculated the accumulated depreciation. Depreciation method used by the client was then tested to ascertain its appropriateness and consistency. Depreciation was then recalculated by preparing schedules of each property, plant, and equipment account with consideration of current and previous years. The computed depreciation amounts were then reconciled to the general ledger and differences were noted. Proposed adjustments were recommended as to correct the depreciation recorded for both the previous and current years. 3. Inspection of records and documents (tracing). 4. Receipts that verifies ownership by the corporation was requested and reviewed to determine the acquisition cost and date in order to ensure that the PPE is truly owned by the company. 5. Disclosures, transactions and events was checked to determine if they were clearly described, and are relevant and understandable in the context of the requirements of the applicable financial reporting framework. ANALYTICAL PROCEDURES
AUDIT OBJECTIVE Misstatement in PPE and Depreciation Misstatement in Depreciation expense and accumulated depreciation Expensing amounts that should be capitalized
AUDIT PROCEDURE
COMMENTS
Compare prior year balances in PPE with current year
No exceptions noted.
Compute the ratio of depreciation charge to the related PPE account and compare with prior years. Compare repairs and maintenance expense with previous years.
No significant differences noted. No exceptions noted. No significant difference from previous period.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 58
ITEMS VEHICLE
POPULATION SIZE 300
SAMPLE SIZE 100
AUDIT PROCEDURES 100
MISSTATEMENTS FOUND None
MACHINERY
500
50
50
None
LAND
100
50
50
None
FURNITURE AND FIXTURE
1000
200
200
None
BUILDING
100
50
50
None
EQUIPMENT TOTAL
2000 4000
500 950
500 950
None None
AUDIT PROCEDURE: Our audit team conducted physical inspections whether actual property, plant, and equipment are existing. ITEMS
SAMPLE SIZE 100
AUDIT PROCEDURES 100
MISSTATEMENTSFOUND
VEHICLE
POPULATION SIZE 300
MACHINERY
500
50
50
None
LAND
100
50
50
None
FURNITURE AND FIXTURE
1000
200
200
None
BUILDING
100
50
50
None
EQUIPMENT TOTAL
2000 4000
500 950
500 950
None None
None
AUDIT PROCEDURE:Our audit team examined the title of deeds and receipts. *All property, plant, and equipment are existing. *All property, plant, and equipment has legal rights and are owned by the entity.
Conclusion:PROPERTY, PLANT, AND EQUIPMENT is FREE FROM MATERIAL MISSTATEMENTS and REASONABLY PRESENTED.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 59
Evidence: LAPSING SCHEDULE BUILDING
Description Date Acquired Farnsworth Palo 4/2/2017 Brooklyn Burauen 07/18/2015 Scranton Tacloban 10/21/2015 Innwood Basey 08/13/2016 East Harlem Abuyog 04/25/2017 TOTAL DEPRECIATION
Cost ₱ 10,072,500.00 ₱ 11,250,000.00 ₱ 8,150,160.00 ₱ 9,558,000.00 ₱ 8,328,000.00
Salvage Value Useful Life ₱ 250,000.00 15 ₱ 375,000.00 10 ₱ 195,000.00 12 ₱ 228,500.00 15 ₱ 178,000.00 10
MethodAnnual Depreciation Accumulated SL ₱ 600,264.00 ₱ 600,264.00 SL ₱ 1,087,500.00 ₱ 2,628,125.00 SL ₱ 1,325,860.00 ₱ 1,325,860.00 SL ₱ 621,967.00 ₱ 259,153.00 SL ₱ 543,333.00 ₱ 543,333.00 ₱ 5,356,735.00
CV Beginning ₱ 10,072,500.00 ₱ 9,709,375.00 ₱ 8,328,000.00 ₱ 8,936,033.00 ₱ 6,824,300.00 ₱ 43,870,208.00
₱ ₱ ₱ ₱ ₱ ₱
CV Ending 9,472,236.00 8,621,875.00 7,784,667.00 8,314,066.00 6,161,370.00 40,354,214.00
*All building is depreciated by the straight line method of depreciation. *The computed depreciation amounts are arrived by the number of months the building item is depreciated from its date acquired. Items acquired from the start to the middle of the month are depreciated as being acquired at the start, while items acquired from the middle to the end of the month are depreciated as being acquired at the end of the month or at the beginning of the next month. *The total misstatement is material compared to the tolerable misstatement. Therefore, it needs for adjustment for building.
VEHICLE
Delivery Truck Date Acquired 5 Lamborghini 03/15/2015 2 Bugatti 8/8/2016 1 La Ferrari 1/7/2016 3 Jeep Wrangler 04/23/2017 6 Bentley Mulsanne 10/9/2015 TOTAL DEPRECIATION
Cost ₱ 6,607,747.90 ₱ 3,032,988.00 ₱ 745,981.00 ₱ 2,430,988.00 ₱ 1,405,446.00
Salvage Value Useful Life MethodAnnual DepreciationAccumulated ₱ 1,200,000.00 10 SL ₱ 540,774.79 ₱ 1,532,196.00 ₱ 800,000.00 15 SL ₱ 148,866.00 ₱ 210,894.00 ₱ 240,500.00 5 SL ₱ 101,096.00 ₱ 151,644.00 ₱ 945,250.00 10 SL ₱ 99,049.00 ₱ 99,049.00 ₱ 248,000.00 15 SL ₱ 77,163.00 ₱ 180,047.00 ₱ 966,948.79
CV Beginning ₱ 5,616,327.00 ₱ 2,970,960.00 ₱ 695,433.00 ₱ 2,430,988.00 ₱ 1,302,562.00 ₱ 2,173,830.00
₱ ₱ ₱ ₱ ₱ ₱
CV Ending 5,075,552.00 2,822,094.00 594,337.00 2,331,939.00 1,225,399.00 13,016,270.00
*All vehicles are depreciated by the straight line method of depreciation. *The computed depreciation amounts are arrived by the number of months the vehicle item is depreciated from its date acquired. Items acquired from the start to the middle of the month are depreciated as being acquired at the start, while items acquired from the middle to the end of the month are depreciated as being acquired at the end of the month or at the beginning of the next month. *The total misstatement is material compared to the tolerable misstatement. Therefore, it needs for adjustment for vehicles.
MACHINERY
Items 5 Engine Machining Station 10 Overhead Conveyor 6 Jig Welder 8 CNC Machine 10 Welding Robot 8 Painting Robot TOTAL DEPRECIATION
Date Acquired 06/16/2016 12/25/2016 05/18/2016 2/3/2015 8/11/2016 6/2/2016
₱ ₱ ₱ ₱ ₱ ₱
Cost 1,077,270.00 3,562,500.00 3,507,750.00 3,914,000.00 10,000,000.00 10,080,000.00
Salvage Value Useful Life Method Annual Depreciation ₱ 250,000.00 10 SL ₱ 41,364.00 ₱ 562,500.00 12 SL ₱ ₱ 507,600.00 8 SL ₱ 218,761.00 ₱ 642,000.00 10 SL ₱ 272,667.00 ₱ 3,500,000.00 15 SL ₱ 72,222.00 ₱ 3,402,000.00 15 SL ₱ 445,200.00 ₱ 1,050,214.00
Accumulated ₱ 41,364.00 ₱ 218,761.00 ₱ 599,867.00 ₱ 72,222.00 ₱ 445,200.00 ₱ 1,377,414.00
CV Beginning ₱ 1,077,270.00 ₱ 3,562,500.00 ₱ 3,507,750.00 ₱ 3,641,333.00 ₱ 10,000,000.00 ₱ 10,080,000.00 ₱ 31,868,853.00
₱ ₱ ₱ ₱ ₱ ₱ ₱
CV Ending 1,035,906.00 3,562,500.00 3,288,989.00 3,314,133.00 9,927,778.00 9,634,800.00 30,764,106.00
*All machinery is depreciated by the straight line method of depreciation. *The computed depreciation amounts are arrived by the number of months the machinery item is depreciated from its date acquired. Items acquired from the start to the middle of the month are depreciated as being acquired at the start, while items acquired from the middle to the end of the month are depreciated as being acquired at the end of the month or at the beginning of the next month. *The total misstatement is immaterial compared to the tolerable misstatement. Therefore, there is no need for adjustment for machinery.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 60
LAND Description Farnsworth Palo, Leyte Brooklyn Burauen, Leyte Scranton Tacloban, Leyte Innwood Basey, Samar East Harlem Abuyog, Leyte TOTAL ACQUISITION
Date Acquired 4/2/2017 07/18/2015 10/21/2015 08/13/2016 04/25/2017
Sq. M. 2000 1000 750 700 800
Salvage Value ₱ 2,250.00 ₱ 2,000.00 ₱ 2,600.00 ₱ 2,500.00 ₱ 2,500.00
Cost ₱ 4,500,000.00 ₱ 2,000,000.00 ₱ 1,950,000.00 ₱ 1,750,000.00 ₱ 2,000,000.00 ₱ 12,200,000.00
CV Beginning ₱ 4,500,000.00 ₱ 2,000,000.00 ₱ 1,950,000.00 ₱ 1,750,000.00 ₱ 2,000,000.00 ₱ 12,200,000.00
₱ ₱ ₱ ₱ ₱ ₱
CV Ending 4,500,000.00 2,000,000.00 1,950,000.00 1,750,000.00 2,000,000.00 12,200,000.00
*There were no material misstatements found through the audit process. FURNITURES AND FIXTURES Item Date Acquired 15 Ford Folding Computer Desks 2/3/2017 15 Ironwood Office Tables 4/4/2017 15 Swivel Chairs 3/2/2016 6 Narra Office Shelves 10/2/2016 4 SECRUI Security Alarm System 2/12/2017 8 HIKVISION CCTV System 9/3/2016 TOTAL
₱ ₱ ₱ ₱ ₱ ₱
Cost 750,000.00 120,000.00 30,000.00 31,500.00 35,600.00 100,000.00
Salvage Value Useful Life Method Annual Depreciation ₱130,000.00 6 SL ₱ 94,722.22 ₱ 37,500.00 10 SL ₱ 8,250.00 ₱ 450.00 6 SL ₱ 4,925.00 ₱ 3,900.00 10 SL ₱ 2,760.00 ₱ 12,480.00 6 SL ₱ 3,853.00 ₱ 7,920.00 7 SL ₱ 13,154.00 ₱ 127,664.22
Accumulated ₱ 94,722.22 ₱ 8,250.00 ₱ 9,440.00 ₱ 5,290.00 ₱ 3,853.00 ₱ 24,116.00 ₱ 145,671.22
CV Beginning ₱ 750,000.00 ₱ 120,000.00 ₱ 25,485.00 ₱ 28,970.00 ₱ 35,600.00 ₱ 89,038.00 ₱ 1,049,093.00
CV Ending ₱ 655,278.00 ₱ 111,750.00 ₱ 20,560.00 ₱ 26,210.00 ₱ 31,747.00 ₱ 75,884.00 ₱ 921,429.00
*All Furniture and Fixtures are depreciated by the straight-line method depreciation. * The computed depreciation amounts are arrived by the number of months the equipment item is depreciated from its date acquired. Items acquired from the start to the middle of the month are depreciated as being acquired at the start of the month, while items acquired from the middle to the end of the month are depreciated as being acquired at the end of the month or at the beginning of the next month.
EQUIPMENT ITEM (3) BROTHER Fax Machine (5) HP Copier Machine (10) EPSON Workforce Printer (1) IRITECH Eye Scanner (1) EPSON Projector (10) APPLE Laptops TOTAL
Date acquired 11/1/2016 6/5/2017 2/9/2016 3/4/2017 5/2/2017 12/8/2016
Cost ₱ 18,000.00 ₱ 75,000.00 ₱ 660,000.00 ₱ 89,950.00 ₱ 132,100.00 ₱ 650,000.00
Salvage Value Useful Life ₱ 6,330.00 10 ₱ 20,750.00 10 ₱ 111,500.00 9 ₱ 12,230.00 7 ₱ 27,000.00 10 ₱ 25,000.00 8
Method SLD SLD SLD SLD SLD SLD
Annual Depreciation ₱ 1,167.00 ₱ 5,425.00 ₱ 60,944.44 ₱ 11,102.86 ₱ 10,510.00 ₱ 78,125.00 ₱ 167,274.30
Accumulated ₱ 2,334.00 ₱ 5,425.00 ₱ 121,888.88 ₱ 11,102.86 ₱ 10,510.00 ₱ 156,250.00 ₱ 307,510.74
CV Beginning ₱ 16,833.00 ₱ 75,000.00 ₱ 599,055.56 ₱ 89,950.00 ₱ 132,100.00 ₱ 571,875.00 ₱ 1,484,813.56
₱ ₱ ₱ ₱ ₱ ₱ ₱
CV Ending 14,499.00 69,575.00 538,111.12 78,847.14 121,590.00 493,750.00 1,316,372.26
* All Equipment is depreciated by the straight-line method of depreciation. * The computed depreciation amounts are arrived by the number of months the equipment item is depreciated from its date acquired. Items acquired from the start to the middle of the month are depreciated as being acquired at the start of the month, while items acquired from the middle to the end of the month are depreciated as being acquired at the end of the month or at the beginning of the next month. *The total misstatement is immaterial compared to the tolerable misstatement. Therefore, there is no need for adjustment for equipment.
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Evidence: SOURCE DOCUMENTS
LAMBORGHINI CORPORATION Timesquare, Makati City 327-7888 VAT Registered Tin: 201-277-095-325 MIN: 18072510154088834 OFFICIAL RECEIPT Date: March 15, 2015, 10:00AM OR # 0001826
C
Buyer Information: Maraming Pera Corporation Palo, Leyte 523-0081
BUGATTI CORPORATION Holland, Tarlac City 327-5647 VAT Registered Tin: 201-277-095-325 MIN: 18072510154088834 OFFICIAL RECEIPT Date: August 8, 2016, 8:42AM OR # 0001926 Buyer Information: Maraming Pera Corporation Palo, Leyte 523-0081
Car Information:
Car Information:
Truck Model: Lamborghini Truck TOTAL: Php 6,607,747.90 Cash 6,608,000.00 Change 252.10
Truck Model: Bugatti Truck TOTAL: Php 3,032,988.00 Cash 3,033,000.00 Change 12.00
Item Purchased: (5) VAT SALE: 5,899,774.91 12% VAT: 707,972.99 Total Amount Payable: Php 6,607,747.90
Item Purchased: (2) VAT SALE: 2,708,025.00 12% VAT: 324,963.00 Total Amount Payable: Php 3,032,988.00
Exist Software Lab Inc. 0502 Orient Square Bldg F Ortigas Pasig City 1605 VAT REG TIN: 43A2I32729912016080541 Date Issued: 08/04/2014 Until 08/04/2019 THIS INVOICE SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE
Exist Software Lab Inc. 0502 Orient Square Bldg F Ortigas Pasig City 1605 VAT REG TIN: 43A2I32729912016080541 Date Issued: 08/04/2014 Until 08/04/2019 THIS INVOICE SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE
INDUSTRUS CORPORATION South Seaport Corner, Makati City 523-7888 VAT Registered Tin: 201-277-095-325 MIN: 18072510154088834 OFFICIAL RECEIPT Date: June 16, 2016, 10:00AM OR # 0001820 Buyer Information: Maraming Pera Corporation Palo, Leyte 523-0081
Machine Information: Model: Engine Machining Station TOTAL: Php 1,077,270.00 Cash 1,078,000.00 Change 730.00
C
C
UTILIKO CORPORATION Cambridge St., Sampalok City 327-7211 VAT Registered Tin: 201-277-095-325 MIN: 18072510154088834 OFFICIAL RECEIPT Date: December 25, 2016, 9:00AM OR # 0001825 Buyer Information: Maraming Pera Corporation Palo, Leyte 523-0081
Machine Information: Model: Overhead Conveyor TOTAL: Php 3,562,500.00 Cash 3,563,00.00 Change 500.00
Item Purchased: (5) VAT SALE: 961,848.21 12% VAT: 115,421.79 Total Amount Payable: Php 1,077,270.00
Item Purchased: (10) VAT SALE: 3,180,803.57 12% VAT: 381,696.43 Total Amount Payable: Php 3,562,500
Exist Software Lab Inc. 0502 Orient Square Bldg F Ortigas Pasig City 1605 VAT REG TIN: 43A2I32729912016080541 Date Issued: 08/04/2014 Until 08/04/2019 THIS INVOICE SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE
Exist Software Lab Inc. 0502 Orient Square Bldg F Ortigas Pasig City 1605 VAT REG TIN: 43A2I32729912016080541 Date Issued: 08/04/2014 Until 08/04/2019 THIS INVOICE SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE
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AUDIT OF TRADE PAYABLES AUDIT OBJECTIVES: 1. To determine whether liabilities (e.g. payables) exist. 2. To determine whether existing accounts payable are included in the accounts payable list. 3. To determine whether the payables represent valid and legal claims of third parties from the client. 4. To determine whether payables are recorded at their proper amounts. 5. To determine whether payables are presented and disclosed according to PAS or PFRS. AUDIT PROCEDURES: 1. Vouched selected amounts from trade accounts payable listing and accruals listing to supporting documentation. 2. Obtained selected suppliers statements and reconcile this to the relevant suppliers' accounts. 3. Performed out-of period liability tests also called search for unrecorded accounts payable. 4. Inspection the supporting documents such as purchase orders, check, check vouchers. 5. The correctness of liabilities depends upon the correctness of purchases. Hence, the auditor should compare the percentage of gross profits to purchase with that of the previous years to verify the correctness of purchases. 6. Evaluating proper financial statement presentation and adequacy. AUDIT PROCEDURE: Our Audit team inspected the supporting check, cash voucher, and purchase order. We searched for the unrecorded payables through examinations of paid or unrecovered invoices, and unmatched purchase order and trace to related journal to determine if it was properly recorded.
ITEMS
Less than 250,000 250,001 to 500,000 500,001 to 1,000,000 1,000,001 and above Total
POPULATION SIZE
SAMPLE SIZE
SAMPLE SIZE (in terms of value)
AUDIT PROCEDURES
MISSTATEMENTS FOUND
MISSTATEMENTS FOUND (in terms of value)
300
100
5,000,000
100
None
None
250
80
20,400,000
75
5
1,275,000
200
60
33,000,000
60
None
None
100
50
50,500,000
48
2
2,020,000
850
290
108,900,000
283
7
3,295,000
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 63
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Rate 5% 3%
Amount 10,160,865.25
1%
-
3%
9,657,758.62
Projected Misstatement: Formula: 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑆𝑖𝑧𝑒 × 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
Therefore: 850 × 3,295,000 = 𝟗, 𝟔𝟓𝟕, 𝟕𝟓𝟖. 𝟔𝟐 290
*Projected Misstatement is less than tolerable misstatement. P9, 657,758.62
ITEMS
POPULATION SIZE
SAMPLE SIZE
SAMPLE SIZE (in terms of value)
300
50
2,500,000
45
5
250,000
250
60
15,600,000
60
None
None
200
70
39,200,000
70
None
None
100
80
88,000,000
80
None
None
850
260
145,300,000
255
5
250,000
Less than 250,000 250,001 to 500,000 500,001 to 1,000,000 1,000,001 and above Total
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Rate 5% 3%
Amount 10,160,865.25
1%
-
0.17%
P817,307.69
MISSTATEMENTS AUDIT MISSTATEMENTS FOUND PROCEDURES FOUND (in terms of value)
Projected Misstatement: Formula: 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑆𝑖𝑧𝑒 × 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
Therefore: 850 × 250,000 = 𝟖𝟏𝟕, 𝟑𝟎𝟕. 𝟔𝟗 260
*Projected Misstatement is less than tolerable misstatement. P817,307.69
Conclusion: TRADE PAYABLES account is REASONABLY PRESENTED.
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 64
AUDIT OF NON-TRADE PAYABLES AUDIT OBJECTIVES 1. To determine the existence of the correct other accounts payables. 2. To identify if there are unrecorded liabilities. 3. To inspect the supporting documents such as purchase orders,check,cash vouchers. AUDIT PROCEDURES 1. Attained a copy from client a list of other accounts payable. 2. Inspected the supporting documents such as purchase orders,check,checkvouchers. 3. Searched the unrecorded payables through examinations of unpaid or unrecorded invoices,unmatched purchase orders. 4. Traced to related journal to determine if it was properly recorded. 5. Recorded any material misstatements. AUDIT PROCEDURE: Our Audit team inspected the supporting check, cash voucher, and purchase order. We searched for the unrecorded payables through examinations of paid or unrecovered invoices, and unmatched purchase order and trace to related journal to determine if it was properly recorded.
ITEMS Less than 250,000 250,001 to 500,000 500,001 to 1,000,000 1,000,001 and above Total
300
100
SAMPLE SIZE (in terms of value) 5,000,000
250
80
20,400,000
75
5
1,275,000
200
60
33,000,000
60
None
None
100
50
50,500,000
48
2
2,020,000
850
290
108,900,000
283
7
3,295,000
POPULATION SAMPLE SIZE SIZE
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Rate 5% 3%
Amount 10,160,865.25
1%
-
3%
9,657,758.62
MISSTATEMENTS AUDIT MISSTATEMENTS FOUND PROCEDURES FOUND (in terms of value) 100 None None
Projected Misstatement: Formula: 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑆𝑖𝑧𝑒 × 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
Therefore: 850 × 3,295,000 = 𝟗, 𝟔𝟓𝟕, 𝟕𝟓𝟖. 𝟔𝟐 290
*Projected Misstatement is less than tolerable misstatement. P9, 657,758.62
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AUDIT PROCEDURE: Our audit team confirmed liabilities to creditor.
ITEMS
POPULATION SAMPLE SIZE SIZE
Less than 250,000 250,001 to 500,000 500,001 to 1,000,000 1,000,001 and above Total
SAMPLE SIZE (in terms of value)
AUDIT MISSTATEMENTS PROCEDURES FOUND
MISSTATEMENTS FOUND (in terms of value)
300
50
2,500,000
45
5
250,000
250
60
15,600,000
60
None
None
200
70
39,200,000
70
None
None
100
80
88,000,000
80
None
None
850
260
145,300,000
255
5
250,000
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Rate 5% 3%
Amount 10,160,865.25
1%
-
0.17%
817,307.69
Projected Misstatement: Formula: 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑆𝑖𝑧𝑒 × 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
Therefore: 850 × 250,000 = 𝟖𝟏𝟕, 𝟑𝟎𝟕. 𝟔𝟗 260
*Projected Misstatement is less than tolerable misstatement. P817,307.69
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AUDIT OF SALES Variable Sampling of SALES Type of Sampling: Statistical Sampling Sample Selection Method: Random Sampling Based on: Sales Cut-off Schedule Audit Objectives: 1. 2. 3. 4. 5.
To determine whether sales have really occurred and pertain to the entity. To review whether all sales are included in the statement of comprehensive income. To examine whether sales have been recorded in the proper accounting period. To evaluate whether sales are accurately recorded in the income statement. To determine whether sales are properly classified.
Audit Procedures: 1. Conduct confirmation of receivable 2. Performing sales cut off 3. Recalculation of recorded amounts
Sales Balances
Total Number of Accounts (Population Size)
Sample Size
Less Than 1,000,000 1,000,001 to 5,000,000 5,000,001 to 10,000,000 10,000,001 to 15,000,000 15,000,001 and Above Total
700 70 150 70 50 1,040
100 50 20 10 30 210
Factors Tolerable Misstatement Expected Misstatement Allowance of Sampling Risk *Actual Misstatement Rate
Rate 5% 3%
Amount 10,160,865.25
1%
-
3%
9,233,714.29
Sample Size (In terms of Value 15,200,000 9,500,000 10,250,000 21,700,000 5, 500, 000 62,150,000
Amount of Misstatement found (Sample Size ) 1,050,000 None 120,000 None 450,000 1,864,500
Projected Misstatement: Formula: 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑆𝑖𝑧𝑒 × 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
Therefore: 1,040 × 1,864,500 = 𝟗, 𝟐𝟑𝟑, 𝟕𝟏𝟒. 𝟐𝟗 210
Actual Misstatement Rate: Amount of Misstatement / Sample Size (In terms of Amount) = 3% Projected Misstatement is less than Tolerable Misstatement 9,233,714.29 < 10,160,856.25
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Evidence: Sales Cut-off Schedule SALES CUT-OFF Client: MaramingPera Corp. Period end: December 31, 2017 Customer
Invoice Number
Reference: SALES.0123
Date in AR Ledger Delivery Date
Transactions recorded before December 31 Dolce MP2015 12/29/2017 Incorporated Green Enterprises MP2016 12/29/2017 Positive Corp. MP2017 12/29/2017 PKT Company MP2018 12/29/2017 Bibo Company MP2019 12/30/2017 Transactions recorded after December 31 Plastic Company MP2020 01/05/2018 Wawi Company MP2021 01/07/2018
Sale recorded in the proper period?
12/28/2017
YES
01/05/2018 12/28/2017 12/28/2017 12/29/2017
NO YES YES YES
01/03/2018 12/29/2017
YES NO
CONCLUSION: Sales account is reasonably presented. Sales were properly classified and disclosed in the financial statements.
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COMPLETING THE AUDIT The objective of the standard is to prescribe: a. When an entity should adjust its financial statements for events after the reporting period; and b. The disclosures that an entity should give about the date when the financial statements were authorized for issue and about events after the reporting period. The standard also requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate. PAS 10, paragraph 3 provides that the events after the reporting period are those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue. Events after the reporting period are also known as subsequent events and such events may require either adjustment or disclosure. Subsequent events are those events or transactions that occur subsequent to the balance sheet date that may affect the financial statements and the auditor’s report. Two types of events can be identified: a. Adjusting Events after the reporting period are those that provide evidence of conditions that exist at the end of reporting period; and b. Non-adjusting Events after reporting period are those that are indicative of conditions that arise after the end of reporting period. EVENTS THAT REQUIRE DISCLOSURES Related Party Disclosures PAS 24, paragraph 12, requires disclosure of related party relationships where control exists irrespective of whether there have been transactions between the related parties. In other words, relationships between parents and subsidiaries shall be disclosed regardless of whether there have been transactions between those related parties. As a minimum, an entity shall disclose the name of the entity’s parent and if different, the ultimate controlling party. MaramingPera Corporation is a parent of 10 subsidiaries. The operation of the corporationas well as its subsidiaries is diversified. The following are the subsidiaries of the parent with corresponding controlling interest: 1. BALAY-BALAY Corporation – a company engaged in the business of trading real estate properties with an ownership interest of 75%
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2. MATITIG-AHAN Corporation – a company engaged in the selling of tools, parts of machines, electric devices and other hardware materials with an ownership of 75% 3. MAHUMOK-HUMOK Corporation – an industry engaged in software programming with an ownership interest of 75% 4. STUDIOUS Corporation – an industry engaged in trading of books with an ownership interest of 75% 5. MASAKIT Corporation – a company engaged in selling of medicines, vaccines and other medical products with an ownership interest of 75% 6. MARASA Corporation – an industry engaged in the trading of food products with an ownership interest of 75% 7. BROOM-BROOM Corporation – an industry engaged in trading of automobiles with an ownership interest of 75% 8. APLIAN Corporation – an industry engaged in trading of appliances with an ownership interest of 75% 9. FURFIX Corporation – an industry engaged in trading of Furnitures and Fixtures with an ownership interest of 75% 10. LEGEND Corporation – an industry engaged in trading of mobile devices with an ownership interest of 75% CASE 1 On February 3, 2017 one of the major customers of the client has filed a bankruptcy due to its inability to recover after a wild fire destroyed their power plants in Ilocos Norte. WILDFIRE ISSUE BISAN ANO Corporation hosts a wind power farm in Ilocos Norte. The corporation supplies mechanical power to the area that can be used for specific tasks (such as grinding grain or pumping water) or a generator can convert this mechanical power into electricity to power homes, businesses, schools and the like. MaramingPera Corporation supplies maintenance trucks to BISAN ANO Corporation and expects to collect 50,000,000 every year for payment. On January 6, 2017, a wildfire incident happened in the area of the wind power farm that is deemed to be caused by a short circuit coming from the wind turbine. Two mechanics and twenty tourists were burned and died from the said fire. Since then, BISAN ANO Corporation have gone through a lot of misfortunes including the farm to be completely damaged. BISAN ANO Corporation now filed bankruptcy on February 3, 2017. MaramingPera Corporation filed claims for the uncollected accounts receivable from BISAN ANO Corporation.
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Conclusion The power plants in Ilocos Norte destroyed by wildfire on January 6, 2017 is a non-adjusting event requiring disclosure only since it happened after the measurement date on December 31, 2016. Hence, no adjustments are necessary to reflect in its financial statements but to disclose only the matters on notes to financial statements provided by the client. PAS 10, paragraph 3.B, provides that those that are indicative of conditions that arose after the reporting period are non-adjusting events after the reporting period. PAS 10, paragraph 10 also states that an entity shall not adjust the amounts recognized in its financial statements to reflect non-adjusting events after the reporting period. PAS 10, paragraph 21 further provides that if non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions that users make on the basis of the financial statements. Accordingly, the entity shall disclose the following for each material category of non-adjusting event after the reporting period: a. The nature of the event; and b. An estimate of its financial effect, or a statement that such an estimate cannot be made.
EVENTS THAT REQUIRE ADJUSTMENTS CASE 2 On March 8, 2017, a litigation against the client was decided by the RTC in favor of the opposing party. The firm proposed an adjusting journal entry amounting to 30,000,000 to correct the recorded amount of provision for litigation expense, but the management refused on the ground that they will still be filing an appeal to the Court of Appeals (CA) Patent Infringement Lawsuit MaramingPera Corporation has several contingent liabilities on December 31, 2016. Among of them, the entity is the defendant in a patent infringement lawsuit. The auditor obtained brief description regarding on that matter because the court is expected to rule the case in late March 2017 and there is no indication that the claimant will settle out of court. Patent Infringement Lawsuit: In May 2016, MaramingPera Corporation became involved in litigation. On March 8, 2017, a litigation against the client was decided by the Regional Trial Court in favor of the opposing party and the court assessed a judgment for 30,000,000 against MaramingPeraCoporation. Laban ng mgaAstig firm proposed an adjusting journal entry amounting to 30,000,000 to correct the recorded amount of provision for litigation expense, but the management refused on the ground that they will still be filling an appeal to the Court of Appeals. MaramingPera Corporation is appealing the amount of the judgment. The entity’s legal counsel believed that it is highly probable that the Court of Appeals will rule in favor of the claimant and
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that the entity will be required to pay damages an estimated amount in the range between 20,000,000 and 30,000,000. The possible outcomes are equally likely as any other in each point in that range. Hence, the firm proposed a new adjusting journal entry amounting to 25,000,000 computed as follows: Upper Limit Lower Limit Midpoint
30,000,000 20,000,000 25,000,000
Proposed Adjustment: Retained Earnings (Litigation Expense) Provision for Litigation
25,000,000 25,000,000
Recognition of Provision PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the financial statements under the following conditions: a. The entity has a present obligation, legal or constructive, as a result of past event. b. It is probable that an outflow of resources embodying economic benefits would be required to settle the obligation. c. The amount of the obligation can be measured reliably. Measurement of Provision PAS 37 paragraph 36 states that the amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. PAS 37 paragraph 37 further states that the best estimate of the expenditure required to settle the present obligation is the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or transfer it to a third party at that time. PAS 37 paragraph 39 also provides that uncertainties surrounding the amount to be recognized as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is “expected value”. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used.
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CASE 3 After a thorough examination of the client’s bank accounts, it has been noted that an amount of 150,000,000 has been floating from one bank to another from November 2016 to January 2017. Fraudulent Action through Kiting Conclusion The overstatement of cash balance of 150,000,000 that has been floating from one bank to another from November 2016 to January 2017 is an adjusting event since it occurred on and before the measurement date on December 31, 2016. Hence, it requires an adjustment to correct the recorded amount of cash in bank balance on the financial statements provided by the client and to recognize items that were not previously recognized. PAS 10, paragraph 3.A states that those that provide evidence of conditions that existed at the end of the reporting period are adjusting events after the reporting period. PAS 10, paragraph 8 further provides that the entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after the reporting period. Proposed Adjustment: Retained Earnings Cash in bank
150,000,000 150,000,000
CASE 4 The client has a pending case in the CTA in relation with the assessment sent by the BIR last May 2016. The amount in the assessment is 80,000,000. Tax Assessment Issue Upon the issuance of Letter of Authority (LA) by the Commissioner of Internal Revenue (CIR), the Bureau of Internal Revenue (BIR) authorized officers named in the Letter of Authority conducted a tax audit to examine and scrutinize the books and records of the MaramingPera Corporation to ascertain the correctness of the tax declared and paid by the entity. After a thorough review and evaluation within 120 days, it was determined that there exists sufficient basis to assess MaramingPera Corporation for tax deficiency. Based on their findings, there was 80,000,000 tax deficiency due to delinquent accounts resulting from a jeopardy assessment. MaraminingPera Corporation received on May 1, 2016 a Preliminary Assessment Notice (PAN) for the proposed assessment from the BIR, stating that the entity had 15 days from its receipt to respond. After 15 days, the entity failed to respond in which case a Formal Letter of Demand (FLD) and Final Assessment Notice (FAN) had been issued against the entity calling for payment of the tax deficiency of 80,000,000.
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Atty. Princess KT, the legal counsel of MaramingPera Corporation, protested administratively against the aforesaid FLD and FAN on June 1, 2016 and filed a request for reinvestigation to the CIR. All relevant supporting documents were submitted on July 1, 2016. However, the protest was denied by the CIR and issued a letter of denial on December 1, 2016. On December 15, 2016, the Princess KT, filed motion for reconsideration but the same request was denied by the CIR. After the receipt of the said decision, Atty. Princess KT elevated the appeal to the Court of Tax Appeals Division on December 26, 2016. Hence, MaramingPeraCoporation has a pending case as of December 31,2016 in the CTA Division in relation with the assessment sent by the BIR last May 2016. The amount in the assessment is 80,000,000. However, while the case is pending, on January 20, 2017, the BIR offer a compromise agreement with MaramingPera Corporation to bring an end to a tax dispute on trial and avoid escalating the case since a reasonable doubt as to the validity of the claim against the entity exists. MaramingPera Corporation accepted the offer in settlement of the original claim to avoid long and expensive court litigation. The BIR has accepted a total judicial compromise amount of 32,000,000 which is equivalent to 40% of the basic assessed tax of 80,000,000 as a full satisfaction of the entity’s tax liability, including any deficiency interest, surcharges and other penalties. CTA approved the compromise agreement in its tax deficiency case on February 1, 2017. “After careful scrutiny of the documents submitted by the parties in support of the judicial compromise, the court finds the same in order and in compliance with established laws, rules and regulations. Hence, the court approves the same,” the CTA said. Conclusion: The tax assessment issue is an adjusting event that requires adjustments to reflect in its financial statements provided by the client. Since the amount of tax assessment is virtually certain that an outflow from the entity’s resources embodying economic benefits will be incurred within 12 months after the reporting period, such assessment shall be accrued as a liability on December 31, 2016. Proposed Adjustment: Retained Earnings (Litigation Expense for Tax Assessment) Accrued Liability for Tax Assessment
32,000,000 32,000,000
SECTION 204 of the Tax Code Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes – The Commissioner may compromise the payment of any internal revenue tax, when: a. A reasonable doubt as to the validity of the claim against the taxpayer exists; or
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b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The compromise settlement of any tax liability shall be subject to the following minimum amounts: a. For cases of financial incapacity, a minimum compromise rate equivalent to 10% of the basic assessed tax; and b. For other cases, a minimum compromise rate equivalent to 40% of the basic assessed tax.
Revenue Regulations No. 30-2002 SECTION 2: CASES WHICH MAY BE COMPROMISED – The following cases may, upon taxpayer’s compliance with the basis set forth under section 3 of these regulations, be the subject matter of compromise settlement: a. Delinquent Accounts; b. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending. c. Civil tax cases being disputed before the courts; d. Collection cases filed in courts; e. Criminal violations, other than those already filed in court or those involving criminal tax fraud. SECTION 3: BASIS FOR ACCEPTANCE OF COMPROMISE SETTLEMENT – The commissioner may compromise the payment of any internal revenue tax on the following grounds: 1. Doubtful validity of the assessment – the offer to compromise a delinquent account or disputed assessment under these Regulations on the ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that the delinquent account or disputed assessment is one resulting from a jeopardy assessment Jeopardy Assessment Shall refer to a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return.
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CASE 5 One of the Firm’s audit staff has submitted a working paper showing a material difference between the balance per book and the balance per audit of the Creditable Withholding Tax (CWT) ErroneousRecording on Creditable Withholding Tax MaramingPera Corporation, a withholding agent,withheld tax from income payments to individuals arising from an employer-employee relationship. The entity filed a creditable withholding tax on compensation income on a quarterly basis. The following were the quarterly payments recorded in the books of the client: Period 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Recorded Creditable Withholding Tax 250,000 250,000 250,000 250,000 1,000,000
One of the Laban ng mgaAstig Firm’s audit staff has submitted a working paper showing a material difference in the Creditable Withholding Tax presentation between the balance per book in the amount of 1,000,000and the balance per audit in the amount of 1,500,000. The audit team, therefore, conducted a further audit investigation to examine the reasonableness of the recorded amount and to identify the primary cause of such difference. After a thorough examination of the books of the client concerning the filing of creditable withholding taxes, it was found out that the material difference was only due to human error of the record keeper of the client in recording the amounts in their books. However,the client filed and paid the correct amount of CWT to the BIR. Hence, no tax consequences were imposed by the BIR. Based on the audit findings, the correct amount that should be recorded were as follows: Period 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Audited Creditable Withholding Tax 375,000 375,000 375,000 375,000 1,500,000
Hence, we proposed an adjustment regarding on this matter because of material difference that could affect the decision of the users of the financial statements and concerning the tax consequences.
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Proposed Adjustment: Quarter 1st 2nd 3rd 4th Total
Balance per Book 250,000 250,000 250,000 250,000 1,000,000
Adjustment 125,000 125,000 125,000 125,000 500,000
Retained Earnings Creditable Withholding Tax Payable
500,000 500,000
Balance per Audit 375,000 375,000 375,000 375,000 1,500,000
Corroborating Evidence: Recalculation Graduated Tax Rate OVER
BUT NOT OVER
10,000 30,000 70,000 140,000 250,000 500,000
10,000 30,000 70,000 140,000 250,000 500,000 -
THE TAX SHALL BE 0 500 2,500 8,500 22,500 50,000 125,000
PLUS 5% 10% in excess of 10,000 15% in excess of 30,000 20% in excess of 70,000 25% in excess of 140,000 30% in excess of 250,000 32% in excess of 500,000
Creditable Withholding Tax on Compensation Payments Balance per Book The client provided the auditor regarding its calculations on creditable withholding tax as follows: Annual Compensation Payments Over Excess Tax Rat Partial Tax Plus Annual CTW
4,796,875 500,000 4,296,875 x 32% 1,375,000 125,000 1,500,000
Unaudited Quarterly Creditable Withholding Taxes Annual CWT Quarterly Remittance
1,500,000 ÷4 375,000
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Balance per Audit The auditor then performed a recalculation procedure to test the correctness of the computation based on BIR rulings on creditable withholding taxes calculations on compensation payments: Annual Compensation Payments Over Excess Tax Rat Partial Tax Plus Annual CTW Audited Quarterly Creditable Withholding Taxes Annual CWT Quarterly Remittance
4,796,875 500,000 4,296,875 x 32% 1,375,000 125,000 1,500,000
1,500,000 ÷4 375,000
Fortunately, it was found out that the client calculated the CWT correctly and the reason for the material difference was only due to errors in recording the correct amount in the books of the client.
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Evidence: PAYROLL DISTRIBUTION REPORT Employee Gil Albert Jul Boston Frank Brenan Ryan Bolton Paul Beaver Sevel Beaver Raul Brent Jeff Birth John Conner Michelle Colin Nino Creg Precious Digger Jan Dustion Alex Dell Marge Des Riz Early Fran Fern Carl Fernandez Karry Hill Elmer Gurtz Jay Grill Alam Lim Eduard Lester Balt Lu Nino Littkle Ellie Lost Ron Marshall Marvin Meer Marcos Now Trish Newman Seth Osburn Linda Potter Trissy Prior Allan Pung Liz Queen Anne Reyes John Rey Mars Sanchez Riizze Stanz Cill Sull Prince Score Den True Elmer Tan Marty Trool Paul Uviii Sheena Veel Em Watson Alex Watson Totals
Basic Salary 225,030.36 177,429.72 173,680.56 248,238.48 188,171.76 200,000.16 196,785.48 246,083.88 242,791.92 223,931.40 83,825.04 223,258.44 209,353.68 190,971.60 148,615.20 121,052.64 176,292.24 189,168.48 207,861.60 249,853.80 199,906.80 202,724.16 201,390.12 216,887.64 134,720.16 166,773.48 939,050.04 911,538.36 196,061.52 78,766.20 169,591.68 129,710.40 154,273.92 189,554.76 250,264.08 184,817.40 231,184.80 94,831.32 257,183.28 594,171.48 177,250.20 281,656.92 271,759.44 185,995.08 191,073.00 155,767.92 125,383.80 149,949.24 10,964,633.64
Pag-IBIG 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 57,600.00
Philhealth 2,700.00 2,100.00 2,100.00 3,600.00 2,400.00 2,550.00 2,400.00 4,500.00 4,200.00 3,150.00 900.00 3,300.00 2,550.00 2,850.00 2,850.00 1,500.00 2,100.00 3,900.00 2,550.00 4,350.00 2,400.00 2,400.00 2,400.00 2,700.00 1,650.00 1,950.00 4,500.00 4,500.00 2,400.00 900.00 2,100.00 2,250.00 2,250.00 2,250.00 1,500.00 3,450.00 2,850.00 1,050.00 4,500.00 4,500.00 2,100.00 3,450.00 3,300.00 2,550.00 2,250.00 2,100.00 1,500.00 1,800.00 128,100.00
SSS 6,000.00 6,000.00 5,799.60 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 2,799.60 6,000.00 6,000.00 6,000.00 6,000.00 3,999.60 5,799.60 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 4,400.40 5,600.40 6,000.00 6,000.00 6,000.00 2,600.40 5,600.40 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 3,200.40 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 4,200.00 5,000.40 271,000.80
13th 18,752.53 14,785.81 14,473.38 20,686.54 15,680.98 16,666.68 16,398.79 20,506.99 20,232.66 18,660.95 6,985.42 18,604.87 17,446.14 15,914.30 12,384.60 10,087.72 14,691.02 15,764.04 17,321.80 20,821.15 16,658.90 16,893.68 16,782.51 18,073.97 11,226.68 13,897.79 78,254.17 75,961.53 16,338.46 6,563.85 14,132.64 10,809.20 12,856.16 15,796.23 20,855.34 15,401.45 19,265.40 7,902.61 21,431.94 49,514.29 14,770.85 23,471.41 22,646.62 15,499.59 15,922.75 12,980.66 10,448.65 12,495.77 913,719.47
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Evidence: PAYROLL DISTRIBUTION REPORT (Continuation) Overtime Pay Other Benefits Gross Salary 10,000.00 253,782.89 9,000.00 201,215.53 12,000.00 200,153.94 5,000.00 273,925.02 10,000.00 213,852.74 12,000.00 228,666.84 5,000.00 218,184.27 8,000.00 274,590.87 10,000.00 273,024.58 12,000.00 254,592.35 5,000.00 95,810.46 10,000.00 251,863.31 9,000.00 235,799.82 7,000.00 213,885.90 5,000.00 165,999.80 10,000.00 141,140.36 12,000.00 202,983.26 5,000.00 209,932.52 5,000.00 230,183.40 9,000.00 279,674.95 7,000.00 223,565.70 7,000.00 226,617.84 3,000.00 221,172.63 500 10,000.00 245,461.61 12,000.00 157,946.84 5,000.00 185,671.27 1000 10,000.00 1,028,304.21 500 12,000.00 999,999.89 5,000.00 217,399.98 6,000.00 91,330.05 9,000.00 192,724.32 10,000.00 150,519.60 12,000.00 179,130.08 5,000.00 210,350.99 500 7,000.00 278,619.42 6,000.00 206,218.85 1000 12,000.00 263,450.20 5,000.00 107,733.93 9,000.00 287,615.22 500 10,000.00 654,185.77 3,000.00 195,021.05 7,000.00 312,128.33 500 10,000.00 304,906.06 5,000.00 206,494.67 5,000.00 211,995.75 9,000.00 177,748.58 8,000.00 143,832.45 12,000.00 174,445.01 4,500.00 391,000.00 12,273,853.11
Total Deductions 89,900.00 89,300.00 89,099.60 90,800.00 89,600.00 89,750.00 89,600.00 91,700.00 91,400.00 90,350.00 84,899.60 90,500.00 89,750.00 90,050.00 90,050.00 86,699.60 89,099.60 91,100.00 89,750.00 91,550.00 89,600.00 89,600.00 89,600.00 189,900.00 87,250.40 88,750.40 116,700.00 141,700.00 89,600.00 84,700.40 88,900.40 89,450.00 89,450.00 89,450.00 138,700.00 90,650.00 115,050.00 85,450.40 91,700.00 116,700.00 89,300.00 90,650.00 115,500.00 89,750.00 89,450.00 89,300.00 86,900.00 88,000.40 4,596,700.80
Taxable Salary 163,882.89 111,915.53 111,054.34 183,125.02 124,252.74 138,916.84 128,584.27 182,890.87 181,624.58 164,242.35 10,910.86 161,363.31 146,049.82 123,835.90 75,949.80 54,440.76 113,883.66 118,832.52 140,433.40 188,124.95 133,965.70 137,017.84 131,572.63 55,561.61 70,696.44 96,920.87 911,604.21 858,299.89 127,799.98 6,629.65 103,823.92 61,069.60 89,680.08 120,900.99 139,919.42 115,568.85 148,400.20 22,283.53 195,915.22 537,485.77 105,721.05 221,478.33 189,406.06 116,744.67 122,545.75 88,448.58 56,932.45 86,444.61 7,677,152.31
Tax Due 28,470.72 16,883.11 16,710.87 33,281.26 19,350.55 22,283.37 20,216.85 33,222.72 32,906.15 28,560.59 591.09 27,840.83 24,012.46 19,267.18 9,689.96 6,166.11 17,276.73 18,266.50 22,608.35 34,531.24 21,293.14 21,903.57 20,814.53 6,334.24 8,639.29 13,884.17 256,713.35 239,655.96 20,060.00 331.48 15,264.78 11,210.44 12,436.02 18,680.20 22,483.88 17,613.77 24,600.05 1,728.35 36,478.79 136,995.45 15,644.21 42,869.58 34,851.52 17,848.93 19,009.15 12,189.72 6,539.87 11,788.92 1,500,000.00
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Employee Gil Albert Jul Boston Frank Brenan Ryan Bolton Paul Beaver Sevel Beaver Raul Brent Jeff Birth John Conner Michelle Colin Nino Creg Precious Digger Jan Dustion Alex Dell Marge Des Riz Early Fran Fern Carl Fernandez Karry Hill Elmer Gurtz Jay Grill Alam Lim Eduard Lester Balt Lu Nino Littkle Ellie Lost Ron Marshall Marvin Meer Marcos Now Trish Newman Seth Osburn Linda Potter Trissy Prior Allan Pung Liz Queen Anne Reyes John Rey Mars Sanchez Riizze Stanz Cill Sull Prince Score Den True Elmer Tan Marty Trool Paul Uviii Sheena Veel Em Watson Alex Watson Totals
Gross Pay 18,752.53 14,785.81 14,473.38 20,686.54 15,680.98 16,666.68 16,398.79 20,506.99 20,232.66 18,660.95 6,985.42 18,604.87 17,446.14 15,914.30 12,384.60 10,087.72 14,691.02 15,764.04 17,321.80 20,821.15 16,658.90 16,893.68 16,782.51 18,073.97 11,226.68 13,897.79 78,254.17 75,961.53 16,338.46 6,563.85 14,132.64 10,809.20 12,856.16 15,796.23 20,855.34 15,401.45 19,265.40 7,902.61 21,431.94 49,514.29 14,770.85 23,471.41 22,646.62 15,499.59 15,922.75 12,980.66 10,448.65 12,495.77 913,719.47
Pag-IBIG 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 4,800.00
Philhealth 225.00 175.00 175.00 300.00 200.00 212.50 200.00 375.00 350.00 262.50 75.00 275.00 212.50 237.50 237.50 125.00 175.00 325.00 212.50 362.50 200.00 200.00 200.00 225.00 137.50 162.50 375.00 375.00 200.00 75.00 175.00 187.50 187.50 187.50 125.00 287.50 237.50 87.50 375.00 375.00 175.00 287.50 275.00 212.50 187.50 175.00 125.00 150.00 10,675.00
SSS 500.00 500.00 483.30 500.00 500.00 500.00 500.00 500.00 500.00 500.00 233.30 500.00 500.00 500.00 500.00 333.30 483.30 500.00 500.00 500.00 500.00 500.00 500.00 500.00 366.70 466.70 500.00 500.00 500.00 216.70 466.70 500.00 500.00 500.00 500.00 500.00 500.00 266.70 500.00 500.00 500.00 500.00 500.00 500.00 500.00 500.00 350.00 416.70 22,583.40
Taxable Pay 17,927.53 14,010.81 13,715.08 19,786.54 14,880.98 15,854.18 15,598.79 19,531.99 19,282.66 17,798.45 6,577.12 17,729.87 16,633.64 15,076.80 11,547.10 9,529.42 13,932.72 14,839.04 16,509.30 19,858.65 15,858.90 16,093.68 15,982.51 17,248.97 10,622.48 13,168.59 77,279.17 74,986.53 15,538.46 6,172.15 13,390.94 10,021.70 12,068.66 15,008.73 20,130.34 14,513.95 18,427.90 7,448.41 20,456.94 48,539.29 13,995.85 22,583.91 21,771.62 14,687.09 15,135.25 12,205.66 9,873.65 11,829.07 875,661.07
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MANAGEMENT REPRESENTAION LETTER
To LABAN NG MGA ASTIG Company;
April 1, 2017
We are writing at your request to confirm our understanding that your audits was for the purpose of expressing an opinion on the consolidated financial statements (hereinafter referred to as “financial statements”) of MARAMINGPERA Corporation. We acknowledge our responsibility for the fair presentation of the financial statements in accordance with Philippine Financial Reporting Standards. We confirm that, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves: GENERAL: 1. We have fulfilled our responsibilities, as set out in the terms of the audit engagement letter dated October 1, 2016 for: A. The preparation and fair presentation of the financial statements and believe that these financial statements have been prepared and presented fairly in accordance with the relevant Financial Reporting Standards B.
Providing you with all relevant information, such as all financial records and related data and complete minutes of meetings, or summaries of actions of recent meetings for which minutes have not yet been prepared, of shareholders, board of directors and committees of the board of directors that may affect the financial statements, and access to such relevant information
C.
Such internal control as management determined is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error
D.
Ensuring that all transactions have been recorded in the accounting records and are reflected in the financial statements
INTERNAL CONTROL OVER FINANCIAL REPORTING: 2. We have communicated to you all deficiencies in the design and implementation or maintenance of internal control over financial reporting of which management is aware.
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FRAUD & NON-COMPLIANCE WITH LAWS AND REGULATIONS: 3. We have disclosed to you: A. The results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud B. All information in relation to fraud or suspected fraud that we are aware of and that affects the Entity and involves: management, employees who have significant roles in internal control, or others, where the fraud could have a material effect on the financial statements C. All information in relation to allegations of fraud, or suspected fraud, affecting the Entity’s financial statements, communicated by employees, former employees, analysts, regulators, or others D. All known instances of non-compliance or suspected non-compliance with laws and regulations, including all aspects of contractual agreements, whose effects should be considered when preparing financial statements E. All known actual or possible litigation and claims whose effects should be considered when preparing the financial statements
COMMITMENTS & CONTINGENCIES: 4. There are no: A. Other liabilities that are required to be recognized and no other contingent assets or contingent liabilities that are required to be disclosed in the financial statements in accordance with the relevant Financial Reporting Standards, including liabilities or contingent liabilities arising from illegal acts or possible illegal acts, or possible violations of human rights legislation B. Other environmental matters that may have an impact on the financial statements C. Guarantees, whether written or oral, under which the Entity is contingently liable. SUBSEQUENT EVENTS: 5. All events subsequent to the date of the financial statements and for which the relevant financial reporting framework requires adjustment or disclosure in the financial statements have been adjusted or disclosed.
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RELATED PARTIES: 6.
We have disclosed to you the identity of the Entity’s related parties and all the related party relationships and transactions of which we are aware and all related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the relevant financial reporting framework.
ESTIMATES: 7. Measurement methods and significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
Yours very truly,
JEROME C. CHAVEZ, CMA Chief Financial Officer, MARAMING PERA Corp
DR. NEIL D. GLORIA, DBA, MiB Chief Executive Officer, MARAMING PERA Corp
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WRAP-UP PROCEDURES Analytical Procedures in Completing Phase ASSETS Current Assets: Cash and Cash Equivalents Trade Receivables Inventory Office Supplies Prepaid Expenses Total Current Assets Non-Current Assets: Investments Account - Equity Method Property, Plant and Equipment Intangible Assets Deferred Tax Assets Total Non-Current Assets TOTAL ASSET
LIABILITIES Current Liabilities: Trade and Non-Trade Payables Accrued Expenses Income Taxes Payable Total Current Liabilities Non-Current Liabilities: Notes Payable Provisions Deferred Tax Liabilities Total Non-Current Liabilities TOTAL LIABILITIES
SHAREHOLDER's EQUITY Common Stock Capital Surplus Treasury Stock Retained Earnings Other Components of Equity Equity Attributable to Parent Non-Controlling Interests
Vertical Analysis Unaudited Balance Audited Balance 11% 3% 13% 14% 9% 9% 1% 1% 5% 5% 38% 33%
11% 28% 11% 12% 62%
11% 30% 12% 13% 67%
100%
100%
Vertical Analysis Unaudited Balance Audited Balance 12% 13% 9% 11% 0% 0% 21% 25%
19% 11% 9% 39%
21% 13% 10% 44%
60%
69%
Vertical Analysis Unaudited Balance Audited Balance 0% 0% 1% 1% 0% 0% 35% 27% 2% 2% 38% 30% 1% 2%
TOTAL SHAREHOLDER's EQUITY
40%
31%
TOTAL LIABILITY and EQUITY
100%
100%
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The auditor applies final analytical procedures to form an overall conclusion as to whether the financial statements taken as a whole are consistent with the auditor’s knowledge of business and to assess the validity of the conclusions reached and evaluating the overall financial statements presentation. The auditor used vertical analysis in conducting the final analytical procedures. The following are the accounts that were audited:
Accounts
Unaudited
Audited
Difference
Cash and Cash Equivalents Trade Receivables Inventory Property, Plant and Equipment Trade and Non-Trade Payables Accrued Expenses Provisions
11% 13% 9% 28% 12% 9% 11%
3% 14% 9% 30% 13% 11% 13%
8% 1% 0% 2% 1% 2% 2%
Based on the results, all most all of the accounts that were audited have difference in percentage between the unaudited balance and the audited balance. The reason for these differences may be due to certain adjustments on misstatement that were discovered during the course of the audit. All of the accounts above have difference in percentages in the range of 1% - 2% only with the exception of cash. May be because the adjustments of these accounts are not material enough to affect the financial statements taken as a whole. However, with regards to cash account balance, it has a difference of 8%. One factor that it results to this material difference is because the client concealed the 150,000,000 misstatement through kiting that has been floating from one bank to another since November 2016 and the amount was substantial to affect the financial statement taken as a whole. Hence, the overall review confirms the conclusions reached with respect to the fairness of the financial statements. Control Over Cash Cash can be easily removed, concealed and transported. It is usually difficult to identity. It has immediate purchasing power. For these reasons, it is easily susceptible to theft or misappropriate. Adequate controls and safeguards must be instituted to ensure that cash collections are actually received by the company and deposited in its bank account, that cash payments are proper, that disbursements are made only for goods and services actually received, and that cash transactions are promptly and accurately recorded. Below are some basic controls that should normally be instituted.
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Control of Cash Receipts 1. Official receipts should be mailed directly or issued to persons making payment. Cash sales should be supported by invoices, sales tickets and other cash sales proofs. All supporting documents must be pre-numbered and placed under proper control. 2. The mail should be opened by a person other than the cashier or the accounts receivable bookkeeper so that cash cannot be removed and the record of cash received falsified without collusion. 3. Each day’s receipt should be deposited in a bank intact and without delay on the following day. Prompt deposit safeguards against theft and prevents the accumulation of large sums in the hands of the cashier. Delay or failure to deposit cash in a bank encourages misuse of funds. Depositing funds intact facilitates the checking of deposits against cash received. 4. Cashier should not have access to accounts receivable subsidiary ledgers, customer’s statements or sales invoices so that he will not have and opportunity to alter or suppress them in order to conceal irregularities. 5. Cash receipts should be journalized and posted soon after receipt to established immediate accountability. Control of Cash Disbursements 1. All disbursements should be made by check, except small ones to be made out of petty cash. When disbursements are made by check, the review and signatures of responsible officials is necessary before disbursement can be made. 2. Checks should be counter-signed so that fraud cannot be committed by one signatory without collusion. Persons signing checks should not be responsible for recording transactions or for keeping cash. 3. Vouchers and other supporting documents should be marked “paid” or otherwise “cancelled” at the time of payment to prevent resubmission of the same voucher for payment. 4. Bank reconciliations should be prepared monthly to enable prompt detection of irregularities. Reconciliations should be prepared by persons not having anything to do with the recording or handling of cash or the signing of checks to insure independent check on these activities. 5. Cash disbursements should be journalized and posted soon after payment to established immediate accountability.
RESPONSIBILITY IN RELATION TO FRAUD a. Those charge with Governance - To ensure the integrity of an entity’s accounting and financial reporting systems and that appropriate controls are in place. - To prevent and detect fraud and error. b. Management - Fair presentation of the financial statements in accordance with the applicable financial reporting standards - To prevent and detect fraud and error - To establish a control environment and to implement internal control policies and procedures designed to ensure, among others, the detection and prevention of fraud and error. - To ensure that the entity’s operations are conducted in accordance with laws and regulations. c. Auditor - To design the audit to provide reasonable assurance of detecting material misstatements in the financial statements, whether caused by error or fraud.
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Audited Consolidated Statement of Financial Position ASSETS Unaudited Balance Adjustments Audited Balance Current Assets: Cash and Cash Equivalents 210,597,600.00 (150,000,000.00) 60,597,600.00 Trade Receivables 243,434,450.00 243,434,450.00 Inventory 165,710,000.00 165,710,000.00 Office Supplies 14,942,700.00 14,942,700.00 Prepaid Expenses 93,946,900.00 93,946,900.00 Total Current Assets Non-Current Assets: Investments Acoount - Equity Method Property, Plant and Equipment Intangible Assets Deferred Tax Assets
728,631,650.00
578,631,650.00
200,256,950.00
200,256,950.00
523,029,750.00 210,459,500.00 233,434,450.00
523,029,750.00 210,459,500.00 233,434,450.00
Total Non-Current Assets
1,167,180,650.00
1,167,180,650.00
TOTAL ASSET
1,895,812,300.00
1,745,812,300.00
LIABILITIES Current Liabilities: Trade and Non-Trade Payables Accrued Expenses Income Taxes Payable Total Current Liabilities
231,502,800.00 165,998,700.00 4,550,700.00
500,000.00 32,000,000.00
402,052,200.00
232,002,800.00 197,998,700.00 4,550,700.00 434,552,200.00
Non-Current Liabilities: Notes Payable Provisions
358,943,100.00 206,558,000.00
Deferred Tax Liabilities
171,296,400.00
Total Non-Current Liabilities
736,797,500.00
761,797,500.00
TOTAL LIABILITIES
1,138,849,700.00
1,196,349,700.00
SHAREHOLDER's EQUITY Common Stock Capital Surplus Treasury Stock Retained Earnings Other Components of Equity
8,606,700.00 17,111,800.00 (2,618,900.00) 671,289,400.00 35,140,600.00
25,000,000.00
358,943,100.00 231,558,000.00 171,296,400.00
8,606,700.00 17,111,800.00 (2,618,900.00) (207,500,000.00) 463,789,400.00 35,140,600.00
Equity Attributable to Parent
729,529,600.00
522,029,600.00
Non-Contolling Interests
27,433,000.00
27,433,000.00
TOTAL SHAREHOLDER's EQUITY
756,962,600.00
549,462,600.00
TOTAL LIABILITY and EQUITY
1,895,812,300.00
1,745,812,300.00
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THE AUDIT TEAM
Phone: (639) 266093466 Fax: (955) 968 212 www.labanngmgaastigco.com.ph facebook.com/labanngmgaastigco
BERNARD ACE ROMANO, CPA Partner-in-Charge
BOA/PRC Reg. No. 04983 September 29, 2015, valid until September 30, 2018 SEC Accreditation No. 0329-FR-4 (Category A) July 14, 2015, valid until July 15, 2018
654 Gen. Santos Avenue, Campetic Rd. Palo, Leyte 6501 Philippines
MAURICE ACOSTA, CPA Associates
MARY JOY ANORA, CPA Associates
CORIZA JOYCE ATIBULA, CPA Associates
BIANCA BALLON, CPA Associates
RINZZI GABRIELLE BASIO, CPA Associates
JOHN FRANCIS BATUCAN, CPA Associates
CHERRY CERVANTES, CPA Associates
ALLYSSA CLAIRE ESPERAS, CPA Associates
CHELSIE ANNE EVARDONE, CPA Associates
YANCY ANNE OCIER, CPA Associates
IRENE BEATRIZ UMACOB, CPA Associates
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LABAN NG MGA ASTIG COMPANY
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SPECIAL THANKS: BASIO’S RESIDENCE
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PHOTO OPS:
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BLOOPERS:
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Copyright © 2019 By LABAN NG MGA ASTIG Co. All rights reserved. No parts of this book may be reproduced or used in any manner without written permission of the copyright owner except for the use of quotations in a book review.
Phone: (639) 266093466 Fax: (955) 968 212 www.labanngmgaastigco.com.ph facebook.com/labanngmgaastigco
BOA/PRC Reg. No. 04983 September 29, 2015, valid until September 30, 2018 SEC Accreditation No. 0329-FR-4 (Category A) July 14, 2015, valid until July 15, 2018
654 Gen. Santos Avenue, Campetic Rd. Palo, Leyte 6501 Philippines
L A B A N N G M G A A S T I G C o. |CREATIVITY.PERSONALITY.ASSURANCE 94