Republic of the Philippines

COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City

NATIONAL GOVERNMENT SECTOR

Cluster 4- National Defense and Security

INDEPENDENT AUDITOR’S REPORT

The Officer-in-Charge
Department of the Interior and Local Government
DILG- NAPOLCOM Center, Quezon Avenue, Quezon City

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of the Department

of the Interior and Local Government, which comprise the statement of financial position
as at December 31, 2016, and the statement of financial performance, statement of cash
flows, statement of changes in net assets/equity and comparison of budget and actual
amounts for the year then ended, and a summary of significant accounting policies and
other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial
statements in accordance with the Philippine Public Sector Accounting Standards
(PPSAS), 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.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements

based on our audit. We conducted our audit in accordance with Philippine Public Sector
Standards on Auditing. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks of material misstatements of
the consolidated financial statements, whether due to fraud or error. In making those risks

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assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements 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 entity’s internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

As discussed in Part II of this report, the following observations affected the fair
presentation of consolidated financial statements of the Department of the Interior and
Local Government, to wit:

1. The reliability of the balance of Cash in Bank-Local Currency, Current Account

(LCCA) and Cash-MDS, Regular totaling ₱421.722 million cannot be ascertained
due to: (a) unreconciled difference of ₱4.225 million between the book and bank
balances in Region II; (b) non-reversion to the cash account of unreleased checks
totaling ₱50.542 million; (c) non-cancellation of stale checks totaling ₱5.038
million; (d) unrecorded book reconciling items amounting to ₱84,468.19;
(e) unrecorded bank accounts in Central Office and Region II with balances
totaling ₱815,489.36; and (f) delayed/non-preparation and non-submission of
Bank Reconciliation Statements in Central Office and in four regions.

2. The accuracy of the balance of Receivables accounts totaling ₱16.453 billion was
doubtful due to discrepancy between the books of DILG and ROs and IAs caused
by: (a) unliquidated fund transfers amounting to ₱755.907 million for completed
projects; (b) unrecorded liquidations and refunds of ₱91.514 million;
(c) erroneous recording of fund transfers totaling ₱360.188 million; (d) existence
of dormant accounts aggregating ₱588.846 million; and (e) undocumented fund
transfers and liquidations.

3. The accuracy of the balance of Inventory accounts totaling ₱3.857 million as at

year-end was unreliable due to: (a) unreconciled discrepancy of ₱3.336 million
between the accounting and property records; (b) direct recording of procured
supplies and materials totalling ₱2.205 million as expense instead of inventories
in NCR and Region VIII; and (c) non-preparation of RSMIs for issued supplies
and materials for the months of November and December 2016. Moreover, other
deficiencies noted include the non-maintenance of stock card and supplies ledger
card; failure to conduct physical count of inventories in NCR, Regions I and XIII;
and non-issuance of ICS to end-user of semi-expendable property in NCR.

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 4. The accuracy of the balances of Prepaid Rent and Guaranty Deposits accounts in
Central Office amounting to ₱1.84 million and ₱14.769 million, respectively, was
doubtful due to: (a) erroneous recording of advance rental/deposit amounting to
₱14.073 million as Guaranty Deposits instead of Prepaid Rent; (b) failure to
adjust the expended portion of Prepaid Rent and the Guaranty Deposit of
₱1 million and ₱14.073 million, respectively, or a total of ₱15.073 million
resulting in the overstatement of both accounts by the same amount; and
(c) inclusion of ₱696,426.09 in the Guaranty Deposit without supporting
documents.

5. The reliability of the Property, Plant and Equipment accounts with an aggregate
balance of ₱734.979 million as of December 31, 2016 cannot be ascertained due
to: (a) inclusion of untitled land and building valued at ₱34.490 million;
(b) unreconciled discrepancy of ₱141.537 million between the accounting and
property records; (c) inclusion of semi-expendable property aggregating ₱40.803
million as PPE; (d) unrecorded PPEs totaling ₱2.465 million; and (e) non-
derecognition of lost properties amounting to ₱59,658.20 in the Central Office
resulting in the overstatement of Information and Communication Technology
Equipment and related Accumulated Depreciation by ₱59,658.20 and ₱26,032.40,
respectively, and the understatement of Loss of Assets account by ₱33,625.80.

6. The balance of Accumulated Surplus/Deficit account was understated by

₱200,370.48 due to erroneous recording of training expenses while the affected
asset accounts were understated by the same amount.

Qualified Opinion

In our opinion, except for the effects of the matters described in the Basis for Qualified
Opinion paragraph, the consolidated financial statements present fairly, in all material
respects, the financial position of the Department of the Interior and Local Government
and 17 regional offices as of December 31, 2016 and their financial performance, cash
flows and changes in net assets/equity and comparison of budget and actual amounts for
the year then ended in accordance with PPSAS.

COMMISSION ON AUDIT

By:

MELISSA GRACE B. MARTINEZ

Supervising Auditor

June 5, 2017