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I. BACKGROUND
II. OBJECTIVE
III. POLICY
IV. EFFECTIVITY
ANNEX A
I. Overview
The emergence of various technologies in data processing has changed the way a tax
audit or examination can be efficiently and effectively done by a Revenue Officer (RO).
Ignoring the computer, treating it as a black box, and auditing around it is no longer feasible
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given the continuous advancement in technologies used by the taxpayers. While there is no
doubt that the use of computers has improved exponentially the reliability of processing
financial transactions and integrity of financial data, the Bureau realizes that there are
significant changes that impact on the traditional audit procedures Performed by the Revenue
Officers. EAISDH
The challenges faced by the RO in the use of computer technology are in the
following:
It is in this context that this Manual is prepared — to enable the ROs to address these
major challenges brought about by the widespread use of computer application systems by
taxpayers.
The Computer Audit Manual is the supplemental reference of the ROs in the
investigation of the internal revenue tax liabilities of the taxpayers who use a Computerized
Accounting System (CAS) or components thereof.
3. Provide ROs with minimum standard procedures and techniques for data
analysis, calculation, reconciliation, exception testing, etc.;
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5. Simplify audit documentation.
3. Examination proper
ASCII — refers to data that has been encoded according to the American Standard
Code for Information Interchange (ASCII). It is the native character set of most
minicomputers and all personal computers.
Audit Software (AS) — software designed for data extraction and analysis of
accounting transaction files.
CD-ROM (Compact Disc-Read Only Memory) — is a data reader for optical discs
commonly called CD drive.
CD-R (Compact Disc-Read Only) — a variation of the Compact Disc which is a Write
Once, Read Many (WORM) optical media (though the whole disc does not have to be
entirely written in the same session) and retains a high level of compatibility with standard
CD readers. These optical discs are read-only which cannot be modified, deleted or written
over with new data.
Component — is something that forms part of a whole system (e.g. Purchase module,
Cash Disbursements module, etc.).
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of records. Records are composed of fields.
Data Type — defines the type of data stored in a field such as character, numeric or
date.
.dbf (database format) — dBASE's underlying file format that is widely used in many
other applications needing a simple format to store structured data.
Disc/Disk — a round plate or platter on which data can be encoded; a secondary data
storage medium which is either a magnetic disk (diskette or hard disk) or an optical disk. A
diskette may look like a small stereo record, usually 3.5 inches in diameter or in some cases,
5.25 inches. Hard disks usually have more storage capacity than diskettes and also offer
faster access to the data they hold. With large computer systems, hard disks are often
contained in disk packs. An optical disk uses a laser beam to store large volumes of data
inexpensively.
Field Length — the maximum number of characters that can be contained in a field.
Fields or Elements — specified areas of a record used for storing a particular class of
data. A field is a sub-unit of a record.
File Record Layout — contains information such as record lengths, field positions,
data types, and field descriptions.
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Files — named collection of records stored or processed as an individual entity. Files
are composed of records.
Flat ASCII — refers to flat files that are composed of characters and spaces not
necessarily arranged in any particular order. ScHADI
Flat File — is a computer file that is usually read or written sequentially and does not
have indexes.
FTP (File Transfer Protocol) — a program or net access method which allows
transfer of files from a remote computer to another computer.
FTP Server (File Transfer Protocol Server) — a network server program or computer
which responds to requests for files via FTP. A busy internet archive site may have one or
more computers dedicated to running FTP server software. These will typically have
hostnames beginning with "ftp", e.g. ftp.denet.dk.
Input File Definitions/Edit Table Layout — record layouts used to describe the
structure and content of a data file and to specify where the data file can be found.
Key — a value used to identify a record in an index database as opposed to a flat file
with no keys and is read sequentially.
Location (as in memory location) — a byte, word or other small unit of storage space
in a computer's main memory that is identified by its starting address and size.
Log File — records all commands and results obtained during the data analysis. It can
be used to retrace steps and repeat earlier results. It also provides an excellent resource for
the generation of reports.
Protocol — a set of rules for the exchange of data between a terminal and a computer
or between two computers.
Records — collection of related fields containing data items grouped for processing.
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Records are subunits of a file.
Secondary Data Storage Medium — additional storage space separate from built-in
memory. TcSHaD
Tape — a secondary data storage medium which comes in reel or cartridge, similar to
a tape that is played on a tape recorder. Magnetic tape is usually used for backup purposes —
for "data insurance" because tape is inexpensive.
A. Pre-Audit Analysis
Prior to examining the taxpayer's books of accounts through the use of CAATTs,
analyzing the return is essential to identify potential issues and items for clarification with
the taxpayer. The RO needs to familiarize and understand the taxpayer's business operations
and accounting processes in connection with CAS or components thereof. The RO also needs
to gain an understanding of the used accounting system initially based on documentation
included in CSET dockets compiled during the processing and issuance of permits to adopt
the CAS or components thereof.
B. Work Planning
This stage includes the preparation of an audit plan. (Refer to Appendix 1 for a
sample audit plan.) The audit plan shall include the audit objectives, audit procedures to be
undertaken and the timeframe for the audit. In preparing for the application of CAATTs in
the tax examination, the RO shall do the following tasks:
c. Obtain the relevant documents and reports from CSET relative to the
issuance of permit to use CAS, or components thereof, to:
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ii. Understand the formula for programmed computations;
iii. Assess whether these formulas are in accordance with the tax
laws and regulations; acITSD
v. Identify the table/files where such relevant data are located; and
Although the CAATTs application may vary on a case to case basis, this Manual
provides a list of potential CAATs applications that a RO should follow/execute (Appendix 5
and discussion under "V. Examination Proper"). These CAATTs applications will now be the
basis of the RO in the preparation of a checklist of files/data to be requested from the
taxpayer which shall be attached to the Letter of Authority (LA) to be served. (Refer to
Appendix 2 for the sample letter request for data and Appendix 3 for checklist of files to be
requested from the taxpayer depending on industry type.)
Within three (3) days after approval and signing of the Letter of Authority
(LA)/Audit Notice (AN) by the authorized revenue official, the LA/AN shall be served to the
taxpayer, including the list of requirements (Appendix 3) and Survey Sheet* (Appendix 4)
for their accomplishment. The RO may request for a systems overview discussion with the
taxpayer's Information Technology (IT) personnel. After the overview, the RO shall:
4. Confirm the contents of the files to be requested, expected file size, date
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of submission, and other related information needed. aSCDcH
* The survey sheet shall also serve as a guide for the RO during discussion to the
taxpayer's authorized IT personnel.
Prior to discussion with the taxpayer, the RO has already listed CAATTs' applications
to be used. However, with the information obtained during the discussion or meeting with the
taxpayer, the RO shall determine their applicability. At this point, the RO shall:
b. Draft a high-level CAATTs flowchart depicting the input files, the major
processing steps, and the expected output files/reports. A narrative
description of the key steps to be performed during the execution phase
may be prepared. This will and in building commands and finally
executing them.
a. Data files;
b. File layout;
2. Ensure that files received from the taxpayer conform to the following
preferred file formats (Appendix 7):
a. DBF files;
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3. Perform data file conversion using available software, if necessary (such
as ACL, Sesam, Word, Excel, Access, etc.)
The RO shall:
2. Count the number of records to ensure that the files received are
complete and accurate.
3. Check and ensure that no unusual items exist. Unusual items may
include the following:
a. Duplicates;
b. Gaps;
6. Request for another download of the files, in case the files received do
not meet the data integrity test. The discrepancies may be caused by
errors on downloading or conversion form one format to another.
V. Examination Proper
General Procedures
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examinations, the RO shall execute the following minimum CAATTs' application/s to carry
out the audit plan: ETIDaH
A. Determine differences during the test run if these are due to faulty program
logic in the CAATTs application or due to taxpayer's system error. If the discrepancy is
caused by faulty program logic, abnormal input data not considered in the computation, or
incorrect record layout, modify and rerun the application as deemed necessary until such
time that the CAATTs application proves to be responsive of the CAATTs objectives and
tested to provide accurate results. Test run may be applied in any of the following:
2. One of many files provided, e.g., 1st month in a group of monthly files;
and
B. Execute the applicable CAATTs' application (Note: Always keep track totals of
record count and amounts to ensure that the data is processed completely; and Document
each CAATTs procedure while executing CAATTs, especially in repeated tests.)
1. General Ledger
a. Obtain the transaction files that interface with the general ledger which
should contain balances of each account together with transaction
history, various references and descriptions.
ii. Foot (total) the balances to ensure they balance to zero. Note:
some ledgers include memo amounts which may need to be
excluded; and
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iii. Total (or summarize) transactions by account. HITAEC
i. Test for transactions with dates outside the taxable period under
audit;
ii. Analyze per account and look for unusual debit/credit entries and
consequent tax exposure; and
2. Sales
a. Analyze
iii. Relate between items shipped and items booked as sales. EHACcT
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c. Perform Exception Tests
i. Extract all sales data for audit by customer, product, region, etc.,
and generate exceptions pertaining to sales prices less than
expected for product type or large discount given (transfer
pricing and large credit notes).
3. Inventory
Inventory can vary in volume and cost within organizations. Where inventory is a
significant item, audit testing is used to provide assurance on existence, completeness
(cut-off) and valuation.
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i. Identify stock acquired from associated companies; and
ii. Isolate inventory items with cost greater than retail price, with
zero/negative quantities, or with zero/negative prices.
4. Payroll
Payroll auditing is an excellent application of the Audit Software. The main objective
is to check validity and accuracy by testing existence of employee, correctness of pay and
accuracy of withholding taxes made. There are many regulations and taxes associated with
payroll and compliance therewith can be checked. Privacy concerns/confidentiality may limit
verification but the following common tests may be applied:
i. Total gross pay, net pay, deductions and any other value fields;
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vii. Compare payroll master file with payroll list or Alpha List.
5. Fixed Assets
Fixed Asset registers vary in the detail of information and volume of records. In
organizations with significant volumes of plant and machinery, the Audit Software can be
used to scan for problem items.
a. Analyze
i. Segregate the file providing the total cost, depreciation and net
book values and net recoverable value;
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iii. Test for dates in the appropriate period;
vii. Extract assets with useful lives or depreciation rates beyond set
norms;
x Determine assets held for rent or lease to tenants, and extract the
amount of rental income received on these properties.
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etc.
iii. Test for items with shipping dates or numbers outside the
expected range;
Many accounts payable tests also relate to supplier master file details. This often
resides on a different file of the detailed ledger items. Apply the common tests as follows:
HCaEAT
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ii. Summarize invoices by supplier to prove individual balances.
iii. Identify and total liabilities for goods received and not yet
invoiced.
Moreover, despite the above enumerations, the RO is not precluded from applying
other techniques which are deemed necessary in a particular case.
Documentation exists in every phase of an audit cycle, from preliminary works to the
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examination proper, since one of the best practices in audit is "documenting while working".
However, in this stage, the documentation and summarization that need to be done pertains
to the results of the CAATTs application that will either form part of the audit report, or as
supporting papers to the audit report.
The documents prepared should be collated and retained in a manner that will be
understood by other ROs who are not part of the original examination, other authorities
within the Bureau, and third parties who might challenge the results of the tax audit. In a
computer audit, the analysis conducted by the RO is in electronic form (stored in CD-R or
DVD-R or any optical media), and the tests are documented through a "log file", which can
only be seen when an authorized third party interested to view the audit case looks into it.
Since the CD-R should form part of the audit docket, the RO must affix his signature on the
"label" side of the CD-R. The standard contents of the CD-R to be prepared by the RO are
the following:
• Computation of findings
To view the contents even without opening the CD-R, a printed copy of the "Table of
Contents" of data stored on it, shall form part of the case docket.
ROs are required to make a report after the computer assisted audit has been
conducted. The documenting and summarizing done will aid the RO in making a good audit
report. To make a good audit report, it should contain the reporting requirements prescribed
under existing revenue issuances and audit manuals, provided, these will not duplicate the
herein prescribed contents of the working paper in CD-R, (i.e. if the existing revenue
issuances or audit manuals require the schedules of sales and purchases, and these schedules
are already in the Working Paper in electronic form, there is no need to attach schedules in
hard copies). acHTIC
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Hereunder is the list of the basic documents that need to be attached to the case
docket containing the audit report, numbered in order of appearance (Item No. 1, being the
first document at the bottom of the case docket):
13. CD-R prepared lay the RO (with table of contents in printed copy); and
As prescribed under RR No. 16-2006, the ROs should keep source data and output
files in CD until the report of investigation and the tax docket of the case has been reviewed
and approved by the authorized Revenue Official. The ROs shall then return to the taxpayer
their computerized accounting books/records intact and in their original form upon such
termination, otherwise, the source data as well as the back-up electronic accounting
documents and records should be retained. (e.g., litigation reference).
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Reviewing an audit report pertaining to tax audit is a mandatory procedure prior to
the approval of the audit reports by authorized officers of the Bureau. To review an audit
performed using CAATTs, the reviewer must also have knowledge on how the used audit
software runs. Listed hereunder are the minimum review procedures that a reviewer shall
follow/execute:
1. Identify potential CAATTs application per audit plan and compare these
to the CAATTs application done by the auditors;
2. Check if the CAATTs application done by the auditors meet the audit
objectives;
4. Examine the details of the CAATTs flowchart and compare them with
command log file;
APPENDIX 1
I. SALES
A. CAATTs Objectives:
B. CAATTs Procedures:
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2. 100% samples for vouching;
II. VAT
B. CAATTs Procedure:
III. Expenditure
A. CAATTs Objectives:
B. CAATTs Procedures:
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1. "Annualized" income vs. withholding tax;
a. Service
b. Operating
c. Capital goods
d. Goods
e. Local/Imported
g. Supplies
h. VAT/non-VAT
IV. Payroll
A. CAATTs Objectives:
B. CAATTs Procedures:
5. Compare payroll master file with payroll list or Alpha List; and
APPENDIX 2
The President
_____________________
_____________________
Subject: Data Files request for Tax Audit per Letter of Authority No. 0000000
Sir:
Pursuant to our Letter of Authority No. 0000000 dated ____________ for the
examination of your books of accounts and other accounting records for the year beginning
_______________ to _____________ we hereby request for the reproduction of the
following master and transaction files in electronic form in accordance with Revenue
Regulations 16-2006 dated August 16, 2006.
We request that each of the above will be submitted to us in separate files, reflecting
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all transactions captured by the system from _____________ to __________ and that the
data should be given in the following formats: delimited text files, .mdb or .dbf file on a
CD-R or DVD-R per module.
Together with the data, please document the file record layouts, including the skip
length and record lengths. For each field, document the field name, field start position, field
length, data type, and formats of numeric and date items. We also require documentation of
key control information, including the transaction cut-off date and time, the number of
records in the file and control totals of numeric fields where applicable. Also include in
separate files, the Chart of Accounts and source system codes.
This represents our initial data request associated with this audit. We anticipate a
necessity for subsequent data requests, but we will endeavor to keep these requests to a
minimum, in consideration of your time and resources.
We appreciate your assistance with this data access, and look forward to working
with you during the course of our audit. We expect our files on or before _______________
which shall be submitted in softcopy and duly signed by an authorized officer of your
company.
APPENDIX 3
I. MANUFACTURING INDUSTRY
A. Revenue
B. Expenditure
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1. Purchase File
C. Payroll
D. Conversion
5. Bill of Materials
E. Fixed Assets
F. Financial Reporting
3. Purchase File
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1. Transaction File
a. Policy Number
b. Plan Code
d. Mode of Payment
h. Policy Date
j. Effective Date
k. Maturity Date
l. Policy Status
m. Cancellation Date
n. Cancellation Code
a. Policy Number
b. Plan Code
d. Renewal Number
e. Agent Code
f. Agent Name
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g. Agent Commission Transaction Number
l. Policy Year
n. Policy Date
o. DST
p. Withholding Tax
6. Reinsurance File
a. Policy Number
d. Maturity Date
j. Commission Income
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k. Amount of Claims Recovery
n. Commission Expense
a. Policy Number
b. Plan Code
h. Claims Expense
3. Withdrawal File
a. Certificate Numbers
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b. Date of Placement
c. Pre-termination Dates
d. Maturity Dates
e. Principal Amount
f. Interest Rates
a. Taxable Deposits
i. Demand Deposits
b. Non-taxable Deposits
a. Loans by classification
i. Commercial
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ii. Industrial
v. Agri-Agra Loan
ix. Principal
x. Terms
xi. Interest
• Maturity Date
• Pre-termination Date
a. Account Number
b. Amount
d. Rate
e. Terms
f. Date
a. Account Number
b. Date
c. Amount
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d. Mode of Payment
e. Other Charges
9. Notes File
V. TELECOM INDUSTRY
1. Invoice File
5. Card Database
7. Tariff Table
APPENDIX 4
SURVEY SHEET
If you wish to complete this questionnaire electronically, we can supply you with an
electronic version on diskette or send it to you by E-mail via Internet. If you need assistance
or additional explanations, we will be pleased to help you. You may contact us by telephone
or by E-mail: your name@your domain. com
Taxpayer Identification
Name ___________________________________________
Address ___________________________________________
Telephone No. ___________________________________________
Fax No. ___________________________________________
E-mail Address ___________________________________________
TIN ___________________________________________
Computer
PC
Stand-alone _________ _________ _________ _________ _________
PC
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Network _________ _________ _________ _________ _________
Main frame
computer _________ _________ _________ _________ _________
Types of connection
[ ] [Yes] _______________________________________________
[ ] [No] _______________________________________________
Software
Give details.
Commercial
Software
(Note 1) ____________ ____________ ___________ ___________
__________ ____________ ____________ ___________ ___________
__________ ____________ ____________ ___________ ___________
__________ ____________ ____________ ___________ ___________
In House
Software ____________ ____________ ___________ ___________
__________ ____________ ____________ ___________ ___________
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__________ ____________ ____________ ___________ ___________
Specify
[ ] [Yes] _______________________________________________
[ ] [No] _______________________________________________
Specify
[ ] [Yes] _______________________________________________
[ ] [No] _______________________________________________
3. Which are the file formats available for data transfer? (Pls. check
appropriate box)
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ASCII/EBCDIC fixed length ____________________________________
ASCII Delimited ____________________________________
Others ____________________________________
Record Retention
Connectivity
Comments:
________________________________________________________
APPENDIX 5
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Industry
The following topics enumerate the suggested computer audit procedures and
techniques based on commonly used application systems by industry. The Revenue officer
may use the following audit techniques when applicable. aESTAI
I. MANUFACTURING INDUSTRY
A. Revenue
7. Summarize the Account for the airway bills and/or bills of lading
and compare using Relate or Merge with recorded export sales;
13. Filter and Total products available for sale still covered with
incentives and compare with declarations per ITR and VAT
returns. (e.g. PEZA, pioneer industry);
14. Check for unusual items (i.e., suspense account analysis); and
B. Expenditure
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3. Stratify balances by value brands;
9. Compare cost and selling price and identify items where cost
exceeds net realizable value;
A. Revenue
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5. Filter and Total consigned goods for more than sixty (60) days;
7. Summarize the Account for the airway bills and/or bills of lading
and compare using Relate or Merge with recorded export sales;
11. Match sales per customer vs. tax credits claimed in the ITR (e.g.
Summary List of Sales vs. Summary Alpha List of Withholding
Taxes (SAWT)); and
12. Classify and summarize gift checks per status (balance and
expiry date).
B. Expenditure
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etc.; and
5. Compare cost and selling price and identify items where cost
exceeds net realizable value;
10. Check for unusual items (i.e., suspense account analysis); and
The main transaction streams are premiums and claims although there are special areas
such as re-insurance where THE AUDIT SOFTWARE can also be used successfully.
Premiums
The main tests are concerned with ensuring all premiums are raised and the correct rate
is used. However, analyses of risk and exception tests of old or forward dated items are
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useful.
A. NON-LIFE:
6. Extract all policies with current year claims and compute company's
share of reinsured losses; and
7. Extract the transactions which are zero-rated and/or exempt from VAT.
B. LIFE:
1. Look for Gaps and duplicates on policy number. Test-check the entries
to the premiums receivable register. Verify existence of transactions
affecting production that may have been omitted in the declaration of
premiums from insurance policies written subject to income tax;
10. Reconcile all income payments subject to final withholding taxes with
the amount of actual payments as reflected in the pertinent account in
the audited financial statements such as interest expense, royalties,
dividend declarations, etc. Segregate taxable from exempt transaction to
determine the correct taxable base;
14. Extract the total amount of ceded premiums in the Reinsurance Register
and determine whether the amount of ceded premiums per Reinsurance
Register tallies with the amounts reflected in audited financial
statements, income tax returns, and annual statement submitted to the
Insurance Commission; ECaHSI
15. Verify the accuracy of the computation of reserves that were set up at
the end of the year under audit;
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16. Review the covering lease contracts to determine the amount of rental
and other pertinent terms and conditions reflected thereat. Check
whether the declared rental income is in accordance with terms and
conditions embodied in the contract;
17. Verify whether all claims for losses are covered by unexpired insurance
policy and all these claims are filed during the taxable year;
18. Extract paid and unpaid losses. Consider the possibility of reverting such
unpaid losses to income account;
20. Filter high value claims. Check for duplicate claims (same policy
number and either same amount or same date of incident); and
The use of Audit Software is on most areas of financial institutions including current
accounts, personal and corporate lending, treasury functions and investment accounts.
The usual guidelines on volume and depth apply. However in some banking systems,
the volume of transactions can be too great to download to PC. It may be appropriate to
download a segment of the data (e.g. a region) or a selected number of fields.
b. Analysis:
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i. Extract Customer MF, Transactions File (deposits), Withdrawal
File, and Rates File;
vi. Extract Loans MF, Transaction file, and Statement of Loans File;
b. Analysis:
iii. Ascertain that all income subjected to final tax are properly taken
up at gross amounts; and
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Letters of Credit Issued/other transactions x Tax Rate = DST
b. Analysis:
• Investment Account
• Investment Properties
• Other Assets
• Bills Payable
• Deposit Liabilities
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• Local Banks
• Foreign Banks
• BSP
• Others
• Subordinated debt
• Equities
• Surplus Reserves
4. Income Tax
b. Analysis:
vi. Check whether bank charges are being booked as part of income
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(bank charges on dormant accounts);
The following tests are relevant where the accounts are either commercial or personal
loans:
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b. Identify large loans;
V. TELECOM INDUSTRY
1. Extract the Receipts subject to VAT and compute VAT from the
Billing/Invoice File; IcSADC
2. Filter overseas calls, overseas SMS and roaming services and compute
Overseas Communication Tax from the Statement of Accounts File;
10. Check capital expenditures greater than the threshold for deferred input
tax;
Distribution and Service companies have many of the standard ledgers, payroll,
accounts payable, etc. which can be key concerns.
4. Extract all sales data for audit by customer, product, region, etc.; TAaIDH
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6. Summarize shipments by warehouse for product distribution analysis.
APPENDIX 6
FRAUD EXAMINATIONS
There are a number of tools to prevent and detect fraud including personnel vetting,
independent authorization of transactions and observation of employees. THE AUDIT
SOFTWARE does not replace any of these techniques but adds a tool that is particularly
useful in the right circumstances.
Clearly the relevant information to check must reside on accessible computer files.
Generally, the larger the volumes and the more detailed the information held, the more useful
THE AUDIT SOFTWARE becomes. Using THE AUDIT SOFTWARE on copies of the files
can be done without alerting those under suspicion and can build up evidence to prove what
has occurred. However, it should be noted that there could be problems in submitting
computer records as evidence to a court. Hence, expert advice should be sought if
information gathered through THE AUDIT SOFTWARE needs to be submitted. Further, this
guide does not cover procedures on how to deal with fraudsters for which specialist help
should be sought.
I. Sales
II. Payroll
APPENDIX 7
Copyright 2019 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia Third Release 2019 51
a. Oracle
b. SQL
c. Access
d. Foxpro
c. Excel
d. Dbase
e. XML
3. Native formats:
a. AS/400PL/1
1. Text File
2. Excel
3. Lotus 123
4. Microsoft Access
5. Dbase
Copyright 2019 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia Third Release 2019 52
6. Word Merge File
8. SML
9. Clipboard
Copyright 2019 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia Third Release 2019 53
Endnotes
1 (Popup - Popup)
Annex A
Appendix 1
Appendix 2
Appendix 3
Appendix 4
Appendix 5
Appendix 6
Appendix 7
Copyright 2019 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia Third Release 2019 54