Republic of the Philippines

NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY

Gen. Tinio Campus, Cabanatuan City, Philippines

GRADUATE SCHOOL

Semester : SECOND SEMESTER AY 2019-2020

Program : MASTER IN EDUCATIONAL MANAGEMENT

Course Title : FISCAL MANAGEMENT

Course Code : EM 222

Student : JOY B. PALIT - ANG

Professor : DR. JESUS ARBOLEDA

STATE AUDIT IN THEPHILIPPINES

NATURE OF STATE AUDITING

State audit is an ancient and respected branch of state administration. In time,state audit
developed from the need for good government. It started from a simple device to prevent ruin
and chaos in public finances and bookkeeping and serves as an instrument for ensuring open,
regular,efficient and responsive government. Thus it became closely intertwined with modern
government and public accountability.

DEFINITION

State audit is the analytical and systematic examination and verification of financial
transactions,operations, accounts, and reports of any government agency for the purpose of
determining their accuracy,integrity, and authenticity, and satisfying the requirements of
law,rules, and regulations.

AUDITING IN PUBLIC ADMINISTRATION

State audit may be considered as the control and accountability component of the fiscal
administration cycle.
AS A CONTROL MECHANISM

Auditing ensures the proper and legal utilization and management of fiscal resources in
accordance with sound financial management principles, accounting and auditing standards,
and applicable laws and regulations.

AS ACCOUNTABILITY COMPONENT

Auditing seeks to ensure that public officials entrusted with functions andresources are made
responsible for the performance and results of operations of their office

IN THE FISCAL ADMINISTRATION CYCLE

Auditing provides inputs to the next phase which is planning. Audit reports contain vital
information on the results of operations of agencies and recommendations to improve their
performance. These information are useful in formulating plans and targets.

HISTORY OF AUDTING IN THE PHILIPPINES

1. BEFORE POLITICAL INDEPENDENCE

A. AUDITING UNDER SPAIN

The first activity in the Spanish colonial government was in 1953 when a Royal Audiencia or a
high court of justice was set up in Manila. Fiscal review was conducted by the audiencia in
addition to regular judicial functions. This later evolved into a separate and independent fiscal
control activity in 1739 with the establishment of the royal exchequer or a national treasury.

B. AUDITING UNDER THE MALOLOS REPUBLIC

In 1896, an independent Philippine republic was declared and the Malolos Constitution was
created. The budget process was described in detail and the budgets were subject to public
scrutiny.

While the Malolos Constitution was silent on the function of auditing, Rule No. 40 of the Decree
of June 20, 1898 provided that tax collectors should render an accounting of all expenditures as
well as all tax collections made which were to be verified by the Assembly.

C. AUDITING UNDER THE AMERICANS

The Americans took over the Philippines on August 13,1898 and the first step undertaken was
an inventory of all public funds. On September 5, 1898, the position of Auditor of the American
military government was created. During the American rule, a shift was made from the judicial
type of audit(Spanish era) to legislative type of audit(Malolos Republic) then to the executive
type of auditing functions. It was during this period that the practice of pre-audit was initiated.
The work of the Auditor was to countersign all warrants for withdrawal of money from the
National Treasury. Later, all disbursements should be approved by the Auditor .

D. AUDITING UNDER THE COMMONWEALTH PERIOD

The Philippines was transformed into a Commonwealth in 1935. Three major events in the
Philippine state auditing were:

1.The drawing of the Constitution of 1935 which provided for an independent General Auditing
Office

2.The passage of Commonwealth Act No. 320 which combined both the accounting and
auditing functions under the GAO

3.The passage of Commonwealth Act No. 325 which conferred on the GAO the function of
auditing public service enterprises.

2. POST INDEPENDENCE PERIOD

An Economic Survey Mission headed by Daniel Bell was sent by President Truman in 1950. Bell
recommended reforms in public administration, including modernization of fiscal
administration, to help government cope with worsening political and economic problems.
Implementation of administrative reforms was part of the precondition for the grant of further
foreign aid. The Government Survey Reorganization Commission(GSRC) was set up with
assistance from the American government in the form of consultancy services from two
management firms. Its objective was to evaluate the entire governmental system and make
recommendations for reforms.

A. THE FIRST REORGANIZATION EFFORT: REFORMS WITH ASSISTANCE OF AMERICAN

CONSULTANTS

In 1954, a modernization project in auditing was initiated upon the advice of the American
consulting firm, Booz, Allen and Hamilton. These were part of the reform efforts in the
administrative system in response to a very real and serious threat to the government. During
this period, the General Auditing Office (G AO) was reorganized twice. In 1953, R. A. 3 837 and
in 1957, R. A.1890.
B. REFORMS UNDER THE SECOND RE-ORGANIZATION EFFORT

The Presidential Commission on Reorganization (PCR)was formed during the late sixties with
the major concerns on the fiscal administrative system which included auditing. This
development can be described as the second deliberate effort to link the administrative system,
including auditing, with national development goals. One of the most significant changes during
the Martial Law era which greatly affected state auditing was the change in the Constitution.
Another development in state auditing under the 1973 Constitution was the reorganization of
the Commission on Audit from a constitutional institution headed by the Auditor General to a
commission type of organization headed by the Chairman and two Commissioners.

II. TYPES OF AUDIT

A. TIMING

B. ORGANIZATIONAL STATUS

C. SCOPE

A. TIMING

TWO MAIN TYPES OF TIMING:

1. Pre-audit - the auditor reviews a transaction even before such services are rendered

2. Post- audit - the auditor reviews and approves the transaction after the services have been
rendered and payment has been made.

The review may consist of:

1. Determining whether all relevant laws, rules and regulations have been observed in the
transaction

2. Physical inspection of supplies or equipment

3. Checking whether all necessary documents are submitted and properly accomplished

4. Determining whether the required authority or approval has been secured; and

5. Checking mathematical accuracy

B. AS TO ORGANIZATION STATUS

1. INTERNAL AUDIT - mainly a management tool for control and evaluation of agency
operations. Sometimes referred to as management audit
2.EXTERNAL AUDIT - performed by auditors external to or independent of the audited
organization. In the state audit it is performedby the COA auditors; in commercial audit, it is
conducted by independent certified public accountants on private business organizations.

C. AS TO AUDIT SCOPE

Fiscal audit is the traditional financial audit´ in government. It is a combination of financial audit
and compliance audits.

1. Financial audit - performed primarily through an examination of financial statements in

order to express an opinion on the fairness with which the financial condition and results of
operationsof an audited entity are presented.

2. Compliance audit - is an evaluation of the extent to which the agency has complied with
pertinent laws, policies, and rules and regulations in the conduct of its operations.

PERFORMANCE AUDIT It is a constructive examination and evaluation of the financial and

operational performance of an organization, program,function or activity with the objective of
identifying opportunities for greater economy, efficiency, and effectiveness in agency
operations.

ECONOMY AND EFFICIENCY AUDITS DETERMINE:

1. Whether the agency is managing and utilizing its resources economically and efficiently.

2. The causes of inefficiencies or uneconomical practices

3. Whether the agency has complied with laws and regulations concerning matters of efficiency
and economy.

EFFECTIVENESS OR ´PROGRAM RESULTS AUDIT DETERMINES

1. Whether the desired results or benefits established by the legislature or other authorizing
body are being achieved

2. Whether the agency has considered alternatives that might yield desired results at a lower
cost.

III.THE AUDIT PROCESS

The state audit cycle consists of seven phases:

1. Phase I : Preliminary survey of the agency or audited entity

2. Phase II : Review of the legal and policy framework within which the agency operates, and
the plans, policies, objectives, and standards it has adopted

3. Phase III : Review and evaluation of the agency's internal control system

4. Phase IV : In-depth examination of critical areas, analyses, and evaluation

5. Phase V : Preparation of draft report and presentation to agency officials

6. Phase VI : Finalization of report

7. Phase VII : Follow-up on the implementation of audit recommendations.

Phase I : Preliminary Survey

It is conducted to acquire a working knowledge of the audited agency and its legal, policy, and
administrative environment. The auditor gathers general background information on the
agency and its operations after which he defines the scope of his audit.

Phase II : Review of Legal and Policy Framework

In this phase, the information gatheredfrom the preliminary survey are reviewed in order to
obtain a general knowledge of the legislation and policies applicable to agency objectives,
policies, programs, and operating standards.

Phase III : Review and Evaluationof Internal Control System

In this phase, the auditor reviews the procedures and practices actually applied by the agency
in processing its transactions to identify major critical areas that would warrant more detailed
examination and determine the type of tests to be used in the closer examination of such areas
later on. At the end of the phase, the auditor is expected to have identified any problem areas
which need further examination in detail.

Phase IV : In-depth Examination of Problem Areas, Data-gathering Analysis and Evaluation

In this phase, the auditor concentrates on audit finding on the problem areas. In-depth
examination may involve reviewing agency reports, books, files, records and such other
relevant documents and analyzing, evaluating, verifying and confirming their content through
inquiries,inspection, or observation.

Phase V : Preparation and Presentation of Draft Report

 A draft audit report is prepared based on the findings and recommendations formulated in the
previous phase. The report is then presented to agency officials for review and comments. An
exit meeting´ is held between the auditor and agency officials to discuss reactions to the
findings, conclusions, and recommendations in the draft report.

Phase VI : Finalization of Audit Report

After the meeting, the auditor finalizes the audit report. The scope of the audit should be
stated clearly and concisely inthe report and any limitations should be explicitly mentioned. The
report should be clear and complete in its finding and recommendations in order to encourage
the agency management to improve its operations.

Phase VII : Follow-up on the Implementation of Audit Recommendations

Audit recommendations, such as suggested improvements, proposed adjustments in the

accounts, correction or discontinuance of malpractices, solution to existing problems, etc.
should be followed-up. It is such improvements that will lead to a full attainments of its
objectives and goals. It is the realization of the 3E's of agency management: Economy, Efficiency
and Effectiveness.

GENERAL OBJECTIVES

1. Establishing accountability for financial material and human resources of an agency. It aims
to establish how and to what extent has the agency officials exercised their fiscal responsibility.

2.Establishing accountability for compliance with applicable laws, policies, rules and
regulations. It means the accountability of government officials to higher authorities for
adherence to laws, policies, and rules and regulations.

3.The efficient, economical and effective operations of the agency is another accountability of
public officials

SPECIFIC OBJECTIVES

In the Lima Declaration of Guidelines on Auditing Precepts, specific objectives of state auditing
are as follows:

1.Proper and effective use of public funds

2.Development of sound financial management

3.Orderly execution of administrative activities

4.Communication of information to public authorities and the public through publication of
audit reports.

AUDIT: PRINCIPLES ANDSTANDARDS

Audit principles and standards guides the auditor in conducting his audit with integrity,
objectivity, independence and efficiency. Professional audit standards serve as guideline to
measure the quality of audit procedures used in the course of audit.

Audit procedures are the various methods used in obtaining evidence and the steps followed in
accomplishing the audit. Audit techniques are ways and methods of gathering evidence and
information.

IV.THE COMMISSION ON AUDIT

The Commission on Audit (COA) is thehighest public institution legally responsible for
conducting professional government audit in the country and sometimes referred to as
Supreme Audit Institution (SAI). The COA is the official external auditor of the government.

POWERS OF COA

1. Examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures of funds and property, owned or held in trust, by or pertaining to, the
government, or any of its subdivisions,agencies, or instrumentalities and such non-
governmental entities receiving subsidy or equity which are required to submit to COA audit.

2. Keep the general accounts of the government

3. Preserve the vouchers and supporting papers pertaining to such accounts

4. Define the scope of its audit and examination and establish the techniques and methods
required

5. Promulgate accounting and auditing rules and regulations.

6. Submit to the President and the Congress an annual report covering the financial condition
and operation of the government and such other reports required by law

7. Recommend measures necessary to improve efficiency and effectiveness in government

8. Decide any case or matter brought before it within sixty days from date of its submission for
decision or resolution; and

9. Perform such other functions as prescribed by law.

FUNCTIONS OF COA

1. Auditorial - includes audit and examination through pre-audit and post-audit services, and
settlement of accounts or liabilities

2. Rule-Making - exclusive authority to determine its scope of audit and examination and
formulate accounting and auditing rules and regulations

3. Reportorial - submission of reports to heads of auditedagencies, the President, and

Congress, and suchother reports as required by law

4. Limited Accounting Function - keeping the generalaccounts of government by accounting for

transactions affecting the overall cumulative results of operation(CRO)

5. Custodial - management and custody of the generalaccounts of government, custody of

funds from tax refunds, and preservation of vouchers and other supporting papers pertaining to
the general accounts.

6. Quasi-Judicial - decision making on compromise claims, request for relief from

accountability, and constructive distraint on property; initiation of criminal/malversation cases
with Sandigan bayan; issuance of opinions on queries

7. Recommendatory - recommends measures to improve efficiency and effectiveness in

general government and agency operations

8. Other Functions - deputization of private licensed professionals to assist government

auditors; participation in inventory of assets and properties; membership in policy study bodies.

ORGANIZATION

1. The Chairman and two Commissioners comprises the Commission Proper (CP) which is the
highest policy making body of the COA. The CP exercises its powers and authority collegially
and has authority to act on any appeal brought before it for final resolution. Its decision is
appealable only to the Supreme Court. The Chairman is the presiding officer of the CP and the
chief executive officer of the Commission.

2. The CP do not audit transactions involving government funds and property. Actual audit and
examination is performed by a resident auditing unit headed by an auditor.

3. COA has a resident auditor who has full authority to perform duties in every agency.
4. Provincial and city auditors supervise the resident auditors in their respective areas. They are
in turn supervised by regional offices headed by Directors who supervise and control the
implementation of auditing rules and regulations in agencies with the region.

5. The COA central offices in Quezon City supervise and control the regional offices.

6. The Accountancy Office prepares the annual financial report of the national government and
verifies appropriations of and controls funds released to national government agencies.

7. The Special Audit Office (SAO) conducts special audits.

Parts of an Audit Report

1. Report Title - The report title must include date of the audit and the addressee of the report.
The date of the report is usually the accountant's last day of fieldwork, and the addressee is
usually the board of directors or stockholders of the organization. It is also important to include
the work independent in the title to set it apart from internal audits within an organization.

2. Introductory Paragraph - This is usually a boilerplate text that states an audit has been
carried out, identifies the financial documents used to perform the audit and places the
important caveat that the company's management team is responsible for the accuracy of the
financial statements. It also determines what time frame is covered by the audit.

3. Scope Paragraph - This paragraph says the audit followed the rules and methods set by the
Generally Accepted Audit Standards and was designed to provide reasonable assurances that
the claims made by the financial statements are accurate. It also indicated the test methods
used by the auditors to test the accounting methods used by the company.

4. Executive Summary - This section includes a summary of the audit's findings. The content of
this summary is determined by what the auditor considers to be important for the executive
echelons of the company. Unlike the next section, the executive summary does not provide
much opinion but focuses instead on expressing clearly the findings of the audit.

5. Opinion Paragraph - The opinion paragraph is used to report on the financial situation of the
company or individual audited and the methods and procedures used to reach a conclusion. It
then offers the auditor's opinion on the financial health of the organization and its conformity
or nonconformity with the Generally Accepted Accounting Principles.

6. Auditor's Name - The auditor must identify himself as the author of the audit by printing his
name at the end of the audit. If the auditor works for a specific firm, he must also include the
name of the company or certified accountant he works for.
7. Auditor's Signature - The auditor is held accountable for the results of his audit up to the
date stated in the audit's title. This accountability is acknowledged by the signature of the
auditor below his name.

Elements of Effective Auditing Planning

1. Research the Audit Area - It is essential to understand the business process or function to be
audited. If not familiar with it, thoroughly research the process or function to fully understand
the subject matter. Review internal procedures, search the internet for resources, and seek
help from subject matter experts.

2. Maintain Open Communications Throughout the Planning Process - The sooner the audit
team reaches out to the auditee, the better. There is a certain amount of trepidation involved
in any audit. Working with an auditee prior to the audit helps ease concerns the auditee may
have. Communicating in person is always preferable. If this is not possible, telephone calls are
the next best thing. Avoid communicating by email if possible.

3. Conduct Process Walk-Throughs - Armed with a working understanding of the process or

function, conduct a face-to-face walk through with the auditee. Identify key business objectives,
methods employed to meet objectives, and applicable rules or regulations. A walkthrough may
include a tour of facilities. You may gather background information relative to the nature,
purpose, volume, size, or complexity of automated systems, processes, or organizational
structure. You might scan documents or records for general condition. All these activities
provide opportunities to interface with the auditee and build rapport before the formal
entrance conference.

4. Map Risks to the Organization, Process, or Function - Ask the auditee what his concerns are,
what "keeps him up at night." Through research and interviews, identify risks to meeting
business objectives and controls employed to mitigate those risks. Rate risks with the auditee
based on probability of occurrence and potential impact. Consider control design, gaps, or
mitigating factors to determine if the control system effectively mitigates risks.

5. Obtain Data Prior to Fieldwork - This has become a principal focus for us recently. We
emphasize data in our initial requests for information. We perform data analytics before we
begin field work. Identifying anomalies to confirm a condition or weakness early helps us target
testing and optimize sample selections.

Results of Improved Audit Planning

Our emphasis on audit planning has yielded worthwhile results. And I will say improving audit
planning has been an investment. We now begin our audit planning eight weeks prior to the
Entrance Conference. In prior years we historically spent 20 to 25 percent of our audit budget
on planning. Audit planning now comprises approximately 35 to 40 percent of the total budget.
The following are some of the dividends:

• Improved credibility and relationships with our stakeholders

• More in-depth and significant issues

• An increased number of process improvements

• Reduced field work time

Audit planning is the audit phase in which we can best influence audit results. It is a key but too
easily overlooked component of the audit process. It is something that needs to be emphasized
and institutionalized into a habit. This habit ultimately leads to audit success.

Audit Procedures

Audit procedures are used by auditors to determine the quality of the financial information
being provided by their clients, resulting in the expression of an auditor’s opinion. The exact
procedures used will vary by client, depending on the nature of the business and the audit
assertions that the auditors want to prove. Here are several general classifications of audit
procedures:

1. Classification testing. Audit procedures are used to decide whether transactions were
classified correctly in the accounting records. For example, purchase records for fixed assets
can be reviewed to see if they were correctly classified within the right fixed asset account.

2. Completeness testing. Audit procedures can test to see if any transactions are missing from
the accounting records. For example, the client's bank statements could be perused to see if
any payments to suppliers were not recorded in the books, or if cash receipts from customers
were not recorded. As another example, inquiries can be made with management and third
parties to see if the client has additional obligations that have not been recognized in the
financial statements.

3. Cutoff testing. Audit procedures are used to determine whether transactions have been
recorded within the correct reporting period. For example, the shipping log can be reviewed to
see if shipments to customers on the last day of the month were recorded within the correct
period.
4. Occurrence testing. Audit procedures can be constructed to determine whether the
transactions that a client is claiming have actually occurred. For example, one procedure might
require the client to show specific invoices that are listed on the sales ledger, along with
supporting documentation such as a customer order and shipping documentation.

5. Existence testing. Audit procedures are used to determine whether assets exist. For
example, the auditors can observe an inventory being taken, to see if the inventory stated in
the accounting records actually exists.

6. Rights and obligations testing. Audit procedures can be followed to see if a client actually
owns all of its assets. For example, inquiries can be made to see if inventory is actually owned
by the client, or if it is instead being held on consignment from a third party.

7. Valuation testing. Audit procedures are used to determine whether the valuations at which
assets and liabilities are recorded in a client's books are correct. For example, one procedure
would be to check market pricing data to see if the ending values of marketable securities are
correct.

A complete set of audit procedures is needed before the auditor has enough information to
decide whether a client's financial statements fairly represent its financial results, financial
position, and cash flows.

References:

https://www.scribd.com/doc/81657705/State-Audit-in-the-Philippines

https://bizfluent.com/info-8784373-7-parts-audit-report.html

https://misti.com/internal-audit-insights/five-elements-of-effective-audit-planning

https://www.accountingtools.com/articles/audit-procedures.html