UNDERSTANDING THE AUDIT PROCEDURES OF THE COMMISSION ON AUDIT (COA)

LGUs can maximize the benefits of COA auditing. Yes, that’s right, benefit from it. High level of effective cooperation with the COA thru their Risk-Based Auditing Approach could be an opportunity to improve management processes in the LGU.

This new approach of COA Auditing is relatively new. Understanding this procedure would be very helpful in creating an environment of beneficial cooperation through which the LGU and COA could effectively work.

The manual of The Risk-Based Audit (Volume 1 & 2) of the Local Government Sector from the Commission on Audit from which the foregoing discussions were largely anchored was very helpful towards understanding this procedure.

A. What is the mandate of the COA?

The authority of the Commission of Audit emanates from the Constitution of the Philippines. The COA is a constitutional body whose jurisdiction extends to all agencies and instrumentalities of the Government including the LGUs.

The constitution in so creating COA, made it an independent office in order to make it more objective in its appraisal of LGU operations and the management of its resources. It vests in the Commission the power to examine and audit all LGU financial statements and transactions.

B. What is the financial audit?

The financial audit is an examination of financial statements with the objective of expressing an opinion on whether financial statements are presented fairly and in conformity with the generally accepted accounting principles. Also, the financial audit covers the review of the processes relating to the capture and processing of data leading to the summarization and preparation of the financial statements and other supporting reports with the main purpose of determining whether the risks identified in the earlier part of the Risk-Based Audit (RBA) is reduced to an acceptable level and providing recommendations to improve the LGUs processes and governance of its operations, as appropriate.

The financial statements audited typically encompass the following:

· Balance Sheet – shows the financial condition of the LGU at a specific date. It presents information on the assets, liability and the government equity of the LGU.

· Statement of Income and Expenses – shows the income and expense of the LGU at the end of a particular period. It presents the detailed information of the income and expenses recognized during the period covered.

· Statement of Cash Flows – shows the LGUs cash activities. It reports cash receipts and cash payments and net change in cash resulting from operating, investing and financing activities of an LGU during a period, in a format that reconciles the beginning and ending cash balances.

The senior management of the LGU are responsible for adopting sound accounting policies, safeguarding assets, devising an effective internal control structure and authorizing or preparing the financial statements and other reports. The senior LGU management should constitute the:

· Governor/Mayor of Local Chief Executive (LCE)

· Vice Governor/Vice Mayor

· Local Administrator

They are also responsible for the representations made in financial statements and other data furnished to any donors, potential donors, creditors, regulatory agencies, and others.

C. What is the Risk-Based Audit (RBA) approach in the conduct of the financial audit?

Since 2005, the Risk-Based Audit approach has been adopted by COA in the audit of financial statements of LGUs.

The RBA is designed to enable the audit team:

1. To express an opinion on the LGU financial statements by assuming financial statements misstatements risks identified relating to:

a. Error Risk

Risk of unintentional misstatement of the financial statements by an amount exceeding tolerable error arising from error in:

· Principle: error in selecting and applying appropriate accounting principles in accordance with the New Government Accounting System (NGAS), or other comprehensive basis of accounting, or other authoritative body.

· Estimate: error in capturing information, making assumptions or performing calculations in determining an estimate

· Critical Information process: error in the capture, input, processing or output of information in a critical information process.

· Financial reporting process: error in the capture, input, processing or output of information in the financial reporting process.

· Disclosure: error in making or omitting disclosure in the financial statements in accordance with selected principles, laws, and regulations

b. Fraud Risk

Risk of intentional misstatement to the financial statements by an amount exceeding tolerable error arising from misstatement or omission of amounts or disclosures in order to:

· Deceived financial statement users by managing results or operations or misstating assets/liabilities or deliberately misclassifying expenditures, or

· Conceal misappropriation of assets.

c. Failure Risk

Risk that an agency may fall in meeting its social and/or commercial operating objectives and interrupt its operation for at lease one year beyond the date of the financial statements.

2. To recommend opportunities to improved LGU operations through identification of LGU information processing risks.

RBA approach considers both financial and operational aspect of financial audit as it:

· Focuses primarily on the identification and assessment of the financial statement misstatements risks (i.e. failure, error and fraud) and provides a framework to reduce the impact to the financial statements of these identified risks to an acceptable level before rendering an audit opinion on the financial statement.

· Provides indicator of risks as a basis for improvement of LGU management and control processes.

D. What are the four main activities in the Risk-Based Audit (RBA) ?

The RBA process is divided into four main phases namely:

· Understand The Operations (UTO) to identify and prioritize risks. (Identify and prioritize problem areas)

· Assess Agency LGU Risk Management Strategies and Controls (AARMSC) to determine residual audit risk (Evaluate problem areas and advise LGU on the internal control and management strategies to be improved.)

· Manage Residual Audit Risk (MRAR) to reduce residual audit risk to acceptable level (Reduce identified problem areas to acceptable level)

· Communicate Value Delivered (CVD) (Communicate audit findings)

It can be noted that the fourth phase, Communicate Value Delivered, may indicate that communications will be done only on the fourth activity, this only pertains to the actual issuance of the report, (i.e., annual audit report, financial statements, etc.) Each of the phases involves continuous and regular communication with the LGU or departments concern when issues and findings are noted in the course of the audit.

E. What is the audit reporting system?

The Annual Audit Report (AAR) is prepared by the auditors as the final output of the yearly comprehensive audit conducted. It is the medium used by the auditor to communicate to the LGU and proper authorities, including the Office of the President and the Congress, the results of COA’s appraisal of how management had discharged its fiscal responsibility. The report includes the auditor’s recommendation of measures necessary to improve the economy, efficiency and effectiveness of LGU operations.

The significant audit findings and recommendations contained in the Audit Observation Memorandum (AOM) are summarized in the said report.

Finally, the overall report which the Commission on Audit is constitutionally mandated to submit to the President of the Philippines and the Congress is known as the Annual Financial Report (AFR). This report aims to serve as an effective tool in national planning and decision-making on matters involving fiscal and operational affairs of the government.

F. Who composes the audit team?

A typical audit team consists of the Cluster Director (CD), the Regional Cluster Director/Supervising Auditor (RCD/SA), an audit team leader (TL) and one or more audit staff depending on the size of the LGU. The CD and RCD/SA should also participate actively in most phases of an audit. However, a division of responsibility for the four main phases of RBA (UTO, AARMSC, MRAR, and CVD) among the audit team members is usually made by the TL for approval by RCD/SA at a minimum. The audit report prepared arising from the performance of the audit is then forwarded to the COA-LGS signing personnel, which is the RCD/SA or CD, to be signed prior to its release.