ManagementLetter - Possible Points

STRICTLY PRIVATE AND CONFIDENTIAL
Date
ABC Company
ICTSI Administration Building
South Access Road, MICT North Harbor
Manila
Attention: Mr. X. Y. Zee
Vice President and Controller
Gentlemen:
Enclosed is the first draft of our letter of comments for ABC Company in connection with our audit of
the financial statements for the period ended September 30, 2002 and review of the existing Accounting
Policies and Procedures.
Please review carefully all our comments and recommendations. We would be glad to discuss any
questions or concerns you may have regarding the contents of this report. Please indicate managements
response on the space provided for some items.
Very truly yours,
A. B. CEE
Partner
cc: Leopoldo S. dela Cruz, Controller
Rodrigo G. Lachica, Jr., Accounting Manager
ABC COMPANY
Management Letter
December 31, 2002
STRICTLY PRIVATE AND CONFIDENTIAL

Date
ABC Company
ICTSI Administration Building
South Access Road, MICT North Harbor
Manila
Attention: Mr. X. Y. Zee
Vice President and Controller
Gentlemen:
We have audited the financial statements of ABC Company for the year ended December 31, 2002 and
reviewed its existing Accounting Policies and Procedures. The main purpose of our audit was to
express our opinion on the fairness of the presentation of the financial statements.
This letter contains particular matters that came to our attention when we audited the financial
statements of the Company for the year ended December 31, 2002 and reviewed its existing Accounting
Policies and Procedures. These matters are outlined in the attached Summary of Comments,
Recommendations and Management Responses. The contents of the accompanying document are not
all-inclusive because the audit and review performed were not designed for making a complete systems
survey.
We wish to commend management for its continuing efforts to improve the Companies systems and
controls. As the Companies auditors, we will continue to do our best to complement these strengths and
serve the Companies in the best way possible.
This report is intended solely for the information of management, and should not be used for any other
purpose.
We appreciate the assistance and courtesy extended to us by the Companies officers and staff during
our audit.
Very truly yours,
SYCIP GORRES VELAYO & CO
By
A. B. CEE
Partner
cc: Leopoldo S. dela Cruz, Controller
Rodrigo G. Lachica, Jr., Accounting Manager
ABC COMPANY
SUMMARY OF COMMENTS, IMPLICATIONS, RECOMMENDATIONS
AND MANAGEMENT RESPONSES
NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards Effective 2003
Comment
The Philippine Accounting Standards Council (ASC) approved in 2001 the adoption of certain
International Accounting Standards (IAS) issued by the International Accounting Standards Committee,
as generally accepted accounting principles (GAAP) in the Philippines. Following are the new
standards which are effective beginning January 1, 2003:
SFAS 10/IAS 10, Events After the Balance Sheet Date,
SFAS 37/IAS 37, Provisions, Contingent Liabilities and Contingent Assets,
SFAS 8A, Deferred Foreign Exchange Differences (an Amendment of ASC SFAS No. 8,
Accounting for the Effects of Changes in Foreign Exchange Rates),
SFAS 22/IAS 22, Business Combinations,
SFAS 38/IAS 38, Intangible Assets, and
SFAS 20/IAS 20, Government Grants.
Implications
The new standards require certain additional disclosures in the financial statements and procedures
which the Company should perform in order to conform with GAAP, such as restatement of balance of
preoperating expenses still in the books as of December 31, 2002.
Recommendation
We suggest that management considers the implication of the foregoing standards in the preparation of
its financial statements, both for internal and statutory reporting purposes. We suggest that the
Company personnel involved in accounting and preparation of financial statements attend training
courses related to these new standards.
Managements Response
-2TAX REGULATIONS
Establish a Retirement Fund for Company Employees
Comment
As of December 31, 2002, the Company had yet to set up a retirement fund for its employees to comply
with Republic Act No. 7641 or the Retirement Law. The Law requires companies to provide employees,
upon reaching their retirement age, with retirement benefits that they have earned in accordance with
Philippine laws and any collective bargaining agreements. In the absence of a retirement plan or
agreement, a retirement pay equivalent to at least one-half months salary for every year of service is
due the retiring employee.
SFAS 24 Retirement Benefit Costs, also provides that the cost of retirement benefits should be
determined using a defined contribution or defined benefit plans. Under a defined contribution plan, the
Companys contributions to the plan in respect of service in a particular period should be recognized as
an expense in that period. Under a defined benefit plan, the current service cost should be recognized as
and expense in the current period. Past service costs, experience adjustments, the effect of changes in
actuarial assumptions and the effects of plan amendments in respect of existing employees in a defined
benefit plan should be recognized as an expense or as income systematically over the expected
remaining working lives of those employees, generally. Defined benefit plans require that the accrual
for retirement benefit costs be computed using an actuary.
Implications
The cost to the Company of providing retirement benefits rises as the employees who will be entitled to
such benefits accumulate service time. Consequently, the non-accrual of retirement benefits when such
services are rendered results in a misstatement of the compensation expense for the period. The
Company may also be subject to penalties for noncompliance of RA No. 7641 by the BIR and SFAS 24
by the SEC.
Recommendations
The Company should start accruing for the retirement plan using an actuarially computed plan. The
accounting method used should comply with generally accepted accounting principles. The acceptable
actuarial methods are the accrued benefit valuation methods. These methods reflect service both
rendered and to be rendered by employees to the date of valuation, and spread the cost evenly over the
periods of service making up the expected remaining working lives of participating employees. In
addition, to be able to deduct retirement pay provision for tax purposes, the Company must register the
actuarially determined retirement plan with the Bureau of Internal Revenue.
-3Establishment of a BIR-Qualified Retirement Plan

Comment
The Company does not have a BIR-qualified retirement plan for all its regular employees and officers.
It has however recognized in the books an estimated retirement liability based on independent actuarial
computations.
Implications
The Company is not able to maximize the benefits of a BIR-qualified retirement plan.
Recommendation
We suggest that the Company establish a BIR-qualified retirement plan for its employees. Among the
benefits that could be realized are:
Attract and retain good people. With keen competition for the best people, a comprehensive
benefits package -- including a retirement plan -- will give the Company an edge in hiring and
retaining good people.
Improve morale. A retirement plan gives employees even more reason to remain committed to
the Company.
Gain significant tax advantages. The Company will be able to get immediate tax deduction of
the amount of normal cost contributed and 10% of the amount pertaining to past service costs each
year for 10 years.
Flexible. The Company has the option to reduce or defer contributions when the budget is
tight.
The Company may also consider the establishment of a BIR-qualified retirement plan in its tax planning
strategy. The Company can obtain external assistance if requested to evaluate the different options
available when establishing such a plan.
Review Impact of Regulation on Improperly Accumulated Retained Earnings

Comment
As of December 31, 2002, the Companys retained earnings amounted to P18.6 million while its paid-up
capital amounted to only P10 million. Under Revenue Regulations (RR) No. 2-01, Implementing the
Provisions on Improperly Accumulated Earnings Tax (IAET) Under Section 29 of the Tax Code of
1997, those classified as closely-held corporations shall be subject to such tax. For purposes of this
regulation, closely-held corporations are those corporations with at least fifty percent in value of the
outstanding capital stock or at least fifty percent of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly by or for not more than twenty individuals.
-4Domestic corporations not falling under the aforementioned definition are, therefore, publicly-held
corporation.
Implications
The Company may be subject to 10% IAET.
Recommendation
RR No. 2-2001, which implements the IAET took effect on March 26, 2001. Under this RR, domestic
corporations are given one year following the close of the taxable year to declare and pay/issue
dividends to avoid the imposition of the 10% IAET on the improperly accumulated taxable income.
Otherwise, the IAET, if any, should be paid within 15 days thereafter.
A compliance review may be necessary to determine whether or not there is a need to declare and
pay/issue dividends within one year following the close of the taxable year to avoid the possible
imposition of IAET. In determining this, it may be necessary to review prior-year accumulations as
well. Note that while the regulations allow certain accumulations, they also take into account the source
of the retained earnings (i.e., the year in which the accumulation happened).
Update Actuarial Valuation of the Retirement Fund for Company Employees

Comment
The last actuarial valuation report on the Companys retirement fund is July 1, 1999. Statement of
Financial Accounting Standards No. 24 Retirement Benefit Costs provides that actuarial valuations
should be updated at least once every three years.
Implications
The uncertainty inherent in projecting future trends in rates of inflation, salary levels and earnings on
investments is taken into consideration in the actuarial valuations by using a set of compatible
assumptions. These assumptions, which are used in determining the cost to the employer of providing
retirement benefits, are based on long-term considerations. If the assumptions are wrong or outdated,
the retirement expense recorded in the books may be misstated.
Recommendations
We recommend that a new actuarial valuation of the retirement fund be obtained.
-5Assess Impact of BIR Regulations on Interest on Intercompany Advances

Comment
The Company does not charge interest on certain intercompany advances. The BIR may impute interest
income on such advances. This would increase the Companys taxable income and consequently its tax
liability.
Implications
The BIR may invoke Section 4.1 of Revenue Memorandum Order (RMO) No.63-99, to wit:
Section 4.1 of RMO No.63-99, provides that, where one member of a group of controlled
entities makes loans or advances directly or indirectly, or otherwise becomes a creditor of
another member of such group, and charges no interest, or charges interest at a rate which is not
equal to an arms-length rate, the Commissioner may make appropriations to reflect an armslength rate for the use of such loan or advance. In this regard, the arms-length rate in the case
of domestic transactions shall be the Bank Reference Rate (BPR) prescribed by the Bangko
Sentral ng Pilipinas (BSP).
Recommendation
The granting of advances and the corresponding imputed interest should be considered by the Company
in its tax planning strategy throughout the year.
Review Policy in Allocating Expenses to Affiliate

Comment
The Company shares certain expenses with Jideco Technology Services, Inc. (JTSI) such as rent
expense paid to Dusit Hotel and other common expenses. Under a formal written agreement, the
expenses are allocated among affiliates based on land area occupied by them.
The Company is reminded that sharing of expenses between related parties is subject to scrutiny by the
tax authorities. The tax authorities may invoke Section 43 of the Tax Code in assessing the Companys
deficiency income tax. We quote Section 43 of the Tax Code as follows:
Section 43 Allocation of income and deductions - in any case of two or more organization, trades
or business (whether or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interest, the Commissioner of the Bureau of Internal
Revenue is authorized to distribute, apportion, or allocate gross income or deductions between or
among such organization, trades, or business, if he determines that such distribution, appointment,
or allocation is necessary in order to prevent evasion of taxes and to clearly reflect the income of
any such organization, trades or business.
-6Furthermore, under the lease contract for the office space in Dusit Hotel, the named lessee is the
Company although the actual and primary occupant of the office is JTSI. It is stated in the contract
of lease that the lessee is prohibited from entering into a sub-lease contract with regards to the office
space concerned. The occupancy of JTSI in the office and its sharing with the rent and common
expenses based on the land area that it occupies may be viewed by Dusit Hotel as a violation of the
non sub-lease agreement.
Implications
The BIR may disallow certain expenses which were allocated to the Companys affiliates, thus
increasing the tax liability of the Company.
Recommendations
The Company is suggested to review its policy in allocating expenses to its affiliate. It may also
examine the possibility of giving up its share in the Dusit Hotel office and transfer the lease to JTSI
since they are the actual and primary occupants of the said office. In any case, the Company does not
have important activities and transactions in that office. All the business operations of the Company
take place in their office in Lipa, Batangas.
Our tax professionals would be happy to assist the Company is assessing the tax implications of the
cost sharing arrangement, as well as help the Company structure the transaction, and prepare the
appropriate documentary supports and agreements, to reduce any tax risks posed by these cost sharing
arrangement.
Review Effects of Republic Act (RA) No. 9135

Comment
RA No. 9135 or The Amended Tariff and Customs Code of the Philippines was passed on February 8,
2001. It provides, among others, compliance audit or examination of records to be conducted by a
customs officer authorized by the Bureau of Customs (BOC) for the purpose of reviewing the proper
duties and taxes paid by Companies selected by BOCs computer-aided risk management system.
Implications
Because of the significant level of the Companys importation, it may be subject to an audit or
examination.
Recommendation
The Company should consider an independent review of compliance with customs rules and regulations.
Internally, all records of importation and/or books of accounts, business and computer systems and all
customs commercial data should be properly kept.
-7Managements Response
Evaluate Effect of the Revenue Regulation on Representation Expenses

Comment
The BIR has implemented Revenue Regulation (RR) No. 10-2002 imposing a ceiling on entertainment,
amusement and recreation (EAR) expenses. The salient points of the proposed RR are as follows:
In the case of a seller of goods, the amount of EAR expenses that will be allowed as deduction shall
not exceed 0.5% of gross sales (i.e., presented as the top line in the income statement). In the case
of a seller of services, the deductible EAR expenses shall not exceed 1.00% of gross revenue.
The ceiling will apply to individuals engaged in business or in the practice of profession, domestic
and resident corporations, and general professional partnerships including their partners/members.
EAR expenses will include representation expenses and entertainment facilities as defined in the
RR.
However, EAR expenses exclude, among others, those which are treated as compensation or fringe
benefits for services rendered by an employee, whether or not subject to withholding tax or fringe
benefits tax; expenses for bona fide stockholders or partners meetings; expenses for events
organized for promotion, marketing and advertising; and other expenses of a similar nature.
Implications
Starting September 1, 2002, the portion of the Companys EAR expenses exceeding the ceiling
applicable to the Company will no longer be allowed as a deduction for tax purposes.
Recommendations
Management has to consider the impact of the RR on the Companys budget for EAR expenses and on
its taxable income.
Evaluate Effects of New Regulations of the Bureau of Internal Revenue (BIR)

Comment
The BIR has issued several Revenue Regulations (RRs) which may have an impact on the Company in
2003. Among these are:
There is a need to revisit the Companys current practices and procedures to ensure compliance with the
new regulations.
-8Implications
The Company may be subject to tax assessments in the future and the BIR may impose certain fines and
penalties because of noncompliance with these new regulations.
Recommendations
We suggest that the Company immediately consider the effects of these new BIR regulations on the
Companys tax position and obligations, engaging internal or external specialists as necessary, to obtain
a better understanding of these new pronouncements. This will help the Company avoid costly tax
decisions and optimize its tax savings. Management should also consider undertaking or commissioning
a tax compliance review to help ensure that the Companys tax exposures, if any, are properly identified,
managed and controlled.
Evaluate Effect of BIR Regulations on Noninterest-Bearing Advances

to Subsidiaries and Affiliates
Comment
The Company has several non-interest bearing cash advances to its subsidiaries and affiliates amounting
to P1,840 million. We understand that these are only supported by interoffice memoranda.
Section 4.1 of Revenue Memorandum Order (RMO) No. 63-99 provides that, where one member of a
group of controlled entities makes a loan or advances directly or indirectly, or otherwise becomes a
creditor of another member of such group, and charges no interest, or charges interest at a rate which is
not equal to an arms length rate, the Commissioner may make appropriate allocations to reflect an
arms length rate interest rate for the use of such loan or advance. Moreover, under Section 2.2 of the
same RMO, indebtedness arising in the ordinary course of business out of sales, leases, or the renderof
services by and between members of the group, or any other similar extension is considered as bona fide
indebtedness. In this regard, the arms-length rate in the case of domestic transactions shall be the Bank
Reference Rate (BRR) prescribed by the Bangko Sentral ng Pilipinas (BSP).
The fact that intercompany loans may be subject to imputed interest also finds support in Kahler
Corporation vs. Commissioner of Internal Revenue (32 AFTR 2d 73-5860), a US case. This is an
appeal from a decision of the US Tax Court. The US Tax Court rejected the Commissioners allocation
of interest income to a parent corporation as a result of interest free loans made by the parent to its
subsidiaries. However, the US Court of Appeals reversed the decision of the US Tax Court. The US
Court of Appeals held that the regulations governing the imputed interest on interest free loans was
reasonable and consistent with the statute. The provisions of the US Tax Code that governs the
allocation of income and expenses among related parties is similar to Section 50 of our Tax Code which
is earlier mentioned. Note that US jurisprudence has persuasive effect in the Philippines.
However, in BIR Ruling No. 191-99-A dated December 3, 1999, the BIR ruled that intercorporate
advances that are analogous to capital contributions are not covered by RMO No. 63-99. Under this
ruling the BIR considered advances based on the percentage of stockholdings as analogous to capital
contributions. Moreover, the BIR also tackled advances that are made due to the financial need of the
-9borrowing company and the financial ability of the lending company, as emergency loans to help a
related company, which is short of capital. The BIR stated that these are not also covered by
RMO No. 63-99 and that these transactions are not clearly done for tax evasion or avoidance purposes.
On this basis, if it can be argued that the advances are provided for emergency purposes or can be
considered analogous to capital contribution, the BIR may not impute interest on these advances.
Implications
The Bureau of Internal Revenue may impute interest income on these advances based on the market rate
to clearly reflect the income of the Company as provided under Section 50 of the Tax Code. Thus, the
Companys taxable income may increase as a result of the imputed interest income, which may result in
additional income tax liability.
Recommendations
We suggest that the Company evaluate its position in light of the foregoing.
Evaluate Effects of Intercompany Advances Not Subjected to

Documentary Stamps Taxes (DST)
Comment
In relation to the above comment, the Company failed to pay DST on interest-free loans granted to
affiliates and subsidiaries. As mentioned earlier, these were documented by inter-office memoranda only.
Under Section 180 of the Tax Code, a DST is imposed on all bonds, loan agreements, promissory notes,
bills of exchange, drafts, instruments and securities issued by the government or any of its
instrumentalities, deposit substitutes, deposit instruments, certificates of deposit bearing interest and
others not payable on sight or demand, at the rate of P0.30 on each P200, or fractional part thereof of
the face value of any such agreement, bill of exchange, draft, certificate of deposit or note.
Loan agreement as defined under Section 3(B) of RR No. 9-94, refers to a contract in writing where
one of the parties delivers to another, money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid. Moreover, Section 6 of the same regulations
further states that where no formal loan agreements or promissory notes have been executed to cover
credit facilities, the DST shall be based on the amount of drawings or availment of the facilities, which
may be evidenced by credit/debit memo, advice in drawings by any form of check or withdrawal slip.
Thus, in BIR Ruling No. 108-99 dated July 15, 1999, the BIR ruled that an inter-office memo covering
advances granted by an affiliate company is in the nature of a promissory note subject to DST imposed
under Section 180 of the Tax Code. Thus, there is a risk that the above advances will be subject to
DST.
However, in BIR Ruling No. DA-666-A-99, it was held that intercompany loans or advances supported
by mere Board Resolutions of the lenders and cash vouchers acknowledged by the borrowers (in the
absence of loan agreements, promissory notes, debit and credit notes and inter-office memo) shall not be
subject to DST because these documents are not in the nature of promissory notes subject to DST.
- 10 Based on the foregoing, there is a risk that these advances except for those supported only by Board
Resolutions may be subject to DST. Thus, the Company may be exposed to deficiency DST plus
surcharge and interest.
However, Section 2 of RR No. 26, otherwise known as the Revised DST Regulations, provides that the
DST shall be paid by the maker, signer, acceptor or transferor at the time the act is done. This provision
of the regulation was interpreted by the CTA as placing the burden of paying the tax upon the parties to
the contract and leaves the tax to be paid indifferently by either party (Sta. Clara Lumber Co., Inc. vs.
Jose Aranas).
Implications
Thus either party to the transaction may be liable to DST. As disclosed, however, the parties to the
contract did not pay any DST on advances granted to/by the Company. Since the other party to the
transaction did not pay the DST, the Company may be exposed to deficiency DST plus surcharge and
interest.
Recommendations
We suggest that the Company evaluate its position in light of the foregoing.
Conduct Related-Party Transactions at Arms Length

Comment
The Company has various intercompany advances and loans to its subsidiaries and other related parties,
some of which are non-interest bearing.
Implications
The BIR has recently placed emphasis on reviewing related-party transactions. Of particular interest to
the BIR are the following:
Intercompany advances which are non-interest bearing or those that bear interest at
rates;
Intercompany sales or purchases at preferred prices.
preferred
In this regard, there is a risk that the BIR may impute interest income at current rates on such advances
and impute profit on other intercompany transactions to more closely reflect the income of the Company
as provided under Section 50 of the Tax Code. Thus, the Companys taxable income may increase as a
result of the imputed income, which may result in additional income tax liability.
- 11 not equal to an arms length rate, the Commissioner may make appropriate allocations to reflect an
arms length interest rate for the use of such loan or advance. Under RMO No. 63-99, for purposes of
determining the arms length rate in domestic transactions, the interest rate to be used is the Bank
Reference Rate prescribed by the Bangko Sentral ng Pilipinas.
Furthermore, income imputed by the BIR can also give rise to deficiency withholding and output taxes.
Recommendations
The Company should review its transactions with related parties to manage potential income that may
be imputed by the BIR on such transactions. Careful consideration should be given to tax minimization
measures which the Company can undertake to reduce its exposure to potential income, withholding and
output taxes.
Maximize Benefit of Net Operating Loss Carryover and Minimum Corporate Income Tax
Comment
As of December 31, 2002, the Company has the following net operating loss carryover (NOLCO) and
minimum corporate income tax (MCIT) balances, which form part of its deferred tax assets, with their
corresponding years of expiration:
NOLCO (at 32%)
MCIT
June 2003
P38,074,231
December 2003
P24,363,549
December 2004
P26,184,568
1,069,606
December 2005
P39,929,307
1,322,109
There are material amounts of the above deferred tax assets that are expiring in 2003 and may not be
fully utilized. These items, however, may affect the Companys net income, if not utilized, since these
were not fully provided with valuation allowance up to the extent of P17.5 million.
Implications
Under the Comprehensive Tax Reform Package, taxable loss may be carried over as deductions from
gross income for the next three consecutive taxable years following the year of such loss. After which,
benefits of the NOLCO can no longer be utilized.
The carryover of NOLCO, however, is allowed only if there has been no substantial change in the
ownership of the business or enterprise in that
Not less than 75% in nominal value of outstanding shares issued, if the business is in the name of
the corporation, is held by or on behalf of the same persons; or
Not less than 75% of the paid-up capital of the corporation, if the business is in the name of the
corporation, is held by or on behalf of the same persons.
- 12 Recommendation
The Company should consider the effects of NOLCO and MCIT as part of its tax planning, both for tax
and financial accounting purposes. In so doing, the Company needs to develop records to be used for
computing and monitoring timing differences between book and taxable income.
To effectively utilize the Companys net operating loss carryovers and its future tax deductions, we
recommend that: (a) prior to the consummation of any significant transactions, the tax consequences
should be reviewed, and (b) prior to the end of each taxable year, the Company should review its longrange tax planning in light of new developments or proposed tax legislation.
Fund the Retirement Plan

Comment
The Company has an established retirement plan and trust fund that qualifies under the requirements of
the Bureau of Internal Revenue as a tax-exempt fund. However, based on the latest actuarial valuation
of the Company dated December 31, 2000, the unfunded past service liability of the fund amounts to
P126,570,250, which is almost 100% of the total past service liability of the fund.
Implications
By not funding the retirement trust fund, the Company exposes itself to the risk of unplanned
low/negative cash position at a time when retirements are high and collections are low or when the
Company plans to use its cash for other transactions like capital acquisitions. In addition, unfunded
retirement cost charged to operations are non-tax deductible until the Company funds the same, and only
to the extent of 10% a year over a period of 10 consecutive years beginning in the year the funding is
made.
Recommendations
The Company should consider the funding of the retirement trust fund as part of its cash and tax
planning measures. Funding the retirement fund allows the Company the flexibility to disburse the
money only when the Company has a high cash position, as well as take advantage of its tax
deductibility when the Company has a high taxable income position.
- 13 Ensure Completeness of Disclosure of Legal and Tax Assessments

Comment
Certain claims have been filed or are pending against the Company. The total claims against the
Company amounted to P10 million. The Company did not disclose this fact in its financial statements
because management believes that said claims are not going to result into a liability to the Company.
Implications
The Company may be subject to claims which have a direct or indirect material effect on the financial
position of the Company which if not disclosed may mislead the readers of the financial statements. The
companys loss contingency may be understated.
Recommendations
The Company should regularly update with the Companys lawyers on the status of these claims in
order to evaluate the impact of these claims to the financial position of the Company.
CLOSING THE BOOKS PROCESS

Expedite Closing of the Books and Ensure Quality of Balances
Comment
The Company closed its books for the year ended December 31, 2002 only in April 2003 a few days
before the deadline for filing of income tax returns. In addition, the reliability of the balances was not
assured as evidenced by numerous adjustments made on the accounts subsequent to the preparation of
the trial balance. We believe that the size and number of adjustments could have been reduced had the
general ledger accounts been thoroughly reviewed during the monthly closings throughout the year and
the general ledger is updated regularly. Also, the Company should recognize that the integrity of
financial information is very critical for management decision-making, reporting, or analysis purposes.
Implications
Untimely closing of books may lead to delay in the preparation of financial statements resulting from
numerous adjustments being
Recommendations
The Company should evaluate its present practice of closing the books and ensure both the timeliness
and reliability of financial information. The Company may consider doing the following activities to
improve their closing process:
Map the existing closing process to identify redundancy and bottlenecks.
- 14
Distribute the workload throughout the year by closing the general ledger more frequently
and analyze selected accounts.
Consider entries or activities that could be performed ahead of the month-end to relieve the
crunch.
Analyze the causes of increased cycle time and should consider such as quality problem.
Create a bonus system that rewards the achievement of cost, quality and time objectives.
Improve Closing Procedures

Comment
There were numerous adjustments to the general ledger accounts. The size and number of adjustments
could have been reduced if accounts had been properly analyzed and adjusted during the monthly
closings throughout the year.
As management is aware, reduced cycle time and reliable financial information provide several benefits,
as follows:
Improves decision making by providing more timely information;

Changes the focus from historical perspective to current and future-oriented perspective;
Reduces the occasions for errors;
Reduces reporting and processing cycle times; and,
Provides better controls over costs.
Recommendations
The Company should evaluate its present practice of closing the books and ensure both the timeliness
and reliability of financial information. The Company may consider doing the following activities to
improve its closing process:
a. Map the existing closing process to identify redundancy and bottlenecks. Process mapping is the
first step in process change. Use this understanding to improve process performance. The map of
the closing process should identify:
-
key events of each workday in the cycle

inputs to the ledger by workday
number of trial balances or passes of the ledger run
types and timing of reports generated
number and types of journal entries made during the close of the year
recurring journal entries, especially if they are manually produced
b. Distribute the workload throughout the month by closing the general ledger more frequently. The
Company may consider closing its books semi-monthly and performing selected account analysis.
- 15 This closing procedure will not only ensure that the workload is distributed to reduce month-end
work; it will also prevent the accumulation of input data (e.g., journal entries, vouchers, etc.).
Admitted ly, there is a tendency to procrastinate in the recording of data until the crunch time,
which is normally during month-end. The discipline of closing the general ledger semi-monthly will
deter this normal tendency.
c. Consider entries or activities that could be performed ahead of month-end to relieve the
crunch. Certain entries can be recorded even at the start of the month, thus reducing the work to
be done at month-end. Examples of these entries are charges to depreciation, regular accruals,
among others.
d. Identify activities contributing to late reporting as a quality problem. To stress the importance of
timely closing, the Company should analyze the causes of increased cycle time and consider such as
a quality problem. For instance, any late reporting of financial data from outside parties or other
internal divisions should be investigated and steps taken to prevent such delays from happening
again.
e. Eliminate unnecessary inspection points. Review cycle time can be reduced by eliminating
inspection points that may be repetitions of a previous process or are not necessary anymore due to
immateriality of amounts involved. For example, the Accounting Manager need not review the
following in detail:
-
Recurring entries where the probability of committing error is very slim; and,
Checking of footings and extensions of vouchers with immaterial amounts.
The elimination of such steps will provide the Accounting Manager with additional time for more
value-adding activities.
f.
Create a bonus system that rewards the achievement of cost, quality and time objectives. Rewards
linked to performance in the closing process stimulate on-time performance and demonstrate that
on-line closing is a management priority. The performance measures and accountability system
established for the process should provide the information needed to evaluate individual
performance.
EVALUATE PROVISIONS FOR EXPENDITURES

Review Accrual Procedures
Comment
Our examination of the accrual balances disclosed significant outstanding balances relating to settled
transactions that require adjustment at the end of the year. Our inquiries disclosed that the absence of
specific procedures for reversal of the accruals at the date of completion and settlement of the covering
transaction is the primary cause of the occurrence of the errors. As it turned out, the acquisition of
assets or recognition of expenses are recorded twice, the first instance at accrual and again at settlement.
- 16 The absence of a requirement for the periodic review of the accruals did not provide the alternative
means for early identification of the errors, leaving these to remain in the accounts until the end of the
year, to be noted in the audit and correspondingly adjusted.
Implications
If there are no procedures to identify settled accruals at yearend, these accruals may remain undetected
thus overstating the payable balance. In addition, if accruals are not reversed during the beginning of
the subsequent year, expenses or prepayments may be taken up twice.
Recommendations
We recommend that the Company develop a formal procedure for the setting up and reversal of
accruals. A number of options may be considered by the Company as follows:
The Company may consider for the accruals to be taken only as working paper adjustments for the
preparation of the monthly reports, although these would have to be taken in the accounts at the end
of the year (to be reversed immediately at the start of the next year). Procedures for identification of
regular accrual sources and assessment of the required accrual balance as of the reporting date to be
set up as work paper adjustment should be established to ensure complete capture in the
management reports (and the books at the end of the reporting period) of the accrued liabilities.
The Company may consider for the accruals to be recorded in the accounts at the end of each
reporting period and reversing the entries immediately at the start of the next period, and
The Company may consider for the accruals to be recorded in the accounts at the end of each reporting
period. Regular review of accrued balances should be required (as also for the other options) to identify
necessary adjustments to the recorded balances at the end of each reporting period.
TIE-UP OF GENERAL LEDGER AND SUBSIDIARY LEDGER BALANCES

AND REVIEW OF SUSPENSE ACCOUNTS
Ensure Tie Up of General Ledger and Cash Equivalents Subsidiary Ledger
Comment
Cash equivalents subsidiary ledger prepared by the Treasury Department did not tie up with the balance
per general ledger. The schedule prepared by the Treasury Department only showed each of the
outstanding dollar and peso-denominated placements as of year-end. It does not display the account
balance total which would tie up with the balance per ledger. Due to this, during restatement of dollardenominated placements, the difference between the restated amount of the dollar-denominated
placements plus the peso-denominated placements with the balance per general ledger/trial balance was
misconstrued to be due to the effect of restatement. Due to this, the difference was erroneously recorded
as unrealized foreign exchange loss. Occurrence of this error lead to the significant adjustment of this
error in the current year financial statements.
- 17 Implications
Recurrence of the said error might cause the financial statements to be misstated.
Recommendations
In order to prevent the future recurrence of the said error, we suggest for the Company to ensure that the
said subsidiary ledger and general ledger are in agreement. Good communication between the
Accounting and Treasury Department would be necessary in order to achieve this.
We further suggest for the accounting department to include an attachment to the schedule provided by
the Treasury Department. The attached schedule should include information such as peso equivalent of
each dollar-denominated placements and account balance total, which would tie up with the balance per
ledger. This would minimize the risk of error involve in the restatement of dollar-denominated
placements.
Ensure Regular Reconciliation of Accounts Receivable General and Subsidiary Ledger

Comments
The Company does not regularly reconcile its accounts receivable general and subsidiary ledger
balances. As of December 31, 2002, there is an unreconciled difference of approximately P2.3 million.
During the course of our audit, we have identified the following reasons that have caused the difference:
Regular write-off of receivable equivalent to 1% of total revenue is properly charged against the
general ledger balance. However, only a part of this amount is specifically identified as to customer
accounts, therefore, the subsidiary ledger is updated only for those specific customer accounts
written-off.
Collections pertaining to previously written off accounts are not properly monitored and restated in
the general ledger. Thus amounts already written off are again deducted from the accounts
receivable general ledger balance upon collection.
In some cases where partial collection previously written off accounts in the subsidiary and general
ledger are specifically identified, the full amount of receivable are restated in the subsidiary ledger
while no restatement is made on the general ledger. Thus, the subsidiary ledger includes amounts
already written-off.
Adoption of new billing and collection system in 2002, which created differences in the beginning
balances amounting to P2.2 million. These were investigated at year end.
Implications
The occurrence of the cases cited above will cause misstatements in the financial statements.
- 18 Recommendations
The function of a subsidiary ledger is to properly account for the amount of receivable from each
customer and to monitor the customers credit history. Unreconciled general and subsidiary ledger may
indicate incomplete or inexistent records of transactions in the general ledger. Thus we recommend the
monthly reconciliation of subsidiary and general ledger and the prompt investigation of all differences to
properly monitor the amount of collectible from customers. Moreover, a summary of accounts written
off should be prepared and collections pertaining to these accounts should be monitored and recorded
properly on the general ledger.
Monitor and Investigate Suspense Accounts

Comment
We noted that the Company maintains in its books significant amounts of suspense items, as follows:
Account Description
Agri Division
GR/IR clearing account
Meat Division
GR/IR clearing account
Customs duties clearing account
Insurance clearing account
Balance
P385,484,275
402,999,045
14,922,831
59,906,179
GR/IR clearing account is automatically credited by the system upon receipt of the inventory. The
system performs invoice verification upon receipt of the original invoice where GR/IR clearing account
is debited and the vendor account is credited. All credit balances on this clearing account arising from
the unfinished invoice verification of some inventory items will be posted as Accrued Accounts Payable
when the books are closed at year-end.
Customs and Insurance Clearing accounts pertain to customs duties and insurance incurred that will be
paid by the Company on its importation of raw materials as determined and billed by the Bureau of
Customs and Freight Handlers, respectively. The said clearing accounts are credited upon receipt of the
imported goods. These will then be debited upon payment on the importations given that the invoice
verification is already performed.
If such suspense accounts are not closely monitored, the Company runs the risk that erroneous and
fraudulent transactions will not be detected on time and result in losses.
Implications
The use of clearing accounts especially if not properly monitored, may cause the recording of
transactions to be recorded twice due to error and it may also be ground for some fraudulent activities to
be hidden.
The Company should enhance its procedures for monitoring and investigating suspense items to assure
that all accounting entries are valid and proper. An officer must review the monitoring report to ensure
propriety of transactions.
Monitor and Investigate Unusual Balances of Accounts Receivable

Comment
There are negative balances in the Companys accounts receivables. These were due to cancellation of
sales where a downpayment was already received and other adjustments. These adjustments resulted in
a negative balance in the accounts receivable.
Implications
The credit balance may cause other accounts receivable subsidiary ledger to be understated if not
updated frequently.
Recommendations
We recommend that the Company analyze the individual balances comprising its account receivables.
Unusual balances should be promptly investigated and cleared.
Monitor and Investigate Unusual Balances of Accounts Payable

Comment
There are debit balances in the Companys accounts payables. These were due to payments made by the
company to its suppliers before being billed.
Implications
The debit balance may cause other accounts payable subsidiary ledger to be understated if not properly
monitored.
Recommendations
We recommend that the Company review each of the subsidiary ledgers that comprise the accounts
payable account. Balances that are unusual should be checked and cleared.
- 20 Managements Response
Direct Adjustments to General Ledger (GL)

Comment
The receipt of the confirmation replies from suppliers revealed that subsidiary ledger(SL) per supplier
does not tie up with the confirmed balances. There were several returns and payments to the suppliers
which were not properly monitored and recorded which resulted to the difference. The difference was
adjusted directly to the GL.
Implications
After effecting the adjustments, the GL is now tied up with the suppliers balance. The SL, however,
will not be tied up with the GL and the suppliers balances.
Recommendation
Adjustments to the GL should also be recorded in the SL in order to update the SL and avoid
unreconciled GL and SL.
CASH - Management Letter Points

Record Long-Outstanding Bank Reconciling Items on a Timely Basis
Comment
As of December 31, 2002, the Company had numerous unexplained bank reconciling items which were
not adjusted until the completion of the audit. Most of these unrecorded reconciling items relate to
______ (e.g., unrecorded fund transfers; payments, debit/credit memos, etc.). The net amount of such
adjustments amounted to P_____ million.
- 21 OR
As of December 31, 2002, the Company had the following unadjusted and unexplained bank reconciling
items which were not adjusted until the completion of the audit:
Bank
Reconciling Item
Erroneous use of GL account
Unbooked remittances from branch
Unbooked credit memos
Various unbooked payments
Returned checks
Unbooked bank debit memos
Others
Total
Amount
P----
P----
We noted that the foregoing items were not disposed of on a timely basis. The bank reconciliation
statements prepared for the month of December 2003 include reconciling items dated as far back as
(indicate the date of the oldest bank reconciling item).
We were informed by (state the name and position of the person who gave the reasons, if possible) that
the delay in the identification and/or recording of the foregoing resulted from the following:
Note :The following items enumerated are for illustrative purposes only. Please cite specific reasons
for your client.
1) The Head Office (HO) and branches maintain numerous bank accounts as follows:
Number of Accounts Maintained
Savings
Current
Head Office
Branch 1
Branch 2
Of the accounts maintained, ___ have been inactive for ___ to ___ months/years.
2) The branch accounting staff is not familiar with the new system used for __________. The staff
does not know which transaction and account codes to use. In addition, there are some staff who
are not aware of the entries to make for branch remittances to HO.
3) Analysis of reconciling items is only done at yearend for most branches resulting in difficulties in
tracing/matching reconciling items with supporting documents. (Also indicate why this is only done
at yearend)
Implications
Bank reconciliation statements serve as an internal control measure to identify any unbooked or
erroneously booked transactions in the Cash account. By not recording reconciling items identified on
a timely basis, the Companys books do not reflect the actual financial position of the Company and
would not be as useful to management. Further, accumulation of unbooked long-outstanding
- 22 reconciling items increases the time and effort needed in the preparation of the bank reconciliation
statements, the risk of error in the bank reconciliation statements, and difficulty in analyzing problems
related to the Cash account.
Recommendations
The Company should ensure that all reconciling items are investigated and cleared promptly. This
should include the preparation of the appropriate journal entries for the identified reconciling items
requiring adjustment in the books, as well as communication with banks for inquiry on contested items.
By implementing these measures, the Company will be able to prevent the accumulation of reconciling
items and reduce the time needed in preparing subsequent bank reconciliation statements.
The Company should also conduct an inventory of its cash placements at the end of each month as an
additional internal control measure since a number of the reconciling items relate to the transfers to/from
cash placements.
The Company should make the necessary arrangements with the banks regarding the prompt delivery of
monthly bank statements and the related supporting documents to permit timely preparation of the bank
reconciliation statements and the prompt disposition of the reconciling items.
To further facilitate the preparation of bank reconciliation statements, the Company may consider the
following:
Enter into a computerized banking arrangement with the banks. Computerized banking will
allow the Company to network with the banks and obtain bank statements on-line at any given time.
The Company will also have immediate access to the details of its bank accounts such as checks
that have cleared the bank, debit and credit memos, deposits already credited by the bank, etc.
Enter into a check preparation agreement with its disbursing banks. Under this arrangement,
the banks will prepare checks for the Company based on the list of payees that the Company will
submit. The payees are instructed to go straight to the banks to claim their checks.
(Also see recommendations in the following discussion which you may incorporate here.)
With these arrangements with the banks, the Companys accounting staff will be relieved of clerical
accounting jobs and can be assigned to perform other tasks.
Reduce Backlog in Bank Reconciliation Preparation

Comment
We observed that most of the bank reconciliation statements for December 2002 were completed only in
__________2003. Based on our interview with Company personnel, some of the reasons for the delay
are: (1) delay in receipt of bank statements and other supporting documents; (2) increased workload;
and, (3) a large number of reconciling items.
- 23 Further, reconciling items identified are not disposed of, particularly those requiring adjustments to book
balances, since the supporting documents for credit and debit memorandums have not been received by
the bookkeeper in charge of reconciling the bank accounts. Thus, these reconciling items accumulate
and have to be addressed again in the next reconciliation activity. This contributes to the delay and
additional time spent in the subsequent reconciliation activity.
Implications
The timely preparation of the bank reconciliation is a major control over the cash balance since it would
provide a check on whether all cash items have been recorded in the books and ensure that the
Companys cash is accounted for. Failure to perform this function on a timely manner could lead to
misstatements in the cash account and other relevant balance sheet and income statement items, as well
as, unexpected losses.
Recommendations
The Company should streamline the process concerning cash to minimize errors and to simplify the
bank reconciliation process. Also, the Company should assess the cost-effectiveness of automating the
reconciliation process. This will improve accuracy and reduce the backlog as well as address the
significant number of transactions for reconciliation.
In addition, the Company should also consider the following:
Regularly coordinate with the banks and with other departments within the Company for the prompt
delivery of the bank statements and other related documents to the designated bank reconcilers for
the timely preparation of bank reconciliation statements.
Arrange with banks that copies of documents like the credit and debit memos be provided to the
Company on a monthly basis, together with the copies of the bank statements/passbooks and paid
checks without the need for reminder or follow-up; and,
Review the workload of the personnel handling the bank reconciliation statements to ensure that the
monthly preparation of bank reconciliation statements will be performed on a timely basis.
Consider giving more extensive training to the Companys personnel on the bank reconciliation
process under the new system to avoid errors that will result to reconciling items.
The HO personnel in charge of the preparation of the bank reconciliation statements should
constantly remind the ___________ division personnel and branch accounting personnel of the
submission of the documents supporting the disbursement and branch transactions to prevent long
outstanding reconciling items.
The HO branch accounting personnel should do the preparation of the reconciliation statements of
the branches. This should expedite the reconciliation process since majority of the transactions
pertains to remittances. Also, the coordination among the personnel will no longer be a problem.
Put in writing the required procedures for the conduct of the bank reconciliation procedures to be
signed by a responsible officer to clearly indicate that these represent management instructions.
This should form part of the Accounting Manual or similar compilation of Company procedures and
instructions. Copies should be furnished to the particular preparer and reviewer for their
understanding and guideline for compliance
- 24
Set up a reporting date for the submission to the designated reviewing officer of the bank
reconciliation statements and accompanying journal entries for the proposed adjustments for the
identified reconciling items. The date set should allow time for the appropriate closing of the books
yet be early enough to allow for timely feedback on the accuracy of recorded cash balances.
Preparation of the bank reconciliation statements should be done monthly. This should include
immediate disposition of reconciling items to prevent additional time to be spent on the analysis of
such items at yearend. Moreover, management should strictly implement its policy on the
submission of monthly bank reconciliation statements.
Improve Controls over Cash on Hand (Petty Cash Fund)

Comment
The following control weaknesses over petty cash fund (PCF) was noted:
1. Cash advances granted were not liquidated on a timely basis.
2. Disbursements exceeded the PCF limit.
3. Disbursements for ________ which should have been part of purchasing process.
4. The petty cash fund is not replenished regularly resulting in depleted balances.
5. Surprise count and regular reconciliation of actual cash on hand and book balances are not
performed.
6. More than 20 employees are handling the petty cash fund.
7. Petty cash fund is not maintained on an imprest basis.
Implications
Cash, being the most liquid asset, is susceptible to fraud or misappropriation. Weak internal control on
cash would result to various possible irregularities such as misappropriation, theft and misplacement of
cash.
Recommendation
To strengthen the controls over cash on hand, we suggest that the Company perform the following:
1. Establish a clear-cut policy and procedure on the granting of cash advances and reimbursement of
expenses to ensure that only legitimate business expenses are funded through PCF.
2. Identify expenses qualified for the use of PCF and evaluate the need to increase or decrease such
fund.
- 25 3. Replenish the petty cash fund on a regular basis, depending on the volume of transactions during a
certain period.
4. Reconcile balances per books and per cash count promptly. This exercise will allow early
identification and disposition of errors disclosed in the reconciliation.
5. Have a representative from the Internal Audit Department (or its equivalent) perform a surprise
cash count on a monthly basis and at year-end to ascertain that the Companys cash on hand is
properly accounted for.
6. Maintain PCF on an imprest basis to accurately monitor replenishment and withdrawals. Under the
imprest system, all cash receipts are deposited intact and all cash disbursements are made through
checks.
7. Moreover, to improve the internal control over cash, the Company needs to review duties and
responsibilities to properly segregate incompatible duties of personnel. Only the Custodian should
have access to the petty cash fund.
Cash Custodian/Salesmen/Credit and Collection Personnel should be Bonded

Comment
The Company has various cash funds totaling P__________ held by (enumerate the custodians, use
position name only and not the name of individuals)
Implication
The custodians of these cash funds have access and control over these funds, thus, providing
opportunities for perpetrating irregularities.
Recommendation
The Company should consider having the cash custodians/salesmen/credit and collection personnel
bonded given the inherent susceptibility of cash to fraud and misappropriation. Although this will cost
the Company additional insurance expense, such cost will be far less than the potential losses which the
Company will incur should there be cases of misappropriation of cash funds. Further, the bonding of
employees can serve as a deterrent against misappropriation of cash funds.
- 26 Review and Strictly Implement Approval Limits for Disbursements

Comment
We observed several instances where the same documents were used to support payments which have
been split into (indicate the number of times the amount was split) so that the disbursements will only
require the approval of (indicate position), who can approve disbursement amounting to up to
P_____(indicate amount), and not the approval of (indicate position of approvers), who should approve
all disbursements in excess of P_____ (indicate amount).
Implication
By splitting supporting documents, large disbursements that may not have been authorized by the proper
signatories are processed for payment. Furthermore, this practice makes the Cash account more
susceptible to misappropriation since the Companys safeguard through proper authorization and
monitoring of large disbursements is circumvented.
Recommendation
We recommend that the Company review its approval limit for disbursements. The limit set may be too
low given the Companys current level of transactions.
Moreover, the internal audit group (or its
equivalent for your client) should review the disbursement process to identify any irregularities.
Validity of supporting documents for disbursements
Comment
As a policy, the Company requires supporting documents (i.e., invoices, requests for payment) to be
included in the check voucher package before disbursements are processed for payment. However, we
found out that these supporting documents were not checked or reviewed for completeness,
authorization, and validity prior to signing the check.
Implications
Signing checks without examining the documents supporting the disbursements could lead to payments
for unauthorized or fraudulent transactions.
Recommendation
Supporting documents should be verified for authorization, accuracy, validity and completeness before
these are further submitted for payment processing. The person designated to review should not be the
one who prepared the check and its supporting documents. Furthermore, they should ascertain that each
invoice should indicate that the following have been performed:
Invoice was compared to purchase order for description, price and quantity.
Invoice quantity was compared to the receiving report.
Extensions and additions were tested.
Invoice was approved for payment.
- 27 Evaluate the Use of Numerous Bank Accounts with Different Banks

Comment
As of December 31, 2002, the Company maintained [number of bank accounts] bank accounts with
[number of banks] banks. Of these, ______ accounts were with ____ banks in Metro Manila. These
include accounts for _______________________ and other accounts which are already inactive.
During the year, bank charges of P________ were paid to the bank related to these inactive accounts.
As an internal control measure, the Company prepares bank reconciliation statements for the bank
accounts.
Implications
By maintaining numerous bank accounts, the Company uses up substantial resources (people, time and
infrastructure) to process and maintain the information.
Recommendations
The Company should conduct an inventory of bank accounts and close out those related to
________________________________ or which are already inactive.
The Company should also consider selecting core cash-management banking partners. When shopping
for a banking partner, the Company should review cash management needs thoroughly by gathering
input from all departments that the bank may impact, examining how well current banking needs are
met, and spelling out expectations for meeting future needs. Because the information systems that link
banks and companies are so complex, once the choice is made, changing banks can be costly.
The advantages of giving fewer banks more company business include enabling the Company to assess
its bank services line by line and compare the prices that each bank charges, as well as sharing this
information among the banks through the use of score cards. In this way, the banks know where they
stand in relation to the other banks, and the Company has more leverage to control bank fees and gain
preferential services. Further, both the Company and the banks know that the Company has alternative
suppliers that understand its business. Should one bank encounter difficulties, the Company can
continue with uninterrupted service using another banking partner.
Monitor the Adequacy of the Balance of Disbursing Accounts

Before Releasing Check Payments
Comment
The Companys Cash account balance includes bank accounts with negative balances, after booking
all the reconciling items. The negative balances relate to outstanding checks resulting in bank
overdrafts.
The following are bank accounts of the company with negative cash balances:
- 28 -
Bank Account
Balance Per Book
Implications
The Companys liabilities are understated since bank overdrafts are in fact claims against the Company.
Furthermore, this reflects improper cash management since the Company continued to issue checks even
is the related bank account is not sufficiently funded.
Recommendations
There should be a person in charge of monitoring whether the balance of a disbursing account is
sufficient to cover the issued checks that will be drawn against the account. This should be done before
the checks are released to prevent checks drawn against insufficient funds, thereby avoiding the
corresponding bank charges and penalties charged by the banks.
Restate Dollar Cash Balances At Month-end

Comment
The Companys dollar cash account is not restated regularly using the appropriate peso to dollar
exchange rate. This is only restated at yearend with the restatement recorded as an audit adjustment.
Implication
Failure to restate dollar cash balances result in the misstatement of the Cash and Unrealized foreign
exchange loss/gain accounts.
Recommendations
The Company should restate its dollar-denominated monetary accounts (e.g., cash, receivables and
payables) using the month-end Philippine Dealing System rate as part of its regular closing the books
procedures to ensure that such management reports, which are the basis for decision-making, reflect
accurate information.
The difference between the restated dollar cash balance and the recorded book balance should be
recorded as unrealized foreign exchange gain/loss. The resulting unrealized foreign exchange gain or
loss should then be reversed at the beginning of the following month to facilitate the normal recording of
dollar transactions.
Improve Cash Reporting System

Comment
The Company has experienced significant growth during the past year, which trend is expected to
continue in the next few years. A significant amount of funds would be required over the next few years
to fund this expected growth. The Company, however, does not have a formal and structured cash
management system designed to ensure that funds are availed of as these are needed to reduce excess
funds and correspondingly the borrowing costs, as well as maximize returns on temporary excess funds,
if any.
As of fiscal year ended March 31, 2002, the Company has a total of P_____ (indicate amount) cash in
bank-savings account and P_____ (indicate amount) loans payable. The Companys loans payable
increased by P_____(indicate amount) from last years balance of P_____(indicate amount). For the
year ended, the Company earned interest amounting to P_____(indicate amount) from its cash in bank.
At an average interest rate of say 5%, the P_____(indicate amount) interest income translates to about
P_____(indicate amount) average amount of excess funds in the bank accounts. The Company also
reported P_____(indicate amount) in interest expense from its loans.
Implications
The Company has excess cash which is not being utilized properly to generate additional income/funds
for use in the Companys operations or reduce the Companys borrowing costs.
Recommendations
The Company should consider developing a formal and structured cash management policy to provide
management with the desired information for effective management of its cash funds. The following
reports should be considered as part of the cash management policy to be implemented:
A weekly report, which summarizes changes in cash position, outstanding accounts

receivable and payable, and the borrowing or temporary investment position.
A weekly forecast for cash requirements and receipts projected over the following four-week
period.
A monthly status report of unusual billing, collection, or payment backlogs influencing cash
flows.
The above reports are intended to keep management informed on current basis of the cash position in
accounts receivable. It would also guide decision-making as it relates to the expenditure of funds,
borrowing, and follow-up of unusual changes in receivable.
- 30 Segregate Custody of Cash From the Recording Function

Comment
We noted that the Companys cashier is also the bookkeeper.
Implication
The Company may be exposed to lapping where some payments received by cashier/bookkeeper are not
recorded upon receipt but are instead used by the cashier/bookkeeper for some other purpose. A
subsequent collection will then be recorded to cover the deficiency on the first collection made.
Consequently, the cash in custody of the cashier/bookkeeper can be manipulated.
Recommendation
We suggest that there should be a different individual doing the record keeping function from the cashier.
This may control the risk of susceptibility of the Company against the manipulation of cash. This could
also give the Company an assurance that cash, which is the most liquid asset, is well accounted and
could only be used for the purpose intended.
Improve Controls Over Preparation and Release of Checks

Comment
We have observed that the employee who prepares the checks for the Companys disbursements is also
the one responsible for mailing them/releasing them to the payee. After the checks have been authorized
and signed by the designated approver/s and signatory/ies, the checks are then forwarded to the same
employee for delivery to the payee.
Implication
Having a signed check go back to its preparer could lead to payments for unauthorized or fraudulent
transactions.
Recommendation
Checks should be mailed promptly/released to the payee after being signed and should not be returned to
the person preparing the checks or the persons requesting them. The one who prepares the check should
not be the one who will disburse or encash the check. There should be another person assigned for the
mailing of the checks. There is also a need to perforate or stamp supporting documents as Paid to
avoid the reuse of the same documents for another payment to be processed resulting in duplicate
payments for the same invoices.
- 31 Monitor Check Issuance

Comment
In our tests of the bank reconciliation statements as of (indicate applicable cut-off date), we noted that a
number of unreleased checks as of that date were included as outstanding checks in the reconciliation
statements. SFAS 2, Summary of Generally Accepted Accounting Principles of Cash require that
these unreleased checks should not be treated as outstanding checks but should be restored to the cash
balance. An adjustment was proposed and taken up to revert these unreleased checks to the cash balance
as of (indicate cut-off date). We understand that identifying the unreleased checks as of every reporting
period may prove difficult in the absence of an internal process or records to capture this information.
Implications
The Companys balance sheet will not reflect the actual financial position of the Company if the
unreleased checks are not restored to the cash balance. The balance sheet will instead reflect
understated cash and liabilities.
Recommendations
The check releasing staff should be required to conduct an inventory of unreleased checks in his
possession at the end of each month. The unreleased checks inventory list should be forwarded to the
person assigned to prepare the monthly bank reconciliation statements. This list should then be used as
the basis for an entry to revert unreleased checks to cash. This adjustment is for immediate reversal at
the beginning of the next period.
Monitoring and Investigation of Suspense Accounts

Comment
The Company has the following balances of suspense account as of December 31, 2002:
Account Description
Sundry credits - suspense
Sundry debits - suspense
Balance
We noted that suspense accounts are used to temporarily record (1) transactions with inadequate
supports; (2) transactions which the entries are not immediately known to the account; (3) confidential
transactions for which the nature is not known to the accounts, among others.
Implications
Suspense accounts may result to misstatement of financial statements. Further errors, intentional or
otherwise, may go undetected.
Ideally, suspense account should not be used. All transactions should be properly identified and
recorded. In the unlikely instance that the suspense account needs to be used, we suggest that this be
authorized by the VP-Controller. Such suspense transactions should be reversed and properly recorded.
Interest on Intercompany Advances

Comment
The Company extended non-interest bearing cash advances to its subsidiaries and affiliates amounting
to P___________. Following is a summary of such advances as of December 31, 2002:
Related party
Balance
The BIR may impute interest income on such advances. The Bureau of Internal Revenue may impute
interest income on these advances based on the market rate to clearly reflect the income of the Company
as provided under Section 50 of the Tax Code. Thus, the Companys taxable income may increase as a
result of the imputed interest income, which may result in additional income tax liability.
Implications
arms length rate interest rate for the use of such loan or advance. Moreover, under Section 2.2 of the
same RMO, indebtedness arising in the ordinary course of business out of sales, leases, or the renderof
services by and between members of the group, or any other similar extension is considered as bona fide
indebtedness. In this regard, the arms-length rate in the case of domestic transactions shall be the Bank
Reference Rate (BRR) prescribed by the Bangko Sentral ng Pilipinas (BSP).
The fact that intercompany loans may be subject to imputed interest also finds support in Kahler
Corporation vs. Commissioner of Internal Revenue (32 AFTR 2d 73-5860), a US case. This is an
appeal from a decision of the US Tax Court. The US Tax Court rejected the Commissioners allocation
of interest income to a parent corporation as a result of interest free loans made by the parent to its
subsidiaries. However, the US Court of Appeals reversed the decision of the US Tax Court. The US
Court of Appeals held that the regulations governing the imputed interest on interest free loans were
reasonable and consistent with the statute. The provisions of the US Tax Code that governs the
allocation of income and expenses among related parties is similar to Section 50 of our Tax Code which
is earlier mentioned. Note that US jurisprudence has persuasive effect in the Philippines.
- 33 However, in BIR Ruling No. 191-99-A dated December 3, 1999, the BIR ruled that }\a RMO No. 6399. Under this ruling the BIR considered advances based on the percentage of stockholdings as
analogous to capital contributions. Moreover, the BIR also tackled advances that are made due to the
financial need of the borrowing company and the financial ability of the lending company, as emergency
loans to help a related company, which is short of capital. The BIR stated that these are not also
covered by RMO No. 63-99 and that these transactions are not clearly done for tax evasion or
avoidance purposes. On this basis, if it can be argued that the advances are provided for emergency
purposes or can be considered analogous to capital contribution, the BIR may not impute interest on
these advances.
Recommendation
The Company should revisit its practices in view of RMO No. 63-99.
Reconciliation of Balances of Accounts Receivable with Customers

Comment
Our comparison of the amount in the accounts receivable confirmation reply against the amount in the
subsidiary ledger disclosed the following differences:
Customer
Per Record
Per
Confirmation
Reply
Difference
The above differences had not yet been reconciled but were passed for adjustment.
or
The differences was due to the following:
There were unrecorded collections from the customers

The balance per record is disputed by customer which is in the process for reconciliation
Implication
The receivable and revenue accounts are misstated which may result to incorrect financial statement
analysis and budget formulation of the Company.
Recommendation
Receivables from customers should be regularly reconciled. All differences should be promptly
investigated so that adjustments, when necessary, can be taken up without delay.
Long Outstanding Accounts Receivable

Comment
The long-outstanding receivables from various customers amounted to P_______, representing accounts
over _____ days and about ___% of the total trade receivables. The details are as follows:
Customers
Balance
Implication
Long outstanding accounts receivable would imply doubtful collection of such accounts. Non-collection
of the receivables will definitely result in losses for the Company and will impact working capital, since
some of the funds used for the advances were obtained from short-term borrowings.
Recommendation
A designated officer should be tasked to review the accounts receivable balances. Credit policy may
need to be tightened given the economic conditions.
Long-outstanding Receivable from Related Party/Officers

Comment
There are long-outstanding receivables from various related parties- including officers and employees.
The details are as follows:
Related parties/Officers
Balance
Implication
Related party receivables should be collected promptly. Delayed collection may result to
misappropriation of funds and forfeiting opportunities. The use of funds must be maximized to benefit
the company. Officers are expected to act in consideration of company policies and objectives.
Delinquent receivables from officers suggest pulling of ranks and taking advantage of the Company.
- 35 Officers responsible and accountable for company assets and interests are tasked to safeguard them, as
such, characters of these individuals must be considered.
Recommendation
There should be a policy for collection of receivables from officers and employees through salary
deductions.
Taxes on Interest and Rental Charged to Related Parties

Comment
In the ordinary course of business, the Company has the following transactions with related parties:
Lease contract agreement for the lease of certain transportation equipment at a minimal amount;
Lease contract agreement for the lease of office space at a minimal rental rate; and
Granting and availment of advances.
Implication
The following significant BIR issuances will give rise to a possible tax exposure related to
intercompany advances:
Revenue Regulation No. 2-98

Revenue Regulation No. 2-98, Withholding Tax at Source, requires a 5% withholding tax on gross
rental for the continued use or possession of real property used in business. During the year, lease
to _________ and ________ for transportation equipment was not subjected to withholding tax as
agreed upon by the two parties.
BIR Ruling No. 116-98

BIR Ruling No. 116-98 rules that interoffice memos covering advances granted by affiliated
corporations or interoffice memos evidencing lending or borrowing are in the nature of a promissory
note. These interoffice memos are therefore subject to documentary stamp tax (DST) at the rate of
P 0.30 on each Php200 or fractional part thereof of their face value pursuant to Section 180 of the
Tax Code.
Recommendation
Management should develop a formal tax planning activity to assess the impact of the above tax issues
on the Companys future operations.
Compliance of BIR policy on tax deductibility of Accounts Written-Off

Comment
The Company claimed as deduction for income tax purposes accounts receivable written off amounting to
P___________ for the year ended ____________. However, there is no evidence that the write-off has
been presented to the Board of Directors for approval as required by the Bureau of Internal Revenue
(BIR).
Implication
In the event the -BIR-examines the books of the Company, the Company should be able to prove the
validity of the bad debts claimed as deduction for income tax purposes to avoid possible expense
disallowance. If the expense is disallowed, the Company may be exposed to deficiency income tax, plus
penalties.
Recommendation
Management should ensure that the Company complies with all the requirements in writing off
receivables set by the BIR to claim the write off as valid tax deduction.
Under Section 34(B) of the Tax Code, the following requirements must be met for a bad debt to be
written off:
There must be a valid and subsisting debt;
The debt must be actually ascertained as worthless and uncollectible during the taxable year.
Before a debt can be ascertained to be worthless, the creditor must take responsible steps to collect
the debt within the period of prescription. This requires a proof of two facts: the taxpayer did in
fact ascertain the debt to be worthless in the year for which the deduction was sought, and that in
doing so, he acted in good faith.
The debt must be charged off during the taxable year.
The debt must also arise from the business, trade or profession of the taxpayer.
Preparation of Reconciliation of Intercompany Accounts

Comment
The Company prepares reconciliation of due to/from of intercompany accounts on a monthly basis.
However, the Company does not adjust all reconciling items on a timely basis.
There is no clear guideline on the settlement of the disputed items. Thus, even when the reconciliation
work is performed, the identified reconciling items are not immediately disposed of and are carried
forward to the succeeding periods.
- 37 Implications
The untimely recording of reconciling items will misstate the interim and year-end financial statements
reported by the Company. This may also result to different amounts disclosed for related party
transactions.
Recommendations
The Company should:
Ensure proper booking of reconciling items on a timely basis to avoid accumulation of

outstanding items.
Investigate unexplained differences and make adjusting entries to prevent recurring and long
outstanding reconciling items.
Review of Changes Made to the Customer and Credit Limit Master File
Comment
There is no independent review of changes made to the customer and credit limit master files. We noted
that there werecustomer accounts with no defined credit limit. Thus, these accounts could not be
subjected to credit checking which could result to possible long outstanding accounts.
Implications
Credit may be extended to unworthy customers thus may result to uncollectible accounts.
Recommendations
The Company should evaluate the listing of customers and its credit limits. The appropriate correction
and adjustment should be made to reflect the intended and approved credit limit based on the customers
historical credit standing. The Credit and Collection Officer should also be required to review the list of
customers regularly for accuracy .
Receivables with Negative Balances

Comment
The Company has trade customers accounts with negative balances totaling P________ million. The
details of which are as follows:
- 38 Customer
Credit Balance
We understand that the negative balances are primarily attributed to customer advances against future
deliveries. However, there are individually immaterial credit customer accounts that would not suggest
advance payment.
Implications
Recommendations
The cause of these negative balances should be identified on a timely basis. More importantly, the
appropriate reclassifications or adjustments should be made. The Company should also identify the
system breakdown causing the errors for required corrective actions to prevent similar errors from
recurring.
Regular Evaluation of Allowance for Doubtful Accounts

Comment
The Company is able to regularly identify delinquent accounts and closely monitor collection efforts.
However, there is no formal or written accounting policy to reflect the identified delinquent or doubtful
accounts in the accounting records.
Implications
While regularly identifying bad debt accounts, pursuing collection of long-outstanding accounts, and
minimizing customer problem accounts are good business practices, timely and regular evaluation of the
adequacy of allowance for uncollectible accounts in the books is a good financial reporting practice.
Financial reports are relied by management in making business decisions.
Recommendations
We suggest that management adopt and implement a formal policy on providing an allowance and
writing off uncollectible accounts throughout the year and not only at yearend. An adequate allowance
for uncollectible amounts should be established to provide for all reasonably anticipated losses inherent
in the receivable balances. Receivables known to be uncollectible should be charged to the allowance
account.
Update and Modify Receivables Aging Schedule

Comment
We noted that the aging schedule was not updated to properly reflect the age of some of the accounts.
An updated aging schedule is critical for an accurate analysis of accounts.
Implications
The aging of receivables which is used as a basis for providing different analysis such as collectibility of
accounts, if not properly presented, would result to incorrect conclusion for the analysis made.
Recommendations
The Company should monitor its receivable and regularly update its aging schedule to ensure the
Update and Modify Receivables Aging Schedule

Comment
The Company maintains its aging schedule manually and it was not updated to properly reflect the age
of some of the accounts.
Implications
The aging of receivables which is used as a basis for providing different analysis such as collectibility of
accounts, if not properly presented, would result to inappropriate conclusion for the analysis made.
Recommendations
The Company should monitor its receivable regularly and update aging schedule on a monthly basis to
properly reflect the age of the accounts.
- 40 Improve Collection of Trade Receivables

Comment
The Companys receivables represent ____ %of the Companys current assets. As
of________________, P __________ is _____ days overdue.
Implications
Given the magnitude of the Companys receivables, it is important that receivables be managed
effectively to maximize the Companys resources.
Recommendations
The Company should consider the following suggestions to improve its receivable collection process:
Encourage customers to pay on time by imposing penalties for late payments and offering discounts
to those who pay early. This will reduce collection periods, hasten cash collections and diminish
the costs related to carrying accounts receivable. Follow prompt-payment discount guidelines
rigidly to discourage payment stretchers.
Identify means of making payment convenient for the customers. Collection efforts are usually
more effective when customers are aware of payment centers most accessible to them. Electronic
fund transfer is an effective mode of payment for this purpose.
The Company may consider outsourcing collections from slow payers to a collection agency or
assigning such receivables to a bank. The advantages of these steps include increased recoverability
of past-due balances, better Company focus on highly collectible accounts, and additional collection
resources with minimal incremental costs. The Company should analyze the cost of outsourcing
and the benefit that it gives. Many companies are reluctant to outsource because of the
accompanying financial charges. They overlook, however, that everyday an account remains
unpaid, it loses value and the risk of write-off will likely be high.
Monitoring of Collections from Customers

Comment
As a practice, the Companys collections from customers are credited to the outstanding customers
balances and does not identify amounts collected s to specific invoice.
Implications
Non monitoring of collection may result to unreconciled balances of per Companys record and the
customer. It may also lead to misstatement of the aging of accounts receivable.
The Company should monitor its collections from customer on a regular basis. Differences that arise
between the collection and the particular invoice should be reconciled on a timely basis.
Policy on Liquidation of Cash Advances of Employees

Comment
The Companys receivables from employees, which mainly represents unliquidated cash advances,
amounted to P __________ as of _______________. Such advances include receivable from resigned
employees.
Implications
The unliquidated advances may no longer be collectible especially when the employee is no longer
working with the Company and may result to additional losses of the Company.
Recommendations
The Company should have a policy on the liquidation of cash advances to employees and in cases where
such cash advances were not liquidated on time, such will be deducted from the employees salary.
INVENTORY
Develop Plan to Reduce and Control Inventory [or Restaurant Equipment
(Including Restaurant Equipment from Closed Stores)] Inventory Levels
Comment
The balance of restaurant equipment inventory and inventory from closed stores as of December 31,
2002 amounted to:
Restaurant equipment
Inventory from closed stores
P29,109,464
90,527,634
P119,637,098
Significant restaurant equipment inventory items are being kept in the warehouse for more than
___(i.e. five) years. This was due to purchases made in the past for specific restaurant projects that
- 42 have been abandoned. These equipment were not issued to other stores or allocated to other
restaurant openings.
The Company incurred warehousing charges for these inventory items amounting to an average
of P27,000 per month (depending on space utilization of inventories).
Implications
Significant amount of warehousing costs are being incurred and high risk of inventory obsolescence
exists due to technological trends, change in food choices and several innovations in the ___ industry
(i.e. fast food industry).
Recommendation
The Company must develop plan reduce and control restaurant equipment inventory by:
Making an assessment of all restaurant equipment inventories (including inventory from closed
stores) whether these are usable or not. Real Estate and Engineering Department must be provided
with information of available usable restaurant equipment inventories so these may be included in
its planning , upgrading and inventory allocation.
Performing cost benefit analysis on whether damaged restaurant equipment inventory should be
repaired or scrapped. If decision to repair is made, the Company should ensure that these
inventories should be allocated for future store openings. Otherwise, it should be scrapped or
written off in order to avoid further carrying costs of such inventories.
Considering just in time purchase of restaurant equipment. That is, the Company will purchase
restaurant equipment only when plan to open the store is being implemented. This would reduce
warehousing costs, risk of inventory obsolescence and reduction of restaurant equipment inventory
on hand.
Discontinue Capitalization of Warehousing Costs as Part of Inventories

Comment
The Company recorded warehousing costs amounting to P2.4 million as inventory costs.
Implications
Capitalization of warehousing costs is not in accordance with Philippine generally accepted accounting
principles.
Recommendation
Warehousing charges recorded as part of inventory must be written off. Prospectively, the Company
must record warehousing charges as part of operating expenses. SFAS 4 (revised 2000) states that cost
- 43 of inventories represents the direct and indirect expenditures for items purchased, or in process of
production including costs of production overhead. It constitutes the sum of the applicable expenditures
and charges directly or indirectly incurred in bringing the inventory items to existing condition and
location. This does not include warehousing charges.
Establish Policy for Recognition of Inventory Obsolescence

Comment
As of December 31, 2002, The Company maintains surplus, slow moving and obsolete inventory items
particularly on premium, restaurant equipment and construction materials inventory. The Company does
not monitor the balance of any slowmoving, surplus and obsolete inventories nor regularly review the
balance of any allowance for inventory obsolescence. For the past years, provisions for inventory
obsolescence were provided as a result of year end audit and formed past of year end audit adjustments.
We understand that the Company does not prepare Inventory Aging Report.
Implications
The Companys financial statements may not be reflecting the net realizable value of its inventories
throughout the year.
Recommendations
An action from management is required to reduce or eliminate surplus, slow moving and obsolete
inventories. This can be accomplished by:
Ascertaining in the present ordering policies that build up is not continuing;
Making steps to ensure that inventories are properly disposed
Establishing written criteria for evaluating and managing surplus, slow moving and obsolete
inventories as well as on the evaluation of allowance for inventory obsolescence.
Preparing aging schedule of non-food inventory items such as premiums, construction and
equipment inventory. This should include accurate perpetual inventory records showing acquisition
and issue quantities and dates as well as average age of a particular inventory item. Periodic review
of records is essential to identify surplus, obsolete and slow moving inventories.
The foregoing would prompt the management on the level of slow moving inventories on hand and the
amount of the Companys investment that stagnates in inventory. Further, this would help management
in future decision making especially on the optimum level of inventory to be purchased, assessment of
inventory obsolescence and budgeting purposes.
- 44 Improve Physical Inventory Procedures

We have noted the following weaknesses in the physical inventory procedures of the Company:
The Company did not issue written physicallinventory instructions to personnel involved in the
count.
No briefing was conducted prior to the start of inventory count to inform personnel involved
about their respective functions and controls/procedures that should be observed during the count.
There were no representatives from the accounting department during the physical count
conducted in HAVI and Company owned restaurants.
Reconciliation of inventory count results from HAVI was not forwarded to the accounting
department for review and approval.
Except in CPI warehouse, inventory count tags were not used to facilitate easy identification
and counting of inventories and ensure completeness of inventory counted.
In various warehouses, inventories are not properly arranged and precounted to facilitate fast
and efficient inventory count process.
Implication
The Company may not be maximizing the benefits of proper planning and execution of physical
inventory count.
Recommendation
A written policy for physical inventory procedures must be developed taking into consideration
weaknesses noted above. We recommend the following control measures:
Comprehensive, written physical inventory instructions should be effectively communicated to

the inventory crew in advance of count date.
Personnel assigned to verify the count should be those other the (1) storekeepers or warehouse
personnel, (2) inventory records clerks and (3) those who maintain the control accounts.
Designated official should be assigned to supervise the physical count.
Arrange, mark, label or otherwise describe stocks so that they can be accurately counted and
identified by the count teams.
Adequately segregate stocks not to be counted (e.g., goods owned by others, scrap, obsolete
and damaged items already written off) from other stocks.
Instructions should ensure that all stocks will be included in the count and that no stocks will
be counted twice (e.g., marking or attaching count tags to stocks already counted).
Use of prenumbered count tags or sheets and recording numbers used to subsequently ascertain
that all counts will be included in compilation.
- 45
Instructions to minimize or control inventory movements during the count so that stocks can be
accurately counted relative to internal stock transfers, outgoing shipments and incoming receipts.
Instructions for proper cutoff of prenumbered inventory documents or other control procedures
to monitor inventory movements.
Monitoring of Documents Used to Account for Inventory Movements

Comment
The significant variance amounting to P19 million between physical count results and inventory records
was due to lack of monitoring of receiving documents. We understand that this was due to the
occurrence of labor strike in the last quarter of the year. Deliveries were then directly made to the Toll
processing plant since the Cabuyao plant was closed. There were instances where the person-in charged
in the Toll Processing plant failed to forward the necessary documents to Meat accounting resulting to
non-recording of transactions.
Implication
Recommendation
The Company should monitor the transfer of receiving documents from the toll processing plant to the
accounting office to ensure accurate and complete recording of transaction in the proper accounting
period.
Utilization of the Sun Business Inventory Control Module (Mcdo)

The current accounting system of GADC cannot generate actual level of inventory as of a given cut off
date for restaurant equipment and construction inventory. We understand that GADC failed to
implement completely the Sun Business Inventory Control Module, a component of the Sun Accounting
System which is being used by the Company for financial reporting purposes. Instead, the Company
uses a special journal to record inventory transactions which are manually entered in the system.
Further, inventory costing and recording are also done manually.
- 46 Implication
Given the number and size of the stores and inventory equipment, such manual transactions are more
susceptible to error.\
Recommendation
The Company should review and implement the Sun Business Inventory Control Module to ensure
efficiency and accuracy of recording of inventory transactions. The Company should request the service
provider of Sun Accounting System to assist the Company in the implementation of the system.
Calibration of Tanks Regularly (Bercy)

Comments
Certain storage tanks have not been calibrated for years. The dates of the tanks last calibration are as
follows:
Location
Contents
Tank Number
Last Calibration Date
Implications
Normally, these tanks should be calibrated every five years. This is done to ensure that the volume
readings obtained during inventory count are accurate. The Company uses a calibration table to
estimate the actual volume of liquid based on volume reading. Over the years, normal deterioration,
stocking, and forces of nature have caused the tanks to lose their original form. The existing calibration
table may not reflect the actual volume of liquid based on sounding height and certain formulas, as
tanks are no longer in the form in which they were last calibrated.
Recommendations
To avoid possible errors in recording production, consumption and ending inventory of the Company the
tanks mentioned above should be calibrated immediately so that the volume of stocks stored in these
tanks can be more accurately measured and recorded in the books.
Regular Review of Standard Costing (from LTR database)

Comment
- 47 Standard costs of the Company are established for the entire year hence it includes estimates of future
costs. This may cause cost of sales to be overstated or understated toward the end of the year, depending
of the accuracy of the standards.
Implication
Monthly financial statements can be distorted because of this practice.
Recommendation
To improve the accuracy of standard costs we suggest that management consider revising these standard
more frequently. Although we agree with managements opinion that it is not economically feasible to
revise all standards more frequently, an alternative approach which should be considered is to
periodically review and revise certain standards throughout the year. One method of doing this would
be:
Divide the standard into twelve groups and review one group each month; and
Revise any standard whenever such standard differs from actual cost by a certain percentage.
Such periodic review would also spread out the workload and improve the usefulness of variance
analysis in monitoring cost trends and evaluating the performance of production and purchasing
functions.
Adopt Perpetual Inventory System and Standard Costing (LTR database)

Comment
The Company takes time in reconciling the inventory balance per GL to the inventory listing. Further,
the Company maintains its inventory record manually and uses the actual costing method.
Implication
The Companys inventory monitoring and reporting may not be done effectively and efficiently.
Recommendation
Sound procedures for the taking of physical inventories is important in assuring that inventory reflected
in the financial records does physically exist. However, this is not a substitute for reliable accounting
and reporting procedures. We recommend that perpetual inventory records be established for
substantially all inventories and that standard cost system s be implemented for all manufacturing
operations. The current accounting system could be modified by reporting production quantities and,
together with sales data already generated, this information could form the basis for perpetual records of
manufactured inventories. Once established, perpetual records and the use of standard costs would:
Reduce the frequency of physical inventory counts
- 48
Provide better accounting control over the flow of goods and increase the possibility of
detecting theft or unrecorded shipments
Provide management with more valuable tools to monitor realization and quickly spot
production inefficiencies.
Provide more reliable cost and accounting data as a basis for determining product profitability
and needed shifts in production and sales emphasis.
Using existing data processing capabilities, the perpetual inventory system could generate valuable
information such as sales statistics, turnover rates, slow-moving or overstocked items and profit by
product, product line, customer and salesman. In addition, it would provide better accounting controls
over quantities. The benefits of perpetual inventories and standard costs relate principally to
manufacturing operations, but may also benefit the retail operation.
Establish Policy for Receiving Deliveries from Suppliers without Purchase Orders
Comment
There are instances when warehouse staff receives inventory even if there is no supporting purchase
order (see below).
Supplier
Date Receipt
Purchase Order # PO Date
Delivery Receipt
Implication
Unauthorized deliveries may be accepted by warehouse staff and liabilities may be incurred by the
Company for such unauthorized deliveries.
Recommendations
The Company should implement a no PO, no receipt policy. Review of documents submitted to
accounting department must consist of receiving report, purchase order, delivery receipt, and suppliers
invoice before payment to suppliers are made.
- 49 Establish Standard Unit of Measurement Gold Wires Inventories

Comment
The Company measures its gold wire inventories by the number of spool regardless of the gold wire
content of the spools.
Implications
Inventory records are not accurate and in accordance with the industry practice. Further, the Company
does not effectively monitor the quantity of its gold wires, thereby making it more prone to theft or
pilferages.
Recommendations
For materials such as gold wires, accurate measurement can be obtained by implementing a standard
variant based on the weight of the gold wires on hand. This formula can be prepared by the Company
or obtained from the suppliers of said gold wires. The weight of the remaining gold wires at month-end
will then be multiplied to the variant and thus obtain a more accurate measurement of inventory.
Review of Supplier Accreditation Process

Comment
The Company should properly accredit suppliers before any transactions can transpire. These suppliers
must undergo product qualification and on-site inspection, which should be documented to support the
accreditation. Per review of the accreditation process, it was noted that for local materials such as
nitrogen gas and spare parts, there are no documents supporting the said accreditation for suppliers of
said materials (attach list of suppliers without proper documentation of accreditation).
Implications
Products provided by non-accredited suppliers may be substandard. There is a risk of collusion
between the purchasing personnel and supplier with regards the billed price of goods. Thus the
Company may end up paying more than the industry price for the specific material and lose out on
opportunities with other suppliers with lower-priced and high quality materials.
Recommendations
Quarterly review of accredited suppliers to determine if prices paid by the Company is still within
industry standards, in order to avoid lost opportunities. Also a review for supporting documentation
such as product qualification and on-site inspection should be done.
- 50 Review of Discontinued Products

Comment
As of December 31, 2002, the following products that the Company ceased to manufacture and the
related raw materials are still being maintained in the warehouse/company premises, and are being
carried in the books at original acquisition cost:
Description
Quantity
Amount
Implication
Aside from the acquisition and carrying costs involvec, the inventories have high risk of obsolescence,
and hence risk of impaired value.
Recommendation
Build up of discontinued products should be reduced either through sale at a lower price or
write-off if sale is not possible.
Allowance for inventory obsolescence must be provided for discontinued products not written
off.
Consider BIR Regulations in the Write-off of Inventories

Comment
In 2002, the Company wrote off inventories from its books amounting to P__million and claimed it as
deductible expense in its income tax return. The Bureau of Internal Revenue (BIR) requires the
following, among others, in order to claim inventory written off from the books as deductible expenses in
the computation of income tax:
Notification to the BIR of the Companys intention to write off certain inventories from the
books
Physical destruction of the inventory items in the presence of BIR representative
Implications
The Company was not in compliance with the said requirement when it wrote off from the books
inventories amounting to about P__________. The BIR may disallow such deduction in the
computation of the Companys 2002 income tax.
We encourage future compliance with the requirements of the BIR to avoid disallowances of deductions.
Enhanced Procedures and Policies for Returned Inventories

Several equipment inventories (see exhibit ___) were returned to the warehouse from various
restaurants during 2002. The Company has no formal policies in accounting for such returns
specifically costing and valuation.
Also, transfer tickets used for the returns are not properly accounted. Delay in the recording of returns
is encountered due to late submission of transfer tickets from various warehouses.
Implication
The inventories become susceptible to theft and accounting errors.
Recommendation
The Company should have a formal policy in accounting for returns of inventories from
projects. Attached is a summary of best practices for inventory accounting (pls attach).
The company should account regularly and accurately all the transfer tickets pertaining to
returns of equipment. All transfer tickets issued must be prenumbered and accounted for
completeness.
The Company may also want to consider outsourcing the monitoring and accounting for
inventories to third party contractor.
Timely Filing of Inventory Lists with the BIR

Comment
The Company does not file inventory listing with BIR (or The inventory listing filed with the BIR does
not agree with the balance shown in the accounting records).
Implication
The Company may be subject to administrative penalty from the BIR if examined.
Recommendation
- 52 We suggest that the Company comply with the provisions of RR No. 5-9 , (state title of this RR) .
RR No. 5-94 states that, any person, natural or juridical, engaged in the sale of goods in the course of
his trade of business shall keep, in addition to other books and records prescribed in these regulations, a
book of inventories, in which shall be recorded in details the quantity, description, unit cost, and the
total cost of every item of their stock-in-trade, material, supplies and all other goods found in the
premises of their establishments at the time they start business and at the close of the taxable year,
whether a calendar or fiscal year. The inventory at the beginning shall be made and submitted to the
Revenue District office having jurisdiction over the taxpayers principal place of business within 10
days after starting the business, and subsequent inventories not later than 30 days after close of the
accounting period employed, whether calendar or fiscal year.
Based on the foregoing, the Company is required to register its book of inventories which shall contain
in quantity, description, unit cost, and the total cost of every item of their stock in trade, materials,
supplies and all other goods found in the premises of their establishments at the time they start business
and at the close of the taxable year.
Review Transfer Pricing Policy with Affiliates

Comment
We understand that the Company has intercompany transfers of inventories from the following affiliates:
Name of Affiliates
Amount of
Inventory
Transferred
Considering that these are related party transactions, the BIR may look into the reasonableness of
allocation of income and expenses between and among the Companys affiliates to ascertain if these are at
arms length pursuant to Section 50 of the Tax Code. The BIR, at its discretion, may allocate gross income
or deduction between or any of the affiliate to clearly reflect the income of each company.
In this regard, Revenue Audit Memorandum Order (RAMO) No. 1-98 defined the rules for the
determination of the true taxable income of related taxpayers in specific transactions such as intercompany loans and advances, cost sharing, resale and agency agreements and the supply of goods and
services between related parties.
Said RAMO discussed the following guides in determining whether a transaction involving supply of
goods or services is at arms length under the Organization for Economic Cooperation and Development
(OECD) Guidelines on transfer pricing:
The Comparable Uncontrolled Price method (CUP) - this evaluates the arms length by reference
to the amount charged in a comparable uncontrolled transaction.
- 53
The Resale Price method (RPM) - it evaluates arms length by reference to the gross profit margin
realized in comparable transactions.
The Cost Plus method (CPM) - it evaluates the arms length by adding the gross profit to the
controlled taxpayers cost of producing the property involved in the controlled transaction and then
impose the applicable profit rate.
The Profit Split method (PS) this is done simply by dividing the profit between the members
involved in the transaction taking into consideration the extent of their participation in the
realization of the transaction.
Implication
There is a risk that the BIR may review the said intercompany transfers of inventory. The BIR may impute
additional revenues for the intercompany advances, if it is found that the amount charged is lower than the
prevailing market rate, for which the Company may also be exposed to deficiency income tax.
Recommendation
We suggest the Company be prepared to prove that the above transactions were made at arms length.
Otherwise, the tax authorities may invoke Section 50 of the Tax Code in assessing the Company
additional income tax. In this regard, the Company may consider a transfer pricing study. An
intercompany pricing study will address the transfer pricing issues, specifically, the arms length nature
of the fees for related party services. The objective of such a study is to evaluate the transfer pricing
issues relating to the above intercompany transactions and, based on a comprehensive economic
analysis, recommend pricing policies that are consistent with the tax laws in the Philippines and the
transfer pricing guidelines of the Organisation for Economic Co-operation and Development (OECD
Guidelines). The regulations in the Philippines and the OECD Guidelines provide that the transfer of
products and services between related entities and the use of intangible property must be priced on an
arms length basis. An arms length price is the price that would prevail if the parties to the
transaction had been dealing with each other as independent entities. This transfer pricing study will
evaluate the intercompany transactions and establish arms length standards for intercompany pricing
policies in these transactions.
Assessment of Inventory at Lower of Costs or Net Realizable Value

Comment
The Company does perform regular assessment of inventory balances by comparing costs and net
realizable value.
Implications
Risk exists that inventory may not be stated in accordance with the provision of SFAS No. 4 (Revised
2000).
- 54 Recommendation
We suggest that the Company complies with the provisions of SFAS No. 4. Under the provisions of
SFAS No. 4, an enterprise should adopt a lower of cost or net realizable value (NRV) convention
without any upper or lower bounds for NRV. Net realizable value is defined as the estimated selling
price in the ordinary course of business less the estimated costs of completion and estimated costs
necessary to make the sale. The Company should therefore evaluate inventory regularly by comparing
costs from net realizable value.
Review Bill and Hold Transactions

Comment
Based on confirmation with shipping lines with which the Company did business during the year,
several inventories stay in the container yard of shipping lines for a long period of time. These are not
taken by the customers/dealers but reflected as sales of the Company. We understand that the terms of
sale is FOB Destination that gives the Company the responsibility to ensure delivery of goods to the
customers and ensure their acceptance prior recognition of revenues.
Implication
Revenues maybe misstated as a result of bill and hold transactions.
Recommendation
Inventories in the container yards not acknowledge by dealers should not be recognized as sales of the
Company. Inventory levels in the container yard must be properly monitored and timely receipt of
dealers should be ensured.
Quantity Used/Issued During the Year vs. Purchases

Comment
During the year, purchases of the following materials inventory exceeded issuances to production:
Description
1.
2.
3.
Quantity
Purchased
Quantity
Used
Difference
- 55 This is due to the lower production during the year compared to budgeted amount.As of year-end, the
Company had an inventory of certain materials totaling P______, which exceeded the anticipated usage
for several years. Subsidiarys management indicated that, based on production forecasts, the purchases
were required under contractual arrangements entered into by the Company three to five years ago.
Implications
Excess inventory increases storage costs and risk to inventory obsolescence.
Recommendations
The Company should ensure that purchasing of materials inventory are in accordance with
production budget. If there are changes in production orders, the production department should
prompt immediately the purchasing and materials department of such changes.
The Company should plan carefully the levels of inventory to maintained taking into
consideration the right amount of purchases relative to production and levels of safety stocks and
surplus inventories maintained on hand.
The Company should ensure that existing or surplus inventories must be properly utilized in
production.
PREPAYMENTS
Apply Excess Input Tax as Tax Credits
Comment
As of December 31, 2002, the Company has accumulated input tax amounting to P____ million as
follows.
Year Incurred
1999
2000
2001
2002
Total
Amount
Since the Company derives a significant amount of its revenues from export sales which are zero-rated
for VAT, it does not expect to incur output tax against which to apply input tax.
- 56 Implications
Accumulated input taxes, if not filed as a claim for refund on a timely basis and properly supported
according to the requirements of the Bureau of Internal Revenue and Department of Finance may not be
completely realizable as tax credits.
Recommendation
Section 77 of the Tax Code allows the taxpayer to file in writing a claim for tax credit or refund of taxes
to the Commissioner of Internal Revenue within two years after payment of the tax. In addition Section
110 (B) of the Tax Code allows any VAT taxpayer to apply for the issuance of a TCC or refund of any
input tax attributable to zero-rated sales or to the purchase of capital goods, to the extent that such input
tax has not been applied against output tax. Moreover, Section 112 (A) of the Tax Code provides that
VAT-registered persons, whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales to the extent that such
input tax has not been applied output tax.
We suggest the Company reviews its outstanding input tax and related supporting documentation, and
ensure that application for refund or tax credit is done on a timely basis and that input taxes have not
prescribed.
Amend Quarterly VAT Returns for Adjustments

Comment
Our comparison of the amount of input tax declared in the VAT returns against the amount of input tax
recorded in the General Ledger (GL) in 2002 disclosed the following differences:
Input Tax
Quarter
First
Second
Third
Fourth
Total
Per Return
P469,706
545,111
4,329,034
1,950,388
P7,294,239
Per
General Ledger
P477,284
2,337,906
2,695,326
1,660,793
P7,171,310
DifferenceOver/(Under)
(P7,578)b
(1,792,796)b
1,633,708b
289,595a
P122,929
We understand that the reason for the differences are as follows:
Overstatement of input taxes claimed in the fourth quarter VAT return amounting to
P 161,932 was due to double take-up in the return of excess input tax carried from previous quarter.
Adjustments pertaining to previous quarters which were automatically effected in the succeeding
quarter VAT return.
- 57 Implications
Quarterly VAT returns are considered final returns. Thus, adjustments pertaining to previous quarter
cannot be effected in the succeeding quarter return. These adjustments may only be corrected by filing
an amended return. The Company may be assessed for deficiency VAT remittances for excess input tax
claimed.
Recommendation
We suggest the Company prepare a reconciliation accounting for the above differences to determine if
there was indeed an over declaration of input tax to determine the extent of the Companys exposure to
the BIR. As it is, appears that there was an over declaration of input tax of P122,929.
Moving forward, any errors or adjustments in quarterly VAT should be corrected by filing an amended
return.
Remit VAT on Royalty Fees Paid

Comment
During the year, the Company paid P_____ royalty fees to _____, a nonresident foreign corporation.
Such is subject to value added tax which the Company is required to withhold from ________ and remit
to the Philippine Government. The Company failed to withhold and remit the said VAT amounting to
P_____________.
Implication
The Company may be exposed to penalty, surcharge and interest for late remittance of VAT related to
said royalty fees.
Recommendation
Pursuant to Section 4.102-1(b) of Revenue Regulations (RR) No. 7-95, royalties payable to nonresident foreign corporation is subject to 10% VAT.
The VAT on royalties shall be based on the contract price agreed upon by the licensor and licensee. The
Company, as licensee, shall be responsible for the payment of VAT on such royalties on behalf of the
non-resident foreign corporation by filing a separate VAT declaration return for this purpose.
We suggest the Company consider its tax position and expense. A separate VAT on said royalties is
supposed to be filed in a separate VAT return. Moreover, pursuant to Section 4.102-1(b) of RR 7-95,
the VAT paid on behalf of the licensor may be claimed by the Company as part of the input tax credit in
its own VAT return. The duly validated VAT declaration/return is sufficient evidence in claiming input
tax credit by the licensee.
Register with Proper Revenue District Office

Comment
For VAT purposes, the Company registered with Revenue District Office (RDO) No. __, ____ City,
although its principal place of business is within the jurisdiction of RDO No. __, _____ City.
Implication
The Company may be subject to administrative penalties for not registering with the proper RDO.
Recommendation
Under Section 4.107-1 of RR No. 7-95, any person who sells, barters, exchanges, leases goods or
properties and renders services subject to VAT shall register with the appropriate RDO which has
jurisdiction over the place wherein the head office is located.
We suggest the Company registers with the correct RDO (i.e., No. ____) to avoid assessments by tax
authorities.
Issue Proforma Invoice for VAT

Comment
As a practice, the Company issues sales invoices based on the initial selling price and adjusts its books
for any price adjustments based on debit/credit memos, pursuant to its agreement with customers.
Consequently, output VAT is declared based on the adjusted selling price.
Implication
The Company may be questioned by the BIR on the difference between output VAT computed per sales
invoice and output VAT declared per VAT return. According to Section 4.100-6(a) of RR7-95, price
discounts should be shown in the invoice and granted at time of sale to be deducted from the tax base
for output VAT computation.
Recommendation
RR No. 7-95 does not provide specific provisions as to the treatment of price adjustments. However to
avoid questions from BIR, we suggest that the Company issue a proforma invoice for the initial selling
price and issues the sales invoice after the final negotiation of the customer.
Renew Expired Lease Contracts

Comment
The Company has certain contracts for the lease of land, buildings and equipment which expired prior to
December 31, 2002. We were informed by ______ that the Company and the lessor have not yet agreed
on the renewal terms of such contracts as of December 31, 2002 although the assets are still being used
by the Company. The Companys accrued rent and rent expense for the period from the expiration of the
lease to yearend were based on the expired contract. Following are the contracts which ended before
December 31, 2002 and the related rent expense per month:
Lessor
End of Lease Term
Rent Expense
Implication
The Companys accrual for lease obligations may not reflect the correct amount when compare to the
amount to be accrued based on the renewed lease agreements. Taxes due may also be understated.
Recommendation
The Company should keep a log for all its contracts. These should be monitored for compliance with
terms and expiration. Further, any taxes due will have to be accrued and remitted.
Assess Reasonableness of Allocation of Rent, Utilities, Accounting

and Administration Expenses from Affiliates
Comment
The Company and three of its affiliates share office space as well as accounting and administration
services. Sharing and allocation of expenses are not covered by any written contract between the
affiliates. A fixed monthly billing is sent to the Company by one of its affiliate for its share in the
expenses incurred during the month. On the other hand, the two other subsidiaries do not bill the
company for such common costs.
Implication
The Company may be questioned by the BIR for its bases for allocation of expenses.
- 60 Recommendation
The Company should consider formalizing such cost sharing agreements. In doing so, it should
consider benchmarks or references which may be referred to by the BIR when reviewing reasonableness
of transfer pricing.
Ensure Adequacy of Insurance Coverage of Assets

Comment
Our examination of the Companys insurance policy revealed that the Company is maintaining an
insurance coverage of P20 million yearly, for its entire property and equipment. However, the net book
value of property and equipment is increasing from year to year, from P20 million in 2000 to
P30 million in 2001 and P40 million in 2002, thereby creating an insurance inadequacy. In addition, the
carrying value of the Companys inventories as of December 31, 2002 amounted to P15 million which
are not covered by the Companys insurance policies.
Implication
The Company may be exposed to a loss contingency due to inadequate insurance of property and
equipment and inventories.
Recommendation
The Company should consider the current fair market value of its property and equipment before
renewing its insurance coverage yearly to ensure that the insurance policy covers the current amount of
its property and equipment and inventories as well.
Proper Classification of Deposits

Comment
In 2002, the Company deposited P20 million for the purchase of _____ equipment. Delivery of such
machine will be in 2003. The Company classified the deposit as other current assets.
Implication
There is a question on appropriateness of such classification.
- 61 Recommendation
Since such deposit was made specifically for the acquisition of a long-term asset, it is more appropriate
to classify such asset as long-term.
Proper Monitoring of Prepaid Lease

Comment
As of December 31, 2002, the Company has an outstanding prepaid lease balance of ______. The lease
contract provides that the prepaid portion is for the period ended September 30, 2002. Thus, the
remaining balance should have been expensed out in 2002. An adjustment at yearend was made to
charge to expense said balance.
Implication
The Company may not be able to spread the effect of prepaid lease on the proper period it should have
been charged. Lease expense will be understated and other current assets overstated at yearend.
Recommendation
The Company should regularly monitor its amortization schedule of prepaid lease in order that lease
expense will be charged on the proper periods and to avoid numerous adjustments at yearend.
Recognize Accumulated Equity in Net Losses of Subsidiaries, Associates

and Joint Ventures in Excess of the Related Cost of Investments and Advances
Comment
The Company does not take up its share in net losses of subsidiaries, associates and joint ventures in
excess of the related cost of investments and advances. Total unbooked accumulated equity in net
losses of subsidiaries, associates and joint ventures in excess of the related cost of investments and
advances as of December 31, 2002 is as follows:
Investee
Subsidiary:
Associate:
Joint venture:
Amount
- 62 -
SFAS 28/IAS 28, Accounting for Investments in Associates, provides that under the equity method,
the investment is initially recorded at cost and the carrying amount is increased or decreased to
recognize the investors share of the profits or losses of the investee after the date of the acquisition.
Further, paragraph 22 provides that if under the equity method, an investors share of losses of an
associate equals or exceeds the carrying amount of an investment, the investor ordinarily discontinues
including its share of further net losses. The investment is reported at nil value. Additional losses are
provided for to the extent that the investor has incurred obligations or made payments on behalf of the
associate to satisfy obligations of the associate that the investor has guaranteed or otherwise
committed.
Implication
The interim financial statements circulated to third-parties- may not reflect the accurate financial
position and results of operations mainly due to:
Overstatement of net income (or Understatement of net loss)

Overstatement of assets (if applicable)
Overstatement of retained earnings (or Understatement of deficit)
Understatement of liabilities.
Recommendation
We suggest the Company review the provisions of SFAS 28/IAS28, determine any special arrangements
with subsidiaries, joint ventures or affiliates which effectively commits the Company to support such
entities beyond its share in net losses and adjust its books, where appropriate.
Recognize the Share of the Minority Interest in the Equity in Net Losses of
(indicate the name of the subsidiary)
Comment
The Company did not recognize the share of the minority interest in the equity in net losses of (indicate
the name of the subsidiary)
SFAS 27/IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries
provides that the losses applicable to the minority in a consolidated subsidiary may exceed the minority
interest in the equity of the subsidiary. The excess, and any further losses applicable to the minority, are
charged against the majority interest except to the extent that the minority interest has a binding
obligation to, and is able to, make good the losses.
Implication
The interim financial statements circulated to third-parties- may not reflect the accurate financial
position and results of operations mainly due to:
- 63
Overstatement of net income (or Understatement of net loss)

Overstatement of assets (if applicable)
Overstatement of retained earnings (or Understatement of deficit)
Understatement of liabilities.
Recommendation
In general, where the minority interest results in a debit balance on consolidation, this is recorded as
additional losses of the Company. We suggest that the Company review the provisions of
SFAS 28/IAS 28 and determine any special arrangements with subsidiaries, joint ventures or affiliates
which effectively commits the Company to support such entities beyond its share in net losses and adjust
its books, where appropriate.
Subject Equity in Net Income of (indicate the name of the subsidiary) to Deferred Income Tax
Comment
Deferred income tax was not calculated for the Companys share in the net income of (indicate the
name of the subsidiary), incorporated in (indicate the country of incorporation).
The Companys accumulated equity in net income of (name of foreign subsidiary or investee) will be
repatriated in the future through dividends. In accordance with the RP - (indicate the country of
incorporation of the foreign subsidiary), dividend income declared by (indicate the name of the
subsidiary) should be subject to (indicate appropriate tax rate). Accordingly, any share in the (indicate
the name of the subsidiary)s net income should be subject to the same tax rate under the liability
method of accounting for deferred income tax. Such situation is different from that of a domestic
corporation because intercorporate dividends between domestic entities are not subject to tax.
An adjusting entry was recorded at yearend to correct the tax treatment of the Companys share in the
net income of (indicate the name of the subsidiary).
Implication
The current practice results to misstatement of deferred tax balance.
Recommendation
The Company should recognize the deferred tax liability related to the Companys share in the net
income of (indicate the name of the subsidiary).
- 64 PROPERTY, PLANT AND EQUIPMENT

Prepare Rollforward of Property, Plant and Equipment Accounts
Comment
The Company does not prepare a detailed lapsing schedule of its property and equipment.
Costs, related accumulated depreciation and additions as well as gains or losses from disposal
of property and equipment can be easily identified.
Also SFAS/IAS 16, which took effect in 2002, requires disclosure of the additions and
disposals of cost and accumulated depreciation of property and equipment.
Implications
Financial data such as details of accumulated depreciation are part of the framework on which business
decisions and regulatory compliance are based. It is essential for the Company to maintain timely and
relevant information because the absence of such information means additional costs and time to be
incurred for the reconstruction of related balances.
Recommendations
The Company needs to review their recording of transactions related to property, plant and equipment.
The existing worksheet and system need to be modified to track information relating to additions,
disposals, transfers, reclassification of cost and related accumulated depreciation and amortization. A
risk owner needs to be identified to assume responsibility for addressing such concerns
Equipment Not Subjected to Real Property Tax (RPT)

Comment
The Company did not subject to RPT operating property and equipment in its _____________
facilities.
Implication
Under Section 232 of the LGC, a province or city within the Metropolitan Manila Area may levy an
annual ad valorem tax on real property such as land, building machinery and other equipment not
specifically exempted under this section.
Moreover, machinery subject to real property tax is defined under Section 198 (o) of the LGC as
machines, equipment , mechanical contrivances, instruments, appliances or apparatus which may or
may not be attached, permanently or temporarily, to real property. It includes the physical facilities for
production, the installation and appurtenant service, facilities, those which are mobile, self-powered, or
self propelled, and those not permanently attached to the real property which are actually, directly, and
exclusively used to meet the needs of the particular industry, business or activity and which by their
- 65 very nature and purpose are designed for, or necessary to its manufacturing, mining, industrial or
agricultural purposes.
There is a risk that the field equipment owned by the Company may be considered as real property
subject to real property tax since the said equipment are necessary to the operation of its business.
Hence, the Company may be exposed to deficiency RPT including surcharges and interest.
Recommendation
We suggest that the Company calculates its exposure related to the foregoing and consider filing its RPT
returns. A compromise may be agreed with the local government. Moving forwards, we suggest a
compliance review may be conducted to ascertain payment of the appropriate tax.
Physical Usage of Assets vs. Title to Asset

Comments
The ownership of the building and machineries included under Property, Plant and Equipment account
of the Company belongs to Y Company, an affiliate. Although this are being used by the Company.
Depreciation related to such equipment is recorded and take as tax deduction by the Company.
Implication
Based on the foregoing issue, there is a risk that the Bureau of Internal Revenue may disallow (BIR)
depreciation expense claimed by the Company, and, if disallowed, may result in future deficiency tax
liability including surcharge and interest. The BIR may also consider the above-mentioned situation as
a possible imputation of income, thus the applicable tax code will apply.
Recommendation
Management should settle the issue of ownership and usage of such assets. The following may be
undertaken:
Execute Deed of Assignment or Deed of Sale to effect transfer to the appropriate party.
Have a lease arrangement between affiliates.
Record depreciation based on asset ownership.
- 66 Capitalized Forex
Comment
As of December 31, 2002, undepreciated capitalized losses included in property and equipment amount
to P000 million. SFAS/IAS 21 which will be effective in 2005 states that Exchange differences arising
on the settlement of monetary items or on reporting an enterprises monetary items at rates different
from those at which they were initially recorded during the period, or reported in previous financial
statements, should be recognized as income or as expenses in the period in which they arise.
On the first occasion that the Company applies SFAS/IAS 21, the Company should, except when the
amount is not reasonably determinable, classify separately and disclose the cumulative balance, at the
beginning of the period, of exchange differences deferred and classified as equity in previous periods.
Implication
The Company is required to comply with SFAS No. 21. Failure to comply with the provisions of the
standard would mean a deviation from accounting principles generally accepted in the Philippines.
Recommendation
We suggest that the Company consider the following in light of the effectivity of SFAS/IAS 21 in 2005.
Identify the portion of the unrealized capitalized foreign exchange loss, which may be considered as
borrowing costs and therefore capitalizable.
Discuss with the Board member plans to declare dividends out of retained earnings in light of the
impact of any unamortized foreign exchange loss which will be charged off against the beginning
balance of retained earnings in 2005.
Required Capitalized Interest - If SFAS on Borrowing Costs Adopted

Comment
The Company adopted the provisions of SFAS/IAS 23, Borrowing costs during the construction of its
plant in Davao. This standard states that borrowing costs, including exchange differences arising from
foreign currency-denominated borrowings to the extent they are regarded as an adjustment to interest
costs, are capitalized if they are directly attributable to the acquisition or construction of a qualifying
asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in
progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized
until the assets are substantially ready for their intended use. However, borrowing costs amounting to
P_______ incurred by the Company for the construction of its Cebu plant was charged to operations
and was not capitalized as part of the cost of the related asset.
- 67 Implication
This resulted in an understatement of the cost of property, plant and equipment and of the overall net
income of the Company.
Recommendation
We suggest that the Company update its policy/manual to reflect the principles of the new SFAS/IAS.
Application of accounting standards should be consistent across the Company and plant.
Capitalization Policy
Comment
The Company has no defined capitalization policy on its property and equipment. Some items with
immaterial acquisition cost (e.g. P500) that can be recorded as outright expense were still capitalized as
part of Companys fixed assets.
Implications
Maintenance of accounting records becomes tedious and time consuming without necessarily adding
significant value to the Companys operations and financial results.
Recommendation
The Company has to review and define its capitalization policy with the view of attaining an optimum
level of administration cost. The capitalization decision should consider other factors such as the
materiality of the expenditure, the property unit used or the length of the period to be benefited.
Normally, one capitalization policy on property and equipment acquisitions to set up a minimum cost of
items acquired, which could be capitalized. This policy would facilitate easier procedure in determining
which among the assets purchased can be capitalized.
Conduct Physical Count of All Existing Property and Equipment

Comment
The Company does not conduct physical inspection of all its existing property and equipment. As a
result, existence of property and equipment is not ascertained.
- 68 Implications
Failure to properly track fixed assets can result in tax reporting errors, potential audit liabilities, lost
depreciation credits, and underused or nonperforming assets.
A key principle of asset management is that an asset cannot be managed and its associated costs cannot
be controlled if there is no indication that the asset exists. Timely and accurate tracking results in more
effective management of acquisition, forecasting, and maintenance activities, as well as enhancing the
Companys ability to trade, shift, or dispose of assets at the optimal time.
Recommendation
We recommend that the Company require a regular ocular inspection of property and equipment.
Periodic ocular inspection of property and equipment not only provide assurance on the existence of the
Companys assets, but also information on the current condition of the asset. This information is
important in assessing the effectiveness of the Companys Preventive Maintenance Program, as well as
in making decisions as to insurance coverage to be taken on the assets.
Results of the ocular inspection should be reconciled with the detailed property records (property
lapsing schedule). For easy matching, a property identification number should be assigned and affixed
to each asset, which identification numbers are also included in the detailed property records. Given the
number of Company assets, consideration should be made to automating the property lapsing schedule,
and allow for an electronic matching of count results and records.
Delay in Closing of Construction In Progress (CIP) Accounts

Comment
Costs included under CIP, amounting to P___ billion, remained outstanding for more than ___ to ___
years. There is no policy to monitor, identify or track completion or abandonment of such CIP.
Implication
Delay in the closing of CIP balances would result in an understatement of the related depreciation
expense and improper classification of accounts.
Recommendation
The Facilities Group, being the owner of CIP projects and the Accounting Department should coordinate
charges accumulated in the CIP accounts. There should be a policy on evaluating progress of all CIP
based on the age of the project. Effectively, after a certain period, such project should either be closed
or completed.
- 69 Identify Impaired Fixed Assets and Reassess Recoverability of Carrying Values

Comment
As of ______, the carrying value of the Companys property, plant, and equipment amounted to ____.
Over the years, the following are the operating conditions:
Capacity _______ of ___%

Downturn in the ______ industry
Decline in sales
Increasing costs
Declining margin
Recurring losses
The foregoing may indicate possible impairment of assets.

Implications
Starting January 1, 2002, the Company is required to assess if there are any indication of asset
impairment. Total assets of the X Company is composed mainly of fixed assets. As of December 31,
2002, ____% of its total assets is composed of property, plant and equipment. Failure to identify
impaired assets and reassess its recoverable amount will significantly misstate the Companys financial
statements.
Recommendations
We recommend that the Company regularly assess conditions indicating possible impairment. If any
such indication exists, the Company should estimate the recoverable amount of the asset. Based on the
provisions of SFAS/IAS 36, the following conditions should be reviewed:
External sources of information
significant decline of the asset market value;
significant changes have taken place and have an adverse effect on the enterprise;
market interest rates or other market rates of return on investments have increased; and
significant decline in budgeted net cash flows or operating profit, among others.
Internal sources of information
Evidence is available of obsolescence or physical damage of an asset;

Significant changes with an adverse effect on the enterprise have taken place during the period,
or are expected to take place in the near future, in the extent to which, or manner in which, an asset
is used or is expected to be used. These changes include plans to discontinue or restructure the
operation to which an asset belongs or to dispose of an asset before the previously expected date;
and
- 70
Evidence is available from internal reporting that indicates that the economic performance of
an asset is, or will be, worse than expected.
SFAS/IAS 36 requires an impairment loss to be recognized (an asset is impaired) whenever the carrying
amount of an asset exceeds its recoverable amount. An impairment loss should be recognized in the
income statement for assets carried at cost and treated as a revaluation decrease for assets carried at
revalued amount.
Segregate Non-operating Assets Classified Under Operating Assets

Comments
The detailed schedule of property and equipment account of the Company includes the following nonoperating assets as identified by ______.
Asset
Amount
Implication
Failure to identify, which items are operating, and non-operating can lead to confusion and improper
classification in the end especially during preparation of financial statements, and it may also raise
questions from the BIR since the following items may be subjected to real property tax.
Recommendations
Operating and non-operating assets should be identified and classified separately. The
Production/Facilities department should be tasked with responsibility of identifying such asset and
informing the accounting department. We also suggest that to the extent possible, non-operating assets
should be physically segregated/assigned a distinct code. For monitoring purposes, this should be
tagged in the system and accounted for separately.
Review of Life Of Assets

Comment
The Company made major enhancements/repairs on some of its existing machinery and equipment.
Based on engineering estimates certified by _________, the major enhancements and repairs effectively
extend the original life of the assets, thus, the depreciable life need to be revised. However, the
- 71 Company has not yet adopted accounting policies and procedures regarding revision of estimated life of
assets.
Recommendation
The useful life of property, plant and equipment should be reviewed periodically according to the
provisions of SFAS/IAS 16 require that, if expectations are significantly different from previous
estimates, the depreciation charge for the current and future periods should be adjusted. During the life
of an asset, it may become apparent that the estimate of the useful life is inappropriate, the useful life,
and, therefore the depreciation rate is adjusted for the current and future periods. On the other hand if
there are major repairs that will enhance the asset, the policy may result in an extension of the useful life
of the asset or an increase in the residual value.
We suggest that management consider the above in formulating its accounting policies and procedures
regarding revisions in estimated life of machinery and equipment.
Adoption of Uniform Life of Asset Across Group of Companies

Comment
The Parent Company and its subsidiaries use the following estimated useful lives in depreciating their
property, plant and equipment. The useful lives of property, plant and equipment used by the Company
is presented below.
Parent Company
Estimated Useful Lives

Subsidiary A
Subsidiary B
Subsidiary C
Machinery and
equipment
Transportation
equipment
Office furniture and
fixtures
Implications
The Company is required to comply with SFAS No. 27 and 16. Failure to comply with the
provisions of the standard would mean a deviation from accounting principles generally accepted in the
Philippines.
Recommendation
SFAS/IAS 27 requires adoption of uniform accounting policies for like transactions and other events in
other circumstances. We suggest that the Company also consider the following:
Create a project group consisting of the accounting and engineering personnel of the different
related companies to evaluate and compare the useful lives of assets.
- 72
Gather industry information with respect to estimated useful life of similar assets.
Recommend uniform estimated useful life.
Compute the impact of any change in useful life to be adopted.
OTHER ASSETS
Evaluation of Impairment Under SFAS/IAS 38
Comment
SFAS/IAS 38, Intangible Assets, establishes the criteria for the recognition and measurement of
intangible assets. This new standard also requires that expenditures on research and development, startup, training and advertising and relocation be expensed as incurred.
The Companys other assets account consist of the following:
Deferred costs
representing cost incurred in the planned cassava plant project, which

to date has not yet started operations. Total costs deferred as of
December 31, 2002 amounted to P___________.
Preoperating expenses
representing unamortized costs incurred during start-up of the

Company.
Paragraph ____ of SFAS/IAS requires the foregoing expenses to be charged off retroactively against
beginning retained earnings in 2003.
Implication
Noncompliance with the provisions of SFAS/IAS 38 is considered departure from Philippine generally
accepted accounting principles. Further, this results in misstatement of financial statements.
Recommendation
We suggest the Company reviews the provisions of SFAS/IAS 38 and considers the implications of the
unamortized balances of deferred costs and preoperating expenses on its 2003 financial statements.
- 73 Evaluation of Impairment of Investments

Comment
The Company has the following investments as of December 31, 2002:
Proprietary club shares
- representing acquisition costs of club shares assigned to expatriates

and officers entitled to such benefits. As of December 31, 2002, a
total of _____shares are held with carrying costs of
P_____________. The market value of such shares as of
December 31, 2002 was P__________.
Shares of stock
- representing acquisition costs of shares of non-traded equity

securities,. Specifically, this includes investments in (name of
company). Based on the (latest) audited financial statements of (name
of company), the net book value of (company) is P______. The
carrying value of such investment is P________ as of December 31,
2002. The foregoing indicates possible impairment in value.
Real estate
- representing costs of investments in raw land in (location),

condominium property in (location or name of development). As of
December 31, 2002, the carrying value of such real properties is
P______ compared to the market value of P_______.
SFAS/IAS _____ requires the regular review of such assets for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. Provision for impairment
losses is recognized when any such amount is determined.
Implications
Assets not evaluated for impairment results in overstatement of such balances.
Recommendation
We suggest that long-lived assets be reviewed regularly for impairment in conformity with SFAS/IAS
_____.
Determine Existence of Recorded Assets

Comment
As of December 31, 2002, the Company had the following recorded under the other assets account:
- 74 Balance as of
December 31,
2003
Other Asset
Nature of Asset
Utility deposits
___-month deposits for _______
Advances to (name of officer)
Loans granted to certain officers which are subject

to salary deductions
Advances to (company)
Loans to (company), the balance of which has been

outstanding since _______
Deposits for purchases
___% deposit for the purchase of ________, the

item of which has been received and installed for
operations since _____
Retentions receivable
___% retention for the completed construction of

____ project, which is being held by customer until
_______. A final certificate of completeness has
been issued to the company since _______
Implication
The other assets account consists of assets, which may no longer exist. This indicates that assets are
overstated by P_________.
Recommendation
We suggest that the designated accounting personnel we assigned to investigate such items and identify
which among the foregoing assets are still recoverable. An adjustment should be made accordingly.
Evaluate Deferred Income Tax Assets

Comment
It is the practice of the Company that deferred tax assets and liabilities are identified only yearend
during the closing audit. Further, the recoverability of such assets is evaluated at such time as well. We
understand from (accounting or finance person and designation) that there is no one in the Accounting
(or finance, where appropriate) Department who is designated with the task of computing income tax
provision for the year. Further, only a select number of personnel in accounting is familiar with the
concept of deferred income tax. Following are the deferred tax items of the Company:
Deferred Tax Assets
Current
Noncurrent
Deferred Tax Liabilities

Current
Noncurrent
- 75 -
Implication
Identification and monitoring of deferred tax assets and liabilities allows the determination of the
appropriate tax reconciling items. Reversals and set-up of the deferred tax items also have impact on
the financial statement figures.
Recommendation
We suggest that the Company designates someone in the Accounting/Finance department to familiarize
with the concepts of deferred income tax. Should reading the provisions of SFAS not be adequate, we
suggest that such personnel be allowed to attend sessions on DIT. Alternatively, a customized session
may be developed by knowledge providers for the Company.
Ideally, income tax calculation and identification of deferred tax asset and liability items should be done
as often as books are closed.
Discontinue Use of Clearing Accounts

Comment
We noted that the Company records transactions with inade
LIABILITIES
Establish a Retirement Fund for Company Employees
Comment
Under Republic Act No. 7641 or the New Retirement Law, companies are required to provide
employees, upon reaching their retirement age, with retirement benefits that they have earned in
accordance with Philippine laws and any collective bargaining agreements. In the absence of a
retirement plan or agreement, retirement pay equivalent to at least one-half months salary for every
year of service, a fraction of at least six (6) months being considered as one whole year, is due the
retiring employee. This Law shall apply to all employees in private sector, regardless of their position,
designation or status and irrespective of the method by which their wages are paid.
The Company has been in operations since _____________. It has however not accrued for retirement
benefits for the services rendered by its employees for the year ended December 31, 2002. We
understand that the Company has taken the position that as of the year ended December 31, 2002, the
retirement benefits that the Company must accrue is not yet material since the Company has been in
operations only beginning ___________. Correspondingly, our opinion on the December 31, 2002
financials did not include an exception for the non-provision of retirement benefits charged for the year.
However, the continued growth of the Company is expected to be accompanied by an increase in
- 76 number of its employees, and correspondingly the amount of retirement benefits to be recognized for
each reporting period.
Implications
The cost to the Company of providing retirement benefits rises as the employees who will be entitled to
such benefits accumulate service time. Consequently, the non-accrual of retirement benefits when such
services are rendered results in a misstatement of the compensation expense for the period.
Recommendations
The Company should consider the provisions of SFAS 24, Retirement Benefit Cost on accrual of
retirement benefits. The amount of retirement benefits expense for the period is computed actuarially
based on accepted valuation methods provided under SFAS 24. These methods reflect service both
rendered and to be rendered by employees to the date of valuation, and spread the cost evenly over the
periods of service making up the expected remaining working lives of participating employees. The
actuarial valuation should be performed in regular intervals, with acceptable lag of up to three (3) years
or earlier, if there are significant changes either in the membership (employee number) or benefits
granted.
Furthermore, to secure the employees interest on their retirement benefits, the Company should consider
setting up a formal retirement fund for its employees. The Company should consider registration of any
formal plan set up with the Bureau of Internal Revenue to enable the company to avail of early
deduction of contributions to a funded and tax qualified plan, provide tax exemptions for benefits paid
out of the plan funds, exemption from final withholding taxes of interest earnings of fund assets, and
other tax privileges granted a tax qualified plan.
Establish a BIR-Qualified Retirement Plan

Comment
The Company does not have a BIR-qualified retirement plan for all its regular employees and officers.
It has however recognized in the books an estimated retirement liability based on independent actuarial
computations (please specify the method used by the Company.
Implications
The Company is not able to maximize the benefits of a BIR-qualified retirement plan i.e attained age
actuarial method, projected units credit method and other accrued benefit valuation methods.
- 77 Recommendation
We suggest that the Company establish a BIR-qualified retirement plan for its employees. Among the
benefits that could be realized are:
Attract and retain good people. With keen competition for the best people, a comprehensive
benefits package -- including a retirement plan -- will give the Companyan edge in hiring and
retaining good people.
Improve morale. A retirement plan gives employees even more reason to remain committed to the
Company.
Gain significant tax advantages. The Company will be able to get immediate tax deduction of the
amount of normal cost contributed and 10% of the amount pertaining to past service costs each year
for 10 years.
Flexible. The Company has the option to reduce or defer contributions when the budget is tight.
The Company may also consider the establishment of a BIR-qualified retirement plan in its tax planning
strategy. The Company can obtain external assistance if requested to evaluate the different options
available when establishing such a plan.
Update Actuarial Valuation of the Retirement Fund for Company Employees

Comment
The last actuarial valuation report on the Companys retirement fund was prepared on ________.
Implications
The uncertainty inherent in projecting future trends in rates of inflation, salary levels and earnings on
investments is taken into consideration in the actuarial valuations by using a set of compatible
assumptions. These assumptions, which are used in determining the cost to the employer of providing
retirement benefits, are based on long-term considerations. If the assumptions are wrong or outdated,
the retirement expense recorded in the books may be misstated.
Recommendations
Statement of Financial Accounting Standards No. 26 Retirement Costs provides that actuarial
valuations should be updated at least once every three years.
We recommend that a new actuarial valuation of the retirement fund be obtained.
- 78 Fund the Retirement Plan

Comment
The Company has tax-qualified retirement plan. Based on the latest actuarial valuation of the Company
dated December 31, 2002, the unfunded past service liability of the fund amounted to
P_______. During the year, total provision for income tax amounted to P_____. The Company has
always been in a tax-paying position.
Implications
By not funding the retirement trust fund, the Company exposes itself to the risk of unplanned
low/negative cash position at a time when retirements are high and collections are low or when the
Company plans to use its cash for other transactions like capital acquisitions. In addition, unfunded
retirement cost charged to operations are non-tax deductible until the Company funds the same, and only
to the extent of 10% a year over a period of 10 consecutive years beginning in the year the funding is
made.
Recommendations
The Company should consider funding its retirement trust fund to the extent of its normal cost and a
portion of its past service cost as part of its cash and tax planning measures. Funding the retirement
fund allows the Company the flexibility to disburse the money only when the Company has a high cash
position, as well as take advantage of its tax deductibility when the Company has a high taxable income
position.
Develop and Implement Tax Planning

Comment
The Company does not practice formal tax planning. At present, tax strategies are determined at yearend and the process, therefore, is more reactive rather than proactive. To realize the full rewards of
operational efficiency, e.g. increasing revenues and net income, management should perform tax
planning.
Implications
Some of the possible effects of no formal tax planning are:
Business transactions are not structured in such a way that the Company is subjected to the
minimum amount of tax liability and still account for transactions in such a manner that sound
business decisions are made;
Transactions are not documented in a manner that will minimize unfavorable tax exposures;
and,
- 79
The most favorable application of tax law based on all the facts underlying a particular
business transaction may not be achieved.
Recommendation
The following actions should be taken:
Review the tax consequences of transactions prior to the consummation.
Review the Companys current and long-range tax plan in the light of new developments or
proposed tax legislation prior to the end of each taxable year.
Conduct tax compliance reviews. Any findings and recommendations can be shared with the other
affiliates, thus minimizing costs. Areas that can be covered are value-added tax and withholding
taxes, among others.
We suggest that the above responsibilities be included in the financial planning function to:
Minimize tax costs;
Forecast tax cash requirements;
Consider tax implications of acquisitions;
Be able to prepare returns timely; and
Coordinate accounting and reporting systems with tax requirements.
Income tax planning is essential if the owners of the business and those in-charge with its management
are to realize the full rewards of operational efficiency.
Stamp Paid Check Vouchers and Other Supporting Documents

Comment
There were check vouchers and other supporting documents not stamped as paid. Following is a
summary of samples reviewed:
Implications
Check vouchers and other supporting documents not stamped as paid may be presented or
inadvertently processed for payment again.
Recommendations
The Company should cancel all check vouchers and other supporting documents by stamping these as
paid to avoid possible double payment. This policy should be included in the Companys Accounting
Policy and Procedures Manual.
Consider Buying Tax Credit Certificates

Comment
The Company is in a tax position and has no net operating carryover or minimum corporate income tax,
which it can use to reduce its tax due.
Implications
Buying of tax credit certificates can reduce the Companys cash outlay for its tax liability.
Recommendations
The Company should consider cash and tax planning options to effectively reduce costs. Such options
include availing of benefits of tax credit certificates.
Interpret Bonus Computation. (Basically for Phinma Group)

Comment
Though the Company has contracts with its management and directors on payments of bonus, such
contracts were in place since ___________ and have not been modified to include developments in
accounting policies which may have impact on bonus calculation. Specifically, the treatment of other
adjustments from cost to equity method of accounting such as dividend income, gain or loss on dilution,
gain (loss) on capital stock transactions, etc. is not defined. The contract only states that the basis of
computation would be net income before effect of equity accounting and consolidation.
As a result of such ambiguity, there have been varying interpretations in prior years on to the treatment
of other adjustments from cost to equity method. Specifically, there was an instance where gain on
dilution was included in the bonus base and excluded in another period. Such varying treatments,
though, were pre-cleared with management and the directors.
Implication
The bonus computation may be subject to manipulation since there is no specific rule as to whether such
adjustments should be treated as part of bonus computation or not.
Recommendations
The intent of management and Board of Directors with respect to payment of such bonus under the
terms of the contract should be redefined and redocumented. Thereafter, it should amend the existing
contract through a Board resolution, if necessary.
Accrue Liability for Tax Assessments

Comment
The Company has tax assessments which it may already have to accrue as a liability based on the new
Statement of Financial Accounting Standard (SFAS) 37/International Accounting Standard (IAS) 37,
Provisions, Contingent Liabilities and Contingent Assets. Under SFAS/IAS 37 provisions are
liabilities of uncertain timing, and are recognized in the balance sheet when:
There is a present obligation (legal or constructive) as a result of a past event;
It is probable (i.e., more likely than not) that an outflow of resources will be required to settle the
obligation; and
A reliable estimate can be made.
Implication
Non-accrual of provision for tax assessments from the Bureau of Internal Revenue may result to
noncompliance with misstatement of the Companys liabilities.
Recommendation
Since tax assessments meet the three requirements mention above for accrual, the Company should
accrue its liability in its books.
Ensure Existence of Right of Offset for Receivables and Payables

Comment
The Company offset certain receivables from ______ with its related liability from the latter amounting
to P________ giving rise to a net receivable (payable) of P________. The details are as follows:
Entity
Amount Offset
Receivable From Payable
Implications
The Companys receivables and/or payables might be understated.
According to SFAS No. 3, Credit balances in accounts receivables, if significant, should be reclassified
as liabilities (as a separate account if material; otherwise, as part of accounts payable) unless these can
be properly offset against debit balances (as in instances where a customer normally offsets his credit
balances against payment on his purchases.
Based on this, the Company can only offset its receivables and payables if it is immaterial and when a
right of offset exists as when there is an agreement or when customer normally offsets his credit
balances as mentioned above.
Allocate Input Tax Between Registered and Non-Registered Activities

Comment
The Company has value added tax (VAT)-registered and VAT-exempt transactions. In its VAT return,
the Company does not allocate its input tax credits between its registered and non-registered
activities.Implications
The Companys application of input tax against output tax may be disallowed by the Bureau of Internal
Revenue and might be exposed to possible tax assessment.
Recommendations
According to National Internal Revenue Code section 110, A VAT-registered person who is also
engaged in transactions not subject VAT shall be allowed as tax credit as follows:
Total input tax which can be directly attributed to transactions subject to VAT;
A ratable portion of any input tax which cannot be directly attributed to either activity.
The amount of input tax to be allocated to VAT-registered activities is the ratio of the net revenue from
VAT-registered activities over the total net revenues from all activities multiplied by total input tax.
Also, the Company should monitor its revenues from registered and non-registered activities for proper
computation of the allocable portion of input tax to such activities as mentioned above.
Check Debit Balances In Accounts Payables

Comment
As of year-end, debit balances in payables aggregated to P____________, details of which are as
follows:
- 83 -
Creditor
Nature
Amount
Implication
The primary reasons of such debit balances are:
Payment to suppliers that is not yet recorded.
Keypunch errors
Payments debited to the wrong vendors account
Recommendation
We recommend that management conduct a thorough review of all debit balances and make necessary
adjustments. Thereafter, investigate and clear all debit balances from the detailed vendors accounts
payable file on a timely basis. In addition, the Companys EDP system should be revised to provide
separate detailed listings and summaries of all outstanding debit balances in order to facilitate the
periodic review of such balances.
Record All Reconciling Items Regularly

Comments
While reconciliation of intercompany accounts is prepared regularly, the reconciling items are not
disposed of on a timely basis. Consequently, certain reconciling items remain outstanding for an
extended period. We were informed that in most instances, nonrecording of reconciling items is due to
unavailability of the supporting documents.
Implication
Reconciling items which remain unresolved or unadjusted will result in misstated account balances.
Further, it makes preparation of future reconciliation statements more tedious.
Recommendation
We suggest that all intercompany reconciling items be disposed of and recorded in the proper accounting
period. As a policy, the burden of proof of the reconciling items should rest on the entity recording a
- 84 receivable. Thus, unless sufficient third party supporting documents are provided by such entity, the
difference should not be a disputed item.
Reconcile Intercompany Accounts

Comment
As in prior years, reconciliation of inter-company accounts are not performed on a regular basis.
Significant discrepancies were noted between balances of the companies involved. Following is a
summary of such differences:
Affiliate
As Recorded
As Recorded
in the
in the
Company Books Affiliates Books
Difference
Implications
The amounts disclosed in the notes to the financial statements of the Company and its affiliates would
be different and thus, may expose the Company to possible tax assessments for understatement of
revenues or overstatement of expenses as well as noncompliance with generally accepted accounting
principles. The financial statements of each of the entities are thus misstated.
Recommendation
Monthly reconciliation of intercompany accounts should be prepared. Any difference should be
communicated to and cleared with the accounting head of the concerned affiliated Companies. In
addition, a policy regarding issuance of debit or credit memos to affiliated companies before each month
end should be established and strictly implemented. The memos should contain adequate information as
to the nature of the transactions.
Review Accrual Procedures

Comment
Our examination of the accrual balances disclosed significant outstanding balances relating to paid
transactions. We noted that this is mainly due to the absence of specific procedures for reversal of the
accruals when check vouchers are prepared and upon settlement of the covering transaction. Exceptions
include double recording of (a) asset acquisitions; (b) recording of expenses upon accrual and upon
payment; or (c) set up of reserves for future expenses.
- 85 Implications
Accruals are prepared to properly account for the expense account and its related liability.
Overstatement of accruals will result to lower net income and misstated liability balances.
Recommendations
We recommend that the Company develop a formal procedure for the setting up and reversal of
accruals. A number of options may be considered:
Accruals to be taken only as working paper adjustments for the preparation of the monthly reports.
These, however, should be included as yearend adjustment when the books are closed and should be
reversed immediately at the start of the succeeding reporting period. Procedures for identification of
regular accruals and assessment of the adequacy of the accrual balance as of the reporting date
should be in place. Standard adjustments should be established to ensure complete capture in the
management and external reports.
Accruals must be recorded at the end of each reporting period with a corresponding reversing entry
for the succeeding period, where applicable.
Payment of Documentary Stamp Tax

Comment
The Company has not paid the documentary stamp tax due on stock subscriptions during the year.
Implications
Failure to file the return and pay the documentary stamp tax exposes the Company to civil penalties of
25% surcharge on the amount due and 20% interest per annum on the unpaid amount of tax.
Recommendation
Under Section 175 of the National Internal Revenue Code (NIRC), there shall be collected a
documentary stamp tax of two pesos (P2.00) on each two hundred pesos (P200.00), or fractional part
thereof, of the par value of such shares of stock, on every original issue of shares of stock by any
association, company, or corporation, whether on organization, reorganization or for any lawful
purpose. The Company, being liable to pay documentary stamp tax, should file a tax return and pay the
same in accordance with the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the BIR Commissioner.
An instrument, document or paper which is required by law to be stamped and which has been signed,
issued, accepted, or transferred without being duly stamped, shall not be recorded, nor shall it or any
copy thereof or any record of transfer of the same be admitted or used in evidence in any court until the
requisite stamp or stamps shall have been affixed thereto and cancelled (Section 201, NIRC).
- 86 The original issuance of shares of stock, instead of certificates of stock, is subject to the documentary
stamp tax. The documentary stamp tax accrues at the time the shares are issued since what is being
taxed is the privilege of issuing shares of stock.
The Corporate Secretary is accountable for such transactions and should inform the Company on its
responsibility to file a documentary stamp tax return as well as pay the same including any penalties
ascribed to it. Prompt action towards this matter is necessary to avert the accumulation of penalties.
Our tax professionals are ready to provide any assistance to the Companys Corporate Secretary in
addressing the mentioned tax risk.
Payment of Fringe Benefits Tax

Comment
Fringe benefits tax has yet to be paid by the Company for the fringe benefits paid to officers and
employees namely: (1) ____________, (2) _________________, and (3)_________________.
Implications
Failure to pay fringe benefits tax may expose the Company to surcharges and interests caused by the
delay of remittance.
Recommendation
Under R.A. 8424, fringe benefits tax is a final withholding tax at the rate of 32% effective January 1,
2000. The basis of the 32% tax rate is the grossed up monetary value of the fringe benefit furnished,
granted or paid by the employer to the employee, whether such employer is an individual, professional
partnership or a corporation, regardless of whether the corporation is taxable or not, or the government
and its instrumentalities.
The Company should therefore file a return and pay the same including the penalties ascribed to it.
Prompt action towards this matter is necessary to avert the accumulation of penalties.
Payment of Real Property Tax

Comment
There is no real property tax accrued in the books or paid during the year by the Company. All taxable
real property, shall be appraised at the current and fair market value prevailing in the locality where the
property is situated.
- 87 Implications
Failure to pay real property tax may expose the company to surcharges and interests caused by the
delay of remittance.
Recommendation
The Company should file a return and pay the same including the penalties ascribed to it. Prompt
action towards this matter is necessary to avert the accumulation of penalties.
Review Long Outstanding Liability to Shareholders/Related Party

Comment
The Company has loans from ______________, an affiliate, totaling P _________as of
_____________. Such balance remained outstanding since_________________.
Implication
The total liability may be misstated because the amount loaned from _____________ may have to be
treated as an additional investment.
Recommendation
The intent of such advances should be reviewed. Should there be no intent of paying back such loan,
the Company should consider documenting this as additional equity. Otherwise, intercompany advances
should be subject to interest.
Reconcile Account with Suppliers

Comment
The Company does not reconcile account with suppliers.
Following is the summary of unreconciled balances between suppliers and Companys books.
Name of Supplier
Amount
Amount
Recorded Per
Recorded Per
Supplier Books Companys Books
Difference
Over (Under)
- 88 Implications
Unreconciled account balances suggest that there may be transactions that were not completely and
accurately recorded.
Recommendations
The Company should prepare monthly reconciliation of account with suppliers. Differences should be
resolved and reconciling items should be disposed on a timely basis. The resolution of the differences
should be reviewed and approved by the finance officer / plant accounting manager. Moreover, to
expedite the reconciliation process in time for the monthly closing, we suggest that a standard form be
used, which clearly outlines the nature and amount of charges made.
Review Long-outstanding Liabilities

Comment
Of the Companys outstanding liabilities, P__________ represent balances from 2000 and prior years.
Implications
The current liabilities of the Company may be overstated on account of these long-outstanding
liabilities. The current ratio and working capital reflected in the Companys financial statements might
likewise be understated.
Recommendations
The Company should conduct an inventory of the outstanding valid liabilities of the Company and
update its books as appropriate. Recorded liabilities should be reviewed and assessed for existence as of
each cut-off date. Further, management should investigate the source of the liability build-up and
include policies to reverse excess accruals.
Accrue bonuses due to employees

Comment
Bonuses to employees are accrued based on instruction of ___________________. There is no defined
policy in place.
- 89 Implications
Failure to accrue bonuses would lead to misstated expense and liability accounts while undefined basis
for bonus computation would lead to inconsistent net income every year.
Recommendation
There should be defined policies for accrual of bonuses for employees. The bonus policy should be duly
approved by the Board of Directors.
Release of Mortgaged Real Properties

Comment
As of December 31, 2002 (or report date - whichever is applicable), the Company fully settled its
long-term debt (or indicate specific title of debt), to the ____ (name of bank or financial institution).
Based on the agreement covering such long-term debt (or indicate specific title of debt), real estate
properties (or specific property item) with book value of P_______ were used as collateral (or pledged
as security). We understand from __________(name and position of client personnel) that the title to
such real estate properties (or specific property item) remain/s with the ____ (name of bank or
financial institution) as of _____(report date), and annotation made on such document has not been
released nor cleared with the registry of deeds (or related agency).
Implication
The Companys documents supporting its ownership to its real properties (or specific property item)
may be subject to risk of loss or theft.
Recommendation
We suggest that the Company conduct a physical inspection of all titles/documents supporting
ownership to all its real and personal properties, and ascertain that only those used as collateral to
outstanding bank loans remain in the custody of the banks/financial institution. For those
titles/documents which remain with the banks but the corresponding loans have been fully settled
already, the treasury personnel should undertake the necessary actions for its release. Moving forward,
the Company should ensure that these titles/documents are monitored and updated regulary.
- 90 Disclosure of Assets Pledged as Collateral

Comment
As of December 31, 2002, following are the Companys bank liabilities and the corresponding
properties which were used as collaterals:
Bank or Financial Institution
Amount of
Outstanding Properties Used as
Loan
Collaterals
Carrying Value of
Properties
Used as
Collateral
The Company did not disclose in its December 31, 2002 financial statements the carrying value of its
properties used as collateral. Statement of Financial Accounting Standards No. 16, _____, requires
disclosure of the existence and amounts of restrictions on title, property, plant and equipment pledged as
security for liabilities.
Implication
The Company may be questioned by the Securities and Exchange Commission for incomplete disclosure
and noncompliance with the required regulations.
Recommendation
We suggest that the Company make full compliance with the SEC rules and accounting standards.
Monitoring of Compliance of Loan Covenants

Comment
The Company has several loan agreements which contain covenants with respect to maintenance of the
following financial ratios, etc (cite several covenants). We noted that there is no documented monitoring
of such covenants as well as testing of compliance of such covenants during the term of the loan.
Instead, this is only done at yearend for statutory reporting purposes. Consequently, it sometimes leaves
the Company no recourse when certain covenants are not complied with. As of December 31, 2002, the
(indicate covenants which have not been complied with) was not complied with. Further, as of the
release of is audited financial statements, there has been no waiver obtained from (name of creditor).
Implication
Potential noncompliance is not recognized and therefore not addressed before the year ends. The
Company may be cited in default, which makes its loans due and demandable.
- 91 Recommendation
We suggest that monitoring is done on a regular basis (ie monthly, quarterly) in order for the Company
to assess compliance of loan covenants throughout the year, and in order for the Company to address
any potential noncompliance before the year ends.
Investments in Preferred and Common Shares of Associates/Subsidiaries

Comment
The Company has ___% investments in the following associates/subsidiaries:
Name of associates/subsidiaries
Number of
common
shares
% of
interest
Number of
preferred
shares
% of
interest
The Company accounts for its investment in preferred shares of _____ (name of associate or
subsidiary) at cost, and the corresponding cumulative dividends accruing to such preferred shares are
deducted from net income (added to net loss) for purposes of equity accounting of its investment in
common shares of the same associate/subsidiary.
Implication
The Company may not be properly applying the generally accepted accounting principles (SFAS
Nos. 27 and 28) on its investments.
Recommendation
Based on the terms of the preferred shares subscription agreement, these preferred shares are subject to
the same right and privileges as the common shares. Therefore, the investment in the preferred shares
should be accounted for in the same manner as the investment in common shares.
- 92 REVENUE AND EXPENSES

Other Income Not Subjected to Value Added Tax (VAT)
Comment
Certain income items totaling to P_______ were not subjected to 10% VAT. This includes the
following:
Income
Sale of scrap materials
Amount
P
Section 105 of the National Internal Revenue Code (Code) provides the following: Any person who, in
the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services,
and any person who imports goods shall be subject to VAT imposed in section 106 to 108 of the Code.
The phrase in the course of trade or business means the regular conduct or pursuit of a commercial or
an economic activity, including transactions incidental thereto. Consequently, the foregoing income are
subject to VAT.
Implications
The Company has a possible tax exposure for nonpayment of 10% VAT on income derived from sale of
scrap materials if assessed by the Bureau of Internal Revenue (BIR) and may be required to pay not
only for the amount of VAT that should have been remitted but also for penalty, surcharge or interest on
nonpayment.
Recommendations
All income generated by the Company, operating or otherwise, unless these are generated as part of the
PEZA registered activity is subject to VAT.
Income Derived from Unregistered Activity of Philippine Economic Zone Authority (PEZA)
Registered Companies Not Subjected to Normal Corporate Income Tax
Comment
Income derived from sources other than those from the registered activity of the Company entitled to
income tax holiday (ITH) was not subjected to the normal income tax rate of 32%.
Implications
The Company has a possible tax exposure for nonpayment of tax pertaining to income derived from
activity not registered with the PEZA if assessed by the BIR and may be required to pay not only for the
amount of tax that should have been paid but also for penalty, surcharge or interest for nonpayment.
All income generated by the Company, operating or otherwise, unless these are generated as part of the
PEZA registered activity is subject to VAT and normal corporate income tax.
Payment of Local Business Taxes

Comment
Business permit due for the year 2002 was not paid. Under the Local Government Code of the
Philippines, the tax period for all local taxes, fees and charges shall be the calendar year. All local taxes,
fees and charges shall be paid within the first twenty days of January or of each subsequent quarter, if
local taxes, fees and charges are paid in quarterly installment.
Implications
The Company has a possible tax exposure for nonpayment of local business taxes aside from possible
surcharge, penalty and interest related to it if assessed by the municipality of _________.
Recommendations
To avoid potential tax exposure, the Company should pay local business taxes due. Based on the Local
Government Ordinance for the Municipality of _____________,
Business permit is assessed based on ____________. Such amount is payable every______. We
suggest the Company complies.
Accrual of Documentary Stamp Tax

Comment
The Company has not accrued or paid documentary stamp tax on all new stock subscriptions during the
year.
Please consider the new BIR interpretations/ rulings that points to the date of the subscription (even
without full payment) as the point for the payment of the DST.
Implications
[Enter implications here.]
- 94 Recommendation
Under Section 175 of the National Internal Revenue Code (NIRC), there shall be collected a
documentary stamp tax of two pesos (P2.00) on each two hundred pesos (P200.00), or fractional part
thereof, of the par value of such shares of stock, on every original issue of shares of stock by any
association, company, or corporation, whether on organization, reorganization or for any lawful
purpose. The Company, being liable to pay documentary stamp tax, should file a tax return and pay the
same in accordance with the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the BIR Commissioner. Failure to file the return and pay the documentary stamp
tax exposes the Company to civil penalties of 25% surcharge on the amount due and 20% interest per
annum on the unpaid amount of tax.
An instrument, document or paper which is required by law to be stamped and which has been signed,
issued, accepted, or transferred without being duly stamped, shall not be recorded, nor shall it or any
copy thereof or any record of transfer of the same be admitted or used in evidence in any court until the
requisite stamp or stamps shall have been affixed thereto and cancelled (Section 201, NIRC).
The Corporate Secretary in coordination with the Accounting Department should determine the amount
of DST due and related exposure. A documentary stamp tax return should be filed with the
corresponding tax and any penalties settled. Our tax professionals are ready to provide any assistance
to the Companys corporate secretary in addressing the mentioned tax risk.
Unsupported Business Expenses

Comment
Certain expenses recorded in the books and taken as tax deductions are not adequately supported.
Following are samples reviewed:
Check Voucher #
Expense/Charge
Amount
Only check vouchers were on file. We were informed that the only supporting documents are
acknowledged vouchers.
Implications
Expenses reported by the Company for statutory purposes might be disallowed by the BIR if these
expenses are found unsubstantiated by sufficient evidence. These expenses might require the Company
to deficiency income tax together with the related surcharge, penalty and interest if assessed by the BIR.
In addition, this poses internal control issues since the funds are disbursed without adequate supporting
documents.
Section 34 of the National Internal Revenue Code (Code) provides that, no deduction from gross
income shall be allowed unless the taxpayer shall substantiate with sufficient evidence such as official
receipts or other adequate records the amount of expense being deducted or the direct connection or
relation of the expense being deducted to the development, management, operation and/or conduct of the
trade, business or profession of the taxpayer.
We suggest the Company revisits its disbursement practices. Policies should be in place requiring
sufficient supporting documents before check vouchers are processed for payments.
Conduct Related-Party Transactions at Arms Length

Comment
The Company grants advances to certain of its subsidiaries and affiliates. Interest may or may not be
charged on such advances. When an interest is charged, this ranged from __% to __% in 2002 while the
average prevailing interest rate is __%.
Implications
The BIR has recently placed emphasis on reviewing related-party transactions. The BIR usually
reviews intercompany advances which are non-interest bearing or those that bear interest at preferred
rates.
In this regard, there is a risk that the BIR may impute interest income at current rates on such advances
to more closely reflect the income of the Company as provided under Section 50 of the Tax Code. Thus,
the Companys taxable income may increase as a result of the imputed income, which may result in
additional income tax liability.
arms length interest rate for the use of such loan or advance. Under RMO No. 63-99, for purposes of
determining the arms length rate in domestic transactions, the interest rate to be used is the Bank
Reference Rate prescribed by the Bangko Sentral ng Pilipinas.
Furthermore, income imputed by the BIR can also give rise to deficiency withholding and output taxes.
Recommendations
The Company should review its transactions with related parties to manage potential income that may
be imputed by the BIR on such transactions. Due consideration should be given to tax efficiency
measures to reduce its exposure to potential income, withholding and output taxes.
Evaluate Effect of the New Revenue Regulation on Representation Expenses

Comment
The BIR has come out with Revenue Regulation (RR) No. 10-2002, Authorizing the Imposition of a
Ceiling on Entertainment, Amusement and Recreational (EAR) Expenses. The salient points of the RR
are as follows:
In the case of a seller of goods, the amount of EAR expenses that will be allowed as deduction shall
not exceed 0.5% of gross sales (i.e., presented as the top line in the income statement). In the case
of a seller of services, the deductible EAR expenses shall not exceed 1.00% of gross revenue.
The ceiling will apply to individuals engaged in business or in the practice of profession, domestic
and resident corporations, and general professional partnerships including their partners/members.
EAR expenses will include representation expenses and entertainment facilities as defined in the
RR.
However, EAR expenses exclude, among others, those which are treated as compensation or fringe
benefits for services rendered by an employee, whether or not subject to withholding tax or fringe
benefits tax; expenses for bona fide stockholders or partners meetings; expenses for events
organized for promotion, marketing and advertising; and other expenses of a similar nature.
The RR has been approved and became effective starting on September 1, 2002. Taxpayers will be
allowed to deduct in full the EAR expenses actually paid during the first nine months of taxable year
2002.
Implications
Starting September 1, 2002, the portion of the Companys EAR expenses exceeding the ceiling
applicable to the Company will no longer be allowed as a deduction for tax purposes.
Recommendations
The impact of RR No. 10-2002 on the Companys expenses should be considered when budgets are
developed as well as tax calculations.
- 97 Classification of Expenses
Comment
Certain expenses such as marketing, commission, delivery and shipping expenses were classified as cost
of sales. We understand that this classification was done because ___________. Although these were
subsequently corrected, this may indicate absence of internal accounting policies. We also noted that the
there was no evidence of review of journal entries made to record such transactions.
Implications
Continuing classification of operating expenses as cost of sales results to inaccurate financial
information and erroneous calculation of MCIT.
Recommendations
A detailed review of each expense account should be made. Afterwhich, it should be identified whether
such expenses are cost of sales or operating expenses. Initially, the Company can use the guidelines
under section 27(E) of the NIRC for classification to avoid issue when MCIT is calculated.
Develop Procedures to Identify Realized Gains Or Losses for Tax Purposes

Comment
There are no procedures in place to monitor whether recorded foreign currency gains or losses are
realized or unrealized. While there are separate income statement accounts in the general ledger for
Unrealized Forex Gain/Loss and Realized Forex Gain/Loss, these were used interchangeably during the
year. It should also be noted that the existing rules allow only that portion of realized foreign exchange
loss or gain to be deducted or included for income tax purposes.
Implications
Income tax computation may not be accurate if the realized and unrealized portions of foreign exchange
gains or losses are not easily determinable. Further, the related deferred taxes may be inaccurate.
Recommendations
The Company is suggested to develop procedures and templates to track foreign currency-denominated
transactions to properly identify realized and unrealized gains and losses. Such procedure should
include identifying date of original foreign currency transactions and all subsequent transactions and
restatements.
- 98 Expenses Deductible for MCIT Computation Purposes

Comment
The Company deducted marketing expenses amounting to P______ for MCIT computation purposes.
Pursuant to Revenue Memorandum Circular No. 4-2003 paragraph vii, cost of services that can be
deducted against gross receipts of common carriers or transportation contractors shall be limited to the
following:
Salaries, wages and other employee benefits of personnel directly engaged in the operation of
transportation equipment;
Toll fees;
Parking fees;
Franchise fees;
Depreciation and amortization, rentals, repairs and maintenance of transportation equipment
Fuel and lubricants for transportation equipment directly used in transporting passengers and/or
goods/cargoes;
Meals provided to passengers;
Cost of safety paraphernalia and other supplies for use by passengers; and
Annual transportation equipment registration fee
We understand though that the Company has not been cited for such exception in the examination made
by the BIR for taxable years ____ to ____.
Implications
The Company may be exposed to deficiency basic MCIT of P______, excluding surcharge and interest.
Recommendation
We suggest that the Company be ready to justify its position. Alternatively, an accrual for such
exposure may be accrued. Moving forwards, the provisions of RMC No. 4-2003 should be complied
with.
- 99 Time of Withholding
Comment
As a practice, the Company withholds taxes only upon payment of qualified expenses. This resulted to
late payment/remittance. Section 4 of Revenue Regulation (RR) No. 12-2001, provides that the
obligation of the payor to deduct and withhold the tax arises at the time an income payment is paid or
payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable
to the payors books, whichever comes first. The term payable refers to the date the obligation
becomes due, demandable or legally enforceable.
Implication
The Company has been assessed for late payment/remittance for the taxable period ____ by the BIR.
Penalties imposed by the BIR is ______% of ________..
Recommendation
As provided under Section 4 of RR No. 12-2001, taxes should be withheld at the time an income
payment is paid or payable, or the income payment is accrued or recorded as an expense or asset,
whichever is applicable to the payors books, whichever comes first. We suggest that the Company
revisits the accrual of and payment terms of purchases of goods and services and prepare a checklist in
accordance of RR No. 12-2001 as guidelines for the Accounts Payable clerk to refer to for payment
processing or expense accrual.
Deductibility of Charitable Contributions

Comment
During the year, the Company made contributions in the form of cash and shares of stocks to
___________, an agency of the Government of the Philippines, amounting to P_____ million and
P_______ million, respectively.
For income tax purposes, contributions to the following qualified institutions can be deducted in full:
Government of the Philippines or any of its agencies, political subdivisions and government
corporations, to be used for priority activities in education, health, youth and sports development,
human settlement, science and culture, and in economic development according to a National
Priority Plan determined by the National Economic and Development Authority, in consultation with
appropriate government agencies, including its regional development councils and private
philanthropic persons and institutions;
Certain foreign institutions or international organizations in pursuance of or in compliance with

agreements, treaties or commitments entered into by the Government of the Philippines and the
foreign institutions or international organizations or in pursuance of special laws; and
- 100
Donations to accredited nongovernment organizations.
Contributions to the Government of the Philippines for non-priority activities are subject to limitation
that it should not exceed 5% of the Companys taxable income before deduction of such contributions.
Contributions during the year for non-priority activities of the Government of the Philippines amounting
to P_______ were not deducted in full from taxable income.
Implications
The Company has not maximized the benefit of deducting its contributions from taxable income.
Recommendations
The Company should include charitable contributions in its tax planning activity to ensure that the
Company benefits from contributions made and deducts contributions in full against taxable income.

ManagementLetter - Possible Points

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STRICTLY PRIVATE AND CONFIDENTIAL

STRICTLY PRIVATE AND CONFIDENTIAL

NEW ACCOUNTING STANDARDS

SFAS 10/IAS 10, Events After the Balance Sheet Date,

SFAS 37/IAS 37, Provisions, Contingent Liabilities and Contingent Assets,

SFAS 22/IAS 22, Business Combinations,

SFAS 38/IAS 38, Intangible Assets, and

SFAS 20/IAS 20, Government Grants.

-3Establishment of a BIR-Qualified Retirement Plan

Review Impact of Regulation on Improperly Accumulated Retained Earnings

Update Actuarial Valuation of the Retirement Fund for Company Employees

-5Assess Impact of BIR Regulations on Interest on Intercompany Advances

Review Policy in Allocating Expenses to Affiliate

Review Effects of Republic Act (RA) No. 9135

Evaluate Effect of the Revenue Regulation on Representation Expenses

Evaluate Effects of New Regulations of the Bureau of Internal Revenue (BIR)

Evaluate Effect of BIR Regulations on Noninterest-Bearing Advances

Evaluate Effects of Intercompany Advances Not Subjected to

Conduct Related-Party Transactions at Arms Length

Intercompany sales or purchases at preferred prices.

Fund the Retirement Plan

- 13 Ensure Completeness of Disclosure of Legal and Tax Assessments

CLOSING THE BOOKS PROCESS

Map the existing closing process to identify redundancy and bottlenecks.

Improve Closing Procedures

Improves decision making by providing more timely information;

key events of each workday in the cycle

EVALUATE PROVISIONS FOR EXPENDITURES

TIE-UP OF GENERAL LEDGER AND SUBSIDIARY LEDGER BALANCES

Ensure Regular Reconciliation of Accounts Receivable General and Subsidiary Ledger

Monitor and Investigate Suspense Accounts

Monitor and Investigate Unusual Balances of Accounts Receivable

Monitor and Investigate Unusual Balances of Accounts Payable

Direct Adjustments to General Ledger (GL)

CASH - Management Letter Points

Reduce Backlog in Bank Reconciliation Preparation

Improve Controls over Cash on Hand (Petty Cash Fund)

Cash Custodian/Salesmen/Credit and Collection Personnel should be Bonded

- 26 Review and Strictly Implement Approval Limits for Disbursements

Invoice quantity was compared to the receiving report.

Extensions and additions were tested.

Invoice was approved for payment.

- 27 Evaluate the Use of Numerous Bank Accounts with Different Banks

Monitor the Adequacy of the Balance of Disbursing Accounts

Balance Per Book

Restate Dollar Cash Balances At Month-end

Improve Cash Reporting System

A weekly report, which summarizes changes in cash position, outstanding accounts

- 30 Segregate Custody of Cash From the Recording Function

Improve Controls Over Preparation and Release of Checks

- 31 Monitor Check Issuance

Monitoring and Investigation of Suspense Accounts

Interest on Intercompany Advances

Reconciliation of Balances of Accounts Receivable with Customers

There were unrecorded collections from the customers

Long Outstanding Accounts Receivable

Long-outstanding Receivable from Related Party/Officers

Taxes on Interest and Rental Charged to Related Parties

Granting and availment of advances.

Revenue Regulation No. 2-98

BIR Ruling No. 116-98

Compliance of BIR policy on tax deductibility of Accounts Written-Off

Capacity _____ of _%