COMMISSION ON AUDIT MEMORANDUM NO. 93-316D November 11, 1993 TO : All Assistant Commissioners, COA Directors of Central and Regional Offices, Heads of Auditing Units of National, Local and Corporate Agencies of the Government and All Others Concerned. SUBJECT: Prescribing the Application of the Test Audit Scheme (TAS) and the Simplified Sampling Scheme (SSS) in the Audit of Current and Prior Years Transactions and Accounts of Local and National Agencies and Government Owned and/or Controlled Corporations. 1.0 RATIONALE: The tremendous volume and complexity of transactions in the government have made the practice of examining each and every transaction physically impossible, and in fact has created a large volume of backlog in post-audit. The existing statistical sampling methodologies presently prescribed by the Commission (COA Memorandum Nos. 84-316-A and 85-316-C), have been applied by only few auditing units mainly in the corporate sector. Thus, it has been observed that due to the adherence to 100% audit of transactions, backlogs in post-audit kept piling up to millions of unaudited vouchers/receipts and other transaction documents. The existence of these backlogs cannot but raise doubt on the integrity of the Annual Audit Reports submitted by the Auditors. Moreover, external auditing as performed by other audit institutions, both in this country and in the world over, is always on test basis. Detailed audit is time-consuming, costly and not necessarily more effective. The auditing staff cannot be expected to examine/review all the work of an Accounting Department or Unit with more staff members. This Commission therefore finds it necessary to develop other simplified schemes that would facilitate audit work and which would be suited to national and local agencies as well as to government owned and/or controlled corporations. 2.0 TEST AUDIT SCHEME 2.1 2.2 DEFINITION OF TERMS 2.1.1 Test Audit Scheme - An audit approach whereby the audit of the selected months of the year is deemed to cover the audit of the transactions and accounts of the entire year under audit. 2.1.2 Test Audit Months - The months selected for audit which shall comprise at least six (6) months of the year under audit as determined in accordance with the procedures prescribed in paragraph 2.2 hereof. SELECTION OF TEST AUDIT MONTHS 2.2.1 The selection of test audit months which shall comprise at least six (6) months of the succeeding year shall be approved by the COA Director concerned. For this purpose, the Unit Auditor shall submit to the said COA Director, on or before the end of December of each year, the following information: 2.2.1.1 Monthly volume of transactions in terms of quantity and total amount per month for the current year and the immediately preceding two (2) years (for the initial year of implementation only), categorized into collections, disbursements and other non-cash transactions. Sub-categories under each of the main categories may be presented as necessary depending on the nature of the operations of the audited agency. 2.2.1.2 Recommendation of the auditor as to the months of the succeeding year that will be subjected to audit. On the basis of the foregoing information, the COA Director concerned may either adopt the recommendation of the Auditor or make changes in the proposed test audit months as he may deem fit or necessary. The approved test audit months shall be communicated in writing to the Auditor within fifteen (15) days upon receipt for the latter's implementation. The communication of the COA Director approving the test audit months shall form part of the permanent working paper file of the auditing unit. 2.2.2 The approved test audit months shall be kept confidential and any unauthorized release of information relative thereto shall be a ground for disciplinary action. 2.2.3 The peak months of the year, i.e., the months when the transactions are voluminous in terms of amount and quantity (other than the months of January and December) shall likewise be included in the test audit months. The peak months for collections may be different from the peak months for disbursements and other transactions, in which case the peak months for both shall be selected in the order of amount and quantity of the transactions. 2.2.4 The months not selected as test audit month (non-test audit months) during any year may be included as test audit month in the succeeding year subject to the condition that the months of January and December as well as the peak months of the succeeding year shall be included in the test audit months. 2.2.5 The test audit months approved by the COA Director concerned shall not be changed without the prior authority of the said Director except when the change(s) is (are) in addition to the test audit months previously approved. However, when in the judgment of the Auditor, the six (6) test audit months approved by the Director can still be reduced as when the internal control system of the auditee agency has been established to be adequate or when errors, suspensions and/or disallowances have been very minimal or negligible or when sheer volume of transactions compels further reduction of test, the Auditor may upon proper written justification recommend to the COA Director concerned, the reduction of the six (6) test audit months which in all cases shall not be less than four (4) months. 2.3 AUDIT SCOPE AND PROCEDURES 2.3.1 2.3.2 The audit of the test audit months shall cover the entire accounting cycle, i.e., from the source documents at the inception of a transaction up to the point when that transaction is ultimately immersed in the agency's financial statements or vice-versa. The audit of the entire accounting cycle will generally comprise the following stages: 2.3.1.1 The audit of source documents for receipts, disbursements and other sources of original entries. 2.3.1.2 The audit of entries in the Books of Original Entries and month-end accounts summarization. 2.3.1.3 The audit of postings from the Books of Original entries and other sources, to Subsidiary and General Ledgers. 2.3.1.4 The verification of trial balance, financial statements and other financial reports. Where the audit in any of the test audit months results to suspensions and/or disallowances or when there are complaints/adverse information concerning certain transaction (whether or not the transactions subject of adverse information are included in the test audit months), all other related or similar transactions in all the months of the year under audit (including the non-test audit months) shall be audited. However, when in the judgement of the Auditor, the suspensions or disallowances in the test audit months are not material as to warrant the audit of the related or similar transactions in the not-test audit months, he may dispense with the audit of the latter mentioned transactions upon written authority of the Director concerned. In case fraud is established during the audit, a special audit report shall be prepared and submitted immediately in accordance with the guidelines embodied in COA Memorandum No. 93-813 dated July 9, 1993. 2.3.3 The Unit Auditor shall keep a permanent file of the Audit Program used in the examination of the transactions and accounts in the test audit months indicating therein among others, the names of the audit staff assigned to perform the audit. The said Audit Program shall be up-dated upon completion of the audit for a particular month, to reflect therein the actual audit procedures undertaken and the names of the audit staff who actually performed the audit activities embodied in the audit program. 2.4 ISSUANCE OF THE CERTIFICATE OF SETTLEMENT AND BALANCES (CSB) 2.4.1 The CSBs shall be issued only for the test audit months except in the instances contemplated on paragraph 2.3.2 above where the particular transactions audited in the non-test audit months shall likewise be covered by the corresponding CSB. 2.4.2 Only the transactions audited shall be stamped "Post-audited" although the transactions for the entire year shall be deemed to have been audited. 2.4.3 Auditing units applying the test audit scheme as herein prescribed shall issue the CSB on a monthly basis in accordance with par. 2.4.1 above. 2.4.4 3.0 When Test Audit Scheme is applied, the certification on the face of the CSB may be modified to include a statement to the effect that the transactions/accounts covered by the CSB have been audited in accordance with the Test Audit Scheme procedures prescribed under COA Memorandum No. __________. SIMPLIFIED SAMPLING SCHEME 3.1 DEFINITION OF TERMS 3.1.1 Batch/population - documents consist of vouchers/receipts/JVs and other transaction documents including their summaries and supporting papers, usually submitted by management in batches periodically to the Auditor for examination and audit. If one month's transactions are few, several months may be combined and if they are voluminous one month may be divided into several populations. In no case, however, shall the population consists of more than four months transactions. 3.1.2 Error - is a deviation from or non-compliance with laws, rules and regulations, or defects in the transaction that affects its validity including inaccuracy in computations and representation of amounts. 3.1.3 High Value Items transactions that are high in amount as determined in accordance with the procedures prescribed and illustrated in paragraph 3.3.1.2a thereof. 3.1.4 Key Items/Special Items transactions and accounts that are prone to error, subject of complaints, and other high risk transactions which in the perception of the auditor require detailed 100% audit such as payment for infrastructure contracts, cancelled/tampered ORs, bank reconciliation statements and the like. 3.1.5 Route - direction specified for each month in the quarterly Memorandum issued by the CASU/CRASU or its equivalent which is either downward or sideward. 3.2 3.1.6 Tolerable Error Rate - percentage of error in relation to the samples selected which does not materially affect the integrity of the population represented in the sample size. 3.1.7 Substantive Errors - when the amounts paid or collected or assessed are illegal, invalid inaccurate or unrecorded. These are also the monetary inaccuracies in computation. 3.1.8 Compliance Errors - deviations from the established system of internal control and prescribed rules and regulations including approval and other documentary requirements. SAMPLING SUPPORT ORGANIZATION Creation and Functions of CASU/CRASU. There shall be a COA Audit Sampling Unit (CASU) for operating offices and COA Regional Audit Sampling Unit (CRASU) for regional offices or its equivalent unit that will monitor, supervise the activities of auditing units applying sampling techniques and conduct in-house training on sampling. It shall also issue one month before the beginning of each quarter the Random Number Start (RNS) covering three months period. (Annex A) 3.3 PROCEDURES : 3.3.1 BASIC SAMPLING DETERMINANTS 3.3.1.1 Determination of Populations a. b. Official Receipts - The Population in the audit of Official Receipts (ORs) may be classified in the following manner: a.1 All ORs per accountable officers; a.2 All ORs as submitted for a particular period by management and as reported by the Chief Cashier regardless of revenue classification; a.3 All ORs per revenue classification for a particular period. The population may be per month, per two (2) months or per three (3) months depending on the volume. In no case shall it exceed four (4) months. Disbursement Vouchers - the population in the post-audit of Disbursement Vouchers (DVs) shall include all the DVs submitted for a particular period as reflected in the transmittal letter after separating the payrolls, liquidation for cash advances and Journal Vouchers (JVs). The payrolls, liquidation of cash advances (other than payrolls) will constitute separate populations while JVs will be audited 100%. The audit of the liquidation of cash advances (other than payrolls) shall be related to the cash examination undertaken and vice versa. The population may be composed of one month, two months or three months transactions depending on the volume. In no case, however, shall the population exceed four months transactions. c. 3.3.1.2 Payrolls - the population for the post-audit of payroll shall consist of the total number of payees or employees per period. This may be per month, per two months or per three months depending on the volume. In no case shall it exceed four months. Adjusted Populations The adjusted population is defined as the population less High Value Items (HVIs) and Key Items (KIs). In cases where the population is homogeneous in terms of amounts, as in the case of payrolls, only KIs are separated from the population to arrive at the adjusted population. HVI's and KI's are to be post-audited 100%. 3.3.1.2a Determination of High Value Items - High Value Items are determined with the use of the percentage table to define the high value as shown below. Percentage to Define High Value Number of Transactions in the population 0 - 1999 2000 - 4999 5000 + Percentage 5% 2% 1% Illustration: For the month of May, 1993, accounting unit submitted 2,030 vouchers (payrolls and journal vouchers are considered separate population and are already segregated) to COA with a total amount of P11,000,000.00. From the table of percentage, 2,030 falls in the range of 2,000 - 4,999 for which 2% is to be used to determine high value. High Value (HV) 2% x P11,000,000.00 = P220,000.00. This means that any single transaction amounting to P220,000.00 and above will be considered high value item. 3.3.1.3 Sample Size The sample size to be used must have the right balance between two conflicting needs - minimal sampling uncertainty and audit economy. Sampling uncertainty can be reduced by increasing the sample size but this would be at the expense of audit economy. The desired sample size from a given population shall be determined through the use of the following table in the determination of sample sizes as shown below: Determination of Sample Sizes No. of transaction in the population 0 - 199 200 - 1999 2000 - 4999 5000 + Sample Size 75 100 150 200 Sample Sizes are determined based on the adjusted population or on the unadjusted population in case there will be no KI's and HVI's. Illustration: Assuming that from the submitted 2,030 vouchers with a total amount of P11,000,000.00, 10 vouchers are high value items, each with amounts of P220,000.00 or more totalling to P7,000,000.00 and 40 vouchers picked as key items amounting to P500,000.00. The adjusted population will now be: Total volume 2,030 less HV items (10) Key items (40) ----------------------------------Adjusted Population 1,980 The sample size for 1,980 vouchers based on the table is 100. 3.3.1.4 Sample Interval The sample interval is determined by dividing the adjusted population by the desired sample size. Example: Based on the given example Sample Interval (SI) = 1,980 Adj.Pop. ----------------------100 sample size = 19.80 or 20 This means that if the sample interval is 20, the auditor will select one sample for every 20 vouchers. 3.3.2 SELECTION OF SAMPLES In the selection of samples, several factors are to be considered. For one, every item in the population must have an equal or known chance of selection. Another, the process of selecting the sample must be unbiased. The samples will be selected on a systematic sampling technique. This means that after getting the sample interval (SI), the Auditor will look from the Memorandum on Random Number Start (RNS) (Annex A) for starting number. In the selection of the prescribed starting number, the month of audit is the reference month. When the prescribed number is higher than the SI, the auditor should refer to the prescribed route stated in the Memorandum to get the number which is equal to or less than the SI. As in our example, 20 is the SI and refering to the month of June in the Memorandum (Annex A), 45 is the starting number for two (2) digits in Table I (Annex B). Since 45 is higher than the SI, the auditor will go downward and look for a number equal to or less than 20, which in this case, the number is 15. This means that the first sample item is the 15th voucher. For the succeeding sample items, add the SI to the number of the first sample item and every interval thereof until the desired sample size is obtained. 1st sample item 2nd sample item 15 + 20 3rd sample item 35 + 20 4th sample item 55 + 20 = = = = 15th voucher 35th voucher 55th voucher 75th voucher This process will continue until the desired sample size is attained. Random Number Start A memorandum on monthly Random Number Start (RNS) will be issued by the CASU/CRASU or its equivalent on a quarterly basis covering three months period. 3.3.3 EVALUATION OF SAMPLES The selected samples are post-audited and evaluated by comparing the actual compliance and substantive errors found during the audit of the samples with the tolerable error rates. The tolerable error rate for compliance evaluation is 20% of the sample size while the tolerable error rate for substantive evaluation is 8% of the total amount of the sample size (Annex C). If the audit of samples does not pass compliance and/or substantive evaluation, the auditor shall audit the whole population. In both cases, the auditor shall submit the corresponding evaluation report. Evaluation Working Paper The auditor shall prepare an Evaluation Working Paper (EWP) (Annex C). While the format is flexible, it must include the reference for the transactions audited and the total number of compliance and substantive errors found in the sample. A copy of the EWP shall be attached to and submitted quarterly together with the accomplishment report. When error rates do not exceed the tolerable error rates. When the audit of the samples reveal compliance and/or substantive error rates equal to or below 20% or 8%, respectively, but which nevertheless resulted to suspensions or disallowances, the transactions in the population related to or similar to the transactions suspended or disallowed in audit shall be audited 100%. The rest of the other transactions in the population shall be considered to have been passed in audit. The amounts suspended and/or disallowed shall be reflected in the CSB. When error rates exceed the tolerable error rates. When the audit of the samples resulted to a situation where either the compliance or substantive error rate exceeds 20% or 8% respectively, the whole population shall be audited 100% and the resulting suspensions and/or disallowances shall be reflected in the CSB/s. 3.3.4 ISSUANCE OF CERTIFICATE OF SETTLEMENT AND BALANCES (CSB) When sampling is applied, the CSB shall preferably be issued on a per population basis. The certification on the face of the CSB may be modified to include a statement to the effect that the transactions/accounts covered by the CSB have been audited in accordance with the Simplified Sampling Scheme procedures prescribed under COA Memorandum No. 93-316D. Transactions to be stamped "Post-Audited" Only the audited High Value Items, Key Items and the samples selected shall be stamped post-audited although the entire population represented by the samples shall be deemed to have been post-audited and covered by the corresponding CSB or CSBs issued therefore. 3.3.5 REPORTING The auditor will submit to CASU/CRASU or its equivalent the quarterly accomplishment report (annex D) which shall reflect the transaction stream, the month of audit, period covered, the volume, the sample size, the key and high value items, the total transaction passed in audit and the number of transactions disallowed/suspended. Likewise, the audit objectives with the corresponding audit procedures as stated in the State Audit Manual shall also be included but only in the initial implementation of sampling. 3.3.6 AUDIT SCOPE The audit of the samples, the High Value items and the Key Items shall likewise cover the entire accounting cycle as provided in 2.3.1 hereof. The transactions selected as samples including the High Value Items and Key Items shall be audited and considered as the basis for audit of the accounts affected by the transactions. In case there are account/s whose transactions do not form part of the samples selected or where there are only very few transactions forming part of the samples, the Auditor may select additional samples pertaining to the said account/s. For the audit of payrolls, the audit may be done through sampling as herein prescribed or by using the systems-based audit approach as prescribed in Section 30.3 of the State Audit Manual. The application of sampling enables the Auditor to form a conclusion on the state of compliance with applicable laws, rules and regulations not only on the sample transactions but also on the population of transactions subjected to sampling selection, and therefor provides the Auditor with an achievable target and manageable audit scope in the post-audit of transactions. However, sampling's inherent limitation is that it is merely an audit technique and may not provide all the answers to the problems that may be encountered in the conduct of the audit. Thus, to ensure that the standard of "sufficient, relevant and competent evidence" needed by the auditor to arrive at a conclusion on the regularity, efficiency, economy or effectiveness of operations or to express an audit opinion on the financial statements, is adequately met, it will be necessary for the auditor to employ, in addition to the procedures applied to the sample transactions, other audit tools and techniques such as but not limited to the following: 1. 2. 3. 4. 5. 6. 7. 8. 9. 4.0 Inspection/physical count Confirmation Observation Analysis Interview/inquiry/questionnaire Recomputations Review of reconciliation procedures Modeling Flowchart/ validation POST-AUDIT OF BACKLOGS The up-dating of post-audit backlogs shall be carried out in accordance with the procedures prescribed. However, in view of the Annual Audit Report that have been rendered in the previous years, the audit of the corresponding accounts need not be disturbed except when the same is relevant to and affects the balances of accountabilities reflected in the books of accounts. As a general rule therefore, the audit of backlogs shall be limited to the determination of regularity or validity of transactions except when balances of accountabilities are affected as a result of the issuance of CSBs or other pertinent special audit reports. 5.0 CONTINUATION OF SAMPLING SCHEMES PRESENTLY EMPLOYED: The existing sampling schemes, the COA-Sampling-Card Methodology (CSCM) and the Pareto's Principle of Distribution shall still be continued. The Auditor shall have the options to choose which scheme is best suited in their particular agency. 6.0 LEGAL AUTHORITY VIS-A-VIS LIABILITY: The provisions of the Constitution grant the Commission exclusive authority to define the scope of its audit and to establish the techniques and methods required therefor. This Constitutional prerogative is amplified in Section 43 (3) of PD 1445, otherwise known as the Government Auditing Code of the Philippines and Section 28 (3), Subtitle B, Book V, of the Administrative Code of 1987 (E.O. No. 292), which contains the basic proviso that justifies the promulgation by the Commission of auditing procedures and techniques to wit: "In the performance of their respective audit functions as herein specified, the auditors shall employ such auditing procedures and techniques as are determined by the Commission under regulations that it may promulgate." When the auditor employs the sampling techniques authorized by the Commission and as long as he apply the technique in good faith and with due care, he does not incur any civil, criminal or administrative liability arising in any way from his use of such audit technique. The sampling procedures herein prescribed should be applied only in instances where the volume of transactions is physically impossible to audit 100%. When the volume of transactions does not warrant the application of sampling technique, the auditor may perform a 100% audit. 7.0 EFFECTIVITY: This memorandum shall take effect immediately. (SGD.) PASCASIO S. BANARIA, Chairman