VIRGIN ERUDITE CO.
RISK ASSESSMENT ANALYSIS
A. Audit Approach
Our audit strategy starts at the same point as First Gen Corporation–with its strategies and
objectives. Through discussions with management, we understand their objectives and risks. We
then focus our approach on those risks that may materially impact financial statements.
Our “top-down”management discussions not only identify the business objectives and risks, but
also key controls in place to manage those risks. We test those management controls. We then
determine how we will substantively test significant account balances and classes of transactions.
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B. Audit Plan Risk Analysis
Our audit approach is risk based. Assessment and identification of risk is performed throughout
the audit process in coordination with senior financial management. We focus on risks that have
a potential impact on financial reporting and the financial accounting systems and controls that
mitigate those risks.
Risk Area that could materially affect the
Financial Statements
Management Controls
Audit Approach
Cash and Cash Equivalents- most liquid
of all assets of client accounts for about
13.53% of conso assets
-The risk of overstatement
-misappropriation thru fraud
-incorrect balances
There are specific
authorizations
required for cash
transactions. As a key
control, cash counts are
required to take place,
and to be reconciled
against cash book
records, at least once a
week and when
responsibility for the
cash is transferred
between staff members.
Cash counts are to be
countersigned by a nonfinance manager
To audit “Cash and
Cash equivalents”, you
will need to get a clear
idea about the bank
accounts, types of bank
accounts, number of
bank accounts, purpose
of each bank account,
banking facilities
arrangements and
agreements, overdraft
facilities, bank
guarantees, Authorized
signatories,
Authorization matrix,
bank payment process,
bank receipt process,
petty cash payment
process and petty cash
top up process., daily
petty cash holding limit
as well as performed
cash analytical
procedures.
Receivables
•Are not properly categorized.
•Do not exist.
•Are not properly valued or collectible.
Receivables are
subject to review at year
end for collectibility.
Overdue accounts are
We review a sample of
accounts receivable for
collectibility issues. We
review the reconciliation
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investigated.
Capital Assets( Inventories and PPE)- There are specific
constituting 49% of conso assets
authorizations
required for capital
Are not properly initially recorded at
projects. Accounts are
cost.
subject to monthly
•Do not exist.
reconciliations.
•Are not appropriately depreciated.
Capitalization
thresholds, depreciable
life guidelines are in
place. Periodic
inventories are
performed of
moveable equipment.
Risk Area that could materially affect the
Financial Statements
Management Controls
to
detail and perform
analytical reviews.
We obtain an
understanding of the
policies and procedures
over capital
assets. We vouch a
sample of
capital asset additions
and review
year end reconciliations.
We recompute
depreciation on a test
basis and perform
analytical procedures
over depreciation
expense. We review
results of physical
inventories and
reconciliation of the
subsystem to the
general
ledger.
Audit Approach
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Accounts Payable and Accrued Expenses
•Are not complete or accurate.
Other Assets and Liabilities
•Are not appropriately stated.
•Are not reconciled or properly
Accounts are reconciled
on a monthly or
quarterly basis. A year
end cutoff is performed
to ensure that significant
payables are captured.
We perform analytical
procedures on balances
and review year end
reconciliations for all
accounts over a given
threshold, as well as a
sample below the
threshold. We perform a
search for unrecorded
liabilities.
Reconciliations are
subject to monthly
monitoring and review.
Large fluctuations are
investigated.
We perform analytical
procedures on balances
and review
reconciliations for all
accounts over a set
threshold,as well as a
sample of those below
the threshold.
deferred.
Risk Area that could materially affect the
Financial Statements
Management Controls
Audit Approach
Revenues and Expenses
Accounts are reviewed
monthly for unusual
trends. Budget to actual
is monitored.
We vouch selected
revenues and expenses
in connection with other
audit areas. We perform
analytics of changes in
accounts and consider
the work completed by
internal audit.
•Are not appropriately categorized.
•Are not complete.
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Shareholders’ Equity
•Are not in the appropriate category.
•Are not supported by appropriate
detail.
Fraud
•Misappropriations.
•Fraudulent billings to contracts.
•Reporting of performance.
Management produces
a year end detail of net
assets by category and
ensures that this detail
reconciles to the
financial statements.
We perform analytical
procedures on balances
and review year end
reconciliations. We
review a sample of
balances to ensure
proper categorization.
Policies, procedures and
controls to ensure
segregation of duties,
compliance with national
and local regulations,
and oversight of
managers.
We consider incentives
and pressures, have and
will continue to expand
our interviews, and
consider the possibility
of fraud in every audit.
We also review internal
audit reports and are
alert for matters that are
indicators of fraud.
C. Perspectives on Fraud Risk
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D.
E.
F.
D. Fraud Risk Analysis
Factors
Degree
Considerations
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Incentive/Pressure
External
Moderate to High
● No imposed pressure from
investors to meet expectations or
maintain financial results
● No expectation to exceed
competitors’ performance
● Compliance to liquidity and
financing requirements
● Compliance to Power Utilities
sector regulations and standards
● Compliance to ISO
certifications
Internal
● Stringent monitoring of Parent
Company through monthly submission
of reports
● Procedures are in place to
prevent fraud from being perpetuated
such as whistleblower program,
Employee Manual Code of Conduct
● Performance bonus is based
on individual employee performance
and 13th month pay is tied up to
results of operation (EBITDA)
Opportunity
Low
In relation to material misstatement
● There are significant
accounting estimates applied by the
company, being part of the Power
Utilities sector( specialized industry)
● Stringent process on financial
and management reporting as
evidenced by significant involvement
of the General Manager in financial
and management reporting
● Significant transactions are
accompanied by contracts or
supported by board resolutions.
In relation to misappropriation of assets
● CCTVs and other monitoring
contraptions are employed and
installed at power production sites and
office areas.
● Inventory items (spare parts
and preforms) are less likely to be
misappropriated due to their
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specialized nature
Rationalization or Attitude
Low
● Client is open to
recommendations on improvements of
existing controls that will mitigate
exposure to risk of fraud or error.
● Existence, communication and
consistent update on Employee
Manual for Code of Conduct
● There were no indicators noted
that management has the tendency to
perpetrate fraud.
● Management is always in a
strong position to be compliant to
relevant reporting standards and
government regulations. In our
discussions with management there
were no instances when management
expressed interest to minimize taxes
paid to the relevant government
agencies and instrumentalities
Special Considerations for Fraud Risk Analysis of a firm from the Energy Industry:
In the energy industry, fraud can take place in a number of activities such as energy trading
procurement, project management, commercial management, etc., though some of the fraud in
this industry is related to energy theft - the non- billing of energy that has been used (more than
80% of fraud events are related to misappropriation).
Here, it is worth mentioning that one of the main problems affecting efficiency and security in
energy companies is the loss associated with the process of energy distribution and supply to
consumers. This loss can be split into two categories:
a. Technical loss. Relates to the loss naturally occurring on the network due to
phenomena such as power dissipation on transmission lines, etc.
b. Non-technical loss. Associated with energy fraud and caused by actions external
to the energy supply system. It consists mainly of energy theft, non-payment on the part
of customers and loss due to errors in the invoicing process.
Identifying and differentiating the percentage of energy lost in distribution from non-technical
causes is a challenge that companies in the industry need to face and resolve. There are three
categories:
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a. Actions that affect the distribution company’s network.Of particular note are the
direct connections into the distribution network without the customer having entered into
a contract for the supply of electricity and the channeling of electrical power towards other
facilities not included in the contract.
b. Actions that affect measuring and control devices such as the tampering of meters
with the aim of reporting consumption levels below actual usage.
c. Dishonest action by company employees in commercial processes. It can take
place, for instance, if there is no proper segregation of duties and the same person records
or modifies transactions and authorizes the associated payments or invoicing.
These three types of fraud can constitute a breach or offense,sometimes punished by sanctions,
whose amount depends on the volume of energy defrauded. As a general rule, energy distribution
companies should detect and report to the authorities any network and equipment irregularities.
G. Related Parties
● Current standards and practices require emphasis on auditing related party
transactions and communicating with the Committee on Audit in this regard.
The following are the significant transactions with related parties:
a. Due to a related party represents noninterest-bearing U.S. dollar and Philippine pesodenominated emergency loans to meet working capital and investment requirements of certain
entities in the Lopez Group.
b. First Gen Group leases its office premises where its principal offices are located from
Rockwell-Meralco BPO Venture, a joint venture of Rockwell Land Corporation (Rockwell), a
subsidiary of FPH.
c. Following the usual bidding process, EDC awarded to First Balfour, Inc. (First Balfour)
procurement contracts for various works such as civil, structural and mechanical/ piping works in
EDC’s geothermal, solar and wind power plants. EDC also engaged the services of Thermaprime
Drilling Corporation (Thermaprime), a subsidiary of First Balfour, for the drilling services such as,
but not limited to, rig operations, rig maintenance, well design and engineering. First Balfour is a
wholly owned subsidiary of FPH.
d. Parent Company
During the February 27, 2014 meeting, the BOD of the Parent Company approved the
confirmation, ratification and approval of the authority of the Parent Company, pursuant to Clause
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(i) of the Second Article of the Parent Company’s Amended Articles of Incorporation, to act as a
guarantor or co-obligor or assume any obligation of any person, corporation or entity in which the
Corporation may have an interest, directly or indirectly, including but not limited to FNPC
e. On January 22, 2020 and July 3, 2020, EDC entered into a surety agreement with GCGI and
BGI, respectively, and the lenders whereby EDC, as a surety, guarantees the funding of the DSRA
in accordance with the loan agreement for the benefit of GCGI and BGI, in lieu of the cash deposit
standing in DSRA.
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