STATE AUDIT IN THE

PHILIPPINES

NATURE OF STATE AUDITING

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

DEFINITION

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

AUDITING IN PUBLIC ADMINISTRATION

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

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

AS A CONTROL MECHANISM

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

AS ACCOUNTABILITY COMPONENT

IN THE FISCAL ADMINISTRATION CYCLE

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

HISTORY OF AUDTING IN THE PHILIPPINES

1. BEFORE POLITICAL INDEPENDENCE

A. AUDITING UNDER SPAIN

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

B. AUDITING UNDER THE MALOLOS REPUBLIC

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

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

C. AUDITING UNDER THE AMERICANS

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

D. AUDITING UNDER THE COMMONWEALTH PERIOD

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

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

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

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

2. POST INDEPENDENCE PERIOD

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

A. THE FIRST REORGANIZATION

EFFORT: REFORMS WITH ASSISTANCE OF

AMERICAN CONSULTANTS

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

B. REFORMS UNDER THE SECOND REORGANIZATION

EFFORT

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

FORMS OF ORGANIZATION/LOCATION IN GOVERNMENT PRIMARY AUDITING

PERIOD SET-UP ACTIVITY

Spanish period Judicial type court of accounts detailed post audit of transactions

First Filipino republic General Assembly Post audit of transactions

American Regime: as colony Bureau under the Governor General Pre-audit of all transactions

American regime: as Commonwealth independent Constitutional body -do-

Post independence: early period independent Constitutional body -do-

Post independence: the fifties -do- Partial lifting of pre-audit

Post independence: early seventies Change to Commission type of organization Further lifting of pre-audit/ Expansion of program audit

II. TYPES OF AUDIT

1. TIMING

2. ORGANIZATIONAL STATUS

3. SCOPE

A. TIMING TWO MAIN TYPES OF TIMING:

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

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

The review may consist of:

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

2. Physical inspection of supplies or equipment;

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

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

5. Checking mathematical accuracy

B. AS TO ORGANIZATION STATUS

1. INTERNAL AUDIT – mainly a management tool for control and evaluation of agency operations. Sometimes referred to as “management audit”.

2. EXTERNAL AUDIT – performed by auditors external to or independent of the audited organization. In the state audit it is performed by the COA auditors; in commercial audit, it is conducted by independent certified public accountants on private business organizations.

C. AS TO AUDIT SCOPE Fiscal audit is the “traditional financial audit” in

government. It is a combination of financial audit and compliance audits.

1. Financial audit performed primarily through an examination of financial statements in order to express an opinion on the fairness with which the financial condition and results of operations of an audited entity are presented.

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

PERFORMANCE AUDIT

It is a constructive examination and evaluation of the financial and operational performance of an organization, program, function or activity with the objective of identifying opportunities for greater economy, efficiency, and effectiveness in agency operations.

ECONOMY AND EFFICIENCY AUDITS DETERMINE:

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

2. The causes of inefficiencies or uneconomical practices;

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

EFFECTIVENESS OR “PROGRAM RESULTS” AUDIT

DETERMINES:1. Whether the desired results or benefits

established by the legislature or other authorizing body are being achieved; and

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

III. THE AUDIT PROCESS The state audit cycle consists of seven phases:1. Phase I – Preliminary survey of the agency or audited entity2. Phase II – Review of the legal and policy framework within which

the agency operates, and the plans, policies, objectives, and standards it has adopted;

3. Phase III – Review and evaluation of the agency’s internal control system;

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

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

6. Phase VI – Finalization of report; and7. Phase VII – Follow-up on the implementation of audit

recommendations.

Phase I –Preliminary Survey

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

Phase II – Review of Legal and Policy

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

Phase III – Review and Evaluation of Internal Control

SystemIn this phase, the auditor reviews the procedures

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

Phase IV – In-depth Examination of Problem Areas, Data-gathering

Analysis and Evaluation

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

Phase V – Preparation and Presentation of Draft

ReportA draft audit report is prepared based on the

findings and recommendations formulated in the previous phase. The report is then presented to agency officials for review and comments. An “exit meeting” is held between the auditor and agency officials to discuss reactions to the findings, conclusions, and recommendations in the draft report.

Phase VI – Finalization of Audit Report

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

Phase VII – Follow-up on the Implementation of Audit

RecommendationsAudit recommendations, such as

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

GENERAL OBJECTIVES, PRINCIPLES AND

STANDARDS

GENERAL OBJECTIVES

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

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

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

SPECIFIC OBJECTIVES

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

1. Proper and effective use of public funds;2. Development of sound financial management;3. Orderly execution of administrative activities;

and4. Communication of information to public

authorities and the public through publication of audit reports.

AUDIT: PRINCIPLES AND STANDARDS

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

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

IV. THE COMMISSION ON AUDIT

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

POWERS, AUTHORITY AND FUNCTIONS OF COA

POWERS OF COA1. Examine, audit, and settle all accounts pertaining to

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

2. Keep the general accounts of the government3. Preserve the vouchers and supporting papers

pertaining to such accounts4. Define the scope of its audit and examination and

establish the techniques and methods required 5. Promulgate accounting and auditing rules and

regulations.

POWERS OF COA6. Submit to the President and the Congress an

annual report covering the financial condition and operation of the government and such other reports required by law;

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

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

9. Perform such other functions as prescribed by law.

FUNCTIONS OF COA1. Auditorial – includes audit and examination through

pre-audit and post-audit services, and settlement of accounts or liabilities;

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

3. Reportorial – submission of reports to heads of audited agencies, the President, and Congress, and such other reports as required by law;

4. Limited Accounting Function – keeping the general accounts of government by accounting for transactions affecting the overall cumulative results of operation (CRO)

FUNCTIONS OF COA5. Custodial – management and custody of the general

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

6. Quasi-Judicial – decision making on compromise claims, request for relief from accountability, and constructive distraint on property; initiation of criminal/malversation cases with Sandiganbayan; issuance of opinions on queries;

7. Recommendatory – recommends measures to improve efficiency and effectiveness in general government and agency operations;

8. Other Functions – deputization of private licensed professionals to assist government auditors; participation in inventory of assets and properties; membership in policy study bodies.

ORGANIZATIONThe Chairman and two Commissioners comprises the

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

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

COA has a resident auditor who has full authority to perform duties in every agency.

ORGANIZATIONProvincial and city auditors supervise the resident

auditors in their respective areas. They are in turn supervised by regional offices headed by Directors who supervise and control the implementation of auditing rules and regulations in agencies with the region.

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

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

The Special Audit Office (SAO) conducts special audits.

THANK YOU!!!