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PRACTICAL
APPROACHES TO
THE AUDIT OF
COOP ACCOUNTS
OBJECTIVE OF AN AUDIT OF
FINANCIAL STATEMENTS
• to enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting
framework.
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AUDITOR’S RESPONSIBILITY
TO CONSIDER FRAUD, ERROR
AND NONCOMPLIANCE
Philippine Standards on
Auditing 240 and 250
DEFINITION
ERROR refers to unintentional misstatement in financial
statements, including the omission of an amount or a
disclosure.
FRAUD refers an intentional act by one or more
individuals among management, those charged with
governance, employees, involving the use of deception to
obtain an unjust or illegal advantage.
NONCOMPLIANCE refers to acts of omission or
commission by the entity being audited, either intentional
or unintentional, which are contrary to the prevailing
laws or regulations.
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TWO TYPES OF FRAUD
• FRAUDULENT FINANCIAL REPORTING
• MISAPPROPRIATION OF ASSETS
IMPORTANCE OF THE AUDITOR’S
CONSIDERATION FRAUD, ERROR AND
NONCOMPLIANCE
When planning and performing audit procedures and in
evaluating and reporting the results thereof, the auditor
should recognize that fraud, error and noncompliance
with laws and regulations may materially affect the
financial statements.
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CLIENT’S RESPONSIBILITIES
• MANAGEMENT- It is the responsibility of the
management to establish appropriate controls to prevent
and detect fraud, error and noncompliance.
• THOSE CHARGED WITH GOVERNANCE- It is the
responsibility of those charged with governance to
oversee management to ensure that appropriate controls
are in place.
AUDITOR’S RESPONSIBILITIES
The auditor’s responsibility is to design the audit
to obtain reasonable assurance that the
financial statements are free from material
misstatements, whether caused by error, fraud or
noncompliance.
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FRAUD RISK FACTORS
• Fraud risk factors that relate to misstatements resulting
from fraudulent financial reporting:
• Management Characteristics
• Industry Conditions
• Operating Characteristics
• Fraud risk factors that relate to misstatements resulting
from misappropriation of assets:
• Susceptibility of assets to theft
• Condition of Internal Control
CONSIDERING NONCOMPLIANCE
• The auditor should obtain a general understanding of
legal and regulatory framework
• The auditor should design procedures to help identify
instances of noncompliance.
• The auditor should design audit procedures to obtain
sufficient appropriate evidence about compliance
with laws and regulations.
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DOCUMENTATION
• Discussion of engagement personnel.
• Specific risks identified and auditor response.
• Communication to management, audit committee,
etc.
AUDITOR RESPONSIBILITY FOR DETECTING ERRORS,
FRAUDS, AND NON-COMPLIANCE
Responsible for Must Communicate Findings?
Detection?
Material Immaterial Material Immaterial
Errors Yes No Yes No
Fraud Yes No Yes Yes
(One level above)
Yes
Illegal Acts Yes No Yes (One level above)
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AUDIT EVIDENCE
PHILIPPINE STANDARD ON AUDITING 500
AUDIT EVIDENCE- DEFINED
“Auditevidence” is all the information used by the
auditor in arriving at the conclusions on which
the audit opinion is based.
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TYPES OF AUDIT EVIDENCE
1. Source documents and accounting records
underlying the financial statements.
2. Other corroborating information
QUALITIES OF AUDIT EVIDENCE
• Sufficiency is the measure of the quantity of audit
evidence.
• Appropriateness is the measure of the quality of audit
evidence.
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PRACTICAL TIPS IN
GATHERING AUDIT
EVIDENCE FOR
COOPERATIVE ACCOUNTS
CASH AND CASH EQUIVALENTS
• Examine bank reconciliations for abnormal reconciling items
• Perform Cut-off procedures to ascertain completeness
• Ascertain that cash and cash equivalent balances represent
cash balances which can be withdrawn anytime ( cash
accounts for retirement funds, statutory funds should be
under “ other funds and deposits””)
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CASH AND CASH EQUIVALENTS
• IMPORTANT CDA REGULATION:
• RESERVE FUND SHOULD BE FUNDED
• Cash or Cash Equivalent used in funding Reserve Fund
is reclassed as “OTHER FUNDS AND DEPOSITS
LOANS AND RECEIVABLES
• Because majority of the cooperatives thrive
on their loans as well as receivable balances,
it is important to ascertain that these loans
are properly authorized, existing and
collectible
• The risk of these loans : “ are they existing?
Are they collectible?”
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LOANS AND RECEIVABLES
• As to existence: take note of loans or receivables which
may have been given to a different member ( issue: fictitious
loans, dosri). This may be checked through confirmations.
• Take note of the ageing of receivables. The CDA has
prescribed proper provisioning for past due loans- using
PORTFOLIO-AT RISK:
• 1 YEAR AND BELOW – 35%
• ABOVE 1 YEAR- 100%
LOANS AND RECEIVABLES
• For past due loans, ask the coop: what are they doing to
collect them? Are they improving their credit policies to
install controls over loans and receivables?
• Unearned interest and discounts are always deducted
from loans and receivables to get net realizable value.
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LOANS AND RECEIVABLES
• Take note of interest on loans- are they properly
computed?
• Are there controls regarding access to records and
segregation of duties?
• Always reconcile subsidiary ledger balances vs. GL
balances, differences might pose as a potential loss.
LOANS AND RECEIVABLES
• Examine ageing of Loans and Receivables.
• Things to watch out for:
• Are these Loans properly authorized?
• Did they go through the review of the Credit
Committee?
• Supporting documents
• Are these loans from Coop members? Remember: a
Coop cannot make a loan to non-members
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ADVANCES TO OFFICERS
• Take note of advances to officers and
employees which have been unliquidated for
quite a period of time. These may represent
fund malversations which may pose a
potential loss for the cooperative
• What is their policy regarding unliquidated
advances?
INVENTORY
• Observe inventory count for existence of ending
inventory. Risk: they may place a big ending inventory
balance in order for the coop income to increase, but
in reality, ending inventory is not existing, or may have
been obsolete/spoiled. Impairment losses should be
recognized on such inventory.
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INVENTORY
• If you have not been able to observe inventory count,
make sure that the inventory was taken by securing an
ending inventory listing signed counted by the
accounting staff/ audit committee. If not, then the risk is
that actual inventory count was not performed.
• Check for obsolescence, spoilage, etc. Also check for
consigned goods. Be aware of the ownership of
inventory on hand.
OTHER ASSETS
• Perform analytical testing for prepayments and other
assets.
- Ask for breakdown of “other assets”, because they may
represent misclassifications to other accounts ( e.g. fixed
assets, expense, etc.)
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INVESTMENTS
• Determine investment classification:
- Debt instrument?
- Short-term – undiscounted amount
- Long-term – amortized cost
- Equity instrument
- Publicly listed – at fair value through profit or loss (
SUBJECT TO AMENDMENT: AT FAIR VALUE THROUGH
EQUITY)
- Non-publicly listed or externally managed- at cost less
impairment
INVESTMENTS
• Determine whether the coop has been managing its fund
portfolio wisely. Consider risks. Make sure that the coop is
properly advised .
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INVESTMENTS
• Determine income on investments – remember that income
from investments not publicly traded are not recognized. Only
income from public traded investment is directly credited to
income.
• Physically determine investment papers. Make sure they are in
the name of the coop
• Make sure that these investments are properly authorized by
the board and the resolutions properly ratified by a general
assembly.
REAL AND OTHER PROPERTIES
ACQUIRED
• Check if the net book value approximates the fair values ;
note impairments in value; disclose if there are any
unrealized gains/losses
• Check for ROPA which remain unsold or unused for quite
a time. These represent idle / non-performing assets which
might affect the computation of Performance Ratios.
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PLANT, PROPERTY AND EQUIPMENT
• Conduct ocular inspection of property and equipment.
It is important that they are existing and still
functioning. Otherwise, provide impairment loss.
• YOU MAY OPT TO USE REVALUATION METHOD
FOR LAND ONLY , but DISCLOSE COST.
PLANT, PROPERTY AND
EQUIPMENT
• The lapsing schedule should always be prepared by client in
order for us to analyze the movements in the fixed asset
account as well as depreciation account. Take note of fixed
asset sale. These must be authorized by the board of
directors. They should also be arms length transactions and
not just
“ accommodation sales”
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PLANT, PROPERTY AND
EQUIPMENT
• Sometimes, the cooperative charges fixed assets purchases
against statutory funds like the Coop Education and Training
Fund and the Optional Fund. take note that we have to
adjust this, showing the cost of the equipment as part of the
total assets of the coop.
• Charging to the statutory funds should be up to the extent
of the depreciation of the assets.
DEPOSIT LIABILITIES
• Take note of special accommodations; i.e. special interest
rates. Remember that too high interest rates given as
accommodations can decrease net income ratio of the
cooperatives in order to favor special members/ vips.
• Take note of dormant accounts.
• Compare SL vs. GL balances for potential losses.
Remember: when SL is bigger than GL, it means you have
to pay more than what is stated in your GL. That is a
potential loss.
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LOANS AND BORROWINGS
• Remember that the loan must always be in the name of the
cooperative
SHARE CAPITAL
• There are 2 kinds of shares: common and preferred; make sure
that the issuance of these shares is in accordance with the
coop’s articles of cooperation
• No owner must subscribe to more than 10% of the total
capital of the coop. take note of “dummy stockholders”.
• Compare SL vs. GL balances for potential losses. Remember:
when SL is bigger than GL, it means you have to pay more than
what is stated in your GL. That is a potential loss
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SHARE CAPITAL
• Make sure the membership of the cooperative falls within
the covered bounds of membership as per articles and by-
laws of the coop
• Analyze movements in share capital. Why are there
withdrawals? Are these approved by the board? ( take note:
for cooperatives, there should be no partial withdrawals)
DEPOSITS FOR SHARE CAPITAL
SUBSCRIPTION
• Take note: why? Is there an application for an increase in
share capital?
• Is it really a deposit for share capital subscription ( part of
equity), or a liability?
• Ascertain the nature of this account so as to determine
account classification
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DONATIONS/GRANTS
• The proper treatment of donations is always as equity.
• Review the donation agreement. If there is an expected
return of the donation, then this should be recorded as a
liability, and not part of equity
• For Fixed asset donations, there is a specified entry with
which to record the donation, and to amortize the fixed
asset via the depreciation account. The depreciation expense
is thereby offset against Donations account.
STATUTORY FUNDS/INTEREST ON SHARE
CAPITAL AND PATRONAGE REFUND PAYABLE
• Always examine the cooperative’s by-laws for any
amendments in the distribution of net surplus.
• Determine if the cooperative transacts with both members
and non-members
• For coops transacting with both members and non-
members, see to it that the income statement segregates
transactions with non-members in order to facilitate
taxation
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STATUTORY FUNDS/INTEREST ON
SHARE CAPITAL AND PATRONAGE
REFUND PAYABLE
• Take note of the allocation for statutory funds if in conformity
with the by-laws.
• Take note: cooperative guarantee fund and other fund
provisions are NOT an allocation of net surplus. They are
treated as an expense.
• Take note of fund utilizations. Take note of large amounts. These
must be in accordance with by-laws, properly authorized by
board resolutions, and ratified by the GA. Correlate with audit
procedures on property and equipment.
STATUTORY FUNDS/INTEREST ON SHARE
CAPITAL AND PATRONAGE REFUND
PAYABLE
For interest on share capital and patronage refund
payable- take note of how these are computed.
Reperform calculation of interest on share capital and
patronage refund
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STATUTORY FUNDS/INTEREST ON SHARE
CAPITAL AND PATRONAGE REFUND
PAYABLE
Please take note that if the reserve fund reaches
10,000,000, it is now taxable for both vat and
income tax on transactions with non-members
DUE TO/DUE FROM ACCOUNTS /
RELATED PARTY TRANSACTIONS
• A coop should disclose its related party transactions; i.e.
investment to affiliates, etc.You should be very keen on
these matters as they may affect the FS as a whole.
• Take note that due to /due from transactions should be
reconciled ( example: due to canteen operations, store
operations, etc.), and accounts should be consolidated.
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SUBSEQUENT EVENTS
• perform procedures designed to obtain sufficient
appropriate audit evidence that all events up to
the date of the auditor’s report that may
require adjustment of, or disclosure in the
financial statements have been identified.
SUBSEQUENT EVENTS
PROCEDURES TO BE UNDERTAKEN:
1. Inquiring of management about the occurrence of
subsequent events
2. Reviewing procedures management has established to
ensure that subsequent events are identified
3. Reading the minutes of meetings of board of directors and
shareholders
4. Sending a letter of inquiry to the entity’s lawyers
concerning litigation and claims
5. Reading the latest available interim financial statements
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AUDITOR’S RESPONSIBILITY- EVENTS AFTER
THE DATE OF THE REPORT
• When, after the date of the report but before the financial
statements are issued, the auditor becomes aware of a fact
which may affect the financial statements, the auditor should
consider whether the financial statements need amendment,
should discuss the matter with management and should take
the action appropriate in the circumstances.
AUDITOR’S RESPONSIBILITY- EVENTS AFTER THE
ISSUANCE OF THE FINANCIAL STATEMENTS
• When, after the financial statements have been issued, the
auditor becomes aware of a fact which existed at the date
of the auditor’s report and which, if known at that date,
may have caused the auditor to modify his report, the
auditor should consider whether the financial statements
need revision, should discuss the matter with management
and should take the action appropriate in the
circumstances.
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Thank You!
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