Preliminary Analytical Procedures: Where Philippines Audits Begin with Precision

Imagine a company’s financial health as a complex puzzle, with each piece representing a number, detail, or financial decision. To ensure trust and precision in completing this intricate puzzle, we rely on the audit process in the Philippines — an indispensable safeguard of a company’s financial well-being. At its core lies the preliminary analytical procedures, which serve as the initial glimpse into this financial mystery.

Analytical Procedures in the Philippines, outlined in Philippine Auditing Standards (PSA) 520, are akin to a financial auditor’s toolkit. It equips Philippines auditors to comprehend the company and its internal controls, evaluate potential errors, and uphold Philippines financial statement integrity. Simply put, Analytical Procedures involve a meticulous examination of numbers and patterns in a company’s financial statements in the Philippines. This procedure may be used during the planning, substantive test, or completion stages of the audit in the Philippines. These insights act as guideposts, ensuring that the financial picture aligns with expectations. It’s synonymous to double-checking calculations to ensure everything tallies accurately. In this article, we will explore the significance of preliminary analytical procedures in auditing in the Philippines, shedding light on their role in amplifying audit efficiency and effectiveness.

Listed below are seven (7) key takeaways of Preliminary Analytical Procedures in the conduct of an audit:

1. As a Risk Assessment Tool

Preliminary analytical procedures in Philippines serve as invaluable tools for auditors to assess the risks associated with an audit engagement. They assist Philippines auditors in identifying areas in a company’s financial records that might be error-prone or problematic. By scrutinizing the financial data, Philippines auditors gain insights into the company’s financial well-being and identify areas that might pose risks. This allows Philippines auditors to strategize where to concentrate their efforts, ensuring a more efficient and focused audit.

2. Planning and Strategy

The data collected in the early analysis step is like a roadmap for Philippines auditors. They use this information to create a plan that fits the client’s unique business and industry. For instance, if Philippines auditors notice significant changes in a company’s revenue, they’ll focus on checking how the company recognizes its revenue. This planning helps Philippines auditors use their time and tools wisely, ensuring they look closely at the areas where there might be problems.

3. Efficient Resource Allocation

Given the fixed timeline associated with Philippines audits, efficiency becomes paramount. Preliminary analytical procedures assist Philippines auditors in identifying the typically accurate and less error-prone areas of financial statements. For instance, depreciation charges throughout the year tend to be consistent when uniform accounting policies are applied to both existing and newly acquired equipment.

Using this method, Philippines auditors can wisely distribute their resources and direct their focus toward areas with a higher risk of errors, such as the application of new accounting standards. This approach not only improves the quality of the audit but also keeps audit costs in check.

4. Early Detection of Anomalies

One of the primary objectives of preliminary analytical procedures is to catch strange or unexpected patterns in financial data. For example, let’s say a company’s revenue suddenly spikes in the middle of the year, without any apparent reason like a new product launch or a major acquisition. This unusual finding would suggest mistakes, irregularities, or even potential fraud in the financial statements in the Philippines,

prompting Philippines auditors to investigate further to ensure everything is accurate and transparent. Detecting these issues early on enables auditors to look deeper into them and take the necessary steps.

5. Client Relationship

Effective communication and working closely with the client are key ingredients for a successful financial statements audit in the Philippines. When we kick off the audit, preliminary analytical procedures give us a chance to talk with the client. By discussing what we uncover during these steps, Philippines auditors get valuable insights and explanations for any unusual trends or surprises. This teamwork approach not only strengthens the relationship with the audit client but also builds trust and transparency as the Philippines audit progresses.

6. Regulatory Compliance

Philippines auditors must follow specific rules and guidelines set by the Philippines auditing profession and regulatory bodies during Philippines audits. Preliminary analytical procedures are a fundamental component of these rules and aid Philippines auditors in fulfilling their responsibilities. Through conducting these checks, Philippines auditors showcase their dedication to a comprehensive and structured auditing approach, which holds great significance during times of regulatory examinations or legal challenges.

7. Continuous Improvement

Philippines auditors can take what they learn from the results of preliminary analytical procedures and make their auditing methods better, adjusting to shifts in how businesses operate. By always working to improve their analysis methods, Philippines auditors can keep up with what’s happening in the industry and the new risks that come up, making sure their audits are up-to-date and meaningful.

In summary, preliminary analytical procedures serve as the foundational stages in guaranteeing the precision of a company’s financial statements in the Philippines. It empowers auditors to anticipate potential pitfalls, strategize their Philippines audit, pinpoint areas for focused attention and resource allocation, and determine their approach to the audited company. By prioritizing these procedures, Philippines auditors can carry out their audit with maximum effectiveness and efficiency, thus assuring that the financial statements are reasonably free from significant errors. This, in turn, bolsters the trust placed in these financial statements in the Philippines by their users, providing them with a high degree of reliability.

In the world of external audits in Philippines, the spotlight often shines brightly on auditors and their responsibilities. However, there is a significant player behind the scenes whose role is equally pivotal yet sometimes overlooked—the management of the company in Philippines being audited. In this article, we will explore on the extent of management’s involvement in ensuring the accuracy of audited financial statements in Philippines and examine the vital role that external auditors in Philippines play in preserving this accountability.

The Power and Perils of Financial Statements in Philippines

Financial statements in Philippines serves as a treasure trove of information, offering a snapshot of a company’s financial health. It wields considerable influence over the decisions of various stakeholders, including investors, creditors, government agencies and the public, in general. The accuracy of financial statements in Philippines is pivotal for making well-informed choices, underscoring their reliability as paramount.

Financial Statements in Philippines is one of the most important documents in your business that is checked or monitored frequently by regulatory bodies, like Philippines Securities and Exchange Commission (SEC), and Bureau of Internal Revenue (BIR), among others. In the absence of a statutory audit in Philippines, there exists a presumption that these financial statements may harbor errors or misstatements, as they have not undergone audit in Philippines by an independent auditor in Philippines. Conversely, audited financial statements in Philippines impart credibility and provide reassurance to external stakeholders, enabling them to make informed decisions.

Management’s Mandate: Crafting Financial Statements in Philippines

Financial Statements in Philippines is the output of any company’s financial activity meticulously prepared and presented in an organized manner. The tasks involved in crafting the financial statements in Philippines is a multifaceted process that includes data gathering, recording, financial statement preparation, and the application of accounting standards in Philippines. Management, acting on behalf of the business entity, must prepare financial statements in Philippines that mirrored the financial activity transpired in an accounting period.

This responsibility of the management to prepare financial statements in Philippines cannot be delegated to any external entity, as management is intricately involved in the day-to-day operations, decision-making processes of the organization, whether in administrative or financial matters and later on the authorization or approval of the Financial Statements in Philippines for issuance. The internal controls, accounting policies, estimates, and judgments established, applied, and maintained by management all play pivotal roles in ensuring the fair preparation and presentation of financial statements.

The Philippine Auditor’s Lens: An External Perspective

An external audit in Philippines is the critical evaluation of a company’s financial statements by an independent party. This serves as checks-and-balances mechanism to ensure that the financial statements in Philippines are reliable to the statement users to make informed decisions.

During an external audit in Philippines, the statutory auditor scrutinizes the procedures and systems utilized by management in creating and presenting the financial statements in Philippines. With a professionally skeptical approach, statutory auditors in Philippines investigate the underlying transactions, internal controls, and policies in use. Through the external audit in Philippines, auditors deliver an informed judgment on whether the financial statements in Philippines are free from material errors or misstatements.

The Blame Game: Addressing Misconceptions

There have been instances where statutory auditors in Philippines have been wrongly blamed for failing to identify material misstatements in the financial statements in Philippines. However, it is important to understand that auditors in Philippines, while performing their duties diligently, are not responsible for the preparation of financial statements in Philippines. Their role is to examine and provide reasonable assurance on the financial statements prepared by the management.

Misconceptions can arise due to the expectation gap – a difference between what the public expects from statutory auditors in Philippines and what auditors can reasonably provide. Bridging this gap involves educating stakeholders on the true scope of an external audit and the respective roles of management and auditors in financial statement preparation. Typically, this information is incorporated in the engagement proposal, highlighting management’s obligations in the preparation and presentation of financial statements in Philippines.

A Balanced Partnership: Collaboration and Transparency

Management and statutory auditors in Philippines must work in harmony to establish a genuine partnership. Effective communication and cooperation between them are important to the successful completion of the audit. Management should furnish the requisite information and extend full cooperation during the audit procedure and this collaborative effort aids in addressing potential concerns and upholds the precision of financial statements in Philippines. In addition, Management should be transparent in the presenting financial data, enabling auditors to conduct a comprehensive evaluation. Conversely, statutory auditors in Philippines should be transparent about their discoveries and the constraints inherent in their audit process.

Striking the Right Note

In the realm of financial statements in Philippines, precision is the fundamental note that any Company must hit. The Management, as the primary person responsible for the fair preparation and presentation of the Financial Statements in Philippines plays a pivotal role in ensuring this note’s precision. On the other hand, External Auditors in Philippines, as independent examiner, confirm assertions of the Management financial data provided through its audit procedures and provide assurance reports on the reliability of the financial statements. It’s essential to move away from the blame game and instead comprehend the distinct roles both parties fulfill. Through collaboration, transparency, and education, we can bridge the gaps of such misconception, and can navigate through business that resonates trust and reliability for all who engage with it and makes a long lasting impact in the society.

One indicator that a business is in good financial standing is it has excessive retained earnings or accumulated profits. With this, users of the financial statements, for example, investors can decide whether to put up additional funds to expand business operations or banks may approve loan applications. The question is, when do you consider retained earnings excessive and what is the regulatory compliance associated with it?

Retained Earnings; definition and classification

Retained earnings in simplest words, is the excess profit accumulated and generated from business operations net of dividend payment to shareholders. It represents a portion of your business equity that may be used for investment in Research and Development, equipment, or business expansion for example. Retained Earnings may be classified further into two: Unrestricted and Restricted. Restricted retained earnings are those that a business may not distribute as dividends such as appropriation of retained earnings for a loan (as required by loan covenant) while unrestricted retained earnings are those that are available for dividend distribution.

When Retained Earnings Is Excessive and Its Exemption?

Retained Earnings are considered excessive if unrestricted retained earnings are more than the 100% paid-up capital of your company.

If your Philippine Company has excess retained earnings, the financial statements must include the following information in accordance with Section 42 of the Revised Corporation Code (RA 11232):

“Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except:

Regulatory Compliance Requirement So, unless covered by the limitations listed above, the Securities and Exchange Commission (SEC) in the Philippines requires that the Audited Financial Statements include a Statement of Reconciliation of Retained Earnings Available for Dividend Declaration. The template for such a statement provided by SEC MC No.11-2008 is attached to this article for reference.

It is a key takeaway that the amount of retained earnings of the Company for the reconciliation statement should be based on Retained Earnings of “stand-alone” or Separate Financial Statements. So, if your Company is a Philippines Subsidiary of a Parent Corporation, the amount of retained earnings for such reconciliation is of the PH Subsidiary Company. This is because retained earnings based on consolidated financial statements include a surplus of subsidiaries, which are not yet actual earnings of the parent unless distributed in the form of dividends by the subsidiaries. However, in accordance with Revised SRC Rule 68, the Parent company’s retained earnings reconciliation must be submitted along with the consolidated financial statements.

In reference with PAS 1, the notes to financial statements of Corporations shall disclose information that is relevant to an understanding of the financial statements which includes any provisions indicating retention for expansion projects must be definite and approved by the Board of Directors. The following disclosures are relevant pursuant to PAS 1 to provide an understanding on the impact of the retention of earnings on the financial statements:

(i) Details of the expansion (e.g., description of the project, timeline) to render the project definite;

(ii) The date of the approval of the project by the Board of Directors

Noncompliance of such regulatory requirements will be subjected to appropriate sanction of the SEC upon review of the audited financial statements as per SEC MC 6-2005: “Failure to Comply with any of the requirements of SRC Rule 68 or Incomplete Disclosures in the Financial Statements”

• First Offense: P 25,000.00 + P 500.00 per day of violation
• Second Offense: P 50,000.00 + P 1,000.00 per day of violation
• Third Offense: P 100,000.00 + P 1,000.00 per day of violation

Tax Implications Prior to CREATE LAW, improper accumulated earnings tax (IAET) is at 10%. IAET was imposed on the excessive accumulated taxable income of a corporation founded for the intention of avoiding income tax on its shareholders by allowing the corporation’s revenues and profits to accrue rather than distributing them to the shareholders as dividends. Its implementation was intended to discourage or penalize firms for improperly accumulated earnings in order to avoid paying dividend taxes that would have been required had the earnings been distributed as dividends to shareholders.

The 10% IAET has been REPEALED with the implementation of CREATE LAW, and there is no retroactivity clause for 10% IAET. According to RR No. 5-2021, the repeal of IAET applies to the entire tax year for all fiscal years/taxable years ending after the effective date of CREATE LAW. Because CREATE LAW went into effect on April 11, 2021, your financial statements of prior to 2021 that contain improperly accumulated earnings over the “reasonable needs” of the business may still be subject to IAET evaluation during tax audit.

At the end of the day, knowing that your firm is in conformity with local regulations in the Philippines can help you save money on penalties and avoid having to deal with future tax or regulatory evaluations. So, if you’re an accountant, you should check your retained earnings before year-end reporting to see if there’s any reporting or disclosure required.