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Audit Observation Memorandum: Office of The Team Leader

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Republic of the Philippines

COMMISSION ON AUDIT
OFFICE OF THE TEAM LEADER
Cluster 5 – Education and Employment
Audit Group – NGS-5-A
Audit Team No. R9-15
Dipolog City, Zamboanga del Norte

AUDIT OBSERVATION MEMORANDUM

AOM No: 2016 – 007 (15)


Date: April 5, 2016

FOR : NATIVIDAD P. BAYUBAY, CESO VI


Schools Division Superintendent
Division of Zamboanga del Norte
Dipolog City

Attention: ARVIE M. OMPOY, CPA


Division Accountant

XXXXXXXXXXXXXXX
Property/Supply Officer

We have verified the Agency’s compliance with laws, rules and regulations, and
observed the following deficiency/ies:

The validity, accuracy, and existence of the reported balances of Property, Plant and
Equipment (PPE) accounts in the agency’s financial statements as of December 31,
2015 with a book value amounting to P999,827,979.44 cannot be fully relied upon due
to the absence of physical inventory reports for PPE accounts and the non-
maintenance of complete perpetual inventory records which are not in keeping with
the applicable provisions of the Government Accounting and Auditing Manual
(GAAM) and the Manual on the New Government Accounting System (MNGAS).

Section 490 Volume I of the GAAM states that physical stocktaking is an


indispensable for checking the integrity of property custodianship. In all cases, the physical

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inventory taking should be regarded with importance. The same provision also prescribes the
following:

“Chief of Agencies is required to take a Physical Inventory of all the


equipment and supplies belonging to their respective offices at least once a
year unless otherwise determined by the COA Chairman in specific cases.
Such inventory shall be made as of December 31 on General Form 41 A and
submitted to the Auditor not later than January 31 of each year unless
extended by the chairman, Commission on Audit, upon prior request of the
Chief of Agency concerned. When the exigencies of the service permit the
taking of inventory should be in the charge of committee of two or more
employees designated by the chief of the agency, including the Property
Officer or Custodian, depending on the extent of property accountability in a
particular agency, to be witnessed by a representative of the Agency
Auditor..”

The physical inventory taking will not only determine the physical existence of the
Inventories, but likewise identifies the responsibility and accountability of the public officers
entrusted with the keeping of the Inventories. Moreover, the RPCPPE serves as basis in
verifying the correctness of the recorded PPE in the General Ledger controlling account.

Section 66, Volume II of NGAS states that:

“Report on the Physical Count of Property, Plant and Equipment (RPCPPE).


The RPCPPE shall be used to report the physical count of property, plant and
equipment by type as of a given date. It shows the balance of property and
equipment per cards and per count and shortage/overage, if any.”

The immediately preceding NGAS provision requires the preparation of the RPCPPE
annually. Subsequent submission of this report to the Auditor concerned, certified by the
Inventory Committee and Approved by the Head of Agency, shall not be later than January
31 of each year.

Likewise, Section 43 of the same Manual requires the Accounting Unit to maintain
Property, Plant and Equipment Ledger Cards (PPELC) for each category of plant, property
and equipment including work and other animals, livestock, etc. The subsidiary ledger cards
shall contain the details of the General Ledger accounts. For check and balance, the Property
and Supply Office/Unit shall maintain Property Cards (PC) for property, plant and
equipment. The balance in quantity per PC should always reconcile with the ledger cards of
the Accounting Unit.

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The agency’s year-end Statement of Financial Position for Calendar Year 2015
reflects the following balances of PPE Accounts:

Accumulated
PPE Accounts Cost Book Value
Depreciation
Buildings 88,598,513.50 60,674,562.01 27,923,951.49
School Buildings 770,836,163.40 97,479,592.64 673,356,570.76
Other Structures 10,178,408.44 8,492,291.62 1,686,116.82
Office Equipment 12,480,729.90 7,997,706.33 4,483,023.57
Information and Communication 42,536,660.16 43,953,819.55 -1,417,159.39
Technology Equipment
Communication Equipment 388,341.00 0.00 388,341.00
Motor Vehicles 1,104,383.00 1,104,383.00 0.00
Furniture and Fixtures 41,125,214.38 31,768,630.12 9,356,584.26
Books 36,819,818.00 40,501,799.80 -3,681,981.80
Construction in Progress - Buildings 286,499,287.73 0.00 286,499,287.73
and Other Structures
Other Property, Plant and Equipment 1,611,457.46 378,212.46 1,233,245.00
TOTAL 1,292,178,976.97 292,350,997.53 999,827,979.44

Verification showed that the desired operation of asset reconciliation has not been
realized by the DepEd Division Office of Zamboanga del Norte which is not in keeping with
the foregoing policies and procedures. This breakdown or ineffective operation of the control
provided by the asset reconciliation came about because:

a. the Property Section did not conduct physical count of its PPE nor maintained the
Property Cards for all types of PPE items; and
b. the Accounting Section did not maintain the PPELC
for all types of PPE.

Asset reconciliation cannot proceed without conducting complete physical count of all
PPE items. Likewise, reconciliation cannot also proceed in the absence of the PC and
PPELC, as these records contain the critical information that will make the reconciliation and
tracking of assets possible.

In the absence of physical count of PPE, the validity, existence and valuation of these
assets could not be ascertained; hence, the financial assertions in the financial statements with
regard to these accounts are doubtful and cannot be fully relied upon.

In addition, the above table shows two (2) PPE accounts with a negative book value at
year-end, to wit:
Accumulated
PPE Accounts Cost Book Value
Depreciation
Information and Communication 42,536,660.16 43,953,819.55 -1,417,159.39
Technology Equipment
Books 36,819,818.00 40,501,799.80 -3,681,981.80

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This simply indicates that these PPE accounts were over depreciated resulting to an
overstatement of the corresponding Accumulated Depreciation Accounts. In effect, the total
depreciation expense recorded for these PPE accounts accumulates to more than their
depreciable amounts. Since depreciation expense account is by its nature temporary and is
closed to equity at year-end, the Accumulated Surplus account balance that will be reported
every year-end will be overstated by an amount equivalent to the excess depreciation until the
same is corrected or adjusted.

These lapses demonstrate an inefficient recording and monitoring of recorded PPE


accounts which also violates certain accounting policies and principles.

The proper balances of these accounts could have been determined as of the balance
sheet date had the Accounting and the Property and Supply Office made a conscious effort to
reconcile their respective inventory records to be able to present a reliable financial
statements. Also, the recording of depreciation expenses could have been properly monitored
to avoid or minimize errors, such as over depreciating a PPE account, had the Accounting
Office maintain a complete perpetual inventory record, as in this case the PPELC.

We recommend that regular physical count of inventory be conducted annually,


and the corresponding Reports, certified correct by the Inventory Committee and
approved by the Head of Agency, be immediately reconciled with the accounting
records so that any differences in PPE valuation are timely resolved. Submission of
RPCPPE should be made within prescribed period to support the validity and
reliability of the reported account balances. Furthermore, we recommend that
management instruct the Property/Supply Unit and the Accounting Section to maintain
the PC and PPELC, respectively, for all types of PPE indicating therein the critical
information necessary for effective management, tracking and accounting.

May we have your comments on the foregoing audit observation within five (5)
calendar days from receipt hereof. Thank you.

ENRIQUE A. FRANCISCO, JR.


State Auditor IV
Audit Team Leader

ESTRELLA B. AVILA
State Auditor V
Regional Supervising Auditor

Proof of Receipt of AOM:

Received by: _________________

Date: ______________________

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