Ateneo de Naga University

School Year 2020-2021

Second Semester

Important Points and Sample Questions on Audit of Specialized Industries

(Course Requirement Part I)

Auditing Specialized Industries

ACCP307

Ira Grace B. De Castro

3rd Year BS Accountancy
AC31
 AUDIT OF COOPERATIVES

Definition
Cooperative is “an autonomous and duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve their social, economic, and
cultural needs and aspirations by making equitable contributions to the capital required,
patronizing their products and services and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative principles.” (Philippine
Cooperative Code of 2008 – RA 9520)

Rule 10 | Capitalization and Accounting Procedures of Cooperatives

Section 2 | Capital Sources Section 3 | Share Capital

Par value may be fixed not more than
 Members’ Share Capital
One Thousand Pesos (P1,000.00)
 Loans and Borrowings including Deposits
 Common Share Capital - issued only to
 Revolving Capital consisting deferred payment
regular members. Holders entitled to vote
of patronage funds, or interest on share capital
(one-man, one vote principle) and receive
 Subsidies, donations, legacies, grants, aids
interest, the rate which should not
and such other assistance from any local or
exceeded the normal rate on investment.
foreign institution whether public or private;
 Preferred Share Capital - issued to
provided that it shall not be divided into
regular and associate members.
individual share capital holdings at any time but
Associate Members shall not be eligible to
shall instead form part of donated capital or
vote nor be voted on account of such
fund of the cooperative.
shareholdings.

Other Salient Points

Sec.4 Limitation on Preferred Shares – 25%
Sec.5 Capital Build Up – reasonable and realistic program
Subscription Agreement – upon admission and additional subscription
Sec.6 Limitation Share Capital Holding – 10% limit based on total Subscribed Capital
Sec.7 Fines on Unpaid Subscribed Share Capital – must be fair and reasonable under the
circumstances as determined by the BOD
Sec.8 Assignment of Share Capital Contribution or Interest – No member shall transfer share or
interest in the coop or any part thereof, unless:
 It was held for not less than 1 year
 Assignment is made to coop or to a member of the coop or to a person who falls within
the field of membership of the coop; and
 The BOD has approved such assignment
Sec.9 Interest on Share Capital – where X is a percentage determined by BOD allocated for interest
on share capital.
X ( Net Surplus less Staturory Reserves)
Rate of Interest =
Total Average Share Month

No Allocation of interest on share capital shall be made without the approval of the Board of
Directors
Sec. 10 Withdrawal of Share Capital – for any valid reason withdraw by giving 60-day notice to
the Board of Directors. Withdrawing member shall be entitled to a refund of share capital
contribution and all other interests in the cooperative
Sec. 11 Patronage Refund –minimum of 30% and should not be more than twice the rate of interest
on share capital
Principle of Equity – Net Surplus shall not be construed as profit, but as excess payments
made by them from the cooperative and which shall be deemed to have been returned to
them if the same is distributed as prescribed by the Code and by this Rule
Sec. 12 Accounting Procedure – shall be in accordance with the generally accepted accounting
principles and practices, taking into consideration cooperative principles and practices. The
cooperative shall use the Standard Chart of Accounts and its accompanying Accounting
Manual prescribed by the Authority.

Gathering Audit Evidence for Cooperative Accounts

Cash and Cash Equivalents Inventory

 Examine bank reconciliations for  Observe inventory count for existence of ending
abnormal reconciling items inventory.
 Perform Cut-off procedures to  Risk: Placing a big ending inventory balance in
ascertain completeness order to increase coop income, but in reality,
 Ascertain that cash and cash ending inventory is not existing, or may have been
equivalent balances represent cash obsolete or spoiled.
balances which can be withdrawn  Impairment losses should be recognized on such
anytime (cash accounts for inventory.
retirement funds, statutory funds  Observation of inventory count not possible: secure
should be under “other funds and an ending inventory listing signed counted by the
deposits”) accounting staff/ audit committee.
Important CDA Regulation:  If not, then the risk is that the actual inventory
 Reserve Fund should be funded count was not performed.
 Cash or Cash equivalent used in  Check for obsolescence, spoilage, consigned goods,
funding reserve fund is reclassed as etc.
“Other funds and Deposits”  Assess the ownership of inventory on hand.

Loans and Receivables

 Ascertain that loans are properly authorized

 Risks: Existence (look out for loans or receivables through confirmations which may have been
given to a different member where there are issues of fictitious loans and dosri) and collectability
(Examine aging of receivables: the CDA has prescribed proper provisioning for past due loans -
using Portfolio-at Risk: 35% for 1 year and below while 100% for above one year)
 Relevant Questions:
 For past due loans, ask the coop:
o What are they doing to collect them?
o Are they improving their credit policies to install controls over loans and receivables?
  Other existing loans and receivables
o Are these loans properly authorized?
o Did they go through the review of Credit Committee?
o Supporting documents
o Are these loans from Coop members?
o Is the interest on loans properly computed?
o Are there controls regarding access to records and segregation of duties?
 Important points:
 Unearned interest and discounts are deducted from loans and receivables to get net realizable
value.
 Always reconcile subsidiary ledger balances vs. general ledger balances, differences might pose
as a potential loss.
 A Cooperative cannot make a loan to non-members

Advances to Other Officers Other Assets

 Take note of advances to officers and employees
 Perform analytical testing for
which have been unliquidated for a quite a period
prepayments and other assets.
of time. These may represent fund malversations
 Ask for a breakdown of “other
which may pose a potential loss for the
assets”, because they may represent
cooperative
misclassifications to other accounts
 What is their policy regarding unliquidated
(e.g. fixed assets, expense, etc.)
advances?

Investments

 Determine investment classification:

 Debt instrument
o Short-term – undiscounted amount
o Long-term – amortized cost
 Equity instrument
o Publicly listed – at fair value through profit or loss (subject to amendment: at fair value
through equity)
o Non-publicly listed or externally managed- at cost less impairment
 Determine whether coop has been managing its fund portfolio wisely. Consider risks and make
sure that the coop is properly advised.
 Determine income on investments – income from investments not publicly traded are not
recognized. Only income from public traded investment is directly credited to income.
 Physically determine investment papers and 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.
 Property, Plant and Equipment Real Properties Acquired
 Conduct inspection of property and equipment. It must be
 Net book value
existing and functioning, otherwise, provide impairment loss.
approximates the fair
 Revaluation method used for land only. Cost must be
values; note impairments
disclosed
in value; disclose any
 Lapsing schedule prepared by client to enable analyzation of
unrealized gains/losses
the movements in fixed asset account and depreciation account.
 Check for RPA
 Fixed asset sale must be authorized by the BOD and should be
remained unsold or
arms-length transactions and not just “accommodation sales”
unused which represent
 Adjust fixed asset purchases charged against statutory funds
idle/non-performing
like the Coop Education and Training Fund and the Optional
assets that might affect
Fund, showing the cost of the equipment as part of the total
computation of
assets of the coop. Charging to the statutory funds should be
Performance Ratios.
up to the extent of the depreciation of the assets

Deposit Liabilities and Borrowings

Deposit Liabilities
 Special accommodation such as special interest rates. Too high interest rates given as
accommodations can decrease net income ratio of the cooperatives in order to favor special
members/vips.
 Dormant accounts
 Compare SL vs. GL balances for potential losses. 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.
Loans and Borrowings
 Loan must always be in the name of cooperative

Share Capital

 Issuance of shares must be in accordance with the coop’s articles of cooperation.

 Subscription must not be more than 10% of total capital of the coop. (risk: “dummy
stockholders”)
 Compare SL vs. GL balances for potential losses. 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.
 Make sure the membership of the cooperative falls within the covered bounds of membership
as per articles and bylaws of the coop
 Analyze movements in share capital. Why are there withdrawals? Are these approved by the
board? (For cooperatives, there should be no partial withdrawals0
 Deposits for share capital subscription
 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 the account classification
 Donations or Grants Statutory funds/Interest on share capital and Patronage Refund Payable
 Review  Always examine the cooperative’s bylaws for any amendments in the
agreement. distribution of net surplus.
 Proper treatment  Determine if the cooperative transacts with both members and non-
of donations is members
always as equity  For coops transacting with both members and non-members, see to it
except when there that the income statement segregates transactions with non-
is an expected members in order to facilitate taxation
return of the  Allocation for statutory funds if in conformity with the bylaws
donation which is  Cooperative guarantee fund and other fund provisions are not an
a liability. allocation of net surplus. They are treated as expense.
 Fixed asset  Fund utilizations. Take note of large amounts. These must be in
donations: Record accordance with bylaws, properly authorized by board resolutions, and
donation and ratified by the GA. Correlate with audit procedures on property and
amortize the asset equipment.
via depreciation  For interest on share capital and patronage refund payable – take note
amount. of how these are computed.
Depreciation  Reperform calculation of interest on share capital and patronage
expense is offset refund.
against Donations  Please take not that if the reserve fund reaches 10,000,000 it is now
account. taxable for both vat and income tax on transactions with non-
members.

Related Party Transactions Subsequent Events

 A coop should  Perform procedures designed to obtain sufficient appropriate

disclose its related audit evidence that all events up to the date of auditor’s report that
party transactions may require adjustment of, or disclosure in the financial statements
such as investment to have been identified.
affiliates, etc. You  Procedures to be Undertaken
should be very keen  Inquiring management about the occurrence of subsequent
on these matters as events
they may affect the  Reviewing procedures management has established to ensure
FS as a whole. that subsequent events are identified
 Due to or due from  Reading the minutes of meetings of board of directors and
transactions should be shareholders
reconciled and  Sending a letter of inquiry to the entity’s lawyers concerning
accounts should be litigation and claims
consolidated  Reading the latest available interim financial statements
 Questions

1. Which among the following is not a part of practical tips in gathering audit evidence for cash and cash
equivalents?
a. Examining bank reconciliations for abnormal reconciling items
b. Performing cash related transactions cut-off procedures to ascertain completeness
c. Ascertain that cash and cash equivalent balances represent cash balances which can be withdrawn
anytime
d. Physically determining investment papers

D
Examining bank reconciliations for abnormal reconciling items, performing cash related
transactions cut-off procedures to ascertain completeness, and ascertaining that cash and cash
equivalent balances represent cash balances which can be withdrawn anytime are all part of
practical tips in gathering audit evidence for cash and cash equivalents. Physically determining
investment papers on the contrary is related to the audit of investment account which is closely
associated with the process of making sure that these investment papers are in the name of the coop
and are properly authorized by the board and the resolutions properly ratified by a general
assembly.

2. Which among the following is not a part of practical tips in gathering audit evidence for property,
plant and equipment?
a. Conducting ocular inspection of property and equipment
b. Ascertain authorization by the board of directors of the fixed asset sale which should be in arms-
length transactions
c. Proper charging to the statutory funds which should be up to the extent of the depreciation of the
assets
d. Proper treatment of donations

Conducting ocular inspection of property and equipment, ascertain authorization by the board
of directors of the fixed asset sale which should be in arms-length transactions, and proper charging
to the statutory funds which should be up to the extent of the depreciation of the assets are
procedures on gathering audit evidence for property, plant and equipment. On the other hand,
proper treatment of donations is a consideration the auditor must take note with regards to
donations or grants. The proper treatment of donations is always as equity except when there is an
expected return of the donation which in such case should be a liability.

3. All of the following are procedures undertaken to obtain sufficient appropriate audit evidence
regarding inventory except
a. Observe inventory count for existence of ending inventory
b. Securing an ending inventory listing signed counted by the accounting staff/ audit committee
c. Assess ownership of inventory on hand.
d. If not possible to observe, automatically consider the account materially misstated
 D

Procedures undertaken to obtain sufficient appropriate audit evidence regarding inventory

includes observation of inventory count for existence of ending 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 rather than automatically
declaring the account as materially misstated. Moreover, when ending inventory listing signed
counted by the accounting staff/ audit committee was not secured, then there exists the risk is that
the actual inventory count was not performed.

4. Which is the risk associated with ending inventory?

a. Placing a big ending inventory balance to increase cooperative income which in reality is not
existing or may have been obsolete or spoiled.
b. Placing a small ending inventory balance to increase cooperative income which in reality is not
existing or may have been obsolete or spoiled.
c. Placing a big ending inventory balance to decrease cooperative income which in reality is not
existing or may have been obsolete or spoiled.
d. Placing a small ending inventory balance to decrease cooperative income which in reality is not
existing or may have been obsolete or spoiled.

One of the procedures undertaken to obtain sufficient appropriate audit evidence regarding
inventory is the observation of inventory count for existence of ending inventory. This is due to the
risk that the cooperative may place a big ending inventory balance in order for the coop income to
increase, but in reality, ending inventory does not exist, or may have been obsolete or spoiled. This
is in line with the logic that a high balance in ending inventory derives a low cost of goods sold.
When netted with the sales, income is high as compared to a high amount of cost of goods sold
deducted from the same amount of sales. In such case, impairment losses should be recognized.

5. As an auditor, which question is relevant in auditing the Loans and Receivables

a. Did they go through the review of Credit Committee?
b. Why is there an application for an increase in share capital?
c. Is it really a deposit for share capital subscription (part of equity) or a liability?
d. Analyzing the movements in share capital, why are there withdrawals?

Only the question (A) “Did they go through the review of Credit Committee?” is relevant in
auditing the Loans and Receivables. This is due to the risk of existence where loans and receivables
may have been given to a different member raising issues of fictitious loans and dosri, unauthorized
extension of loans and the collectability. Concerns on application for an increase in share capital,
classification of deposit for share capital subscription (part of equity) or a liability, and analyzation
of the movements in share capital and withdrawals are significant points for the audit of the
cooperative’s share capital.