Findings No.1 COA Annual Audit Report 2004

July 28, 2008

Prepayments on insurance premium were directly charged to expense under account code Other Maintenance and Operating Expenses, thus understating the asset account and government equity account by P 509,654.10.

Section 64 of the New Government Accounting Manual defines prepayment as advance payment of expenses not yet incurred. A payment of annual insurance premium is an example of prepayment. The payment is treated as an asset rather than an expense.

Verification of records disclosed that not all payments of insurance premium were recorded under Prepaid Insurance, an asset account. The total amount paid for insurance premium was P 1,878,032.25, however the amount recorded in the subsidiary ledger as Prepaid Insurance is only P 1,202,657.50. Further verification disclosed that the difference of P 675,374.55 was directly recorded to the expense account using Other Maintenance and Operating Expenses, which is not the proper account. The unexpired portion of the insurance premium recorded under the latter account was P 509,654.10. Thus the amount was not recognized as an asset, but an expense in the financial statements. The prevailing condition can be fully explained/illustrated in the Analysis of Accounts, as presented below:

Per BookPer AuditVarianceBeginning BalanceP 478,022.97P 478,022.97P 0.00Add: Payments during the year

724,634.73

1,400,009.28

675,374.55TotalP 1,202,657.70P 1,878,032.25P 675,374.55Less: Expired portion1,074,705.321,240,425.77165,720.45Ending BalanceP 127,952.38P 637,606.48P 509,654.10

The deficiency was a result of insufficient appropriation for insurance expense.

The erroneous recording of the transaction resulted in the overstatement of expenses in the Statement of Income and Expenses and understatement of asset and government equity accounts in the Balance Sheet by P 509,654.10.

When the audit observation was presented to management, the latter concurred.

Recommendation:

Instruct the City Accountant to debit Prepaid Insurance and Credit Prior Years’ Adjustments Accounts for P 509,654.10. She shall be advised to record the transactions in their appropriate accounts.

Due to non-availability of subsidiary records, 69% or P 4,350,788.42 of the Other Prepaid Expenses year-end account balance of P 6,315,522.23 could not be validated, thereby its accuracy and reliability could not be ascertained.

Financial statements are representation of management’s financial position and results of operations. It should provide information that are reliable, accurate and complete as these will serve as tools for management and other financial statements’ readers in arriving at decision related to financial affairs.

Audit revealed that 69% or P 4,350,788.42 of the Other Prepaid Expenses year-end account balance of P 6,315,522.23 represents converted accounts from Other Assets – Miscellaneous Assets and Deferred Charges accounts (8-73-000), which could not be validated due to lack of subsidiary records. The bookkeeper also failed to keep the source documents as basis in the computation of the expired portion of the prepayments.

Precisely, the city was not able to recognize the expense portion of the prepayments over a number of years that overstated its assets and equity accounts. Besides, the accuracy and reliability of the account balance of Other Prepaid Expenses in the amount of P 4,350,788.42 could not be ascertained.

The City Accountant justified the deficiency that the above accounts had remained outstanding for several years prior to its conversion in December 2001 with the implementation of the New Government Accounting System.

Management confirms our audit observation.

Recommendation:

Instruct the City Accountant to maintain subsidiary records and files of source documents that needs schedule. Reconstruct records on affected Other Prepaid Expenses account and make appropriate adjustments to arrive at accurate balance.

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Written by admin · Filed Under Commission on Audit, Ozamiz City