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LESSON 1-2: AUDIT OF EXPENDITURE & DISBURSEMENTS CYCLE
Big Picture:
Ito yung process ng purchasing hanggang payment. Kasama dito: 1. Purchasing – pagbili ng goods/
services. 2. Receiving – pagtanggap ng goods. 3. Accounts Payable (A/P) – pag-record ng liability. 4. Cash
Disbursements – pagbabayad.
Key Terms (Important!) - Purchase Requisition (PR): Request from department. Ex: IT requests 10 new
laptops. - Purchase Order (PO): Formal order to supplier. Ex: PO #2025-050 for ₱500k laptops. - Receiving
Report (RR): Proof of delivery. Ex: Only 9 laptops delivered instead of 10. - Three-way match: Match PO, RR,
and Invoice bago mag-record. Ex: PO says 10 laptops, RR says 9, Invoice says 10 → dapat sundin RR. -
Vendor Master File: List of official suppliers. Ex: Fake supplier dapat hindi makapasok dito. - Voucher
package: Complete set of docs (PR, PO, RR, Invoice, approvals). - Cut-off: Record in right period. Ex: Delivery
on Dec 30 → record as Dec liability. - Petty Cash (Imprest fund): Small cash fund, replenished back to fixed
amount. - SOD (Segregation of Duties): Different people for authorization, recording, custody.
Audit Assertions & Examples: - Occurrence: Payment to real supplier, not fake. - Completeness: All
received goods recorded. Ex: Jan payment traced back to Dec delivery. - Accuracy: Recompute invoice. Ex: 9
× ₱50k = ₱450k. - Cut-off: Goods delivered Dec but recorded Jan = wrong. - Rights & obligations: Liability
dapat tunay at authorized.
Audit Procedures: - TOC: Check approvals on POs, verify vendor master edits. - Substantive: Search
unrecorded liabilities (SURL), review RRs near year-end, confirm A/P balances. - Disbursement Testing:
Inspect last/first checks, confirm payee bank details.
Red Flags: Duplicate invoices, shell vendors, wrong cut-off.
LESSON 1-3: AUDIT OF PRODUCTION & INVENTORY / WAREHOUSING
CYCLE
Big Picture:
Cycle ng paggawa ng goods at safeguarding ng inventory. Steps: planning → materials issuance →
production (WIP) → finished goods → warehousing/dispatch.
Key Terms (Important!) - Bill of Materials (BOM): Recipe ng product. Ex: 1 shirt = 2m cloth + 5 buttons + 1
hr labor. - Routing: Sequence ng production steps. Ex: Cutting → Sewing → Packaging. - Production Order:
Authorization to produce. Ex: Make 500 shirts by Sept 30. - Materials Requisition (MR): Request for raw
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materials. Ex: Request 100m cloth from warehouse. - Work-in-process (WIP): Partly finished goods. Ex: Half-
sewn shirts. - Standard costing & variances: Compare actual vs standard. Ex: Standard ₱100 per shirt,
actual ₱120 → ₱20 unfavorable variance. - Perpetual inventory system: System updated real-time after
each transaction. - Cycle Count: Partial periodic counts. Ex: Count top 10 high-value items weekly. -
Obsolescence: Old/expired/damaged goods. Ex: Unsold 2019 phone models. - Consignment: Goods
physically present pero hindi owned.
Audit Assertions & Examples: - Existence: Check kung physically present ang inventory. - Completeness:
All on-hand items recorded. - Valuation: Cost build-up correct (material + labor + overhead). Ex: If selling
price ₱80 but cost ₱100 → write down to ₱80. - Cut-off: Goods issued/received dapat nasa tamang period. -
Rights & Obligations: Consigned goods excluded.
Audit Procedures: - Physical Count: Observe counts, test count samples. - Valuation: Recompute costs,
check NRV vs cost. - Third-party confirmation: Confirm goods held at warehouse. - Analytics: Inventory
turnover, GP% trends.
Red Flags: Phantom inventory, overcapitalized overhead, unrecorded scrap, obsolete items carried at full
cost.
LESSON 1-4: AUDIT OF INVESTING & FINANCING CYCLE
Big Picture:
- Investing: Buying/disposing PPE, intangibles, investments. - Financing: Raising funds (loans, bonds,
shares), leases, dividends.
Key Terms (Important!) - PPE (Property, Plant & Equipment): Long-term assets. Ex: New factory ₱50M. -
Capitalization vs Expense: Ex: New machine installation ₱200k → capitalize; minor repair ₱20k → expense.
- Depreciation: Spread cost over life. Ex: ₱1M truck, 10 years, ₱100k residual → ₱90k/year. -
Componentization: Separate depreciation per major part. Ex: Plane engine vs body. - Impairment: Asset
value lower than recoverable amount. Ex: Book ₱5M, recoverable ₱3M → ₱2M impairment loss. -
Intangibles: Non-physical assets. Ex: Software ₱2M amortized 5 years. - Debt instruments: Loans/bonds.
Ex: ₱10M loan payable in 5 years. - EIR (Effective Interest Rate): Method to spread interest. Ex: Bonds sold
at discount, interest spread via EIR. - Leases (IFRS 16): Recognize ROU + Lease Liability. Ex: Office rent ₱50k/
month for 5 years. - Equity: Share capital, treasury shares, dividends. Ex: ₱1/share dividend declared.
Audit Assertions & Examples: - Existence: Inspect PPE (machinery exists). - Completeness: All loans
recorded. - Valuation: Recompute depreciation, impairment. - Classification: Current vs noncurrent debt. -
Presentation & Disclosure: Related-party loans properly disclosed.
Audit Procedures: - PPE Additions: Vouch to PO, invoice, RR. - Depreciation: Recompute yearly charge. -
Impairment: Test recoverable value. - Debt: Confirm with lenders. - Leases: Recompute PV of lease. -
Equity: Check board minutes for dividends.
Red Flags: Wrong capitalization, hidden impairments, misclassified debt, missing disclosures.
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Mini-examples: - Lease: 5-year rent → ROU + Lease Liability. - Investment: Bond held to collect → amortized
cost.
SUMMARY MEMORY AIDS
• Expenditure/AP: OCCACCPR (Occurrence, Completeness, Cut-off, Accuracy, Classification,
Presentation, Rights)
• Inventory: ECVCRP (Existence, Completeness, Valuation, Cut-off, Rights, Presentation)
• Investing/Financing: ECVCP (Existence, Completeness, Valuation, Classification, Presentation)
PRACTICE Qs (Sample)
1. Three docs in 3-way match? → PO, RR, Invoice.
2. Example of cut-off error in purchases? → Dec delivery recorded Jan.
3. Example of impaired inventory? → Unsold stock > 1 year, selling price lower than cost.
4. FIFO vs WA in rising prices? → FIFO = lower COGS, higher EI.
5. What is EIR? → Effective Interest Rate for amortized cost of bonds/loans.
