Republic of the Philippines

COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines

MEMORANDUM No. : 2011-005

Date: 23 MAR zpn

TO The Assistant Commissioner and the Cluster Director of the

Local Government Sector, Regional Directors, Supervising
Auditors. Audit Team Leaders and All Others Concerned

SUBJECT Unrecorded Credit Financing Transactions of the Local

Government Units (LOUs)

Under the Local Government Code (RA 7160), the LOUs are given the power to
create indebtedness and lO cntcr into credit and other financial transactions to fmanee local
infrastructure and other socia-economic development projects in accordance with the
approved local development plan and public invcsunenl program.

There were reports of instances where the LGU Accountants were not
infonnedlforwarded the documents pertinent to the loans entered into by the Local Cltief
Executives (LeE). In such cases, the loans were either not recorded or recorded late in the
books of accoums of the LGUs. Thus, the Auditor fails to give reasonable assuran<:e on the
fairness of presentation of the financial statements (FS) particularly on the loan accounts of
the LGUs.

To preclude such instances in the audit of the LGU liabilities from credit financing
and to ensure completeness of the recorded liabilities including the disclosures, tltis
memorandum is being issued to remind the Audit Team Leaders to include in their audit
procedures on credit financing, the verification of the documents on sources of financing, as
follows:

1. Review all Sanggun..iang Resolutions and secure copics of those penaining to the
financial operations of the LOUs, specifically the sources of funds and project
finallcing. and the authority of the LeE to secure loans;
 Page 2 -Proposed Memo 011 Credit Financing

2. Obtain and review copies of the Annual Investment Plan (ALP) and the Annual
and Supplemental Budgets, to detennine whether the proceeds from credit
financing are included among the sources of financing;

3. Based on the review of documents in Nos. I and 2 above, if warranted, coordinate

with the Auditor of the Government Financial Institutions (GFIs), to obtain the
documents on the LGUs credit financing transactions. Also, confinnlverify the
correctness of loan releases, repayments and charges;

4. Check if all the funds from credit financing are properly recorded in the books of
the agency taking into consideration the pertinent provision of RA 7160 and
Section 105 of the NGAS Manual Vol. I for LGUs, to facilitate detection of
unrecorded loan releases of principal, interest repayments and charges; and

5. Review completeness of the FS disclosures such as amount of loan (original and

supplemental), tenns of the loan, interest rate, maturity date, purpose, collateral,
lending bank/institution, etc.

For compliance.