COMMISSION ON AUDIT MEMORANDUM NO.

93-316D November 11, 1993

TO : All Assistant Commissioners, COA Directors of Central and Regional

Offices, Heads of Auditing Units of National, Local and Corporate
Agencies of the Government and All Others Concerned.

SUBJECT: Prescribing the Application of the Test Audit Scheme (TAS) and the
Simplified Sampling Scheme (SSS) in the Audit of Current and Prior
Years Transactions and Accounts of Local and National Agencies
and Government Owned and/or Controlled Corporations.

1.0 RATIONALE:

The tremendous volume and complexity of transactions in the government

have made the practice of examining each and every transaction physically
impossible, and in fact has created a large volume of backlog in post-audit. The
existing statistical sampling methodologies presently prescribed by the Commission
(COA Memorandum Nos. 84-316-A and 85-316-C), have been applied by only few
auditing units mainly in the corporate sector. Thus, it has been observed that due to
the adherence to 100% audit of transactions, backlogs in post-audit kept piling up to
millions of unaudited vouchers/receipts and other transaction documents. The
existence of these backlogs cannot but raise doubt on the integrity of the Annual
Audit Reports submitted by the Auditors.

Moreover, external auditing as performed by other audit institutions, both in

this country and in the world over, is always on test basis. Detailed audit is time-
consuming, costly and not necessarily more effective. The auditing staff cannot be
expected to examine/review all the work of an Accounting Department or Unit with
more staff members.

This Commission therefore finds it necessary to develop other simplified

schemes that would facilitate audit work and which would be suited to national and
local agencies as well as to government owned and/or controlled corporations.

2.0 TEST AUDIT SCHEME

2.1 DEFINITION OF TERMS

2.1.1 Test Audit Scheme - An audit approach whereby the audit of

the selected months of the year is deemed to cover the audit
of the transactions and accounts of the entire year under
audit.

2.1.2 Test Audit Months - The months selected for audit which shall
comprise at least six (6) months of the year under audit as
determined in accordance with the procedures prescribed in
paragraph 2.2 hereof.

2.2 SELECTION OF TEST AUDIT MONTHS

2.2.1 The selection of test audit months which shall comprise at
least six (6) months of the succeeding year shall be approved
by the COA Director concerned. For this purpose, the Unit
Auditor shall submit to the said COA Director, on or before the
end of December of each year, the following information:

2.2.1.1 Monthly volume of transactions in terms of quantity

and total amount per month for the current year
and the immediately preceding two (2) years (for
the initial year of implementation only), categorized
into collections, disbursements and other non-cash
transactions. Sub-categories under each of the
main categories may be presented as necessary
depending on the nature of the operations of the
audited agency.

2.2.1.2 Recommendation of the auditor as to the months

of the succeeding year that will be subjected to
audit.

On the basis of the foregoing information, the COA

Director concerned may either adopt the recommendation of
the Auditor or make changes in the proposed test audit
months as he may deem fit or necessary. The approved test
audit months shall be communicated in writing to the Auditor
within fifteen (15) days upon receipt for the latter's
implementation. The communication of the COA Director
approving the test audit months shall form part of the
permanent working paper file of the auditing unit.

2.2.2 The approved test audit months shall be kept confidential and
any unauthorized release of information relative thereto shall
be a ground for disciplinary action.

2.2.3 The peak months of the year, i.e., the months when the
transactions are voluminous in terms of amount and quantity
(other than the months of January and December) shall
likewise be included in the test audit months. The peak
months for collections may be different from the peak months
for disbursements and other transactions, in which case the
peak months for both shall be selected in the order of amount
and quantity of the transactions.

2.2.4 The months not selected as test audit month (non-test audit
months) during any year may be included as test audit month
in the succeeding year subject to the condition that the
months of January and December as well as the peak months
of the succeeding year shall be included in the test audit
months.

2.2.5 The test audit months approved by the COA Director

concerned shall not be changed without the prior authority of
 the said Director except when the change(s) is (are) in
addition to the test audit months previously approved.
However, when in the judgment of the Auditor, the six (6) test
audit months approved by the Director can still be reduced as
when the internal control system of the auditee agency has
been established to be adequate or when errors, suspensions
and/or disallowances have been very minimal or negligible or
when sheer volume of transactions compels further reduction
of test, the Auditor may upon proper written justification
recommend to the COA Director concerned, the reduction of
the six (6) test audit months which in all cases shall not be
less than four (4) months.

2.3 AUDIT SCOPE AND PROCEDURES

2.3.1 The audit of the test audit months shall cover the entire
accounting cycle, i.e., from the source documents at the
inception of a transaction up to the point when that
transaction is ultimately immersed in the agency's financial
statements or vice-versa. The audit of the entire accounting
cycle will generally comprise the following stages:

2.3.1.1 The audit of source documents for receipts,

disbursements and other sources of original
entries.

2.3.1.2 The audit of entries in the Books of Original Entries

and month-end accounts summarization.

2.3.1.3 The audit of postings from the Books of Original

entries and other sources, to Subsidiary and
General Ledgers.

2.3.1.4 The verification of trial balance, financial

statements and other financial reports.

2.3.2 Where the audit in any of the test audit months results to
suspensions and/or disallowances or when there are
complaints/adverse information concerning certain transaction
(whether or not the transactions subject of adverse
information are included in the test audit months), all other
related or similar transactions in all the months of the year
under audit (including the non-test audit months) shall be
audited. However, when in the judgement of the Auditor, the
suspensions or disallowances in the test audit months are not
material as to warrant the audit of the related or similar
transactions in the not-test audit months, he may dispense
with the audit of the latter mentioned transactions upon written
authority of the Director concerned.

In case fraud is established during the audit, a special

audit report shall be prepared and submitted immediately in
 accordance with the guidelines embodied in COA
Memorandum No. 93-813 dated July 9, 1993.

2.3.3 The Unit Auditor shall keep a permanent file of the Audit
Program used in the examination of the transactions and
accounts in the test audit months indicating therein among
others, the names of the audit staff assigned to perform the
audit. The said Audit Program shall be up-dated upon
completion of the audit for a particular month, to reflect therein
the actual audit procedures undertaken and the names of the
audit staff who actually performed the audit activities
embodied in the audit program.

2.4 ISSUANCE OF THE CERTIFICATE OF SETTLEMENT AND

BALANCES (CSB)

2.4.1 The CSBs shall be issued only for the test audit months
except in the instances contemplated on paragraph 2.3.2
above where the particular transactions audited in the non-
test audit months shall likewise be covered by the
corresponding CSB.

2.4.2 Only the transactions audited shall be stamped "Post-audited"

although the transactions for the entire year shall be deemed
to have been audited.

2.4.3 Auditing units applying the test audit scheme as herein

prescribed shall issue the CSB on a monthly basis in accordance with par.
2.4.1 above.

2.4.4 When Test Audit Scheme is applied, the certification on the

face of the CSB may be modified to include a statement to the
effect that the transactions/accounts covered by the CSB
have been audited in accordance with the Test Audit Scheme
procedures prescribed under COA Memorandum No.
__________.

3.0 SIMPLIFIED SAMPLING SCHEME

3.1 DEFINITION OF TERMS

3.1.1 Batch/population - documents consist of

vouchers/receipts/JVs and other transaction documents
including their summaries and supporting papers, usually
submitted by management in batches periodically to the
Auditor for examination and audit. If one month's transactions
are few, several months may be combined and if they are
voluminous one month may be divided into several
populations. In no case, however, shall the population
consists of more than four months transactions.
 3.1.2 Error - is a deviation from or non-compliance with laws, rules
and regulations, or defects in the transaction that affects its
validity including inaccuracy in computations and
representation of amounts.

3.1.3 High Value Items transactions that are high in amount as

determined in accordance with the procedures prescribed and
illustrated in paragraph 3.3.1.2a thereof.

3.1.4 Key Items/Special Items transactions and accounts that are

prone to error, subject of complaints, and other high risk
transactions which in the perception of the auditor require
detailed 100% audit such as payment for infrastructure
contracts, cancelled/tampered ORs, bank reconciliation
statements and the like.

3.1.5 Route - direction specified for each month in the quarterly

Memorandum issued by the CASU/CRASU or its equivalent
which is either downward or sideward.

3.1.6 Tolerable Error Rate - percentage of error in relation to the

samples selected which does not materially affect the integrity
of the population represented in the sample size.

3.1.7 Substantive Errors - when the amounts paid or collected or

assessed are illegal, invalid inaccurate or unrecorded. These
are also the monetary inaccuracies in computation.

3.1.8 Compliance Errors - deviations from the established system of

internal control and prescribed rules and regulations including
approval and other documentary requirements.

3.2 SAMPLING SUPPORT ORGANIZATION

Creation and Functions of CASU/CRASU.

There shall be a COA Audit Sampling Unit (CASU) for

operating offices and COA Regional Audit Sampling Unit (CRASU) for
regional offices or its equivalent unit that will monitor, supervise the
activities of auditing units applying sampling techniques and conduct
in-house training on sampling. It shall also issue one month before
the beginning of each quarter the Random Number Start (RNS)
covering three months period. (Annex A)

3.3 PROCEDURES :

3.3.1 BASIC SAMPLING DETERMINANTS

3.3.1.1 Determination of Populations

a. Official Receipts - The Population in the

audit of Official Receipts (ORs) may be
 classified in the following manner:

a.1 All ORs per accountable officers;

a.2 All ORs as submitted for a

particular period by management
and as reported by the Chief
Cashier regardless of revenue
classification;

a.3 All ORs per revenue classification

for a particular period. The
population may be per month, per
two (2) months or per three (3)
months depending on the
volume. In no case shall it
exceed four (4) months.

b. Disbursement Vouchers - the population

in the post-audit of Disbursement
Vouchers (DVs) shall include all the
DVs submitted for a particular period as
reflected in the transmittal letter after
separating the payrolls, liquidation for
cash advances and Journal Vouchers
(JVs). The payrolls, liquidation of cash
advances (other than payrolls) will
constitute separate populations while
JVs will be audited 100%. The audit of
the liquidation of cash advances (other
than payrolls) shall be related to the
cash examination undertaken and vice
versa. The population may be
composed of one month, two months or
three months transactions depending on
the volume. In no case, however, shall
the population exceed four months
transactions.

c. Payrolls - the population for the post-

audit of payroll shall consist of the total
number of payees or employees per
period. This may be per month, per two
months or per three months depending
on the volume. In no case shall it
exceed four months.

3.3.1.2 Adjusted Populations

The adjusted population is defined as the

population less High Value Items (HVIs) and Key
Items (KIs). In cases where the population is
 homogeneous in terms of amounts, as in the case
of payrolls, only KIs are separated from the
population to arrive at the adjusted population.
HVI's and KI's are to be post-audited 100%.

3.3.1.2a Determination of High Value Items -

High Value Items are determined with
the use of the percentage table to
define the high value as shown below.

Percentage to Define High

Value

Number of Transactions Percentage

in the population

0 - 1999 5%
2000 - 4999 2%
5000 + 1%

Illustration:

For the month of May, 1993, accounting

unit submitted 2,030 vouchers (payrolls and journal
vouchers are considered separate population and
are already segregated) to COA with a total
amount of P11,000,000.00. From the table of
percentage, 2,030 falls in the range of 2,000 -
4,999 for which 2% is to be used to determine high
value. High Value (HV) - 2% x P11,000,000.00 =
P220,000.00. This means that any single
transaction amounting to P220,000.00 and above
will be considered high value item.

3.3.1.3 Sample Size

The sample size to be used must have the

right balance between two conflicting needs -
minimal sampling uncertainty and audit economy.
Sampling uncertainty can be reduced by increasing
the sample size but this would be at the expense of
audit economy.

The desired sample size from a given

population shall be determined through the use of
the following table in the determination of sample
sizes as shown below:

Determination of Sample Sizes

No. of transaction Sample Size

 in the population

0 - 199 75
200 - 1999 100
2000 - 4999 150
5000 + 200

Sample Sizes are determined based on the

adjusted population or on the unadjusted
population in case there will be no KI's and HVI's.

Illustration:

Assuming that from the submitted 2,030

vouchers with a total amount of P11,000,000.00,
10 vouchers are high value items, each with
amounts of P220,000.00 or more totalling to
P7,000,000.00 and 40 vouchers picked as key
items amounting to P500,000.00. The adjusted
population will now be:

Total volume 2,030

less HV items (10)
Key items (40)
-----------------------------------
Adjusted Population 1,980

The sample size for 1,980 vouchers based on the

table is 100. 3.3.1.4

Sample Interval

The sample interval is determined by

dividing the adjusted population by the desired
sample size.

Example: Based on the given example

Sample Interval (SI) = 1,980 Adj.Pop.

-----------------------
100 sample size

= 19.80 or 20

This means that if the sample interval is 20,

the auditor will select one sample for every 20
vouchers.

3.3.2 SELECTION OF SAMPLES

In the selection of samples, several factors are to be

 considered. For one, every item in the population must have
an equal or known chance of selection. Another, the process
of selecting the sample must be unbiased. The samples will
be selected on a systematic sampling technique. This means
that after getting the sample interval (SI), the Auditor will look
from the Memorandum on Random Number Start (RNS)
(Annex A) for starting number. In the selection of the
prescribed starting number, the month of audit is the
reference month. When the prescribed number is higher than
the SI, the auditor should refer to the prescribed route stated
in the Memorandum to get the number which is equal to or
less than the SI. As in our example, 20 is the SI and refering
to the month of June in the Memorandum (Annex A), 45 is the
starting number for two (2) digits in Table I (Annex B). Since
45 is higher than the SI, the auditor will go downward and look
for a number equal to or less than 20, which in this case, the
number is 15. This means that the first sample item is the
15th voucher. For the succeeding sample items, add the SI to
the number of the first sample item and every interval thereof
until the desired sample size is obtained.

1st sample item = 15th voucher

2nd sample item 15 + 20 = 35th voucher
3rd sample item 35 + 20 = 55th voucher
4th sample item 55 + 20 = 75th voucher

This process will continue until the desired

sample size is attained.

Random Number Start

A memorandum on monthly Random Number Start

(RNS) will be issued by the CASU/CRASU or its equivalent on
a quarterly basis covering three months period.

3.3.3 EVALUATION OF SAMPLES

The selected samples are post-audited and evaluated

by comparing the actual compliance and substantive errors
found during the audit of the samples with the tolerable error
rates. The tolerable error rate for compliance evaluation is
20% of the sample size while the tolerable error rate for
substantive evaluation is 8% of the total amount of the sample
size (Annex C). If the audit of samples does not pass
compliance and/or substantive evaluation, the auditor shall
audit the whole population. In both cases, the auditor shall
submit the corresponding evaluation report.

Evaluation Working Paper

The auditor shall prepare an Evaluation Working Paper

(EWP) (Annex C). While the format is flexible, it must include
 the reference for the transactions audited and the total
number of compliance and substantive errors found in the
sample. A copy of the EWP shall be attached to and
submitted quarterly together with the accomplishment report.

When error rates do not exceed the tolerable error rates.

When the audit of the samples reveal compliance

and/or substantive error rates equal to or below 20% or 8%,
respectively, but which nevertheless resulted to suspensions
or disallowances, the transactions in the population related to
or similar to the transactions suspended or disallowed in audit
shall be audited 100%. The rest of the other transactions in
the population shall be considered to have been passed in
audit. The amounts suspended and/or disallowed shall be
reflected in the CSB.

When error rates exceed the tolerable error rates.

When the audit of the samples resulted to a situation

where either the compliance or substantive error rate exceeds
20% or 8% respectively, the whole population shall be audited
100% and the resulting suspensions and/or disallowances
shall be reflected in the CSB/s.

3.3.4 ISSUANCE OF CERTIFICATE OF SETTLEMENT AND

BALANCES (CSB)

When sampling is applied, the CSB shall preferably be

issued on a per population basis. The certification on the face
of the CSB may be modified to include a statement to the
effect that the transactions/accounts covered by the CSB
have been audited in accordance with the Simplified Sampling
Scheme procedures prescribed under COA Memorandum No.
93-316D.

Transactions to be stamped "Post-Audited"

Only the audited High Value Items, Key Items and the
samples selected shall be stamped post-audited although the
entire population represented by the samples shall be
deemed to have been post-audited and covered by the
corresponding CSB or CSBs issued therefore.

3.3.5 REPORTING

The auditor will submit to CASU/CRASU or its

equivalent the quarterly accomplishment report (annex D)
which shall reflect the transaction stream, the month of audit,
period covered, the volume, the sample size, the key and high
value items, the total transaction passed in audit and the
number of transactions disallowed/suspended. Likewise, the
 audit objectives with the corresponding audit procedures as
stated in the State Audit Manual shall also be included but
only in the initial implementation of sampling.

3.3.6 AUDIT SCOPE

The audit of the samples, the High Value items and

the Key Items shall likewise cover the entire accounting cycle
as provided in 2.3.1 hereof. The transactions selected as
samples including the High Value Items and Key Items shall
be audited and considered as the basis for audit of the
accounts affected by the transactions. In case there are
account/s whose transactions do not form part of the samples
selected or where there are only very few transactions forming
part of the samples, the Auditor may select additional samples
pertaining to the said account/s.

For the audit of payrolls, the audit may be done

through sampling as herein prescribed or by using the
systems-based audit approach as prescribed in Section 30.3
of the State Audit Manual.

The application of sampling enables the Auditor to

form a conclusion on the state of compliance with applicable
laws, rules and regulations not only on the sample
transactions but also on the population of transactions
subjected to sampling selection, and therefor provides the
Auditor with an achievable target and manageable audit
scope in the post-audit of transactions.

However, sampling's inherent limitation is that it is

merely an audit technique and may not provide all the
answers to the problems that may be encountered in the
conduct of the audit. Thus, to ensure that the standard of
"sufficient, relevant and competent evidence" needed by the
auditor to arrive at a conclusion on the regularity, efficiency,
economy or effectiveness of operations or to express an audit
opinion on the financial statements, is adequately met, it will
be necessary for the auditor to employ, in addition to the
procedures applied to the sample transactions, other audit
tools and techniques such as but not limited to the following:

1. Inspection/physical count
2. Confirmation
3. Observation
4. Analysis
5. Interview/inquiry/questionnaire
6. Recomputations
7. Review of reconciliation procedures
8. Modeling
9. Flowchart/ validation
4.0 POST-AUDIT OF BACKLOGS

The up-dating of post-audit backlogs shall be carried out in accordance with

the procedures prescribed. However, in view of the Annual Audit Report that have
been rendered in the previous years, the audit of the corresponding accounts need
not be disturbed except when the same is relevant to and affects the balances of
accountabilities reflected in the books of accounts. As a general rule therefore, the
audit of backlogs shall be limited to the determination of regularity or validity of
transactions except when balances of accountabilities are affected as a result of the
issuance of CSBs or other pertinent special audit reports.

5.0 CONTINUATION OF SAMPLING SCHEMES PRESENTLY EMPLOYED:

The existing sampling schemes, the COA-Sampling-Card Methodology

(CSCM) and the Pareto's Principle of Distribution shall still be continued. The
Auditor shall have the options to choose which scheme is best suited in their
particular agency.

6.0 LEGAL AUTHORITY VIS-A-VIS LIABILITY:

The provisions of the Constitution grant the Commission exclusive authority

to define the scope of its audit and to establish the techniques and methods
required therefor. This Constitutional prerogative is amplified in Section 43 (3) of
PD 1445, otherwise known as the Government Auditing Code of the Philippines and
Section 28 (3), Subtitle B, Book V, of the Administrative Code of 1987 (E.O. No.
292), which contains the basic proviso that justifies the promulgation by the
Commission of auditing procedures and techniques to wit:

"In the performance of their respective audit functions as herein specified,

the auditors shall employ such auditing procedures and techniques as are
determined by the Commission under regulations that it may promulgate."

When the auditor employs the sampling techniques authorized by the

Commission and as long as he apply the technique in good faith and with due care,
he does not incur any civil, criminal or administrative liability arising in any way from
his use of such audit technique.

The sampling procedures herein prescribed should be applied only in

instances where the volume of transactions is physically impossible to audit 100%.
When the volume of transactions does not warrant the application of sampling
technique, the auditor may perform a 100% audit.

7.0 EFFECTIVITY:

This memorandum shall take effect immediately.

(SGD.) PASCASIO S. BANARIA, Chairman