Kyela Reyes Audit of Specialized Industries

BSA – 3A Mr. Gian Carlo Catahum

MIDTERM EXAMINATION
1. Discuss the different audit and accounting considerations and trends for the BPO
industry.

The business process outsourcing (BPO) market has expanded significantly in recent years,
as businesses increasingly seek to outsource non-core business operations to specialized service
providers. This trend has created a unique set of audit and accounting challenges for BPO
organizations to overcome. One of the most difficult accounting difficulties for BPO organizations
is accurately recognizing and allocating revenue. BPO contracts can be complicated, containing
variable pricing structures, performance-based incentives, and specific service-level agreements.
Allocating revenue appropriately among these various components necessitates considerable
consideration and judgment. BPO providers must also have strong systems and processes in place
to reliably track billable hours, expenses, and other critical data. Another critical accounting area
is the reporting of capital expenditures connected to technology infrastructure and other assets
needed to provide BPO services. Determining suitable depreciation and amortization durations, as
well as distinguishing between operating and capital leases, can have a substantial impact on a BPO
firm's financial statements. Furthermore, other risks may be connected with audits in the BPO
industry, including as security and data privacy risks, underestimating service costs,
overdependence on service providers, communication challenges, and emerging trends and
evolving skills. To mitigate these risks, BPO organizations must create strong financial
management systems, strengthen internal controls, and promote collaboration among accounting,
IT, and operations. They can improve financial supervision and position themselves for long-term
success by taking proactive risk management measures and adopting industry developments.
The nature of the BPO business model requires various audit considerations. BPO
providers frequently use dispersed operations and technological infrastructure, which must be
properly tested for security, availability, and data integrity. Auditors must assess the design and
operational effectiveness of all relevant internal controls, including those at subcontractor or vendor
locations. Substantive testing of revenue, costs, and other account balances is considerably more
difficult in the BPO setting. Auditors may have to do extensive transaction testing, review system-
generated reports, and reconcile data from numerous systems and locations. To summarize, the
BPO sector is evolving, introducing new audit and accounting considerations. For example, when
robotic process automation and artificial intelligence become more widely used in BPO services,
the controls and risks connected with these technologies must be assessed.
2. Discuss at least 10 different risks associated with banking activities.

Assessing the risks that are present in banking organizations' financial operations in-depth
is a necessary step in the auditing process. Recognizing and reducing the following significant risks
is a crucial responsibility for auditors:

1. Credit Risk: The bank's credit risk management procedures, such as its loan origination, credit
analysis, and loan loss provisioning procedures, must be assessed by auditors.

2. Liquidity Risk: By examining the bank's liquidity management procedures and the sufficiency
of its liquid assets, auditors must evaluate the bank's capacity to fulfill its immediate obligations.
Kyela Reyes Audit of Specialized Industries
BSA – 3A Mr. Gian Carlo Catahum

3. Market Risk: Auditors are required to examine the bank's exposure to market risks, including
pricing, foreign exchange, and interest rate risk, as well as the efficacy of its hedging measures.

4. Operational Risk: In order to detect and reduce operational risks, such as the possibility of fraud,
mistakes, and system failures, auditors must assess the bank's internal controls, procedures, and
systems.

5. Risk associated with compliance: Auditors are responsible for verifying that the bank complies
with all applicable laws, rules, and industry standards, including those pertaining to know-your-
customer (KYC) and anti-money laundering (AML).

6. Information Technology (IT) Risk: To guarantee the integrity and security of the bank's
information systems, auditors must evaluate the IT infrastructure, cybersecurity protocols, and data
management procedures.

7. Reputational Risk: Auditors are required to take into account the possible effects of the bank's
operations on the public's impression of the bank and its reputation. They must also suggest steps
to safeguard the bank's image and brand.

8. Strategic Risk: Auditors are required to assess the bank's overall business plan, suitability for the
market, and efficacy of its risk control system.

9. Model Risk: To guarantee the precision and dependability of the models' forecasts, auditors must
examine how the bank uses financial models, including its assumptions, inputs, and outputs.

10. Audit Risk: Auditors must be aware of their own audit risk, which includes the danger of
missing substantial misstatements or other flaws in the bank's financial statements or operations.

Auditors are necessary for maintaining the operational efficiency, regulatory compliance, and
financial stability of banking institutions because they recognize and manage these various risks.
The banking industry's integrity and public trust are dependant upon the implementation of
effective risk management and auditing procedures.

3. Discuss the Challenges in Mining Industry in the Philippines.

The mining industry in the Philippines has a number of major issues that have hindered its
growth and development. One of the key challenges is the country's volatile regulatory
environment, which has seen regular changes to mining laws and policies, causing uncertainty for
investors and firms and making long-term planning difficult. Another major issue is the conflict
between mining operations and environmental conservation. Mining operations in the Philippines
have frequently harmed the country's various ecosystems and indigenous populations, prompting
intense opposition from environmental groups and local stakeholders concerned about degradation,
displacement, and public health threats. Balancing economic development and environmental
conservation remains a constant challenge. Inadequate infrastructure and logistics are also
Kyela Reyes Audit of Specialized Industries
BSA – 3A Mr. Gian Carlo Catahum

significant challenges, as many mining sites are located in rural places with limited access to
highways, ports, and other critical infrastructure. This makes it harder to transfer resources, raising
operational expenses and lowering the industry's competitiveness. Another important concern is
the predominance of illicit and small-scale mining enterprises, which frequently operate outside of
the regulatory system, dodging taxes and environmental restrictions while also causing
environmental damage. Legitimate mining businesses are weakened by this, and the government
loses out on money. The mining industry has also been beset by governance issues, including
accusations of corruption and a lack of accountability and transparency in mining operations, along
with worries about the equitable sharing of economic advantages. Resolving these governance
concerns is essential to fostering public confidence and guaranteeing sustained growth. In addition,
the mining industry finds it difficult to compete with other sectors of the economy for talent due to
differences in pay and career advancement prospects. Long-term growth and competitiveness in
the sector depend on building a strong personnel pipeline and offering sufficient training and
development.

4. Discuss the technical accounting considerations for construction and real estate industry.

The technical accounting issues that the construction and real estate industries encounter
are distinct and need for specialized knowledge and the implementation of industry-specific
concepts. Due to its capital-intensive nature, the industry faces difficult problems with cost
treatment, asset value, and revenue recognition. Revenue recognition is the main factor in technical
accounting. Long-term projects spanning several reporting periods are common for construction
and real estate companies. Accounting rules that offer guidance on the recognition of revenue over
time depending on the degree of completion and the transfer of control to the customer include
ASC 606 and IFRS 15. Depending on the nature of the project and the terms of the contract, this
could require measurement approaches that are input-based or output-based.

Classifying and valuing assets is another crucial topic. Land, buildings, and other items
need to be included on real estate developers' balance sheets. Accurately portraying the company's
financial situation requires proper asset assessment, which takes into account variables including
market trends, development expenses, and possible impairment. Furthermore, there can be a
substantial impact on revenue recognition and the application of applicable standards depending on
whether an asset is classified as inventory (for properties held for sale) or property, plant, and
equipment (for operating assets). Another technical aspect is how development and construction
expenditures are handled. Businesses need to be very clear about which costs—including labor,
materials, and overhead can be capitalized and which ones, like pre-development, leasing fees, and
administrative expenses, must be paid for as they are incurred. The proper capitalization and
allocation of these costs have a direct impact on reported gross margins and project profitability.
Accounting for leases is yet another area of complication. The implementation of IFRS 16 and ASC
842 has fundamentally altered how businesses account for operating and financing leases,
necessitating the identification of right-of-use assets and lease liabilities on their balance sheets.
This has an impact on how construction and real estate enterprises report their rental expenses,
interest costs, and overall financial performance as lessees or lessors. Finally, the industry's reliance
on estimates and judgments, such as percentage of completion, projected project costs, and asset
impairment evaluations, necessitates the implementation of strong internal controls and good
accounting rules. Accurate and transparent financial reporting is critical for investor trust and
regulatory compliance.