MODULE 9

Auditing Electronic Commerce (E-commerce) Industry

Overview:
Although traditional commerce is still present in the Philippine market, e-
commerce has significantly penetrated the country by storm. In a country like the
Philippines, going digital if you are a business owner is beneficial, as most
consumers are internet-savvy. In the last decade, the number of internet users in
the Philippines has surpassed other Asian countries. Across the globe, Filipinos
are one of the largest populations using the internet, spending at least an average
of 10 hours a day on the web. It tells a lot about the appetite of online consumers,
and a large part of them gravitate to play video games and search for fashion
trends and make-up.
 Sales through e-commerce have quickly accelerated in 2020 because of the long
lockdown periods in the Philippines. According to apparel and footwear e-
commerce platform, Zalora, over nine tenths of Filipino internet users searched for
goods and services to purchase during the lockdown period that began in March
2020. Even before the pandemic, e-commerce was rapidly expanding in the
Philippines, mostly drive by online marketplaces. However, in comparison to other
countries, the Philippines is still lagging in terms of e-commerce expansions. The
reach of Philippines’ e-commerce is not yet as established as other countries,
providing much room for growth in 2020. In fact, several key players have only
started building their own e-commerce in 2020.
Module Objectives:
Know the nature and background of the particular specialized industry;
Learn the overview, statistics, and updates of the specialized industry in the
Philippine setting;
Identify the different audit considerations and trends for the industry.
Nature and Background of Specialized Industry

Ecommerce (or electronic commerce) is the buying and selling of goods (or
services) on the internet. It encompasses a wide variety of data, systems, and
tools for online buyers and sellers, including mobile shopping and online payment
encryption. Most businesses with an ecommerce presence use an ecommerce
store and/or an ecommerce platform to conduct online marketing and sales
activities and to oversee logistics and fulfillment.

Types of e-commerce
As commerce continues to evolve, so do the ways that it’s conducted. Following
are the most traditional types of e-commerce models:
1.Business to Consumer (B2C): B2C e-commerce is the most popular e-
commerce model. Business to consumer means that the sale is taking place
between a business and a consumer, like when you buy a rug from an online
retailer.
2. Business to Business (B2B): B2B e-commerce refers to a business selling a
good or service to another business, like a manufacturer and wholesaler, or a
wholesaler and a retailer. Business to business e-commerce isn’t consumer-
facing, and usually involves products like raw materials, software, or products
that are combined. Manufacturers also sell directly to retailers via B2B
ecommerce.
3. Direct to Consumer (D2C): Direct to consumer e-commerce is the newest
model of ecommerce. D2C means that a brand is selling directly to their end
customer without going through a retailer, distributor, or wholesaler.
Subscriptions are a popular D2C item, and social selling via platforms like
InstaGram, Pinterest, Facebook, SnapChat, etc. are popular platforms for
direct-to-consumer sales.
4. Consumer to Consumer (C2C): C2C e-commerce refers to the sale of a good
or service to another consumer. Consumer to consumer sales take place on
platforms like eBay, Etsy, Fivver, etc.
5.Consumer to Business (C2B): Consumer to business is when an individual
sells their services or products to a business organization. C2B encompasses
influencers offering exposure, photographers, consultants, freelance writers, etc.

Everyone from independent freelancers to small businesses to the largest of

corporations can benefit from the ability to sell their goods and services online at
scale.
Here are some examples of types of e-commerce:
1.Retail: The sale of products directly to a consumer without an intermediary.
2.Drop shipping: The sale of products that are manufactured and shipped to
consumers via a third party.
3.Digital products: Downloadable items like templates, courses, e-books,
software, or media that must be purchased for use. Whether it is the purchase of
software, tools, cloud-based products, or digital assets, these represent a large
percentage of ecommerce transactions.
4.Wholesale: Products sold in bulk. Wholesale products are usually sold to a
retailer, who then sells the products to consumers.
5.Services: These are skills like coaching, writing, influencer marketing, etc., that
 6.Subscription: A popular D2C model, subscription services are the recurring
purchases of products or services on a regular basis.
7.Crowdfunding: Crowdfunding allows sellers to raise startup capital to bring their
product to
the market. Once enough consumers have purchased the item, it is then created
and shipped.
Benefits of e-commerce
Clearly online commerce offers a plethora of benefits. Let’s look at some of the
biggest ones.
1.Convenience
Online commerce makes purchases simpler, faster, and less time-consuming,
allowing for 24-hour sales, quick delivery, and easy returns.
2.Personalization and customer experience
E-commerce marketplaces can create rich user profiles that allow them to
personalize the products offered and make suggestions for other products that
they might find interesting. This improves the customer experience by making
shoppers feel understood on a personal level, increasing the odds of brand
loyalty.
3.Global marketplace
Customers from around the world can easily shop e-commerce sites –
companies are no longer restricted by geography or physical barriers.
4. Minimized expenses
Since brick and mortar is no longer required, digital sellers can launch online
stores with minimal startup and operating costs.
E-commerce carries the following disadvantages:
Limited customer service. If you are shopping online for a computer, you cannot
simply ask an employee to demonstrate a particular model's features in person.
And although some websites let you chat online with a staff member, this is not a
typical practice.
Lack of instant gratification. When you buy an item online, you must wait for it to
be shipped to your home or office. However, retailers like Amazon make the
waiting game a little bit less painful by offering same-day delivery as a premium
option for select products.
Inability to touch products. Online images do not necessarily convey the whole
story about an item, and so e-commerce purchases can be unsatisfying when the
products received do not match consumer expectations. Case in point: an item of
clothing may be made from shoddier fabric than its online image indicates.
14 Ecommerce Trends Leading the Way
1.Augmented Reality enhances the reality of online shopping.
2.There will be a growing volume of voice search.
3.AI helps shops learn about shoppers.
4.On-site personalization uses those insights to create individualized
experiences.
5.Big data plays a big part in creating personalized experiences.
6.Chatbots improve the shopping experience.
7.Mobile shopping is still on the move.
8.More ways to pay.
9.Headless and API-driven ecommerce allow continued innovation.
10.Customers respond to video.
11.Subscriptions keep customers coming back.
12.Sustainability is becoming more important.
13.Businesses should optimize digital strategy for conversion.
14.B2B is growing...and changing.
Overview, Updates, Statistics of the Specialized Industry in the Philippines

COVID-19 has increased demand for eCommerce in the Philippines. While the
younger population was already open to online shopping, the need for social
distancing has pushed the cash centric and face to face shopping culture towards
a more digital one, and this is expected to continue. What is lacking is proper
digital and logistics infrastructure to truly enable a digital economy. There needs to
be higher bandwidth capacity to service the retail market.

Current Market Trends

Filipinos are prolific users of social media. Estimates this year show that there
are 76 million active social media users from the Philippines. Of this number, 75
million are on Facebook; 12 million on Twitter, and 4 million are LinkedIn users.
good reason to be optimistic about eCommerce growth in the Philippines.
However, the country also faces the following challenges:

Infrastructure gap: Need for further improvement in internet speed. According to

OOKLA’s Speedtest Global Index, the Philippines’ fixed broadband internet speed
is 22.74 Mbps in July 2020 and ranked 108th of 174th. Mobile broadband speed
is 16.17 Mbps in June 2020 and ranked 121st of 114th of 138th countries. The
Philippines also ranked 63rd out of the 100 economies and 26th in the 2020
Inclusive Internet Index conducted by the Economist intelligence unit. Logistics
and distribution also pose significant challenges in product delivery. A lack of cold
chain storage limits food products that can be transported for long distances.
Traffic and an inefficient delivery network also make delivery extremely unreliable
in many areas.
 Most internet users gain access through smartphones. Smartphone penetration
is now at 48.4 percent of households.
•Low Broadband Penetration: Many Filipinos access the web from mobile, home,
internet cafés and their workplace.
• Low digital payment penetration: Bangko Sentral ng Pilipinas (BSP) in a 2018
report shows that an estimated 66 percent of Filipinos do not use banks, and
about eight percent use credit cards. Hence, online stores in the Philippines
provide cash on delivery payment options or payment centers (i.e., 7/11
branches). Different companies such as telcos, banks, and fintech start-ups have
rolled out e-wallets for unbanked populations. Significant players include
PayMaya (PLDT), GCash (Globe). The BSP also launched PESONet, a new
electronic funds transfer service that enables customers of participating banks,
e-money issuers, or mobile money operators to transfer funds in Philippine Peso
currency to another customer of other participating banks, e-money issuers or
mobile money operators in the Philippines.
•The Philippines is a fast-growing retail e-commerce market and the most popular
retail e- commerce platforms include Lazada, Shopee, Zalora, Ebay, and Kimstore.
• Security concerns: Those who have credit cards are wary of transacting online,
given the numerous incidents of hacking and weak cybersecurity efforts that still
plague the country. Therefore, e-commerce platforms have established a cash
payment mechanism using large convenience store chains (i.e., 7/11 and Mini
Stop) and local express delivery service (i.e., LBC). Filipino consumers require
further education on security measures that can protect their online transactions.
This will establish increased levels of confidence in online banking, purchasing,
and selling.
 eCommerce Intellectual Property Rights
The Philippines has passed adequate legislation to promote eCommerce, the
eCommerce Law, Cybercrime, and Data Privacy Laws. However, enforcement
agencies like the Department of Justice and Philippine National Police and the
local courts are not yet adept at handling cases involving electronic transactions.
The system is not, however, in place. The National Privacy Commission
(NPC) is tasked with implementing the Data Privacy Law, and they have had
significant achievement through Philippine-based companies designating “Data
Privacy Officers” or DPOs. The NPC is also leading the Philippines to be compliant
with international privacy agreements such as the European General Data
Protection Regulation (GDPR) and APEC Cross Border Privacy Rules (CBPR).
systems, and focus on the customer’s perspective and business processes. AsiaRx
takes control of the entire procurement process from finding the product to
availability check, to order status verification.
•http://philippines.tradekey.com – A B2B marketplace connecting Filipino
exporters with overseas buyers. It connects traders with global wholesalers,
buyers, importers and exporters, manufacturers, and distributors in over 240
countries.
•www.philippinecompanies.com – A Philippine business directory with 413,282
registered companies. This website builds its database from publicly accessible
directories such as Business Registrations from various municipalities.
•http://philippines.tradeford.com – Provides global importers with information on
products, exporters, suppliers, manufacturers, and wholesalers. TradeFord’s
buyers and suppliers’ database covers major industries such as apparel, fashion,
chemicals, construction, electronics, furniture, food and beverage, health and
beauty, machinery, transportation, and more.
•https://www.kenresearch.com – Global industry research and information
service company. Provides industry intelligence, equity research reports and
business consulting services covering several sectors.
•https://www.carousell.ph/ - Global online marketplace open in 45 countries in
world used for buying and selling of goods and services.
Online Payment
The increase in online shopping and access to online bank transactions is
increasing payment in the Philippines. Vendors are turning to online payment as a
convenient buying method. However, the security concerns over platforms and a
cash-based society’s culture limits its effectiveness.
Mobile eCommerce
Data from Globe Telecom and the Philippine Long-Distance Telephone Company
shows that there are 163.7 million mobile subscribers in the Philippines. Most
Filipinos access the internet through their mobile phones, providing cost-effective
and consistent access. Philippine and international businesses sell products and
services through mobile that has direct access to online consumers. The
Philippines is the fastest growing app market in Southeast Asia.
Digital Marketing
The proliferation of social media and online platforms directly contributed to the
growth of digital marketing. An estimate of 76 million Filipino are online users and
steady growth trends continue.
Traditional marketing companies emerged with new marketing techniques that
include social media. Businesses are continuing to transition to digital marketing to
reach an even broader market for potential customers, and this is becoming a
reliable and growing trend.

Social Media
Filipinos are prolific users of social media. Estimates this year show that there are 76
million active social media users in the Philippines. Of this number, 75 million use
Facebook; 12 million use Twitter, and 6.7 million are LinkedIn users. The Philippines
is recognized as one of the top countries for internet users worldwide in terms of
time spent on social media; 4 hours on mobile and 5.2 hours on desktop and
tablet.
Challenges of eCommerce in the Philippines Cash-based
payment methods dominate, for now
One of the reasons behind the relatively slow uptake of eCommerce in the
country in the past few years is the continued dominance of cash-based
transactions. According to the Philippines’ central bank, cash accounted for 99 per
cent of all local transactions as of January 2018. In addition, the country has been
slow to adopt eWallets, with only 1.3 per cent of Filipinos owning electronic money
accounts based on Bangko Sentral ng Philippines’ 2017 Financial Inclusion
Survey. Meanwhile, merely 1.9 per cent of Filipinos over the age of 15 have a
credit card. 68 per cent of Filipinos with savings keep them at home instead of at a
bank in 2019.
Logistics concerns due to unique geography.
With the Philippines being an archipelago of more than 7,600 islands, logistics
naturally presents a challenge you will have to prepare for when serving
customers in this country. Consumers living in the sprawling capital of Metro
Manila enjoy access to huge shopping malls, flagship brick- and-mortar stores,
and even same-day online delivery from large marketplaces like Lazada and
Shopee.

Growing pains with Internet connectivity

The Philippines has one of the slowest and most expensive Internet connections
in Southeast Asia. Coupled with high mobile phone and social media usage, this
means online merchants must pay attention to mobile optimization, particularly
when it comes to the sizes of their product images, this ensures that consumers
Keep in mind that Facebook, the country’s most popular social media network has
a free version for mobile phone users in the Philippines. That means online
merchants can leverage the network to advertise and sell their products. In fact,
PayPal’s research shows that 87 per cent of Filipino merchants sell products on
social media. Facebook also drives traffic and engagement on Lazada, Shopee,
and Zalora.
Changing eCommerce perceptions
A universal challenge for any online merchant is gaining buyers’ trust. For
eCommerce, this means using a combination of strategies, ranging from prompt
delivery to accurate product descriptions.
You also need to account for the low trust Filipino consumers have in credit
cards. According to a MoneyMax survey, many Filipinos are reluctant to get credit
because they fear it will lead to overspending and debt. Considering the challenges
in Philippine eCommerce, online merchants can also build trust by offering
alternative payment options to credit cards. This may be in the form of cash-on-
delivery and local e-wallets.

Audit Considerations
E-commerce, or e-business, via the internet is now bringing fundamental changes to
the way business is conducted. The continued evolution of technology, the
economics of the internet, and the growth of e-commerce are significantly affecting
the traditional business environment. E- commerce is changing the competitive
market and making international trading viable for a much larger number of
businesses.
 However, during these changes in the business environment, the auditor's
responsibility to provide an opinion on the financial report has remained
unchanged. Although communication and transactions over networks and through
computers are not new features of the business environment, the increasing use of
the internet for e-commerce introduces new variables of risk and control requiring
audit consideration. E-commerce is not clearly defined or constrained but comes
with 'open boundaries' in terms of scope. The auditor requires appropriate skills to
understand how an entity's e-commerce strategy addresses the business risks that
arise. Audit risk assessment for e-commerce requires a paradigm shift in the way
auditors consider client entities and the way auditors plan audit procedures to
reduce audit risk to an acceptable level.
When a business engages in e-commerce, it runs many new risks. The internet
provides every entity with the opportunity to trade in a global market. But when
transactions are initiated by unknown parties on the internet, there are risks
relating to the authenticity and integrity of trading partners and e-commerce
transactions. Usually, management will identify e-commerce business risks, and
address those risks with appropriate security and control measures. In contrast,
the auditor will consider e-commerce business risks only in so far as they affect
audit risk. Audit risk relates to the risk that the entity's financial report (on which
the auditor provides an audit report) is materially misstated.

A business may be faced with a number of constraints when developing e-

commerce, including the availability of appropriate technical and marketing
expertise, the need for continuing investment, and the identification and resolution
of security issues. Although these issues may remain unresolved, many entities
are continuing to develop e-commerce on a 'risk-reward' basis. As a result, the e-
commerce market is growing rapidly, particularly the use of e-commerce on a
business-to-business (B2B) basis to shorten supply lines and reduce costs. Such
growth, without due attention to the risks in an electronic trading environment,
impacts on both business risk and audit risk.

E-commerce business risks include those arising from:

 the identity and nature of relationships with e-commerce trading partners;
 the integrity of transactions;
 electronic processing of transactions;
 systems' reliability;
  privacy issues;
 return of goods and product warranties;
 taxation and regulatory issues.

Audit guidance relating to e-commerce is only one part of a much larger project,
requiring continuous research into the potential audit and assurance implications
associated with advancements in technology. For example:
 The audit profession will face further challenges with the internet enablement of
business reporting using XBRL (Extensible Business Reporting Language) (visit
www.xbrl.org for further information), or another business reporting language.
This 'next generation' of change is already on the horizon, as the development
and adoption of XBRL will also facilitate process alignment between transactions
from a website to back office reporting systems.
  The migration of business from the document orientation of today's paper
environment to the electronic environment of the future (via existing internet
technologies) will prompt further change in the business reporting-information
supply chain, and issues for audit consideration.
 As e-commerce continues to evolve, websites may become platforms to create
new markets and develop products. For example, facilities such as 'chat rooms'
or e-commerce auctions on their websites, may be used as platforms to reach
new markets.
Each of these 'new' developments carries risks, which may not be identified in
their early stages. Therefore, as the auditor reconsiders the impact of e-commerce
in each new reporting period, the audit profession must remain aware of the
potential impact of evolving internet technology and emerging standards of
industry practice on audit procedures.
Key Risks Areas in E- Commerce Industry

Supply Chain Management

Sales and Marketing Strategy
Vendor Management
Information Technology
Claim, Return, and Refund
Revenue Assurance
Assessments:
1.State the nature and background of the specialized industry.
2.What are the relevant statistics, and updates of the specialized industry in the
Philippine setting?
3.Identify the different audit and accounting considerations and trends for the
industry.
4.Look for at least 2-3 audited financial statements of companies under the
specialized industry in the Philippines and list down your observations from audit
report to the financial statements.

End of Module