It’s that time of the year again! Engage your auditor, meet your accountant, organise your documents and get on top of your audit deadlines. If your business is submitting Audited Financial Statements for the first time or if you simply need a recap on how the process works, outlined below is a summary of the key points that you need to know. Our team of experts here at CloudCfo have also provided examples of the common issues that could arise during the audit process.
Make sure to check www.cloudcfo.ph/blog on a regular basis for updates and information on accounting and bookkeeping practices in the Philippines throughout 2019.
Before anything else, preparation is the key to success. This well known statement is especially relevant for businesses seeking to navigate through audit season as smoothly as possible. Every year, companies in the Philippines are required to invest time, resources and expenses to ensure they comply with their statutory audit obligations. This requires engaging an auditor, organising documentation and developing clear lines of communication with the company accountant. Ideally, preparation should begin early in the financial year by ensuring the company has in place efficient and streamlined accounting and finance processes. This can really decrease the workload required once audit season arrives. It is also something with which CloudCfo, enabled by cloud accounting and smart technology solutions, is very well placed to assist!
We have set out below some key information that companies should be aware of over the coming weeks. Our team of experts have already started helping clients prepare for this year’s audit. Let us know how we can help by contacting us at email@example.com.
What is audit season?
Each year, many companies in the Philippines have to prepare and submit finance and tax related documents to various regulatory bodies. This allows the Government to ensure that companies are adhering to their corporate and financial obligations. There is, however, one particularly important requirement that companies must adhere to and which is the main focus of this article. It is the obligation to prepare and submit Audited Financial Statements (AFS) to the Bureau of Internal Revenue (BIR) and to the Securities and Exchange Commission (SEC) before a stated deadline each year.
The AFS is, in essence, the financial accounts (income, cashflow, equity, assets, liabilities, etc) of a company that have been examined by a licensed Certified Public Accountant (CPA) who has expressed their audit opinion on whether or not the financial statements are accurate and prepared in accordance with financial reporting standards, practices and principles. The CPA should be independent of the company and must be accredited by the Board of Accountancy in the Philippines.
While this article deals primarily with the obligation to prepare and file the AFS, companies should be aware that this is not the only document that has to be filed during audit season. For example, companies must submit their Annual Income Tax Return to the BIR at the same time as the AFS. Companies must also submit a Statement of Management Responsibility to the SEC when submitting their AFS. So make sure you consider all of the documents that need to be submitted this audit season!
What types of companies have to submit an AFS?
Unless exempt, corporations, partnerships or individuals with gross quarterly sales, earnings, receipts or output of more than PHP150,000, are required to submit an AFS to the BIR.
A domestic stock company with paid-up capital of PHP50,000 or more must submit an AFS to the SEC. A non-stock domestic company that has annual gross sales of PHP100,000 or more or has assets valued at PHP50 million or more must submit an AFS to the SEC.
Companies should be aware that different reporting thresholds apply to other entities such as foreign corporations, branches, regional or representative offices in the Philippines. If you don’t know which category your company falls into, contact your advisers now to confirm if your company is required to file an AFS.
What are the statutory filing deadlines?
For companies whose financial year aligns with the calendar year (i.e. financial year-end is 31 December), the AFS must be filed with the BIR by 15 April 2019. If a company’s financial year is different from the calendar year, the AFS must be submitted to the BIR by the 15th day of the fourth month following the company’s financial year-end date. For example, if your company’s financial year ends on 31 March 2019, the AFS must be filed by 15 July 2019.
There are different deadlines for filing the AFS with the SEC. Where a company’s financial year and the calendar year align, the deadline date for filing the AFS is determined by the last numerical digit of the company’s SEC registration number. Where there is no alignment, companies must file their AFS with the SEC within 120 calendar days from the end-date of their financial year.
BE WARNED – companies who fail to submit their audited financial statement by the statutory deadline could face penalties imposed by the SEC which could go up to PHP10,000 for the first offence!
What are the key steps in the audit process?
A company must first engage a competent, licensed and accredited auditor to carry out the audit. An auditor must be a CPA and should be independent from the company itself to ensure an unbiased and credible external opinion.
The auditor will need all relevant financial documents to perform the audit. The company must therefore, in conjunction with its accountant, retrieve and provide all requested information to the auditor. Gathering the required company documents to enable the audit can be one of the most time and resource consuming activities for a company during this period. We recommend developing clear lines of communication with all representatives, officers, accountants or employees involved in preparing the company books of accounts during the financial year.
Once the auditor has performed the audit and signed off on the AFS, the company must then file the AFS with the BIR and afterwards with the SEC. Both of these filings must be made by physically attending at each of the offices. So make sure not to leave filing until the last minute in order to avoid the queues and a potential late filing!
What if your company is not in a position to meet the statutory deadline? What can you do? It can arise where companies have not yet finalised their books of accounts, are having trouble locating documents required by the auditor or if there remains unreconciled accounts to resolve. In these circumstances, there is an option to file a “tentative” financial statement by the statutory deadline. The finalised AFS (once completed) must be filed subsequent to this or the company could face financial penalties. However, companies should aim to have everything in order so there is no need to file a “tentative” FS or worry about missing the deadline. It also illustrates good corporate governance. Remember – early preparation is key!
Remember: Filing ≠ Compliance
Merely filing the AFS with the BIR and SEC does not mean the company has fulfilled its compliance obligations or that the audit process is necessarily over. The BIR has the power to examine a company’s financial records for up to three years after filing to ensure they are in order. If the BIR wishes to further examine the AFS or tax filings for that particular year, it will notify the company of its intention to do so. If you receive any form of notification from the BIR, inform your accountant immediately.
How cloud accounting can help a company prepare for audit season
Our team of CPAs are experts at guiding clients through the audit season with ease and efficiency. As CloudCfo provides its bookkeeping and accounting services via cloud-based accounting, the audit season is a much simpler process for our clients. All relevant documents are stored online on one easily accessible platform, all processes are formalised, documented and stored and the regular financial reports generated throughout the year by CloudCfo helps maintain accurate books of accounts. Engaging CloudCfo as your outsourced accounting and finance service provider will ensure more streamlined processes and value-added financial reporting – essential for successfully navigating your business through audit season each year!
Don’t hesitate to contact us at firstname.lastname@example.org if you need help with your compliance obligations during the 2019 audit season. If you are finding this audit season to be problematic or very time consuming, let us tell you about the benefits of using an outsourced accounting service provider and a cloud-based accounting system. Preparation for next year’s audit season can start this year!