Audit season is well and truly upon us here in the Philippines. 15 April is just around the corner!
Our team of experts have already started supporting clients with their preparations for the 2020 audit season.
If you own or run a business in the Philippines and your financial year has just ended, now is the time to start (if you haven’t started already!) making sure that your accounts, books and finances are in order.
To avoid the next few weeks being any harder than they have to be, check out below our Explainer on audit season for businesses in the Philippines!
What do people mean when they talk about “audit season”?
Businesses operating in the Philippines, are required (unless exempt), on a yearly basis, to submit certain accounting, bookkeeping, finance and tax-related documents and information to various regulatory agencies in the Philippines. In particular, the Bureau of Internal Revenue or BIR and the Securities and Exchange Commission or SEC.
All relevant financial information is channeled into a statement (a financial statement) which, once finalized, should provide an accurate picture of the financial position of the company as at the end of the previous financial year.
However, prior to submission to the BIR and the SEC, the financial statement must first be audited and signed off by an independent auditor. Hence the term, Audited Financial Statement or AFS.
Depending on the status of the accounting books and finances and the complexity or history of the business, audit season can either be a relatively straightforward process….or a long and difficult one!
When is the actual “season”?
“Audit season” generally starts for companies a few months prior to the deadline by which they need to file their AFS with the BIR. This is the time that companies will start collecting financial information and documentation, liaising with their auditor, preparing the financial statement, etc.
For companies in the Philippines with a financial year that aligns with the calendar year (i.e. 1 January to 31 December), the financial statement must be filed with the BIR by 15 April 2020.
If a company’s financial year is different from the calendar year, the Audited Financial Statement must be submitted to the BIR by the 15th day of the fourth month after the company’s financial year-end date. For example, if your company’s financial year ends on 31 March 2020, the AFS must be filed by 15 July 2020.
SEC filing deadlines for the AFS are different. If a company’s financial year aligns with the calendar year, the deadline date is determined by the last numerical digit of the company’s SEC registration number. Otherwise, companies must file their financial statement with the SEC within 120 calendar days from the date that the company’s financial year ends.
What is the purpose of the audit?
A statutory audit is a corporate governance mechanism that has been adopted by many countries around the world.
It is a tool that gives governments oversight of the financial activities of businesses in a particular jurisdiction and helps ensure that their financial records and accounting methods are compliant with local laws.
What’s the difference between audit season and the BIR Audit?
When talking about “audit season”, remember, we are referring to the yearly audit that companies are mandated to perform at the end of each financial year. We aren’t talking about the BIR audit.
The BIR audit is when the BIR sends a Letter of Authority or LOA to a business confirming that the business has been selected for audit by the BIR. The BIR will then proceed to engage with the business and its owners to investigate the business and its accounting, finance and tax activities with the ultimate purpose of ensuring compliance.
While this article is not about the BIR audit, here’s our advice if your business receives an LOA – inform your accountant immediately!
Preparing for audit season
Preparing for audit season in the Philippines can involve a lot of work, time and resources – particularly if your accounting books, finances or financial documents are not in order. If, however, your accounting processes and controls have been properly managed throughout the financial year, the process should be much smoother.
There are a number of steps required to prepare for and comply with the statutory audit each year. Let’s start with who will actually be carrying out the audit.
Engaging a competent auditor
A key element of successful compliance with your statutory audit obligations here in the Philippines is the engagement of an auditor to perform the audit for the company. The company cannot do the audit itself.
In the Philippines, there are a number of key requirements for a business to consider when engaging an auditor. At the very minimum, an auditor in the Philippines should be:
- Competent, licensed and accredited. The accreditation will be from the Board of Accountancy in the Philippines.
- A Certified Public Accountant or CPA. Make sure to request evidence of this qualification!
- Independent from the business – this is to ensure that an unbiased and credible external opinion is provided. The auditor should not be the same accountant that has already been engaged by the company to manage the accounts and finances of the company. This applies whether the business has an in-house accountant or an outsourced accounting services provider.
The Audited Financial Statement
A key document that companies have to prepare and submit as part of the audit process is the Audited Financial Statement or AFS.
The yearly financial statement should be prepared by the business. It should then be reviewed by the auditor for compliance purposes. If the auditor is satisfied that the statement accurately portrays the financial status of the company as at the end of the previous financial year, it will be signed off as certified by the auditor. At this point, the financial statement can be referred to as an Audited Financial Statement and can be submitted to the BIR and SEC.
The auditor is effectively certifying that the financial statements of the company are accurate and were prepared in accordance with the proper financial reporting standards, practices and principles.
What documentation and information is required?
To perform their role properly, an auditor will need to request, receive and review various financial documents and information that they deem relevant to the financial activities of the business over the course of the last financial year.
What kind of documents and information? Anything that might be relevant to the financial activities of the company during the previous financial year. Remember – the auditor will be signing off on the financial statements, so they are likely to request, from time to time, documents to support the information contained in the financial statement.
Gathering the required company documents to enable the audit to be carried out can be one of the most time and resource consuming activities for a company during this period. Our recommendation at this stage of Audit Season? Make sure to have in place clear lines of communication with all representatives, officers, accountants or employees that were directly involved with the company’s finances and accounts during the financial year.
Companies should also be aware that the AFS, while important, is not the only document that should be filed during audit season. Companies must submit their Annual Income Tax Return or ATR to the BIR at the same time as the AFS. Companies also have to include a Statement of Management Responsibility when submitting their AFS to the SEC. So speak with your accountant and make sure they have considered all of the documents that need to be submitted this audit season!
What businesses in the Philippines have to submit an Audited Financial Statement?
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 corporate entities in the Philippines (e.g. foreign corporations, branches, regional or representative offices). So contact your accountant without delay to confirm if your business is required to file an AFS in 2020!
If your company’s finances, books and accounts are maintained and in good shape during the year, audit season can be a much more streamlined and simpler process!
At CloudCfo, we believe that proper preparation for audit season starts by engaging a competent and proactive accountant in the Philippines! Remember – the audit relates to the entirety of the previous financial year. So engaging competent accounting services earlier than later is highly advised!
CloudCfo does not perform audits for its client. The auditor should be entirely independent. CloudCfo does, however, support its clients by ensuring that throughout the financial year, books of accounts are being maintained properly, all transactions are recorded, all tax filings are submitted and the company is aware of and adhering to it compliance obligations.
In short? CloudCfo ensures that the entire accounting, bookkeeping and finance functions of our clients are always in excellent shape and ready for when audit season comes around!
Remember …. fail to prepare…..prepare to fail!