Geortne Orvis Ss RECEIVED BY 4" or Lt Republic of the Philippines COMMISSION ON AUDIT LGS-D - Cebu Il, Audit Team R7-03 City of Naga Province of Cebu ‘CONFIDENTIAL AOMNo —: 2020 - 014 (2019) Date February 19, 2020 AUDIT OBSERVATION MEMORANDUM (AOM) For. HONORABLE VALDEMAR M. CHIONG City Mayor City of Naga, Cebu Attention: Kelvin Ray Ababa Rowena Arnoza City Accountant City GSO We have reviewed the Inventory Report and compared it with accounting records of the LGU - City of Naga, Cebu for the calendar year 2019 and observed the following deficiencies/errors: Various properties totaling 4,698,570.00 remained unrecorded as of December 31, 2019, but were already included in the Inventory Report since they were acquired during the year, contrary to International Public Sector Accounting Standards (IPSAS) No. 17 on the recognition of PPE, thereby understating the affected PPE accounts and their corresponding depreciation expenses, thus impairing the fair presentation of the financial statements. Intemational Public Sector Accounting Standards (IPSAS) No. 17 provides the recognition criteria of the property, plant and equipment that: "The cost of an item of property, lant and equipment shall be recognized as an asset if, and only if: (@) It is probable that future economic benefits or service potential associated with the item will flow to the entity; and (b) The cost or fair value of the item can be measured reliably.” It was noted in the comparison of the Inventory Report submitted by the General Service Office and Accounting Records showed that 20 properties totaling R 4,698,570.00 (Annex A) were net recorded in their appropriate accounts thereby understating the total PPE and likewise their corresponding depreciation expense. Summary of the accounts affected is presented below:Fund ‘Account Title ‘Account No. ‘Amount GF TCT Equipment 7-07-05-030, 184,320.00 GF Medical Equipment 4-07-05-110, 335,000.00. GF ‘Motor Vehicles. 1-07-06-010 4,138,000.00- SEF ‘Other PPE [1-07-99-990 41,250.00 ‘GRAND TOTAL 4,698,570.00 Further verification disclosed that the ICT Equipment, Medical Equipment and Other PPE totaling ® 560,570.00, which was acquired from November to December 2019, were already recorded in January 2020, The motor vehicles totaling P 4,138,000.00 were acquired through donations on July 31, 2019 (R 2,050,000.00) and on April 2, 2019 (R 2,088,000.00) covered with Deed of Donations but not yet recorded in the accounting books as of date. Inquiry with the accounting personnel disclosed that PPE, other than infrastructures assets, are recorded upon payment, not upon acquisition date, contrary to the recognition criteria as provided in IPSAS 17. It was also noted that the GSO personnel did not forward the documents necessary in the recording of properties like the Deed of Donations for donated properties, Delivery Receipt and Acknowledgment Receipt of Equipment (ARE), and the like, to the Accounting Department thus, resulting in the late and/or non-recording of properties. The late and/or non-tecording of the properties caused the non-recording of the corresponding depreciation expense for the year 2019 using the straight-line method with the following estimates as provided by the accounting department: ‘Account Title ‘Amount of Residual Value Useful Life ICT Equipment 10% of cost 5 years ‘Medical Equipment 10% of cost 40 years ‘Motor Vehicles 10% of cost 10 years. (Other PPE 10% of cost 5 years As further provided in the Philippine Application Guidance (PAG) No. 3 to IPSAS 17: “Depreciation of an asset begins when it is available for use such as when it Is in the location ‘and condition necessary for it to be capable of operating in the manner intended by management. For simplicity and to avoid proportionate computation, depreciation shall be for one ‘month if the PPE is available for use on or before the 15” of the month. However, if the PPE is available for use after the 15” of the month, depreciation shall be for the succeeding month, * With the use of the estimates and the provision in IPSAS 17, total unrecorded depreciation was computed below: Fund] Account Title] Accumulated Depreciation Depreciation Expense Total Depreciation for2019 GF [ICT Equipment ‘AD = information & Depreciation = Machinery Equipment 276480 Communication Technology (6-05-01-050) Etquipment(1-07-05-031) City of Naga AOM No. 2020-024 (2019) Page 2 of 4Fund | Account Title | Accumulated Depreciation ‘Depreciation Expense Total Depreciation for 2019 GF) Wadical Equipment | AD - Medical Equipment (7-07- | Depreciation - Machinery Equipment 251250 05-114) (5.05-01-050), GF | Motor Vehicies "AD Motor Vehicles Depreciation - Transportation 202,155.00 Equipment ‘SEF | Other PPE ‘AD Other Property, Plant & | Depreciation ~ Other Property, Plant W500 Equipment (1-07-96-991) ‘and Equipment (6-05-01-990) I ‘GRAND TOTAL 207,927.30 May we have your comments on the foregoing audit observations within fifteen (18) calendar days from receipt hereof. We recommend the following adjusting entry be made by the City Accountant to properly reflect the balances of the affected accounts thus presenting fairly the financial statements in compliance with IPSAS 1: ‘Account Title Debit Amount —[ Credit Amount Motor Vehicle 4,138,000.00 Prior Period Adjustment (Grants and 4,138,000.00 Donations in Kind) #fTo record donated motor vehicles Prior Period Adjustment (Depreciation Exp) 207,927.30 AD - ICT Equipment 2,764.80 AD - Medical Equipment 2,512,50 AD - Motor Vehicles 202,155.00 AD - Other PPE 495.00 fo record daprciation expanse not taken up in | 201 We further recommend that the GSO forward the documents, when properties are already received and available for use, to the City Accounting Office for proper recording in accordance with IPSAS 17 on the recognition of assets and computation of the corresponding depreciation expense. LUZ Uj MENDOZA it Auditor IV OIC - Audit Team Leader MARIADAISY O. BERCEDE State Auditor V ‘Supervising Auditor City of Naga AOM No, 2020-014 (2019) Page Sof 4Proof of Receipt of AOM No. 2020-044 (2019) City of Naga: Designation Printed Name & Signature Date City Mayor City Accountant City of Naga —AOM No, 2020-014 (2019) Page dofare ae ra |e aero cit 29 he ‘tomar