EXECUTIVE SUMMARY

A. INTRODUCTION

The Municipality of Kabugao is the oldest among the seven municipalities of the
Province of Apayao. It was formally created in 1914 when Lieutenant-Governor Blas
Villamor of the American government appointed Manuel Rugrug as the first president of
Kabugao. Pursuant to Act No. 1876, it became the sub-provincial capital of the sub-
province of Apayao in 1916 and was created into a regular municipality by virtue of
Executive Order No. 42 dated June 25, 1963 by President Diosdado Macapagal. It is
composed of 21 regular and one administrative barangays and classified as a 1st class
Municipality. It is presently under the leadership of Honorable Joseph C. Amid who is
on his third term as Municipal Mayor.

The Municipality of Kabugao envisions to be the prime eco-tourism destination of the

north, cultural heritage capital of the far-north and Apayao’s watershed cradle with
empowered, hospitable and God-fearing people, living in a competitive, rich and
progressive economy in a safe and sound environment inspired by competent, dynamic and
kind-hearted leaders.

Audit Methodology and Scope of Audit

A financial audit and compliance was conducted to ascertain the propriety of the
financial transactions and observance of the agency with prescribed rules and regulations.
A value for money audit was likewise conducted to determine whether the programs,
projects and activities for the year were implemented in an efficient, economical and
effective manner.

The audit was focused on the various audit thrusts/issues issued by the Local
Government Sector of the Commission on Audit. Walk through, analysis of data, interview
with concerned officials and employees, and other audit techniques that were necessary
were employed in the conduct of audit.
.
B. FINANCIAL HIGHLIGHTS

Kabugao is greatly dependent on its Internal Revenue Allotment which composed of

98.40% of the total revenue. Other sources of funds include local taxes, permits and
licenses, service income and other income.

The financial condition and results of operations of the Municipality for CY 2017
compared to that of the preceding year is detailed as follows:

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 Particulars 2017 2016 Increased
(Decreased)
A. Financial Condition
Assets ₱256,285,369.38 ₱202,652,534.12 ₱53,635,835.26
Liabilities 89,746,958.21 77,216,383.63 12,530,574.58
Government Equity 166,538,411.17 125,436,150.49 41,102,260.68
B. Result of Operation
Income ₱181,159,505.92 ₱161,912,989.38 ₱19,246,516.54
Expenses 146,112,734.49 114,213,605.78 31,899,128.71
Excess of Income 35,157,717.35 49,996,383.60 (14,838,666.25)

Moreover, the comparative presentation of the sources and application of fund is as

follows:
Particulars 2017 2016 Increased
(Decreased)
A. Sources of Funds ( Appropriation )
Personnel Services ₱58,168,198.85 ₱54,519,344.78 ₱3,648,854.07
MOOE 60,807,255.00 55,490,820.86 5,316,434.14
Financial Expenses -0- 0 -0-
Capital Outlay 13,463,000.00 49,919,494.48 (36,456,494.48)
B. Application of Fund ( Obligation )
Personnel Services ₱58,168,198.85 ₱54,519,344.78 ₱3,648,854.07
MOOE 60,807,255.00 55,490,820.86 5,316,434.14
Financial Expenses 0 -0-
Capital Outlay 13,463,000.00 49,919,494.48 (36,456,494.48)
Total ₱132,438,453.85 ₱159,929,660.12 (₱27,491,206.27)

C. AUDITOR’S OPINION ON THE FINANCIAL STATEMENTS

The auditor rendered a qualified opinion on the fairness of presentation of the financial
statements due to the doubtful validity and propriety of Accounts Payable totaling
P47,227,899.09.

Likewise, in Observation No. 2 of this report, erroneous and/or non-recording of

various transactions contrary to the Philippine Public Sector Accounting Standards Nos. 1,
resulted in the Overstatement of Assets and Liabilities in the amount of ₱2,606,347.34 and
₱3,740,718.09, respectively; and understatement of P1,134,370.75 in the Government
Equity.

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D. SUMMARY OF SIGNIFICANT OBSERVATIONS AND
RECOMMENDATIONS

Financial and Compliance Audit

1. Accounts Payables totaling P47,227,899.09 were not properly documented contrary to

PPSAS 30, COA-DBM Joint Circular No. 2013-1 and Accounting Circular Letter 2007
– 001, casting doubt on the validity and propriety of the financial claims.

We recommended that the Municipal Accountant:

a. analyze the composition of the Accounts Payables and revert to the government equity
account of the LGU, those without binding claims.

b. submit the following reports to enable the Audit Team to evaluate the fair presentation
of the financial statements for CY 2017 and every quarter thereafter.

1. list/schedules with complete information of the Accounts Payable (Due and

demandable).

2. separate list/schedule of the obligations Not Yet Due and Demandable in

compliance to Accounting Circular Letter 2007 – 001

2. Erroneous and/or non-recording of various transactions contrary to the Philippine

Public Sector Accounting Standards Nos. 1, resulted in the Overstatement of Assets
and Liabilities in the amounts of ₱2,606,347.34 and ₱3,740,718.09, respectively; and
understatement of ₱1,134,370.75 in the Government Equity.
We recommended that the Municipal Accountant adjust the under/overstated accounts
through the following adjusting journal entry:

Information and Communication 323,260.00

Technology Equipment
Other Machinery and Equipment 402,926.33
Office Equipment 265,865.00
Furniture and Fixture 251,450.00
Due to BIR 1,599.04
Due to PAG-IBIG 1,447,899.08
Trust Liability 2,400,000.00
Cash in Bank – LCCA 2,327,284.29
Csh ib Bank – LCCA (E-gov) 1,453,432.38
Accounts Receivable - Disallowance 3,132.00
Water Supply Systems 66,000.00
Accounts Payable 72,715.71
Due to PhilHealth 4,275.00
Due to GSIS 31,789.32
Prior Period Adjustments 1,134,370.75

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3. Funds received from the Department of Interior and Local Government to finance
various projects under the 2015 Salintubig (Improvement and upgrading of Potable
Water Supply) from DILG CAR amounting to P2,400,000.00 which was erroneously
deposited and recorded in the books of the LGU’s General Fund account and later on
transferred to the Trust Fund account was not recorded accordingly contrary to the
provisions of Section 309 and 310 of Republic Act No. 7160, resulting in overstatement
of accounts in the General Fund and understatement of the related accounts in the Trust
Fund.

We recommended that the Municipal Accountant record in the Trust Fund books, the
transfer of 2015 Salintubig (Improvement and Upgrading of Potable Water Supply)
fund with the following entry:

Cash in Bank – LCCA 2,400,000.00

Due to NGA’s 2,400,000.00

4. Funds transferred from the General Fund to the Special Educational Fund (SEF)
amounting to P1,749,108.19 were erroneously and/or not recorded in the LGU’s Books
of Accounts resulting in overstatement of Cash accounts in the General Fund and
corresponding understatement in the SEF Fund accounts.

We recommended that the Municipal Accountant adjust the effected accounts through
the following adjusting journal entries:

Under the General Fund Books of account

Prior Year’s Adjustment 1,749,108.19

Cash in Bank –LCCA (PVB) 1,749,108.19

To adjust the erroneous entry made for the transfer of fund from the general to the SEF
fund.

Under the SEF Fund Books of account

Cash in Bank –LCCA 1,749,108.19

Prior Year’s Adjustment 1,749,108.19

To record the received and deposit of fund transfer from the GF.

5. Supplies and materials totaling ₱12,635,777.51 was purchased through alternative

mode, of which ₱8,835,777.51 was procured through shopping and P3,800,000.00 was
paid through cash advances, contrary to pertinent provisions of the Revised IRR of RA
No. 9184, COA Circular No. 97-002 and BIR Revenue Regulation No. 16-2005, thus
depriving the government of obtaining the most advantageous price and of collecting
taxes that could have been withheld from the payments thereof.

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 We recommended that management:

a. require the department heads to consolidate supplies and material requirements

through their Project Procurement Management Plans (PPMP) and submit them for
consolidation by the Bids and Awards Committee in the Annual Procurement
Program in accordance with Section 7, Rule II of the Revised IRR to avoid
individual/piecemeal purchases.

b. limit procurement of goods through shopping, unless the circumstances warrant its
application as provided under section 52 of RA 9184.

c. stop the practice of procuring supplies, materials out of cash advances unless the
same are exceptionally urgent and payment through check is not possible.

6. Cash advances for purposes other than travelling expenses amounting to

₱11,323,500.00 were granted to elective officials of the municipality, in violation of
pertinent provisions of COA Circular No. 97-002, hence considered unauthorized
disbursements.
We recommended that:

a. management strictly observe the pertinent provisions of COA Circular No. 97-002
in granting cash advances. Henceforth, refrain from granting to elective officials,
cash advances other than their authorized traveling expenses.

b. the purpose of the cash advance be properly identified and each item of the
expenditure be properly indicated for the Budget Officer to know what object of
expenditures are being obligated.

7. Retention money amounting to P3,794,256.98 were paid prior to the lapse of 1 year
warranty period without posting a substitute instrument acceptable to the government
as provided under section 62.2.2.3.4 and Item No. 6 of Annex E of the 2016 revised
IRR of RA 9184 putting the Agency at risk in case of uncorrected discovered defects
of the projects.

We recommended that management adhere to the provision of section 62.2.2.3.4 and

Item No. 6 of Annex E of the 2016 revised IRR of RA 9184 in paying/releasing the
retention money.
8. Contracts entered into by the LGU and cash advances granted were not obligated
upon approval and payment respectively. Instead, obligations of allotment were only
made during payment of the contracts and liquidation of cash advances. Further, there
were no registry of Appropriations, Allotments and Obligations maintain by the
Accountant contrary to Section 344 of RA 7160, section 52 and section 18 of NGAS
for Local Volume I and II, respectively, putting the allotted fund for the transactions
at risk of possible misappropriation.

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 We recommended that management comply with the pertinent provision of Section 344
of RA 7160, section 52 and section 18 of NGAS for Local Volume I and II, respectively
by requiring:
a. the issuance of obligation request for contract and other transactions at gross before
payment. No further obligation request needed during progress billing/partial
payment.
b. the issuance of obligation request for cash advances at gross before payment. If the
liquidation does not equal to the cash advance, issue separate obligation request to
adjust the difference accordingly.
c. the Accounting section maintain separate registries for appropriation, allotment and
obligation to be reconciled with the budget office registries every end of the month
or as necessary.
d. obligation of allotment by certifying/approving and recording the Obligation
Request to the appropriate registries to earmark the allotment, safe from being
misappropriated to other activities, program or project.
9. Contract documents, purchase orders and supporting documents were not submitted
within the prescribed period
under COA Circular No. 2009-001 dated February 12, 2009 and other applicable rules
and regulations, thereby hindering the timely evaluation thereof and giving
recommendation, if needed, for immediate correction by management.

We recommended that management comply with the prompt submission of perfected

contracts in accordance with Section 3.1.1 of COA Circular No. 2009-001 to allow
ample time for review and evaluation.

10. Health personnel were paid fixed monthly travelling allowance totaling to P31,800.00
which are not among those provided under DBM-DOH Joint Circular No 1, S. 2012,
hence, without legal basis and unauthorized.
We recommended that:
a. management discontinues the granting of fixed travelling allowance to RHU
personnel.
b. payment/reimbursement of traveling expenses to RHU personnel be in accordance
with the provision of Executive Order 298.
11. Transportation allowance and reimbursement of fuel amounting to P253,800.00 and
P151,592.97, respectively, were paid to officials and employees who are assigned or
are using government motor vehicle contrary to Local Budget Circular No. 103 dated
May 15, 2013 and COA Circular No. 2012-003. The payment of fuel expenses in
addition to the full transportation allowance is considered excessive.

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 We recommended that management stop the practice of paying Transportation
Allowance to officials who are issued or use government vehicles in compliance with
the provisions of Local Budget Circular No. 103 dated May 15, 2013 and COA Circular
No. 2012-003.
12. The Agency Action Plan and Status of Implementation (AAPSI) was not submitted on
time hampering the review, monitoring and evaluation of management’s action on
previous year’s audit observations and recommendations contrary to R.A 10633
otherwise known as the General Appropriations Act of FY 2015.

We recommended that management submit the Agency Action Plan and Status of
Implementation (AAPSI) within the period prescribed by law.

13. The Municipality does not have enough Current Assets to pay its Current Liability
incurring net current asset deficit of P28,869,634.64 as of December 31, 2017, hence,
casting doubt on the ability of the municipality to pay its maturing obligations.

We recommended that the Municipal Accountant:

a. prepare the monthly bank reconciliation statements and submit the same together
with complete bank statements to the Audit Team to aide in the determination of
the correct Cash in bank balance;

b. prepare individual analysis of all the current assets and current liability accounts to
establish their reliability; and

c. submit important lists and furnish subsidiary records of the subject accounts for
evaluation by the Audit Team to aide in the immediate formulation of necessary
audit recommendations.

We further recommended that should deficit still exist after necessary adjustments, if
any has been made after analyzing the affected current accounts, management consider
devising strategic plan in budgeting and effective control; or limit spending activities
of the municipality to accumulate enough savings to cover the deficit.

14. Error in the remittances of GSIS payments withheld from the LGU personnel resulted
in overpayment of Contribution/premium and loan amortizations in the amount of
P494,053.90 and P59,975.65, respectively or net overpayment of P554,129.55 hence,
considered unauthorized payments and loss of government fund.
We recommended that management:
a. reconcile the record of GSIS contribution/deductions in the payrolls with the
corresponding monthly remittances to ascertain the exact under or overpayment per
account for every employee.

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 b. coordinate with the GSIS servicing branch for possible offsetting of the overpaid
amount or for any possible remedy to correct the error incurred and to recover the
overpaid amount.

c. be careful in the encoding of the GSIS monthly remittance list reconciled with the
actual payroll deduction and government share payments to avoid incurring the
same error.

15. The mandatory documentary requirements for payment of 29 job orders/contracts

amounting to P2,307,971.16 were not submitted contrary to pertinent provision of
Items 9.1.3.2 of COA-Circular 2012-001, thereby the correctness, validity and
propriety of the transaction cannot be established.

We recommended that management support all payments of job orders/contract with

the mandatory documents required under the pertinent provisions of item 9.1.3.2 of
COA Circular 2012-001 dated June 14, 2012.

16. Only the accomplishment report of GAD directly related activities conducted by the
Municipal Social Welfare and Development Office amounting to P500,000.00 was
submitted by the LGU. Accomplishment report on the streamlined GAD program and
activities was not prepared. Hence, compliance of the LGU to PWC, NEDA & DBM
Joint Memorandum Circular (JMC) No. 2013-01 could not be verified.

We recommended that:

a. management familiarize with the used of the tools Harmonized Gender and
Development Guidelines test (HDGD) and administer in its program, projects and
activities to have a basis in estimating the cost attributable to GAD; and

b. under the GAD Focal Point System, prepare a consolidated plan and
accomplishment report on the GAD activities of the LGU and furnish copies to the
Audit Team for evaluation

17. Suspension and Disallowances amounting to ₱13,607,233.86 and ₱12,682,274.08

remained unsettled as of December 31, 2017 contrary to pertinent provisions of COA
Circular 2009-006.

We have recommended that Management enforce settlement of suspension and

disallowances pursuant to Section 7 of 2009 RRSA.

E. STATUS OF IMPLEMENTATION OF PRIOR YEARS’ AUDIT

RECOMMENDATIONS

Of the 37 audit recommendations embodied in the 2016 Annual Audit Report, 11 were
fully implemented, 19 were partially implemented and 7 were not implemented.

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