NCE Understand SCOTs/disclosure processes and perform walkthroughs

Entity name:

Susumi Philippine
Logistics, Inc.

Reporting period:

March 31,
2015

Significant class of transactions (SCOT) / disclosure process:

Name:

Non-routine and Estimation

Nature:

Routine

Owner:

Ms. Hanna M. Lescano Assistant Accounting Manger

Ms. Rachel Cajipe - Accounting Assistant

Background
We obtain an understanding of the significant classes of transactions (SCOTs) and significant disclosure
processes to identify and understand the risks of material misstatement at the assertion level (and, when
applicable, to identify and understand what can go wrongs (WCGWs)).
Attach this template to the related significant class of transactions/process within GAMx-SA in the
Understand significant classes of transactions and significant disclosure processes and perform
walkthroughs screen.
When we test controls for one or two routine SCOTs, we use the template NCE Understand routine
SCOTs, perform walkthroughs and test controls.

Our understanding of the critical path

Document below our understanding of the critical path of the SCOT/ significant disclosure process,
including the major inputs and outputs. The critical path includes:

Initiation: the point where the transaction first enters the entitys process and is prepared and
submitted for recording

Recording: the point where the transaction is first recorded in the books and records of the entity

Processing: any changes, manipulation or transfers of the data in the books and records of the
entity

Reporting: the point where the transaction is reported (i.e., posted) in the general ledger.

Document our understanding of how incorrectly processed information is detected and corrected on a
timely basis.
To help ensure that we properly consider the effects of computer processing in making our risk
assessments and developing our audit strategy, describe automated aspects of the critical path of the
SCOT/significant disclosure process, including manual aspects that depend upon computer functionality or
computer generated data. Document the attributes of the related IT applications in the Audit planning
template, section 3.3, or equivalent documentation.
As part of our understanding of the critical path of the SCOTs, we obtain and document our high-level
understanding of relevant controls for the following, when not affected by significant risks:

Estimation SCOTs (refer to NCE 17-EST-2.2)

Related party relationships and transactions, when we identify a related party SCOT (refer to NCE
10-4.2)
For significant risks, we identify controls relevant to the audit (refer to NCE 10-7) and document these in
the APT.

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NCE Understand SCOTs/disclosure processes and perform walkthroughs

Background
We obtain an understanding of the significant classes of transactions (SCOTs) and significant disclosure
processes to identify and understand the risks of material misstatement at the assertion level (and, when
applicable, to identify and understand what can go wrongs (WCGWs)).
Attach this template to the related significant class of transactions/process within GAMx-SA in the
Understand significant classes of transactions and significant disclosure processes and perform
walkthroughs screen.
When we test controls for one or two routine SCOTs, we use the template NCE Understand routine
SCOTs, perform walkthroughs and test controls.

Our understanding of the critical path

Automated
aspects

Performed by

Describe the critical path

(job title only)

Preparation of Lapsing Schedule

Assistant Accounting Manager

NA

Recording of Depreciation Expense

Assistant Accounting Manager

SAP Business
One Version
8.82

Estimation and Recording of Allowance

for Bad Debts

Assistant Accounting Manager

SAP Business
One Version
8.82

Preparation of Amortization Schedule

Assistant Accounting Manager

NA

Recording of Amortization

Assistant Accounting Manager

SAP Business
One Version
8.82

Recording and Reversal of Accrual

Assistant Accounting Manager

SAP Business
One Version
8.82

Restatement of Cash

Assistant Accounting Manager

NA

Recording of Unrealized Gain/Loss

Assistant Accounting Manager

SAP Business
One Version
8.82

Intercompany Reconciliation

Assistant Accounting Manager

NA

Preparation of Tax Returns

Accounting Assistant

NA

Provide any other details that are necessary to understand the initiation, recording, processing and reporting of
the transactions, including major input and output sources, if not included in the descriptions above. Refer to
NCE 17-EST-Documentation for the required documentation of our understanding of estimation SCOTs,
including relevant controls.
The non routine and estimation transactions of the Company are the following:
1. Computation of depreciation expense
2. Provision for impairment losses on receivables
3. Estimation of accruals
4. Computation of amortization of prepayments
5. Computation of Foreign Currency Gain/Loss
6. Intercompany Reconciliation
7. Preparation of Tax Returns
1.Computation of Depreciation Expense
Depreciation Policy:
The Company is using straight line depreciation
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NCE Understand SCOTs/disclosure processes and perform walkthroughs

The depreciation begins on the month that the asset is purchased provided that it is
purchased on or before the 15th day of the month. If the item is purchased beyond the 15th
day of the month, the depreciation begins the following month.
Capitalization of Asset and Major Repairs:
The Company has no policy regarding capitalization of asset. It is based on the discretion
and professional judgment of the Assistant Accounting Manager taking in consideration the
nature of the asset, benefit to the company and useful life.
Asset Disposals
The Company disposes assets which are not anymore useful to the Company. The entry to
record the disposal of assets are as follows:
Disposal at book value: (May vary depending on the type of Asset disposed; Motor
Vehicle is given as an example)
Accumulated Depreciation Motor Vehicle
Motor Vehicle

xxx

xxx

Disposal at above book value:

Accumulated Depreciation Motor Vehicle
Motor Vehicle
Gain on Sale of Fixed Asset

xxx
xxx
xxx

Disposal at below book value:

Accumulated Depreciation Motor Vehicle
Loss on Sale of Fixed Asset
Motor Vehicle

xxx
xxx

xxx

Useful lives of Properties and Equipment:

Leasehold Improvement - 4 years
Motor Vehicle - 3 years
Office Equipment - 3 years
Office Furniture and Fixtures - 5 years
Computer Software - 3 years
Warehouse Equipment - 3 years

Recording of the Depreciation on the system

The lapsing schedule of Property and Equipment is updated monthly and maintained only in
an excel file outside SAP Business One (B07.Control 1).
The depreciation expense is computed and recorded on the system manually through a
journal entry monthly by the Assistant Accounting Manager (B07.Control 2). The depreciation
expense is being classified also into cost center customer service, operations, sales,
accounting and admin. Classification depends in which cost center the asset was used. The
entry for recording depreciation is as follows:
Depreciation Expense Sales
Depreciation Expense Operations
Depreciation Expense Customer Service
Depreciation Expense Accounting & Admin
Accumulated Depreciation Motor Vehicle
Accumulated Depreciation Office Equipments
Accumulated Depreciation Office F&F
Accumulated Depreciation Warehouse Equipment
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xxx
xxx
xxx

xxx
xxx
xxx
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NCE Understand SCOTs/disclosure processes and perform walkthroughs

Accumulated Depreciation Computer Software

xxx

The Assistant Accounting Manager is the one who prepares the lapsing schedule of property
and equipment.
The lapsing schedule contains the dates the property and equipment were available for use,
costs, estimated useful lives, accumulated depreciation, and net book values.
The Company performs physical fixed asset count at the end of the fiscal year.
The Company also has fully depreciated assets which are still being used. Most of these are
office equipment such as office chairs and desks, filing cabinets, shelves, etc.
2.Provisions for impairment losses on receivables
The Acctg. Assistant maintains an aging analysis of receivables and provides an allowance on
overdue accounts. The aging analysis is system generated performed every month which
contains the date sale was made into which customer, invoice details, and aging of the
receivable. The receivables are specifically being monitored by the Acctg. Assistant. The
Company normally gives a term of 30 days to its customers. Those receivables which are
outstanding for more than 120 days are considered impaired and the Company provides an
allowance for such receivables. Journal entry for the provision is entered into SAP by the
Acctg. Assistant.
3.Estimation of accruals
Accruals are computed for Telephone and Landline Expense, Parking and Toll Fees, Cellular
Phones Expenses, Professional Fees, Securities Expense, 13th Month Pay and Retirement
Benefit Expense. Except for the last two accounts, the basis of accruals is the prior month
billing (B07.Control 3). Amount to be accrued for 13th month pay is determined by the
Assistant Accounting Manager depending on the current payroll salary of employees. While
amount accrued for retirement benefit expense was based on projected amount on the latest
actuarial valuation report. Expenses are classified into respective cost centers in which they
originate. The journal entries to record the accruals other than 13th month pay and retirement
benefit expense is prepared and posted in SAP by the Accounting Staff (B07.Control 4). While
Assistant Accounting Manager prepares and records the accrual for the remaining two
accounts (B07.Control 4). Accruals made are reversed on the subsequent month upon
payment. Journal entries to record the reversal and the subsequent payment are made by the
Accounting Staff in charge of payables. For the expenses where billings are made every 15th
of the month, they are pro-rated based on the no. eing of days used during March and April
only to comply with proper cut off and for proper recognition of expenses on proper
accounting period. Hardcopy of journal entry was no longer printed and review of the
immediate supervisor was no longer performed. The pro-forma entry to record accruals and
its subsequent reversals are as follows:
Internet - Operations
Professional Fee Accounting & Admin
Machinery Maintenance Operations
Staff Benefits
Accruals Others

xxx
xxx
xxx
xxx

xxx

Subsequent Reversal:
Accruals Others
Cash or any other appropriate payable account

xxx
xxx

4.Computation of amortization
The Assistant Accounting Manager prepares the monthly amortization table (B07.Control 5).
Amortization table includes the type of asset purchased, its cost, estimated useful life or
period coverage, and unexpired and expired portion of the prepayment. Previous periods
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NCE Understand SCOTs/disclosure processes and perform walkthroughs

prepayments are ensured to be reversed or expensed. Payments containing a prepayment are
identified per type and per amount based on the check vouchers and other disbursement
documents. Coverage prepayments are noted to determine the expired portion at the end of
the year. Journal entries to record prepayments and subsequent adjustments are done by the
Assistant Accounting Manager (B07.Control 6).
The proforma entry to record prepayments are as follows:
Prepaid Insurance (or any other prepaid asset account)
Accounts Payable Others

xxx

xxx

Since the Company is using voucher system, they record prepayments upon
preparation of Accounts Payable Vouchers. This will then be reversed upon preparation
of Check Voucher. The entry will be:
Accounts Payable Others
CIB - BPI Php (or any other Bank Account)

xxx
xxx

The entry to record amortization of prepayments is as follows:

Insurance Expense Accounting & Admin
Insurance Expense Operations
Insurance Expense Sales
Prepaid Insurance

xxx
xxx
xxx

xxx

5.Computation of Foreign Currency Gain/Loss

The Company has some foreign currency denominated transactions. The unrealized foreign
currency gain or loss is computed every year end while preparing bank recon using BSP rates
for Yen and USD transactions (B07.Control 7). Cash restatement is done every year end. The
Company also restates its outstanding foreign currency payables and receivables at interim
and yearend. The proforma entry to record unrealized foreign gain/loss is as follows:
Unrealized Forex Gain/Loss
CIB BPI USD
CIB BPI JPY
CIB MBTC - USD
CIB RCBC USD

xxx

xxx
xxx
xxx
xxx

(This is a result of a loss in foreign currency translation. If the result of translation is a

Gain, the entry is just a reverse entry of this one.)
For Receivables and Payables, the Company uses AR - Revaluation and AP Revaluation account to recognize unrealized Forex Gains and Losses.
6. Intercompany Reconciliations
The Company performs intercompany reconciliations at year end for related parties within the
LINA Group of Companies. The Accounting Assistant prepares the Confirmation Letter for
Intercompany Balances (receivables and payables) signed by the Assistant Accounting
Manager. These confirmation letters were sent to related parties. Once confirmation is
received back, the Company and the related party will reconcile for any difference in the
balances in will make necessary and appropriated adjustments.
7. Preparation of Tax Returns
The accounting assistant is the one responsible for the preparation of Tax Returns (Income Tax
Returns, VAT Returns, Withholding Tax Returns, etc.) and is then reviewed by the Assistant
Accounting Manager for submission to the BIR.

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NCE Understand SCOTs/disclosure processes and perform walkthroughs

Walkthrough
Describe the walkthrough procedures performed, addressing the points at which the transactions are
initiated, recorded, processed, and ultimately reported in the general ledger (or serve as the basis for
disclosures), including both the manual and automated steps of the process. For significant disclosure
processes, describe the procedures performed to confirm our understanding of the process and sources of
information management uses to generate significant disclosures. Use original source documentation and
information technology that the client personnel typically would use in the flow of transactions.
For controls over significant risks: Describe the walkthrough procedures to confirm our understanding of
the design of the controls and that they have been implemented. As we walk through the prescribed
procedures and controls, we should ask personnel to describe their understanding of the control activities
and demonstrate how they are performed.
We may perform our walkthrough in conjunction with the tests of transactions included in our substantive
procedures.

A) Walkthrough procedures
We select the following transactions for walkthrough:

Transaction selected for

walkthrough:

Individual(s) we talked with to

confirm our understanding:

March Depreciation for Office Equipment

March Amortization of Prepaid Insurance

March Accrual of 13th month pay

Ms. Hanna M. Lescano

Acctg. and Admin. Assistant
Supervisor

Date:

May 14, 2015

Description of the walkthrough procedures performed:

We re-performed the flow of transaction through the documented process:
A. Depreciation
We obtained the screenshot of the journal entry of the Office Furniture and Equipment-Main
Building depreciation expense for the month of September. No exceptions noted. Please refer
to the documents obtained for the details of the journal entry.
(See Paper Profile B07.02.01 Nonroutine & Estimation Process
Docs_Depreciation)
We recomputed the expense recorded based on the lapsing of Property, Plant and Equipment
for said month (Control 1). No exceptions noted. Please see attached lapsing schedule.

SPLI_Lapsing
Schedule_3.31.2015.xlsx

B. Amortization
We obtained the screenshot of the journal entry for the amortization of Leasehold
Improvements for the month of March (Control 6). We recomputed the amortization and
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NCE Understand SCOTs/disclosure processes and perform walkthroughs

compared the amount computed on the amount recorded in the journal. No exceptions
noted. Please refer to the documents obtained for the details of the journal entry.
(See Paper Profile B07.02.02 Nonroutine & Estimation Process
Docs_Amortization)
We recomputed the expense recorded based on the amortization schedule of Leasehold
improvements for said month. Please refer to attached amortization schedule of leasehold
improvement. (See SPLI_Lapsing Schedule_3.31.2015 attached above). (Control 5).
C. Accrual
We obtained the screenshot of the journal entry for the accrual of 13th month pay for the
month of March 2015 (Control 4). Amount accrued was based on monthly salaries of
employees divided by twelve (12) (Control 3). No exceptions noted. Please refer to the
documents obtained for the details of the journal entry.
(See Paper Profile B07.02.03 Nonroutine & Estimation Process Docs_Accruals)

B) Segregation of incompatible duties, authorization and

management override of controls

Yes

If we answered Yes to the above:

Do the incompatible duties represent a deficiency in the
design of controls that is not sufficiently mitigated by other
management actions or controls that have been identified?

b. Was anything noted in our walkthrough procedures that

would indicate there are issues related to authorization?
If we answered Yes to the above:
Do the authorization issues represent a deficiency in the
design of controls that is not sufficiently mitigated by other
management actions or controls that have been identified?
If we answered Yes to the above, provide further
documentation and the related effect on our audit strategy.
c. Was anything noted in our walkthrough of controls that
indicate the potential for management override of controls or
that such override may have occurred?
If we answered Yes to the above:
Does the potential for management override of controls
represent a deficiency in the design of controls that is not
sufficiently mitigated by other management actions or
controls that have been identified?

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Additional
observations

a. Was anything noted in our walkthrough procedures that

would indicate there are incompatible duties?

If we answered Yes to the above, provide further

documentation and the related effect on our audit strategy.

No

NCE Understand SCOTs/disclosure processes and perform walkthroughs

B) Segregation of incompatible duties, authorization and

management override of controls

Yes

No

No

N/A

Additional
observations

Did our walkthrough procedures confirm our

understanding of the SCOT and/or significant
disclosure process?

For SCOTs and significant disclosure

processes affected by significant risks, did our
walkthrough procedures confirm that the
controls relevant to the audit have been
properly designed and implemented?

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Additional
observations

If we answered Yes to the above, provide further

documentation and the related effect on our audit strategy.
C) Conclusion

Yes