Manual on Audit of Telecommunications Industry

March 3, 2022 REVENUE AUDIT MEMORANDUM ORDER NO. 2-2022 SUBJECT : Manual on Audit of Telecommunications Industry TO : All Internal Officers, Employees and Others Concerned I. OBJECTIVES 1. To provide Revenue Officers with Audit Manual which contains minimum standard procedures and uniform guidelines for the proper examination and/or investigation of tax liabilities of taxpayers belonging to telecommunications industry; and 2. To prescribe mandatory reporting requirements for all cases involving taxpayers under the telecommunications industry. II. RATIONALE In today's world of constant connectivity, telecommunication networks have become an integral part of our daily lives. It becomes a critical component of national infrastructure, similar in many ways to roads and highways which are important contributor to economic growth. As such, it is governed with special laws and is being regulated by the National Telecommunications Commission in pursuant to Republic Act No. 7925. Further, this industry requires innovations to increase capacity and speed of wireless data networks which are all associated with capital expenditures and rights-of-use of assets, among others. Due to the complications of the nature of the business and existence of voluminous transactions, the telecommunication industry has distinct accounting terminologies, procedures and practices and peculiar accounting system as well. While this manual provides suggested audit procedures and techniques, the Revenue Officers are not precluded from applying other examination techniques, which they may find relevant and necessary under circumstances. III. REPORTING REQUIREMENTS Revenue Officers conducting the audit/investigation of companies engaged in telecommunication and similar activities are required to accomplish and comply with all the reporting requirements specially provided in this Telecommunications Audit Manual. IV. REPEALING CLAUSE This Order supersedes all revenue issuances or portions thereof inconsistent therewith. V. EFFECTIVITY This Order shall take effect immediately upon approval. (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue ATTACHMENT Manual on Audit of Telecommunications Industry (Year 2022) ACKNOWLEDGMENT The development of this Audit Manual of Telecommunications Industry was completed under the leadership of Commissioner Caesar R. Dulay and Deputy Commissioner-Operations Group, Arnel SD. Guballa. This Manual is a joint project of the Assessment Service (AS) with the Assessment Programs Division (APD) as the lead division which spearheaded the project and complemented by the Large Taxpayers Service (LTS). Acknowledgement is hereby extended to the Technical Working Group on Audit Manual for their invaluable contribution to the project. STEERING COMMITTEE Maria Luisa I. Belen Assistant Commissioner, AS Manuel V. Mapoy OIC-Assistant Commissioner, LTS Rossana P. San Vicente Head Revenue Executive Assistant, AS Edith B. Carayugan Chief, Assessment Programs Division Amelita A. Escober Chief, VAT Credit Audit Division Severita C. Dela Cruz Chief, Assessment Division, Revenue Region No. 7A Mariza R. Uy Chief, Assessment Division, Revenue Region No. 8A Carmen Grace L. Comoda Technical Assistant, Office of the Regional Director, Revenue Region No. 8B Rufino C. Cantaros Assistant Chief, Assessment Division, Revenue Region No. 7B Carlyn B. Cruz-Racuya Chief, Office Audit Section, Assessment Division, Revenue Region No. 7A Leilanie L. Claridad OIC-Chief, Review and Evaluation Section, Assessment Division, Revenue Region No. 7A Jayson R. Payapag OIC-Asst. Assessment Division, Revenue Region No. 8A COMMITTEE SECRETARIAT Estela G. Buenviaje Chief, Assessment Procedures and Techniques Section, APD Ruth L. Urbi OIC-Chief, Programs Evaluation Section, APD Ma. Rhodora D. Abuda Acting Chief, Audit Programs Section, APD Joy Marie P. Buyuccan Assessment Procedures and Techniques Section, APD Francis Fredirick O. Baja Assessment Procedures and Techniques Section, APD Lorrelei C. Cervantes Audit Programs Section, APD TELECOMMUNICATIONS INDUSTRY TEAM Ione S. Alejo Head Revenue Executive Assistant, LTS-Regular Corazon R. Balinas OIC-Asst. Regional Director, Revenue Region No. 5 Asela E. Sese Group Supervisor, Regular Large Taxpayers Audit III Ma. Daisy M. Loyola Regular Large Taxpayers Audit III Janice U. Yu Large Taxpayers VAT Audit Unit Monica L. Zamora OIC-Asst. Division Chief, Excise Large Taxpayers Audit Division II SPECIAL CONTRIBUTORS Analynsia C. Alarde Chief, Regular LT Division III Renato J. Mina Revenue District Officer, Revenue District Office No. 44 Rubi Ruth G. Magtagnob Chief, Regular LT Division II TYPE OF INDUSTRY: TELECOMMUNICATIONS INDUSTRY I. Brief Description of the Industry Telecommunications industry refers to communication businesses using regulated facilities that transmit data globally in words, voice, audio or video, across the globe. These include companies engaged in the service of broadcasting, telecommunications and cable providers which use copper cable, fiber or wireless technologies. Telecommunications can establish all forms of access points for a community and supports the deployment of powerful broadband networks to transport data and content. No other industry touches as many technology-related business sectors as telecommunications, which, by definition, encompasses not only the traditional areas of local and long-distance telephone service, but also advanced technology-based services including wireless communications, the Internet, fiber optics and satellites. Telecom is also intertwined with entertainment of all types. The infrastructure component of the industry serves a vital role in the economic progress of the country. It provides convenient and efficient way of dealing with different business transactions, either locally or internationally. In only a few years, the industry has evolved from an inefficient public utility to a sector with an improved competition, providing consumers lower cost of communicating at home or abroad. Mobile phones have outnumbered landline phones in the Philippines. The Philippines, called the text message capital of the world, is the world leader in Short Messaging Service (SMS) with almost one billion daily messages. It has also emerged as one of the top off-shoring destinations for Information Technology Enabled Services (ITES). A. Terminologies Common to Telecommunications Industry 1. Five/Fourth (5G/4G) generation of mobile networks most recent generations of mobile cellular networks that mainly uses LTE (Long Term Evolution) technology to enable very high-speed mobile broadband services while also supporting traditional voice calls and text messaging. 2. Activation Fee the initial set up fee to turn on a cellphone so that it can operate within the selected carrier network or any initial fee which may be charged prior to extending a particular type of service to a subscriber. 3. Bandwidth the capacity of a telecom line to carry signals. The necessary bandwidth is the amount of spectrum required to transmit the signal without distortion or loss of information. 4. Billing Information appropriate network usage date of one PTE that is required by another PTE to facilitate customer billing with attendant acknowledgement and status reports and are exchanged between PTEs to process claims and adjustments. 5. Broadband descriptive term for evolving digital technologies that provide consumers a signal switched facility offering integrated access to voice, high-speed data service, video-demand services, and interactive delivery services. 6. Cellular Mobile Telephone Systems (CMTS) wide area mobile radio telephone systems with its own switch, base stations and transmission facilities capable of providing high capacity mobile telecommunication by utilizing radio frequencies. 7. Code Division Multiple Access (CDMA) a technology used in digital communications such as 2G and 3G mobile cellular networks where a single frequency channel is used to transmit the information for multiple users who are each allocated special codes to avoid interference. 8. Content Provider an entity/organization that creates and/or maintains a database of information/data and which may offer services and products to the public for compensation. 9. Electronic Loading (E-load) is an electronic system used to sell, on prepaid basis, airtime credits to prepaid telephone services subscribers, in lieu of the use of prepaid cards. 10. Electronic Money (E-money) also known as electronic cash, electronic currency, digital money, digital cash, digital currency or scrip tokens or representations of value but expressed in digital form which enable the users thereof to store value, transmit, and receive tokens of value, ultimately allowing the user to move funds electronically and to effect electronic payments of generally limited amounts. Value that is converted into tokens in digital form is created upon actual deposit of cash with the telcos, through any of their business centers, or through automatic/electronic debit against the account of any person with a bank such as when the user executes the transaction through an Automated Teller Machine (ATM), mobile phone or through the internet. 11. Electronic Wallet the electronic equivalent of a traditional physical wallet which holds digital or E-money residing in the mobile phone unit of a mobile phone subscriber and linked to the server of the electronic wallet service provider and the digital money therein store may be recharged via electronic money systems and can thus operate similar to a virtual debit card from where payments for goods and services purchased may be source and electronically transmitted to the seller. 12. Franchise a privilege conferred upon a telecommunications entity by Congress, authorizing that entity to engage in a certain type of telecommunications service. 13. General Packet Radio Service (GPRS) a technology, also referred to as 2.5G, that introduced efficient mobile internet services in the 2G GSM networks. 14. Global Positioning System (GPS) A global system that uses a network of satellites to help navigate by calculating the location of GPS receivers within satellite navigators (Sat Nav), smartphones and other devices with embedded GPS capability. 15. Global System for Mobile (GSM) Communications a digital technology most widely used for the second generation (2G) of mobile cellular networks that enables secure voice calls and text messaging services. 16. Incoming Collect Calls telephone calls originating from a subscriber or customer of a PTE and terminating to and paid by a subscriber or customer of the terminating PTE. 17. Incoming Paid Calls telephone calls originating from a subscriber or customer of a PTE and paid to the said PTE. 18. Indirect Access a situation where a customer's call is routed and billed through the network of a PTE even if the call originated from the network of another PTE. 19. Interconnection the linkage by wire, radio, satellite or other means, of two or more existing PTEs with one another for the purpose of allowing or enabling the subscribers or customers of one PTE to access or reach the subscribers or customers of another PTE. 20. Interconnection Usage Charge the network usage charge applicable to direct and indirect interconnection between networks for call origination, call termination, or call transit, as the case may be. 21. International Gateway Facility a facility consisting of international transmission, switching and network management facilities that serve as the point of entry and exit in the Philippines of international traffic between a PTE's network and point/s outside the Philippines. 22. International Leased Lines a line dedicated to a specific customer in order to establish a high-speed point-to-point communication channel between the Philippines and other countries. 23. International Toll Calls are calls originating from one local calling (service) area and terminating to a foreign calling (service) area or originating from an FA and terminating in a local public telecommunications entity, or vice-versa. 24. Local Exchange Carrier (LEC) a PTE providing transmission and switching of telecommunication services, primarily but not limited to voice-to-voice service, in a geographic area anywhere in the Philippines. Mobile Telcos fall within the definition of LEC. 25. Long Term Evolution (LTE) a leading technology used for the fourth generation (4G) of mobile cellular networks that offers 4G services on your mobile phone. LTE provides 4G upgrade paths to all key 3G networks including Universal Mobile Telecommunications System (UMTS) and Code Division Multiple Access (CDMA) 2000. 26. Prepaid Subscription a type of subscription of a mobile telco customer which does not require monthly fixed subscription but is maintained by virtue of airtime credits that may be brought and credited (or loaded) into the mobile phone units from time to time and consumed, subject to validity period limitations and minimum airtime load policy of the Mobile Telco concerned, where the prepaid amount of credits available is stated in terms of its peso equivalent and is commonly referred to as "load." 27. Postpaid Subscription Plan mobile telephone subscriber plans which require the Mobile Telco to bill the subscriber on a periodic basis, generally on a monthly basis, and the amount to be paid depends on the usage or the number of credits used per month, subject to a minimum monthly subscription fee which may or may not include corresponding minimum airtime/service credits. 28. Public Telecommunications Entity (PTE) any person, firm, partnership or corporation, government or private, engaged in the provision of telecommunications services to the public for compensation. A local PTE is a PTE organized and existing under Philippine laws. 29. Revenue Fee Sharing Agreement remuneration agreement pertaining to interconnection whereby the originating and transmitting or terminating carriers share the revenues paid by the customer on the basis of either a pre-agreed percentage or fixed amount per minute, also called access charge. 30. Roaming the use of a wireless phone outside of the "home" service area defined by a service provider. Higher per-minute rates are usually charged for calls made or received while roaming. Long distance rates and a daily access fee may also apply. 31. Roaming Administration Fee/Surcharge additional charge imposed by the LEC on top of the base rate charged by a foreign telecommunications company for services availed by a subscriber while roaming to cover any additional cost to the LEC, if applicable. 32. Roaming Charges the charges incurred by a subscriber of a mobile telco while abroad, such as call or other service charges imposed by an FA/mobile telco for communications services rendered to a subscriber of a roaming partner PTE/FA as well as the administration/service fee charged by the mobile telco of the roaming subscriber. 33. Settlement Process the payment system between interconnecting PTEs for jointly providing telecommunications services by which PTEs compensate each other for interconnection services. 34. Subscriber Identity Module (SIM) card which contain a unique number identifying a particular subscriber, authorizing or enabling the same to have access to the services provided by the telecommunications company. 35. Telecommunications Company (Telco) a company that provides telephone and other associated services to its customers. 36. Universal Mobile Telecommunication System A technology which provides the 3G upgrade path to mobile networks on the GSM track such as GSM, GPRS and EDGE networks. It uses Wideband Code Division Multiple Access (WCDMA) as its radio access network. 37. Value-Added services (VAS) neither refer to added features or values to basic telephone service nor ordinarily provided by a PTE such as format, media, conversion, encryption, enhanced security features, paging, internet protocol, computer processing and the like. The term value-added services may be alternatively referred to as enhanced service. II. List of Relevant Documents Necessary in the Conduct of Audit A. General Information Sheet B. Approved Legislative Franchise C. Certificate of Public Convenience and Necessity (CPCN) D. Audited Financial Statements E. Annual & Quarterly Income Tax Return F. Information Return on Transactions with Related Party (Form 1709) G. Audited Financial Statements and Annual Returns submitted to National Telecommunications Commission (NTC) H. Monthly/Quarterly Withholding Tax Returns and Alphalists of Employees/Income Payees I. Monthly/Quarterly VAT Returns and Summary List of Sales/Purchases/Importation J. Documentary Stamp Tax Returns K. Other Percentage Tax Returns-Overseas Communication Tax (OCT) L.wxw Reconciliation of "Book Income" and "Taxable Income"/Details and Supporting Documents of Reconciling Items per Schedule 10, BIR Form 1702 M. Proof of Claimed Creditable Tax Withheld at Source (Form 2307) N. Proof of Claimed Bad Debts O. Lapsing Schedule P. Soft Copy of Books of Accounts Q. Trial Balance (TB) and Chart of Accounts R. General Ledger (GL) File S. List of Registered POS and Monthly Z-Reading/eSales T. Management/Service Agreement with Related Party U. Details of Postpaid Subscribers per Type of Plan per Plan Rates V. Schedule of Prepaid Cards Sold During the Year W. Sample Service Agreements with BIG TICKET Customers X. Sample Contract Agreements with BIG TICKET Suppliers Y. Revenue Fee Sharing Agreement with Content Providers Z. Interconnection Usage Charges with Other Telecom Providers AA. Usage of Data Records BB. Roaming Partners CC. Roaming Charges Agreement with Foreign Administration (FA) DD. Tax Treaty Agreement with Foreign Countries EE. Remittance Partners FF. Remittance Agreements with BIG TICKET Remittance Partners GG. List of Merchants in Connection with the Use of E-Money HH. Agreements with BIG TICKET Merchants in Connection with the Use of E-Money II. List of Banks, Credit Card Companies and Other E-Money Issuers JJ. Agreements with BIG TICKET Banks, Credit Card Companies and Other E-Money Issuers KK. Reports Submitted to Regulatory Agencies LL. Various Issuances (RA's, RR's, RMC's, RMO's, Court Decisions) MM. Official Receipt (OR) File NN. Statement of Accounts (SOA) File OO. Billing Summary File PP. Card Database QQ. Subscriber Master File RR. Tariff Table SS. Settlement Transaction File TT. Payable File UU. AUC (Asset Under Construction) File VV. Billing Transaction File WW. E-wallet database (dealers' balances) XX. Call Detail Record (CDR) III. Understanding Taxpayer's Manner of Business Operation A. Organizational Chart with Statement of Functions 1. Understand taxpayer's business Request copy and scrutinize the stated functions and responsibilities to determine which office can provide the documents relevant to the conduct of audit or answers the questions during the examination. a. Business organization i. Structure corporation, joint venture or partnership; with branches ii. Ownership local or foreign; percent of ownership iii. Industry and ranking industry analyses/publications, etc. b. Nature of Business i. Main business activity; secondary activities ii. Sources of income iii. Related party transactions iv. Volume of transactions B. Business Flow study the flowcharts provided C. Accounting Period and Method Adopted 1. Analyze Audited Financial Statements for familiarity of the accounting policies and method used 2. Determine the accounting period used Calendar Year or Fiscal Year 3. Determine the methods adopted Cash Basis or Accrual Basis D. Bookkeeping Systems 1. Request a copy of the auditee's Accounting Manual 2. Request accounting records Books of Accounts, i.e. , General Journal, General Ledger, Cash Receipts Book, Cash Disbursements Book, Sales Journal, Purchase Journal in Computerized Format and Chart of Accounts 3. Obtain copy of the permit to use Computerized Accounting System (CAS) 4. Evaluate protocols of the CAS 5. Conduct Interview to Determine the Accounting Cycles, i.e. , Revenue Cycle & Expense Cycle E. Invoicing System 1. Request for sample copies of Official Receipts (OR) and Sales Invoice (SI) 2. Check compliance of the invoicing requirements 3. Conduct Interview with Sales Personnel to Determine the Sequencing of Issuance of OR and SI 4. Conduct Random Matching/Ocular Inspection of OR's and SI's issued 5. Conduct Interview with the accounting personnel to determine how the daily sales transactions are recorded in the books of accounts. IV. Manual Audit of Statement of Financial Position and Income Statement Accounts A. Asset Accounts 1. Cash and Cash Equivalents a. Compare deposits shown in the bank statement against entries in the Cash Receipts Book and Official Receipts. b. Check cash sales with the Cash Receipts Book if they have been correctly recorded. c. Investigate entries in the general ledger cash account. d. Review cash receipts journal. e. Review cash disbursements journal. f. Tally debits and credits to the cash accounts per month against sales credit, debits to Purchase and Expense accounts, and other sources and application of cash based on the worksheet of real and nominal accounts submitted by the taxpayer. 2. Contract Assets/Trade and Other Receivables a. Secure a breakdown of the receivables by class. b. Check entries in the general ledger control accounts. c. Determine if subsidiary ledgers are in agreement with control accounts. d. Note any credit balances in the general ledger or subsidiary accounts. e. Check credit sales invoices and postings from the sales journal to the subsidiary and control account. f. Compare balances of accounts receivable and sales for the current year with that of the preceding year. g. Investigate large and/or unusual balances classified as other accounts receivable. h. Determine whether accrued income on interest bearing notes or accounts has been included in income. i. Investigate the sources of notes receivable. j. Check the detailed listing of beginning receivables to cash collected as reflected in the Cash Receipts Book. 3. Allowance for Bad Debts a. Ascertain the company's policy of providing for allowance. b. Compare balances in the allowance account with that of the preceding year. c. Evaluate the reasonableness of the allowance. d. Compute the ratio of bad debts expense over sales. e. Review the aging schedule of accounts receivable. f. Examine minute book for authorization to write off accounts. g. Ascertain that accounts written-off are worthless by examining supporting documents. h. Check the financial status of the customers. i. Check entries to the allowance account. 4. Inventories a. Familiarize with the taxpayer's business and its products. b. Request/secure from the taxpayer copies of the following: i. List of all inventory items; ii. Records of sales, purchases, sales returns, purchase returns and other records/documents, such as stock cards, pertinent to the taxpayer's records of inventories; and iii. Inventory lists at the end of the year. c. Conduct immediate physical count of all accountable forms and establish cut-off thereof. d. Select a representative sample of at least ten percent (10%) of the total number of inventory items. e. Determine fast-moving items and slow-moving items in the inventory. f. Prepare pre-numbered inventory count tags or any other medium in duplicate. g. Conduct a full or detailed physical inventory count in the presence of the taxpayer or his authorized representative. h. Record counted items on the Inventory Count Worksheet. i. Ascertain the level of internal control relative to the processing/handling of inventories adopted by the taxpayer. j. Verify the method of inventory valuation adopted by the taxpayer. k. Check if all books of inventories are registered with the Bureau of Internal Revenue (BIR). l. Reconcile Actual Inventory Summaries with Inventory Record/Stock Cards kept by the taxpayer. m. Compute for the value of the undeclared sales. n. Determine the discrepancy by using the Beginning Inventory List as submitted by the taxpayer. o. Consolidate the results of all inventory. p. Compute the applicable deficiency taxes arising from over/understatement of inventories. 5. Prepayments a. Verify the nature and source of assets and manner which they are charged off to expense. b. Verify charges to expenses if prepaid expenses are not reflected in the balance sheet. 6. Depreciable Assets a. Compare the asset and related reserve amounts as they appear on the tax return, balance sheet, depreciation schedule, and taxpayer's books and schedules. b. Review depreciation schedule of fixed assets and ascertain propriety of depreciation expense claimed. c. Review asset additions during the year by reference to invoices, contracts and other documents and determine if the proper cost basis was used. d. Decreases in the asset accounts during the year should be noted. e. Ascertain if the taxpayer has transferred assets to the owner, officers, stockholders or to a controlled-domestic or foreign corporation for less than fair or adequate consideration. 7. Allowances for Depreciation, Amortization and Other Valuation Reserves a. Review the nature and source of all accounts. b. Determine the correctness of the amount of asset being depreciated. c. Ascertain the taxpayer's depreciation and amortization policies. d. Check authorization of acquisitions and disposals. 8. Intangible Assets a. Investigate the nature of the intangible assets. b. Determine cost of acquired the intangible; costs should be capitalized when useful lives can be estimated. c. Determine if the recorded cost and cost of current additions includes proper elements such as legal fees, application fees, and other costs of acquisitions. d. Verify correctness of deductions claimed as amortization of intangible assets. e. Determine if there have been transactions with related taxpayers. f. Determine if income applicable to intangibles has been included as income. g. Analyze any transaction involving transfer of foreign rights to any foreign entity. h. Be alert to transactions which could have given rise to intangibles classifiable as asset account which may have been recorded as expense. 9. Investments a. Familiarize with the nature of investments. b. Purchases and sales should be at fair market value. c. Verify journal entries to ascertain the selling price and gain on sale of investments. d. Any write-up or write-down to reflect market values should not be reflected in income or expense on the tax return. e. Check the recognition of Investments whether treated as Capital Assets or Ordinary Assets. f. Check whether the applicable tax due CGT or EWT and DST were settled. g. Investigate sales to related parties and/or officers or stockholders below fair market value. h. Cross-check all investments during the year. i. Determine whether the premium/discount is amortized over the life of the bond. 10. Advances to Stockholders a. Verify authorization from Board of Directors for advances and loans to stockholders and officers. b. Identify company officers and stockholders who are granted advances regularly. c. Ascertain if the transactions are at arm's length. Amounts resulting from less than an arm's length transaction may be additional taxable income to the recipient as a disguised dividend or compensation. d. Check payments of advances to the company. e. Determine whether payment of DST is applicable. f. Verify entries and supporting documents on cancellation of advances if the same do not originate from cash receipts. 11. Other Assets a. Obtain a schedule of Other Assets Account. b. Investigate sources of charges to the account. B. Liabilities and Equity Accounts 1. Contract Liabilities/Accounts Payable/Accrued Expenses a. Reconcile subsidiary ledgers with the control accounts. b. Note existence of debit balances in the general ledger or subsidiary accounts. c. Note accounts which have long overdue balances. d. Review computation of year-end accruals with respect to their deductibility as expenses or purchases. e. Check reversing entries of accruals. f. Examine legitimacy of accounts payable to affiliates or related taxpayers. g. Be aware of any contingent liability by reviewing minutes of meetings and annual reports. h. Secure a copy of the lease contract/agreement if payables include liability on security deposits. 2. Unearned Revenues/Deferred Credits a. Check all payments received as recorded in the cash receipts book. b. Check if collections were included in the gross income during the year when the payments were actually received. c. Look for credit balance of accounts which fall under Deferred Credits. d. Inspect the Contracts and Progress Reports to determine whether the reporting of income has been delayed beyond the completion of the project. e. Record unrecognized gain for tax purposes as a deferred credit. 3. Notes Payable/Loans Payable a. Acquaint with the pertinent provisions of loan contracts, mortgage agreements, certificates of indebtedness, financing arrangements. b. Scrutinize any long-term outstanding liability to the owner, shareholders, and officers or to a related taxpayer. c. Determine if the property pledged/mortgaged is income producing. d. Verify if funds were borrowed for use of affiliates as the interest expenses. e. Determine whether the indebtedness will give rise to interest expense that is subject to limitations on deductibility. 4. Loans from Shareholders/Officers/Owners a. Determine whether there is a true debtor-creditor relationship. b. Check the financial statements of the corporation as well as that of the shareholders. c. Check supporting loan documents issued in favor of the shareholders, officers or owners. d. Verify certain payments of loans against check vouchers and cancelled checks. e. Verify the debit and credit entries in the general ledger account. f. Examine adjustments especially increases in the account at the end of the year. 5. Other Non-Current Liabilities a. Obtain a schedule of Other Non-Current Liabilities Account. b. Investigate sources/movement to the account. 6. Capital Stock a. Review entries in the Capital Stock account and verify increases and decreases. b. Verify correctness of all items appearing on the return, books, and financial statements. c. Ascertain that the correct amount of DST has been paid. d. Compare data from minute book with items recorded on the books of accounts to determine if entries have been made. e. Determine if expenses relating to stock issuance have been properly handled. f. Determine if the fair market value of the stock to be received by each exchanging shareholder is equal to the fair market value of the stock surrendered in the exchange. g. Examine by-laws, Articles of Incorporation or other documents in support of other transactions affecting capital stock. h. Determine if the increase in capital stock is the direct consequence of an exchange of property. 7. Retained Earnings a. Compare the amount of earnings retained in the business. b. Verify correctness of all items. c. Check increases which do not originate from net income. d. Determine if declared and unpaid dividends are properly recorded. e. Investigate the real status of the business. f. Examine supporting documents and authorization for all other debit and credit transactions. C. Income Accounts In all cases, account for gaps in the sales invoices/official receipts issued. Verify with the LT Assistance Division (LTAD) or the appropriate office/division the approved sales invoice/official receipts number series. Compare the same with the Authority to Print (ATP) issued to Taxpayer. Verify which series is approved for use as Vat/non-VAT: zero-rated invoices/ORs, exempt, etc. 1. Revenues (General) a. Identify sources of revenues sale of services, sale of goods, other income miscellaneous, incidental, isolated transactions and etc. b. Review the revenue recognition on each sources of revenue. c. Review the Telco's accounting method of revenue recognition if the same is acceptable and consistent with the policies implemented in prior years. d. Compare with industry practice. e. Check if there are expenses that are offset against revenues or revenues that were not reported but offset against administrative and selling expense. f. Cross-check with amounts reported in the other tax returns such as VAT, OCT. g. Compare the revenues for the year under audit and that of the previous year. h. Identify significant movements in the accounts and inquire from the taxpayer. i. Request for a breakdown of the revenue reported in the TB by product, if possible. j. Reconcile TB with Audited Financial Statement (AFS). k. Reconcile TB/AFS with the amounts submitted to NTC. l. Verify details of discrepancies noted. m. Check significant year-end adjustments. n. Review reconciling items AFS vs. ITR. 2. Revenue from Voice Calls/SMS a. Inquire and obtain sample voucher journal entries to determine recording of income. Check if net or gross of interconnection fees, FA, content provider b. Obtain sample voucher/journal entries and test the recording of a voice call transaction and determine if the revenue and related interconnection fee is recorded in accordance with such method c. Review the significant revenue sharing agreements with FA, other telecommunications company for interconnection fees, to ascertain if the rates used in accruing the income/expense are in accordance with the agreement d. Account for possible variances e. Test check to ascertain whether all charges to subscribers for voice services are properly recorded f. Determine if there are deposit received from customers that should have been recognized as income i. Obtain schedule of customers' deposit and list of inactive subscribers ii. Check if there are deposits due to or payable to inactive subscribers iii. If there are, evaluate if the corresponding deposits should already be considered revenue of the taxpayer g. Flat rate subscribers i. Identify the number of flat rate subscribers per type of plan during the year ii. Perform test of reasonableness of the revenue recorded (total number of subscriber per type of plan multiply by the plan rates) h. Post-paid plans i. Get the average monthly revenue per subscriber and compute the estimated revenues ii. Perform cut-off procedures to ascertain if unbilled revenues are reported as income iii. Request schedule of revenue from post-paid plans for the last month of the taxable year being examined iv. Obtain sample billings issued to subscriber for the month v. Trace the sample billings issued from the schedule and determine if unbilled revenues are accrued as income for the year i. Prepaid subscribers i. Determine method of recording prepaid cards check if deferred revenue upon sale or revenue upon consumption or expiration ii. Ascertain correctness of revenue recorded iii. Verify that revenues recognized during the year are based on actual usage, plus revenue pertaining to expired prepaid cards (Accounting purposes actual usage; Taxation purposes time of sale) iv. Test check timing of recording of actual usage and expiration v. Obtain schedule of prepaid card sold during the year and sample invoices. Trace the sample to the schedule 3. Interconnection Access Revenue a. Obtain copies of the toll settlement statements. Compare the amounts settled with the amounts previously accrued. Check if variances are reported for income tax purposes. b. Check the sum of (1) accrued interconnection income for the year and (2) the additional fees entitled to receive based on the settlements reached during the year with the interconnection revenues reported in the TB. Verify the reason of the variance c. Inquire method of calculating interconnection fee expense/income (due to/from) other telco or FAs. d. Analyze changes in the interconnection fee "due to/from accounts" to determine whether the taxpayer has made settlements e. Check reconciliation statements by telecommunications companies; check if these transactions are properly recorded f. Check aging of interconnection fees due to/from other telcos or FAs g. Ascertain if there are outstanding fees that had actually been settled h. Determine if differences between the settled and previously accrued amounts are properly adjusted/reported i. Check undisputed calls j. Check undisputed calls within 30 days from billing are recorded as expense or income k. For unsettled accounts beyond 60 days, inquire from the Telco the reasons for the delay in the settlement 4. Roaming Charges a. Obtain copies of FA contracts and sample billings b. Test sample transactions to determine if the amount billed is accordance with the contracts/usage c. Compare the billings for roaming charges from FA vis--vis taxpayer's billing database with the amount reported as revenues d. Verify discrepancies e. Obtain schedule of roaming charges for inbound and outbound roaming. Also, obtain copies of journal vouchers/records to confirm that they had properly been reported as revenues during the period f. Cross check revenues declared with information reported for VAT and OCT purposes g. Analyze changes to "receivable from/payables to foreign telcos" to determine whether there were adjustments to the revenues recognized. Check if these adjustments are properly considered for tax purposes 5. Value-Added services (VAS) Revenues a. Check recording of income b. Obtain schedule of revenue from value-added services by partner-content provider c. Obtain copies of the agreements to ascertain that expenses accrued/netter out are consistent with the rates stipulated in the agreement d. Obtain schedule of billings to customers for VAS, both from prepaid and postpaid plans. Compare the amounts in the said schedule/billings with that reported in the schedule of value-added services e. Analyze changes to payables to content providers to determine whether there were adjustments to the expenses accrued. Check if these adjustments are properly recorded f. Check if subjected to applicable expanded withholding tax (EWT) i. Payable account if recording is net ii. Expense account if recording is gross 6. Income from Consultancy a. Determine the taxpayer's accounting method of recognizing income, whether cash or accrual. Most professionals, however, adopt the cash basis of accounting. b. Examine contracts with clients and other correspondence/documents in relation to professional services rendered. c. Compare income reported on the tax return with the books of accounts, creditable withholding tax forms, financial statements and official receipts issued. Verify discrepancies, noted, if any. d. Account for official receipts issued. Note any missing receipt or break in the series and investigate the reasons therefor. e. Analyze the reasonableness of expenses claimed in relation to income declared. f. Conduct interviews and third party verification, if necessary. 7. Rentals/Leased Lines/Circuit Rentals a. Request schedule of lease revenues. b. Obtain copies of lease agreements with its significant clients. c. Conduct ocular inspection of the premises under lease. Identify tenants and monthly or annual rentals. Conduct interviews, if necessary. d. Relate real properties under lease agreement to assets declared in the balance sheet. Note inconsistencies between asset values and income generated. e. Analyze the agreement and determine the rentals due from the client during the year; compare this amount with the revenue reported. 8. Other Income a. Scrutinize the entries in the general ledger and general journal for any other income or other receivables recorded thereto. b. Test check entries in intercompany accounts to determine whether shifting of income or management fees may have been made and charged to affiliates. c. Investigate suspense accounts and unusual liability accounts, such as due to affiliates/due to stockholders and other payables to uncover possible income not recorded in the income accounts. d. Check the characteristics of the customer's loyalty programmes that are with multiple element arrangements. Obtain the mechanics and determine if the fair value of accumulated/redeemed points were properly measured and declared in the statement of financial position as deferred revenue and to the income statement as realized revenue. D. Expenses Accounts 1. Expenses (General) a. Understand company policy of reporting expenses for financial and tax reporting consistent with the policies applied in prior years and in accordance with tax rules on deductibility of expense b. Compare the amounts in the adjusted TB vs audited FS and with the figures reported in the annual report submitted to NTC. Check nature of variances c. Test check proper documentation of expenses consider materiality d. Test check significant expense account check practice of timing of recognition of expense and basis of recording e. Ascertain that taxes have been withheld on the expense subject to withholding taxes non-deductibility for failure to comply f. Check large, one-time, or unusual transactions access/get confirmation from transacting party g. Examine transactions with affiliates and determine if the same are entered into at arm's length h. Based on the information provided in the FS, identify expenses that may have different treatment for tax and accounting purposes. Verify if these differences exist and if accounted as a reconciling item. i. Check expense related accounts in reconciling items: i. Philippine Financial Reporting Standards (PFRS) ii. Differences in accounting and tax treatment iii. For those reflected in prior years; or spread for several years Check prior year's returns ( e.g. , unrealized gains/losses) and schedules ( e.g. , past service cost) 2. Discounts a. Verify company policies on giving discounts i. Check method of recording (estimate or accrual/any adjustment made/reconciling item/time of recording ii. Access other party especially large accounts 3. Interconnection Expense a. Same procedure with income account 4. Purchases/Cost of Goods Sold a. Compare totals of purchases in the return, income statement, purchase book, subsidiary purchases book, if any, and general ledger. Determine any discrepancy and investigate its nature as well as the nature of year-end adjustments. b. Determine that the purchases declared are neither overstated nor understated by vouching the supporting documents, and test-checking the footings of invoices, purchase books and ledger accounts Under-statement of purchases may also mean under declared sales. c. Tour the premises where inventory items are kept and correlate actual inventory level against purchases reported. Test-check stock cards of major inventory items to evaluate accuracy of inventory reports. d. Scan the purchases book for possible unusual payees or unusual amount of purchases. Take note of suppliers not generally associated with the products or services handled by the taxpayer. e. Verify entries in the general ledger account which originate from unusual sources such as journal entries, debit and credit memoranda and other accounting records. f. Test check recorded purchases for a representative period with supplier's invoices and cancelled checks. Note if there are personal expenditures, withdrawals of merchandise by the owners, fictitious or duplicate invoices, cancelled purchase invoices, excessive rebates, discounts and allowances and purchases not received. g. Where there are only a few major suppliers, conduct third party verification to ascertain the correctness of purchases declared, if there is suspicion of fraud or if the Revenue Officer believes that this is necessary. h. If purchases are from suppliers related to the owners or from affiliates, conduct a review of a number of transactions to uncover prices in excess of market value, excessive rebates and allowances, and other similar schemes. i. Verify the inventory valuation method applied by the taxpayer whether first-in, first-out (FIFO) last-in, first-out (LIFO), specific identification, weighted average or simple average. Last-in, first-out is not acceptable for income tax purposes. Determine consistency of its application from year to year. j. Compare inventory balances in the return under examination with the balances for the prior and subsequent years' returns, and reconcile these with the general ledger and the physical inventory summary. k. Check unauthorized changes in inventory valuation method from period to period. Conduct test-checking of inventory valuation of sample inventory items from the summary inventory sheets and determine if the taxpayer has not improperly valued any inventory item. l. Check gross profit variations. Any significant variation should be discussed with the taxpayer and a reasonable explanation in writing should be obtained. A material decrease in gross profit from one year to the next could be due to understated ending inventory. m. Analyze unusual entries to cost of sales. Account for labor, materials and overhead charges not directly related to sales or transfers of finished goods. Be alert on the possibility that the taxpayer may be trying to include a non-deductible item in the cost of sales account. n. Determine whether year-end purchases are included in closing inventory. Review purchase invoices at the last month of the taxable year under audit. Compare quantities on the inventory summary for classes of goods purchased with the quantity in the ending inventory list and quantity of sales recorded at year-end for such goods. Thus, if a specific item or a certain quantity of goods were purchased on the last day of the year, it should be included in the ending inventory unless sold that same day. o. Determine reductions in ending inventory values by reviewing authorization for write-downs and provision for obsolescence or decline in market values. Check minutes of meetings for such authorization. Analyze journal entries for the write-down or provision of allowance for obsolescence/decline in value. Check itemized inventory summary sheet and test-check the list with actual physical inventory. 5. Salaries, Wages and Other Employees' Benefits a. Evaluate the expense initially by comparing the ratio of salaries and wages to sales and the percentage of taxes withheld to total salaries, allowances bonuses and other compensation. Low ratios might indicate that the company hires sub-contractors or an understatement of expenses which may be a lead to under declared sales. High ratios may also mean an understatement of sales or padded payroll with functions or terminated employees. b. Interview personnel assigned to prepare payroll and inquire if family members are included in the payroll. If so, check legitimacy of the work assignment and reasonableness of compensation paid. c. Observe the actual number of employees and relate this to the declared sales. Inquire if independent contractors are hired in lieu of regular employees. d. Perform a comparative analysis of salaries, wages and other employee benefits with prior and subsequent years. Material changes may indicate a change in the volume of business or in the policy of classifying manpower employed. e. Determine if the taxpayer is properly withholding the correct amount of taxes on compensation by test-checking actual pay slips against employee records and BIR Form 1604 CF (Annual Alpha List of Employees from whom Withholding Tax has been deducted). f. Reconcile totals of wages paid which were subjected to withholding tax and totals of compensation paid which were not subjected to withholding tax with payroll expense claimed. Consider the possibility of disallowing any noted discrepancy in accordance with existing rules and regulations. 6. Marketing/Advertising Expense a. Check nature of account especially significant items Amortizable or expense outright? b. Check accounts pertaining to free goods/phones given as incentive for staying with telco for "x" number of years Amortizable over the holding period? 7. Management/Professional Fee a. Verify if the amounts are material and examine contracts to check the detailed description of the exact professional services rendered. b. Check legal expenses or representation expenses as it might at times be political contributions, bribes or kickbacks, which should be disallowed. c. Verify if the amount paid to related party was reported by the other party for income tax purposes. 8. Rentals a. Ascertain the nature of the transaction, i.e. , whether it is a simple lease or a conditional sale. Obtain copies of lease agreements on real properties. b. If it is a simple lease, determine the rental due under the agreement and compare this with the rental claimed as deduction. c. If the term of the lease indicates that the lessee may take or acquire the title to the property, rental expense should be disallowed. d. Take note of the effectivity of IFRS 16 Leases beginning January 1, 2019 which recognizes Right of Use (ROU) assets in the AFS. i. Verify composition of ROU assets and check related depreciation expense. Obtain lease agreements on leased assets. ii. Lease/rental expense per Statement of Income usually includes depreciation expense of ROU assets, finance cost/interest expense/accretion on lease liability, expenses relating to short-term leases, variable lease payments, and the likes. iii. Compare lease/rental expense per Statement of Income as against claimed as deduction for tax purposes. Any difference must be accounted as reconciling item in the ITR. 9. Interest Expense a. Ascertain that interest is claimed only in relation to indebtedness properly supported with agreements that explicitly provide for the payment of interest. b. Check if there are dividends relating to redeemable preferred chares that may have been reported as interest expense; interest recognized on finance leases that are considered as simple lease for tax purposes. c. Ascertain if interest claimed as deduction is computed in accordance with the terms of agreement. d. Ascertain if the loans acquired were not utilized but were loaned out to affiliates interest free. If so, disallow interest expense claimed. e. Determine if interest paid or accrued applies to obligations due to related taxpayers. Consider such items as: i. Arm's length features ( Bona fide obligations/interest in excess of the prevailing rates in unrelated transactions) ii. Accrual of items payable to related taxpayers which are not paid within the prescribed time limit. f. Determine the accounting method used by the taxpayer. If accrual basis, only the interest accruing during the taxable year is deductible. g. Check if the interest expense claimed as deduction from gross income is net of prescribed percentage of interest income subject to final tax (interest arbitrage provision). 10. Losses a. Verify if the amount of the abandonment loss is the adjusted basis of the abandoned asset. b. Determine if the loss of missing assets really occurred within the taxable year. c. Determine if the retirement or abandonment loss is specifically allowable under the taxpayer's method of accounting for depreciable property. 11. Taxes and Licenses a. Verify whether only the taxes properly paid or accrued during the year have been claimed. b. Determine that no protested taxes or reserves for deficiency taxes upon audit are claimed. c. Determine if the taxpayer has title to the real and personal property being taxed. d. Determine if there are any taxes on the purchase of capital assets that were already capitalized but also charged to expense account. e. Understand the tax treatment of custom duties related to imported articles if claimed as deductions or capitalized as part of the cost of the equipment. 12. Repairs and Maintenance a. Determine depreciation policy of the taxpayer. A conservative depreciation policy often contemplates a high degree of current repair expenditures. b. Verify nature of expenditures. If the expenditure prolongs the life or enhances the value of the existing assets, then it is not deductible but should be capitalized and depreciated over the years of their estimated usefulness. c. Check repair accounts for the possibility that personal expenses of owners or other company officers and employees are included. 13. Contributions a. Determine if the donee or recipient is the government or an accredited relief organization. b. Determine if the contribution is to be utilized for the rehabilitation of calamity stricken areas declared by the President. c. Verify if the claim is actually paid within the taxable year. d. Check limitations of expenses. 14. Bad Debts a. Obtain and review list of charged-off accounts. b. Determine with a reasonable degree of certainty the uncollectibility of the debt. c. Determine if the charge-off is based on worthlessness of the debt within the year. d. Determine if there are repossessed merchandise. If so, verify if the value of repossessed merchandise has been correctly assigned and deducted from the claimed amount of bad debts. e. Verify losses on installment receivable if consideration on any repossessed merchandise had been taken into account and if portion of the losses had been charged to the unrealized gross profit account. f. Determine if the method of deducting bad debts is acceptable and consistent with the method applied in the preceding year. g. Verify bad debts expense in relation to the examination of the allowance for doubtful accounts. 15. Depreciation and Amortization a. Ascertain that the basis of depreciation is historical cost and additions to the cost of the property are acceptable for tax purposes. b. Determine if the cost of the property reported for accounting purposes included estimated dismantling cost, interest relating to the acquisition or construction of the property and customs duties. c. Understand how the Telco treated interest relating to the acquisition or construction of the property. i. If Capitalized and claimed as deduction for tax purposes during the year; ii. Verify if there's amortization of prior year's capitalized interest deducted from depreciation expense during the year; iii. Check deferred tax liabilities Capitalized borrowing costs. d. Determine the reasonableness of depreciation. i. Compute the estimated depreciation rate per type of assets. ii. Compare the above with the depreciation rate declared in the annual report submitted to NTC. Request reconciliation for significant variance. e. Check if there were changes in the useful life of properties made during the year, or the method used in computing depreciation. i. Check if the BIR was properly notified. ii. Check if adjustment pertaining to prior years as a result of said changes were charged to current year's operation instead of RE. f. Verify if there are impairment losses recognized during the year and if said losses were claimed as deduction for tax purposes. Check reversal of impairment losses or revaluation increments. 16. Transportation and Travel a. Determine if the expenditures have been incurred in relation to the business or practice of profession, not for personal use. b. Determine the policy with respect to reimbursement or giving grants of allowances to employees. c. Prepare a summary of the total expenses posted to the accounts and compare the same with the deductions claimed per tax return. d. Determine from the analysis and verification of supporting documents the reliability of the records. e. Determine company-owned vehicles and the expenses incurred in connection with these vehicles. 17. Representation and Entertainment a. Determine if the expenditures have been incurred in relation to the business or practice of profession, not for personal use. b. Check if the amount of withholding tax, if applicable has been withheld. c. Check limitations of expenses in accordance with Revenue Regulations 10-2002. 18. Miscellaneous Expense a. Check the validity of the individual charges to the account. b. Determine if deductions claimed are adequately substantiated. c. Ascertain if the miscellaneous expenses claimed do not contain any personal items. V. Manual Audit of Value-Added Tax (VAT) and Overseas Communications Tax (OCT) In all cases, account for gaps in the sales invoices/official receipts issued. Verify with the LT Assistance Division (LTAD) or the appropriate office/division the approved sales invoice/official receipts number series. Compare the same with the Authority to Print (ATP) issued to Taxpayer. Verify which series is approved for use as Vat/non-VAT: zero-rated invoices/ORs, exempt, etc. Obtain SLS-P-I as filed/submitted to the BIR and compare the same with taxpayer's submissions/declarations in the returns and AFS. A. Audit of Output Tax 1. General Procedures Based on the trial balance (as reconciled with the AFS), identify the different types of revenues reported. If necessary in the analysis, request for a breakdown of these revenues by type of products sold and/or services provided. Voice call revenues Interconnection access revenues Roaming charges Leased Lines/circuit rentals Value added services Sale of phone kits, SIM pack and accessories a. Sale of goods i. Determine nature ii. Get amounts from TB and compare with AFS or other available sources iii. Check propriety of rate applied 12%/0%/exempt iv. Scan the expenses for unusual balances (credit balance). This may pertain to an income. Determine the nature of such expenses with unusual balances and determine its VAT implications b. Sale of services i. Determine amount of collection from revenues actual or constructive ii. Cross check with other data from other returns, from NTC, etc. iii. Review summary of list of zero-rated sales, exempt sales, to determine if the transactions are 0-rated or exempt iv. Classify revenues by type of product/service, if necessary in the analysis c. Voice calls/SMS i. Request a schedule of the collections of voice call charges from customers/subscribers classified into rate of VAT applicable (12%, 0%, exempt, OCT). The schedule of collections should contain the transaction date, reference number, amount net of taxes, amount VAT, amount OCT, billing/invoice and official receipts number/reference. ii. Test check the accuracy of the schedule by examining sample billing statements to subscribers. Trace the samples obtained with the amounts in the schedule. Inquire any variances. iii. Determine the reliability of the schedule if not reliable, perform more thorough analysis of variances, use alternative computation/determination of gross receipts. iv. Understand the policy of the telco in determining the sales to be reported for VAT/OCT purposes for billings with local and overseas call which are not fully paid. Evaluate if such policy is acceptable for tax purposes. d. Deposits i. Determine if there are deposit received from customers that should have been recognized for VAT purposes. ii. Obtain schedule of customers' deposit and list of inactive subscribers. iii. Check company policy on refund/forfeiture if acceptable. iv. Check if there are deposits due to be forfeited. FI there are, evaluate if the corresponding deposits should already be considered revenues of the taxpayer. e. Interconnection access revenues i. Obtain copies of toll settlement statements If the settlement resulted to telco receiving higher amount than what it had previously accrued as interconnection revenue, check if the additional payments had been reported for VAT purposes. If the settlement resulted to telco paying a lower amount than what it had previously accrued as interconnection expenses, check if there were adjustments. ii. Analyze changes in the interconnection fees "due to/from account" to determine whether the taxpayer has made settlements for these accounts Check if these transactions are properly recorded for VAT purposes. iii. Check aging of interconnection fees "due to/from other telcos or FAs." Ascertain if there had already been settlements made during the year which were not reported in the books. f. Roaming charges B. Audit of Input Tax 1. General procedures a. Compare the amount of each category of purchases per VAT returns with the amount of purchases per subsidiary purchase journal b. Compare the input vat on importations with the schedule of VAT on importations obtained from Bureau of Customs c. Ascertain the treatment of input tax on the purchase of depreciable assets if the aggregate acquisition cost (exclusive of VAT) exceeds P1M in a calendar month, the input tax should be spread evenly over the life of the assets or sixty (60) months (please take note of the changes in the TRAIN Law) d. Allocate input tax on mixed transactions 2. Substantiation a. Obtain a schedule of input taxes, sample invoices, receipts, import-entry declarations and returns supporting VAT withheld by telco (Form 1600) to determine if the input taxes claimed by the taxpayer are properly substantiated. 3. Value-added services a. Obtain a schedule of payments to content provider. b. Check reporting method gross or net; VAT to be based on gross, claim input tax on billings by content provider; if the telco reports taxable sales from VAT net of share of content providers, check the difference of actual amount paid by telco compared to amount accrued. This may result to undeclared VAT. C. Audit of Overseas Communications Tax 1. From the revenue reported in the Trial Balance, identify the products/services which may entail overseas calls or dispatch of messages. These may include: a. Long distance international b. Long distance private network international c. Text messaging fee international d. Operator surcharge/report chare international e. Public calling office service revenue international f. Telex/telegram international g. Facsimile/fax services international h. Other services international 2. Understand how the company tracks the overseas calls/dispatch. Obtain sample documents ( e.g. , billings issued to subscribers, vouchers, journal entries, transaction reports, etc.) to ascertain the correctness of the representations made by Telco. 3. Obtain the list of clients that are exempt from paying OCT. These shall be limited to: a. Government, including GOCC's b. Diplomatic services c. International organizations d. News services e. Entities enjoying exemption from OCT under the tax incentive granted to them 4. Request a schedule of the collections from international calls/messages. The schedule of collections should contain the transaction date, reference number, amount, billing/invoice and official receipts number/reference. 5. Check the accuracy of the schedule by getting samples. (The number of samples may differ based on the examiner's reliance on the taxpayer's internal controls). Trace the samples to the schedule provided by Telco. 6. Compute the gross receipts subject to OCT and compare with the OCT paid by the Telco. 7. Compare the OCT payable per books as of the end of the period reported in the books as of the end of each period with the OCT remitted to the BIR in the last return filed for the period. VI. Audit of Relevant Statement of Financial Position and Income Statement Accounts Using Computer Assisted Audit Tools and Techniques (CAATTs) The used of CAATTs is a supplemental reference of the ROs in the investigation of the internal revenue tax liabilities of taxpayers who use a Computerized Accounting System (CAS), Computerized Books of Accounts (CBA) and/or components thereof. The RO shall: A. Reconcile control totals with the report totals (Accountable Forms, Books of Account, and Financial Statements) to clear any discrepancies between these amounts. B. Count the number of records to ensure that the files received are complete and accurate. C. Check and ensure that no unusual items exist. Unusual items may include the following: 1. Duplicates; 2. Gaps; 3. Transactions with negative amounts; 4. Transactions with invalid codes; and 5. Transaction outside the period under examination. D. Clarify with the taxpayer the existence of unusual transactions. Depending on the justification of the taxpayer, the RO may opt to isolate these transactions as they may require different parameters and conditions from those of regular items, or he may automatically treat them as invalid items, hence considered exceptions. E. Upon establishing the completeness and accuracy of data files and clarifying unusual items, analyze further the data files. F. Request for another download of the files, in case the files received do not meet the data integrity test. The discrepancies may be caused by errors on downloading or conversion form one format to another. G. Determine differences during the test run if these are due to faulty program logic in the CAATTs or due to taxpayer's system error. If the discrepancy is caused by faulty program logic, abnormal input data not considered in the computation, or incorrect record layout, modify and return the application as deemed necessary until such time that the CAATTs application proves to be responsive of the CAATTs objectives and tested to provide accurate results. Test run may be applied in any of the following: 1. The whole data file, if there is only one file provided; 2. One of many files provided, e.g. , 1st month in a group of monthly files; and 3. A subset of the data file, if the whole file is very large. H. Execute the applicable CAATTs' application (Note: Always keep track totals of record count and amounts to ensure that the data is processed completely. Document each CAATTs procedure while executing CAATTs, especially in repeated tests.) 1. General Ledger a. Obtain the transaction files that interface with the general ledger which should contain balances of each account together with transaction history. b. Understand and analyze coding structures of more complex general ledgers which have segmented account code for different purposes. Transaction data should include sources, dates, accounting month, transaction references and posting references. Sophisticated ledgers will hold each individual posting to allow inquiries, analyses and "drill down." c. Generate ledger balances i. Summarize totals of entries generated by different sources/modules ( e.g. , purchase or sales ledger, journal vouchers, etc.); ii. Foot (total) the balances to ensure they balance to zero. (Note: some ledgers include memo amounts which may need to be excluded) ; and iii. Total (or summarize) transactions by account. c. Perform exception tests: i. Test for transactions with dates outside the taxable period under audit; ii. Analyze per account and look for unusual debit/credit entries and consequent tax exposure; and iii. Test for duplicate postings. d. Match and compare generated account groupings against balances per audited financial statements. Document unreconciled discrepancies, if any. Some general ledgers hold non-financial data, e.g. , employee numbers, for use in management reporting and apportioning of costs. There will be some form of type code to identify these and should be excluded from the computation of the TB. 2. Sales Generally, a sales history file should be available, although on some systems, transactions are archived monthly. In this case, arrangement/s will have to be made to copy and save the file each month. The Append Database feature of the Audit Software can then be used to create an annual file (or whatever period is required) from the monthly files. It is worthwhile conducting some analysis of sales by appropriate headings and then using exception testing. a. Analyze i. Extract the Official Receipts (OR) subject to VAT and compute VAT from the Billing Statement (BS) File and analyze sales by month, category or customer; ii. Analyze Dealer Sales and compute withholding tax. b. Generate ledger balances of sales transactions i. Reproduce sales summarizes and posted totals; ii. Test pricing discount computations on invoices; and iii. Relate between items shipped and items booked as sales. c. Perform exception tests i. Extract all sales data for audit by customer, product, region, etc., and generate exceptions pertaining to sales price less than expected for product type or large discount given (transfer pricing and large credit notes); ii. Filter the data on overseas calls, overseas SMS and roaming services and compute Overseas Communication Tax from the Statement of Accounts File; iii. Extract and summarize unearned revenue and compare it with subscriber's balances; iv. Extract Value Added Service (VAS) transactions of the Content Providers. d. Look for gaps and duplicates i. Test for missing Sales Invoice (SI)/Official Receipts (OR) numbers; ii. Test for missing shipping/delivery receipts; iii. Test for duplicate invoices (either duplicate invoice number, shipping order number or customer and detail/amount); and e. Match and compare i. Match Cash Receipts Journal to receipts posted to the Accounts Receivable Ledger for credit transactions. Identify any unmatched records; ii. Compute interconnection revenues and interconnection payables from the Settlement Transaction file and check offsetting; iii. Review customer deposits; iv. Recognized expired cards as income; v. Compare the number or items listed on the daily sales report with the number of items billed on the invoices. 3. Inventory Inventory can vary in volume and cost within organizations. Where inventory is a significant item, audit testing is used to provide assurance on existence, completeness (cut-off) and valuation. a. Analyze and summarize i. Analyze high value transactions ( e.g. , input tax verification); ii. Summarize stock on-hand by group, location, type, etc.; and iii. Summarize products by group, location, type, etc. b. Generate ledger balances relative to Inventory i. Generate report on products in order of profitability; and ii. Test clerical accuracy of totals and extensions. c. Perform exception tests i. Identify stock acquired from associated companies; and ii. Isolate inventory items with cost greater than retail price, with zero/negative quantities, or with zero/negative prices. d. Look for Gaps and Duplicates i. Test for duplicate item numbers or descriptions; and ii. Test hash totals. e. Match and compare i. Compare cost to selling price to look for valuation discrepancies. 4. Payroll Payroll auditing is an excellent application of the Audit Software. The main objective is to check validity and accuracy by testing existence of employee, correctness of pay and accuracy of withholding taxes made. There are many regulations and taxes associated with payroll and compliance therewith can be checked. Privacy concerns/confidentiality may limit verification but the following common tests may be applied: a. Analyze and summarize i. Analyze and summarize costs for special pay, overtime, premium, etc.; and ii. Summarize payroll distribution for reconciliation to general ledger. b. Generate ledger balances of payroll-related accounts iii. Total gross pay, net pay, deductions and any other value fields; iv. Check computation of gross pay; v. Check computation of taxable/non-taxable pay; vi. Classify employees by position; vii. Classify and summarize employees' pay by cost center and compare against MCIT; viii. Re-compute withholding taxes and compare against remittances; and ix. Compare payroll master file with payroll list or Alpha List. c. Perform Exception Tests i. Extract all employees not included in the employee Masterfile; and ii. Extract all employees with missing Tax Identification Number (TIN). d. Look for gaps and duplicates iii. iv. Test hash totals. 5. Fixed Assets Fixed Asset registers vary in the detail of information and volume of records. In organizations with significant volumes of plant and machinery, the Audit Software can be used to scan for problem items. a. Analyze i. Provide a total of depreciated assets still in use. ii. Analyze components of AUC (Asset Under Construction); and iii. Check transfer of AUC to Fixed Assets and re-compute asset life/depreciation expense against amounts posted in general ledger. b. Generate ledger balances on Fixed Assets related accounts. i. Segregate the file providing the total cost, depreciation and net book values and net recoverable value; ii. Recalculate depreciation figures; iii. Prove totals of additions and disposals and recalculate profits or losses on disposal; and iv. Segregate impairment losses. c. Perform exception tests i. Identify items with unusual movements in Net Book Value ( e.g. , appraisal increment charged to depreciation); ii. Supply details where the depreciation rate is unusual; iii. Test for dates in the appropriate period; iv. Identify assets transferred or acquired from group companies; v. Identify items with zero or negative cost and items where depreciation exceeds cost; vi. Identify items where description does not match coding; vii. Extract assets with useful lives or depreciation rates beyond set norms; viii. Identify fully depreciated items and assets higher than replacement costs; ix. Analyze changes in capital asset accounts and verify existence of any sale, exchange or disposition of fixed or capital assets during the year under audit; and x. Determine assets held for rent and lease to tenants, and extract the amount of rental income received on these properties. d. Look for duplicates i. Test for duplicate reference numbers. e. Match and compare ii. n Compare book and tax depreciation and indicate variances; and iii. Compare useful lives of assets by category. 6. Accounts Receivable (AR) Tests of AR are performed to establish existence, completeness and valuation. Items of particular concern are old unpaid invoices, unmatched cash and large balances. These can all be picked up with exception tests. a. Analyze and summarize i. Profile accounts using stratification to identify large accounts and the proportion of value in the larger items; and ii. Generate summarizes by customer, invoice, amounts, products, etc. b. Generate ledger balances of AR-related accounts i. Total the file. Separate debits and credits; ii. Check transaction totals to the balance on each account; and iii. Show variances between delivery documents and invoices. c. Perform exception tests i. Report credit balances; ii. Identify unmatched cash or credits; iii. Test for items with shipping dates or number outside the expected ranges; iv. Identify payments of some accounts or invoices; v. Identify invalid transaction types; and vi. Identify high value credit notes, balances, and invoices. d. Look for gaps and duplicates i. Identify for duplicate invoices, credit notes or receipts; and ii. Report gaps in sequences of invoices and credit notes generated. 7. Accounts Payable (AP) It is important to establish that liabilities are neither understated nor overstated. Current standards also look for potential fraudulent activities in the accounting systems. Many accounts payable tests also relate to supplier master file details. This often resides on a different file of the detailed ledger items. Apply the common test as follows: a. Analyze and summarize i. Reconcile check register to disbursements by vendor invoice; and ii. Summarize invoices by supplier to prove individual balances. b. Generate ledger balances of AP-related accounts. i. Total the file. Separate debit and credit balances. c. Perform exception tests i. Identify debit balances; ii. Identify unusual stand-out data; and iii. Identify and total liabilities for goods received and not yet invoiced. d. Look for gaps and duplicates i. Test for duplicate payments/invoices. e. Match and compare i. Match subsequent period payments against period and balances to identify unmatched payments: Compare invoices posted against purchase order amounts; and Compare recurring monthly expenses to paid invoices. I. Generate a report on the items with discrepancies/audit findings. Investigate the reasons for the discrepancies/findings and resolve the issues with the taxpayer. For example, the RO may obtain copies of supporting documents ( e.g. , sales invoices, official receipts, delivery receipt, sales reports, collection reports, etc.) relating to the exceptions; and Moreover, despite the above enumerations, the RO is not precluded from applying other techniques which are deemed necessary in a particular case. The RO can use the same techniques in auditing other books and/or modules of the system such as General Journal, Purchase Journal, Cash Receipt Journal, Cash Disbursement Journal, and other special journals/subsidiary ledgers. Sample of Financial Statements in case of auditing complete CAS can also be viewed by the RO for checking the transaction trail. VII. Third Party Verification A. Regulatory Agencies Involved 1. National Telecommunications Commission (NTC) the government through NTC regulates the telecommunications industry. There are two stages before a firm can enter into the regulated segments of the industry. The first step requires a congressional franchise to operate a telecommunications service in all or some parts of the country. The second stage involves application for Certificate of Public Convenience and Necessity (CPCN) or a Provisional Authority (PA) issued by NTC, which requires the carriers to prove that they are technically and financially able to execute the operations and that a significant demand exists. The PA contains the description of the service, specific rate to be charged for the service and the regulations. 2. Securities and Exchange Commission (SEC) 3. Board of Investments (BOI) 4. National Privacy Commission (NPC) 5. Cybercrime Investigation and Coordinating Center (CICC) B. Other Taxpayers 1. Sources of Revenues Post Paid Subscribers, Flat Rate Subscribers 2. BIG TICKET Suppliers 3. Related Parties of the Taxpayer, i.e. , parent company, affiliates, subsidiaries C. Relevant Parties 1. Major Players in the Telecommunications Industry 2. Contracting Parties (FA) of the Taxpayer Outside the PH 3. Philippine Stock Exchange (Big Players in the industry are listed) VIII. Audit Reports A. Revenue Officer's Audit Report (500 Series) B. Narrative Memorandum Report 1. Background of the Case 2. Taxpayer's Compliance 3. Audit Procedures Done During the Conduct of the Audit 4. Results of Investigation 5. Summary of Deficiency Taxes 6. Recommendation IX. List of Working Papers to be Attached in the Audit Report A. Monthly Total Debits and Credits of Both B/S and I/S accounts B. Income Payments Subject to Withholding Tax vs. Tax Withheld vs. Withheld Tax Remitted C. Summary of Taxpayer's Tax Declaration per Tax Type for the Taxable Period Covered by Tax Audit D. Reconciliation of Sales/Receipts Declared in the Income Tax Returns Books vs. Business Tax Returns vs. Third Party Sources (including Withholding Agents') Annex 1 E. Other Schedule and Working Papers Showing the Findings/Discrepancies in Deficiency Tax Assessment 1. Schedule of Official Receipts (Service) Annex 2 2. Schedule of Sales Invoices (Non-Service) Annex 3 3. Schedule of Analysis of Gross Receipts/Sales Subject to VAT Annex 4 4. Computation of Input tax on Exempt Transactions Annex 5 X. List of References A. Handbook on Audit Procedures and Techniques RAMO 1-2020 B. Handbook on Computer Assisted Audit Tools and Techniques RAMO 1-2008 C. BIR-EPRA Training on Auditing Telecommunications Companies D. https://boi.gov.ph/wp-content/uploads/2018/02/Telecommunications-Infrastructure-January-2018.pdf E. https://www.fcc.gov/general/glossary-telecommunications-terms F. https://commsbrief.com/mobile-telecom-acronyms-and-abbreviations-with-definitions/ ANNEX 1 Reconciliation of Sales/Receipts Declared in the ITR vs. AFS vs. VT Returns vs. TPI ANNEX 2 Schedule of Official Receipts (Service) NAME OF TAXPAYER TIN: TAXABLE PERIOD: Schedule of Official Receipts (Service) Date Official Receipt No. TIN CUSTOMER'S NAME ADDRESS Statement of Account Vatable Sales Zero-Rated Sales Exempt Sales VAT TOTAL ANNEX 3 Schedule of Sales Invoices (Non-Service) NAME OF TAXPAYER TIN TAXABLE PERIOD Schedule of Sales Invoices (Non-Service) DATE SALES INVOICE NO. TIN CUSTOMER'S NAME ADDRESS PARTICULARS ITEM QUANTITY SELLING PRICE DISCOUNT NET SELLING PRICE VATABLE SALES VAT ZERO-RATED SALES EXEMPT SALES TOTAL SALES ANNEX 4 Analysis of Gross Receipts/Sales Subject to VAT ANNEX 5 Computation of Input Tax on Exempt Transactions n Note from the Publisher: Copied verbatim from the official document. Irregular numerical sequence.