2021 audit season in the Philippines – The Audited Financial Statement

2021 audit season in the Philippines – The Audited Financial Statement

Finance & Accounting

CloudCfo Inc

CloudCfo Inc

16 Mar 2021, 15:45 — 11 min read

For many businesses in the Philippines, the deadline for filing the annual Income Tax Return is 15 April 2021.

Many businesses, if non-exempt, are required to also prepare and attach an Audited Financial Statement (AFS) when submitting their annual Income Tax Return (ITR).

The period between January and 15 April every year is often referred to as the ‘audit season’.

In this article, we explain what audit season actually means for companies and why many business founders, owners, and managers must be aware of the 15 April 2021 deadline for filing the AFS!

What is the Statutory Audit?

Every year, all non-exempt businesses in the Philippines must file an Audited Financial Statement, or AFS, with the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC). 

A yearly financial statement should provide a crystal-clear picture of the company’s financial transactions, activities, and status during the previous financial year.

However, before a company submits their yearly financial statement to the BIR and then to the SEC, the financial statement must first be audited, certified, and signed off by an independent auditor.

In order to have the financial statement audited and certified by the auditor, companies must first spend time preparing their financial documentation and information so that it can be transitioned into a financial statement.

Once the financial statement has been audited, it can then be referred to as an Audited Financial Statement, or AFS, and submitted to the various government agencies.

So, what’s the reason for requiring an audit?

It is a mandatory statutory requirement imposed by law and monitored by the Philippines' regulatory agencies – the BIR and the SEC.

The statutory audit is a common regulatory tool used by governments across the world to ensure that a) companies are practicing robust financial management and b) adhering to the local compliance requirements of the country or jurisdiction in which the company is registered.

By requiring companies to submit third-party certified reports on their financial activities each year, governments can ensure a higher level of corporate governance within their jurisdiction and a higher level of tax compliance.

For more information on the type of taxes companies in the Philippines are required to pay, check out Tax for corporations in the Philippines – why so complex?

Why is it called ‘audit season’?

The process of preparing the financial statement and engaging and liaising with an auditor to ensure that all of the financial data is complete and accurate can be a long, and sometimes tedious, process – particularly if proper financial management has not been practiced by the company during the previous financial year.

That’s why it is referred to as ‘audit season’ – not audit day.

‘Audit season’ generally starts for companies a few months prior to the deadline by which they need to file their AFS with the BIR. During this time, companies will start collecting financial information and documentation from the prior financial year, preparing the financial statement and engaging and liaising with their selected auditor.

What’s the deadline for submitting the AFS in the Philippines?

In the Philippines, the Audited Financial Statement must be submitted to the BIR, together with the Annual Income Tax Return, by the 15th day of the fourth month after the company’s financial year-end date.

It is quite common for companies in the Philippines, and indeed, internationally, to align their financial year with the regular calendar year (i.e. 1 January to 31 December).

As such, the Audited Financial Statements of companies in the Philippines that followed the calendar year in 2020 must be filed with the BIR by 15 April 2021.

If a company’s financial year is different from the calendar year, the deadline for filing will be different. For example, if your company’s financial year ended on 31 January 2021, the AFS would have to be filed by 15 May 2021.

Filing the AFS with the SEC

The AFS must be filed first with the BIR and then subsequently, with the SEC. There are slightly different requirements for filing the AFS with each agency.

Filing with the SEC will always come after the AFS has been first filed with the BIR. In fact, the SEC requires that the AFS would first be officially stamped as received by the BIR.

We will be covering the specific requirements for filing the AFS with the SEC in one of our next articles in March! So, make sure to check back on the CloudCfo Insights Blog over the next few weeks for a further update on the requirements for filing the AFS with the SEC!

Is there a difference between audit season and the BIR audit?

Any reference to ‘audit season’, would generally refer to the yearly audit that companies are statutorily required to conduct. In short, it is a mandatory requirement under law that companies undergo at the same time each year that their business is registered.

When people refer to a ‘BIR audit’, this is something quite different!

From time to time, the BIR may wish to investigate or examine the finances of a company to understand if the company is complying with its statutory obligations and practicing robust finance and tax management.

Before the BIR commences with an investigation, they will issue a Letter of Authority, commonly referred to as an LOA, to the particular company, which confirms that the business has been identified and selected for audit by the BIR.

The BIR sometimes suspends tax audits at certain times of the year.

The BIR will then proceed to engage with the business and its owners to examine the business and its accounting, bookkeeping, finance, and tax activities. The ultimate purpose is to determine if the business is complying with the tax and compliance framework in the Philippines.

It’s very important to understand the difference between the BIR audit and the statutory audit! So make sure to speak to your accountant or bookkeeper in the Philippines if you are still unsure of the differences!

Preparing for audit season

The level of work required to prepare for audit season in the Philippines will mostly depend on how diligent a company has been maintaining and managing their accounts, books, and finances during the previous financial year.

If your books have been kept in good shape by your in-house accountant or your outsourced accounting services provider, the audit process should run smoothly and require limited clarifications or queries from your auditor. In short, everything should be in order!

A key step required to prepare for and comply with the statutory audit each year is selecting an auditor for the business.

Key items to consider before engaging with an auditor

Below are some key factors for business owners to consider when selecting an auditor for their businesses in the Philippines:

  • Qualification - your auditor should be licensed, accredited, and independent of your company!

  • Communication -  your auditor should be proactive, enforce timeline monitoring and clearly define issues for clarification in a timely manner.

  • Reputation - requesting references can always help to understand the level of expertise and experience of prospective auditors.

  • Cost -  Make sure to agree on the total cost of the audit process before engaging your auditor!

If your company’s financial year ended on 31 December 2020 and you haven’t yet engaged an auditor for the 2021 audit season, make this a top priority for your business in the coming days!

The Audited Financial Statement (AFS)

As mentioned above, the key document that companies must generate, prepare and finalize during the audit process is the financial statement.

The financial statement should be prepared by the company in the first place. It will then be reviewed by the auditor in order to ensure that the financial statement has been prepared in accordance with local tax and compliance requirements.

Once your auditor is satisfied with your financial statement as it portrays true and accurate financial transactions and activities of the business during the financial year in question, the auditor should then be able to sign off on the financial statement and deem it certified.

The auditor is effectively certifying that the finances of the company, for the particular year, are accurate and were prepared in accordance with the proper financial reporting standards, practices and principles in the Philippines.

Once certified by the auditor, the financial statement can then be referred to as an Audited Financial Statement and can be submitted to the BIR, and subsequently to the SEC. 

Which Companies need to submit an Audited Financial Statement?

Companies that are required to submit an Audited Financial Statement to the BIR include non-exempt corporations, partnerships, and individuals that have gross quarterly sales, earnings, receipts, or output of more than PHP150,000.

For the SEC, a domestic stock company with paid-up capital of PHP50,000 or more must submit an AFS. A non-stock domestic company that has annual gross sales of PHP100,000 or more or has assets valued at PHP50 million or more must submit an AFS to the SEC.

Reporting requirements may differ slightly depending on the type of company or business (e.g., foreign corporations, company branches, representative offices, partnerships, etc.).

If you have just completed the process of business registration in the Philippines, speak with your accountant immediately to understand your company’s obligations (if any) when it comes to the preparation and submission of the AFS!

CloudCfo – online accounting and bookkeeping services for small businesses and SMEs in the Philippines

CloudCfo does not act as an auditor or perform audit services for companies in the Philippines!

CloudCfo does, however, support startups, small businesses, and SMEs in the Philippines by ensuring that their finances, books, and accounts are maintained diligently and accurately throughout the financial year.

So, when audit season does come around, your business is ready!

If you want to ensure that your accounting and finance function is ready for the 2022 audit, visit our website or contact us directly at enquire@cloudcfo.ph to understand how we can support your business!

To explore business opportunities, link with me by clicking on the 'Invite' button on my eBiz Card.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy, or position of GlobalLinker.


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