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TO All COA Assistant Commissioners, COA Directors,

COA Auditors and All Others Concerned

SUBJECT Guidelines in the Computation of Cost of Audit

Services Rendered to Water Districts (WDs) and the
Grant of Reduction of Cost of Audit Services

1. Rationale

This Memorandum is issued to:

a) address the clamor for a customized billing system for WDs,

which considers the WDs' financial circumstances, such as, but
not limited to the size, years of operation, presence of
government subsidy, level of generated income and their financial
health as government subsidized entities;

b) eliminate resentment over perceived unreasonable audit fees and

consequent refusal to be audited; and

c) mitigate or prevent further increase in the unpaid audit fee

assessments of COA to WDs.

2. Definition/Description of Terms

2.1 Personnel Services (PS) refer to salaries and mandatory

allowances/fringe benefits of personnel involved in the audit of
the WDs as expressly authorized by law and/or other
administrative issuances, including statutory contributions
related thereto.

2.2 Maintenance and Other Operating Expenses (MOOE) refer to

travelling expenses, communication expenses, freight and
delivery charges, supplies and materials, water, illumination
and power, authorized discretionary, and representation
expenses and out-of-pocket expenses.

2.3 Out-of-Pocket Expenses refer to all other expenses incurred

directly related to or connected with the audit of water districts.

2.4 Corporate Operating Budget (COB) refers to the detailed

projection of all estimated income and expenses of the
Government Owned or Controlled Corporation (GOCC) based on
forecasted revenue in a given year.

2.5 Category A, B, C, or D classification of WDs is based on the
Revised Local Water District Manual on Categorization and
Other Related Matters (LWD-Macro) issued by the Department
of Budget and Management (DBM) CY 2011 which considers the
number of active service connections and points rating based on
Gross Revenues, Total Assets, Net Income before Interest and
Depreciation, as well as Staff Productivity Index, to distinguish
between each classification. In general, category A refers to
Large WDs with 75-100 points rating earned; category B refers
to Big WDs with 50-74 points rating earned; category C refers
to Medium WDs with 25-49 points rating earned; and category
D refers to Small WDs with 1-24 points rating earned.

3. Guidelines

3.1 The cost of regular audit services by the COA shall be based on
the actual cost of audit work rendered in the WDs based on the
COA computation of man-hours and MOOE used.

3.2 The computation of the PS component of the audit cost for WDs
under categories A, and B, shall follow the computation being
applied to regular GOCCs pursuant to existing COA guidelines
issued by the Planning Finance and Management Sector (PFMS),
COA, for the assessment of cost of audit services to regular

3.3 To give consideration to WDs under categories C and D

particularly those that are (a) within the 1st three years of initial
operations; and (b) experiencing financial distress/losing/not
yet financially viable, the audit cost may temporarily exclude
the PS component until the WD becomes financially
established/stable as measured by the current financial
statements showing profitability and liquidity and proving the
financial capability of the WD to pay.

3.4 In order to be billed with both PS and MOOE, WDs under

categories C and D must meet the liquidity ratio and anyone of
the profitability ratios as illustrated in Annex A hereof, based on
the current year's audited financial statements with
comparative analysis of the said ratios in the immediately
preceding two years.

3.5 The audit cost of MODE shall include:

a. Travel expenses of the members of the audit team as

provided under Executive Order Nos. 248 dated May 29,
1995 and 298 dated March 23, 2004 (and any amendments

b. Office supplies to be used by the audit team for the
duration of the audit shall be as follows (subject to 1%
annual increase on account of inflation):

WD Audit Duration Amount

Category (No. of audit (P)
A 91-150 25,000
B 70-90 20,000
C 46-69 15,000
D 15-45 10,000

c. Actual communication expenses such as telephone-Iandline,

telephone-mobile, internet expenses, freight and delivery

d. Out-of-pocket expenses.

3.6 The cost of travel expenses to be charged by each team shall

depend on the number of days and number of team members
assigned for the audit of a water district as provided in the
Audit Plan.

3.7 Water Districts that are classified as A and B shall be charged

with Administration Cost or Supervision cost of 10% on PS and
MOOE, while those categorized as C and D which are in its first
three years of operations or financially distressed shall,
however, be charged Supervision cost at 5% of MOOE, until
such time that they become financially stable as measured by
the current financial statements which reflect the WD's
profitability and liquidity based on the parameters/computation
mentioned in 3.4 of this Memorandum.

4. Responsibilities

4.1 The detailed assessment of the audit cost shall be prepared by

the Audit Team Leader (ATL) , reviewed by the Supervising
Auditor (SA), and approved by the Regional Director (RD). The
assessment for WDs under categories C and D shall be
supported with the financial analysis prepared by the concerned
ATL based on the audited financial statements of the WD
concerned to evaluate the WD's profitability and liquidity per
Annex A hereof and a recommendation to grant reduction in the
cost of audit.

4.2 Based on the approved assessment, if found in order, the

Accounting Office of the Regional Office, shall prepare the
Billing Statement consisting of the PS and MOOE for WDs under
categories A and B. The Billing Statement for WDs under
categories C and D shall include only the MODE upon the
recommendation of the ATL/SA as approved by the RD when
audit discloses them to be not yet financially viable or in
financial distress.

4.3 The RD shall transmit the Billing Statement to the WD thru the
SA within 15 days after the transmittal of the AAR to the WD
Management. A copy of the PS Billing Assessment shall be
furnished the Bureau of Treasury (BTr) and the Department of
Budget and Management (DBM).

4.4 The SA shall cause the remittance of the PS cost of audit by the
WD to the BTr, and the MOOE cost of audit to the concerned
COA Regional Office.

s. Amendments and Repeals

All COA Circulars, Memoranda and other issuances inconsistent

herewith are hereby revoked or amended accordingly.

6. Effectivity

This Memorandum shall take effect fifteen (15) days after publication
in the Official Gazette or newspaper of general circulation.


0' THI CHlUtitnUON
e .. "'.

I III I 17.001207031747


The financial capability of WDs may be measured through financial ratios reflective
of the profitability and liquidity computed from the WD's current financial

1. Financial ratios that measure profitability, where a higher margin percentage

is a favorable profit indicator:

a. Net Profit Margin shows how much profit is derived from every
peso of total sales. It indicates how well the WD has managed its
operating expenses. It also indicates whether the WD is
generating enough sales volume to cover minimum fixed costs
and still leave an acceptable profit margin.

Formula: Net Profit

Total Sales

A net profit margin of 20% and above qualifies a WD to be

assessed both the PS and MOOE components of the Cost of Audit.

b. Return on Assets evaluates how effectively the WD employs its

assets to generate a return. It also measures efficiency.

Formula: Net Profit

Tota I Assets

Return on Assets of 20% and above qualifies a WD to be billed

both the PS and MOOE components of the Cost of Audit.

c. Return on Net Worth/Return on Investment (ROI) determines the

rate of return on the invested capital. It is used to compare
investment in the agency against other investment opportunities.
There should be a direct relationship between the ROI and risk
(the greater risk, the higher the return). As a rule of thumb,
investment professionals favor companies with at least 5% ROI.

Formula: Net Profit

Net Worth

An ROI of 5% and above qualifies a WD to be assessed both PS

and MODE components of the Cost of Audit.

2. To measure liquidity, Quick Ratio gauges the ability of a WD to pay for its
current liabilities by using its most liquid current assets.

Formula: (Cash & Cash Equivalents+Short-term

Investments+Accounts Receivable)
Total Current Liabilities

A 1: 1 liquidity/quick ratio or better qualifies a WD to be assessed both the

PS and MOOE.