CLOSING MEETING

ARDCIBANK, INC. – A RURAL BANK

15 February 2019
Boardroom, 3F ARDCI Corporate Building
ATTENDEES

BDO Roxas Cruz Tagle and Co.

• Jarred D. Pereña – Engagement Audit Partner

• Sherwin T. Obispo – Senior Audit Associate
• Paulo T. Cortez – Audit Associate

ARDCIBank, Inc. – A Rural Bank

• Deogracias Talan – President

• Alvin Vienes – Bank Manager
• Marlon Poblete – Accountant
• Margie Camacho – Senior Bookkeeper
• Czar Anthony Tud – Compliance Officer
• Judy May Magtangob – Internal Auditor
• Amalyn Joco – Cashier
• Wenda Panti – Personnel Officer

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AGENDA

01 Financial highlights
02 Summary of observations and recommendations
03 Other matters
04 Proposed audit time table
05 Pending year-end audit requirements

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FINANCIAL HIGHLIGHTS

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FINANCIAL HIGHLIGHTS
STATEMENTS OF CONDITION - UNADJUSTED
Increase
RESOURCES 2018 2017 (Decrease) %
Cash and other cash items P1,154,628 P1,327,509 (172,881) -13
Due from Bangko Sentral ng Pilipinas 2,657,780 2,688,127 (30,347) -1
Due from other banks 40,448,573 40,521,133 (72,560) 0
Loans and other receivables (gross) 95,293,204 97,386,292 (2,919,555) -2
Allowance for impairment (8,699,591) (7,873,124) 826,467 10
Held-to-maturity investments 24,018,908 24,777,677 (758,769) -3
Bank premises, furniture, fixtures and equipment, net 368,843 489,102 (120,259) -25
Investment properties 34,191 34,191 - 0
Deferred tax asset, net 2,032,171 2,032,171 - 0
Retirement benefit asset 758,122 1,099,228 (341,106) -31
Other resources 573,094 1,157,158 (584,064) -50
TOTAL RESOURCES P158,639,923 P163,639,464 (4,999,541) -3
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FINANCIAL HIGHLIGHTS
STATEMENTS OF CONDITION - UNADJUSTED
Increase
LIABILITIES AND CAPITAL FUNDS 2018 2017 (Decrease) %
Liabilities
Deposit liabilities P63,700,298 P71,888,754 (P8,188,456) -11
Accrued interest, taxes and other payables 4,201,311 4,679,229 (477,918) -10
Total liabilities 67,901,609 76,567,983 (8,666,374) -11

Capital funds
Common share 50,841,400 50,841,400 - 0
Remeasurement of net defined benefit asset, net (1,556,420) (1,556,420) - 0
Unappropriated surplus 41,453,334 37,786,501 3,666,833 10
Total capital funds 90,738,314 87,071,481 3,666,833 4
Total liabilities and capital funds P158,639,923 P163,639,464 (4,999,541) -3

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FINANCIAL HIGHLIGHTS
STATEMENTS OF COMPREHENSIVE INCOME - UNADJUSTED
Increase
2018 2017 (Decrease) %
Interest income 28,331,800 32,925,676 (4,593,876) -14
Interest expense 1,769,736 2,947,476 (1,177,740) -40
Net interest income 26,562,064 29,978,200 (3,416,136) -11
Provision for impairment losses (2,853,018) (5,178,525) 2,325,507 -45
Net interest income after provision for impairment losses 23,709,046 24,799,675 (1,090,629) -4
Other operating income 4,362,912 4,307,218 55,694 1
Other operating expenses (21,700,595) (19,154,837) (2,545,758) 13
Income before income tax 6,371,363 9,952,056 (3,580,693) -36
Provision for income tax 2,094,803 2,754,865 (660,062) -24
Net income for the year 4,276,560 7,197,191 (2,920,631) -41
Other comprehensive gain - 576,405 (576,405) -100
Net comprehensive income for the year 4,276,560 7,773,596 (3,497,036) -45
SUMMARY OF OBSERVATIONS AND RECOMMENDATIONS

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DEPOSIT LIABILITIES
INACCURATE MICROSAVINGS ACCOUNT REPORT
Observation:
Microsavings transactions per system-generated report “Savings Account Transaction per ID” during the year did not reconcile with
journal entries made in General Ledger.

Per Savings
Account
Transaction per ID Per General
MICROSAVINGS ACCOUNT report Ledger Difference
Beginning – per prior year deposit listing P28,561,521 P28,561,521 P-
Credits 57,646,767 59,080,829 (1,434,062)
Debits (58,130,691) (58,565,787) 435,096
Ending 28,077,598 29,076,563 998,965

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DEPOSIT LIABILITIES
INACCURATE MICROSAVINGS ACCOUNT REPORT

Further examination shows that the system generated report differs from transaction date to any given later date. This is due to
factors yet discovered by the Bank personnel.

Interest WHT Auto credit loans Batch credit

Sample date Trans Date Print Date Diff Trans Date Print Date Diff Trans Date Print Date Diff Trans Date Print Date Diff
01/10/2018 22,418.00 33,717.00 - 11,299.00
01/12/2018 61,672.00 35,287.00 26,385.00
01/31/2018 74,449.26 74,378.50 70.76 14,890.00 14,875.84 14.16
02/28/2018 62,256.11 62,200.00 56.11 12,451.58 12,440.43 11.15
03/01/2018 1,272,342.62 1,261,582.62 10,760.00
03/28/2018 61,879.33 61,813.47 65.86 12,375.56 12,362.38 13.18 841,769.50 833,789.50 7,980.00
08/23/2018 81,742.78 81,442.78 300.00 1,280,848.53 1,268,098.53 12,750.00

Note:
1. Print date is as of 12 Feb 2019
2. The Senior Bookkeeper verified that for the sample date 23 Aug 2018, the amount per transaction date is correct. Other days are
still for reconciliation.
DEPOSIT LIABILITIES
INACCURATE MICROSAVINGS ACCOUNT REPORT
Observation:
The following accounts have differences in imputed balance per savings report versus savings listing amount:
Account Number Imputed balance Savings list balance Difference
1 001-01-008764-10 7,157.85 6,757.85 400.00
2 001-01-006013-05 10,318.95 11,618.95 1,300.00
3 001-01-014914-07 7,281.74 9,730.38 2,448.64
4 001-01-008777-02 5,984.51 5,784.51 200.00
5 001-01-011402-11 7,973.47 9,039.74 1,066.27
6 001-01-012815-09 877.09 3,377.09 2,500.00
7 001-01-007747-05 (165,281.80) 7,965.94 173,247.74
8 001-01-014228-05 14,611.65 14,936.65 325.00
9 001-01-014179-00 5,112.06 6,017.06 905.00
10 001-01-007289-05 409.43 4,666.98 4,257.55
11 001-01-012457-08 19,406.17 28,319.17 8,913.00
12 001-01-012829-06 8,712.45 14,567.95 5,855.50
13 001-01-013840-00 (679,457.32) 14,471.30 693,928.62
14 001-01-013117-03 5,532.18 10,773.68 5,241.50
15 001-01-000937-06 7,740.09 7,140.09 600.00
-743,621.48 155,167.34 898,788.82

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DEPOSIT LIABILITIES
DORMANT SAVINGS ACCOUNTS STILL TAGGED AS ACTIVE
Observation:
11 dormant savings accounts are still tagged active per system, although last transaction date exceeds the 2 year dormancy period.
Account Number Last Transaction Date Account Status
1 001-15-001711-05 12/06/2016 ACTIVE
2 001-01-007310-09 07/01/2015 ACTIVE
3 001-01-007568-09 12/29/2016 ACTIVE
4 001-01-008172-01 12/29/2016 ACTIVE
5 001-01-011745-04 07/01/2015 ACTIVE
6 001-01-012010-05 12/29/2016 ACTIVE
7 001-01-012350-02 06/01/2015 ACTIVE
8 001-01-012650-04 06/01/2015 ACTIVE
9 001-01-012795-04 06/30/2015 ACTIVE
10 001-01-012890-06 12/29/2016 ACTIVE
11 001-01-014906-02 11/21/2016 ACTIVE
Recommendation:
• Timely monitoring of dormant accounts

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DEPOSIT LIABILITIES
INCONSISTENT DETAILS PER TIME DEPOSIT CERTIFICATE VS. SYSTEM
Observation:
Time deposit details for 2 accounts were inconsistent between certificate versus system.

Account Number Details Per system Per Certificate Difference

001-07-000481-03 Date Due 06/01/2019 06/02/2019 1 day
Term 180 days 181 days 1 day
001-07-000545-00 Date Due 05/20/2019 05/21/2019 1 day

However, as of 15 February 2018, these errors were corrected in the system, with certificate prevailing, being the official document.

Recommendation:
• Revisit all time deposit accounts in the system to check the accuracy of details.
• Timely systems check on details of time deposit. Ensure accuracy of system reports against manual documents.

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DEPOSIT LIABILITIES
INTERNAL CONTROL LAPSES
Observation:
Issue Effect
1 out of 10 samples Signature card not stamped “closed” Non-compliance to internal control policies and
procedures

Per Senior Bookkeeper, this may have happened when the Cashier is on leave, reason for non-stamping of the signature card kept in
vault.

Recommendation:
• Strict implementation of deposit closing policies and procedures.

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LOANS RECEIVABLE
ACCRUAL OF INTEREST ON LOANS
Observation:

Interest income on loans are recorded under cash basis during the year, with accruals made only at year-end.

As of year-end, interest income was accrued based on the ratio of last years accrual with last year’s outstanding balance and applied
the same ratio to current year outstanding balance. In 2017, accruals were based on the system-generated report of transaction date.

Criteria:

For financial reporting, the financial statements should be reported under accrual basis of accounting.

However, BSP Circular 1011, s 2018 section 7 states that accrual of interest on loans and other credit accommodations shall not be
allowed for non-performing loans.

Recommendation:

• Interest income should be based on the actual calculation of interest.

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LOANS RECEIVABLE
INACCURATE TAGGING PER LOAN LISTING VERSUS AGING REPORT
Observation:

Loan tagging as to current or past due varies between report of loan listing and aging report.

Loan STATUS
Account No. Per loan list Per Aging Report
001-06-083447-5 Past due Current
001-06-083369-0 Past due Current
001-06-082720-0 Past due Current
001-06-005956-4 Current Past due
001-06-005340-1 Current Past due

The details per loan aging report is used for the loan provisioning. The aging report appeared to be correct in terms of past due days
counting. However, the application of concept of non-performing loans (NPLs) is not included per system aging report. Thus, loan
provisions for non-performing loans were not separately considered, subsequent interests collected remained booked in the account.

Recommendation:

• Loan tagging per loan listing should be corrected for past due.
• Incorporate the system tagging for NPL.

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LOANS RECEIVABLE
INTERNAL CONTROL LAPSES
Observation:
4 out of 45 samples
1 out of 45 samples
4 out of 45 samples
Issue
No tickmark on loan application checklist
No BM signature on Disclosure Statement
(however application form is approved)
No attached supporting documents for
declared cash flow
Effect
May result in incomplete documentation of loans
May result in incomplete documentation of loans
May result to approval of loans which may show credit
deficiencies later on

Recommendation:
• Strict implementation of loan origination policies and procedures.
• Conduct more detailed regular review of credit folder documentation.

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INVESTMENTS
NON-AMORTIZATION OF INVESTMENTS IN BONDS
Observation:

Investments in bonds in Land Bank were not properly amortized during the year. The Bank is still on process of computing the accrued
interest and amortization of investments. Accounts affected are investments and related interest income.

Recommendation:

• Regular review and reconciliation of carrying amount of investments and related interest receivable.
PFRS 9 IMPLEMENTATION
LOAN PROVISIONING POLICY
Observation:

The Bank is yet to develop a clear cut PFRS 9 adoption guidelines with respect to loan provision since its current policy is still largely
based on days past due. No forward-looking factors were considered under the current method of provisioning. Also, the Bank
currently does not employ a 3-stage model of impairment.

Criteria:

Per BSP Circular 1011, s. 2018, the Bank is required to adopt PFRS 9 starting 01 Jan 2018.

Recommendation:

• Review and research on appropriate loan provisioning policies for PFRS 9 compliance.
FS PRESENTATION
INCORRECT CLASSIFICATION/ PRESENTATION OF EXPENSE ACCOUNTS
Observation:

Account Issue Recommendation

Taxes and licenses Includes the percentage tax of the
Bank (5% to 7%)
Taxes and licenses Includes the documentary stamp tax
and creditable withholding tax on
investments in Small Business
Corporation (SBC)
Representation expense Includes the unreceipted payment to
BIR LOA for taxable year 2016
(P500,000)
Book the expense and related accruals separately.
Book the expense and related asset separately.
-Doc stamp used (for expense)
-Creditable withholding tax (for asset, which should
have BIR Form 2307)
-Book the expense in some other account which is
not subject to tax limits. Also, ensure strict
implementation of requirement on vendor Official
Receipts to substantiate expense transactions.
AUDIT FINDINGS
LACK OF PROPER TURNOVER OF DOCUMENTS
Observation:

Schedules of the following were not properly turned over to the new Accountant:
• Furniture, fixtures and equipment (FFE) – oustanding and retirements made
• Accrued interest receivable
• Investments in bonds (IBODI-Land Bank)

Due to the above items, the new Accountant took time to reconcile the detailed schedules of those accounts. The investments in
bonds in Land Bank were also not amortized because of lack of turn-over instructions from previous Accountant.

Recommendation:
• Resignees should turnover all files prior to leaving.
• All key schedules should at least be discussed to the recepient for proper turn-over.
• Ensure complete filing and indexing of documents for easier reference.

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IT GENERAL CONTROL FINDINGS

1. Lack of review on user access matrix for appropriateness

2. Lack of processes and controls over deactivation of user access rights
3. No periodic review of active users
4. Low configuration of password parameters
5. Lack of separate environments for development, testing and deployment of program changes
OTHER MATTERS

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OTHER MATTERS

1. Update on results of operations

2. Update on system development (Instafin)
3. PFRS 9 implementation
4. Significant contracts entered during the year
5. Major changes in organizational structure
6. Tax or legal matters
7. Going concern or fraud issues

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PROPOSED AUDIT TIME TABLE
ACTIVITY PROPOSED TIMING
Year-end audit meeting with Management and BOD 15 February 2019
Submission of pending audit requirements 22 February 2019
Review by Management of draft Audited Financial Statements (AFS) 2nd week of March
Finalization of AFS 3RD week of March

Note: Timelines will be achieved depending on timely submission of audit requirements and resolution of
outstanding audit matters.

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PENDING AUDIT REQUIREMENTS

1. Final list of Client Adjusting Journal Entries (CAJE) with supports

2. Financial statements prepared by Compiler
3. Actuarial valuation report
4. Schedule of accrued interest receivable breakdown (Loans and Investments)
5. Accrued interest income on loans (per system programmer)
6. Results of internal audit work on loan and deposit confirmation
7. Related party balance and transaction reconciliation
8. Confirmations:
• BSP
• Bank (4/6 remaining)
• Investments
• Legal
9. Minutes of meetings up to approval of financial statements
10. Certificate of completeness of minutes of meetings

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ANY QUESTIONS?
THANK YOU!