DIVINE WORD COLLEGE OF LAOAG

School of Business and Accountancy

Name: Franchesca Marie A. Lumabao Date: March 07, 2024

Sophia Anne Margarette M. Nicolas
Regine Gale E. Ulnagan

Course & Year: Bachelor of Science in Accountancy 3

Subject: Auditing and Assurance: Specialized Industries

POWER DISTRIBUTOR

OVERVIEW OF POWER DISTRIBUTOR

The power distributor, also known as the energy distributor, covers the generation,
transmission, and distribution of power to the public and industry. It encompasses various
activities related to producing electrical energy from different sources (such as coal, natural
gas, nuclear, hydro, wind, and solar), transmitting it through grids, distributing it to end-users
(residential, commercial, and industrial), and managing the infrastructure necessary for
reliable power supply.

PROCESS AND OPERATIONS

Three phases of Power Distributor

1. Power Generation - is the process of converting various forms of energy into

electrical energy. This electricity is produced at power plants or generating stations
using different energy sources.

Two Types of Sources of Energy

 Conventional Sources of Energy - refers to those forms of energy that have

been widely used for a long time and are derived from traditional sources that
have undergone substantial commercial development.

Examples:
1. Thermal Power Plant - is a type of power station in which heat energy is
converted to electrical energy.

2. Hydel Power Plant - also known as hydroelectric power plants, harness

the energy of flowing or falling water to generate electricity.

3. Nuclear Power Plant - type of power plant that uses the process of
nuclear fission to generate electricity.

 Non-conventional Sources Energy - also known as renewable or

alternative energy sources, are derived from resources that are naturally
 DIVINE WORD COLLEGE OF LAOAG
School of Business and Accountancy

replenished and have a relatively low environmental impact. (Examples: wind

power, solar power, MHD generation, fuel cell, etc)

2. Power Transmission - involves the movement of electrical energy from power

plants to substations and from substations to distribution networks over long
distances.

The main components of power transmission

 Transmission Lines - these are high-voltage overhead lines or underground

cables used to transport electricity over long distances. They are made of
conductive materials such as aluminum or copper and are supported by
towers or poles.

 Substations - facilities where the voltage of electricity is either stepped up for

transmission or stepped down for distribution. They contain transformers,
circuit breakers, switches, and other equipment to manage and control the
flow of electricity.

 Voltage Regulation - Voltage regulation refers to the process of maintaining

the voltage levels within an acceptable range at various points in the electrical
power system. Voltage regulation is achieved through various methods and
devices, including automatic voltage regulators (AVRs), tap-changing
transformers, voltage control relays, and capacitor banks.

3. Power Distribution - involves delivering electricity from substations to consumers

through local distribution networks.

The main components of power distribution

 Distribution Lines - medium-voltage overhead lines or underground cables

that carry electricity from substations to homes, businesses, and industrial
facilities within a localized area.

 Transformers - Distribution transformers are installed on utility poles or in

ground-level cabinets to step down the voltage of electricity from the
transmission level to levels suitable for consumer use.

 Protection Devices - Circuit breakers, fuses, and other protective devices are
installed along distribution lines to protect against overloads, short circuits,
and other faults, ensuring the safety and reliability of the distribution system.

 Metering and Billing - Electricity usage is measured using meters installed at

consumer premises, allowing utilities to accurately bill customers for the
electricity consumed.
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School of Business and Accountancy

AUDIT CONSIDERATION

 Regulatory Compliance - the power industry operates within a heavily regulated

environment, subject to various regulations related to safety, environmental
protection, energy efficiency, and licensing. Auditors must ensure that power
companies comply with all relevant regulations to avoid fines, penalties, or legal
issues that could impact the financial statements.

 Revenue Recognition: Given the complex nature of revenue streams in the power
industry (e.g., electricity sales, capacity payments, ancillary services), auditors need
to carefully assess the appropriateness of revenue recognition methods applied by
the company in accordance with accounting standards. This involves verifying the
accuracy and completeness of revenue reported, ensuring it is recognized in the
appropriate accounting period, and assessing the adequacy of related disclosures.

 Asset Valuation: Power companies own significant assets such as power plants,
transmission infrastructure, and renewable energy installations. Auditors need to
evaluate the valuation of these assets, including considerations such as depreciation
methods, useful lives, impairment testing, and fair value measurements. This
involves assessing the reasonableness of asset values reported on the balance
sheet and ensuring compliance with accounting standards.

 Contractual Obligations: Power companies often enter into long-term contracts for
the sale of electricity, fuel supply, and infrastructure construction. Auditors must
review these contracts to ensure they are accounted for correctly, including revenue
and expense recognition, and assess the impact of any renegotiations or
modifications on the financial statements.

 Going Concern Considerations: Auditors need to assess the power company's

ability to continue as a going concern, considering factors such as long-term
investments, regulatory changes, technological advancements, and market
conditions. This assessment helps ensure that the financial statements provide
relevant and reliable information to users.

RISK IN POWER DISTRIBUTOR

 Market risk - arises from the volatility of energy prices in the market, which can
affect the company's revenue and profitability. This is an uncontrollable risk.

How to prevent market risk?

Auditors assess the company's risk management strategies and controls to mitigate
market risk, such as hedging strategies, diversification of revenue sources, long-term
contracts, and scenario analysis to evaluate the potential impact of market
fluctuations on financial performance.

 Regulatory risk - arises from changes in regulations and policies governing the
power industry.
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School of Business and Accountancy

How to prevent regulatory risk?

Auditors evaluate the effectiveness of the company's compliance programs,
monitoring systems, and response mechanisms to address regulatory risks.

 Operational risk - Arises from the company's day to day operations, including
maintenance, safety, and reliability issues.

How to prevent operational risk?

Auditors evaluate the effectiveness of preventive and detective controls, incident
response procedures, staff training, and disaster recovery plans to ensure the
company can effectively manage and mitigate operational risks.

 Financial risk - Arises from the company's financial structure, including debt levels,
credit ratings, and interest rates.

How to prevent financial risk?

Auditors evaluate the company's financial risk management strategies, debt
covenants, cash flow projections, and capital adequacy to ensure the company can
effectively manage and mitigate financial risks.

SOURCE OF REVENUE

 Sale of Electricity
 Sale of other services

SOURCE OF EXPENSES

 Fuel Costs
 Operations and Maintenance Costs
 Depreciation and Amortization
 Purchased Power Costs
 Regulatory Compliance Costs
 Administrative and Overhead Expenses
 Taxes and Government Levies

FINANCIAL STATEMENT
 file:///C:/Users/SAM%20NICOLAS/Downloads/MERALCO-FS.pdf
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School of Business and Accountancy

TELECOMMUNICATION INDUSTRY

OVERVIEW OF TELECOMMUNICATION INDUSTRY

Telecommunication is the transmission of information over significant distances to

communicate. The telecommunications industry can be classified into the equipment sector
and the services sector.

o Equipment sector comprises companies that manufacture products that are used by
both customers and other companies in the same sector. Equipment sector includes
satellite and broadcast network equipment, wireless equipment, as well as computer
networking equipment.
o Service sector comprises wired, wireless services and internet and other broadband
services.

This industry was deregulated in 1995 when President Fidel Ramos signed Republic Act
7925 (The Public Telecommunications Policy Act of the Philippines). This law opened the
sector to more private players and improved the provision of telecom services are better and
fairer rates. The industry was deregulated in 1995, leading to the creation of many
telecommunication service providers for mobile, fixed-line, Internet and other services.

Republic Act No. 7925, An act to promote and govern the development of Philippine
telecommunications and the delivery of public telecommunications services.

Deregulation of the Telecommunications Industry

In 1995, Former President Fidel V. Ramos deregulated the telecommunications
industry, signing the Republic Act 7925 or the Public Telecommunications Policy Act
of the Philippines.

RA 7925 aims to promote and govern the development of Philippine

telecommunications and ensure the efficient delivery of public telecommunications
services. It applies to all public telecommunications entities operating within the
Philippines.

How Does a Telecom Audit Work?

 A telecommunications audit begins by collecting all telecom bills, contracts,
and service agreements. Expert auditors then analyze this data, looking for
billing errors, unused services, or areas where better rates can be negotiated
with telecom service providers.

 Recommendations are made based on findings, including renegotiating

contracts, eliminating redundant services, or transitioning to more cost-
effective solutions.
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School of Business and Accountancy

PROCESS AND OPERATIONS

 Signal Generation: Information is generated, such as voice, data, or video.

 Encoding: The information is encoded into a format suitable for transmission,
often in digital form.
 Transmission: The encoded information is transmitted over a medium, such as
cables, fiber-optic lines, or wireless signals.
 Reception: The transmitted signal is received by the intended recipient.
 Decoding: The received signal is decoded back into its original format.
 Processing: The decoded information may undergo further processing, such as
amplification or filtering.
 Delivery: The processed information is delivered to the end user, whether it's a
phone call, internet data, or television broadcast.
 Feedback: In some cases, feedback or acknowledgment signals may be sent
back to the sender to confirm successful transmission.

AUDIT CONSIDERATION

 Regulatory Compliance
Verify compliance with telecommunications regulations and licensing requirements.
Ensure adherence to data protection and privacy laws, especially regarding customer
information.

 Revenue Recognition
Examine revenue recognition practices, ensuring they align with industry standards
(e.g., IFRS 15 or ASC 606). Review billing systems to confirm accurate invoicing and
revenue reporting.

 Network Infrastructure and Technology

Telecommunications companies invest heavily in network infrastructure and
technology to support their operations.

RISK IN TELECOMMUNICATION INDUSTRY

 Customer Billing and Collection Risks

Telecommunications companies rely on accurate billing and collection processes to
generate revenue. Auditors should assess the risk of billing errors, such as incorrect
tariff rates, billing for unauthorized services, or failure to bill customers accurately and
timely. They should also evaluate the risk of uncollectible accounts receivable and
assess the adequacy of the company's allowance for doubtful accounts.

How to prevent Customer Billing and Collection Risks?

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School of Business and Accountancy

Auditors assess the effectiveness of internal controls related to customer billing and
collection processes. They evaluate the design and implementation of controls such
as segregation of duties, authorization procedures, and access controls to prevent
unauthorized or fraudulent activities. By identifying weaknesses in internal controls,
auditors help management strengthen controls to mitigate risks associated with
inaccurate billing or unauthorized collection.

 Cybersecurity and Data Privacy

Telecommunications companies are increasingly susceptible to cybersecurity threats
and data breaches due to the vast amounts of sensitive customer information they
handle. Auditors need to evaluate the effectiveness of cybersecurity controls, data
privacy compliance, and risk management processes to safeguard sensitive
customer information. This involves assessing the company's cybersecurity policies
and procedures and ensuring that appropriate controls are in place to protect against
cybersecurity risks.

How to prevent Cybersecurity and Data Privacy?

Auditors evaluate the adequacy of cybersecurity policies and procedures
implemented by organizations to safeguard sensitive data. They assess the design
and implementation of controls such as access management, data encryption,
network security, and incident response plans to prevent unauthorized access to
systems and protect data from cyber threats. By identifying gaps in cybersecurity
policies and procedures, auditors help organizations strengthen their defenses
against potential security breaches and data breaches.

 Competition and Market Risks

The telecommunications industry is highly competitive, with rapid technological
advancements and changing consumer preferences. Auditors should assess the risk
of market competition, including pricing pressures, market share erosion, and the risk
of losing key customers to competitors. They should also evaluate the company's
strategies for product innovation, market expansion, and customer retention.

How to prevent Competition and Market Risks?

Auditors scrutinize financial statements and disclosures to ensure accuracy and
transparency in reporting. By meticulously reviewing financial data, including
revenues, expenses, and profitability metrics, auditors verify that companies present
a true and fair view of their financial performance. This verification process helps
prevent market risks stemming from misleading financial information, such as inflated
revenues or understated expenses, which could distort market perceptions and
mislead investors.

 Capital Expenditure and Investment Risks

Telecommunications companies often make significant investments in network
infrastructure, spectrum licenses, and technology upgrades. Auditors should assess
the risk of overvaluation, impairment, or inadequate disclosure of these investments
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School of Business and Accountancy

in the financial statements. They should also evaluate the company's capital
expenditure policies, investment decisions, and risk management practices related to
capital projects.

How to prevent Capital Expenditure and Investment Risks?

Auditors assess the rationale and justification behind capital expenditure decisions to
ensure they align with the organization's strategic objectives and provide long-term
value. They review investment proposals, capital budgeting processes, and project
evaluations to evaluate the economic viability, potential returns, and risk factors
associated with capital projects. By scrutinizing investment decisions, auditors help
mitigate risks related to overinvestment, underperformance, or misallocation of
capital resources, thereby safeguarding the organization's financial sustainability.

SOURCE OF REVENUE

 Service revenues

Mobile Communication Services

o Voice Calls
o Text Messaging (SMS)

Mobile Data Services

o Internet Data Plans
o Data Add-ons

Fixed-Line Services
o Landline Service
o Broadband Internet

 Non-Service revenues
o Handset Sales
o Roaming Charges
o Interconnection Fees
o Equipment Leasing or Rental

SOURCE OF EXPENSES
 General, selling, and administrative expenses
 Depreciation and amortization
 Cost of inventories sold.
 Interconnect costs.
 Financing costs
 Impairment and other losses

FINANCIAL STATEMENT
 file:///C:/Users/USER/Downloads/GLOBE-FS.pdf
 DIVINE WORD COLLEGE OF LAOAG
School of Business and Accountancy