Audit
Learn what an audit is, its types, how a BIR audit works, and how to prepare your small business.
Published Monday 17 August 2026
Table of contents
Key takeaways
- An audit is an independent examination of your financial records to confirm they're accurate and fairly presented. In the Philippines, financial-statement audits follow the Philippine Standards on Auditing (PSA) and must be performed by a Certified Public Accountant (CPA).
- The Bureau of Internal Revenue (BIR) can audit your business through a Letter of Authority. The ordinary assessment period is three years from the filing deadline, or 10 years if a fraudulent return was filed or no return was filed at all.
- Taxpayers whose gross quarterly sales, earnings, receipts, or output exceed ₱3 million must have their books audited yearly by an independent CPA. Corporations with total assets or total liabilities exceeding ₱3 million must file audited financial statements with the SEC.
- To prepare for an audit, keep thorough records, reconcile accounts regularly, and retain your books of accounts for five years from the day after the filing deadline, as required by the EOPT Act (Republic Act No. 11976).
What is an audit?
An audit is an independent examination of a business's financial records or statements to give an opinion on whether they're accurate and fairly presented. The goal is to provide assurance to stakeholders that the numbers reflect the true financial position of the business.
In the Philippines, this includes financial-statement audits performed by CPAs and tax audits conducted by the Bureau of Internal Revenue (BIR). Both types of audits help confirm that your financial statements and tax filings are reliable and compliant with local regulations.
Types of audits
Small businesses in the Philippines may encounter different types of audits depending on their size, industry, and regulatory requirements.
- External (financial-statement) audit: an independent CPA examines your financial statements and issues an opinion on whether they're fairly presented
- Internal audit: a review conducted by your own staff or an internal team to evaluate internal controls and operational efficiency
- Tax audit (BIR): the Bureau of Internal Revenue examines your tax returns and supporting records to verify compliance with the National Internal Revenue Code
- Compliance audit: an assessment of whether your business follows specific laws, regulations, or contractual obligations
What is the purpose of an audit?
An audit builds confidence for lenders, investors, and regulators by providing independent verification that your financial records are accurate. This assurance supports better business decisions, helps you meet compliance requirements, and can improve your access to financing.
Auditors focus on materiality, which means they concentrate on misstatements large enough to affect the decisions of someone relying on your financial statements. An audit provides reasonable, not absolute, assurance. This means auditors can offer a high level of confidence that the statements are free of material misstatement, but they cannot guarantee every error will be found.
Auditing standards in the Philippines
Financial-statement audits in the Philippines follow the Philippine Standards on Auditing (PSA). These standards are based on the International Standards on Auditing (ISA) and are adopted by the Auditing and Assurance Standards Council (AASC). Audits must be performed by a Certified Public Accountant (CPA) regulated under Republic Act No. 9298, the Philippine Accountancy Act of 2004, by the Board of Accountancy and the Professional Regulation Commission.
Two separate thresholds determine who must be audited, based on different measures. Under the National Internal Revenue Code (NIRC) Section 232, as amended by the TRAIN law, taxpayers whose gross quarterly sales, earnings, receipts, or output exceed ₱3 million must have their books audited yearly by an independent CPA. Under SEC Memorandum Circular No. 4, Series of 2026 (effective for fiscal years ending 31 December 2025 onward), corporations with total assets or total liabilities exceeding ₱3 million must file audited financial statements.
The audit process
Whether you're preparing for a CPA financial-statement audit or a BIR examination, the process generally follows a similar structure.
- Planning and notification: the auditor or BIR issues formal notification, defines the scope and period to be reviewed, and requests initial information.
- Gathering records: you compile the necessary documents, including journals, ledgers, invoices, bank statements, and tax returns. Keeping accurate records of your accounting transactions throughout the year makes this step much easier.
- Fieldwork and testing: auditors review your records, test transactions for accuracy, and assess internal controls.
- Reporting: the auditor issues a report summarising findings and, for financial-statement audits, provides an opinion on your statements.
The audit opinion and possible outcomes
After completing a financial-statement audit, the CPA issues an opinion under the Philippine Standards on Auditing. There are four possible outcomes.
- Unqualified (clean) opinion: the financial statements are fairly presented in all material respects. This is the best outcome, though it does not mean the statements are entirely error-free.
- Qualified opinion: the statements are fairly presented except for a specific issue identified by the auditor.
- Adverse opinion: the financial statements contain material misstatements and are not fairly presented.
- Disclaimer of opinion: the auditor was unable to obtain sufficient evidence to form an opinion.
What triggers a BIR audit?
A BIR tax audit is formally started by a Letter of Authority (LOA). The LOA names the revenue officers authorised to conduct the audit and specifies the tax period and taxes covered. An assessment issued without a valid LOA has no legal force. A Letter Notice is not the same as an LOA and does not authorise an audit.
Common triggers for a BIR audit include discrepancies between your tax returns and third-party data (such as supplier reports), unusually large deductions relative to income, and unreported income detected through cross-referencing.
How far back can the BIR audit?
The BIR's ability to assess additional taxes is limited by statute.
- Three years ordinarily, counted from the return-filing deadline (NIRC Section 203)
- 10 years from discovery if a false or fraudulent return was filed with intent to evade tax, or if no return was filed at all (NIRC Section 222)
What an audit does not do
Audits have limitations. Auditors use sampling techniques rather than reviewing every single transaction, which means some errors may go undetected. An audit provides reasonable, not absolute, assurance and does not guarantee that all fraud or every error will be found. Audits are designed to detect material misstatements, not to uncover every small discrepancy.
How to prepare for an audit
Good preparation reduces stress and helps the audit go smoothly. Here are steps you can take throughout the year.
- Keep thorough records: maintain organised documentation for all income, expenses, and assets. Strong bookkeeping practices make audits far less disruptive.
- Reconcile accounts regularly: perform bank reconciliation monthly to catch discrepancies early.
- Separate business and personal finances: use dedicated business accounts to keep records clear and easier to audit.
- Document deductions: keep receipts and supporting documents for all claimed deductions.
- Review returns before filing: double-check your tax returns to avoid errors that could trigger a BIR audit.
- Hire an accredited CPA: work with a qualified professional for financial-statement audits and tax compliance. You can find an accredited accountant through the Xero Advisor Directory.
- Retain books of accounts for five years: under the EOPT Act (Republic Act No. 11976) and Revenue Regulations No. 7-2024, you must keep your books of accounts for five years from the day after the filing deadline. Keep records longer if a BIR protest or claim remains open.
Stay audit-ready with Xero
Keeping accurate, accessible records is your best defence when an audit comes. Xero helps you stay organised with automated bank feeds, one-click reconciliation, digital receipt capture, and real-time financial reports. With your data in one place and always up to date, you can respond to auditors quickly and confidently.
See how Xero can simplify your finances and get one month free.
FAQs on audits
Here are answers to common questions about audits in the Philippines.
What is the purpose of an audit?
An audit provides independent assurance that your financial statements or tax returns are accurate and comply with applicable standards. This builds trust with lenders, investors, and regulators.
What are the main types of audits?
The main types are external (financial-statement) audits, internal audits, BIR tax audits, and compliance audits. Each serves a different purpose and may be required based on your business size or industry.
Does an audit detect fraud?
Audits are designed to detect material misstatements, including those caused by fraud. However, because auditors use sampling and provide reasonable (not absolute) assurance, some fraud may go undetected.
How far back can the BIR audit?
The BIR can ordinarily assess additional taxes within three years of the filing deadline. If a fraudulent return was filed or no return was filed, the period extends to 10 years from discovery.
How much does an audit cost a small business?
Audit fees are quoted in pesos and vary by firm, business size, and complexity. Request a quote from an accredited CPA to get an accurate estimate for your situation.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.