MEMORANDUM

TO

SUBJECT

I. RATIONALE

1\.epubltr of toe ilbtlippines COMMISSION ON AUDIT

Commonwealth A venue, Quezon City

Assistant Commissioners, Cluster Directors, Regional Directors, Supervising Auditors, Audit Team Leaders and all Others Concerned

Guidelines on the preparation, consolidation and transmittal of annual/year­end audit reports, including audit reports on the Unified/Integrated Audit Approach of Programs, Projects, and Activities (PPAs) jointly/commonly implemented by various agencies and audited by regular audit teams.

In the pursuit of continuing effort for greater effectiveness and efficiency in performing its audit functions, the Commission adopted the Unified/Integrated Audit Strategy and is consistently adopting best practices and international standards, particularly the reporting requirements of International Standards of Supreme Audit Institutions (ISSAI), in order to deliver more relevant, cohesive, clear, complete, and timely reports that meet the needs and expectations of as wide a number of stakeholders as possible.

In light thereof, and after a thorough review and evaluation of the current practices and procedures in the preparation, consolidation, submission and transmittal of audit reports, the Commission has found it necessary and appropriate to rationalize the audit report preparation process and update existing issuances to attain integrated actions for more efficient and effective delivery of audit service.

II. COVERAGE

This Memorandum shall cover the preparation, consolidation, submission and transmittal of annual/year-end audit reports on the result of financial, compliance and performance audits of all national, local and corporate agencies starting CY 2014, including audit reports on the Unified/Integrated Audit Approach of Programs, Projects, and Activities jointly/commonly implemented by various agencies and audited by regular audit teams.

The Audit Reports of Special/Fraud Audit Teams shall be excluded from the coverage of this memorandum.

Ill. DEFINITION OF TERMS

For the purpose of this Memorandum, the following terms shall mean as follows:

A. AGENCY-

1. For the national government- As a general rule, "Agency" is an agency which is listed as such in the General Appropriations Act. The Agency may be a department, bureau, council, state university or college. The regional, branch and field offices are component

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units of the national government. In the case of the Department of Education, its nationalized high schools are component units of the Agency.

2. For government corporations - "Agency" refers to government-owned or controlled corporations (GOCCs), government financial institutions (GFis), and government instrumentalities with corporate powers (GICPs)/government corporate entities (GCEs), including their subsidiaries, and water districts. The regional, branch and field offices are component units of the corporation.

3. For the local government- "Agency" pertains to the political subdivisions established under the Constitution of the Philippines such as provinces, cities, municipalities and barangays; the economic enterprises financed and maintained by the province/city/municipality; and leagues/federations of local government units and local elective officials.

B. Unified/Integrated Audit Report (UAR) - an audit report prepared at year-end or upon completion of PPAs which are jointly/commonly implemented by various agencies and audited by regular audit teams in accordance with the guidelines prescribed in COA Memorandum No. 2014-008 dated August 18, 2014. -:.

C. Annual Audit Report (AAR) - a report prepared at year-end on the results of audit on the accounts and operations of an Agency.

1. For a national government agency with regional offices and field/operating units, the AAR shall be the consolidated report on the results of audit of the head office, and the regional/division/district/field offices of such agency.

2. For a government corporation with regional branches and/or field offices, the AAR shall be the consolidated report on the results of audit of the head office and regional/branch/field offices, and subsidiaries, if needed/required, of such agency.

3. For a local government unit, the AAR shall be the report on the results of audit of a province, city, municipality and barangay. The frequency of Audit Reports of Barangays shall be in accordance with COA Memorandum No. 99-089 dated December 14, 1999 on Three-Year Period Cyclical Audit of Barangays and Uniform Simplified Format of Reporting.

4. For the national or corporate agency without regional offices and/or field/operating units (stand-alone agency), the AAR shall be the report on the results of audit of such agency.

D. Management Letter (ML) - an audit report on the results of audit of the regional/branch office, field/operating unit, staff bureau and line office with complete set of books of accounts; or an audit report on agencies with complete set of books of accounts but no financial statements submitted as of the deadline set by COA; and league/federation of local government units and local elective officials.

E. Summary of Audit Observations and Recommendations (SAOR) - a report/matrix that summarizes the audit observations, recommendations, management comments and auditor's rejoinder; a year-end audit report on the audit of a regional/field office agency with incomplete set of books of accounts and national high schools with complete set of books of accounts; and for auditees with results of audit to be consolidated at

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regional/accounting center/area/head office, the SAOR shall be the basis/ input for the consolidation of ML/AAR/UAR.

F. Year-End Audit Report- may be an AAR, ML, SAOR, UAR

G. Audit Observation Memorandum (AOM) - a written notification to the auditee head and concerned officer/s informing of deficiencies noted in the audit of accounts, operations or transactiqns and requiring comments thereto and/or submission of documentary and other information requirements within a reasonable period.

H. Transmittal Letter - a communication transmitting the UAR/ AAR/SAOR which shall include the type of opinion rendered on the financial statements (for AAR), a summary of the most significant audit observations and recommendations, an acknowledgment of the assistance and support extended by the officials and staff of the Agency to the audit team, and request for implementation of the recommendations and information on the actions taken within 60 days from receipt of the Report. An Agency Action Plan and Status of Implementation (AAPSI) form prescribed under COA Memo No. 2014-002 dated March 18, 2014 shall be attached to the Transmittal Letter of the SAOR for the requested action to be taken by Management.

I. Independent Auditor's Report (IAR)- is a report of the auditor on the results of the audit of the financial statements, which includes the modified or unmodified opinion on the fairness of presentation of the financial statements. Unmodified opinion is rendered when the auditor has obtained sufficient appropriate evidence to conclude that the financial statements are presented, in all material respects, in accordance with the applicable financial reporting framework. Modified opinion is rendered when the auditor concludes, based on the audit evidence obtained, that the financial statements, in part or as a whole, are not free from material misstatement or when the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements, in part or as a whole, are free from material misstatement (ISSAI1700, paragraphs 16 and 17).

J. Statement of Management's Responsibility for the Financial Statements - is a written statement signed by the Chief Accountant and the Head of the Agency or his duly authorized representative for the purpose, stating that the preparation of the financial statements is management's responsibility.

IV. GENERAL GUIDELINES-

A. One AAR shall be prepared for:

1. a department or head office and its branches or component units of: a. national government agencies listed and provided with separate appropriation in

the GAA; and b. GOCCs;

2. each Local Government Unit (LGU);

3. each agency with separate appropriation presented in the GAA (stand-alone national government agency); and

4. each water district and other corporate stand-alone agencies.

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B. Management Letter (ML) shall be prepared for:

1. Regional/branch office and field/operating unit, staff bureau and line office with complete set of books of accounts;

2. League/federation of local government units and local elective officials; and

3. Agencies with complete set of books of accounts but no financial statements submitted as of the deadline set by COA.

C. A Summary of Audit Observations and Recommendations (SAOR) duly supported by individual AOMs issued with management replies and auditor's rejoinder shall be prepared before the conduct of exit conference and shall be updated after the exit conference.

D. An exit conference shall be conducted before transmittal of year-end audit reports.

E. All annual year-end audit reports shall be transmitted to the heads of agency/auditee not later than the deadline set by the Commission.

F. Independent Auditor's Report (IAR) shall cover the financial statements presented for the year(s) covered by the audit.

G. Topic sentence for audit observations shall briefly state only the major/significant audit issues.

V. SPECIFIC GUIDELINES

A. Audit Instructions

The procedures/requirements under Part IV (Specific Guidelines) of COA Memorandum No. 2014-008 dated August 18, 2014 shall be followed.

B. Preparation of the Audit Observation Memorandum (AOM)

1. The Audit Team Leader (ATL) and Supervising Auditor/Regional Supervising Auditor (SA/RSA) shall jointly sign the AOMs to be issued to the head of the agency/auditee and/or concerned officers for deficiencies observed in the course of the audit. The AOM allows the agency officials/personnel to present their side of the audit observation, to which the auditor shall also issue a reply.

2. At the end of the audit period, these AOMs, management replies/comments and auditor's rejoinder/reply are consolidated by the ATL into a SAOR for discussion during the exit conference with agency officials.

C. Preparation of SAOR

1. The SAOR shall be presented in matrix form with the following columns:

a. Reference (AOM No.); b. Observations; c. Recommendations; d. Management comments; and

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e. Auditor's rejoinder.

2. The SAOR shall be accompanied by a Status of Implementation of Prior Year's Audit Recommendations in matrix form adopting the format prescribed under COA Memorandum No. 2014-002 dated March 18, 2014.

3. The RSA shall transmit the updated/final SAOR to the head of auditee for auditees without complete set of books and national high schools with complete set of books. It shall be covered with a Transmittal Letter.

4. For agencies with regional office/area/accounting centers, the RSA/ATL thereof shall consolidate the SAORs of field offices with the audit observations of the Regional Office/area/accounting center and prepare the Consolidated SAOR for discussion during the exit conference, and the ML/updated Consolidated SAOR (for auditee with incomplete books of accounts) for issuance by the RSA to the head of the regional office/auditee and submission to the head office SA or RSA of the accounting center/area where the transactions of the auditee are booked, for consolidation, copy furnished the Director concerned.

5. In case there is no regional ATL, the SAOR/Consolidated SAOR shall be directly submitted by the RSA to the head office SA or RSA of the accounting center/area where the transactions of the auditee are booked, for consolidation, copy furnished the Director concerned.

D. Conduct of Exit Conference

1. A written notification to auditee head for the conduct of exit conference should be made by the SA/RSA at least one week before the schedule of the exit conference, copy furnished the Director concerned.

2. The notification for the conduct of Exit Conference shall be supported with a SAOR.

3. Proceedings of the Exit Conference should be properly documented, reviewed by the ATL and approved by the SA/RSA.

4. The auditee head shall be furnished a copy of the minutes of the Exit Conference within one week from the date of the Exit Conference, with the advice that unless a correction is received from management within three days from receipt thereof, minutes will be deemed well-taken by the audit team.

5. The minutes of the Exit Conference shall form part of the work papers of the audit.

E. Preparation of ML

1. The ML shall contain the following:

a. Date; b. Addressee; c. Authority, objective and scope of audit; d. Audit observations and recommendations including management comments and

audit teams' rejoinder;

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e. Status of implementation of prior years' unimplemented audit recommendations; f. Acknowledgement; g. Signatory; and h. Appendices

1) Financial Statements, if any; and 2) Schedules to support the audit observations, if any/necessary

2. M Ls shall also be prepared for agencies that submitted their financial statements 30 days or more after due date set by COA. Such non-submis~ion/delayed submission of financial statements shall be presented as the first audit observation. This non­submission/delayed submission shall be handled as follows:

a. The delayed or non-submission of financial statements shall be reported by the RSA/SA to the Cluster/Regional Director, who shall communicate to the Regional Director of concerned oversight agencies like the Department of the Interior and Local Government, Department of Budget and Management and the Governance Commission for GOCCs. In the case of delayed or non-submission of financial statements of departments/head offices of national government agencies/corporations, this shall be communicated to the agency head by the Assistant Commissioner concerned.

b. Upon submission· of the delayed financial statements, the ATL shall verify the account balances, presentation and disclosures in the said statements, and completeness of the submission of the documents supporting the same. An AAR shall then be prepared with the findings and recommendations and the status of implementation of prior years' unimplemented audit recommendations, as

updated.

c. In case of GOCCs, the audit group shall submit to the Planning, Finance and Management Sector, this Commission, assessment of additional audit fees that shall be charged to the auditee for the extra cost of services and incidental expenses incurred by the Audit Team for updating the report.

F. Preparation of AAR

1. For NGS and CGS, RSAs shall submit to the head office SA copies of the MLs and SAORs, supported with copies of AOMs issued, management replies/comments and auditor's rejoinder/reply. The head office SA shall review the Mls and SAORs for validity and significance and consolidate similar findings, disclosing the amounts of deficiencies involved for inclusion/consolidation in the AAR to be prepared for the department/head office, if warranted. The number of areas/branches (regional/field/operating units) which have the same findings shall also be disclosed in the discussion.

2. Inclusion/exclusion of audit observations in the AAR depends on the commonality of the observation with the others and in case of peculiar ones, on the significance of the observation such as, it is of public interest and impacts on the audit opinion and/or budget, among others.

3. The format and contents of the AAR shall be structured into the following sections and shall have the following contents:

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a. Executive Summary

Summarizes the significant results of audit for immediate attention and action of the Head of the Agency, in as much as possible not more than five pages, which shall contain the following:

1) Introduction which contains the name of the auditee, audit methodology and scope of audit

2) Financial Highlights a) Comparative presentation for the current and previous year's total assets,

liabilities, equity, income and expenses; and

b) Comparative presentation of the appropriation/allotment/obligation for national and local agencies, budget and actual expenditures for GOCCs, for the current and previous years, including funds received from and transferred to other agencies and non-government and people's organizations.

3) Opinion of the auditor on the fairness of presentation of the financial statements. If modified, state briefly the bases for the opinion.

4) Summary of Significant Observations and Recommendations other than the bases for the modified opinion that need immediate attention and action by the Head of the Agency. The observation shall, at most, contain only the condition and the cause.

5) Summary of total suspensions, disallowances and charges as of year-end.

6) Statement on the quantity/number of recommendations implemented, partially implemented and not implemented in the current year for the unimplemented prior years audit recommendations.

b. Independent Auditor's Report

1) The SA shall render an opinion on the current year's consolidated financial statements presented in accordance with the comparative information requirements of the applicable financial reporting framework (PAS 1, paragraph 36, 38, 38A, 38B; PPSAS 1, paragraph 53 and Implementation Guidance, Illustrative Financial Statement Structure). For agencies being audited on cyclical basis, the ATL shall render an opinion on the current and all previous years' financial statements covered in the cyclical period (1-3 years) currently audited, presented comparatively with the financial statements of the preceding cyclical audit period (1-3 years), except national high schools and other national government agencies on whose financial statements audit opinions are not required to be rendered.

2) The IAR shall contain the following:

a) Title which is the "Independent Auditor's Report"

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b) Addressee- which is the Head of the Agency in case of National and Local government agencies and Head of Agency and Board of Directors/Board of Trustees in case of GOCCs and sues

c) Introductory Paragraph which shall : * Identify the entity whose financial statements have been audited; * State that the financial statements have been audited; * Identify the title of each statement that comprises the financial

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statements; Refer to the summary of significant accounting policies and other explanatory information; and Specify the date or period covered by each financial statement comprising the financial statements subject to the nature of the comparative information presented as required by the applicable financial reporting framework (ISSAI1710, paragraph 10)

d) Management's Responsibility for the Financial Statements which describes the responsibilities of those in the organization that are responsible for the preparation ofthe financial statements

e) Auditor's Responsibility which states that the responsibility of the auditor is to express an opinion on the financial statements based on the audit.

f) Basis for Modified Opinion (specify whether qualified, adverse, and disclaimer) for the current year's financial statements subject to the nature of the comparative information presented as required by the applicable financial reporting framework (ISSAI1710, paragraph 10). In case of cyclical audit, the previous years' financial statements refer to the two or three­year period covered by the previous audit.

g) Auditor's Opinion which could be unmodified or modified (qualified, adverse, and disclaimer)

h) Emphasis of matter or other matters as may be warranted under the circumstances

i) Signature of the Auditor

j) Date of the Auditor's Report which shall not be earlier than the date on which the auditor has obtained sufficient appropriate evidence on which to base the auditor's opinion on the financial statements.

3) If the auditor addresses other reporting responsibilities in the auditor's report on the financial statements that are in addition to the auditor's responsibility under the ISAs to report on the financial statements, these other reporting responsibilities shall be addressed in a separate section in the auditor's report that shall be sub-titled "Report on Other Legal and Regulatory Requirements," or otherwise as appropriate to the content of the section (ISSAI 1700, paragraph 38, A34-A35).

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4) If the auditors report contains a separate section on other reporting responsibilities, the headings, statements and explanations before the Auditor's signature shall be under the sub-title "Report on the Financial Statements." The "Report on Other Legal and Regulatory Requirements" shall follow the "Report on the Financial Statements" (ISSAI 1700, paragraphs 39 and A36.)

c. Audited Financial Statements with comparative information for the current year and previous year.

The financial statements prepared in accordance with the applicable financial reporting framework, to be attached to the audit report shall include the following:

• For local Government Units, National Government Agencies, and Corporate Government Agencies considered non-Government Business Enterprises as may be determined by the Assistant Commissioner concerned and approved by the Commission Proper:

In accordance with Philippine Public Sector Accounting Standard (PPSAS) No. 1, paragraph 21:

1) A Statement of Financial Position; 2) A Statement of Financial Performance; 3) A Statement of Changes in Net Assets/Equity 4) A Cash Flow Statement; 5) When the entity makes publicly available its approved budget, a comparison of

budget and actual amounts either as a separate additional financial statement or as a budget column in the financial statements; and

6) Notes comprising a summary of significant accounting policies and other explanatory notes.

• For Government Business Enterprises (corporate government agencies as may be determined by the Assistant Commissioner concerned and approved by the Commission Proper):

In accordance with Philippine Accounting Standard (PAS) No. 1, paragraph 10:

1) a statement of financial position as at the end of the period; 2) a statement of profit or loss and other comprehensive income for the period; 3) a statement of changes in equity for the period; 4) statement of cash flows for the period; 5) notes, comprising a summary of significant accounting policies and other

explanatory information; a) comparative information in respect of the preceding period as specified in

PAS 1, paragraphs 38 and 38A; and 6) a statement of financial position as at the beginning of the preceding period

when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs 40A-40D. (PAS 1, paragraph 10)

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d. Audit Observations and Recommendations

1) This portion consists of the observations and recommendations of the auditor as well as the summary of the agency's explanation or reply to the observations, with the auditor's rejoinder, as necessary. The observations should include only residual issues not addressed after (a) issuance of the AOM and (b) conduct of the exit conference.

2) Audit Observations shall adhere to facts and applicable rules in a direct manner using simple short sentences. It should not be subjective, judgmental, conclusive and wordy.

3) The audit observations and recommendations shall include the following:

a) caption/topic sentence containing the gist of the main issue duly quantified, if warranted.

b) details of audit observation benchmark or measure against which performance is compared or evaluated, such as laws, rules and regulations and best practice; the situation observed; the source and reasons giving rise to the condition observed; and the impact and consequences of the conditions (the materiality of the findings, their impact on the budget, citizens or users, implications for principles of sound public sector management, etc.). As much as possible, quote only pertinent portions of provisions of laws, rules and regulations as well as management comments or summarizes, without changing substance, if quoting the same would make the report very long.

c) Notice of suspension, notice of disallowance or notice of charge issued pertinent to the observation

4) The audit recommendations shall provide constructive and remedial measures to correct or address the audit observations, clearly setting out what needs to be done by whom and when.

5) This part of the report shall also include, but not limited to, non-compliance with tax laws; results of audit on gender and development; PDAF, DAP and other funds; and status of ND, NS, NC; as well as comments pertaining to senior citizens and differently-a bled persons, if warranted.

6) The audit observations and recommendations shall be presented in the order of significance with priority to the reasons for modification of opinion in the financial statements.

e. Status of Implementation of Prior Years' Unimplemented Audit Recommendations

The status of implementation of prior years' unimplemented audit recommendations shall contain information on whether or not unimplemented audit recommendations have been implemented by the agency during the year. Unimplemented audit recommendations which have not been or partially implemented by management during the year may be reiterated and presented with

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updates in the current year's Audit Observations and Recommendations portion of the AAR depending on their importance, pervasiveness and significance of amount/effect on the opinion on the financial statements.

f. Appendices which shall pertain to significant findings, if necessary.

G. Preparation of Unified/Integrated Audit Report

The matrix of consolidated findings/recommendations/comments and rejoinder as prescribed in part V.3d of COA Memorandum No. 2018-008 dated August 18, 2014 shall be the basis of the Head Office SA to prepare the UAR.

The format and contents of the UAR shall be structured into the following sections and shall have the following contents:

a. Part 1- Executive Summary States in brief the audit objective, scope and methodology and summarizes the significant results of audit for immediate attention and action of the lead and co­implementing agencies of the Program/Project/Activity (PPA) examined and evaluated.

b. Part II- Discussion of the PPA

• Introduction which contains, among others, the Program/project name, objectives and goal, and the name of the lead implementing agency and co­implementing agencies and their responsibilities

• Financial Highlights which include amount of Fund and Source(s), Utilization and Balance

• Targets and Accomplishments

c. Part Ill- Audit Observations and Recommendations (As prescribed in Part F.3.d(3) hereof)

H. Transmittal Letter of the Report

The Transmittal Letter shall consist of not more than three pages. It shall be transmitted to the Head of the Agency/Auditee in case of National and Local agencies and Head of Agency/Auditee and Board of Directors/Board of Trustees in case of GOCCs, and shall contain the following:

1. Authority for the audit; 2. Coverage ofthe audit; 3. Audit opinion (for AAR); 4. A concise paragraph summarizing the most significant findings and observations and

information that the details and the other findings and observations are discussed in the Observations and Recommendations portion of the report;

5. Acknowledgement to Management; and 6. Request for implementation of the audit recommendations and action plan for their

implementation.

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1. Review and Transmittal of the AAR/UAR

1. Review and transmittal of the AAR/UAR shall be in accordance with the Matrix of Supervision for Unified/Integrated Audit Approach under Part V Item 1 of the COA Memorandum No. 2014-008 dated August 18, 2014.

2. The final audit report shall be transmitted to the following:

Local Government Units Local Chief Executive and Sangguniang Panlalawigan/Panlungsod/Bayan

Head of Agency (for component units of LGUs) National Government

Head of Agency and Board of Regents/Trustees Agencies Government-Owned or Board of Directors/Trustees and Head of Agency Controlled Corporations

3. The following shall also be furnished with a copy of the AAR/UAR:

3.1 For National Agencies and Government-Owned or Controlled Corporations (GOCCs)

a. President of the Republic ofthe Philippines b. Vice-President c. President of the Senate d. Speaker of the House of Representatives e. Chairperson-Senate Finance Committee f. Chairperson-Appropriations Committee g. Secretary of the Department of the Budget and Management h. Governance Commission for Government-Owned or Controlled Corporations i. Presidential Management Staff, Office of the President j. National Library (soft copy) k. University of the Philippines (UP) Law Center (soft copy) I. COA Commission Central Library (soft copy)

3.2 For Local Government Units (LGUs)

a. Sangguniang Panlalawigan/Panglungsod/Bayan b. Local Chief Executive (for AARs on Barangays including component units of LGUs) c. Bureau of Local Government Finance (BLGF) d. Secretary of Department of the Interior and Local Government (except AARs for

barangays) e. National Library (soft copy) f. University of the Philippines (UP) Law Center (soft copy) g. COA Commission Central Library (soft copy)

J. Action Plan for the Implementation of Audit Recommendations

1. To ensure implementation of audit recommendations in the AAR/UAR, an Action Plan shall be requested from the auditee in the accordance with COA Memorandum No. 2014-002 dated March 18, 2014, to be accomplished by the concerned personnel ofthe auditee and submitted to the audit team for monitoring and validation purposes.

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2. The Action Plan Monitoring Tool shall be used by the audit team to monitor implementation of audit recommendations and the same shall form part of the working papers of the subsequent year's audit and submitted to the Cluster/Regional Director concerned.

K. EFFECTIVITY This Memorandum shall begin to take effect for audit reports of 2014.

L. REPEALING CLAUSE All issuances of the Commission which are inconsistent herewith are hereby repealed or amended accordingly.

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