AUDI21A - Process employed to establish the reliability

or unreliability of the FS and supporting

ADITING AND ASSURANCE PRINCIPLES
documents
CHAPTER 1 - Important factor in the dissemination of

THE DEMAND FOR AUDITING AND financial information

ASSURANCE SERVICES - Services of the independent CPA –

Indispensable
Economic Demand for Auditing
- Requires the highest level of technical
- Audits are long in demand long before competence, freedom from bias, and
Securities Laws and the BIR required them concern for integrity of the FR process
- Need for accountability when business - Provide users with assurance that the FSs
owners hire others to manage their are presented in accordance with the
business financial accounting principles and reporting
standards
Industrial Revolution – birth of the modern
- Provides reasonable assurance of detecting
accounting and auditing
material misstatements of the FS and non-
Public Company – sells its stocks or bonds to the compliance with laws that have a direct and
public (Capital Market) material effect on the determination of FS

Managers – agents of the owners; fulfill a amounts (should remain alert to, and

stewardship function evaluate if any, noncompliance with laws

that have only an indirect effect)
Information Asymmetry – manager generally has
more information about the true financial position Philosophy of an Audit

and results of operations of the entity than does the Auditor’s Role
absentee owner
- Determine whether the reports prepared by
What are Assurance Services? the manager conform to the contract’s

- Describe the broad range of information provision

enhancement services performed by a CPA Auditor’s Verification

- Designed to enhance the degree of
- Adds credibility to the report
confidence in the information
- Reduces information risk, which potentially
- Two types:
benefits both the owner and the manager
o Increase reliability
- Reduces the decision maker’s risk
o Putting information in a form or
context that facilitates decision Business, Institutions, and Individuals
making
- Must maintain records of their financial
Attestation Services conditions and progress

- Provide assurance as to its reliability Creditors and Investors

- Provide report on subject matter or an
- Present and prospective
assertion about the subject matter
- For credit extension and investment
Audit or Examination purposes

- One on most sought-after attestation Government Agencies

services
 - Help them to carry out their duties imposed - Audited – FSs are accompanied by an audit
upon them by law report prepared by independent public
accountants
Internal Management
- Reporting in accordance with an agreed-
- For planning, directing, and controlling upon set of accounting principles does not
business operations solve the problem by itself (managers are in

Free-market Economy the position to manipulate)

- Can exist only if there is sharing or reliable Unintentional Bias

information - Unaudited FSs leave a credibility gap

- Strengthened if the information is
Accidental Errors
transparent and unbiased
- Information must reflect the economies of its Lack of Knowledge of Accounting Principles
transactions and the current economic
- Unaudited FSs may have been honestly,
condition of both its assets and any
but carelessly, prepared
obligations owed
Deliberate Falsification
Financial Statement Audit - Auditors gather
evident to obtain high level of assurance that FSs - Unaudited FSs may have been deliberately
are free of material misstatement due to fraud or falsified (not common, but it does occur and
errors and presented in accordance with can cause devastating losses)
appropriate framework The Assurance Analogy and the Philippines
Unqualified Audit Report – auditor has no Standards on Auditing (PSAs)
reservations IAASB - International Auditing and Assurance
Auditors Board

- Serve a number of parties - Provide pronouncements designed to foster

- Most important is the public (investors, the development of consistent worldwide

lenders, workers, and others who make auditing standards

decision based on financial information) International Financial Markets would be

- Should view themselves as guardians of the facilitated if auditing and accounting standards
capital markets were uniform.

The public expects auditors to: AASC – Auditing and Assurance Standard Council

1. Find fraud ASPC - Auditing Standards and Practice Council

2. Require accounting principles the best
- Review and recommends for approval to the
portray the spirit of concepts adopted by
PRC-BOA their adoption as the Philippines
accounting standard setters
Standards on Auditing (PSAs)
3. Be independent of management
(Independent in fact and in appearance) In the Philippines

Importance of Audited Financial Statement RA 9298 – Law that regulates the Practice of
Accountancy
- Accepted means by which business
corporation report their operation results - Provides that Professional Regulatory
and financial position Board of Accountancy shall monitor the
conditions affecting the Practice of
 Accountancy and adopt such measures to - Informal rules that guide relationships
enhance and maintain the high professional, among practitioners
ethical, and auditing standards - Traditions and myths that have arisen
concerning the CPA Examinations
Auditing is in demand because it plays a
valuable role in monitoring the contractual Code of Ethics for Professional Accountants in
relationships between the entity and its the Philippines
stockholders, managers, employees, and debt
- Effective on April 6, 2016
holders
- A profession is distinguished by certain
CPAs have been charged with providing audit characteristics including:
services because of their traditional reputation of 1. Mastery of a particular intellectual skill
competence, independence, objectivity, and 2. Adherence by its members to a common
concern for public interest. code of values and conduct

CHAPTER 2 3. Acceptance of a duty to society as a

whole
PROFESSIONAL PRACTICE OF
ACCOUNTANCY OVERVIEW Who is Professional Accountant?

Accountancy as a Profession - An individual who holds a valid certificate

issued by BOA (CPA)
Attributes of a Profession (1957) – Earnest
Greenwood In Public Practice

Systematic Theory - In a firm that provides professional services

- Accounting Theory In Business

Professional Authority - Commerce, industry, service, the public

sector, education, the not-for-profit sector,
- Determines what is good or bad for the
regulatory bodies, or professional bodies, or
client
a professional accountant contracted by
- Expertise in the systematic theory of
such entities.
accounting, and auditing
- Sub-sectors
Community Sanction a. Commerce and Industry
b. Education
- Admission is controlled
c. Government
- Candidate must satisfy government
educational and experience requirements, Scope of Practice
and pass CPA Licensure Board Exam
RA 9298 – Philippine Accountancy Act of 2004
- PRC-BOA – controls licensing system
Article 1, Section 4, Paragraphs (a) to (d)
Regulation Code
a. Practice of Public Accountancy
- Powers and privileges constitute a b. Practice in Commerce and Industry
monopoly c. Practice in Education or Academe
- To prevent abuse – Rules of Professional d. Practice in the Government
Conduct or Code of Ethics
Assurance, Attest, and Auditing Services
A Culture Defined

- Formal norms of the code of ethics

 At a general level, they encompass the iv. Reviews of FS and other
same process: evaluation of evidence to determine information
whether information has been recorded and v. Agreed-upon Procedures
presented in accordance with predetermined set of Engagements
criteria, together with the issuance of a report that II. Other Assurance Services
indicates the degree of correspondence vi. CPA ElderCarePrime Plus
Services
Assurance Services
vii. CPA Performance View Services
- Allows reporting not only on the reliability viii. CPA Risk advisory Services
and credibility of information but also on the ix. Others
relevance and timeliness of the information
Non-assurance Services
(Late 1990s)
- Improve the quality of information, or its I. Tax Services
context, for decision makers II. Management Consulting Services
i. Fraud Investigations
Attestation Services
ii. Information Technology Consulting
- Occur when a practitioner is engaged to III. Other Non-assurance Services
issue a report on subject matter, or an i. Compilation, Accounting, and Data
assertion about subject matter, that is the Processing System Services
responsibility of another party ii. Others
- Subject matter can take many forms
Types of Auditors
- FS auditing – particular, specialized form of
an attest service External Auditors

Audit Services - CPA firms

- Independent auditors
- Systematic process of objectivity obtaining
- Audits client’s historical FS
and evaluating evidence regarding an
- Operational and compliance auditing
assertion about economic actions and
events to ascertain the degree of Internal Auditors
correspondence between those assertions
- Could be CPA firms hired by the entity as
and established criteria and communicating
consultants or employee who perform
the results to interest users
independent appraisal activity within the
Relationship Among Assurance, Attest and organization
Auditing Services - Provide management with valuable
information for making decisions concerning
- Different professional standards apply to
effective operation of its business
each type of service
- Concerned with all kinds of financial and
- CPAs provide both assurance and non-
other data generated for both internal and
assurance services but a few, specially of
external users
the management consulting type overlap
- Operational, management or performance,
Assurance Services and compliance auditing

I. Attestation Services - Independent of the line functions in an

i. Audits of FS organization and may report directly to the

ii. Examination of Internal Control audit committee or BOD

iii. Trust Services Government Auditors

COA - Commission on Audit b. Compliance Auditing
- Examination, audit, and settlement in
- Determines whether government agencies
accordance with laws and regulations
and other entities that use public funds:
- Determines the extent to which rules,
1. Present their FS fairly
policies, laws, covenants, or government
2. Conduct the programs with economy
regulations are followed by the entity being
and efficiency
audited
3. Desired results are achieved
c. Operational Audit
- Operational audit
- Future-oriented, independent, and
- COA auditors are highly regarded in the
systematic evaluation for management of
auditing profession
the operational activities
BIR – Bureau of Internal Revenue - Purpose of improving profitability and

- Affects individuals as well as businesses increasing the attainment of the other

organizational objectives
- Compliance Auditing
- Performance or management audit
- Auditor must have considerable tax
d. Forensic Auditing
knowledge and auditing skills
- Detect a deter fraudulent activities
Regulatory Auditors
- Increased significantly in recent years
1. SEC
Types of Other Attest Services
2. Bangko Sentral ng Pilipinas
3. Cooperative Commission - Auditors can provide numerous types of

4. Office of Insurance Commission attest services regarding almost any subject

5. Other Government Agency Examiners matter.

- Checks solvency and compliance of various - A promising new era of attestation services

institutions and business firms related to assertions companies make about

sustainability-claimed reductions in carbon
Forensic Auditors
emissions or appropriate handling of
- Trained in detecting, investigating, and hazardous waste
deterring fraud and white-collar crime
Other Non-Assurance Services
- Reconstructuring incomplete or damaged
accounting records - Many public accounting firms perform other

- Probing money-laundering activities broad categories of non-assurance services

- Identify and investigating transactions and Agreed-Upon Procedures

assets in business or marital disputes
- Intended users determines the procedures
- Investigating and documenting
and the professional accountant provides
embezzlement allegations and negotiating
report of factual findings as a result of
insurance settlement
undertaking those procedures
Types of Other Audit Services - Not an assurance engagement but an
example of attestation
4 Major Types of Audits

a. Internal Audit Tax Preparation and Planning Services

- Add value and improve an organization’s - Assists clients in preparing and filing tax
operations returns, providing advice on tax and estate
- Go beyond the accounting and financial planning, and representing clients on tax
records
 issues before the Internal Revenue Service issued a professional ID card or a valid
or tax courts temporary or special permit

Management Advisory Services CPA – Certified Public Accountant

- Providing advice and assistance concerning - CPAs who practice as independent auditors
an entity’s organization, HR, finances, must meet registration requirements to
operations, IT systems, or other activities exercise their right to practice.
- Help public companies implement effective
Requirements to Enter the Accountancy
internal control over FR in preparation for an
Profession
integrated audit
- CPA firms perform MAS primarily for entities 1. Pre-Qualification Requirement

whom they do not provide a FS audit - BSA program should provide a foundation
of professional knowledge, skills, and
Compilation, Accounting, Data Processing
professional values, ethics, and attitude
System Services
- CMO No. 27 series of 2017 – 173 units
- Public accounting firms perform a number of 2. CPALE
accounting-related services for nonpublic - Article 2 Section 13 to 18
and nonaudit clients i. Qualification of applicants
- Bookkeeping, payroll processing, preparing - Filipino
FS - Good moral character
- Compilation – less assurance than an FS - Holder of a degree of BSA
audit - Has not been convicted to any criminal

CHAPTER 3 offense (Moral Turpitude)

ii. Scope of Examination
THE PUBLIC ACOOUNTING PROFESSION
- PRC BOA Resolution No. 262 Series of
ENVIRONMENT
2015; Starting May 2016
Practice of Public Accountancy Defined - FAR
- AFAR
Article 1 Section 4
- MAS
Practice of Public Accountancy shall constitute a
- Auditing
person who is:
- Taxation
- Skilled in the knowledge, science, and - RFBT
practice of accounting iii. Rating in the Licensure Examination
- Qualified to render audit and verification; - GA 75%
prepare, sign, and certify reports; design, - No grades lower than 65%
install, and revise accounting system; - Conditional Credit – Take the remaining
prepare income tax returns; represent subject within 2 years
clients before government agencies 3. Other Legal and Regulatory

Article 4 Section 26 Requirements

i. Oath
- No person shall practice accountancy in this
- Required
country or use the title CPA unless such
ii. Issuance of Certificate of Registration
person received from the Board a certificate
and Professional ID
of registration or a professional license and
Certificate of Registration
 - Subject to payment of fees environment, collaborate with others, and
- Signed by the chairperson of the maintain a professional personal presence.
Commission and the chairman and
Education and development for acquiring and
members of the board
maintaining capabilities of professional
- With official seal of the Commission and the
accountants can include:
Board
1. Advance professional education
- Full force and effect until withdrawn,
2. On-the-job training and experience program
suspended, or revoked
3. Off-the-job training
Professional ID 4. Continuing professional development (CPD)

- Registration No. courses and activities

- Date of issuance - Individuals may need further education and

development beyond that needed to qualify
- Expiry date
as professional accountants
- Signed by the chairperson of the
- Sustainability of this profession depends on
Commission
the quality of services provided by its
- Renewable every 3 years
members and its capacity to respond
iii. Indication of Certificate of
effectively and efficiently to the demands of
Registration, ID Card, and
economy and society
Professional Tax Receipt
- In public practice – bound by professional
- Certificate of Registration No.
and accounting standards and reporting
- Date of Issuance
requirements and by the regulatory and
- Duration of Validity
professional ethics framework
- PTR No.
- In private practice – responsible to
iv. For CPAs in the Public Practice an
management
accreditation from the BOA is
- Obliged to engage in lifelong learning
required
- Renewable every 3 years Core Values

Developing Capabilities and Competence After - Essential and enduring beliefs that it
Admission to the Profession upholds over time
- Retain unique character and value
- Requirements of those entering the auditing
profession is demanding C – Competence

Technical Knowledge and Expertise R – Relevance in the global market

- Must understand accounting and auditing O – Objectivity

literature, develop industry and client-
L – Lifelong learning
specific knowledge, develop and apply
computer skills, evaluate internal controls, I – Integrity

and assess and respond to fraud risk C – Commitment to excellence

Leadership, Teamwork, and Professional Skills Core Competencies

- Make presentations, exercise logical - Unique combination of human skills,

reasoning, communicate decisions by knowledge, and technology that provides
providing meaningful feedback, act with values and results to users
integrity, and ethics, interact in a team
 - Enhancing these is a key to sustaining a 1. PICPA
competitive and differential advantage in the - Accountants Journal – Technical and formal
marketplace papers, bulletins, and pronouncements
2. Sectoral Organizations
C – Communication Skills
- Complements to PICPA’S objectives
L – Leadership Skills - Provide specific professional development

A – Anticipating and Serving Evolving Needs and other requirements of CPAs in the
different sectors
S – Synthesizing Intelligence to Insight
- ACPAPP – Association of CPAs in Public
I – Integration and Collaboration Practice
- ACPAE – Association of CPAs in Education
C – Critical Thinking and Problem-Solving Skills
- ACPACI – Association of CPAs in
Regulatory and Professional Organizations That
Commerce and Industry
Influence the Profession
- GACPA – Government Association of CPAs
A. Regulatory Government Agencies C. Standard-Setting Bodies
1. PRC 1. IFAC - International Federation of
- Regulation and licensing of various Accountants
professions - Munich 1977
- Professional Standards and Ethics - Development and enhancement of the
- PRC Modernization Act of 2000 profession to provide services of
2. BOA consistently high quality
- Consists of a chairman and 6 members - Non-profit, non-government, non-political

- Empower to administer the Accountancy international organization of accountancy

Law bodies

- Only body that may issue and revoke CPA - Open to accountancy bodies

certificate and grant licenses to practice - Membership in IFAC automatically includes

- Philippine Accountancy Act of 2004 membership in the IASB

3. SEC - Consisting of 1 representative from each

- Assist in providing investors with reliable member accountancy body elects the

information upon which to make investment members of Council

decisions - Programs are implemented primarily by

- Has considerable influence in setting FRS smaller working groups or standing

and Disclosure requirements technical committee

- Represented in PFRSC, AASC, and PIC 2. IASB

- Has power to establish rules for any CPA - London, 2001

associated with audited FSs submitted to - 14 BM (12 are full-time)

the commission - Reside in 9 countries

4. COA - Developing a single set of high-quality
- Audits government units global standards that require transparent
- Compliance and Operational Audit and comparable information in general

5. BIR purpose FS

- Tax Laws (NIRC) - Cooperates with national accounting

- Compliance audit standard-setters to achieve convergence in

B. Professional Organizations accounting standards around the world

 3. FRSC 2, Statutory Law
- Adoption of IFRS in the Ph
- Passed by legislative bodies
4. IAPS – International Auditing Practice
C. Degree of Wrongdoing
Committee
1. Appropriate Audit
- Standing committee of the Council of IFAC
- No degree of wrongdoing
- International Standards on Auditing (ISAs)
2. Fraud
5. AASC
- With the intent to deceive
- Adoption of auditing and assurance
- Know the FS is misstated but do not take
standards in the Ph
appropriate action to report the
CPAs Legal Liability misstatement
- Maximum wrong
- Audit professionals have a responsibility
under common law to fulfill expressed and Scienter – knowledge of the falsity; knowledge that
implied contracts with clients one’s actions are wrong or contrary to law
- Liable for negligence and/or breach of
Tortfeasor – One that commit a tort
contracts should they fail to provide the
services or not exercise due care in their Tort – A wrong that is committed by someone

performance 2 Degrees of wrong doing

- Lawsuits typically involved misstatements
1. Ordinary Negligence
such as:
- Absence of reasonable care
a. Improper or in adequate disclosures
- Do not do what reasonably prudent auditors
b. Inappropriate valuation
should do
- Other typical lawsuits brough by clients
2. Gross/Constructive Negligence
against CPA firms
- Consistently fail to follow the standards of
a. Did not discover an employee
defalcation as a result of negligence the profession

b. Did not complete the audit on the Legal Liability of the Independent Auditor
agreed date
To Clients
c. Inappropriate withdrawal from audit
- Public accounting firms – defensive auditing - Failure to exercise due professional care
to minimize risks; understand how and - An honest error does not constitute a
when auditors can be liable negligence as long as he has exercised due
professional care
Legal Concepts related to Auditor’s Liability
- Basic purpose – render an opinion not
A. Due Professional Care (Prudent Person detect fraud
Concept) - Client is entitled to recover any losses and
- Auditor is not guarantor of the statement’s the audit fee
accuracy
Defenses
- Not infallible and can make errors in
judgement - Lack of duty to perform the service
- Expected to exercise the same reasonable - Performed using reasonable care or lack of
care reasonable care did not cause damages
B. Sources of Responsibility - Absence of causal connection
1. Common Law - Clients own action contributed to the loss
- Developed through court decisions (Contributory Negligence)
 - Statutes of limitations has expired 6. Use engagement letters; clearly point out to
the client the scope of the auditor’s service
To Third Parties
and responsibilities
- Rely upon the auditor’s work 7. Professional Skepticism
- For losses caused by the auditor’s fraud or gross 8. Consult with the more experienced auditors
negligence about difficult issues
- Expression of an opinion when, in fact, he has 9. Professional liability insurance coverage

no basis for an opinion (Gross Negligence) (not common Ph)

- Failure to detect a widespread fraud 10. Seek legal counsel whenever serious

(negligence problem occur

Defenses Society’s Expectations and Auditor’s

Responsibilities
- Nonnegligent performance
- Management – Primary responsible for
- Lack of privity contract (limitation of liability;
maintaining effective internal control and for
not liable for ordinary negligence; lack of
ensuring the fairness of the company’s FS
duty defense)
- Auditors – Provide reasonable assurance
- Absence of causal connection
- Statute of limitations has expired Challenges Faced by the Public Accounting
Profession
Limitations on Auditor’s Responsibility
- Auditors and accountants are called upon to
- Satisfies his or her detection responsibility
make professional judgements
by planning to search for material errors or
1. Increasing complex transactions and
irregularities and exercising due skill and
organizational standard
care
2. Attest material fraud (Some people still
- PSA 240 – Possible existence of
expect this)
fraud/error, consider the potential effect on
3. Computer system are complex (creates
the financial information, and perform such
opportunity or additional risk)
modified and additional procedure as he
4. Many companies are global (requires high
determines appropriate
quality audit)
- Communicate his findings to management
5. Time pressure to get the audit done (Agile
on a timely basis if:
Approach)
1. Fraud may exist even if its potential
6. Generate audit fees sufficient to both:
effect is immaterial
a. Attract new people to the profession
2. Fraud or significant error is actually
b. Retain managers and partners (resistance
found to exist
form clients who may believe that price
Minimizing Exposure to Legal Liability changes are not warranted; cannot offer
high retainer’s fee)
1. Emphasize compliance with the Standards
- More than a “rules person”
2. Thoroughly investigate prospective clients
3. Avoid companies and industries in which - Must be able to meet the challenges of

risk of litigation in high professional judgement and adhere to the

4. Exercise extreme care standards of professional excellence and

5. Establishing and following appropriate ethics

quality control procedures The Accounting Profession’s Credibility Crisis

 - Expectation gap – gap between what - Fewer senior accountants than staff
auditors attempt to do in audit and the - Spend 2 to 3 years in each classification
user’s expectations of the audit before achieving partner status
- To address this gap public regulations and - Promotions are made from within or direct
regulations within firms have been adopted entry into a firm at a rank above staff rarely
to include ethe following: occurs
1. Accreditation of the BOA (BIR and SEC
Audit Partner
signing)
2. Establishing and complying with 1. Plan and review all phase of an audit
intentional standards for accounting, engagement
reporting, and auditing services 2. Sign the audit report
3. Revised Code of Ethics for Public 3. Approve billing to clients
Accountants 4. Obtain/establish contracts with clients
4. Quality control of public accounting 5. Determine office operation policies
practice
Audit Manager/Supervisor
5. Comply with continuing professional
development programs 1. Liaison officer

6. Quality Assurance Review – QAR (BOA) 2. Discuss with the client (Problems, Reports,

7. Penalizing those found guilty of and Results of the Audit)

unacceptable practices 3. Direct supervision on seniors in charge

8. Monitoring adequate competition among 4. Review working papers or drafts

CPA’s 5. Training programs

CHAPTER 4 In-Charge (Senior) Auditor

MANAGEMENT OF A PUBLIC ACCOUNTING 1. Prepare the audit program for an

PRACTICE engagement subject to review

2. Assign particular phases of the audit work to
Public Accounting Firms
staff and exercise direct supervision over
- Sole Proprietorship or Partnership them

- Corporation is not allowed to engage in the 3. Perform certain audit procedures requiring

practice of public accounting skills and experience

- Practitioners now seem to favor the a. Revie of AOI, By-Laws, and other non-

adoption of “Professional Corporations” financial records

- No longer designates themselves as CPA b. Verification of A, L and the basis of

firms (Professional Services Firms) valuation

c. Comparison of current and prior period/s
Organizational structure of a CPA firm is
operating results
influence by the following:
d. Examination of adequacy of allowances
1. Need to be independent from clients 4. Take up with the clients or partners
2. Need for a structure to encourage questions
competence 5. Assemble the working papers in an audit for
3. Increased risk faced by the auditors review or approval

Public Accounting Firm Organization Staff Auditor

- Fewer partners than managers and senior 1. Prepare schedules and reports of findings
accountants 2. Work on tax returns
 3. Check the accuracy of footings and - Self-interest; Professional competence and
extensions on books od accounts and other due care
records
Safeguards
4. Check postings (Journals to Ledger)
5. Examine vouchers supporting minor - Making the clients aware of the terms of the
disbursements engagement and, in particular, the basis on
6. Serve as an assistant (Generally) which fees are charged and which services
are covered by the quoted fee
Marketing Professional Services
- Assigning appropriate time and staff
Section 250.1 and 250.2 of Revised Code of
Fees – fair reflection of the value of work involved
Ethics for Professional Accountants
and should take into account:
Advertising or other forms of marketing
a. Skills and knowledge
- Threat to compliance with fundamental b. Level of training and experience
principles c. Time
- Self-interest; Professional Behavior d. Degree of responsibility and urgency

Should not bring the profession into disrepute when Methods of Billing Clients
marketing professional services
1. Actual time charges basis (Per Diem
- Exaggerated claims Basis)
- Disparaging references to unsubstantiated - Actual time spent x hourly rates
comparisons to the work of another 2. Flat or Fixed fee basis
- Flat but all-inclusive pre-arranged amount
Should be guided by the provision in the PRCBOA
3. Maximum Fee Basis
Resolution no. 126, series of 2008 Rules on
- Per diem basis, with the agreement that the
Advertising and Promotions for the Practice of
total charges will not exceed a pertain
Accountancy
agreed maximum amount
When in doubt, consult with the relevant 4. Retainer Basis
professional body - Fixed pre-determined fee for all services
Sources of Clients rendered during a designated period of time

Referrals from: Out of pocket expenses – charge to the client in

addition to the professional fees (directly
1. Businessmen
attributable)
2. Clients
3. Financial and government institutions Auditing in a Globalized Environment
4. Other CPAs
- Different set od business regulations, tax
5. Legal and other professional firms
rules, and often different accounting
Professional Fees methods presents a daunting challenge for
accountants and professional bodies that
Section 240 of Revised Code of Ethics for
establish accounting and auditing rules
Professional Accountants
- Public accounting firms have had to develop
May quote whatever fee deemed to be appropriate the capacity to provide services worldwide;
Fee establish a corresponding relationship with
a firm in a foreign location to accomplish the
- A fee lower than another is not in itself
audits od their multinational client firms
unethical
Philippine System of Quality Management E - Engagement performance
(PSQM)
R - Resources
- Adopted from ISQM of IAASB
I - Information and communication
- Replaces PSQC (Quality Control)
A - Acceptance and continuance of client
- For firms that performs audit or reviews of
relationship and specific engagements
FS, or other assurance or related services
engagements Requirements
- Effective in December 15, 2022
Applying and complying with relevant
- Evaluated within 1 year following December
requirements
15, 2022
- Comply with each requirement of this
Quality Management
PSQM unless not relevant to the firm
PSQM - Understand this PSQM (Application and
other explanatory material)
- Robust, proactive, and effective approach to
QM System of QM
- Encourages firms to design a system of QM
- Exercise Professional Judgement
that is tailored to the nature and
- Governance and leadership establish the
circumstances of the firms and
environment that supports the design,
engagements it performs
implementation, and operation of the SQM
- Firms are required to have system of QM
designed and implemented in accordance Responsibilities
with PSQM 1 by December 15, 2022
Assign:
Objective
1. Ultimate responsibility and
Provide reasonable assurance accountability
- CEO. Managing Partner, Managing Board
1. Firms fulfill their responsibilities in
of Partners (or equivalent)
accordance with professional standards and
2. Operational Responsibility (SQM)
applicable legal and regulatory
3. Operational Responsibility (Specific
requirements
Aspects)
2. Issued audit engagement report in
a. Compliance and independence
appropriate
requirements
The Firm’s System of QM b. Monitoring and remediation process

- Operates in a continual and iterative In assigning roles (Par. 20):

manner, and responsive to change; not in a
- Appropriate experience, knowledge,
linear manner
influence, authority and sufficient time
Address the following 8 components: - Understand their assigned roles and

MERGERIA accountability

M - Monitoring and remediation process Operational Responsibility – Have direct line of

communication to the individuals assigned ultimate
E - Ethical requirements that are relevant
responsibility and accountability
R - Risk assessment process
Risk Assessment Process
G - Governance and leadership
 - To establish quality objectives, identify and a. Engagement teams understand and fulfill
assess quality risks and design and their responsibilities in engagements
implement responses to address the quality b. Nature and extent of direction and
risks supervision of engagement teams and
- Establish policies and procedures to identify review of the work performed is appropriate
information that indicates additional or c. Exercise appropriate professional
modified quality objectives, risks, or judgement and professional skepticism
responses d. Consultations on difficult or contentious
matter is undertaken and conclusions
Governance and Leadership
agreed are implemented
- Establishes the environment that supports e. Difference of opinions are brought to the
the SQM attention of the firm and resolved
a. Commitment to quality through a culture f. Engagement documentation is assembled
b. Responsible and accountable for quality on a timely basis after the engagement
c. Commitment to quality through a actions report; appropriately maintain and retained
ang behaviors
Resources
d. Appropriate organizational structure
e. Resources need are planned for and Human Resources
resources contained, allocated or assigned
a. Hired, developed and retained and have the
in a manner that is consistent with the firm’s
competence and capabilities to:
commitment to quality
- Perform quality edits
Relevant Ethical Requirement - Perform activities and carry out
responsibilities
Firm and its personnel:
b. Commitment to quality through actions and
1. Understand the relevant ethical behaviors, develop and maintain the
requirements appropriate competence; Held accountable
2. Fulfill their responsibilities or recognized through timely evaluation,
compensation, promotions, and other
Others including network, network firms, individuals
in the network or service providers: incentives
c. Obtained from external sources (the
1. Understand the relevant ethical network, another network firm, or a service
requirements provider)
2. Fulfill their responsibilities d. Engagement team members are assigned
Acceptance and Continuance of Client to each engagement, including an
Relationships and Specific Engagements engagement partner
e. Perform activities within the SQM
1. Judgements are appropriate based on:
(competence, capabilities, and sufficient
a. Information obtained about the nature
time)
and circumstances of the engagement
and integrity and ethical values of the Technology Resources
client Intellectual Resources
b. Firm’s ability to perform the engagement
2. Financial and operational priorities of the Service Providers

firm do not lead to inappropriate judgements Information and Communication

Engagement Performance
 a. Information system identifies, captures, d. Policies and procedures that require the
processes and maintains relevant and individuals performing the monitoring
reliable information activities to have CCST and address the
b. Culture of the firm recognizes and objectivity of the individuals performing the
reinforces the responsibility of the personnel monitoring activities
to exchange information with the firm and
Evaluating Findings and Identifying Deficiencies
one another
c. Relevant and reliable information is Evaluating Identifies Deficiencies
exchange throughout the firm - Evaluate the severity and pervasiveness
- Communicated; Sufficient to enable them
- Root cause/s and effect individually and in
t9o understand and carry out their
aggregate
responsibilities
d. Relevant and reliable information is Responding to Identified deficiency

communicated to 3rd parties - Individual assigned operational

- To or within the firm’s network and service responsibility
providers o Evaluate whether the remedial
- Required by law, regulation, and actions are appropriately designed
professional standards or to support and implemented
external parties’ understanding of the SQM o If not effective, take appropriate

Specified Responses (Par. 26) action to determine the remedial

actions are appropriately modified
Establish policies and procedures for/that:
that they are effective
a. Identifying, evaluating, communicating,
Findings About a Particular Engagement
addressing, and reporting of threats and
breaches - Procedures are omitted or report issued

b. Become aware of information subsequent to may be inappropriate

the accepting or continuing a client o Take appropriate action to comply
relationship or specific engagement; with relevant professional standards,
Obligated by law or regulation to accept a and applicable legal and regulatory
client relationship or specific engagement requirements
c. Require communication with those charge o When report is inappropriate,
with governance; When it is otherwise consider implication, take
appropriate to communicate with external appropriate action, and obtain legal
parties; The information to be provided advice
when communicating externally
Ongoing Communication Related to Monitoring and
d. Address engagement quality review in
Remediation
accordance to ISQM 2
- Individuals assigned operational
Monitoring and Remediation Process
responsibility communicate on a timely
a. To provide relevant, reliable, and timely basis to the individuals assigned ultimate
information responsibility and accountability
b. Take appropriate actions to identified o Description of the monitoring
deficiencies activities performed
c. Inspection of completed engagement o Deficiencies identified, including
severity and pervasiveness
 o Remedial actions - Design and implement remedial actions
- Communicate the matters to engagement (Par. 42)
teams and other individuals to enable them
Evaluating the System of Quality Management
to take prompt and appropriate action in
accordance with responsibilities Ultimate Responsibility and Accountability

Network Requirements and Network Services - Evaluate

- Undertaken as of a point in time, and
- Understand:
performed at least annually
o Requirements established by the
- Shall conclude 1 of the following:
network
o SQM provide the firm with
o Any services or resources provided
reasonable assurance that the
by the network
objectives of the SQM are being
o Responsibilities for any actions that
achieved
are necessary to implement the
o Except for matters related to
network requirements and network
identified deficiencies that have a
services
sever but not pervasive effect on the
- Firm remains responsible for its SQM; Shall
design, implementation, and
not allow compliance with the network
operation of the SQM, SQM provide
requirements or use of network services to
the firm with reasonable assurance
contravene the requirements of this PSQM
that the objectives of the SQM are
- Firm shall:
being achieved
o Determine how the network
o SQM does not provide the firm with
requirements or network services
reasonable assurance that the
are relevant to, and are taken into
objectives of the SQM are being
account
achieved
o Evaluate how network requirements
- Reaches conclusion, the firm shall:
or network services need to be
o Take prompt and appropriate action
adapted or supplemented
o Communicate to engagement teams
Monitoring Activities Undertaken by the Network on and other individuals assigned to the
the Firm’s System of Quality Management activities; and external parties in
accordance with the firm’s policies
- Determine the effect of the monitoring
and procedures
activities and the firm’s responsibilities
- Firm shall undertake periodic performance
- Obtain results (Par. 40)
evaluations of the individuals assigned
Monitoring Activities Undertaken by the Network ultimate responsibilities and accountability,
Across the Network Firms and the individuals assigned operational
responsibility; Take into account the
- Understand the scope of the monitoring
evaluation of the SQM.
activities and how will the results be
communicated Documentation

Deficiency in Network Requirements and Network - Sufficient to

Services Identified by the Firm o Support a consistent understanding

- Communicate to the network information of SQM, implementation and

about the deficiency operation of the responses, and

evaluation of the SQM
 o Provide evidence of the design, - Moral principles and standard of conduct
implementation, operation of the - Branch of Philosophy; study of rightness
responses and wrongness of human action
- Shall include: - Society or a particular group within the
o Identification of individuals assigned society
ultimate responsibilities and
Professional Ethics
accountability, and the individuals
assigned operational responsibility - Extend beyond moral principles
o Quality objectives and Risks - Standard od behavior designed for both

o Description of the responses and practical and idealistic purposes

how the firm’s responses address - Designed in part to encourage ideal

the quality risks behavior; Must be both practical and

o Regarding the monitoring and enforceable

remediation process - Above the law but below ideal

 Evidence of activities - Members voluntarily accept standards of

performed professional behavior more rigorous than
 Evaluation of findings and those required by law
identified deficiencies and
“Mixture of moral and practical concepts, with the
their related root causes
sprinkling of exhortation to ideal conduct designed
 Remedial action and
to invoke ‘right action’ on the part of the members
evaluation of the design and
of the profession concerned – all reduced to rules
implementation of such
which are intended to be enforceable, to some
remedial actions
extent, by disciplinary action”
 Communications
o Basis for the conclusion reached Attempt to:

pursuant Ensure high standard of competence

- Matters as they relate to network - Regulate and strengthen their relationship
requirements and network services and the - Promote and protect the image of the
evaluation of network requirements and profession and the welfare of the community
network services
Why people act unethically?
- Establish a period of time for the retention of
documentation; Sufficient to enable the firm 2 primary reasons
to monitor the design, implementation and
1. Person’s ethical standard differs from those
operation of the firm’s SQM, or for a longer
of society
period if required by law or regulation
2. Choose to act selfishly
CHAPTER 5
In many instances, both reasons exist
PROFESSIONAL ETHICS
Unethical Behavior
- Distinguishing characteristic of any
- Conduct that differs from what they believe
profession is the existence of code of ethics
would have been appropriate given the
for its members
circumstances
- Providing standards all members are
- Each of us decides for ourselves what we
expected to follow
consider is unethical behavior
Ethics
Rationalizing Unethical Behavior
 - There are alternative ways to resolve ethical 3 Parts
dilemmas, but care must be taken to avoid
Part A – General Application of the Code
methods that are rationalization of unethical
behavior Part B – Professional Accountants in Public

1. Everybody does it Practice

2. If it’s legal, it’s ethical Part C – Professional Accountants in Business

3. Likelihood of discovery and consequences
Fundamental Principles (PICCO)
The Need for Professional Ethics
P – Professional Behavior
- No universally accepted definition of what
I – Integrity
constitutes as a profession
C – Confidentiality
Important Common Characteristics
C – Competence and Due Care
1. Responsibility to serve the public
- Independence – Most important concept O – Objectivity
embodied in public accounting’s Code of
Threats to Compliance (FASSI)
Ethics
2. Complex body of knowledge F – Familiarity

3. Standard of admission to the profession A – Advocacy

4. Need for public confidence
S – Self-interest
Characteristics and Values Associated with
S – Self-review
Ethical Behavior
I – Intimidation/ Adverse/ Undue Influence
- Integrity
- Honesty Safeguards
- Promise Keeping
- Actions or other measures that may
- Loyalty (Fidelity)
eliminate threats or reduce them to an
- Fairness acceptable level
- Caring for other
Code of Ethics: Applicability to CPAs in Public
- Respect for others
Practice
- Responsible Citizenship
- Pursuit of Excellence Conflict of Interests (Sec. 220)

- Accountability P – Objectivity and others

Our ethics are based upon a strict set of Evaluate

moral principles rather than just a long list of
- Significance of relevant interests or
rules to which we only adhere in certain
relationship
situations
- Significance if the threats created by
The Code of Ethics for Professional performing the professional service/s
Accountants
Marketing and Professional Services (250)
- PRCBOA
T – Self- interest
- Approved February 20, 2018
- Resolution No. 18 Series of 2018 P – Professional Behavior
- Adoption of the 2016 Code of Ethics for
Gifts and Hospitality (260)
Professional Accountants of the IESBA
T – Self- interest T – Self- interest

P – Objectivity P – Independence

Custody of Clients Assets (270) - All direct financial interests are prohibited
- Material indirect financial interest are
P – Professional Behavior
prohibited
Independence (290)
Loans and Guarantees (290.117)
Independence of Mind
P – Independence
- State of mind that permits the CPA to
perform an attest service without being
affected by influences that might No T – Made under normal lending procedures,
compromise professional judgement terms, and conditions

Independence in Appearance Business Relationship (290.123)

- Avoidance of circumstances that might T – Self- interest or Intimidation

cause a reasonable and informed 3 party, rd
P – Independence
aware of all relevant information, including
safeguards applied, to reasonably conclude No T if:
that the integrity, objectivity, or professional
- Insignificant to the firm, member of the audit
skepticism has been compromised
team, immediate family member, and client
Issues on Independence Requirements for - Immaterial to the investor, or group
CPAs in Public Practice (290.126) investors
- Does not give the investor, or group
Immediate Family
investors the ability to control the closely-
General rule: Independence is impaired held entity

Exemption: Employment with an Audit Client (290.133)

1. Employed by a client in other than key P – Independence

position
No safeguard could reduce the threat to an
2. Participate in a benefit plan related to a
acceptable unless:
client
- Individual is not entitled to any benefits or
Close relatives
payments; unless fixed pre-determined
- Independence is impaired if relatives have a arrangements; amount is immaterial to the
key position and material financial interest firm

Other Relatives and Friends - Does not continue to participates or appear

to participate in the firm’s business or
- Independence is impaired when a
professional activities
reasonable person, aware of all relevant
facts relating to a situation, would conclude Temporary Staff Assignment (290.140)

that there is an unacceptable threat to T – Self-review

independence
P – Independence
- This evaluation is made based on
Conceptual Framework on Independence Assistance may be given for a short period of time;
not be involved in:
Financial Relationships
 - Providing non-assurance services not Legal Services (290.204)
permitted under this code
T – Self-Review
- Assuming management responsibilities
Recruiting Services (290.209)
Providing Non-attest Attest Services (290.154)
T – Self-Interest/Familiarity/Intimidation
- May provide advice, research materials and
recommendations - Firm may generally provide such services
as reviewing that professional qualification
Preparing Accounting Records and Financial
of a number of applicants and providing the
Statements (209.164)
advice on their suitability for the post
T – Self-review when the firm subsequently audits - May also interview and advise on
the FSs candidate’s competence

- May provide if client is not a public interest Fees and Other Types of Remuneration
entity
1. Fees – Relative size (290.215)
- Except in emergency, may provide to a
T – Self-interest
client that is a public interest entity when: P – Professional Competence and Due
1. Only the firm has the resources and Care
necessary knowledge
- Quote whatever fee deemed to be
2. Restriction would result to difficulties of
appropriate
the client
- Low – Difficult to perform the engagement in
o Who provide the service is not part
accordance with applicable technical and
of the audit team
professional standard for that price
o For only a short period of time and
- Referral fee or commission – T – Self-
are not expected to reoccur
interest P – Objectivity and Professional
o Situation is discussed to those
competence and Due Care
charged with governance 2. Fees – Overdue (290.218)

Valuation Services (290.171) - P - Independence

- Owed by a client (long overdue)
T – Self-review
- Not collected before issuance of the report
Tax Return Preparation (290.177) 3. Contingent fees (290.219)

Does not generally create a threat to independence - Not regarded as being contingent if
established by a court or other public
Internal Audit Services (290.190)
authority
T – Self-review 4. Compensation and evaluation services
(290.223)
P – Independence
T - Self-interest
IT System Services (290.196)
- Created when a member of an audit team is
T – Self-review
evaluated and compensated for selling non-
P – Independence assurance services to that audit client

Litigation Support Services (290.202) Resolving Ethical Conflict

T – Self-review/Advocacy - Professional Accountants may be required

P – Independence to resolve a conflict in complying with the

fundamental principles
- Relevant factors in a formal or informal
resolution process:
1. Relevant facts
2. Ethical Issues involved
3. Fundamental principles related
4. Established internal procedures
5. Alternative courses of action
- If the matter remains unresolved, consult
with other appropriate persons within the
firm or employing organizations for help in
obtaining resolution.