CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING CPA REVIEW

CODE OF PROFESSIONAL ETHICS FOR CPAs

Code of Ethics for Professional Accountants in the Philippines

 is based on the International Code of Ethics for professional accountants

developed by the International Federation of Accountants.
 Is mandatory for all CPAs and is applicable to professional services
performed in the Philippines on or after January 1, 2004.
 Is divided into three parts:
Part A - applies to all professional accountants unless otherwise specified
Part B - applies only to those professional accountants in public practice
Part C - applies to employed professional accountants, and may also
apply, in appropriate circumstances, to accountants employed in
public practice

CPAs should observe the following FUNDAMENTAL PRINCIPLES:

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behavior
6. Technical standards

RULES APPLICABLE TO ALL PROFESSIONAL ACCOUNTANTS

1. INTEGRITY AND OBJECTIVITY
a. Integrity implies not merely honesty but fair dealing and
truthfulness. The principle of objectivity imposes the obligation on
all professional accountants to be fair, intellectually honest, and
free of conflicts of interest.
b. Professional accountants should neither accept nor offer gifts or
entertainment which might reasonably be believed to have a
significant and improper influence on their professional judgment or
those with whom they deal.

2. PROFESSIONAL COMPETENCE may be divided into two separate phases

a. Attainment of professional competence- requires initially a high
standard of general education followed by specific education, training,
and examination in professionally relevant subjects and a period of
work experience.
b. Maintenance of professional competence– requires a continuing
awareness of development in the accountancy profession including
relevant national and international pronouncements on accounting,
auditing, and other relevant regulations and statutory requirements

3. CONFIDENTIALITY
a. Professional accountants have an obligation to respect the
confidentiality of information about a client’s or employer’s affairs
acquired in the course of professional services.
b. The duty of confidentiality continues even after the end of the
relationship between the professional accountant and the client or
employer.

4. TAX PRACTICE
a. The professional accountant should ensure that the client or the
employer are aware of the limitations attaching to tax advice and

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 services so that they do not misinterpret an expression of opinion as
an assertion of fact.
b. A professional accountant should not be associated with any return or
communication in which there is reason to believe that it:
1. Contains a false or misleading statement;
2. Contains statements or information furnished recklessly or without
any real knowledge of whether they are true or false; or
3. Omits or obscure information required to be submitted and such
omission or obscurity would mislead the revenue authorities.
c. When a professional accountant learns of a material error or omission
in a tax return of a prior year, or the failure to file a required tax
return, he/she has a responsibility to:
1. Promptly advise the client or employer of the error or omission and
recommend that disclosure be made to the revenue authorities.
2. If the client or employer does not correct the error, he/she:
a. Should inform the client or the employer that it is possible to act
for them in connection with that return or other related
information submitted to the authorities; and
b. Should consider whether continued association with the client or
employer in any capacity is consistent with professional
responsibilities.

5. CROSS BORDER ACTIVITIES

When a professional accountant performs services in a country other than

the home country and differences on specific matters exist between
ethical requirements of the two countries, the following provisions should
be applied:
1. When the ethical requirements of the country in which the services are
being performed are LESS STRICT than the Philippine Code of Ethics,
then our code should be applied.
2. When the ethical requirements of the country in which the services are
being performed are STRICTER than our code, then the ethical
requirements in the country where services are being performed
should be applied.
3. When the ethical requirements of the Philippines are mandatory for
services performed outside the Philippines and are stricter than that
set out in (1) and (2) above, then the ethical requirements of the
Philippines should be applied.

6. PUBLICITY

In the marketing and promotion of themselves and their work,

professional accountants should:
a. Not use means which brings the profession into disrepute.
b. Not make exaggerated claims for the services they are able to offer,
the qualifications they possess, or experience they have gained; and
c. Not denigrate the work of other accountants.

RULES APPLICABLE TO PROFESSIONAL ACCOUNTANTS IN PUBLIC

PRACTICE

INDEPENDENCE

a. Independence requires:
1. Independence of mind – The state of mind that permits the
provision of an opinion without being affected by influences that
compromise professional judgment, allowing an individual to act
with integrity, and exercise objectivity and professional skepticism.
2. Independence in appearance – The avoidance of facts and
circumstances that are so significant that a reasonable and

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 informed third party, having knowledge of all relevant information,
including safeguards applied, would reasonably conclude a firms, or
a member of the assurance team’s integrity, objectivity or
professional skepticism had been compromised.
b. Members of assurance teams, firms, and network firms should identify
THREATS to independence, evaluate the significance of those threats,
and, if the threats are other than clearly insignificant, identify and
apply SAFEGUARDS to eliminate the threats or reduce them to
acceptable level, such that independence of mind and independence in
appearance are not compromised. In situations when no safeguards
are available to reduce the threat to an acceptable level. The only
possible actions are to:
1. Eliminate the activities or interest creating the threat; or
2. Refuse to accept or continue the assurance engagement.

INDEPENDENCE REQUIREMENTS IN ASSURANCE ENGAGEMENTS

a. For assurance engagements provided to an audit client, the member of the
assurance team, the firm and network firms are required to be independent
of the client
b. For assurance engagements provided to clients that are not audit clients,
when the report is not expressly restricted for use by identified users, the
members of the assurance team and firm are required to be independent of
the client
c. For assurance engagements provided to clients that are not audit clients,
when the assurance report is expressly restricted for use by identified users,
the members of the assurance team are required to be independent of the
client. N addition, the firm should not have a material direct or indirect
financial interest in the client

Network firm – an entity under common control, ownership or management with

the firm or any entity that a reasonable and informed third party having knowledge
of all relevant information would reasonably conclude as being part of the firm
nationally or internationally

Financial interest – an interest in equity or other security, debenture, loan or

other debt instrument of an entity including rights and obligations to acquire such
an interest and derivatives directly related to such interest

Direct financial interest – a financial interest:

1. Owned directly by and under the control of an individual or entity; or
2. Beneficially owned through a collective investment vehicle, estate, trust
or other intermediary over which the individual or entity has control
Indirect financial interest – a financial interest beneficially owned through a
collective investment vehicle, estate, trust or other intermediary over which the
individual or entity has no control

THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a
financial interest in, or other self-interest conflict with, an assurance client.
Examples:
a. A direct financial interest or material indirect financial interest in an
assurance client
b. A loan or guarantee to or from an assurance client or any of its directors
or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements
2. SELF-REVIEWTHREAT
Occurs when:

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 a. Any product or judgment of a previous assurance engagement or non-
assurance engagement needs to be reevaluated in reaching conclusions
on the assurance engagement or;
b. When a member of the assurance team was previously a director or
officer of the assurance client, or was an employee in a position to exert
direct and significant influence over the subject matter of the assurance
engagement
3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance team, promotes, or may
be perceived to promote, an assurance client’s position or opinion to the
point that objectivity may, or may be perceived to be compromised
4. FAMILIARITY THREAT
Occurs when, by virtue of a close relationship with an assurance client, its
directors, officers or employees, a firm or a member of the assurance team
becomes too sympathetic to the client’s interests.

5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting
objectively and exercising professional skepticism by threats, actual or
perceived, from the directors, officers or employees of an assurance client

SAFEGUARDS
1. When the threats are identified, other than those that are clearly
insignificant, appropriate safeguards should be identified and applied to
eliminate the threats or reduce them to an acceptable level. This decision
should be documented
2. When the safeguards are available are insufficient to eliminate the threats to
independence or to reduce them to an acceptable level, or when a firm
chooses not to eliminate the activities or interest creating the threat, the only
course of action available will be the refusal to perform, or withdrawal from,
the assurance engagement

CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firm’s own systems and procedures

Safeguards created by the profession, legislation or regulation include:

a. Educational, training and experience requirements for entry into the
profession
b. Continuing education requirements
c. Professional standards and monitoring and disciplinary processes
d. External review of a firm’s quality control systems; and
e. Legislation governing the independence requirements of the firm

Safeguards within the assurance client include the following:

a. When the assurance client’s management appoints the firm, persons other
than management ratify or approve the appointment
b. The assurance client has competent employees to make managerial
decisions
c. Policies and procedures that emphasize the assurance client’s commitment
to fair financial reporting
d. Internal procedures that ensure objective choices in commissioning non-
assurance engagements; and
e. A corporate governance structure, such as an audit committee, that provides
appropriate oversight and communications regarding a firm’s services
Safeguards within the firm’s own systems and procedures may include
FIRMWIDE safeguards such as the following:
a. Firm leadership that stresses the importance of independence and the
expectation that members of assurance teams will act in the public interest
b. Policies and procedures to implement and monitor quality control of
assurance engagements
c. Documented independence policies

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 d. Internal policies and procedures to monitor compliance with firm policies and
procedures as they relate to independence
e. Policies and procedures that will enable the identification of interests or
relationships between the firm or members of the assurance team and
assurance client
f. Policies and procedures to monitor and, if necessary, mange the reliance on
revenue received from a single assurance client
g. Using different partners and teams with separate reporting lines for the
provision of non-assurance service to an assurance client
h. Policies and procedures to prohibit individuals who are not members of the
assurance team from influencing the outcome of the assurance engagement
i. Timely communication of a firm’s policies and procedures, and any changes
thereto, to all partners and professional staff, including appropriate training
and education thereon
j. Designating a member of senior management as responsible for overseeing
the adequate functioning of the safeguarding system
k. Means of advising partners and professional staff of those assurance clients
and related entities from which they must be independent
l. A disciplinary mechanism to promote compliance with policies and
procedures; and
m. Policies and procedures to empower staff to communicate to senior levels
within the firm any issue of independence and objectivity that concerns them;
this includes informing staff of the procedures open to them

Safeguards within the firm’s own systems and procedures may include
ENGAGEMENT SPECIFIC safeguards such as the following:
a. Involving an additional professional accountant to review the work done or
otherwise advise as necessary. This individual could be someone from
outside the firm or network firm, or someone with the firm or network firm
who was not otherwise associated with the assurance team
b. Consulting a third party, such as a committee of independent directors, a
professional regulatory body or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged
with governance,
e. Disclosing to audit committee, or others charged with governance, the nature
of services provided and extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not
make, or assume responsibility for, management decisions for the assurance
client
g. Involving another firm to perform or re-perform part of the assurance
engagement
h. Involving another firm to re-perform the non-assurance service to the extent
necessary to enable to take responsibility for that service; and
i. Removing an individual from the assurance team, when that individual’s
financial interest or relationships create a threat to independence

ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of
the assurance client during the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the
assurance services and ends when the assurance report is issued, except
when the assurance engagements is of a recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance
engagement ends with the notification by either party that the professional
relationship has terminated or the issuance of the final assurance report,
whichever is later
4. In the case of an audit engagement, the engagement period includes the
period covered by the financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by
the financial statements that the firm will report on, the firm should consider
whether any thretas to independence may be created by:
a. Financial or business relationships with the audit client during or after
the period covered by the financial statements, but prior to the
acceptance of the audit engagement; or
b. Previous services provided to the audit client

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Similarly, in the case of an assurance engagement that is not an audit
engagement, the firm should consider whether any financial or business
relationships or previous services may create threats to independence.