CHAPTER 2
THE PROFESSIONAL STANDARDS
When auditing financial statements, an auditor
assumes certain professional responsibilities.
Auditor's opinion must be based on an
examination conducted in accordance with
professional standards. Failure to comply with
these standards exposes the auditor to risks such
as loss of public respect or even assessment of
legal damages.
THE PROFESSIONAL STANDARDS
Standards are established to measure the quality
of performance of individuals and organizations.
Standards relating to the accounting profession
concern themselves with CPAs' professional
qualities, the judgment exercised by the CPAs in
the performance of their professional
engagement, and the CPA firm's quality control
policies and procedures.
THE PROFESSIONAL STANDARDS
The Board of Accountancy promulgated ten
generally accepted auditing standards (GAAS)
that establish required level of quality for
performing financial statement audits. These
standards must be followed by CPAs when
auditing financial statements.
THE PROFESSIONAL STANDARDS
Philippine Standards on Auditing (PSAs) are
issued to clarify the meaning of these ten GAAS.
Auditing procedures are the means used by the
auditors in attaining the quality required by the
standards.
GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)
GAAS represent measures of the quality of the
auditor's performance. These standards should be
looked at as a minimum standard of performance
that auditors should follow. These ten GAAS are
grouped into general, fieldwork and reporting
standards.
GENERAL STANDARDS
1. The examination is to be performed by person or
persons having adequate technical training and
proficiency as an auditor.
2. In all matters relating to an engagement, an
independence in mental attitude is to be
maintained by the auditor.
GENERAL STANDARDS
1. The examination is to be performed by person or persons
having adequate technical training and proficiency as an
auditor.
2. In all matters relating to an engagement, an
independence in mental attitude is to be maintained by
the auditor.
3. Due professional care is to be exercised in the
performance of the audit and in the preparation of the
report.
STANDARDS OF FIELDWORK
4. The work is to be adequately planned and assistants; if
any, are to be properly supervised.
5. There is to be a proper study and evaluation of existing
internal control as a basis for reliance thereon and for the
determination of the resultant extent of the tests to which
auditing procedures are to be restricted.
STANDARDS OF FIELDWORK
6. Sufficient competent evidential matter is to be obtained
through inspection, observation, inquiries and
confirmations to afford a reasonable basis for an opinion
regarding the financial statements under examination.
STANDARDS OF REPORTING
7. The report shall state whether the financial statements
are presented in accordance with generally accepted
accounting principles.
8. The report shall-identify those circumstances in which
principles have not been consistently observed in the
current period in relation to the preceding period
STANDARDS OF REPORTING
9. Informative disclosures are to be regarded as reasonably
adequate unless otherwise stated in the report.
10. The report shall either contain an expression of opinion
regarding the financial statements, taken as a whole, or
an assertion to the effect that an opinion cannot be
expressed. When an overall opinion cannot be expressed,
the reasons therefore should be stated.
In all cases, where an auditor's name is associated with
the financial statements, the report should contain a
clear-cut indication of the character ot the auditor's
examination if any and the degree of responsibility he is
taking.
PHILIPPINE STANDARDS ON AUDITING (PSAS)
The Auditing and Assurance Standards Council (AASC) has
been given the task to promulgate auditing standards,
practices and procedures which shall be generally
accepted by the accounting profession in the Philippines.
The structure of AASC pronouncements is shown in Figure
ADOPTION OF INTERNATIONAL STANDARDS
To facilitate the preparation by the AASC of its
pronouncements and to attain uniformity of those
pronouncements with international auditing standards,
the AASC has approved the adoption of the International
Standards on Auditing (ISAs), International Standards on
Assurance Engagements (ISAEs), International Standards
on Review Engagement (ISREs) and International
Standards on Related Services (ISRSs) issued by the
International Auditing and Assurance Board (LAASB)
created by the International Federation of Accountants
(IFAC).
ADOPTION OF INTERNATIONAL STANDARDS
In addition to these standards, Practices Statements are
also issued to provide practical assistance to auditors in
implementing the standards and to promote good
practice in the accountancy profession.
ADOPTION OF INTERNATIONAL STANDARDS
In this connection, the AASC undertakes a review of the
standards and practices statements issued by IAASB to
determine if these can be adopted in the Philippines with
or without changes, after considering any local
requirements imposed by law or practice.
SYSTEM OF QUALITY CONTROL
If the public is to rely on the professional CPAs work, it is
essential that appropriate controls are put in place to
ensure that their work is consistently of high quality. The
need for practicing CPAs to implement and maintain
quality control measures is derived from the fact that
audits are usually conducted by audit teams. It is only by
implementing quality control policies and procedures that
CPAs can ensure that all members of the audit teams
perform the same level of quality of work
SYSTEM OF QUALITY CONTROL
Quality controls are policies and procedures adopted by
CPAs to provide reasonable assurance of conforming with
professional standards in performing audit and related
services.
SYSTEM OF QUALITY CONTROL
Under Philippine Standards on Quality Control (PSQC) 1, a
firm has an obligation to establish a system of quality
control designed to provide it with reasonable assurance
that the firm and its personnel comply with professional
standards and regulatory and legal requirements, and
that the report issued by the firm are appropriate in the
circumstances. In this regard, engagement teams:
SYSTEM OF QUALITY CONTROL
Implement quality control procedures that are
applicable to audit engagement;
Provide the firm with relevant information to enabling
the functioning of that part of the firm's system of
quality control relating to independence; and
Are entitled to rely on the firm's systems unless
information provided by the firm or other parties
suggest otherwise.
ELEMENTS OF A SYSTEM OF QUALITY CONTROL
PSA 220 states that audit firm should implement policies
and procedures designed to ensure that all audits are
conducted in accordance with PSAs.
ELEMENTS OF A SYSTEM OF QUALITY CONTROL
The quality control policies and procedures adopted by
audit firms vary depending on the firm's size and nature of
its practice, cost benefit considerations and other factors.
PSA 220 has identified the following quality control policies
that may serve as a guide to audit firms in establishing
their own system of quality control.
LEADERSHIP RESPONSIBILITIES FOR QUALITY ON AUDITS
The firm should establish policies and procedures
designed to promote an internal culture based on
recognition that quality is essential in the performance of
the engagements.
LEADERSHIP RESPONSIBILITIES FOR QUALITY ON AUDITS
The engagement partner should take responsibility for the
overall quality on each audit engagement to which the
partner is assigned. The engagement partner should set
example regarding the quality of audit by emphasizing
through actions and messages the importance of
performing work that complies with professional
standards, complying with the firm's quality control
policies and procedures, and issuing appropriate audit
reports.
ETHICAL REQUIREMENTS
The firm should establish policies and procedures
designed to provide it with reasonable assurance that the
firm and its personnel comply with ethical requirements,
which include
1.Integrity;
2. Objectivity;
3. Professional competence and due care;
4. Confidentiality; and
5. Professional behavior
ETHICAL REQUIREMENTS
The engagement partner should consider whether
members of the engagement team have complied with
these ethical principles. Any issues involving engagement
team member's non-compliance with ethical
requirements must be properly resolved and documented.
INDEPENDENCE
The firm should establish policies and procedures
designed to provide it with reasonable assurance that the
members of the engagement team, the firm and, where
applicable, the network firms maintain independence
when providing assurance services.
INDEPENDENCE
The engagement partner should form a conclusion on
compliance with independence requirements that apply
to the audit engagement. The engagement partner
should
1.Obtain relevant information to identify circumstances
and relationships that create threats to independence;
2. Evaluate information on identified breaches of the firm's
independence policies and procedures to determine
whether they create a threat to independence;
INDEPENDENCE
3. Take appropriate safeguards to eliminate such threats
or reduce them to an acceptable level; and
4. Document conclusions on independence and the basis
for such conclusion.
INDEPENDENCE
3. Take appropriate safeguards to eliminate such threats
or reduce them to an acceptable level; and
4. Document conclusions on independence and the basis
for such conclusion.
INDEPENDENCE
3. Take appropriate safeguards to eliminate such threats
or reduce them to an acceptable level; and
4. Document conclusions on independence and the basis
for such conclusion.
ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS
The firm should establish policies and procedures for the
acceptance and continuance of client relationships and
specific engagements, designed to provide it with
reasonable assurance that it will only undertake or
continue relationships and engagement where it:
1. Has considered the integrity of the client;
2. Is competent to perform the engagement and has the
capabilities, time and resources to do so; and
3. Can comply with ethical requirements.
ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS
The engagement partner should be satisfied that
appropriate procedures regarding the acceptance and
continuance of client relationships and specific audit
engagement have been followed, and that conclusions
reached in this regard are appropriate and have been
documented
HUMAN RESOURCES AND ASSIGNMENT
The firm should establish policies and procedures
designed to provide it with reasonable assurance that it
has sufficient personnel with the capabilities, competence,
and commitment to ethical principles necessary to
perform the engagement. Such policies and procedures
should address issues concerning personnel Recruitment;
Performance evaluation, compensation and promotion;
HUMAN RESOURCES AND ASSIGNMENT
Capabilities and competence;
Career development; and
Assignment of engagement teams
HUMAN RESOURCES AND ASSIGNMENT
The engagement partner should be satisfied that the
engagement team collectively has the appropriate
capabilities, competence and time to perform the audit
engagement in accordance with professional standards,
and regulatory and legal requirements, and to enable an
auditor's report that is appropriate in the circumstances to
be issued.
ENGAGEMENT PERFORMANCE
The firm should establish policies and procedures
designed to provide it with reasonable assurance
that engagements are performed in accordance with
professional standards and other regulatory and legal
requirements; and
that the audit report issued is appropriate in the
circumstances.
ENGAGEMENT PERFORMANCE
The engagement partner should take responsibility for the
direction, supervision, review and overall performance of
the audit engagement.
Direction
Assistants should be informed of their responsibilities, the
nature of the entity's business, potential problems that
may arise and the detailed approach to the performance
of the engagement.
ENGAGEMENT PERFORMANCE
Supervision
This involves monitoring the progress of the audit,
resolving accounting and audit issues, and considering the
level of consultation appropriate for the engagement.
Review
Work performed by assistants should be reviewed to
consider whether the audit procedures, evidence and
documentation are appropriate to support the conclusion
reached.
ENGAGEMENT PERFORMANCE
The engagement partner should:
1. Be responsible for the engagement team undertaking
appropriate consultation on difficult and contentious
matters;
2. Be satisfied that members of the engagement team have
undertaken appropriate consultation during the course of
the engagement, both within the engagement team and
others at the appropriate level within or outside the firm;
ENGAGEMENT PERFORMANCE
3. Be satisfied that the nature and scope of, and conclusions
resulting from such consultations are documented and agreed
with the party consulted;
4. Determine that conclusions resulting from consultations have
been implemented.
ENGAGEMENT PERFORMANCE
The firm should establish policies and procedures
requiring an engagement quality control review that
provides an objective evaluation of the significant
judgments made and conclusions reached in formulating
the auditor's report.
ENGAGEMENT PERFORMANCE
This requires the engagement partner:
1.To determine that an engagement quality. control
reviewer has been appointed
2.To discuss significant matters arising during the audit
engagement, including those identified during the
quality control review, with the engagement quality
control reviewer; and
3.Not to issue the auditor's report until the completion of
the engagement quality control review.
ENGAGEMENT PERFORMANCE
The firm should establish policies and procedures setting
out the scope of quality control review, criteria for the
eligibility of the reviewer, and documentation of the quality
control review.
DIFFERENCES OF OPINION
The engagement team should follow the firm's policies
and procedures for dealing with and resolving differences
of opinion that arise within the engagement team, with
those consulted and, where applicable, between the
engagement partner and the engagement quality control
reviewer.
MONITORING
The continued adequacy and operational effectiveness of
quality control policies and procedures is to be monitored.
Policies and procedures must be adopted to provide
reasonable assurance that the systems of quality control
are relevant, adequate and operating effectively.
The firm's quality control policies and procedures should
be communicated to its personnel in a manner that
provides reasonable assurance that the policies and
procedures are understood and implemented.
QUALITY CONTROL REVIEW
Recognizing the importance of professional accountants'®
services to the society, the government has also taken
steps to ensure that CPAs work to the highest standards
which can reasonably be expected from them. The
government thru the Professional Regulatory Board of
Accountancy (BOA) has required all CPA firms and
individual CPAs in public practice to obtain a certificate of
accreditation to practice public accountancy. Such
certificate is valid for three years and can be renewed after
complying with the requirements of the Board of
Accountancy.
QUALITY CONTROL REVIEW
As a condition to the renewal of the certificate of
accreditation to practice public accountancy, the Board
requires individual CPAs and CPA firms to undergo a
quality control review to ensure that these CPAs comply
with accounting and auditing standards and practices.
QUALITY CONTROL REVIEW
The PRC has created a Quality Review Committee (QRC)
which shall conduct a quality review on applicants for
registration to practice public accountancy and shall
recommend the revocation of the certificate of
registrations of CPAs who have not observed the quality
control measures or those who have not complied with the
standards of quality prescribed for the practice of public
accountancy:
