MODULE ON PRE 314

AUDITING and ASSURANCE PRINCIPLES

TABLE OF CONTENTS

Lesson 1 – FUNDAMENTALS OF AUDITING AND ASSURANCE SERVICES 1

Universe of CPA Services

Assurance Engagements: Nature, objective, range, types (Audits, Reviews)

Assurance services and attestation services; Other assurance
services
Non-assurance Engagements
Agreed-upon procedures services: Compilation of financial or other
information
Tax services; Management consulting; Accounting and Data Processing or
Information Technology system services
Elements of an Assurance Engagement
High-level assurance engagement: Objective, Ethical requirements,
Accepting the engagement, Agreeing to the terms of the engagement,
Quality control, Planning and conducting the engagement, Evidence,
Documentation, Subsequent event, Using the work of an expert,
Reporting

Lesson 2 – INTRODUCTION TO AUDITING 7

Definition and objective of auditing
The nature, purpose and scope of an audit; Accounting and auditing
distinguished.
The historical development of auditing
The ethical case of auditing:
Philosophy of an audit;
Why independent auditing is necessary
The notion of accountability, stewardship and agency
The social concept of an audit and its changing role
Philippine Standards on Auditing (PSAs)
Types of audits: Financial statements audit, operational audit; compliance
Audit
Types of auditors
General Types of Audit
External independent financial statement audit: Nature, Objectives,
Scope,
Advantages and Practical Benefits (PSA 200)
Major steps in the systematic process
Types of opinions and situations leading to their expression-
Unqualified, Qualified, Adverse, Disclaimer, Piecemeal
Basic requirements for an effective Financial Statement audit
Internal audits: Nature, objective, scope responsibility and authority,
independence
 Relationship to external audit; Internal auditing approach and techniques

Characteristics of internal audit report

Government auditing, nature and scope; Commission on Audit,

Principal duties of the COA, Functions of government auditors
Special Purpose Audit: Operational or management audit, compliance
audits

Lesson 3 – THE PROFESSIONAL PRACTICE OF ACCOUNTING 19

Nature of the Accounting Profession
Italian initiatives in the sixteenth century;
Origins of the modern profession in the early nineteenth century
Development of professional bodies in the English-speaking world
Development in Asia Pacific in the twentieth century
International dimension and the “big four” international accountancy
Firms
Standard-setting and regulation in accounting practice
Early sources of regulation:
Public sector regulation of accounting practice;
National securities commissions and their role in effect on
professional accounting regulations standards;
Private sector standard-setting for accounting practice
Harmonization of accounting practice internationally
The International Accounting Standards Board (IASB) and its
IFRS
The United Nations Intergovernmental Working Group of Experts
on International Standards of Accounting and Reporting (ISAR)
Public Accounting Profession: Public Accounting as a Profession; Attributes,
objectives and fundamental principles
Certified Public Accountant
Organizations that affect Public Accounting
Regulatory government agencies: PRC, BOA, SEC, COA
Professional organizations; Philippine Institute of CPAs
Standard-setting bodies
Regulation of the Public Accounting Practice
Republic Act No. 9298 or the Philippine Accountancy Law of 2004
Regulation within the firm
Quality Control for firms/audits
Peer regulation; Services of a CPA in public practice
Core competencies required in the public accounting profession
Emerging assurance and consultancy services of CPAs
Functions and duties of independent auditors for serving the public
Interest-clients and third parties
Management of a Public Accounting Practice
Establishment and operation of a Public Accounting practice
Terms of audit engagements (PSA 210)
Acceptance and retention of audit
Management’s responsibility for financial reporting; The Role of the Audit
Committee
 Auditing in a Globalized Environment

Lesson 4 – THE CPA’s PROFESSIONAL RESPONSIBILITIES

Philippine Standards on Auditing (ISAs based)
Introduction and status; glossary of terms;
Framework for auditing and related services
Objective and general principles governing an audit of financial statements
Ethical requirements; relating to an audit; Conduct of an audit; Scope of an
audit;
Reasonable assurance, Responsibility for the financial statements
Code of Ethics for Professional Accountants in the Philippines
(effective January 1, 2004)
Objectives; fundamental principles
The Code applicable to all professional accountants
The Code applicable to professional accountants in public practice
The Code applicable to employed professional accountants
Auditor’s Legal Liability:
Consideration of Laws and Regulations in an audit of financial statements
(PSA 250)
Legal concepts related to auditor’s liability
Legal liability of the independent auditor to clients; to third parties.
Responsibility in tax practice
CPA Tax Practitioner’s Certificate to the BIR
Limitation on auditor’s responsibility
Auditor’s defenses against client’s suits
Auditor’s defenses against third-party lawsuits
Minimizing exposure to legal liability
Communication of audit matters with those charged with governance
(PSA 260)
 INTRODUCTION

Assurance engagements performed by professional accountants are intended to enhance the

credibility of information about a subject matter by evaluating whether the subject matter
conforms in all material respects with suitable criteria, thereby improving the likelihood that the
information will meet the needs of an intended user.

The level of assurance provided by the professional accountant’s conclusion conveys the
degree of confidence that the intended user may place in the credibility of the subject matter.
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LESSON 1
FUNDAMENTALS OF AUDITING AND ASSURANCE SERVICES

Universe of CPA Services

Accounting involves the processes of wherein financial information are analyzed, measured,
recorded, classified and summarized. The results of the processes are then interpreted and
presented in financial statements and other relevant reports. The Certified Public Accountant is
frequently asked to examine these financial reports and to provide assurance that interested
parties and other users may rely on the authenticity of the information contained therein.

The objectives and elements of assurance engagements to provide high or moderate level of
assurance are described in the Philippine Framework for Assurance Engagements, which was
unanimously approved by the members of the Auditing Standards and Practices Council for
adoption in the Philippines. The PFAE basically provides a frame of reference for practitioners
and others involved in assurance engagements.

Services Offered by a Professional Accountant

The services normally offered by a Certified Public Accountant in public practice are
classified under two main categories: assurance engagements and non-assurance
engagements.

Assurance Engagements

An assurance engagement is an agreement between the CPA practitioner and an intended

information user. In an assurance engagement, the practitioner

a. uses pertinent criteria in the evaluation and measurement of a subject matter that is
the responsibility of another party; or the same responsible party; and
b. expresses a conclusion designed to enhance the degree of confidence that the
intended user may have on the subject matter.

Nature of Assurance Engagements

An assurance engagement involves the expression of a practitioner’s satisfaction with the

reliability of an assertion made by one party for the use of another party.

The assertion made by one party is referred to as the subject matter.

The practitioner/auditor collects and assesses sufficient and appropriate evidence against
pertinent standards, identified as the criteria.

After conducting applicable and appropriate procedures to provide reasonable basis for his
conclusion, the practitioner then expresses his conclusion on a high or moderate level of
assurance on the degree of confidence that the intended user may place on the reliability of
the subject matter.

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To illustrate:

Subject matter : Statements of Financial condition, Financial Performance and Cash Flows
Criteria : Philippine Reporting Standards for recognition, measurement,
presentation and disclosure.
Conclusion : Outcome of the evaluation or the subject matter information on the level of
assurance that the practitioner provides in the assurance report

In summary, an assurance engagement may be characterized as consisting of

a. a three-party relationship involving:
- the practitioner
- a responsible party
- the intended user
b. subject matter or an assertion
c. criteria against which the subject matter is assessed
d. evidence that is sufficient and appropriate basis to arrive at a
conclusion e. written assurance report expressing practitioner’s conclusion

Objective of Assurance Engagements

The primary objective of assurance engagements is the professional accountant’s

expression of a conclusion that will provide intended users with a level of assurance on the
degree of confidence to place on the reliability and credibility of the subject matter.

Range of Assurance Engagements: Assertion Based vs. Direct Reporting Engagement

An assurance engagement performed by the practitioner for a responsible party, on a subject

matter or assertion made by the same responsible party; with the outcome also made available
to the intended user is termed an assertion-based engagement.

An assurance engagement performed by the practitioner for the intended user, on a subject
matter that is the responsibility of another party, with the outcome directly provided to the
intended user is termed a direct-reporting engagement.

Types of Assurance Engagements

Assurance engagements that a professional accountant may perform include audits,

reviews, attestations and other assurance services.

Audits

An audit is an assurance engagement aimed to provide a high level of assurance that the
subject matter has met the appropriate criteria in all material respects. The practitioner may be
asked to perform various types of audits, the most frequent of which, is the external audit or the
independent financial statement audit. The auditor expresses his conclusion in the positive form
after an examination of adequate and competent evidence and performing necessary tests and
auditing procedures. A high degree of confidence on the subject matter of the assurance
engagement enhances the credibility of the financial statements.

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The practitioner states his conclusion in the positive form, expressing his opinion thus:

I believe the audit evidence obtained is sufficient and appropriate to provide a basis for
my audit opinion. In my opinion, the financial statements present fairly in all material
respects,
the financial position, financial performance and cash flows. . in accordance with Philippine
Financial Reporting Standards.

Reviews

A review is a limited examination of the client’s financial statements, performed for the
purpose of providing a limited assurance that the statements are presented in accordance with
identified Financial Reporting Standards. The evidence examined supports a moderate level of
assurance that the information reviewed is free of material misstatements.

The practitioner uses the negative form of expression of his conclusion, to wit:

On the basis of procedures performed, nothing has come to my attention that would
cause me to believe that the financial statements are not prepared in all material respects, in
accordance with (a reporting standard identified).

The negative assurance may also be expressed thus:

Based on my review, I am not aware of any material modification that should be made
on the accompanying statements so that they would conform with generally accepted
accounting principles for reporting criteria identified).

Assurance Services and Attestation Services

An attestation service is an engagement in which a practitioner issues a written

communication expressing a conclusion on the reliability of an assertion that is the responsibility
of another party. The same principles and rules that apply to assurance engagements apply to
attestation services with additional detailed standards in the Statement on Standards for
Attestation Services. Like audits, from where attestation and assurance evolved, the latter two
are also based on independent verification. Audits however are highly structured and are
geared to the need of a greater number of users; while attestations and assurance services are
more customized to the intended user’s need and are highly useful in more limited
circumstances.

Other Assurance Services

The professional accountant may also perform these assurance services:

Assurance on Risk Assessment – Identifies the risks that affect an entity, studies link
between
 risks and the entity’s mission, vision, objectives and strategies and develops new and
relevant measures.

Information System Reliability Service – Provides assurance that information system enerate
reliable real-time information; includes tests that the system protects against potential
data defects.

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Assurance on Sales Personnel-Customer Interaction – Performs anonymous shopping to
observe and assess actual procedures done by sales personnel in their interaction with
customers.

Annual Environmental Audit – Ensures that the entity’s policies effectively comply with
environmental standards; assesses compliance with the country’s existing environmental
laws.

Among the various other assurance services performed by the professional accountant are:

*Assurance Services on Information Technology

*CPA Web Trust Service
*Assurance on Digital Information Risk
*Business Performance Measurement Services
*Health Care Performance Measurement
*Eldercare Plus
*Assurance on compliance with ISO 9000
*Assurance on Fraud and Illegal Acts Risk

Non-Assurance Engagements

A professional accountant is not precluded from performing non-assurance engagements hat

are not covered by the Philippine Framework for Assurance Engagements. Among these non-
assurance engagements are agreed-upon procedures, compilation of financial or other
information, tax services, management consulting and advisory services, accounting and data
processing or information technology system services.

Agreed-upon Procedures Services

The intended user or the party who engages the professional accountant determines the
examination processes to be performed. Upon accomplishing the required procedures, the
professional accountant submits the factual findings of the results of his examination. The
intended user assesses the findings and draws his own conclusions, deriving some assurance
from the report of the findings.

Compilation of Financial or Other Information

The intended user/client supplies the professional accountant with financial information,
which he classifies and summarizes and presents in financial statement format in conformance
with Financial Accounting and Reporting Standards. No assurance is expressed in a compilation
report but a level of assurance is provided as the professional accountant identifies errors in the
representation of client.
Tax Services

A Certified Public Accountant who is duly registered with the PRC and duly accredited with
the BIR, can render tax services to both audit and non-audit clients. These tax services consist
of representation of clients in tax cases; tax planning; and tax compliance which includes the
preparation of annual tax returns and assistance in the filing of monthly or quarterly VAT and
other returns.
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Management Consulting and Advisory Services

The usual consulting and advisory services offered by a CPA include design and installation
of accounting system, corporate finance, computer risk management and E-Business. In
performing these services, a CPA normally follows these steps: determine client objectives,
define problems, do fact-finding, evaluate alternatives, formulate proposals, communicate
results, implement and follow up.

Accounting and Data Processing or Information Technology System Services

Professional accountants may be contracted by small businesses with inadequate staff for
the ‘outsourcing’ of accounting and data processing services; such as manual or automated
bookkeeping, journalizing, posting adjusting entries, financial statements preparation; and
information system on tax, stock and transfer agency and internal auditing.

Elements of an Assurance Engagement

A high-level assurance engagement normally consists of these main elements: objective,

ethical requirements, accepting the engagement, agreeing to the terms of the engagement,
quality control, planning and conducting the engagement, evidence, documentation, subsequent
event, using the work of an expert, and reporting.

Objective

The purpose of the engagement or the intended user’s need of assurance, as well as the
subject matter of the engagement, should be identified and clearly understood between both the
practitioner and the client/intended user.

Ethical Requirements

The professional accountant or auditor possesses and observes the ethical requirements of
the fundamental principles of independence, integrity, objectivity, competence and due care,
confidentiality, professional behavior and the application of technical standards.

Accepting the Engagement

When the practitioner is satisfied that the subject matter is appropriate, the criteria is suitable
and supporting evidence is available, he may relay his acceptance of the engagement by a
formal letter stating among others, the starting date of his audit fieldwork and his proposed
professional fee.

Agreeing to the Terms of the Engagement

 The practitioner’s acceptance letter, better known as the engagement letter, contains a
space below “Agreed”/”Conforme”, where client or intended user places his signature to indicate
agreement with the terms in the engagement letter, henceforth called engagement contract
when signed by the client.

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Quality Control

The practitioner should observe quality control and develop a quality-oriented internal
culture. The importance of quality is stressed in meetings, briefing, and seminars. Reports to be
issued and work performed should be checked for compliance with regulatory standards and
legal requirements.

Planning and Conducting the Engagement

The practitioner should plan, coordinate and schedule the activities in the conduct of the
engage-ment so that the engagement may be performed in an effective manner. An audit plan
involves an overall audit strategy and is normally drafted prior to starting work at the client’s
office.

Evidence

All information that a practitioner uses in arriving at a conclusion is considered evidence.

Audit evidence should be appropriate, sufficient and competent to provide basis for
practitioner’s conclusion. Audit evidence is more reliable when provided by original documents
from sources outside the entity.

Documentation

Significant computations and information gathered during the audit must be documented.
The practitioner describes, among others, the controls tested, who/what was observed, who
was spoken to, what was discussed, explanation or representation given by client, and
evaluation of evidence obtained.

Subsequent Event

Events that occur after audit date or subsequent events are studied and their effect on the
subject matter is determined; whether the event is material and needs disclosure or adjustment.

Using the Work of an Expert

An expert is a person or entity possessing special skill, knowledge, and experience in a

particular field other than accounting and auditing. The practitioner usually consults an expert
for the valuation or replacement cost of assets; or an actuary for the appropriateness of
insurance loss reserves.

Reporting
 Upon completion of the examination, the practitioner evaluates his findings, formulates an
opinion and drafts the assurance report. The audit report expresses the practitioner’s opinion on
the level of confidence that may be placed on the financial statements or subject matter of the
engagement.

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LESSON 2
INTRODUCTION TO AUDITING
Nature, Purpose and Scope of an Audit

Auditing is an independent discipline that relies on the results of accounting and other
financial information. Auditing reports and reviews the propriety of management’s
communication of financial statements. Auditing is an assurance and attest function involving an
objective examination of the client’s internal control, records, transactions and their underlying
supporting documents.

An audit is performed in order to ascertain the fairness, integrity, authenticity and reliability of
the client’s financial statements that have been prepared in accordance with generally accepted
accounting principles. An audit is conducted for the purpose of rendering an opinion on the
fairness of the presentation of the financial statements. The long-range objective of audits is to
guide future decisions of management in all matters involving control, analysis, forecasting and
reporting for the improvement of financial performance.

The scope of an audit varies to fit the requirements of an engagement. Examination

procedures are dictated by the professional accountant’s thorough knowledge of principles and
procedures, sound judgment, adequate education, proper training, open critical mind; and
understanding the entire management information system.

The Historical Development of Auditing

The earliest form of accounting started as soon as civilization developed and transactions
took place between people. The development of accounting is closely aligned with the progress
of man’s commerce and trading activities. Accounting developed in keeping with changes in
economic theory and business practices from the 16th to the 18th centuries.

Public accountants came about during the late 18 th century and in the 19th century, expert
book-keepers were asked to trace fraudulent transactions and locate errors. Accounting theory
and practiced developed rapidly with the increased size of business entities and the complexity
and multiplicity of business transactions in the early 20th century.

During the 20th century, the emphasis of audit shifted to a greater range from tax services
and audit of financial statements to, among others: assurance services in connection with
normal business operations; corporate mergers and reorganizations; regulations over securities
issuances; management advisory services; investigative, representation and other services in
the varied fields of business.
 The practitioner of today is a competent Certified Public Accountant, well equipped with
education and training to meet the increased demands of intended users for the assurance that
is provided by auditing.

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The Ethical Case of Auditing

Ethics is a composite of moral principles and self-discipline that is beyond the ordinary
expectation or requirement of law. The ethics of the professional accountant is his protection
against involvement in acts discreditable to the profession. The client management is
responsible for the financial statements but the practitioner is responsible for his opinion
expressed on the financial statements. The practitioner’s opinion is expressed without duress or
concession but independently. As dictated by professional integrity, competence and due care.

Philosophy of an Audit

Financial reports, presenting the financial condition, results of financial performance, cash
flows and other pertinent financial information on an entity, are submitted to management,
stockholders or owners, creditors and pertinent government agencies; and are made available
to interested parties, such as the employees, labor organizations, prospective investors and the
general public. These financial statements however, would remain as mere reports of an entity
on itself, without much credibility until an independent auditor attests to the fairness, integrity
and authentically of the data contained therein.

When financial statement users see the independent auditor’s audit report expressing his
opinion on the fairness of the presentation of these financial statements, they are assured of
reliable information not resulting from misrepresentation, irregularities, illegal acts, fraud or
error. Financial statements attested to by an independent auditor would allow users to make
well-informed decisions; by providing information to help, among others: management in
choosing alternatives, stockholders and investors in acquiring or disposing stockholdings,
creditors in the advisability of loan extension or renewal; and the government in the proper
imposition of taxes.

Definition of Auditing

Auditing is the critical and logical process by which a qualified practitioner examines and
evaluates an entity’s financial statements and relevant accounting data, documents and records
to enable him to express an opinion on the fairness of the presentation of the financial
statements in accordance with generally accepted accounting principles. Auditing is the
independent verification of accounting information to determine adherence to accounting
principles and evaluate the accuracy and reliability of financial statements and reports.

The American Accounting Association (AAA) defines Auditing as a systematic process by

which a competent, independent person objectively obtains and evaluates evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between those assertions and established criteria and communicating the results to interested
users.
The International Federation of Accountancy (IFAC) defines Auditing as a structured process
involving the application of analytical skill, professional judgment and professional skepticism;
using appropriate forms of technology and adhering to a methodology, in compliance with
relevant technical standards and required standards of professional ethics.

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Objective of Auditing

The objective of auditing is to ascertain the integrity and authenticity of management’s

financial statements to obtain a basis for the expression of an opinion on the fairness of its
presentation in accordance with generally accepted accounting principles.

The Framework of the Philippine Standards on Auditing, PSA 120, states that the objective
of auditing is to enable the auditor to express an opinion whether the financial statements are
prepared in all material respects in accordance with an applicable financial reporting framework.

Why Independent Auditing is Necessary

In most instances, an independent audit is necessary in order to obtain objective and

unbiased financial statements, where the account balances and results of operations are arrived
at through the impartial application of pertinent principles and procedures. Current businesses
are often managed by non-owners, and decision-makers do not have direct involvement in daily
operations. These situations may result in conflict of interest and information would most likely
favor the provider of such data. Moreover, numerous transactions result in voluminous
documents that must be properly measured and recorded; not buried in the files, independent
audits are necessary to ensure that information in financial statements are complete, unbiased
or impartial, and that the reliable and objective financial statements are geared to the common
needs of information users.

The Notion of Accountability, Stewardship and Agency

Auditing supports the notion of accountability, stewardship, and agency, which are all
positions of trust and need independent verification to determine the propriety or impropriety of
the manner that such positions were handled.

Accountability is the obligation to render accounts when the position of trust is terminated.
Every supporting vouchers, receipts, computation of expenses and claims of creditors must be
kept and filed, with recording done in authorized books. Accountability continues until the
account is closed or cleared and the position or relationship is terminated.

A steward is an individual entrusted to manage, administer, or supervise the financial affairs

or properties of another individual or business entity. Stewardship implies accountability. An
agent is an individual or entity entrusted by another to act in his stead in the performance of a
specific activity, financial or otherwise. Agency likewise implies accountability. Management, as
steward and agent of the business entity, performs the functions of accounting with supporting
documents properly filed so that auditing may check on its accountability.
The Social Concept of an Audit And its Changing Role

In ancient history, failure in record-keeping was penalized in Sumeria, in the Mesopotamian

Valley. In ancient Egypt, record-keeping for the royal storehouses was subjected to verification;
and irregularities were punishable by fine, mutilation or death. It may be assumed that a
qualified individual performed the examination of records before the punishment was handed
down. In the 19th century auditing or the verification of records was performed by the
bookkeepers, who were asked to trace fraudulent transactions and locate errors.

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Currently, the functions of auditing can no longer be contained around the desks provided by
clients to the practitioner performing fieldwork for an audit engagement. Businesses have
extended their operations beyond their original locations by putting up branches and granting
franchises. Groups of companies arose and vast industrial empires have developed. For as
much as the accounting profession has grown, so also has the social aspect of audits
expanded.

The unprecedented progress of global information technology has led to the

internationalization of the capital market. Multinational corporate holdings, mergers and
brokerages are greatly facilitated by the internet. Foreign investments and borrowings and
international transactions in world trade are done on-line supported by the tremendous
development in the banking industry. Generally accepted accounting principles have been
formed and developed for adaptation in the international environment, achieving transparency
by recording transnational transactions of the same nature in the same manner.

The practitioner in the current global environment frequently needs to incorporate in his audit
report the work of an expert or another auditor. The examination of client’s consolidated
financial statements, although presenting cross-border economic activities and operating
performances in formats that facilitate comparisons for decision-making, would still require the
consideration of multiple relevant factors and the inclusion of audit procedures applicable to the
client’s perceived needs.

Audits have since evolved from attestation engagements to assurance and non-assurance
services for an almost innumerable variety of subject matters for the reliability of which, an
intended user/client may require an auditor’s opinion.

Philippine Standards of Auditing (PSAs)

The Auditing Standards and Practices Council (ASPC) was established by the PICPA
(Philippine Institute of Certified Public Accountants) and the ACPAPP (Association of CPAs in
Public Practice); with the mission of promulgating auditing standards, practices and procedures
that shall be generally accepted by the accounting profession in the Philippines. The ASPC has
17 regular members coming from the ACPAPP (2); Board of Accountancy (1; Securities and
Exchange Commission (1); Commission on Audit (1); independent auditing firms (7); and five
from the PICPA; one representative each from the Academe, Commerce and Industry and
Public Practice in Luzon, Visayas and Mindanao.
The PSAs or Standards, are pronouncements of the ASPC, containing basic principles and essential
procedures together with related guidance for their application. The PSAs apply whenever an
independent examination of financial statements is conducted for the purpose of expressing an opinion
thereon; such examination done for any entity, whether profit-oriented or not, and irrespective of
size or legal form.

Types of Audits

Audits may be classified according to these bases:

a. time frequency
b. extent of the examination
c. scope of the examination
d. emphasis of the audit
e. who performs the audit
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According to the time frequency involved in the examination, audits may be: periodic or
interim.

When the audit is done annually or quarterly with progress reports made within the year and
an annual report made for the year, the periodic examination is termed an annual audit. When
the auditor visits the client at regular intervals during the year, bringing up to date all work since
his previous visit, the audit is a continuous or interim audit.

According to the extent of the examination, an audit may be a detailed audit or test audit. All
relevant transactions and records are examined in a detailed audit, as in a Cash audit. A test
audit involves the examination of selected records and transactions that are representative of
the whole, as in a test audit or sampling of transactions.

According to the scope of the examination, audits may be complete or partial. When the
conduct of the examination is unrestricted and involves all necessary audit procedures, the audit
is a complete audit. When only a particular portion of the work is carried out and the
examination is restricted, the audit is a partial audit.

According to the emphasis of the audit, audits are classified as financial audit, operational
audit, compliance and performance audit.

According to who performs the audit, audits are classified as to the type of auditor performing
the audit. These are independent audits, internal audits, and government audits.

Types of Auditors

A Certified Public Accountant is normally classified as to the type of audit he is identified with
and which he engages in, in the performance of his duties and practice. A qualified CPA may be
an independent auditor, an internal auditor, or a government auditor.

An independent auditor is a practicing CPA hired by a business entity to perform an

examination of its financial statements and to express an opinion on its fair presentation in
accordance with generally accepted accounting principles. An independent auditor’s primary
responsibility is to the public who rely on his opinion regarding the financial statements.
Inasmuch as an independent auditor is not an employee conducting an audit within the business
entity, he is also identified as an external auditor. An independent auditor is commonly referred
to as a practitioner.
 An internal auditor is a Certified Public Accountant who performs independent appraisal
activity within the business organization for the review of accounting and other operations as a
basis for protective and constructive service to management. An internal auditor holds a
significant part in the organization’s internal control system, determining adherence to
prescribed procedures. He assists management achieve operational efficiency and
effectiveness by identifying existing deficiencies and recommending corrective measures.

A government auditor is a Certified Public Accountant employed by government agencies,

such as the Commission on Audit (COA) that performs examination of government units, public
entities and private organizations using public funds; and the Bureau of Internal Revenue (BIR)
that performs examination of financial statements to determine taxpayers’ compliance with tax
laws. Government auditors, also called examiners, perform independent examination into how
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governmental agencies handle their financial responsibilities of administering government funds,
achieving purposes, and ensuring that programs and activities are conducted in an efficient and
economical manner.

General Types of Audits

Audits, in general, are classified into financial statement audit; internal audit, government
audit and special purpose audit.

Financial Statement Audit

Nature

A financial statement audit is better known as an independent, external audit since the
auditor who performs the objective examination of financial statements is independent of
management and financial statement users; and whose practice is outside the client’s
organization.

Objectives

The objectives of a financial statement audit are to enable the auditor to express an opinion
on its fair presentation in accordance with generally accepted accounting principles; and to
assure users that the financial statements are free from misrepresentations and that the
information contained therein are reliable bases for well-informed decisions.

Scope

A financial statement audit specifies the period covered by the auditor’s examination, the
scope or audit procedures deemed necessary under the circumstances to achieve the objective
of the audit; and the use of audit procedures applied on a test basis on evidence that the auditor
believes sufficient and competent for his opinion on the fairness of presentation of financial
statements.

Advantages and Practical Benefits

A financial audit expressing an opinion on the fair presentation of the financial statements
offers decision-makers a reliable basis for the choice or course to take to achieve organization’s
goals. The constructive suggestions and recommendations stated by the auditor, if implemented
would help in the effectiveness of controls and the efficiency of operations, as well as in
improving earning capacity. Needless to say, a financial statement audit supplements an
individual’s innate honesty, as a fraud deterrent to officers and employees and as an incentive
for the exercise of greater than due care in performing assigned tasks.

Financial statements that have been audited provide government agencies, other institutions
and the general public with a credible basis for, among others, evaluating managerial efficiency,
extension of credit, determining dependable computation of tax, and administering trusts and
estates.

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Major Steps in the Systematic Process

The major steps in financial statement audits are similar to the sequence followed in a high-
level assurance engagement; generally divided into three phases: the pre-engagement and
audit planning activities; gathering and evaluating of evidence; completing the audit and issuing
the audit report.

1. Pre-engagement and audit planning activities

In accepting the engagement, certain points must be cleared with the client such as period
covered and purpose of the audit. The auditor also notes preliminary considerations among
which are the study of the client’s business, the industry environment, evaluation of internal
control, investigating the accounting system, and clearance for testing entries and confirming
receivables.

2. Gathering and evaluating of evidence

The actual audit work covers the gathering and evaluating of evidence in the performance
of compliance and substantive tests.

Evidence may be gathered through inquiries, inspection and observation or transaction

walk-through of the organization’s specific policies and procedures, all of which must be
described or fully documented.

Compliance tests are tests of controls aimed to determine proper execution, recording and
custodianship in the basic transaction cycles: the revenue and collection cycle, expenditure
cycle and financing and investing cycle.

Substantive tests involve the tests of transactions, test of details of balances and analytical
procedures. Substantive tests aim to confirm and substantiate existence or occurrence,
completeness, valuation, rights and obligations, and presentation and disclosure of items in the
financial statements.

3. Completing the audit and issuing the audit report

In the final phase of the audit, the practitioner summarizes the results of his audit findings,
identifies subsequent events, completes the audit; and issues the audit report expressing the
opinion corresponding to his conclusion.

Types of Opinions and Situations Leading to Their Expression

 The different types of opinions that an independent external financial statement auditor may
express are: an unqualified opinion, a qualified opinion, an adverse opinion, a disclaimer of
opinion, and a piecemeal opinion.

An unqualified opinion expresses ‘present fairly’ when the audit examination was
conducted without restrictions; there are no errors or irregularities that will result to materially
misstated financial statements; no uncertainties exist, disclosures are adequate and
presentation of financial statements is in conformity with generally accepted accounting
principles.

A qualified opinion expresses ‘present fairly except for’ or ‘subject to’ when the auditor is
precluded from expressing an unqualified opinion because of existing uncertainties or
inconsistencies and not very material departure from generally accepted accounting principles,
or failure to apply generally accepted auditing standards, although not very material.
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An adverse opinion states that the financial statements are not fair presentations, that they
are not in conformity with generally accepted accounting principles, when the auditor’s
examination revealed very material departure from generally accepted accounting principles
and the auditor was not able to convince the client to make necessary adjustments or include
material disclosures.

A disclaimer of opinion states that the auditor is not in a position to express an opinion, so
no opinion is expressed on the financial statements, when there have been very material
restrictions or limitations to the conduct of the audit examination and very material uncertainties
exist regarding the financial statements.

A piecemeal opinion is an opinion that specifies an identified account or accounts in the

financial statements when the auditor has already expressed a disclaimer or an adverse opinion
on the financial statements taken as a whole. A piecemeal opinion contradicts the disclaimer or
adverse opinion and must be avoided under any circumstances.

Basic Requirements for an Effective Financial Statement Audit

The basic requirement for an effective financial statement audit are contained in the
generally accepted auditing standards, summarized into the general standards, the standards of
fieldwork and the standards of reporting.

The general standards are:

1. The examination must be performed by person or persons with adequate technical

training
and proficiency as an auditor.
2. An independence in mental attitude to be maintained by the auditor in all matters relating
to the assignment.
3. Due professional care is to be exercised in the performance of the examination and in
the
preparation of the report.

The standards of fieldwork are:

 1. The work is to be adequately planned and assistance, if any, are to be properly
supervised.
2. There is to be proper study and evaluation of the existing internal control as a basis for
reliance thereon, and for the determination of the resultant extent of the tests to which
audit procedures shall be deemed appropriate in the circumstances.
3. Sufficient, competent evidential matter is to be obtained through inspection, observation,
inquiries, and confirmation to afford a reasonable basis for the opinion regarding the
financial statements under examination.

The standards of reporting are:

1. The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.
2. Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.

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3. The report shall contain an expression of opinion regarding the financial statements
taken
as whole; or an assertion to the effect that an opinion cannot be expressed, in which
case
the reasons therefor should be stated.
4. When the auditor’s name is associated with financial statements, the report should
contain
a clear-cut indication of the character of the author’s examination, if any, and the degree
of responsibility he is taking.

NTERNAL AUDITS

Nature and Objective

Internal audit is a managerial control that measures and evaluates the effectiveness of other
controls. It is an independent appraisal activity within an organization for the review of
operations as a service to management.

The main objective of internal auditing is to assist all members of management in the
effective discharge of their responsibilities by furnishing them with analyses, appraisals,
recommendations and comments concerning the activities reviewed.

Scope

The internal auditor should have free access to all records, properties and personnel of the
organization, whenever necessary in the performance of his functions. An internal auditor does
not engage in accounting activities or any other line activity. His work emphasizes appraisal,
analysis and reporting on the policies and methods of operation, and on the functions of
purchasing, selling, accounting, payments, collections, and others.

Responsibility and Authority

 The internal auditor’s responsibility may be classified into activities that involve financial and
operational or management auditing. In financial auditing, the internal auditor is responsible for
the verification of the reliability of the accounting and reporting system and determining whether
internal control procedures are complied with. In operational or management auditing, the
internal auditor is responsible for all areas of operations where internal auditing would be of
assistance to management.

Independence

The internal auditor must be independent of the organization’s management and personnel.
He shows his independence and objectivity by not engaging in activities, which he himself will
later appraise. He does not develop nor install procedures or forms, which he himself will later
review.

Relationship to External Audit

External audits are conducted by independent auditors for the purpose of gathering evidence
on which to base an opinion on the fair presentation of the financial statements of the
organization; whereas internal audits are primarily performed to assist in all phases of
managerial functions. Internal auditors are more directly concerned with the detection and
prevention of fraud.

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The internal auditor and the eternal auditor are not competitors; the latter may rely on the
work of the former under certain circumstances. The work of an external auditor is affected by
the work of an internal auditor. When the internal auditor has ascertained that the systems of
operational methods in force are efficient, the external auditor’s study and evaluation of internal
control will be greatly facilitated.

The reliability of internal control will in turn, affect the extent of detailed examination during
the external audit.

Internal Auditing Approach and Techniques

Internal auditing approach and techniques include the:

a. appraisal of controls to determine that adequate operating controls are applied;
b. activities to ensure the protection of assets by compliance with established policies,
plans and procedures, accounting and safeguarding company assets;
c. verification of internal management reports by ascertaining reliability of management
data;
d. appraisal of management performance by evaluating the quality of performance of
assigned responsibilities;
e. recommendations for operational improvements.

Characteristics of an Internal Audit Report

An internal audit report is not standardized; its contents, though depending on the auditor’s
discretion, normally include:
a. scope and purpose of the audit
b. description of the operation or activity audited
c. audit standards complied with
 d. audit results or deficiencies discovered
e. recommendations for remedial or corrective action

The internal auditor must have an awareness and understanding of management’s problem.
His audit report communicated to management should also include:
a. recommendations or generalized proposals for change
b. specification for action or actions needed to carry out the recommendations
c. motivation for action or presenting a picture of what can be achieved

GOVERNMENT AUDITING

Government auditing is the analytical and systematic examination and verification of financial
transactions, operations, accounts and reports of any government agency to determine their
accuracy, integrity and authenticity, and compliance with the requirements of law, rules and
regulations.

Nature and Scope

Government auditing involves the determination of whether government funds are being
used properly and in compliance with existing laws and whether the programs and activities are
being conducted efficiently and economically.

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The scope of government auditing covers compliance audit, financial audit, and performance
audit.
 Compliance audit is the examination and settlement in accordance with law and
regulation.
 Financial audit examines the accounting and financial system and contents to
ensure reliability of the recorded financial data for the purpose of expressing an
opinion on the fairness with which the financial condition and results of operations
are presented.
 Performance audit is an objective examination of the financial and operational
performance of an organization, program, activity or function to determine
opportunities for greater economy, efficiency and effectiveness. Performance audits
may be in the form of a management audit, a program results audit or an economy
and efficiency audit.

A management audit is the appraisal of management performance from the point of view of
the least cost and the analysis of benefits attained against costs incurred.

A program results audit or effectiveness audit is the evaluation of program results in

achieving management goals and objectives.

An economy and efficiency audit determines the causes of inefficiencies or uneconomical

practices.

Commission on Audit

The Commission on Audit (COA), with jurisdiction and authority defined by the Constitution
of the Philippines, is the highest and final authority in the audit of the government and its
instrumentalities; to include the national government, the local government, the corporate offices
of government owned or controlled corporations and self-governing boards, commissions, or
agencies, departments, regions and bureaus, as well as, the performance offices of non-
governmental firms subsidized by the government or those funded by donations through the
government or for which the government has put up a counterpart fund, or those required to pay
levies or government share.

Principal Duties of the COA

The Commission on Audit is charged with these duties:

a. To examine, audit and settle all accounts pertaining to the revenue or receipts and
expenditures or uses of government funds and property
b. To keep the general accounts and preserve vouchers pertaining thereof
c. To promulgate accounting and auditing rules and regulations, including those for the
prevention of irregularities, unnecessary, excessive or extravagant expenditures, or uses
of government funds and property.
d. To submit to the president of the Philippines within the time fixed by law, an annual
financial
report of the government, its subdivisions, agencies and instrumentalities, including
government-owned or controlled corporations and recommend measures to improve their
efficiency and effectiveness
e. To decide cases brought before it within sixty days from the date of submission for
resolution
f. To perform such other duties and functions, as may be prescribed by law
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Functions of Government Auditors

Government auditors may be assigned to the department, regions, bureaus and offices of
the national government; to audit offices in local government units; and to corporate or
performance audit offices. As representative of the Commission, the government auditor shall
exercise such powers and functions as may be authorized by the Commission, to wit:

a. To formulate accounting rules and regulations for their respective audit offices
b. To formulate and develop plans, programs, operating standards, and administrative
techniques for the implementation of auditing rules and regulations in their respective
audit offices
c. To advise and assist the Chairman of the COA on matters pertaining to the audit of the
offices under their respective jurisdiction

The audit conducted by government auditors assigned to the performance audit offices shall
be limited to the funds of government subsidies with emphasis on the statutory authority on the
usage of appropriated funds and the legality of expenditures. Government auditors assigned to
corporate offices also have the responsibility of consolidating corporate audit reports, and to
submit a report of audit for each calendar year to the head or governing body of the agency
concerned.

SPECIAL PURPOSE AUDIT

 The auditor may be asked by a client to perform an audit for a special purpose, in which
case, the auditor should have a clear understanding of the purpose for which the information
being reported on is to be used, and who is most likely to use it. The auditor normally indicates
in the report the purpose for which the report is prepared and the restrictions on its distribution
and use.

Two of the major special purpose audits are the operational or management audit and the
compliance audit. An auditor may be engaged to perform an operational or management audit
for the examination of specified accounts in the financial statements that are affected by
particular phases of operations and identified functions of management. An auditor may also be
engaged to perform a compliance audit when a client wishes to obtain the auditor’s opinion that
an entity has complied with certain aspects of contractual agreements, such as: maintenance of
predetermined financial ratios, restriction of dividend distribution, and application of proceeds
from sale of non-current assets.

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LESSON 3
THE PROFESSIONAL PRACTICE OF ACCOUNTING
Nature of the Accounting Profession

The accounting profession began with the scribes in ancient Mesopotamia and grew with
double-entry bookkeeping in Italy during the Middle Ages. The earliest proof of double-entry
bookkeeping was found in fragments dated 1211 from the account book of a banker in Florence,
Italy. Double-entry bookkeeping was also used by treasury officials in Genoa, Italy in 1340, by
the Medici and Datini bankers in Florence, the bankers in Milan, Genoa, Pisa and Venice; and in
the existing records of Amatino Manucci, a Florentine banker at the beginning of the fourteenth
century.

Development of Professional Bodies in the English-speaking World

The oldest professional body of accountants started in Scotland, where the first members
were known as Chartered Accountants. They indicated the letters ‘CA’ following their name. in
1880, the Institute of Chartered Accountants was formed in England and Wales. The members
drew up the standards of conduct for accountants. They then ruled that experience considered,
the basis for membership admission shall be successful examinations.

In the last quarter of the nineteenth century, the chartered accountants of Scotland, England
and Wales traveled to the United States to oversee and audit vital industries built by British
capital in America. Several of these chartered accountants stayed and started practice in the
United States. They taught and trained individuals in the discipline of the accounting profession.
The accountants, who have long since practiced in the United States, could most likely trace
their origins with these chartered accountants from Britain.

In 1887, accounting associations across America formed the American Association of Public
Accountants, the first national accounting association in the United States; later identified as the
American Institute of Certified Public Accountants (AICPA). The accounting profession in the
United States grew along with the prosperity that accompanied the change from agricultural to
an industrial economy.

Development in Asia Pacific in the Twentieth Century

The accountants in the Asia and the Pacific are aware of the need of accounting
organizations on the international level. The Philippine Institute of Certified Accountants
(PICPA) was founded on November, 1929 and has since played an active role in the
organization of the ASEAN Federation of Accountants. PICPA has likewise held an important
role in the formation of the Confederation of Asian and Pacific Accountants (CAPA). PICPA has
also taken the over-all leadership in these organizations many times. Furthermore, PICPA has
initiated the first Far East Conference of Accountants held in Manila in 1957.

International Dimension and the ‘Big Four’ International Accountancy Firms

Since the formal emergence of accounting as a distinct profession in Scotland in the middle
of the nineteenth century, accountants have rendered service to businesses of varying sizes,
from sole proprietorships to huge multinational conglomerates.
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During the twentieth century, the eight largest public international accounting firms, known as
the ‘Big Eight’ dominated the accounting profession. These firms were: Arthur Andersen & Co.;
Coopers & Lybrand; Deloitte, Haskin & Sells; Ernst & Ernst; KMG Peat Marwick; Price
Waterhouse; Touche Ross; and Arthur Young.

A few decades ago, Ernst & Ernst merged with Arthur Young, to form Ernst & Young; and
Touche Ross combined with Deloitte, Haskin & Sells, to form Deloitte & Touche; thus reducing
the ‘Big Eight’ to the ‘Big Six’.

In the past decade, Cooper & Lybrand merged with Price Waterhouse to form Price
Waterhouse Cooper; thereby reducing the ‘Big Six’ to the ‘Big Five’.

During the first years of this century, Arthur Anderson & Co. was involved in the Enron
Scandal, and the ‘Big Five’ largest international public accounting firms were reduced to four.

The four largest international public accounting firms, better known as the ‘Big Four’ are:
- Price Waterhouse Coopers
- Deloitte, Touche, Tomahtsu
- Ernst & Young
- KPMG

Standard-setting and Regulation in Accounting Practice

 Standard-setting and regulation in accounting practice are primarily aimed to ensure that the
public accountant complies with laws and regulations related to the independent audit of
financial statements; and to ascertain that the public is protected from fraud and gross
negligence.

Early Sources of Regulation

The Professional Regulations Commission (PRC) is an executive branch of the National

Government empowered to administer, implement and enforce policies with respect to the
licensing and regulation of the various professions under its jurisdiction. The PRC has authority
over the accounting profession; and is empowered to enforce rules and regulations for the
maintenance of the professional standards and ethics of the profession. In the year 2000, the
PRC Modernization Act gave the Commission jurisdiction over all the professional regulatory
boards in the Philippines, one of which is the Professional Regulatory Board of Accountancy,
better known as the BOA.

Public Sector Regulation of Accounting Practice

The public sector regulation of accounting practice is provided by the Professional Regulatory
Board of Accountancy (BOA) that is empowered to administer the Accountancy Law and the
Commission on Audit (COA).

The regulatory bodies of certain industries also regulate accounting practice, most significant
of these are:
1. Bangko Sentral ng Pilipinas (BSP)
2. Insurance Commission
3. Cooperative Development Authority of the Philippines (CDA)

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The Professional Regulatory Board of Accountancy is empowered to administer the
Accountancy Law, and as the only licensing body for the accounting profession, BOA can grant
or issue and revoke CPA certificates to practice public accounting. the functions and authority of
BOA are provided for in the Philippine Accountancy Act of 2004 (Republic Act No. 9298).

The Commission on Audit was created under the Philippine Constitution to be the highest
and final authority in the audit of the government and its instrumentalities. COA endeavors to
determine that the government agency abides by the principles enumerated in the Auditing
Code, among which, are: “No money shall be paid out of any public treasury or depository
except in pursuance of an appropriation, law or specific statutory authority”, and “Government
funds or property shall be spent or used solely for public purposes”.

National Securities Commissions and Their Role in Effect on Professional Accounting

Regulations Standards

The Securities and Exchange Commission (SEC) is the government agency exercising a
major role in effect on professional accounting regulations standards. The SEC regulates
registration and operation of corporations, partnerships and other forms of associations in the
Philippines. It has authority for specifying reporting requirements necessary for fair disclosures
to investors; and to establish rules for CPAs associated with audited financial statements
submitted to the Commission. These functions give the Securities and Exchange Commission
considerable influence in setting generally accepted accounting principles governing the public
practice of accounting. Moreover, the SEC is represented in standard-setting bodies, such as
the Accounting Standards Council (ASC) or the Financial Reporting Standards Council (FRSC)
and the Auditing Standards and Practices Council (ASPC).

Other Standard-setting for Accounting Practice

The other standard-setting bodies for accounting practice are councils created by the
Professional Regulation Commission upon the recommendation of the Board of Accountancy
aimed to assist the Board in carrying out its powers and functions as provided in Article II
Section 9 of Republic Act No. 9298 or the Philippine Accountancy Act of 2004.

The councils were created and empowered to monitor the conditions affecting the practice of
accountancy in the country, to adopt measures, promulgate accounting and auditing standards,
rules and regulations and best practice, which shall include and adopt international standards,
for the enhancement and maintenance of high professional, ethical accounting and auditing
standards.
These bodies are the: Financial Reporting Standards Council (FRSC)

Auditing and Assurance Standards Council (AASC)BOA,

The members of the councils represent BOA, SEC, BSP, COA, and the national accredited
associations of CPAs:
- ACPAPP (Public Practice)
- ACPAC (Commerce and Industry)
- ACPAE (Education)
- GACPA (Government)

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The Bureau of Internal Revenue (BIR) is also represented in the FRSC. A Chairman leads the
councils. The FRSC chairman had been a past or is presently a senior practitioner in any sector
of accounting practice; while the AASC chairman had been a past or is presently a senior
practitioner in public accountancy.

Public Accounting Profession

In the new Code of Ethics for Professional Accountants, a profession is described as

distinguished by certain characteristics, among which are:

- mastery of a particular skill acquired by training or education

- adherence by its members to a common code of values and conduct
established by its administering body, including an outlook which is
essentially objective
- acceptance of a duty to society on the whole, usually in return for restrictions
in the use of a title or in the granting of a qualification.

Public Accounting as a Profession

As a profession, public accounting may be characterized by attributes of competence,

independence, moral integrity, concepts of ethics and legal responsibility, and service to the
public.
 Competence is assured by the educational requirement and th civil service eligibility, which
are the prerequisites to the practice of accountancy in the Philippines. In fulfilling the academic
requirement, the accountant learned the language and the body of knowledge that make the
profession. The civil service eligibility comes with the passing of the Certified Public Accountant
licensure examination for admission to the practice of accountancy.

Independence is the professional accountant’s quality of impartiality and fairness to all users
of the financial statements. The attitude of independence is the underlying reason why the
public relies on the opinion expressed by the professional accountant; that the financial
statements he has attested to are fair and unbiased presentations on which a user can base
reasonably intelligent analysis for decision-making.

Integrity involves righteousness, sincerity, honesty, and strength of conviction. The

professional accountant’s moral integrity is the public’s assurance that he would not attest to
any financial statement unless he has conducted an examination thereof with due professional
care and in accordance with generally accepted auditing standards.

The concepts of ethics of the accountancy profession are declared in the Code of Ethics for
Professional Accountants in the Philippines, which demands that the accountants maintain a
standard of conduct higher than that required by law. The Code is mandatory for all professional
accountants and defines his conduct in relation to his colleagues, his clients, and the public.

The legal responsibility of the professional accountant to the users of the financial
statements that he has attested to is contained in the Philippine Accountancy Act of 2004, which
includes provisions for administrative and penal proceedings that may be instituted against a
professional accountant. If found guilty, he may be punished with a fine and/or imprisonment
and/or the revocation or temporary suspension of his certificate or license to practice
accounting.
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The accounting profession, as a segment of society is characterized by service to the public.
The members of the accountancy profession render service with due care, competence, and
diligence
An accountant has the duty to maintain professional awareness of up-to-date developments in
practice, legislation and techniques. Accounting professionals are granted the right to use a title
or qualification for which they are deemed to have acknowledged their duty to the profession
and to the public.

Certified Public Accountant

In the Philippines, the practice of accountancy is the exclusive domain of Certified Public
Accountants, who have passed the Certified Public Accountant licensure examination
conducted by the Professional Regulatory Board of Accountancy (BOA), under the supervision
of the Professional Regulation Commission (PRC).

A Certified Public Accountant holds a Certificate of Registration signed by the Chairperson of

the PRC and by the Chairman and members of the Professional Regulatory Board of
Accountancy. The Certificate of Registration is tamped with the official seals of the Commission
and of the Board, and indicates that the Certified Public Accountant named thereon, is a duly
registered professional, legally entitled to engage in the practice of the accounting profession. A
Certified Public Accountant is commonly referred to as a CPA, and recently, he is identified as a
professional accountant.

The Certified Public Accountant has taken his Oath of Profession and has been issued a
valid Professional Identification Card containing his name, signature and photograph. The
professional ID card bears the signature of the Chairperson of the Professional Regulation
Commission; as well as the Certified Public Accountant’s registration number, date of issuance
and expiry date, and is renewable every three (3) years.

Organizations that Affect Public Accounting

The organizations that affect the practice of public accounting are regulatory government
agencies, professional organizations and pertinent standard – setting bodies. Along with these
organizations, certain rules and regulations, and relevant legislation also govern the practice of
public accounting in the Philippines.

Regulatory Government Agencies

The regulatory government agencies that affect public accounting are:

1. Professional Regulation Commission (PRC)
2. Professional Regulatory Board of Accountancy (BOA)
3. Securities and Exchange Commission (SEC)
4. Commission on Audit (COA)

The PRC administers and implements policies of the government regarding regulation and
licensing of the professions under its jurisdiction. The PRC likewise monitors the maintenance of
professional standards and ethics, and enforces the rules and regulations pertinent to the
profession.

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The Professional Regulatory Board of Accountancy (BOA) functions under the supervision
and administrative control of the PRC. Functions of BOA:

a. Implements policies on the practice of the accounting profession in the Philippines.

b. It is charged with the supervision of the registration, licensing, and practice of
accountancy.
c. Determines the requirements for the admission of candidates to the CPA licensure
examination.
d. Prepares the contents of the licensure examination, scores, rates, and submits the
results thereof to the PRC
e. Investigates and renders decisions on violations of the accountancy act.
f. Monitors the conditions affecting the practice of accountancy, promulgates
accounting
and auditing standards, rules, regulations, and best practices, and is authorized to
adopt measures to enhance and maintain high standards and ethics in the
profession.

The Securities and Exchange Commission (SEC) is empowered to regulate the registration
and operation of corporations, partnerships and other forms of business organizations in the
country. The SEC is authorized to specify reporting requirements and to establish rules for the
submission of audited financial statements. The SEC requires detailed annual reports from
business organizations, especially corporations offering new securities: stocks and/or bond, to
the public or through the stock fair disclosure exchange. The SEC examines the financial
statements for completeness, adequacy, and for the protection of investors.

The Commission on Audit (COA) determines whether government funds are handled
properly and in compliance with existing laws, and whether programs and activities are
conducted economically. It formulates and develops programs, standards, and administrative
techniques for the implementation of auditing rules; and submits to the President an annual
report of the government, departments, regions, bureaus, and offices of the national and local
governments. corporate government offices, and government-subsidized non-governmental
firms to the extent of government funds.

Professional Organizations

The professional organizations that affect the practice of public accounting are the
Accredited Professional Organization of Certified Public Accountants or APOs. These are the
integrated national and sectoral professional organizations of CPAs accredited by the
Professional Regulatory Board of Accountancy (BOA) and the Professional Regulation
Commission (PRC).

The integrated national association of CPAs in the Philippines is the Philippine Institute of
Certified Public Accountants (PICPA).

The accredited sectoral associations of professional accountants are the:

- Association of Certified Public Accountants in Public Practice (ACPAPP)
- Association of Certified Public Accountants in Commerce and Industry (ACPACI)
- Association of Certified Public Accountants in Education (ACPAE)
- Government Association of Certified Public Accountants (GACPA)

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Philippine Institute of Certified Public Accountants

The Philippine Institute of Certified Public Accountants, commonly referred to as PICPA, is

the sole integrated national organization of all registered and licensed professional accountants
in the Philippines. The PICPA was registered with the SEC as a non-profit corporation. It was
accredited by the Professional Regulatory Board of Accountancy and approved by the PRC per
Accreditation No. 15, dated October 1,1975.

The PICPA is a member of the IFAC or the International Federation of Accountants, whose
objective is to develop and enhance a coordinated worldwide accountancy profession. The
PICPA is also committed to IFAC objective of improving harmonized standards and uniformity of
professional ethics. The PICPA disseminates and implements among its members the
pronouncements developed by IFAC. Through the Accountant’s Journal, its official publication,
the PICPA updates the members of the profession with the technical and formal papers,
bulletins, statements, and other pronouncements released by standard-setting bodies, such as
the Financial Reporting Standards Council and the Auditing and Assurance Standards Council.
 The PICPA schedules seminars, conferences, technical sessions, symposiums and
dialogues for the professional development of all members; and conducts regular sports and
fellowship activities to foster social awareness and camaraderie among the members. The
CPA’s membership in the PICPA does not bar him from seeking membership in other
accredited associations of professional accountants; nevertheless, all professional accountants
are united through their membership in the PICPA.

Association of Certified Public Accountants in Public Practice

The ACPAPP is the accredited sectoral organization of individual CPAs, firms and
partnerships of CPAs engaged in the public practice of accountancy. These firms are duly
registered with the PRC and the BOA, such registration renewable every three years. A CPA in
public practice renders various professional services to more than one client for a fee. In
compliance with requisite accounting and auditing standards and rules, the Certified Public
Accountant affixes his seal and signature to the auditor’s report and indicates his current
Professional Tax Receipt (PTR) with the date and place of payment thereof.

A Certified Public Accountant engaged in the public practice of accountancy is simply called
the ‘auditor’ when performing auditing, assurance and related services for clients. Specifically,
the professional accountant in public practice is referred to as the external or independent
auditor to distinguish him from the internal auditor in the employ of the organization under
examination. In general, the term ‘practitioner’ is widely used to refer to the CPA in public
accounting practice.

Association of Certified Public Accountants in Commerce and Industry

The ACPACI is the accredited sectoral organization of CPAs employed in commerce and
industry, where such CPA is involved in decision-making that require knowledge in Accounting;
or where the CPA holds a position requiring the holder thereof to be a CPA. An individual CPA
employed in commerce and industry performs for his employer, professional services, among
which are: general accounting, budgeting, tax administration, internal auditing, liaison with
external auditors, and representation in tax matters. A CPA employed in commerce and
industry, may be, as his position indicates, a finance officer, accountant or accounting manager,
a

26
comptroller, or an internal auditor. The ACPACI helps apprise the employer of the technical and
ethical standards of the accounting profession.

Association of Certified Public Accountants in Education/Academe

The ACPAE is the accredited sectoral organization of CPAs in the field of education. The
CPA connected with educational institutions, handles technically-related subjects, such as:
 fundamentals of accounting * cost accounting
 financial accounting * advanced accounting
 auditing theory * financial management
 auditing problems * business law
 management advisory services * taxation
 a CPA connected with the academe, may be an accounting professor, or a reviewer handling
subjects included in the licensure examination. He could be dean if he possesses additional
qualifications, such as a masteral or a doctoral degree. The ACPAE aims to contribute to the
effectiveness, enrichment and dignity of the teaching profession.

Government Association of Certified Public Accountants

The Government Association of Certified Public Accountants (GACPA) is the sectoral,

accredited organization of CPAs in the government service. The members of the GACPA are
individual CPAs with positions in an accounting group in the government or who perform
proprietary functions in a government-owned or controlled corporation. An individual CPA in the
GACPA may have been appointed to a position where decision-making requires knowledge of
accounting or where civil service eligibility as a CPA is a prerequisite. The GACPA enjoins its
members to comply with civil service rules at all times and to be ever conscious that a public
office is a public trust. Professional accountants employed in the public sector often hold
positions where they are identified as an examiner or an auditor. Public sector is the term used
to refer to the local, regional or national government offices, and the local, regional or national
offices of related government agencies.

Standard-setting Bodies

The standard-setting bodies affecting the practice of public accounting in the Philippines are
the international accounting bodies whose standards have been gradually adopted in the
country; and the standard-setting councils created by the Implementing Rules and Regulations
(IRR) to Republic Act No. 9298, otherwise known as the Philippine Accountancy Act of 2004.

International Accounting Bodies

International accounting bodies affecting the practice of accountancy in the Philippines, are:

- International Federation of Accountants (IFAC)

- International Accounting Standards Board (IASB)
- International Auditing Practices Committee (IAPC)

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The international harmonization of accounting practice is the primary mission of the IFAC or the
International Federation of Accountants and the IASB or International Accounting Standards
Board.

The International Accounting Standards Board (IASB) has assumed in April, 2001 the
responsibility for setting international accounting standards from the International Accounting
Standards Council (IASC). The International Accounting Standards (IASs) issued by the
International Accounting Standards Council were adopted by the IASB, retaining their
designation and format, while some standards were revised and improved. The new standards
that were issued by the IASB are designated as International Financial Reporting Standards
(IFRS); and designated as PFRS or Philippine Financial Reporting Standards upon adoption in
the Philippines.
 International Auditing Practices Committee (IAPC) is a standing technical committee in the
International Federation of Accountants (IFAC) Council. the IAPC develops and issues, on
behalf of the IFAC Council, the International Standards on Auditing (ISAs). The ISAs are
standards and statements applied on a variety of audit and attest functions, assurance, and
other related services. With the ISAs, the IAPC aims to improve the uniformity of practices in
financial statement audits, assurance, and other related services throughout the world.

Standard-setting Councils

The standard-setting councils were created by the IRR to RA 9298 or the Philippine
Accountancy Act of 2004. These councils are:

- Financial Reporting Standards Council (FRSC)

- Auditing and Assurance Standards Council (AASC)
- Education Technical Council (ETC)

The FRSC and the AASC were created and empowered to monitor the conditions affecting
the practice of accountancy in the country, and to adopt measures, promulgate accounting and
auditing standards, rules and regulations and best practice, which shall include and adopt
international standards, for the enhancement and maintenance of high professional, ethical
accounting and auditing standards. Each council have a Chairman and fourteen members.

The Board of Accountancy approved the adoption in the Philippines of all the revised and
improved IASs and all the new IFRS, issued by the IASB, designating them as PFRSs, effective
January 1, 2005.

The Auditing and Assurance Standards Council (AASC) issued pronouncements in the form
of Philippine Standards on Auditing (PSAs) and Philippine Auditing Practice Standards
(PAPSs). The PSAs apply to independent examinations conducted by the CPA, for the purpose
of expressing an opinion on the financial statements of any entity, whether profit-oriented or not,
and irrespective of size or legal form. On the other hand, the PAPSs are issued by the AASC to
provide practical assistance to CPAS in the implementation of the PSAs and to promote good
practice.
Other pronouncements of the AASC are in the form of Philippine Standards on Quality Control,
on Review Engagements, on Assurance Engagements, and on Related Services; as well as
practice statements on Philippine Engagement, Assurance Engagement and Related Services.

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The Education Technical Council (ETC) was created to assist the BOA in continuously
upgrading the accountancy education in the Philippines, to make the Filipino CPAs globally
competitive. The ETC assists the Board in carrying out its power and functions “To ensure, in
coordination with the Commission on Higher Education (CHED) or other authorized government
offices, that all higher educational instruction and offering of accountancy, including review
centers and/or CPE providers offering accounting seminars, comply with the policies, standards
and requirements prescribed by the CHED. . . in the areas of curriculum, faculty, library and
facilities. Provided, that for the orderly implementation of this provision, the Board and the
Commission may enter into a Memorandum of Agreement with the CHED”.

The ETC shall be composed of seven (7) members: a Chairman, who had been or who is
presently a senior accounting practitioner in the academe; one (1) member each from BOA,
ACPAPP, ACPACI and GACPA; and two (2) members from the ACPAE, equitably distributed
among private and public schools offering the Bachelor of Science in Accountancy degree.

The minimum standard accounting curriculum is determined by the ETC. The ETC then
periodically evaluates and submits a report on the performance of the educational institutions to
the Board. If deemed meritorious, the report is forwarded to the Commission and submitted to
the CHED for consideration and appropriate action.

Regulation of the Public Accounting Practice

Republic Act No. 9298 was enacted during the 3rd session of the 12th Philippine Congress
to repeal Presidential Decree No. 692 then known as the Revised Accountancy Law. RA 9298
was approved by the President on May 13, 2004 to regulate the practice of accountancy in the
Philippines and is known as the Philippine Accountancy Act of 2004, also referred to as The
Act.

RA 9298 starts with the declaration of policy, thus:

“The State recognizes the importance of accountants in nation-building and development.

Hence, it shall develop and nurture competent, virtuous, productive and well-rounded
professional accountants, whose standards of practice and service shall be excellent,
qualitative, world-class and globally competitive through inviolable, honest effective and
credible licensure examinations and through regulatory measures, programs and
activities that foster their professional growth and development”. (Sec. 2)

The three main objectives of the Philippine Accountancy Act of 2004 are:
a. standardization and regulation of accounting education
b. examination for registration of Certified Public Accountants
c. supervision, control and regulation of the practice of accountancy in the Philippines
(Sec. 3)

The areas covered by The Act contain provisions on:

a. Scope of the practice of accountancy
b. Professional Regulatory Board of Accountancy
c. Examination, regulation and licensure
d. Practice of accountancy
e. Penal and final provisions

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Scope of the practice of accountancy (Sec.4)

A CPA may be engaged in the public practice of accounting; or in the practice of accounting
in commerce and industry; in the academe or in the government. A CPA may engaged in public
accounting in one or more sectors of the practice.

An individual is deemed to be engaged in the public practice of accounting when he:

a. holds himself as skilled in the knowledge, science and practice of accounting whether
in his individual capacity or as partner or staff member in an accounting or auditing
firm;
b. holds himself as qualified to render professional services as a Certified Public
Accountant, offering or rendering any or all of these services for a fee:
 - auditing or the verification of financial transactions and accounting records;
- preparation, signing or certification of financial reports for credit or other
purposes;
- design, installation and revision of accounting system;
- preparation of income tax returns;
- representation of clients in tax or other accounting-related matters;
- professional assistance on accounting procedures, recording and
presentation of financial information.

An individual is deemed as practicing accounting in commerce and industry, when he:

a. is involved in decision-making requiring knowledge in accounting, finance and
taxation;

b. represents his employer before government agencies on tax and other matters related
to accounting (IRR Sec. 4);
c. holds a position, the holder of which should be a CPA, where such position may
involve:
- recording financial transactions
- preparation of financial statements
- coordinating with external auditors in the audit of financial statements
- budgeting
- tax administration
- internal auditing (IRR Sec. 28(A)

An individual is considered as practicing accounting in the academe, when he teaches

Fundamentals of Accounting, Financial Accounting, Auditing Theory, Auditing Problems,
Financial Management, Management Advisory Services, Finance, Business Law and Taxation,
and other technically-related subjects.

An individual is deemed to be in the practice of accounting in the government when he:

a. holds or is appointed to a position in an accounting professional group in the
government,
or in the government-owned or government-controlled corporation;
b. performs proprietary functions or is involved in decision-making requiring professional
knowledge in accounting;
c. holds a position requiring a civil service eligibility as a CPA.

Other provisions of RA No. 9298 or the Philippine Accountancy Law of 2204:

1. Professional Regulatory Board of Accountancy Regulatory Board of Accountancy
(BOA): Salient provisions
2. The CPA Examination: Salient provisions
Other provisions on Registration and Licensure
3. Practice of Accountancy: Salient provisions; Penal and Final Provisions

Regulation Within the Audit Firm

 The practice of public accounting is greatly affected by the regulation within the audit firm.
The term “audit firm” refers to both the partners of a firm or to a sole practitioner offering audit
services. The audit firms abide by a set of regulations primarily identified as quality control
policies and procedures aimed to ensure that all audits are conducted according to relevant
standards and practices and that audit personnel comply with professional and ethical
standards and requirements.

Philippine Standard on Auditing, Quality Control for Audit Work (PSA 220) provides guidance
on the establishment of the policies and procedures on both level of audit firms and of individual
audits. The guide to the quality control policies and procedures established to guide an audit
firm apply to audit work in general. On the other hand, the quality control policies and
procedures established to guide individual audits mainly apply to work delegated to assistants.

Quality Control for Firms Performing Audits and Reviews of Historical Financial
Information and Other Assurance and Related Service Engagements (PSQC 1)

The Philippine Standards on Quality Control (PSQC 1) requires all audit firms to establish a
system of quality control by June 15, 2006. A quality control system is a set of policies and
procedures designed to provide reasonable assurance that the public accounting firm complies
with governmental standards. The quality control policies and procedures, and the extent of the
documentation thereof, depend upon several factors, among which are the size of the audit firm,
nature of the audit firm’s practice, the organization and geographic dispersion, and cost-benefit
considerations.

Quality Control for Audit Firms

The policies and procedures comprising the quality control system of the audit firm may be
incorporated in its internal documentation and training instructions; and communicated in
seminars, meetings, dialogues, and briefings through mission statements, newsletters and
memoranda.

Elements of a System of Quality Control

The elements that the system of quality control of an audit firm and of individual audits
should incorporate per PSA 220, are further clarified by PSQC 1, which declares that the
policies and procedures included in the system of quality control should address the elements
of:
- leadership responsibilities for quality within the firm
- ethical requirements
- acceptance and continuance of client relationship and specific engagements
- human resources
- engagement performance
- monitoring.
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Leadership Responsibilities for Quality Within the Firm

The audit firm’s leadership has the ultimate responsibility for the system of quality control,
and exercises a very significant influence on a quality-oriented culture that prevails in the audit
firm. The firm’s leadership should emphasize that quality control policies and procedures guide
the performance of audit work and the issuance of reports; and that quality work is recognized
and rewarded. The firm’s management is responsible for communicating to the partners and
staff the importance of quality of work, and that commercial considerations should not override
the quality of work performed. Management should devote sufficient resources for the
development, documentation, and support of its quality control policies. Performance evaluation,
personnel compensation and promotion should demonstrate the firm management’s
commitment to quality. The audit firm’s leadership should ascertain that the operational
responsibility for the firm’s quality control system is assigned to personnel with sufficient and
appropriate experience and ability, to enable him to identify quality control issues and develop
appropriate policies and procedures. The firm’s leadership should give said personnel the
necessary, authority to implement the firm’s quality control policies and procedures.

Ethical Requirements

The audit firm’s system of quality control should establish policies and procedures that would
ensure personnel compliance with the relevant ethical requirements contained in the Code of
Ethics for Professional Accountants in the Philippines. The firm’s system of quality control
should include policies and procedures that place emphasis on the compliance with the
fundamental principles of independence, integrity, objectivity, professional competence and due
care, confidentiality and professional behavior (PSQC 1). Quality control policies and
procedures for the compliance of the ethical requirements of The Code will have greater
effectiveness if the system is reinforced by clear provisions on the leadership of the firm,
education, training of personnel, monitoring and applicable process for dealing with non-
compliance.

The firm should establish policies and procedures designed to provide reasonable assurance
that the fundamental principle of independence is complied with by the firm, its personnel and
others subject to the independence requirement.

Ethical Requirements on Independence

Guidelines for the quality control on independence in an audit firm PSQC 1

Quality control policies and procedures should enable the firm to:
a. Communicate the firm’s independent requirements to personnel and where
applicable, to others as required by the Code.
b. Identify and evaluate circumstances and relationships that create threats to
independence, and to take appropriate action to eliminate these threats or
reduce them to an acceptable level by applying safeguards or, if considered
appropriate, withdraw from the engagement.

Quality control policies and procedures should require that:

a. Relevant information about client engagement be communicated and updated,
so that the audit firm may readily evaluate the over-all impact on independence
requirements.

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b. Personnel promptly notify the firm of the circumstances or relationships that create
a threat to independence so that appropriate action can be taken.
c. Appropriate personnel accumulate and communicate relevant information, so the
firm can:
- readily determine whether the independence requirement is satisfied.
- maintain and readily update records relating to independence.
 - take appropriate action regarding identified threats to independence.
d. Identified threats to independence may need these appropriate actions:
- eliminate the threats to independence, or
- reduce the threats to acceptable levels by the application of safeguards,
such as the rotation of senior personnel on the engagement every five (5)
years, or
- withdraw from the engagement, if deemed advisable.

Quality control policies and procedures should include requirements for the:

a. Notification of any breach of the independence requirement which should be

immediately communicated to relevant personnel so that the firm may determine
whether further action is needed to resolve the matter.
b. Written confirmation on paper or in electronic form, of compliance with the firm’s
policies and procedures on independence, that should be submitted at least annually
by all firm personnel required to be independent by the Code of Ethics for
Professional Accountants.
c. Appropriate action of the firm on information indicating non-compliance so that the
firm may demonstrate the importance attached to independence and thereby make
the issue current and visible to its personnel.
d. Criteria to determine the need of safeguards to reduce the familiarity threat to an
acceptable level when using the same senior personnel for an assurance
engagement over a long time.
e. Rotation of engagement partners after a period of time for all audits of financial
statements of listed entities in compliance with the Code.

Acceptance and Continuance of Client Relationship and Specific Engagements

The audit firm should obtain relevant and necessary information on which to base the
decision to accept an engagement with a new client, or to continue an existing engagement, or
to accept a new engagement with an existing client. The quality control policies and procedures
of the audit firm should provide reasonable assurance that the firm will undertake or continue an
engagement only when the audit firm:

a. has considered the integrity of the client and no information was obtained that would
lead to the conclusion that the client lacks integrity.
b. is competent and has the capabilities, time and resources to perform the
engagement.
c. can comply with ethical requirements.

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Matters to Consider Regarding Client Integrity

In deciding whether to accept or refuse a new engagement, the audit firm makes background
searches and gathers information from banker, legal counsels, peers in the industry, and from
other firm personnel and third parties on matters relevant in forming conclusions regarding client
integrity, such as, the prospective client’s:
 - identity and business reputation; and that of the principal owners,
- management and parties charged with governance;
- nature of business operations and practices;
- possible involvement in money laundering activities;
- probable involvement in criminal activities.

In addition to these inquiries, the audit firm communicates with the existing or the preceding
accountant of the prospective client for such matters as the reason of the non-continuance of
their engagement; any limitation in the scope of work, client interpretation of accounting
standards, client attitude regarding internal control, and client response regarding audit fees.

Matters Regarding Audit Firm’s Competence with Ethical Requirements

In deciding to accept or refuse a new engagement, the audit firm considers its competence
and compliance with ethical requirements. The audit firm reviews and compares the profiles of
partners and personnel at all level against the specific requirements of the engagement, in order
to determine such matters as:
- sufficient personnel with the necessary competence and capabilities;
- personnel with the knowledge of and experience in the regulatory and
reporting requirement relevant to the prospective client’s industry;
- available personnel that meet the criteria and eligibility requirements to
perform quality control review;
- availability of experts, if needed;
- audit firm’s ability to duly complete the engagement within the reporting
deadline.

Matters to Consider When Withdrawing from an Engagement

The audit firm may consider it appropriate to withdraw from or discontinue the engagement
when it decides that accepting the engagement would give rise to an actual or a potential
conflict of interest, or significant matters arising during a current or previous engagement would
lead to a grave conflict of interest. The quality control policies and procedures on the withdrawal
from or the discontinuance of an engagement should include the consideration of these matters:

 documentation of relevant facts and circumstances, and reasons for the withdrawal;
 consultation and discussion with the appropriate level of client management and
those who are charged with governance;
 documenting the significant issues, results of consultations, conclusions reached and
the basis thereof;
 reporting the withdrawal to pertinent regulatory authorities in compliance with
professional, regulatory or legal requirements, if any.

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Human Resources

The audit firm’s system of quality control shall provide reasonable assurance that it has
sufficient personnel with capabilities and competence, and commitment to ethical principles
necessary to perform the engagement according to professional standards and regulatory and
legal requirements, and to enable the audit firm to issue appropriate reports.
 The audit firm’s quality control policies and procedures shall address these personnel issues:
- recruitment - career development
- performance evaluation - promotion
- capabilities - compensation
- competence - estimation of personnel needs

Quality control policies should include provisions for:

 recruitment and the hiring of personnel with integrity and the capacity to develop the
capabilities and competence o perform the work of the audit firm.
 capabilities and competence developed through professional education, continuing
professional development, work experience, and coaching or counseling by more
experienced staff.
 performance evaluation, compensation and promotion procedures give due
recognition and reward to the development and maintenance of competence and
commitment to ethical principles.
 Career development, continuing professional development, estimation of personnel
need, and technical training emphasize the audit firm’s expectations of quality
performance on which depends advancement to positions of greater responsibility
and failure to comply with the audit firm’s policies and procedures may result to
disciplinary action.

Assignment of Engagement Teams

The engagement team is composed of an engagement partner and the audit team members.
The engagement team is led by the engagement partner, also referred to as the lead partner,
partner-in-charge, or managing partner, who is responsible for signing the audit report.

The quality control policies and procedures of an audit firm should:

a. monitor the availability and workload of partners, personnel, and staff.

b. ascertain that individuals with sufficient time, competence and capabilities
are assigned to perform the audit engagement.
c. require a clear definition to the engagement partner of his responsibilities.
d. require a clear communication to the audit team members, and to the key
members of the client management of the identity and role of the engagement
partner.
e. determine the number of personnel and the degree of competence and
capabilities of the personnel assigned to an engagement team.

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The personnel assigned to an engagement team should understand and have practical
experience, appropriate training and participation with other engagements of a similar nature.
Audit personnel assigned to an engagement team must:

a. have knowledge of the relevant industries in which the client operates;

b. understand the firm’s quality control policies and procedures;
 c. comply with professional and technical standards, and regulatory and legal
requirements;
d. have appropriate technical knowledge of pertinent information technology;
e. have the ability to apply professional judgment.

Engagement Performance

The audit firm should establish policies and procedures designed to provide reasonable
assurance that engagements are performed in accordance with professional standards and
regulatory and legal requirements, and that reports issued are appropriate in the circumstances.

Standardized documentation and industry or subject matter specific guidance materials may
be used to ensure consistency in the quality of engagement performance. These materials
contain processes or methods for:
a. briefing the engagement team on the objectives of their work.
b. compliance with applicable engagement standards.
c. engagement supervision, staff training and coaching.
d. reviewing the work performed, judgment made, and form or report to be issued.
e. documentation of the work performed and the timing and extent of the review.
f. keeping all policies and procedures current.

All the members of the engagement team should understand the objectives of their work;
less experienced members of the team may be assisted by appropriate team-working and
training. Supervision is normally needed to keep track of the progress of the engagement and
consider the capabilities and competence of the individual members to determine whether the
work is being carried out according to the planned engagement approach. Supervision should
consider significant issues that may arise and any matters for consultation or modification of the
planned approach.

Review responsibilities fall on more experienced team members including the engagement
partner. The review should consider whether work has been performed according to
professional standards and regulatory and legal requirements; or appropriate consultations have
been made and resulting conclusions documented and implemented. The review should
determine whether the nature, timing and extent of work performed need revision; and most
importantly, whether work performed supports the conclusions reached an is appropriately
documented; evidence obtained is sufficient and appropriate to support the report; and the
objectives of the engagement procedures have been achieved.

Appropriate consultations on difficult or contentious matters are provided for in the quality
control policies and procedures of the audit firm. Audit firms seek to establish a culture where
consultations are recognized as a strength that helps to promote quality and improve the
application of professional judgement. The nature and scope of the consultations are
documented, as well as the resulting conclusions, which are implemented.

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Differences of opinion within the engagement team or with those consulted or between the
reviewer of the engagement quality control and the engagement partner, should be
documented. The policies and procedures established by the audit firm should apply and
conclusions reached should be implemented. The report should not be issued until the matter of
the difference is resolved. Resolution of the difference and implementation of the conclusion
should be documented.
 Appropriate engagement quality control review may be included in the audit firm’s policies
and procedures, in which case, provision must be made for an objective evaluation of the
significant judgement made by the engagement team and the conclusions reached in
formulating the report. The audit firm should also establish policies and procedures setting out
the:

a. nature, timing and extent of an engagement quality control review.

b. criteria for the eligibility of the engagement quality control reviewer.
c. documentation requirement for an engagement quality control review.

The review is conducted in a timely manner at appropriate stages during the engagement so
that significant matters may be promptly resolved before the report is issued. The technical
qualifications include necessary experience and authority, required for the performance of the
review. The degree that the reviewer may be consulted should not compromise the reviewer’s
objectivity.

Documentation should indicate that the reviewer is not aware of any unresolved matters that
would cause him to believe that the significant judgement made by the engagement team and
the conclusions reached were not appropriate.

Monitoring

The audit firm should establish monitoring policies and procedures designed to provide
reasonable assurance that the system of quality control:
a. is relevant, adequate, operating effectively, and complied with in practice.
b. includes an ongoing consideration and evaluation of the system of quality control.
c. includes a periodic inspection of a selection of completed engagements.

Monitoring the compliance with quality control policies and procedures aims to evaluate:
a. adherence to professional standards and regulatory and legal requirements.
b. appropriate design and effective implementation of the quality control system.
c. appropriate application of quality control policies and procedures so that the reports
issued are appropriate in the circumstances.

Monitoring of the firm’s system of quality control is entrusted to persons with sufficient
experience and authority. Monitoring covers both the appropriateness of the design and the
effectiveness of the operation of the system of quality control.

The ongoing evaluation of the quality control system includes analysis of new development
reflected in the firm’s policies and procedures; written confirmation of compliance with policies
and procedures on independence; continuing professional development and training; and
decisions related to acceptance and continuance of client relationships and specific
engagements.

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The ongoing considerations include:
a. determination of corrective actions and improvements made in the system.
b. communication of weaknesses identified in the system.
c. evaluation of the type of deficiency noted during the monitoring process.
 Appropriate remedial action should be taken and changes may be made to the pertinent
quality control policies and procedures.

The results of monitoring the quality control system of the audit firm should be communicated
at least annually. Communication is addressed to engagement partners or other appropriate
individuals within the firm. The information communicated includes:

a. a description of the monitoring procedures performed.

b. the conclusions drawn from the monitoring procedures.
c. a description of significant deficiencies and actions taken to resolve the deficiencies.

Appropriate documentation relating to monitoring should:

a. set out monitoring procedures, including those for selecting completed

engagements.
b. record evaluation of:
- adherence to professional standards and regulatory and legal requirements;
- appropriate design and effective implementation of quality control system;
- appropriate application of quality control policies and procedures.
c. identify deficiencies noted, evaluate their effect, and set out the basis for determining
whether further action is necessary.

Complaints and allegations are appropriately dealt with by the firm’s policies and procedures
designed to provide reasonable assurance thereon. The audit firm might receive complaints and
allegations that worked performed fails to comply with professional standards and regulatory
and legal requirements, and with allegations of noncompliance with the firm’s system of quality
control.

Clearly defined channels should allow firm personnel to raise concerns without fear of
reprisals. Complaints and allegations should be investigated under the supervision of a partner
with sufficient and appropriate experience and authority; and may involve legal counsel if
necessary.

Documentation should provide evidence of the operation of each element of the system of
quality control; such as independence confirmation, performance evaluation and the results of
monitoring inspections. The audit firm decides on the manner of documentation, whether with
the use of electronic database or manual notes and checklists.

Objectives of Quality Control Policies (PSA 220)

The objectives of the quality control policies of an audit firm will consider: professional
requirements, skills and competence, assignment, delegation, consultation, acceptance and
retention of clients and monitoring.

Professional requirements refer to the ethical principles governing the auditor’s

professional responsibilities. Personnel in the audit firm must adhere to the basic principles of
independence, integrity, objectivity, confidentiality and professional behavior.
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Skills and competence are reasonable expectations when the audit frim is staffed with
personnel who have attained the professional competence and have maintained the technical
standards that are required in fulfilling their responsibilities with due care.
 Assignment of audit work is normally given to personnel with the required degree of
technical training and proficiency.

Delegation of audit work is to be made with sufficient direction and supervision. The review
of work must be made at all levels, to provide assurance that work performed meets the
required standards of quality.

Consultation with those who have the professional expertise, within or outside the firm, may
be made whenever deemed necessary.

Acceptance and retention of clients is to be made upon due consideration of the:

- audit firm’s independence and ability to serve the client properly, as well as
- integrity of client’s management.

The audit firm must evaluate prospective clients and review existing clients on an ongoing
basis.

Monitoring the continued adequacy and operational effectiveness of quality control policies
and procedures is a very significant factor in the effectiveness of a system of quality control.

Quality Control for Audits of Historical Financial Information . . .

Quality Control Procedures Applicable to the Individual Audit Engagement . . .

Peer Regulation

The regulation of the practice of public accounting may be done through peer review
performed by another CPA in public accounting practice or by an independent team of CPAs.
Peer review aims to evaluate another audit firm’s compliance with its own quality control
system. The practitioners of public accounting that audit publicly-held corporations must have
membership with the Securities and Exchange Commission-Practice Section and observe its
regulations affecting the public practice of accounting. Furthermore, the members of the public
accounting profession prefer self-regulation, that is, forming regulations for themselves, rather
than some other form of regulation by outsiders, who do not fully understand the profession.

Services of a CPA in Public Practice

The services offered by CPAs in public practice are categorized into assurance and non-
assurance engagements. Assurance engagements include audits, reviews, and other
assurance engagements. Non-assurance engagements include agreed-upon procedures,
compilation of financial and other information, preparation of income tax returns, management
consultancy, and other advisory services.

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Core Competencies Required in the Public Accounting Profession
 The competences required in the public accounting profession and some of the component
skills for the corresponding tasks, are:

 Analytical skills – perceive anomalies; recognize implications, sense missing data-

research skills and assessing data; analyzing commercial and financial data;
systems analysis and review; organizational analysis of functions and of structures.
 Business advisory skills – understand implications of critical business issues, create
innovative ideas and decide and implement action steps-possess technical
knowledge to provide insightful recommendations to clients; present creative
business ideas to help clients achieve goals.
 Business knowledge – understand economics, industry issues, business process,
structures, functions and practices; best practices, business analysis, and control
practices.
 Capacity for work – demonstrate a strong work ethic; respond well to pressure.
 Comprehension of client’s business processes – understand client’s business
thoroughly; how client runs his business, his customers and competitors, business
strategy and goals; how client’s business processes can be continuously improved.
 Communication skills – express thoughts clearly, orally and in writing; can tailor
communication for different audiences, convey ideas, lead discussions, explain
procedures clearly.
 Efficiency – strong organizational skills, manage time and staff, use technology to
improve efficiency.
 Intellectual capability – with conceptual, diagnostic, evaluative, forward, imaginative
and systematic thinking; recognize data, draw appropriate conclusions; weighs
alternatives and options.
 Learning and rejuvenation – continuous learning to improve services and client
relationships, as well as assess and improve one’s capabilities.
 Marketing and selling – develop relationships, make initial contact and quality client’s
interest.
 Model building – identify and implement methods for quantifying activities; monitor
currency of measures, institute parameters for measurement process; review
proposed measures.
 People development – attract, develop, motivate, and retain high quality human
resources, develop performance plans, sustain highly motivated personnel to
achieve common goals.
 Relationship management – establish credibility with and the trust of key decision-
makers; seek, value and respect their judgment and inputs.
 Responsiveness and timeliness – availability when needed; willing to give clients first
priority; meets deadlines promptly.
 Technology – master new information technology; use audit software, database
system, spreadsheets and other information technology.
 Verification – develop audit objectives; design and perform procedures for each
specified standard or criteria; evaluate evidence to conclude compliance with
standards.
 Accounting and Auditing Standards – understand literature, familiar with current
technical developments; perform thorough and accurate research.

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  Administrative capability – perform administrative responsibilities; manage elements
of cost, revenue, and profit to maximize the financial return on the engagement.
 Managing audit risk – understand and apply risk management knowledge and
techniques in accepting and performing assurance engagement.

Emerging Assurance and Consultancy Services of CPAs

The CPAs assurance services consist of the examination of sufficient evidence to support his
conclusion on the reliability of assertions on the subject matter; providing the user of his report
with basis for the degree of confidence in arriving at the optimum financial decision. In
performing consultancy services, the CPA employs his knowledge, training, experience and skill
to arrive at findings, conclusions and recommendations that would provide the client with
needed information.

Among the emerging assurance and consultancy services offered by public accounting firms
in the country, are:

Actuarial services Application software selection and implementation

Arbitrage rebate services
Business process risk consulting
Center for trust online
Corporate finance
Cost performance management
E-business
Government contract services
Systems design installation
Tax outsourcing and processing
Business fraud investigation services
Business risk solutions
Computer risk management
Cash management
Derivatives and treasury risk management
Financial advisory services
Mergers and acquisitions
Personal financial counseling
Transfer pricing

Functions and Duties of Independent Auditors for Serving the Public Interest-Clients and
Third Parties

The Code of Ethics for Professional Accountants in the Philippines recognizes that the
members of the accountancy profession are enjoined:
- to work to the highest standards of professionalism;
- to attain the highest levels of performance;
- to meet the public interest requirement expected of the profession.

In view thereof, independent auditors have the duty of serving the public interest with:
a. credibility in information and information systems.
b. professionalism clearly recognizable by clients, employers and interested parties.
c. quality of services carried out to the highest standards of performance.
d. confidence in the framework of professional ethics governing the provision of the
accountant’s services.

In order to perform their functions and duties in the service of public interest, the professional
accountant is enjoined to observe these fundamental principles: integrity and objectivity,
professional competence and due care, confidentiality, professional behavior and technical
standards.
 41
 Integrity. The professional accountant should be straightforward and honest in the
performance of his services to the public.
 Objectivity. The professional accountant should be fair; he should not allow
prejudice or bias, conflict of interest or influence of others to override his
knowledgeable and unbiased judgement.
 Professional competence and due care. The members of the accountancy
profession should render service with due care, competence and diligence. An
accountant has the duty to maintain professional awareness of up-to-date
developments in practice, legislation and techniques.
 Confidentiality. The professional accountant should not disclose information
acquired while rendering professional services, unless required by law.
 Professional behavior. The auditor should refrain from conducts discreditable to the
profession and maintain professional behavior consistent with the good reputation of
the profession.
 Technical standards. He should render professional services in accordance with
pertinent technical and professional standards and be guided by the requirements of
integrity and objectivity.

Management of a Public Accounting Practice

Practice of Public Accounting Defined

The practice of public accounting shall constitute in a person who, whether in his individual
capacity or as a partner or staff member in an accounting or auditing firm, holds himself as
skilled in the knowledge, science and practice of accounting; or holds himself as qualified to
render professional services as a Certified Public Accountant, offering or rendering any or all of
these services for a fee: (Sec. 4; RA 9298)

- auditing or the verification of financial transactions and accounting records;

- preparation, signing or certification of financial reports for credit or other
purposes;
- design, installation and revision of accounting system;
- preparation of income tax returns;
- representation of client’s in tax or other accounting-related matters;
- professional assistance on accounting procedures
- recording and presentation of financial information.

Only a Certified Public Accountant may practice accountancy in the Philippines; and use the
title “Certified Public Accountant”, or use the abbreviated title “CPA” or display or use any device
such as titles, signs, cards, or advertisements to indicate that he is a CPA, who is practicing
accountancy. A single practitioner or a partnership formed for the practice of accountancy shall
be registered CPAs in the Philippines. (Article IV Sec. 28 RA 9298)

No one shall practice accountancy in the Philippines and use the abbreviated title “CPA”, or
use any sign to indicate he is practicing accountancy, unless he has a certificate of registration
and a professional identification card; or a professional license or a valid temporary/special
permit duly issued to him by the Professional Regulatory Board of Accountancy and the
Professional Regulation Commission (Sec. 26). The Securities and Exchange Commission shall
not register any corporation for the practice of public accountancy. (Sec. 28)
42

Establishment and Operation of a Public Accounting Practice

A public accounting firm may be organized as a single proprietorship, the owner of which is
called the principal; or as a partnership, the owners of which are called partners. The principal of
a single proprietorship and all the partners of the partnership organized for the practice of public
accounting must be registered Certified Public Accountants in the Philippines.

No corporation may be organized and registered with the Securities and Exchange
Commission to practice public accountancy in the Philippines, primarily because the general
standards in the conduct of an audit refer to the personal attributes of the auditor; and
corporations are juridical or artificial entities that cannot be bound by the ethical and
professional standards of the profession. Furthermore, corporate stockholders have limited
liability and this would adversely affect the public’s reliance on audited financial statements.

Registration with PRC and BOA

From the effectivity of this Act, certificate of accreditation shall be issued to CPAs in public
practice, according to the rules and regulations promulgated by the Professional Regulatory
Board of Accountancy (BOA) and approved by the Professional Regulation Commission (PRC).
The certificate of registration is issued only when registrant has shown that he has acquired a
minimum of three (3) years meaningful experience in any areas of public practice, including
taxation. In the field of public practice, meaningful experience may be earned as audit assistant
for at least one (1) year and as auditor in charge of an engagement for at least two (2) years.
(IRR Sec. 28A)

The individual CPAs, sole proprietor, partners, including the staff members of a sole
proprietorship or partnership in the public practice of accountancy, are required to register with
the BOA and the PRC.

The sole proprietorship or partnership shall not commence the practice of public accounting
until a valid Certificate of Registration has been issued to them in accordance with PRC BOA
Resolution No. 69, Series of 2002.

Operations

The practice of public accountancy offers various forms of services to the public and as such,
an accounting firm would need a place of business and the usual fixtures and appurtenances
that an office needs. An accounting firm shall necessarily be composed of a principal or partners
who are duly registered and accredited with Professional Regulations Commission (PRC) and
the Professional Regulatory Board of Accountancy (BOA).

The accounting firm must obtain a business license or mayor’s permit to operate a business
and the public practitioners should likewise pay the privilege tax and get the Professional Tax
Receipt in the city or municipality where they practice public accountancy. Moreover, the
practitioners of public accountancy should be registered and obtain a Certificate of Accreditation
with the Bureau of Internal Revenue (BIR).
 43
Public accounting firms that have clients who are required to file their financial statements
with the Securities and Exchange Commission (SEC) are also required to file with the said
agency, a representation letter for the client, stating among other things, that the conduct of the
audit was in conformity with generally accepted auditing standards and the financial statements
are presented in conformity with generally accepted accounting principles.

In general, the operations of a public accounting firm shall abide faithfully within the bounds
of the Rules of Professional Conduct for CPAs in RA 9298; and the Code of Ethics for
Professional Accountants in the Philippines.

Sources of Clients

A public accounting practitioner normally obtains clients through referrals. He joins civic and
professional organizations and actively participates in their activities and community affairs. He
would get referrals from businessmen and other members, as well as from colleagues or other
CPAs in the sectoral organizations. By maintaining his integrity, keeping his standards high and
rendering prompt and efficient service, the CPA would get referrals from clients, financial and
governmental institutions, and legal and other professional firms.

Announcement

CPAs are prohibited by the Code of Ethics to solicit clients; he may however, use appropriate
space in newspapers and magazines to announce a new practice, the establishment of his
office, or the transfer of his address for the information of clients and the general public.

Announcements should contain a bare statement of facts (Code, Sec. 14), to wit:

 Name of CPA/CPAs; Business Address; E-mail Address; and Telephone

and/or mobile numbers.

Professional Fees

Audit fees should be arranged and agreed upon between the client and the auditor before
the start of the audit. Clients should be made to understand that good professional men are
honest and efficient; and will render service in the least time, consistent with good practice.
Professional fees should be a fair reflection of the services performed for the client, considering
the requirements in terms of the: skill and knowledge, level of training and experience for the
type of service involved; the degree of responsibility entailed; and the time and rate of each
personnel involved in the audit.

Methods of Billing Clients

CPAs ordinarily bill clients using any of these methods:

a. Per diem or actual time charged basis. Audit fee is computed at actual number of
hours by the per diem rates of members of the audit team and audit staff involved in the
audit. A maximum fee may be agreed upon, beyond which the total per diem charges
shall not exceed.
 44
b. Flat fee basis. The CPA estimates the possible charges for the audit and states the
amount with some explanation if deemed advisable. He may also charge the client for
out-of-pocket costs.

c. Retainer basis. The CPA may be asked to do interim audit work, in which case, the
client is billed a monthly or annual fee for the various services the CPA has agreed to
perform during the said period.

Organization of CPA Firms

A firm of public accountants must be well-organized in order to ensure efficient operations.

According to responsibility and experience, positions and tasks in audit firms may be classified
into: partners, manager, supervisor, seniors, semi-seniors, and juniors.

Partners. The partners are the top-level authority; they select and hire the audit staff, plan
staff training, establish operational policies, obtain clients and approve audit reports.

A partner discusses and approves billing with the client, plans and reviews all phases of an
audit engagement. He determines whether all audit work has been performed according to
generally accepted auditing standards and in accordance with the terms of the audit
engagement.

He determines if the results of the audit are fair presentations of the financial condition and
results of operations of the client. A partner signs the audit report.

Manager. The manager acts as liaison between the partners and the audit staff. He takes
charge of the training program and exercises direct supervision on seniors in charge of the
audit. He may discuss items of material importance with the client, upon the approval of the
partners. He reviews the working papers and drafts the audit report.

He discusses the results of the audit and the audit report and settles accounting problems or
matters that may arise during the audit with the client. In small firms, a partner may act as
manager.

Supervisor. A supervisor determines the audit procedures to be used in an audit. He

supervises the accountants. He is a rank lower than the manager and works mainly with the
specific audit team assigned. In small firms, a manager-supervisor may perform the tasks of a
supervisor along with his responsibilities as manager; and a senior performs the supervisor’s
audit involvement.

Seniors. A senior is in charge of the fieldwork of an audit engagement and is directly

responsible to the manager or the partner. He sees that their instructions and the firm policy are
followed. He assumes responsibility for the completion of the audit. He prepares the audit
program for specific engagement and plans assignment of the different phases of the audit
work.

He performs the more important procedures in the audit. He reviews non-financial records
such as the articles of incorporation and by-laws. He assembles working papers, drafts the
financial statements, and investigates unusual variations in current and past year’s operations.
He prepares the income tax returns and the original draft of the audit report.

45
Semi-seniors. A semi-senior is a member of the audit staff who may not yet possess the
experience of a senior but can cope up with a portion of the audit with minimum supervision. He
consults with the senior and performs phases of the audit with perception, realizing the
importance of such phase to the whole audit. In small firms, the position of semi-senior is
usually omitted.

Juniors. The junior or staff accountant is under direct supervision of the senior. He performs
the detailed work of an audit. He verifies footings, extensions and postings. He traces
evidences, prepares analyses, schedules, and bank reconciliations. He proves computations in
reports and proofreads typed reports against manuscripts. He reports to the senior any error or
unusual items.

Terms of Audit Engagement

Serious considerations should be given to the decision to accept or reject a prospective

client and should the public practitioner decide to accept an audit engagement, he requests a
conference with the client to discuss the terms of the audit.

The practitioner and the prospective client should reach an agreement as to:
a. the specific services to be rendered;
b. the cooperation expected from the client and his personnel;
c. the start and completion date of the audit;
d. the scope of the audit;
e. any limitation of the audit work.

Acceptance and Retention of Audit

When a Certified Public Accountant is approached by a prospective client, he must exercise

prudence and make some inquiries before accepting the engagement.

Generally accepted auditing standards should be met. The auditor should have
independence in mental attitude and he should ascertain that his independence would not be
impaired in any way with regards to the prospective client.

The auditor discusses the reputation of the prospective client with banks, lawyers or other
acquaintances in the business, civic and professional communities for any indication of
improper conduct of the prospective client’s business.

The CPA should evaluate management integrity to avoid liabilities caused by cases where
the major factor is lack of management integrity. He communicates with the predecessor
auditor, with the approval of the prospective client, regarding any disagreement with
management on auditing standards or accounting principles; such as proper and adequate
disclosures. He asks the client, as well as the predecessor auditor for the reason for the change
in auditors.
 The auditor should consider the availability of audit staff with the expertise and competence
to perform the audit engagement. He should make preliminary inquiries to gauge the quality of
the prospective client’s internal control and adequacy of accounting records. He should be
convinced of the availability of evidence that would be sufficient to form basis for expressing an
opinion.

The CPA may accept the engagement with a new client if his inquiries yielded satisfactory
results. In the same manner, the CPA may retain an audit client whose management’s integrity
and conduct of business have remained within generally accepted standards and procedures.
46
Appointment of Auditors

When an agreement is reached with the client for the performance of an audit, the principal
or partner proceeds to select the auditors to form the audit team. According to responsibility and
experience, auditors are appointed to the positions of partner, manager, supervisor, seniors,
semi-seniors and juniors. According to what is deemed required for the audit engagement, one
auditor may be appointed each as partner, as manager, and as supervisor; or only one auditor
as manager-supervisor. Normally, one or two seniors can satisfactorily meet the needs of the
audit engagement and the number of semi-seniors and juniors depend upon the volume of
estimated audit work.

Engagement Letter

The CPA then prepares the engagement letter to contain the principal items agreed upon
with the client. The engagement letter, that is signed “conforme” or “agreed” by the client on the
space provided for his signature at the bottom of the page, serves as a written contract between
the CPA and the client. It states explicitly the professional services expected of the auditor and
the responsibilities of the client. The express delineation of responsibilities is necessary, so that
misunderstandings or possible future legal action between the CPA and the client may be
minimized, if not entirely eliminated.

The engagement letter is addressed to whoever hired the CPA, ordinarily, the Chairman of
the Board of Directors, the Chairman of the Audit Committee, or the President or Chief
Executive Officer of the company. The audit committee members are non-working directors of
the company.

The usual contents of the engagement letter are:

a. confirmation of the agreement to perform the audit for the specified audit year;
b. conditions, scope, and limitation of the audit;
c. disclaimer of responsibility to discover or detect fraud;
d. audit fees and billing arrangements;
e. other relevant matters; such as:
- filing with the Securities and Exchange Commission (SEC)
- filing the client’s Income Tax Returns (ITR) with the Bureau of Internal
Revenue

Client Continuance

The CPA in public practice of accountancy periodically reviews the list of current clients and
identifies those whose continued association with the audit firm may no longer be advisable.
The client may need specialized services that the audit firm is not in the position to provide; or
client refuses to accept audit firm’s negotiation for increase in audit fees; or the audit firm has
difficulty working with the client’s personnel; or most importantly, the audit firm has come into
evidence of the lack of integrity of client management or of a significant impropriety in client’s
conduct of business. A letter of discontinuance may be sent to client in response to client’s
request for a repeat audit.

47
Recurring Audits

When the audit engagement is for a recurring audit, the practitioner reviews the terms of the
previous engagement and the client’s permanent audit file. Should there be no change in the
circumstances of the audit and both auditor and client agree to the same terms as in the
previous engagement, there may be no need of sending a new letter of engagement; however,
the current audit file of clients should include the letter of engagement for the current audit
engagement.

A new letter of engagement is sent to the client, as a legal requirement; and when the auditor
believes the client has misunderstood the scope and objectives of the audit and there is a need
to remind the client of the terms of the engagement; or certain terms have been revised; or
when there is a significant change in the nature and size of the client’s business, and especially
when there is a change in ownership, or in senior management, or in the Board of Directors.

Acceptance of a Change in Engagement

Before the completion of an audit engagement, circumstances may arise that would lead a
client to request for a change in the engagement to one that provides for a lesser assurance.
Where in an engagement for an audit, generally accepted auditing standards cannot be
performed without restrictions, or financial statements cannot be presented in conformity with
generally accepted accounting principles; a client would request to change the engagement
from an audit to a review or a compilation or an agreed-upon procedures, to avoid an adverse or
disclaimer of opinion.

If the auditor finds the reasons presented by the client justification enough for the request, he
may agree to the change. In this case, both auditor and client should indicate their agreement to
the revised terms of the engagement and the auditor issues a report appropriate for the revised
terms. Otherwise, he should withdraw from the engagement; and his withdrawal and the
circumstances leading to his withdrawal from the original engagement should be reported to the
Board of Directors, shareholders, and other involved parties.

Management Responsibility for Financial Reporting

The management’s responsibility for financial reporting is expressly stated in the second
paragraph of the independent auditor’s report.

Management is responsible for:

a. the preparation and fair presentation of the financial statements in accordance with
 Philippine Financial Reporting Standards or the applicable financial reporting
framework;
b. designing, implementing and maintaining internal control relevant to the:
- preparation and fair presentation of financial statements that are free from
material misstatements, whether due to fraud or error;
- provision of reasonable assurance that:
*transactions are executed per management authorization and recorded
properly;
*financial statements are fairly presented in accordance with generally
accepted accounting principles.

48
c. selecting and applying appropriate accounting policies and making accounting
estimates that are reasonable in the circumstances.

The Board of Directors discharges management’s responsibility for financial statements

through the Audit Committee.

The Role of the Audit Committee

The Audit Committee is composed of the non-working members of the Board of Directors. Its
work strengthens the financial reporting process of the entity. The committee meets periodically
with the internal auditor and independent accountants, who also have direct access to the
committee. The Audit Committee communicates with the auditor to discuss the adequacy of
internal accounting controls, the scope and results of their work and the quality of financial
reporting.

The Audit Committee oversees internal audit activities;

 nominates the independent audit firm to perform the audit;
 reviews the plan for the audit with the auditor;
 discusses disagreement between auditor and management and any problems the
auditor encounters during the engagement;
 reviews the financial statements and the auditor’s report upon the completion of the
audit engagement.

The Audit Committee reviews and approves significant proposed audit adjustments and
resolves major issues discussed with management prior to the retention of the auditor, as well
as disagreement between the auditor and management about the application of accounting
principles to specific transactions of the entity. He reviews and approves the scope of the audit;
the disclosures in the financial statements; and the wording of the auditor’s report.

The organization of an Audit Committee is endorsed by the Securities and Exchange

Commission, however, some entities do not have an audit committee. A qualified non-working
director or the internal auditor may be assigned these tasks that normally belong to the Audit
Committee:
a. Auditing standards require that the published annual report containing the audited
financial statements be read with due care to ensure that the entity’s published
annual
 report does not contain other information that would contradict and raise doubts
about
the validity of the audited financial statements.

b. Controversial and emerging areas for which there is lack of authoritative guidance
require the determination of the effect of significant accounting policies; selection of
or
changes in significant accounting policies and their application; and the method used
to account for unusual transactions.

c. The process used by management to arrive at accounting estimates requires a study

on which to base the auditor’s conclusion as to the reasonableness of management
judgment and particularly sensitive estimates.

ASSESSMENT

Course Requirements:
1. Reaction paper, portfolio, etc.
2. Grading System
 Prelim/Midterm/Final Exam 33.3%
 Quizzes 33.3%
 Group or individual paper, presentation, portfolio 33.4%
 REFERENCES

1. Galanza, Raquel Monte

Auditing Assurance Principles, Ethics, and Good Governance
2015 Edition, Quezon City,
Rex Printing Company, Inc.

2. Cabrera, Elenita Balatbat

Auditing and Assurance Principles
2019 Edition, Manila, Philippines
GIC Enterprises & Co., Inc.