Philippine School of Business Administration

Manila

Integrated Review - Auditing BLD

2nd Semester 2020-2021

Quality Control for an Audit of Financial Statements

PSA 220 (REDRAFTED)

Scope of this PSA

This Philippine Standard on Auditing (PSA) deals with the specific responsibilities of the auditor regarding
quality control procedures for an audit of financial statements. It also addresses, where applicable, the
responsibilities of the engagement quality control reviewer. This PSA is to be read in conjunction with
relevant ethical requirements.

System of Quality Control and Role of Engagement Teams

Quality control systems, policies and procedures are the responsibility of the audit firm. The firm has an
obligation to establish and maintain a system of quality control to provide it with reasonable assurance that:

a. The firm and its personnel comply with professional standards and regulatory and legal requirements;
and
b. The reports issued by the firm or engagement partners are appropriate in the circumstances.

The firm’s responsibilities is to establish and maintain its system of quality control for audit engagements.
The system of quality control includes policies and procedures that address each of the following elements:
• Leadership responsibilities for quality within the firm;
• Relevant ethical requirements;
• Acceptance and continuance of client relationships and specific engagements;
• Human resources / Assignment of Engagement Teams;
• Engagement performance; and
• Monitoring.

Reliance on the Firm’s System of Quality Control

Unless information provided by the firm or other parties suggest otherwise, the engagement team may rely
on the firm’s system of quality control in relation to, for example:
• Competence of personnel through their recruitment and formal training.
• Independence through the accumulation and communication of relevant independence
information.
• Maintenance of client relationships through acceptance and continuance systems.
• Adherence to regulatory and legal requirements through the monitoring process.

Objective
The objective of the auditor is to implement quality control procedures at the engagement level that provide
the auditor with reasonable assurance that:
a. The audit complies with professional standards and regulatory and legal requirements;
b. The auditor’s report issued is appropriate in the circumstances.

Elements of System of Quality Control

Leadership Responsibilities for Quality on Audits

The engagement partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned.

The actions of the engagement partner and appropriate messages to the other members of the
engagement team, in taking responsibility for the overall quality on each audit engagement, emphasize:

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a. The importance to audit quality of:

(i) Performing work that complies with professional standards and regulatory and legal
requirements;
(ii) Complying with the firm’s quality control policies and procedures as applicable;
(iii) Issuing auditor’s reports that are appropriate in the circumstances; and
(iv) The engagement team’s ability to raise concerns without fear of reprisals; and
b. The fact that quality is essential in performing audit engagements.

Relevant Ethical Requirements

Throughout the audit engagement, the engagement partner shall remain alert, through observation
and making inquiries as necessary, for evidence of non- compliance with relevant ethical
requirements by members of the engagement team.

The Philippine Ethics Code establishes the fundamental principles of professional ethics, which include:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior.

If matters come to the engagement partner’s attention through the firm’s system of quality control or
otherwise that indicate that members of the engagement team have not complied with relevant ethical
requirements, the engagement partner, in consultation with others in the firm, shall determine the
appropriate action.

Independence
The engagement partner shall form a conclusion on compliance with independence requirements that apply
to the audit engagement. In doing so, the engagement partner shall:

a. Obtain relevant information from the firm and, where applicable, network firms, to identify and
evaluate circumstances and relationships that create threats to independence;

b. Evaluate information on identified breaches, if any, of the firm’s independence policies and
procedures to determine whether they create a threat to independence for the audit engagement;
and

c. Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying
safeguard.
The engagement partner shall promptly report to the firm any inability to resolve the matter for
appropriate action, which may include eliminating the activity or interest that creates the threat, or
withdrawing from the audit engagement, where withdrawal is legally permitted.

Acceptance and Continuance of Client Relationships and Audit Engagements

The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and audit engagements have been followed, and shall determine that
conclusions reached in this regard are appropriate.

Information such as the following assists the engagement partner in determining whether the conclusions
reached regarding the acceptance and continuance of client relationships and audit engagements are
appropriate:
• The integrity of the principal owners, key management and those charged with governance of the
entity;
• Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
• Whether the firm and the engagement team can comply with relevant ethical requirements; and
• Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

If the engagement partner obtains information that would have caused the firm to decline the audit

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engagement had that information been available earlier, the engagement partner shall communicate that
information promptly to the firm, so that the firm and the engagement partner can take the necessary action.

Human Resources / Assignment of Engagement Teams

The engagement partner shall be satisfied that the engagement team, and any auditor’s experts who are not
part of the engagement team, collectively have the appropriate competence and capabilities to:

a. Perform the audit engagement in accordance with professional standards and regulatory and legal
requirements; and
b. Enable an auditor’s report that is appropriate in the circumstances to be issued.

An engagement team also includes a member using expertise in a specialized area of accounting or auditing,
whether engaged or employed by the firm, if any, who performs audit procedures on the engagement.

When considering the appropriate competence and capabilities expected of the engagement team as a
whole, the engagement partner may take into consideration such matters as the team’s:
• Understanding of, and practical experience with, audit engagements of a similar nature and
complexity through appropriate training and participation.
• Understanding of professional standards and regulatory and legal requirements.
• Technical expertise, including expertise with relevant information technology and specialized areas of
accounting or auditing.
• Knowledge of relevant industries in which the client operates.
• Ability to apply professional judgment.
• Understanding of the firm’s quality control policies and procedures.

Engagement Performance
Direction, Supervision and Performance
The engagement partner shall take responsibility for:
a. The direction, supervision and performance of the audit engagement in compliance with professional
standards and regulatory and legal requirements; and
b. The auditor’s report being appropriate in the circumstances.

Direction of the engagement team involves informing the members of the engagement team of matters such
as:
• Their responsibilities
• Responsibilities of respective partners where more than one partner is involved in the conduct of an
audit engagement.
• The objectives of the work to be performed.
• The nature of the entity’s business.
• Risk-related issues.
• Problems that may arise.
• The detailed approach to the performance of the engagement.

Discussion among members of the engagement team allows less experienced team members to raise
questions with more experienced team members so that appropriate communication can occur within the
engagement team.
Appropriate teamwork and training assist less experienced members of the engagement team to clearly
understand the objectives of the assigned work.

Supervision includes matters such as:

• Tracking the progress of the audit engagement.
• Considering the competence and capabilities of individual members of the engagement team,
including whether they have sufficient time to carry out their work, whether they understand their
instructions, and whether the work is being carried out in accordance with the planned approach to
the audit engagement.
• Addressing significant matters arising during the audit engagement, considering their
significance and modifying the planned approach appropriately.
• Identifying matters for consultation or consideration by more experienced engagement team
members during the audit engagement.

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Where a member of the engagement team with expertise in a specialized area of accounting or auditing
is used, direction, supervision and review of that engagement team member’s work may include
matters such as:
• Agreeing with that member the nature, scope and objectives of that member’s work; and the
respective roles of, and the nature, timing and extent of communication between that member
and other members of the engagement team.
• Evaluating the adequacy of that member’s work including the relevance and reasonableness of
that member’s findings or conclusions and their consistency with other audit evidence.

Reviews
The engagement partner shall take responsibility for reviews being performed in accordance with the firm’s
review policies and procedures.
On or before the date of the auditor’s report, the engagement partner shall, through a review of the audit
documentation and discussion with the engagement team, be satisfied that sufficient appropriate audit
evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued.
Consultation
The engagement partner shall:
a. Take responsibility for the engagement team undertaking appropriate consultation on difficult or
contentious matters;
b. Be satisfied that members of the engagement team have undertaken appropriate consultation
during the course of the engagement, both within the engagement team and between the
engagement team and others at the appropriate level within or outside the firm;
c. Be satisfied that the nature and scope of, and conclusions resulting from, such consultations are
agreed with the party consulted; and
d. Determine that conclusions resulting from such consultations have been implemented.

Engagement Quality Control Review

For audits of financial statements of listed entities, and those other audit engagements, if any, for which the
firm has determined that an engagement quality control review is required, the engagement partner shall:

a. Determine that an engagement quality control reviewer has been appointed;

b. Discuss significant matters arising during the audit engagement, including those identified during the
engagement quality control review, with the engagement quality control reviewer; and
c. Not date the auditor’s report until the completion of the engagement quality control review.

The engagement quality control reviewer shall perform an objective evaluation of the significant judgments
made by the engagement team, and the conclusions reached in formulating the auditor’s report. This
evaluation shall involve:

a. Discussion of significant matters with the engagement partner;

b. Review of the financial statements and the proposed auditor’s report;
c. Review of selected audit documentation relating to the significant judgments the engagement team
made and the conclusions it reached; and
d. Evaluation of the conclusions reached in formulating the auditor’s report and consideration of
whether the proposed auditor’s report is appropriate.

For audits of financial statements of listed entities, the engagement quality control reviewer, on performing
an engagement quality control review, shall also consider the following:

a. The engagement team’s evaluation of the firm’s independence in relation to the audit engagement;
b. Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult or contentious matters, and the conclusions arising from those consultations; and
c. Whether audit documentation selected for review reflects the work performed in relation to the
significant judgments made and supports the conclusions reached.

Differences of Opinion
If differences of opinion arise within the engagement team, with those consulted or, where applicable,
between the engagement partner and the engagement quality control reviewer, the engagement team shall

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follow the firm’s policies and procedures for dealing with and resolving differences of opinion.

Monitoring
An effective system of quality control includes a monitoring process designed to provide the firm with
reasonable assurance that its policies and procedures relating to the system of quality control are relevant,
adequate, and operating effectively. The engagement partner shall consider the results of the firm’s
monitoring process as evidenced in the latest information circulated by the firm and, if applicable, other
network firms and whether deficiencies noted in that information may affect the audit engagement.

QUALITY CONTROL REVIEW

Recognizing the importance of professional accountancy services the society, the government has also taken
steps to ensure that CPAs work to the highest standards which can reasonably be expected from them. The
government through the Professional Regulatory Board of Accountancy (BOA) has required all CPA firm’s and
individual CPA’s in public practice to obtain a certificate of accreditation to practice public accountancy. Such
certificate is valid for three years and can be renewed after complying with the requirements of the Board Of
Accountancy.
As a condition to the renewal of the certificate of accreditation to practice public accountancy, the board
requires individual CPA and CPA firms to undergo a quality control review to ensure that these CPAs comply
with accounting and auditing standards and practices.
The PRC has created Quality Review Committee (QRC) which shall conduct a quality review on applicants for
registration to practice public accountancy and shall recommend the revocation of the certificate of
registrations of CPAs who have not observed the quality control measures or those who have not complied
with the standards of quality prescribed for the practice of public accountancy.

Requirement as to Documentation
The auditor shall document:
a. Issues identified with respect to compliance with relevant ethical requirements and how they were
resolved.
b. Conclusions on compliance with independence requirements that apply to the audit engagement,
and any relevant discussions with the firm that support these conclusions.
c. Conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements.
d. The nature and scope of, and conclusions resulting from, consultations undertaken during the course
of the audit engagement.

The engagement quality control reviewer shall document, for the audit engagement reviewed, that:
a. The procedures required by the firm’s policies on engagement quality control review have been
performed;
b. The engagement quality control review has been completed on or before the date of the auditor’s
report; and
c. The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that
the significant judgments the engagement team made and the conclusions they reached were not
appropriate.

THE PROFESSIONAL STANDARDS

When auditing financial statements, an auditor assumes certain professional responsibilities. Auditor’s opinion
must be based on an examination conducted in accordance with professional standards. Failure to comply with
these standards exposes the auditor to risks such as loss of public respect or even assessment of legal damages.
Standards are established to measure the quality of performance of individuals and organizations. Standards
relating to the accounting profession concern themselves with CPA’s professional qualities, the judgment
exercised by the CPA’s in the performance of their professional engagement, and the CPA firm’s quality control
policies and procedures.
The Board of Accountancy promulgated the generally accepted auditing standards (GAAS) that establish
required level of quality for performing financial statement audits. These standards must be followed by CPA’s
when auditing financial statements.
Philippine standards on Auditing (PSAs) are issued to clarify the meaning of these ten GAAS. Auditing procedures
are the means used by the auditors in attaining the quality required by the standards.

Generally Accepted Auditing Standards (GAAS)

GAAS represent measures of the quality of the auditor’s performance. These standards should be looked at as a
minimum standard of performance that auditors should follow. These ten GAAS are grouped into general,
fieldwork and reporting standards.

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• General Standards
1. The examination is to be performed by person or persons having adequate technical training
and proficiency as an auditor.
2. In all matters relating to engagement, independence in mental attitude is to be maintained by
the auditor.
3. Due professional care is to be exercised in the performance of the audit and in the preparation
of the report.

• Standards of Fieldwork
4. The work is to be adequately planned and assistants, if any, are to be properly supervised.
5. There is to be a proper study and evaluation of existing internal control as a basis for reliance
thereon and for the determination of the resultant extent of the tests to which auditing
procedures are to be restricted.
6. Sufficient competent evidential matter is to be obtained through inspection, observation,
inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial
statement under examination.

• Standards of Reporting
7. The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.
8. The report shall identify those circumstances in which principles have not been consistently
observed in the current period in relation to the preceding period.
9. Informative disclosures are to be regarded as reasonably adequate unless otherwise stated in
the report.
10. The report shall either contain an expression of opinion regarding the financial statements,
taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an
overall opinion cannot be expressed, the reasons therefore should be stated. In all cases, where
an auditor’s name is associated with the financial statements, the report should contain a clear-
cut indication of the character of the auditor’s examination if any and the degree of
responsibility he is taking.

PHILIPPINE STANDARDS ON AUDITING (PSAs)

The Auditing and Assurance Standards Council (AASC) has been given the task to promulgate auditing standards,
practices and procedures which shall be generally accepted by the accounting profession in the Philippines.
• Adoption of International Standards
To facilitate the preparation by the AASC of its pronouncements and to attain uniformity of those
pronouncements with international auditing standards, the AASC has approved the adoption of the
International Standards on Auditing (ISAs), International Standards on Assurance Engagements (ISAEs),
International Standards on Review Engagement (ISREs) and International Standards on Related Services
(ISRs) issued by the International Auditing and Assurance Board (IAASB) created by the International
Federation of Accountants (IFAC).

In addition to these standards, Practice Statements are also issued to provide practical assistance to
auditors in implementing the standards and to promote good practice in the accountancy profession.

In this connection, the AASC undertakes a review of the standards and practices statements issued by
the IAASB to determine if these can be adopted in the Philippines with or without changes, after
considering any local requirements imposed by law or practice.

MULTIPLE CHOICE QUESTIONS

1. The policies and procedures adopted by a firm to provide reasonable assurance that all audits done by the
firm are being carried out in accordance with the Objective and General Principles Governing an Audit of
Financial Statements.
A. General controls C. Peer review
B. Internal controls D. Quality controls

2. The main purpose of implementing quality control policies and procedures is:
A. To have a favorable peer review.
B. To comply with regulatory agency.

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C. To standardize the policies and procedures of the audit firms.

D. To provide reasonable assurance that audit will be conducted in accordance with PSA.

3. A firm should establish and maintain a system of quality control to provide it with reasonable assurance that:
I. The firm and its personnel comply with professional standards and applicable legal and regulatory
requirements.
II. Reports issued by the firm or engagement partners are appropriate in the circumstances.
A. I only. C. Both I and II.
B. II only. D. Neither I nor II.

4. The firm shall establish policies and procedures designed to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and regulatory and legal requirements,
and that the firm or the engagement partner issue report that are appropriate in the circumstance. Such policies
and procedures shall include:
A. Review responsibilities.
B. Supervision responsibilities.
C. Matters relevant to promoting consistency in the quality of engagement performance.
D. All of the choices.

5. The objectives of the quality control policies to be adopted by the audit firm will ordinarily incorporate:
A. B. C. D.
Skills and competence Yes Yes Yes No
Monitoring Yes No Yes Yes
Professional requirements Yes Yes No Yes

6. The nature and extent of a CPA firm’s quality control policies and procedures depend on
A. B. C. D.
The CPA firm’s size Yes Yes No Yes
The nature of CPA firm’s Yes Yes Yes No
practice
Cost-benefit considerations Yes No Yes Yes

7. Quality control policies and procedures should be implemented at

A. B. C. D.
Level of the audit firm Yes Yes No No
Individual audits Yes No Yes No

8. An audit firm should implement quality control policies and procedures designed to ensure that all audits are
conducted in accordance with PSAs or relevant national standards or practices. These policies and procedures
should be implemented
A. On individual audits only.
B. At the audit firm level only
C. Either at the audit firm level or on individual audits.
D. Both at the audit firm level and on individual audits.

9. Which of the following is not one of the major concerns of the auditor when establishing quality control
policies and procedures?
A. Billing arrangement C. Ethical requirements
B. Engagement performance D. Independence

10. Which of the following quality control objectives would be least important to the auditor?
A. Determination of audit fee C. Professional advancement
B. Hiring personnel D. Review and supervision

11. The firm’s system of quality control should include policies and procedures that address each of the
following elements, except
A. Control environment
B. Human resources
C. Relevant ethical requirements
D. Engagement Performance

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12. In pursuing a firm’s quality control objectives, a firm should adopt policies and procedures to enable it to
identify and evaluate circumstances and relationships that create threats or reduce them to an acceptable level
by applying safeguards, or, if considered appropriate, to withdraw from the engagement. Which quality control
element would be most likely to satisfy?
A. Monitoring
B. Human resources
C. Ethical requirements
D. Leadership responsibilities for quality within the firm

13. A firm of CPAs may use policies and procedures such as notifying professional personnel as to the names of
audit clients having publicly held securities and confirming periodically with such personnel that prohibited
relations do not exist. This is done to achieve effective quality control in which of the following areas?
A. Human resources.
B. Ethical requirements.
C. Acceptance and continuance of clients.
D. Leadership responsibilities for quality within the firm.

14. The primary purpose of establishing quality control policies and procedures for deciding whether to accept
new client is to
A. Enable the CPA firm to attest to the integrity of the client management.
B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management lacks integrity.
D. Anticipate before performing any field work whether an unqualified opinion can be expressed.

15. A CPA firm’s quality control procedure pertaining to the acceptance of a prospective audit client would most
likely include
A. Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for an opinion.
B. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the required substantive tests.
C. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
D. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management.

16. A quality control policy that requires personnel in the firm to adhere to independence, integrity, objectivity,
confidentiality and professional behavior, relates to
A. Assignment C. Professional requirements
B. Monitoring D. Skills and competence

17. Which of the following is an element of a CPA firm’s quality control system that should be considered in
establishing its quality control policies and procedures?
A. Assigning personnel to engagements
B. Complying with laws and regulations
C. Considering audit risk and materiality
D. Using statistical sampling techniques

18. In pursuing the firm’s quality control objectives with respect to assigning personnel to engagements, the
auditor’s may use policies and procedures such as
A. Evaluate client’s upon occurrence at specified events to determine whether the relationships
ought to be continued.
B. Designating senior qualified personnel to provide advice on accounting or auditing questions
throughout the engagement.
C. Establishing at entry levels a policy for recruiting that includes minimum standards of academic
preparation and accomplishments.
D. Requiring timely identification of the staffing requirements of specific engagements so that
enough qualified personnel can be made available.

19. In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which
partners or employees of the CPA firm were previously employed by the CPA firm’s client as this may create
threat to CPA’s independence. Which quality control element would this be most likely to satisfy?
A. Assignment C. Professional requirements

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B. Monitoring D. Skills and competence

20. This involves informing assistants of their responsibilities and the objectives of the procedures they are to
perform. It also involves informing them of matters such as the nature of the entity’s business and possible
accounting and auditing problems that may affect the nature, timing and extent of audit procedures with which
they are involved.
A. Delegation C. Review
B. Direction D. Supervision

21. Which of the following quality control procedures does not relate to skills and competence?
A. Advancement C. Hiring
B. Direction D. Professional development

22. Which of the following is one of the elements of a CPA firm’s quality control system?
A. Complying with laws and regulations
B. Considering audit risk and materiality
C. Consultation
D. Using statistical sampling techniques

23. Which of the following is a policy that must be established to comply with the quality control element of
delegation of task to staff?
A. Whenever necessary, personnel should seek assistance from knowledgeable persons within or
outside the firm.
B. The continued adequacy and operational effectiveness of quality control policies and
procedures are to be observed.
C. There is a sufficient direction, supervision, and review of work performed at all levels to provide
reasonable assurance that the work performed meets appropriate standards quality.
D. The firm is to be staffed by personnel who have attained and maintain the technical standards
and professional competence required to enable them to fulfill their responsibilities.

24. Which of the following procedures does not pertain to the quality control policy of delegation?
A. Provide procedures for planning audits.
B. Provide on- the- job trainings during performance of audits.
C. Provide procedures for maintaining the firm’s standards of quality for the work performed.
D. Plan to personnel needs of the firm on an overall basis and for individual practice offices.

25. In connection with the element of consultation, a CPA firm’s system of quality control should ordinarily
provide that all personnel
A. Provide procedures for planning audits
B. Have the knowledge required to enable them to fulfill responsibilities assigned
C. Review and test compliance with the firm’s quality control policies and procedures
D. Seek assistance from persons having appropriate levels of knowledge, judgment, and authority

26. Which one of the following is not one of the three General Standards?
A. Proper planning and supervision.
B. Independence of mental attitude.
C. Adequate training and proficiency.
D. Due professional care.

27. Which one of the following is not a Field Work Standard?

A. Adequate planning and supervision.
B. Due professional care.
C. Understand the entity and its environment including internal control.
D. Sufficient appropriate audit evidence.

28. The General Standards stress the importance of:

A. evidence accumulation.
B. personal qualities the auditor should possess.
C. communicating the auditor’s findings to the reader.
D. general supervision of the audit.

29. The generally accepted auditing standard that requires “Adequate technical training and

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proficiency” is normally interpreted as requiring the auditor to have:

A. formal education in auditing and accounting.
B. worked for an entity similar to the entity being audited.
C. independence in mental attitude
D. a graduate degree in a business field.

30. Which of the following statements most accurately captures the intent of the standards of field work?
A. Field work standards are primarily concerned with personal attributes necessary during the conduct
of the audit.
B. Field work standards provide extensive guidance regarding the conduct of an audit.
C. Field work standards are primarily directed at the auditor’s planning, understanding of internal
control, and evidence accumulation.
D. Field work standards are primarily concerned with the conduct of substantive testing as opposed to
testing of internal controls.

“END”

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