Fundamentals of Assurance Services

SOURCES: Philippine Framework for Assurance Engagements, PSA 120, Public Accountancy Profession (Cabrera
2013-2014 Edition)

ASSURANCE ENGAGEMENT

“Assurance engagement” means an engagement in which a practitioner expresses a

conclusion designed to enhance the degree of confidence of the intended users other than
the responsible party about the outcome of the evaluation or measurement of a subject
matter against criteria.

Nature of Assurance Engagement

Assurance refers to the auditor’s satisfaction as to the reliability of an assertion being

made by one party for use by another party. To provide such assurance, the auditor
assesses the evidence collected as a result of procedures conducted and expresses a
conclusion. The degree of satisfaction achieved and, therefore, the level of assurance
which may be provided is determined by the procedures performed and their results.

Objective of an Assurance Engagement

The objective of an assurance engagement is for a professional accountant to evaluate or

measure a subject matter that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides the intended user with a level
of assurance about that subject matter. Assurance engagements performed by a
professional accountant 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.
Elements of an Assurance Engagement
A. A Three Party Relationship involves a practitioner, a responsible party, and intended
users;
a. Practitioner - The term “practitioner” as used in this Framework is broader than the
term “auditor” as used in PSAs and PSREs, which relates only to practitioners
performing audit or review engagements with respect to historical financial
information. A practitioner may be requested to perform assurance engagements
on a wide range of subject matters. Some subject matters may require specialized
skills and knowledge beyond those ordinarily possessed by an individual
practitioner.

The practitioner is satisfied that those persons carrying out the engagement
collectively possess the requisite skills and knowledge, and that the practitioner
has an adequate level of involvement in the engagement and understanding of the
work for which any expert is used.

b. Responsible Party
The responsible party is the person (or persons) who:
(a) In a direct reporting engagement, is responsible for the subject
matter; or
(b) In an assertion-based engagement, is responsible for the subject
matter information (the assertion), and may be responsible for the subject
matter.

- An example of when the responsible party is responsible for both

the subject matter information and the subject matter, is when an
entity engages a practitioner to perform an assurance engagement
regarding a report it has prepared about its own sustainability
practices.
- An example of when the responsible party is responsible for the
subject matter information but not the subject matter, is when a
government organization engages a practitioner to perform an
assurance engagement regarding a report about a private
company’s sustainability practices that the organization has
prepared and is to distribute to intended users. The responsible
party may or may not be the party who engages the practitioner (the
engaging party).

c. Intended Users - are the person, persons or class of persons for whom the
practitioner prepares the assurance report.
The responsible party can be one of the intended users, but not the only
one.
B. An appropriate subject matter;
The subject matter, and subject matter information, of an assurance engagement
can take many forms, such as:
• Financial performance or conditions (for example, historical or
prospective financial position, financial performance and cash flows) for
which the subject matter information may be the recognition, measurement,
presentation and disclosure represented in financial statements.
• Non-financial performance or conditions (for example, performance
of an entity) for which the subject matter information may be key indicators
of efficiency and effectiveness.
• Physical characteristics (for example, capacity of a facility) for which
the subject matter information may be a specifications document. •
Systems and processes (for example, an entity’s internal control or IT
system) for which the subject matter information may be an assertion about
effectiveness.
• Behavior (for example, corporate governance, compliance with
regulation, human resource practices) for which the subject matter
information maybe a statement of compliance or a statement of
effectiveness.

Subject matters have different characteristics, including the degree to which

information about them is qualitative versus quantitative, objective versus
subjective, historical versus prospective, and relates to a point in time or covers a
period. Such characteristics affect the:
(a) Precision with which the subject matter can be evaluated or
measured against criteria; and
(b) The persuasiveness of available evidence. The assurance report
notes characteristics of particular relevance to the intended users.

An appropriate subject matter is:

(a) Identifiable, and capable of consistent evaluation or measurement
against the identified criteria; and
(b) Such that the information about it can be subjected to procedures
for gathering sufficient appropriate evidence to support a reasonable
assurance or limited assurance conclusion, as appropriate.

C. Suitable criteria
Criteria are the benchmarks used to evaluate or measure the subject matter
including, where relevant, benchmarks for presentation and disclosure. Criteria
can be formal, for example in the preparation of financial statements, the criteria
may be Philippine Financial Reporting Standards; when reporting on internal
control, the criteria may be an established internal control framework or individual
control objectives specifically designed for the engagement; and when reporting
on compliance, the criteria may be the applicable law, regulation or contract.
Examples of less formal criteria are an internally developed code of conduct or an
 agreed level of performance (such as the number of times a particular committee
is expected to meet in a year).

Suitable criteria exhibit the following characteristics:

(a) Relevance: relevant criteria contribute to conclusions that assist decision-
making by the intended users.
(b) Completeness: criteria are sufficiently complete when relevant factors that
could affect the conclusions in the context of the engagement
circumstances are not omitted. Complete criteria include, where relevant,
benchmarks for presentation and disclosure.
(c) Reliability: reliable criteria allow reasonably consistent evaluation or
measurement of the subject matter including, where relevant, presentation
and disclosure, when used in similar circumstances by similarly qualified
practitioners.
(d) Neutrality: neutral criteria contribute to conclusions that are free from bias.
(e) Understandability: understandable criteria contribute to conclusions that
are clear, comprehensive, and not subject to significantly different
interpretations.

Criteria need to be available to the intended users to allow them to understand

how the subject matter has been evaluated or measured. Criteria are made
available to the intended users in one or more of the following ways:
(a) Publicly.
(b) Through inclusion in a clear manner in the presentation of the subject
matter information.
(c) Through inclusion in a clear manner in the assurance report. (d) By
general understanding, for example the criterion for measuring time in
hours and minutes.

The practitioner plans and performs an assurance engagement with an attitude of

professional skepticism to obtain sufficient appropriate evidence about whether
the subject matter information is free of material misstatement.

Professional Skepticism
The practitioner plans and performs an assurance engagement with an
attitude of professional skepticism recognizing that circumstances may
exist that cause the subject matter information to be materially misstated.
An attitude of professional skepticism means the practitioner makes a
critical assessment, with a questioning mind, of the validity of evidence
obtained and is alert to evidence that contradicts or brings into question the
reliability of documents or representations by the responsible party.

D. Sufficiency and Appropriateness of Evidence

- Sufficiency is the measure of the quantity of evidence.
 - Appropriateness is the measure of the quality of evidence; that is, its relevance and its
reliability.
Accordingly, the sufficiency and appropriateness of evidence are interrelated.
However, merely obtaining more evidence may not compensate for its poor quality.

The reliability of evidence is influenced by its source and by its nature, and is dependent
on the individual circumstances under which it is obtained. Generalizations about the
reliability of various kinds of evidence can be made; however, such generalizations are
subject to important exceptions. Even when evidence is obtained from sources external
to the entity, circumstances may exist that could affect the reliability of the information
obtained. For example, evidence obtained from an independent external source may not
be reliable if the source is not knowledgeable. While recognizing that exceptions may
exist, the following generalizations about the reliability of evidence may be useful:
● Evidence is more reliable when it is obtained from independent sources
outside the entity.
● Evidence that is generated internally is more reliable when the related
controls are effective.
● Evidence obtained directly by the practitioner (for example, observation of
the application of a control) is more reliable than evidence obtained
indirectly or by inference (for example, inquiry about the application of a
control).
● Evidence is more reliable when it exists in documentary form, whether
paper, electronic, or other media (for example, a contemporaneously
written record of a meeting is more reliable than a subsequent oral
representation of what was discussed).
● Evidence provided by original documents is more reliable than evidence
provided by photocopies or facsimiles.

The practitioner considers the relationship between the cost of obtaining evidence and the
usefulness of the information obtained. However, the matter of difficulty or expense
involved is not in itself a valid basis for omitting an evidence gathering procedure for which
there is no alternative. The practitioner uses professional judgment and exercises
professional skepticism in evaluating the quantity and quality of evidence, and thus its
sufficiency and appropriateness, to support the assurance report.
E. Written Assurance Report - A written assurance report in the form appropriate to a
reasonable assurance engagement or a limited assurance engagement.

The practitioner provides a written report containing a conclusion that conveys the
assurance obtained about the subject matter information. ISAs, ISREs and ISAEs
establish basic elements for assurance reports. In addition, the practitioner considers
other reporting responsibilities, including communicating with those charged with
governance when it is appropriate to do so.

Classification and Types of Assurance Engagements

Assertion-based Engagements and Direct Reporting Engagements

Assertion-based Engagements
- In some assurance engagements, the evaluation or measurement of the subject
matter is performed by the responsible party, and the subject matter information is
in the form of an assertion by the responsible party that is made available to the
intended users.

Direct Reporting Engagements

- The practitioner either directly performs the evaluation or measurement of the
subject matter, or obtains a representation from the responsible party that has
performed the evaluation or measurement that is not available to the intended
users. The subject matter information is provided to the intended users in the
assurance report.

There are two types of assurance engagement a practitioner is permitted to perform: a

reasonable assurance engagement and a limited assurance engagement.
● Reasonable Assurance Engagement
- The objective of a reasonable assurance engagement is a reduction in assurance
engagement risk to an acceptably low level in the circumstances of the
engagement as the basis for a positive form of expression of the practitioner’s
conclusion.

● Limited Assurance Engagement

- The objective of a limited assurance engagement is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the
engagement, but where that risk is greater than for a reasonable assurance
engagement, as the basis for a negative form of expression of the practitioner’s
conclusion.

Assurance Services
● Audit Services - the auditor's opinion enhances the credibility of financial statements by
providing a high, but not absolute, level of assurance. Absolute assurance in auditing is
not attainable as a result of such factors as the need for judgment, the use of testing, the
inherent limitations of any accounting and internal control systems and the fact that most
of the evidence available to the auditor is persuasive, rather than conclusive, in nature.

The objective of an audit of financial statements is to enable the auditor to express an

opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework. The phrase used to express
the auditor's opinion is “present fairly, in all material respects.” A similar objective applies
to the audit of financial or other information prepared in accordance with appropriate
criteria.
 In forming the audit opinion, the auditor obtains sufficient appropriate audit evidence to be
able to draw conclusions on which to base that opinion.

● Review Services - the auditor provides a moderate level of assurance that the information
subject to review is free of material misstatement. This is expressed in the form of negative
assurance.

The objective of a review of financial statements is to enable an auditor2 to state whether,

on the basis of procedures which do not provide all the evidence that would be required
in an audit, anything has come to the auditor's attention that causes the auditor to believe
that the financial statements are not prepared, in all material respects, in accordance with
an identified financial reporting framework. A similar objective applies to the review of
financial or other information prepared in accordance with appropriate criteria.

A review comprises inquiry and analytical procedures which are designed to review the
reliability of an assertion that is the responsibility of one party for use by another party.
While a review involves the application of audit skills and techniques and the gathering of
evidence, it does not ordinarily involve an assessment of accounting and internal control
systems, tests of records and of responses to inquiries by obtaining corroborating
evidence through inspection, observation, confirmation and computation, which are
procedures ordinarily performed during an audit.

Although the auditor attempts to become aware of all significant matters, the procedures
of a review make the achievement of this objective less likely than in an audit engagement,
thus the level of assurance provided in a review report is correspondingly less than that
given in an audit report.

Non-Assurance Services

Engagements covered by Philippine Standards for Related Services, such as agreed-upon

procedures engagements and compilations of financial or other information.

● For agreed-upon procedures, as the auditor simply provides a report of the factual
findings, no assurance is expressed. Instead, users of the report assess for themselves
the procedures and findings reported by the auditor and draw their own conclusions from
the auditor's work.

In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out

those procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings. The recipients of the report
must form their own conclusions from the report by the auditor.

The report is restricted to those parties that have agreed to the procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.
● In a compilation engagement, although the users of the compiled information derive
some benefit from the accountant’s involvement.

In a compilation engagement, the accountant is engaged to use accounting expertise as

opposed to auditing expertise to collect, classify and summarize financial information. This
ordinarily entails reducing detailed data to a manageable and understandable form without
a requirement to test the assertions underlying that information. The procedures employed
are not designed and do not enable the accountant to express any assurance on the
financial information. However, users of the compiled financial information derive some
benefit as a result of the accountant's involvement because the service has been
performed with due professional skill and care.

● The preparation of tax returns where no conclusion conveying assurance is expressed.

● Consulting (or advisory) engagements, such as management and tax consulting.
 Non-Audit Assurance Engagements and Related Services
SOURCES: Philippine Framework for Assurance Engagements, PSRE 2400, PSRE 2401, PSA 120, PSAE 3400,
PSRS 4400, PSRS 4410, Public Accountancy Profession (Cabrera 2013-2014 Edition)

Review Engagements

● Reviews of Historical Financial Information

Objective of a Review Engagement

The objective of a review of financial statements is to enable an auditor to state
whether, on the basis of procedures which do not provide all the evidence that
would be required in an audit, anything has come to the auditor's attention that
causes the auditor to believe that the financial statements are not prepared, in all
material respects, in accordance with generally accepted accounting principles in
the Philippines (negative assurance).

General Principles of a Review Engagement

The auditor should comply with the “Code of Professional Ethics for Certified Public
Accountants” promulgated by the Board of Accountancy. Ethical principles
governing the auditor's professional responsibilities are:
(a) independence;
(b) integrity;
(c) objectivity;
(d) professional competence and due care;
(e) confidentiality;
(f) professional behavior; and (g) technical standards.
- The auditor should conduct a review in accordance with this PSA.
- The auditor should plan and perform the review with an attitude of professional
skepticism recognizing that circumstances may exist which cause the financial
statements to be materially misstated.
- For the purpose of expressing negative assurance in the review report, the auditor
should obtain sufficient appropriate evidence primarily through inquiry and
analytical procedures to be able to draw conclusions.

Scope of a Review
The procedures required to conduct a review of financial statements should be
determined by the auditor having regard to the requirements of this PSA, relevant
professional bodies, legislation, regulation and, where appropriate, the terms of
the review engagement and reporting requirements.
Moderate Assurance
A review engagement provides a moderate level of assurance that the information
subject to review is free of material misstatement, this is expressed in the form of
negative assurance.

Terms of Engagement
The auditor and the client should agree on the terms of the engagement. The
agreed terms would be recorded in an engagement letter or other suitable form
such as a contract.

Planning
In planning a review of financial statements, the auditor should obtain or update
the knowledge of the business including consideration of the entity's organization,
accounting systems, operating characteristics and the nature of its assets,
liabilities, revenues and expenses.

Work Performed by Others

When using work performed by another auditor or an expert, the auditor should be
satisfied that such work is adequate for the purposes of the review.

Documentation
The auditor should document matters which are important in providing evidence to
support the review report, and evidence that the review was carried out in
accordance with this PSA.

Procedures and Evidence

The auditor should apply judgment in determining the specific nature, timing and
extent of review procedures. The auditor will be guided by such matters as:
● Any knowledge acquired by carrying out audits or reviews of the financial
statements for prior periods.
● The auditor's knowledge of the business including knowledge of the
accounting principles and practices of the industry in which the entity
operates.
● The entity's accounting systems.
● The extent to which a particular item is affected by management judgment.
● The materiality of transactions and account balances.

- The auditor should apply the same materiality considerations as would be applied
if an audit opinion on the financial statements were being given.
- The auditor should inquire about events subsequent to the date of the financial
statements that may require adjustment of or disclosure in the financial statements.
The auditor does not have any responsibility to perform procedures to identify
events occurring after the date of the review report.
 - If the auditor has reason to believe that the information subject to review may be
materially misstated, the auditor should carry out additional or more extensive
procedures as are necessary to be able to express negative assurance or to
confirm that a modified report is required.

Conclusions and Reporting

- The review report should contain a clear written expression of negative assurance.
The auditor should review and assess the conclusions drawn from the evidence
obtained as the basis for the expression of negative assurance.
- Based on the work performed, the auditor should assess whether any information
obtained during the review indicates that the financial statements are not presented
fairly, in all material respects, in accordance with generally accepted accounting
principles in the Philippines.

The review report should:

(a) state that nothing has come to the auditor's attention based on the
review that causes the auditor to believe the financial statements are not
presented fairly, in all material respects in accordance with generally
accepted accounting principles in the Philippines (negative assurance); or
(b) if matters have come to the auditor's attention, describe those
matters that impair a fair presentation, in all material respects in
accordance with generally accepted accounting principles in the
Philippines, including, unless impracticable, a quantification of the possible
effect(s) on the financial statements, and either:

- The auditor should date the review report as of the date the review is completed,
which includes performing procedures relating to events occurring up to the date
of the report. However, since the auditor's responsibility is to report on the financial
statements as prepared and presented by management, the auditor should not
date the review report earlier than the date on which the financial statements were
approved by management.

● Review of Interim Financial Information

General Principles of a Review of Interim Financial Information

- The auditor should comply with the ethical requirements relevant to the audit of the
annual financial statements of the entity. These ethical requirements govern the
auditor’s professional responsibilities in the following areas: independence,
integrity, objectivity, professional competence and due care, confidentiality,
professional behavior, and technical standards.
- The auditor should implement quality control procedures that are applicable to the
individual engagement.
- The auditor should plan and perform the review with an attitude of professional
skepticism, recognizing that circumstances may exist that cause the interim
 financial information to require a material adjustment for it to be prepared, in all
material respects, in accordance with the applicable financial reporting framework.

Objective of an Engagement to Review Interim Financial Information

- The objective of an engagement to review interim financial information is to enable
the auditor to express a conclusion whether, on the basis of the review, anything
has come to the auditor’s attention that causes the auditor to believe that the
interim financial information is not prepared, in all material respects, in accordance
with an applicable financial reporting framework. The auditor makes inquiries, and
performs analytical and other review procedures in order to reduce to a moderate
level the risk of expressing an inappropriate conclusion when the interim financial
information is materially misstated.

Agreeing the Terms of the Engagement

- The auditor and the client should agree on the terms of the engagement.

Procedures for a Review of Interim Financial Information

- Understanding the Entity and its Environment, Including its Internal Control
- The auditor should have an understanding of the entity and its environment,
including its internal control, as it relates to the preparation of both annual and
interim financial information, sufficient to plan and conduct the engagement so as
to be able to:
(a) Identify the types of potential material misstatement and consider
the likelihood of their occurrence; and
(b) Select the inquiries, analytical and other review procedures that will
provide the auditor with a basis for reporting whether anything has come to
the auditor’s attention that causes the auditor to believe that the interim
financial information is not prepared, in all material respects, in accordance
with the applicable financial reporting framework.

- In order to plan and conduct a review of interim financial information, a recently

appointed auditor, who has not yet performed an audit of the annual financial
statements in accordance with PSAs, should obtain an understanding of the entity
and its environment, including its internal control, as it relates to the preparation of
both annual and interim financial information.

Inquiries, Analytical and Other Review Procedures

- The auditor should make inquiries, primarily of persons responsible for financial
and accounting matters, and perform analytical and other review procedures to
enable the auditor to conclude whether, on the basis of the procedures performed,
anything has come to the auditor’s attention that causes the auditor to believe that
the interim financial information is not prepared, in all material respects, in
accordance with the applicable financial reporting framework.
- The auditor should obtain evidence that the interim financial information agrees or
reconciles with the underlying accounting records.
 - The auditor should inquire whether management has identified all events up to the
date of the review report that may require adjustment to or disclosure in the interim
financial information.
- The auditor should inquire whether management has changed its assessment of
the entity’s ability to continue as a going concern. When, as a result of this inquiry
or other review procedures, the auditor becomes aware of events or conditions that
may cast significant doubt on the entity’s ability to continue as a going concern, the
auditor should:
(a) Inquire of management as to its plans for future actions based on
its going concern assessment, the feasibility of these plans, and whether
management believes that the outcome of these plans will improve the
situation; and
(b) Consider the adequacy of the disclosure about such matters in the
interim financial information.
- When a matter comes to the auditor’s attention that leads the auditor to question
whether a material adjustment should be made for the interim financial information
to be prepared, in all material respects, in accordance with the applicable financial
reporting framework, the auditor should make additional inquiries or perform other
procedures to enable the auditor to express a conclusion in the review report.

Evaluation of Misstatements
- The auditor should evaluate, individually and in the aggregate, whether
uncorrected misstatements that have come to the auditor’s attention are material
to the interim financial information.

Auditor’s Responsibility for Accompanying Information

- The auditor should read the other information that accompanies the interim
financial information to consider whether any such information is materially
inconsistent with the interim financial information.
- If a matter comes to the auditor’s attention that causes the auditor to believe that
the other information appears to include a material misstatement of fact, the auditor
should discuss the matter with the entity’s management.

Communication
- When, as a result of performing the review of interim financial information, a matter
comes to the auditor’s attention that causes the auditor to believe that it is
necessary to make a material adjustment to the interim financial information for it
to be prepared, in all material respects, in accordance with the applicable financial
reporting framework, the auditor should communicate this matter as soon as
practicable to the appropriate level of management.
- When, in the auditor’s judgment, management does not respond appropriately
within a reasonable period of time, the auditor should inform those charged with
governance.
 Departure from the Applicable Financial Reporting Framework
- The auditor should express a qualified or adverse conclusion when a matter has
come to the auditor’s attention that causes the auditor to believe that a material
adjustment should be made to the interim financial information for it to be prepared,
in all material respects, in accordance with the applicable financial reporting
framework.

Limitation on Scope
- A limitation on scope ordinarily prevents the auditor from completing the review.
- When the auditor is unable to complete the review, the auditor should
communicate, in writing, to the appropriate level of management and to those
charged with governance the reason why the review cannot be completed, and
consider whether it is appropriate to issue a report.

Going Concern and Significant Uncertainties

- If adequate disclosure is made in the interim financial information, the auditor
should add an emphasis of matter paragraph to the review report to highlight a
material uncertainty relating to an event or condition that may cast significant doubt
on the entity’s ability to continue as a going concern.
- If a material uncertainty that casts significant doubt about the entity’s ability to
continue as a going concern is not adequately disclosed in the interim financial
information, the auditor should express a qualified or adverse conclusion, as
appropriate. The report should include specific reference to the fact that there is
such a material uncertainty.
- The auditor should consider modifying the review report by adding a paragraph to
highlight a significant uncertainty (other than a going concern problem) that came
to the auditor’s attention, the resolution of which is dependent upon future events
and which may affect the interim financial information.

Documentation
- The auditor should prepare review documentation that is sufficient and
appropriate to provide a basis for the auditor’s conclusion and to provide evidence
that the review was performed in accordance with this PSRE and applicable legal
and regulatory requirements.

● Examination of Prospective Financial Information

Philippine Standard on Assurance Engagements (PSAE) 3400 establishes
standards and provides guidance on engagements to examine and report on
prospective financial information including examination procedures for
bestestimate and hypothetical assumptions. This PSAE does not apply to the
examination of prospective financial information expressed in general or narrative
terms, such as that found in management’s discussion and analysis in an entity’s
annual report, though many of the procedures outlined herein may be suitable for
such an examination.
The general guidelines include the following:

Acceptance of Engagement

- Before accepting an engagement to examine prospective financial information, the

auditor would consider, among other things:
○ The intended use of the information.
○ Whether the information will be for general or limited distribution.
○ The nature of the assumptions, that is, whether they are best-estimate or
hypothetical assumptions.
○ The elements to be included in the information.
○ The period covered by the information.

- The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the
prospective financial information will be inappropriate for its intended use.

- The auditor and the client should agree on the terms of the engagement.

Knowledge of the Business

- The auditor should obtain a sufficient level of knowledge of the business to be able
to evaluate whether all significant assumptions required for the preparation of the
prospective financial information have been identified. The auditor would also need
to become familiar with the entity’s process for preparing prospective financial
information, for example, by considering:
○ The internal controls over the system used to prepare prospective
financial information and the expertise and experience of those persons
preparing the prospective financial information.
○ The nature of the documentation prepared by the entity supporting
management’s assumptions.
○ The extent to which statistical, mathematical and computer-assisted
techniques are used.
○ The methods used to develop and apply assumptions.
○ The accuracy of prospective financial information prepared in prior
periods and the reasons for significant variances.

- The auditor should consider the extent to which reliance on the entity’s historical
financial information is justified.

Period Covered

- The auditor should consider the period of time covered by the prospective
financial information. Since assumptions become more speculative as the length
 of the period covered increases, as that period lengthens, the ability of
management to make best-estimate assumptions decreases. The period would
not extend beyond the time for which management has a reasonable basis for the
assumptions. The following are some of the factors that are relevant to the auditor’s
consideration of the period of time covered by the prospective financial information:
■ Operating cycle, for example, in the case of a major construction project
the time required to complete the project may dictate the period
covered.
■ The degree of reliability of assumptions, for example, if the entity is
introducing a new product the prospective period covered could be
short and broken into small segments, such as weeks or months.
Alternatively, if the entity’s sole business is owning a property under
long-term lease, a relatively long prospective period might be
reasonable.
■ The needs of users, for example, prospective financial information may
be prepared in connection with an application for a loan for the period
of time required to generate sufficient funds for repayment.
Alternatively, the information may be prepared for investors in
connection with the sale of debentures to illustrate the intended use of the
proceeds in the subsequent period.

Examination Procedures

- When determining the nature, timing and extent of examination procedures, The
auditor’s considerations should include:
● the likelihood of material misstatement;
● the knowledge obtained during any previous engagements; ●
management’s competence regarding the preparation of
prospective financial information;
● the extent to which the prospective financial information is affected
by the management’s judgment; and
● the adequacy and reliability of the underlying data.
- The auditor should obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of
significant management assumptions and management’s acceptance of its
responsibility for the prospective financial information.

Presentation and Disclosure

- When assessing the presentation and disclosure of the prospective financial
information, in addition to the specific requirements of any relevant statutes,
regulations or professional standards, the auditor will need to consider whether:
a. the presentation of prospective financial information is informative and not
misleading;
 b. the accounting policies are clearly disclosed in the notes to the prospective
financial information;
c. the assumptions are adequately disclosed in the notes to the prospective
financial information. It needs to be clear whether assumptions represent
management’s best-estimates or are hypothetical and, when assumptions
are made in areas that are material and are subject to a high degree of
uncertainty, this uncertainty and the resulting sensitivity of results needs to
be adequately disclosed;
d. the date as of which the prospective financial information was prepared is
disclosed. Management needs to confirm that the assumptions are
appropriate as of this date, even though the underlying information may
have been accumulated over a period of time;
e. the basis of establishing points in a range is clearly indicated and the range
is not selected in a biased or misleading manner when results shown in the
prospective financial information are expressed in terms of a range; and
f. any change in accounting policy since the most recent historical financial
statements is disclosed, along with the reason for the change and its effect
on the prospective financial information.

Such a report would:

● State whether, based on the examination of the evidence supporting the

assumptions, anything has come to the auditor’s attention which causes
the auditor to believe that the assumptions do not provide a reasonable
basis for the prospective financial information.
● Express an opinion as to whether the prospective financial information is
properly prepared on the basis of the assumptions and is presented in
accordance with generally accepted accounting principles in the
Philippines.

● State that:
○ actual results are likely to be different from the prospective
financial information since anticipated events frequently do not
occur as expected and the variation could be material. Likewise,
when the prospective financial information is expressed as a
range, it would be stated that there can be no assurance that actual
results will fall within the range, and
○ in the case of a projection, the prospective financial information
has been prepared for (state purpose), using a set of assumptions
that include hypothetical assumptions about future events and
management’s actions that are not necessarily expected to occur.
Consequently, readers are cautioned that the prospective financial
information is not used for purposes other than that described.
 - When the auditor believes that the presentation and disclosure of the prospective
financial information is not adequate, the auditor should express a qualified or
adverse opinion in the report on the prospective financial information, or withdraw
from the engagement as appropriate.
- When the auditor believes that one or more significant assumptions do not provide
a reasonable basis for the prospective financial information prepared on the basis
of best-estimate assumptions or that one or more significant assumptions do not
provide a reasonable basis for the prospective financial information given the
hypothetical assumptions, the auditor should either express an adverse opinion in
the report on the prospective financial information, or withdraw from the
engagement.
- When the examination is affected by conditions that preclude application of one or
more procedures considered necessary in the circumstances, the auditor should
either withdraw from the engagement or disclaim the opinion and describe the
scope limitation in the report on the prospective financial information.

Level of Assurance
In a Review Engagement, the auditor provides a moderate level of assurance that the information
subject to review is free of material misstatement. This is expressed in the form of negative
assurance.

Agreed-Upon Procedures

Objective of an Agreed-upon Procedures Engagement

The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate third
parties have agreed and to report on factual findings.

Defining the Terms of the Engagement

The auditor should ensure with representatives of the entity and, ordinarily, other specified
parties who will receive copies of the report of factual findings, that there is a clear
understanding regarding the agreed procedures and the conditions of the engagement.

Documentation
The auditor should document matters which are important in providing evidence to support
the report of factual findings, and evidence that the engagement was carried out in
accordance with this PSA and the terms of the engagement.

Procedures and Evidence

The auditor should carry out the procedures agreed upon and use the evidence obtained
as the basis for the report of factual findings.
Reporting
- The report on an agreed-upon procedures engagement needs to describe the purpose
and the agreed-upon procedures of the engagement in sufficient detail to enable the
reader to understand the nature and the extent of the work performed.

In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out those

procedures of an audit nature to which the auditor and the entity and any appropriate third parties
have agreed and to report on factual findings. The recipients of the report must form their own
conclusions from the report by the auditor. The report is restricted to those parties that have
agreed to the procedures to be performed since others, unaware of the reasons for the
procedures, may misinterpret the results.

Level of Assurance
For agreed-upon procedures, as the auditor simply provides a report of the factual findings, no
assurance is expressed. Instead, users of the report assess for themselves the procedures and
findings reported by the auditor and draw their own conclusions from the auditor's work.

Compilation of Financial Information

Objective of a Compilation Engagement

The objective of a compilation engagement is for the accountant to use accounting
expertise, as opposed to auditing expertise, to collect, classify and summarize financial
information.

Defining the Terms of the Engagement

The accountant should ensure that there is a clear understanding between the client and
the accountant regarding the terms of the engagement.

Documentation
The accountant should document matters which are important in providing evidence that
the engagement was carried out in accordance with this PSA and the terms of the
engagement.

Procedures
- The accountant should obtain a general knowledge of the business and operations of the
entity and should be familiar with the accounting principles and practices of the industry in
which the entity operates and with the form and content of the financial information that is
appropriate in the circumstances.
- The accountant should read the compiled information and consider whether it appears to
be appropriate in form and free from obvious material misstatements. In this sense,
misstatements include:
• Mistakes in the application of generally accepted accounting principles in
the Philippines.
• Nondisclosure of generally accepted accounting principles in the
Philippines and any known departures therefrom.
 • Nondisclosure of any other significant matters of which the accountant has
become aware.
The generally accepted accounting principles in the Philippines and any known
departures therefrom should be disclosed within the financial information, though
their effects need not be quantified.
- If the accountant becomes aware of material misstatements, the accountant should try to
agree appropriate amendments with the entity. If such amendments are not made and the
financial information is considered to be misleading, the accountant should withdraw from
the engagement.

Responsibility of Management (
- The accountant should obtain an acknowledgment from management of its responsibility
for the appropriate presentation of the financial information and of its approval of the
financial information.
- The financial information compiled by the accountant should contain a reference such as
"Unaudited," "Compiled without Audit or Review" or "Refer to Compilation Report" on each
page of the financial information or on the front of the complete set of financial statements.

In a compilation engagement, the accountant is engaged to use accounting expertise as opposed

to auditing expertise to collect, classify and summarize financial information. This ordinarily entails
reducing detailed data to a manageable and understandable form without a requirement to test
the assertions underlying that information. The procedures employed are not designed and do
not enable the accountant to express any assurance on the financial information. However, users
of the compiled financial information derive some benefit as a result of the accountant's
involvement because the service has been performed with due professional skill and care.

Level of Assurance
In a compilation engagement, although the users of the compiled information derive some benefit
from the accountant’s involvement, no assurance is expressed in the report.

Audit of Historical Financial Information

SOURCES: Philippine Framework for Assurance Engagements, PSA 120, PSA 200, Public Accountancy Profession
(Cabrera 2013-2014 Edition)

AUDITING
- Defined by the American Accounting Association, Auditing is 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.
 1. Systematic process – auditing involves structured/logical series of sequential
steps or procedures known as the audit process.
2. Objectively obtaining and evaluating evidence – auditing involves gathering
and evaluating sufficient appropriate audit evidence that will support the auditor’s
opinion
○ Objectivity refers to the combination of impartiality, intellectual honesty
and freedom from conflicts of interest.
○ Audit evidence is the information obtained by the auditor in arriving at
the conclusions on which the audit opinion is based.
3. Assertions about economic actions and events – assertions are the subject
matter of auditing
○ In the context of audit of financial statements, assertions are
representations of management, explicit or otherwise, that are embodied in
the financial statements. Assertions include the accounts,
balances/amounts and disclosures appearing on the face of the financial
statements (and in the notes to financial statements) and which the
management claims to be free of misstatements.
○ Audit evidence gathered and evaluated by the auditor may support or
contradict the assertions of management.
4. Established criteria – the standards or benchmarks that are needed to judge the
validity of the assertions on the financial statements.
○ In the context of audit of financial statements, the established criteria are
the applicable financial reporting framework (for example, the PFRS).
5. Ascertain the degree of correspondence between assertions and
established criteria – The auditor’s objective is to determine whether the
assertions conform with established criteria, that is, whether the financial
statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework (such as the PFRS).
6. Communicating the results to the interested users – The ultimate objective of
audit is the communication of audit findings/opinion on the fairness of the financial
statements to interested users.
○ Communicating results is achieved through issuance of a written audit
report which contains the audit opinion (or disclaimer of opinion).
○ Interested users are the wide variety of financial statements users who
rely on the auditor’s opinion such as the stockholders, creditors, potential
investors and creditors, management, government agencies, and the
public (in general).

Assurance, Attestation and Audit Services Distinguished

- Similarity: These services are often used interchangeably because they encompass the
same decision-process
- Differences: Scope of services
 a. “Assurance services” is broader in scope and in concept than either auditing or
attestation. It encompasses both audit and attestation services. Otherwise stated,
attestation and audit services are subsets of assurance services.
b. “Attestation services” is broader than audit because attest function is beyond
historical FS. Attestation services cover even non-GAAP FS.
c. Auditing, particularly FS audit, is a type of assurance and attestation service that
involves examination of historical FS prepared in accordance with GAAP.

Types of Audits
1. According to objectives or nature of assertion.
● Financial statement audit – an audit conducted to determine whether the financial
statements of an entity are fairly presented in accordance with an identified
financial reporting framework (or PFRS)
○ An audit of financial statements is the type of audit most frequently
performed by CPAs (due to the widespread use of audited financial
statements) on a fee basis and for more than one client.
Financial audit is also called:
■ External audit – because it is performed by external auditors,
whether individual CPAs or CPA firms, who are not employees of
the client
■ Independent audit – because the auditor is independent of the
client subject to audit
■ Financial Audit
● Compliance audit: a review of an entity’s degree of compliance with applicable
laws and rules/regulations or contracts; usually performed by government auditors.
● Operational audit involves a systematic review and evaluation of the specific
operating units (or procedures, methods or activities) of an organization in relation
to specified objectives for the purpose of measuring/assessing its performance in
terms of efficiency and effectiveness of operations, identifying opportunities for
improvement and making recommendations to improve performance (such as
introduction of controls to reduce waste).
- Also called performance audit or management audit
- Usually performed by internal auditors
- Efficiency relates to use of its resources, while effectiveness relates to
accomplishing objectives.

Major differences between financial and operational auditing:

● The financial audit is oriented to the past whereas an operational audit concerns
performance for the future.
● The financial audit report is distributed to many readers whereas the operational
audit report goes to a few managers.
● Financial audits are limited to matters that directly affect the financial statements
whereas operational audits cover any aspect of efficiency and effectiveness.
2. According to types of auditor or their affiliation with the entity being examined:
● External / Independent Audit
- performed by practitioners or independent CPAs who offer their
professional services for a fee to various clients on a contractual basis
- Independent or external auditors are not employees of the client
- External audit complements internal audit
● Internal Audit
- performed by the entity's own employees known as internal auditors.
- internal auditors investigate and appraise the effectiveness and efficiency
of operations and internal controls of the firm

Internal auditing is defined as "an independent, objective assurance and consulting

activity designed to add value and improve an organization's operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control, and governance
processes."

Internal auditing includes the audit of:

● Financial and operating information
● Compliance with policies, plans, procedures, laws, regulations, and contracts
● The means of safeguarding assets and verifying their existence
● The economy and efficiency with which resources are employed; and
● Operations or programs to ascertain whether results are consistent with
established objectives and goals and whether they are being carried out as
prescribed.

- Internal auditing is an appraisal control that measures and evaluates other

controls. The increased complexity and sophistication of business operations have
required management to rely on this appraisal control.
- Internal auditors review the adequacy of the company's internal control system
primarily to ascertain whether the system provides reasonable assurance that the
company's objectives and goals will be achieved efficiently and economically.
a. Efficient performance implies the use of minimal resources to meet the
company's objectives and goals.
b. Economical performance is the accomplishment of objectives and goals
at a cost commensurate with the task.

The overall objective of Internal Auditing is to assist the members of the organization,
particularly management and board of directors, in the effective discharge of their
responsibilities

● Government Auditing
- A governmental audit is typically designed to determine whether the
auditee has complied with applicable laws and regulations.
 The scope of government audit may extend beyond FS audit to include: A.
FS audit
B. Performance Audit (includes: program results (effectiveness) audit and
economy and efficiency audit)
C. Compliance Audit

- Government auditors are required to prepare a written report on the entity's

internal control and assessment of control risk made as part of a financial
statement audit. The auditor's report should include the following:

1. The scope of the auditor's work in obtaining an understanding of

the entity's internal control and in his/her assessment of control risk.
2. The entity's significant controls including those that are established
to ensure compliance with laws and regulations that have a
material impact on the financial statements.
3. The conditions, including the identification of material weaknesses,
identified as a result of the auditor's work.

- The Government Auditing Standards require auditors to prepare a written

report on the entity's internal control. This report should include the
conditions, including the identification of material weaknesses, discovered
as a result of the auditor's work. However, the report should not give any
form of assurance on the design and effectiveness of the entity's internal
control.
- Government auditors are required to obtain an understanding of the
possible financial statement effects of laws and regulations having direct
and material effects on amounts reported. Also, they are required to make
an assessment whether management has identified such laws that might
have such effects.
- The audit of a government program involves obtaining information about
the costs, outputs, benefits, and effects of the program. Auditors attempt to
measure the accomplishments and relative success of the program based
on the actual intent of the legislation that established the program.

Objective, Scope and Limitations of Financial Statement Audit

- The objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework. The phrase used to express
the auditor’s opinion is “present fairly, in all material respects”. A similar objective applies
to the audit of financial or other information prepared in accordance with appropriate
criteria.
- The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on
whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework. In the case of most general purpose
frameworks, that opinion is on whether the financial statements are presented fairly, in all
material respects, in accordance with the framework. An audit conducted in accordance
with PSAs and relevant ethical requirements enables the auditor to form that opinion.

Scope of the Audit

- The auditor’s opinion on the financial statements deals with whether the financial
statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework. Such an opinion is common to all audits of financial
statements. The auditor’s opinion therefore does not assure, for example, the
future viability of the entity nor the efficiency or effectiveness with which
management has conducted the affairs of the entity.
- In some jurisdictions, however, applicable laws and regulations may require
auditors to provide opinions on other specific matters, such as the effectiveness of
internal control, or the consistency of a separate management report with the
financial statements.

Overall Objectives of the Auditor

In conducting an audit of financial statements, the overall objectives of the auditor are:
I. To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and
II. To report on the financial statements, and communicate as required by the
PSAs, in accordance with the auditor’s findings.
In all cases of when reasonable assurance cannot be obtained and a qualified opinion in
the auditor’s report is insufficient in the circumstances for purposes of reporting to the
intended users of the financial statements, the PSAs require that the auditor disclaim an
opinion or withdraw from the engagement, where withdrawal is legally permitted.

Ethical Requirements Relating to an Audit of Financial Statements

The auditor shall comply with relevant ethical requirements, including those
pertaining to independence, relating to financial statement audit engagements.

The auditor is subject to relevant ethical requirements, including those pertaining

to independence, relating to financial statement audit engagements. Relevant
ethical requirements ordinarily comprise Parts A and B of the Code of Ethics for
Professional Accountants in the Philippines (the Code of Ethics) related to an audit
of financial statements together with national requirements that are more
restrictive.
 Part A of the Code of Ethics establishes the fundamental principles of professional
ethics relevant to the auditor when conducting an audit of financial statements and
provides a conceptual framework for applying those principles. The fundamental
principles with which the auditor is required to comply by the Code of Ethics are: ●
Integrity
● Objectivity
● Professional competence and due care ● Confidentiality
● Professional behavior.
Part B of the Code of Ethics illustrates how the conceptual framework is to be
applied in specific situations.

In the case of an audit engagement it is in the public interest and, therefore,

required by the Code of Ethics, that the auditor be independent of the entity subject
to the audit. The Code of Ethics describes independence as comprising both
independence of mind and independence in appearance. The auditor’s
independence from the entity safeguards the auditor’s ability to form an audit
opinion without being affected by influences that might compromise that opinion.
Independence enhances the auditor’s ability to act with integrity, to be objective
and to maintain an attitude of professional skepticism.

Professional Skepticism
The auditor shall plan and perform an audit with professional skepticism
recognizing that circumstances may exist that cause the financial statements to be
materially misstated.

Professional skepticism includes being alert to, for example:

● Audit evidence that contradicts other audit evidence obtained.
● Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence.
● Conditions that may indicate possible fraud.
● Circumstances that suggest the need for audit procedures in addition to
those required by the PSAs.

Maintaining professional skepticism throughout the audit is necessary if the auditor

is, for example, to reduce the risks of:
● Overlooking unusual circumstances.
● Over generalizing when drawing conclusions from audit observations.
● Using inappropriate assumptions in determining the nature, timing, and
extent of the audit procedures and evaluating the results thereof.

The auditor cannot be expected to disregard past experience of the honesty and
integrity of the entity’s management and those charged with governance.
Nevertheless, a belief that management and those charged with governance are
honest and have integrity does not relieve the auditor of the need to maintain
 professional skepticism or allow the auditor to be satisfied with lessthan-
persuasive audit evidence when obtaining reasonable assurance.

Professional Judgment
The auditor shall exercise professional judgment in planning and performing an
audit of financial statements.

Professional judgment is essential to the proper conduct of an audit. This is

because interpretation of relevant ethical requirements and the PSAs and the
informed decisions required throughout the audit cannot be made without the
application of relevant knowledge and experience to the facts and circumstances.
Professional judgment is necessary in particular regarding decisions about:
● Materiality and audit risk.
● The nature, timing, and extent of audit procedures used to meet the
requirements of the PSAs and gather audit evidence.
● Evaluating whether sufficient appropriate audit evidence has been
obtained, and whether more needs to be done to achieve the objectives of
the PSAs and thereby, the overall objectives of the auditor.
● The evaluation of management’s judgments in applying the entity’s
applicable financial reporting framework.
● The drawing of conclusions based on the audit evidence obtained, for
example, assessing the reasonableness of the estimates made by
management in preparing the financial statements.

Professional judgment needs to be exercised throughout the audit. It also needs

to be appropriately documented. In this regard, the auditor is required to prepare
audit documentation sufficient to enable an experienced auditor, having no
previous connection with the audit, to understand the significant professional
judgments made in reaching conclusions on significant matters arising during the
audit.

Inherent Limitations of an Audit

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent
limitations of an audit, which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor’s opinion being persuasive rather
than conclusive. The inherent limitations of an audit arise from:
● The nature of financial reporting
The preparation of financial statements involves judgment by
management in applying the requirements of the entity’s applicable
financial reporting framework to the facts and circumstances of the
entity. In addition, many financial statement items involve subjective
decisions or assessments or a degree of uncertainty, and there may
 be a range of acceptable interpretations or judgments that may be
made.
● The nature of audit procedures There are practical and legal limitations on
the auditor’s ability to obtain audit evidence. For example:
- There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that is
relevant to the preparation and presentation of the financial
statements or that has been requested by the auditor. Accordingly,
the auditor cannot be certain of the completeness of information,
even though the auditor has performed audit procedures to obtain
assurance that all relevant information has been obtained.
- Fraud may involve sophisticated and carefully organized schemes
designed to conceal it. Therefore, audit procedures used to gather
audit evidence may be ineffective for detecting an intentional
misstatement that involves, for example, collusion to falsify
documentation which may cause the auditor to believe that audit
evidence is valid when it is not. The auditor is neither trained as nor
expected to be an expert in the authentication of documents.
- An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as
the power of search, which may be necessary for such an
investigation.
● The need for the audit to be conducted within a reasonable period of time
and at a reasonable cost.
- The matter of difficulty, time, or cost involved is not in itself a valid
basis for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than
persuasive. Appropriate planning assists in making sufficient time
and resources available for the conduct of the audit.
Notwithstanding this, the relevance of information, and thereby its
value, tends to diminish over time, and there is a balance to be
struck between the reliability of information and its cost.

Because of the inherent limitations of an audit, there is an unavoidable risk that

some material misstatements of the financial statements may not be detected,
even though the audit is properly planned and performed in accordance with PSAs.
Accordingly, the subsequent discovery of a material misstatement of the financial
statements resulting from fraud or error does not by itself indicate a failure to
conduct an audit in accordance with PSAs.
However, the inherent limitations of an audit are not a justification for the auditor
to be satisfied with less-than-persuasive audit evidence. Whether the auditor has
performed an audit in accordance with PSAs is determined by the audit procedures
performed in the circumstances, the sufficiency and appropriateness of the audit
evidence obtained as a result thereof and the suitability of the auditor’s report
 based on an evaluation of that evidence in light of the overall objectives of the
auditor.

Information Risk
The primary economic reason for an audit of financial statements is the demand
by external users for reliable or fairly stated financial statements that they will use
in making economic decisions. Thus, the market for auditing services is driven by
demand by external financial statements users.

An audit can help reduce information risk - risk that the financial statements that
will be used for decision-making are materially misleading, unreliable or
inaccurate.

Four conditions/reasons that gave rise to a demand for independent audit of

financial statements:
- Potential conflict of interest between users and preparers of the financial
information can result in biased information – Client management may not
be objective in financial reporting. It may provide impressive but biased,
unrealistic, or misleading financial statements to obtain benefits that it
seeks. On the other hand, financial statement users need unbiased,
realistic, or reliable financial statements.
- Remoteness of users – Users do not have access to entity’s records to
personally verify the reliability of the financial information.
- Complexity of subject matter requires expertise – Expertise is often required
for information preparation and verification. Users of financial statements
are not equipped with the necessary skills, competence, and knowledge of
complexities of accounting and auditing to determine whether the financial
statements are reliable.
- Consequence for decision making – Financial statements are used for
important decisions that involve significant amount of money. If a decision
is based on misleading financial information, it could have substantial
financial or economic consequences on decision makers.

Another condition that gave rise to demand for audit of financial statements is the
stewardship or agency theory which means that management wants the credibility
an audit adds to the financial statement to enhance stewardship of the financial
statement and to lessen the owner’s mistrust of the management.

To reduce Information Risk:

The management or users of their financial statements may adopt any or all of the
following approaches:
1. Allow users to verify information.
 The user may go to the business establishment to examine records
and obtain information about the reliability of the statement. Although
impractical because of costs, this is usually adopted by BIR
examiners or a business intending to purchase another business.
2. Users share information risk with management.
If users rely on inaccurate financial statements and as a
consequence incurs a financial loss, a lawsuit may be brought
against management to recover part of such loss.
3. Have the financial statements audited.
As an expert in the application of financial reporting standards, the
independent auditor further enhances the quality of financial
reporting.

Audit of Historical Financial Information

SOURCES: Philippine Framework for Assurance Engagements, PSA 120, PSA 200, Public Accountancy
Profession (Cabrera 2013-2014 Edition)

AUDITING
- Defined by the American Accounting Association, Auditing is 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.

7. Systematic process – auditing involves structured/logical series of sequential steps or

procedures known as the audit process.
8. Objectively obtaining and evaluating evidence – auditing involves gathering and
evaluating sufficient appropriate audit evidence that will support the auditor’s opinion
○ Objectivity refers to the combination of impartiality, intellectual honesty and
freedom from conflicts of interest.
○ Audit evidence is the information obtained by the auditor in arriving at the
conclusions on which the audit opinion is based.
9. Assertions about economic actions and events – assertions are the subject matter of
auditing
○ In the context of audit of financial statements, assertions are representations of
management, explicit or otherwise, that are embodied in the financial
statements. Assertions include the accounts, balances/amounts and disclosures
appearing on the face of the financial statements (and in the notes to financial
statements) and which the management claims to be free of misstatements.
○ Audit evidence gathered and evaluated by the auditor may support or
contradict the assertions of management.
 10. Established criteria – the standards or benchmarks that are needed to judge the validity
of the assertions on the financial statements.
○ In the context of audit of financial statements, the established criteria are the
applicable financial reporting framework (for example, the PFRS).
11. Ascertain the degree of correspondence between assertions and established criteria –
The auditor’s objective is to determine whether the assertions conform with established
criteria, that is, whether the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework (such as the PFRS).
12. Communicating the results to the interested users – The ultimate objective of audit is
the communication of audit findings/opinion on the fairness of the financial statements
to interested users.
○ Communicating results is achieved through issuance of a written audit report
which contains the audit opinion (or disclaimer of opinion).
○ Interested users are the wide variety of financial statements users who rely on
the auditor’s opinion such as the stockholders, creditors, potential investors and
creditors, management, government agencies, and the public (in general).

Assurance, Attestation and Audit Services Distinguished

- Similarity: These services are often used interchangeably because they encompass the same
decision-process
- Differences: Scope of services
a. “Assurance services” is broader in scope and in concept than either auditing or
attestation. It encompasses both audit and attestation services. Otherwise stated,
attestation and audit services are subsets of assurance services.
b. “Attestation services” is broader than audit because attest function is beyond historical
FS. Attestation services cover even non-GAAP FS.
c. Auditing, particularly FS audit, is a type of assurance and attestation service that involves
examination of historical FS prepared in accordance with GAAP.

Types of Audits
3. According to objectives or nature of assertion.
● Financial statement audit – an audit conducted to determine whether the financial
statements of an entity are fairly presented in accordance with an identified financial
reporting framework (or PFRS)
○ An audit of financial statements is the type of audit most frequently performed
by CPAs (due to the widespread use of audited financial statements) on a fee basis
and for more than one client.
Financial audit is also called:
■ External audit – because it is performed by external auditors, whether
individual CPAs or CPA firms, who are not employees of the client
■ Independent audit – because the auditor is independent of the client
subject to audit
 ■ Financial Audit
● Compliance audit: a review of an entity’s degree of compliance with applicable laws and
rules/regulations or contracts; usually performed by government auditors.
● Operational audit involves a systematic review and evaluation of the specific operating
units (or procedures, methods or activities) of an organization in relation to specified
objectives for the purpose of measuring/assessing its performance in terms of efficiency
and effectiveness of operations, identifying opportunities for improvement and making
recommendations to improve performance (such as introduction of controls to reduce
waste).
- Also called performance audit or management audit
- Usually performed by internal auditors
- Efficiency relates to use of its resources, while effectiveness relates to
accomplishing objectives.

Major differences between financial and operational auditing:

● The financial audit is oriented to the past whereas an operational audit concerns
performance for the future.
● The financial audit report is distributed to many readers whereas the operational audit
report goes to a few managers.
● Financial audits are limited to matters that directly affect the financial statements
whereas operational audits cover any aspect of efficiency and effectiveness.

4. According to types of auditor or their affiliation with the entity being examined:
● External / Independent Audit
- performed by practitioners or independent CPAs who offer their professional
services for a fee to various clients on a contractual basis
- Independent or external auditors are not employees of the client
- External audit complements internal audit
● Internal Audit
- performed by the entity's own employees known as internal auditors.
- internal auditors investigate and appraise the effectiveness and efficiency of
operations and internal controls of the firm

Internal auditing is defined as "an independent, objective assurance and consulting activity
designed to add value and improve an organization's operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control, and governance processes."

Internal auditing includes the audit of:

● Financial and operating information
● Compliance with policies, plans, procedures, laws, regulations, and contracts
● The means of safeguarding assets and verifying their existence
 ● The economy and efficiency with which resources are employed; and
● Operations or programs to ascertain whether results are consistent with established
objectives and goals and whether they are being carried out as prescribed.

- Internal auditing is an appraisal control that measures and evaluates other controls. The
increased complexity and sophistication of business operations have required
management to rely on this appraisal control.
- Internal auditors review the adequacy of the company's internal control system primarily
to ascertain whether the system provides reasonable assurance that the company's
objectives and goals will be achieved efficiently and economically.
a. Efficient performance implies the use of minimal resources to meet the
company's objectives and goals.
b. Economical performance is the accomplishment of objectives and goals at a cost
commensurate with the task.

The overall objective of Internal Auditing is to assist the members of the organization,
particularly management and board of directors, in the effective discharge of their responsibilities

● Government Auditing
- A governmental audit is typically designed to determine whether the auditee
has complied with applicable laws and regulations.

The scope of government audit may extend beyond FS audit to include: A. FS audit
D. Performance Audit (includes: program results (effectiveness) audit and economy
and efficiency audit)
E. Compliance Audit

- Government auditors are required to prepare a written report on the entity's

internal control and assessment of control risk made as part of a financial
statement audit. The auditor's report should include the following:

1. The scope of the auditor's work in obtaining an understanding of the

entity's internal control and in his/her assessment of control risk.
2. The entity's significant controls including those that are established to
ensure compliance with laws and regulations that have a material impact
on the financial statements.
3. The conditions, including the identification of material weaknesses,
identified as a result of the auditor's work.
 - The Government Auditing Standards require auditors to prepare a written report
on the entity's internal control. This report should include the conditions,
including the identification of material weaknesses, discovered as a result of the
auditor's work. However, the report should not give any form of assurance on the
design and effectiveness of the entity's internal control.
- Government auditors are required to obtain an understanding of the possible
financial statement effects of laws and regulations having direct and material
effects on amounts reported. Also, they are required to make an assessment
whether management has identified such laws that might have such effects.
- The audit of a government program involves obtaining information about the
costs, outputs, benefits, and effects of the program. Auditors attempt to measure
the accomplishments and relative success of the program based on the actual
intent of the legislation that established the program.

Objective, Scope and Limitations of Financial Statement Audit

- The objective of an audit of financial statements is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework. The phrase used to express the auditor’s opinion is
“present fairly, in all material respects”. A similar objective applies to the audit of financial or
other information prepared in accordance with appropriate criteria.
- The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the
financial statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework. In the case of most general purpose frameworks, that opinion is
on whether the financial statements are presented fairly, in all material respects, in accordance
with the framework. An audit conducted in accordance with PSAs and relevant ethical
requirements enables the auditor to form that opinion.

Scope of the Audit

- The auditor’s opinion on the financial statements deals with whether the financial
statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework. Such an opinion is common to all audits of financial
statements. The auditor’s opinion therefore does not assure, for example, the future
viability of the entity nor the efficiency or effectiveness with which management has
conducted the affairs of the entity.
- In some jurisdictions, however, applicable laws and regulations may require auditors to
provide opinions on other specific matters, such as the effectiveness of internal control,
or the consistency of a separate management report with the financial statements.

Overall Objectives of the Auditor

In conducting an audit of financial statements, the overall objectives of the auditor are:
III. To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework; and
IV. To report on the financial statements, and communicate as required by the
PSAs, in accordance with the auditor’s findings.
In all cases of when reasonable assurance cannot be obtained and a qualified opinion in the
auditor’s report is insufficient in the circumstances for purposes of reporting to the intended users
of the financial statements, the PSAs require that the auditor disclaim an opinion or withdraw
from the engagement, where withdrawal is legally permitted.

Ethical Requirements Relating to an Audit of Financial Statements

The auditor shall comply with relevant ethical requirements, including those pertaining
to independence, relating to financial statement audit engagements.

The auditor is subject to relevant ethical requirements, including those pertaining to

independence, relating to financial statement audit engagements. Relevant ethical
requirements ordinarily comprise Parts A and B of the Code of Ethics for Professional
Accountants in the Philippines (the Code of Ethics) related to an audit of financial
statements together with national requirements that are more restrictive.

Part A of the Code of Ethics establishes the fundamental principles of professional ethics
relevant to the auditor when conducting an audit of financial statements and provides a
conceptual framework for applying those principles. The fundamental principles with
which the auditor is required to comply by the Code of Ethics are: ● Integrity
● Objectivity
● Professional competence and due care ● Confidentiality
● Professional behavior.
Part B of the Code of Ethics illustrates how the conceptual framework is to be applied in
specific situations.

In the case of an audit engagement it is in the public interest and, therefore, required by
the Code of Ethics, that the auditor be independent of the entity subject to the audit. The
Code of Ethics describes independence as comprising both independence of mind and
independence in appearance. The auditor’s independence from the entity safeguards the
auditor’s ability to form an audit opinion without being affected by influences that might
compromise that opinion. Independence enhances the auditor’s ability to act with
integrity, to be objective and to maintain an attitude of professional skepticism.

Professional Skepticism
The auditor shall plan and perform an audit with professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.
 Professional skepticism includes being alert to, for example:
● Audit evidence that contradicts other audit evidence obtained.
● Information that brings into question the reliability of documents and responses
to inquiries to be used as audit evidence.
● Conditions that may indicate possible fraud.
● Circumstances that suggest the need for audit procedures in addition to those
required by the PSAs.

Maintaining professional skepticism throughout the audit is necessary if the auditor is, for
example, to reduce the risks of:
● Overlooking unusual circumstances.
● Over generalizing when drawing conclusions from audit observations.
● Using inappropriate assumptions in determining the nature, timing, and extent of
the audit procedures and evaluating the results thereof.

The auditor cannot be expected to disregard past experience of the honesty and integrity
of the entity’s management and those charged with governance. Nevertheless, a belief
that management and those charged with governance are honest and have integrity does
not relieve the auditor of the need to maintain professional skepticism or allow the
auditor to be satisfied with lessthan- persuasive audit evidence when obtaining
reasonable assurance.

Professional Judgment
The auditor shall exercise professional judgment in planning and performing an audit of
financial statements.

Professional judgment is essential to the proper conduct of an audit. This is because

interpretation of relevant ethical requirements and the PSAs and the informed decisions
required throughout the audit cannot be made without the application of relevant
knowledge and experience to the facts and circumstances. Professional judgment is
necessary in particular regarding decisions about:
● Materiality and audit risk.
● The nature, timing, and extent of audit procedures used to meet the
requirements of the PSAs and gather audit evidence.
● Evaluating whether sufficient appropriate audit evidence has been obtained, and
whether more needs to be done to achieve the objectives of the PSAs and
thereby, the overall objectives of the auditor.
● The evaluation of management’s judgments in applying the entity’s applicable
financial reporting framework.
 ● The drawing of conclusions based on the audit evidence obtained, for example,
assessing the reasonableness of the estimates made by management in preparing
the financial statements.

Professional judgment needs to be exercised throughout the audit. It also needs to be

appropriately documented. In this regard, the auditor is required to prepare audit
documentation sufficient to enable an experienced auditor, having no previous
connection with the audit, to understand the significant professional judgments made in
reaching conclusions on significant matters arising during the audit.

Inherent Limitations of an Audit

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore
obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an
audit, which result in most of the audit evidence on which the auditor draws conclusions
and bases the auditor’s opinion being persuasive rather than conclusive. The inherent
limitations of an audit arise from:
● The nature of financial reporting
The preparation of financial statements involves judgment by
management in applying the requirements of the entity’s applicable
financial reporting framework to the facts and circumstances of the
entity. In addition, many financial statement items involve subjective
decisions or assessments or a degree of uncertainty, and there may be a
range of acceptable interpretations or judgments that may be made.
● The nature of audit procedures There are practical and legal limitations on the
auditor’s ability to obtain audit evidence. For example:
- There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that is
relevant to the preparation and presentation of the financial statements
or that has been requested by the auditor. Accordingly, the auditor
cannot be certain of the completeness of information, even though the
auditor has performed audit procedures to obtain assurance that all
relevant information has been obtained.
- Fraud may involve sophisticated and carefully organized schemes
designed to conceal it. Therefore, audit procedures used to gather audit
evidence may be ineffective for detecting an intentional misstatement
that involves, for example, collusion to falsify documentation which may
cause the auditor to believe that audit evidence is valid when it is not.
The auditor is neither trained as nor expected to be an expert in the
authentication of documents.
 - An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as the
power of search, which may be necessary for such an investigation.
● The need for the audit to be conducted within a reasonable period of time and at
a reasonable cost.
- The matter of difficulty, time, or cost involved is not in itself a valid basis
for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than
persuasive. Appropriate planning assists in making sufficient time and
resources available for the conduct of the audit. Notwithstanding this,
the relevance of information, and thereby its value, tends to diminish
over time, and there is a balance to be struck between the reliability of
information and its cost.

Because of the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements of the financial statements may not be detected, even though
the audit is properly planned and performed in accordance with PSAs. Accordingly, the
subsequent discovery of a material misstatement of the financial statements resulting
from fraud or error does not by itself indicate a failure to conduct an audit in accordance
with PSAs.
However, the inherent limitations of an audit are not a justification for the auditor to be
satisfied with less-than-persuasive audit evidence. Whether the auditor has performed
an audit in accordance with PSAs is determined by the audit procedures performed in the
circumstances, the sufficiency and appropriateness of the audit evidence obtained as a
result thereof and the suitability of the auditor’s report based on an evaluation of that
evidence in light of the overall objectives of the auditor.

Information Risk
The primary economic reason for an audit of financial statements is the demand by external users
for reliable or fairly stated financial statements that they will use in making economic decisions.
Thus, the market for auditing services is driven by demand by external financial statements users.

An audit can help reduce information risk - risk that the financial statements that will be used for
decision-making are materially misleading, unreliable or inaccurate.

Four conditions/reasons that gave rise to a demand for independent audit of financial statements:
- Potential conflict of interest between users and preparers of the financial information can
result in biased information – Client management may not be objective in financial
reporting. It may provide impressive but biased, unrealistic, or misleading financial
statements to obtain benefits that it seeks. On the other hand, financial statement users
need unbiased, realistic, or reliable financial statements.
 - Remoteness of users – Users do not have access to entity’s records to personally verify
the reliability of the financial information.
- Complexity of subject matter requires expertise – Expertise is often required for
information preparation and verification. Users of financial statements are not equipped
with the necessary skills, competence, and knowledge of complexities of accounting and
auditing to determine whether the financial statements are reliable.
- Consequence for decision making – Financial statements are used for important decisions
that involve significant amount of money. If a decision is based on misleading financial
information, it could have substantial financial or economic consequences on decision
makers.

Another condition that gave rise to demand for audit of financial statements is the stewardship
or agency theory which means that management wants the credibility an audit adds to the
financial statement to enhance stewardship of the financial statement and to lessen the owner’s
mistrust of the management.

To reduce Information Risk:

The management or users of their financial statements may adopt any or all of the following
approaches:
4. Allow users to verify information.
The user may go to the business establishment to examine records and obtain
information about the reliability of the statement. Although impractical because
of costs, this is usually adopted by BIR examiners or a business intending to
purchase another business.
5. Users share information risk with management.
If users rely on inaccurate financial statements and as a consequence incurs a
financial loss, a lawsuit may be brought against management to recover part of
such loss.
6. Have the financial statements audited.
As an expert in the application of financial reporting standards, the independent
auditor further enhances the quality of financial reporting.
 The Professional Practice of Accounting
Sources: Philippine Accountancy Act of 2004, Continuing Professional Development Act of 2016

Scope of Practice. – The practice of accountancy shall include, but not limited to, the following:

A. Practice of Public Accountancy - shall constitute in a person, be it his/her individual

capacity, or as a partner or as a staff member in an accounting or auditing firm, holding
out himself/herself as one skilled in the knowledge, science and practice of accounting,
and as a qualified person to render professional services as a certified public accountant;
or offering or rendering, or both, to more than one client on a fee basis or otherwise,
services such as the audit or verification of financial transaction and accounting records;
or the preparation, signing, or certification for clients of reports of audit, balance sheet,
and other financial, accounting and related schedules, exhibits, statements or reports
which are to be used for publication or for credit purposes, or to be filed with a court or
government agency, or to be used for any other purpose; or the design, installation, and
revision of accounting system; or the preparation of income tax returns when related to
accounting procedures; or when he/she represents clients before government agencies
on tax and other matters related to accounting or renders professional assistance in
matters relating to accounting procedures and the recording and presentation of financial
facts or data.
B. Practice in Commerce and Industry - shall constitute in a person involved in decision
making requiring professional knowledge in the science of accounting, or when such
employment or position requires that the holder thereof must be a certified public
accountant.
C. Practice in Education/Academe - shall constitute in a person in an educational institution
which involve teaching of accounting, auditing, management advisory services, finance,
business law, taxation, and other technically related subjects: Provided, That members of
the Integrated Bar of the Philippines may be allowed to teach business law and taxation
subjects.
D. Practice in the Government- shall constitute in a person who holds, or is appointed to,
a position in an accounting professional group in government or in a government– owned
and/or controlled corporation, including those performing proprietary functions, where
decision making requires professional knowledge in the science of accounting, or where
a civil service eligibility as a certified public accountant is a prerequisite.

Characteristics/Attributes of a Profession:
● Mastery of a particular intellectual skill, acquired by training and education
● Adherence by its members to a common code of values and conduct established by its
administering body, including maintaining an outlook which is essentially objective; and
 ● Acceptance of a duty to society as a whole (usually in return for restrictions in use of a title
or in the granting of a qualification)

Accountancy meets all characteristics of a profession as follows:

● To be a member of the accounting profession, one must first obtain a BSA degree, pass
a difficult CPA board exam and continue learning through meaningful working experience
and continuing professional education.
● In acting in the public interest, professional accountants observe and comply with the
ethical requirements of the Code of Ethics for professional accountants in the Philippines.
● A distinguishing mark of the accountancy profession is its acceptance of the responsibility
to act in public interest. Therefore, a professional accountant’s responsibility is not
exclusively to satisfy the needs of an individual client or employer.

Objectives of the Accountancy Profession:

● To work to the highest standards of professionalism
● To attain the highest levels of performance, and
● To meet the public interest requirement

Public interest – the collective well-being of the public the CPA serves
● Public interest imposes responsibility on the accountancy profession and on its members
● Public – community of people and institutions who rely on the objectivity and integrity of
CPAs; consists of clients, credit grantors, governments, employers, employees, investors,
the business and financial community, and others who make such reliance

Important Role of CPAs in Society:

The public rely on CPAs for:
● Sound financial accounting and reporting
● Effective financial management and
● Competent advice on a variety of business and taxation matters

CPA – a person who holds a valid Certificate of Registration and a Professional Identification card
issued by the PRC/BOA to those who satisfactorily complied with all the legal and procedural
requirements for such issuance, including in appropriate cases, having passed the
CPA licensure examination
● Also referred to as professional accountant
● A member of the accountancy profession in the Philippines

Regulation of the Accounting Profession:

1. Public Regulation – RA 9298 otherwise known as “The Philippine Accountancy Act of
2004” (including its Implementing Rules and Regulations)
2. Regulation by the Profession – through the implementation of the Code of Ethics for
professional accountants / CPAs in the Philippines
3. Regulation within the Firm – through implementation of a system of quality control
Organizations that Affect Accountancy
a. Professional Regulation Commission (PRC) – the government agency that
administers, implements and enforces the regulatory policies of the Philippine
Government with respect to the regulation and licensing of the various professions (such
as the accountancy profession) under its jurisdiction.
● the professional regulation commission of the Philippines created under RA
No. 8981
● The PRC derives its authority from the PRC Modernization Act of 2000.
● The PRC is the government agency that has overall jurisdiction over the
regulatory boards (such as the Board of Accountancy) in the
Philippines.

b. Professional Regulatory Board of Accountancy (BOA)

- the government agency empowered to administer/enforce the Philippine
Accountancy Act of 2004 (RA 9298), BOA is under the administrative supervision
of the PRC.
- The Professional Regulatory Board of Accountancy, hereinafter referred to as the
Board, under the supervision and administrative control of the Professional
Regulation Commission, hereinafter referred to as the Commission, shall be
composed of a chairman and six (6) members to be appointed by the President of
the Philippines from a list of three (3) recommendees for each position and ranked
by the Commission, from a list of five (5) nominees for each position submitted by
the accredited national professional organization of certified public accountants.
The Board shall elect a vice-chairman from among its members for a term one (1)
year. The chairman shall preside in all meetings of the Board and in the event of a
vacancy in the office of the chairman, the vicechairman shall assume such duties
and responsibilities until such time as a chairman is appointed.

Objectives of RA 9298:
● The standardization and regulation of accounting education;
● The examination for registration of CPAs; and
● The supervision, control, and regulation of the practice of accountancy in
the Philippines.

Councils/committee formed to assist BOA:

● Financial Reporting Standards Council (FRSC) – assists BOA in the
establishment and promulgation of GAAP in the Philippines.
● Auditing and Assurance Standards Council (AASC) – created to assist BOA
in the establishment and promulgation of GAAS in the Philippines.
● Education Technical Council (ETC) – assists BOA in continuously
upgrading accounting education in the Philippines.
● Quality Review Committee (QRC) – conducts an oversight into the quality
of audits of financial statements through a review of the quality control
measures instituted by an Individual CPAs, Firm or Partnership of CPAs
engaged in the practice of public accountancy to ascertain his/her/its
 compliance with prescribe professional, ethical and technical standards of
public practice.
● PRC CPE Council – assists BOA in implementing its CPE program.

c. Securities and Exchange Commission (SEC) – the government agency that regulates
the registration and operations of corporations (whether stock or non-stock), partnerships
and other forms of associations in the Philippines.

Overall objective of the SEC:

- The overall objective of the SEC is to assist in providing investors
with reliable information upon which to make investment decisions.

SEC reportorial requirements:

● The SEC prescribes financial reporting requirements.
● SEC requires companies that plan to issue new securities to the public to
submit a registration statement to the SEC for approval.
● The financial statements to be filed with the SEC shall be accompanied by
a Statement of Management’s Responsibility for Financial Statements.

Composition of SEC
- A chairperson and four (4) commissioners appointed by the President of
the Philippines for a term of 7 years.

d. Bangko Sentral ng Pilipinas (BSP)

- regulates and supervises the banking industry.
- The primary objective of the BSP is to maintain price stability conducive to
a balanced and sustainable economic growth. It also aims to promote and
preserve monetary stability and the convertibility of the peso.

Monetary Board – the policy-making body of the BSP.

Composition of Monetary Board

- Composed of 7 members appointed by the President of the Philippines for
a term of 6 years, as follows:
- BSP Governor
- A member of the Cabinet to be designated by the President of the
Philippines.
- Five (5) members from private sector

e. Commission on Audit (COA) – the government agency examines whether government

units handle their funds in compliance with existing laws and regulations and whether their
programs are being conducted effectively, efficiently and economically.
 - The COA is the highest and final authority in state auditing. Its jurisdiction
and responsibility is defined by the Philippine Constitution (under Article IX
– D).
- The COA acts as the sole external auditor of all government departments
and agencies, including government-owned or controlled corporations.
- Commission proper – governing body of COA

Composition
- The COA is composed of a Chairman and two (2) Commissioners to be
appointed by the President of the Philippines with the consent of the
Commission of Appointments for a term of 7 years without reappointment
Qualifications of COA members:
● Natural-born citizens of the Philippines
● At least thirty-five years of age at the time of their appointment
● CPAs with not less than 10 years of auditing experience or members of the
Philippine Bar who have been engaged in the practice of law for at least 10
years, and
● Not have been candidates for any elective position in the elections
immediately preceding their appointment

f. Insurance Commission (IC) – government agency regulates and supervises the

insurance industry for the promotion of national interest.

g. Bureau of Internal Revenue (BIR) – government agency that enforce tax laws; the BIR
is empowered to collect taxes to raise revenues for the use and support of the government.

Standard-Setting Bodies
a. Local/Domestic:
● Financial Reporting Standards Council (FRSC) – accounting standardsetting
body/council created by the BOA
○ BIR representation. The BIR, although represented in the FRSC, is not
represented in the AASC.
○ Appointment. The Chairman and members of the FRSC and AASC shall
be appointed by the PRC upon the recommendation of the BOA in
connection with the APO (PICPA).
○ Term of office. The Chairman and members of both the FRSC and AASC
shall have a term of 3 years renewable for another term.
○ Main function of FRSC and AASC: To assist BOA in carrying out its
powers and functions on monitoring the conditions affecting the practice of
accountancy and adoption of such measures, including promulgation of
accounting and auditing standards, rules and regulations and best
practices
Chairman 1

BOA 1

SEC 1

BSP 1

BIR 1

COA 1

A major organization composed of preparers and users of FS 1

Accredited National Professional Organization of CPAs (APO) - PICPA

- Public Practice 2

- Commerce and Industry 2

- Academe/Education 2

- Government 2 8

Total Members 15

● Auditing and Assurance Standards Council (AASC)

- Auditing Standard - Setting Body/Council created by the BOA.

Chairman 1

BOA 1

SEC 1

BSP 1

COA 1
Association or organization of CPAs in active public practice of accountancy 1

Accredited National Professional Organization of CPAs (APO) - PICPA

- Public Practice 6

- Commerce and Industry 1

- Academe/Education 1

- Government 1 9

Total Members 15

b. Foreign/International:
● International Federation of Accountants (IFAC)
- The recognized global/worldwide organization for the accountancy
profession.
- The International Federation of Accountants (IFAC) is the worldwide
organization for the accountancy profession. Founded in 1977, its mission
is “to serve the public interest, IFAC will continue to strengthen the
worldwide accountancy profession and contribute to the development of
strong international economies by establishing and promoting adherence
to high-quality professional standards, furthering the international
convergence of such standards and speaking out on public interest issues
where the profession’s expertise is most relevant.” IFAC is comprised of
158 members and associates in 123 countries worldwide, representing
approximately 2.5 million accountants in public practice, industry and
commerce, the public sector, and education. No other accountancy body in
the world and few other professional organizations have the broad-based
international support that characterizes IFAC.

● International Accounting Standards Board (IASB) - the international

accounting standard-setting body.
- Foreign counterpart of the FRSC
- Its issuances are called IFRS
- It replaced the International Accounting Standards Committee (IASC)

● International Auditing and Assurance Standards Board (IAASB) –

international auditing standard-setting body
- Foreign counterpart of the AASC
- It replaced the International Auditing Practices Committee (IAPC)
 Both the IASB and IAASB are under the IFAC.

Professional and Sectoral Organizations

a. Philippine Institute of Certified Public Accountant (PICPA)

- the globally-recognized and integrated national professional organization of CPAs
in the Philippines accredited by the BOA and the PRC. PICPA is designated as the
accredited professional organization (APO) in the Philippines.
- The Mission of PICPA is to enhance the integrity of the accountancy profession,
serve the best interest of its members and other stakeholders, and contribute to
the attainment of the country's national objectives.
- PICPA must renew its accreditation once every three years.

b. Sectoral Organizations
● Serve the needs of CPAs in different scopes of practice
● Provide seminars, programs and workshops that specifically serve the interests of
the CPAs in their respective sectors
● Each sector has its own organization as follows:
1. Public Practice – Association of CPAs in Public Practice (ACPAPP)
2. Commerce and Industry – Association of CPAs in Commerce and Industry
(ACPACI)
3. Education/Academe – Association of CPAs in Education (ACPAE)
4. Government – Government Association of CPAs (GACPA)

Continuing Professional Development

- Provides that compliance with the Continuing Professional Development Act of
2016 is a mandatory requirement in the renewal of Professional Identification
Cards.
- Sec 32 of Republic Act 9298, otherwise known as the “Philippine Accountancy Act
of 2004”, states that all certified public accountants (CPAs) shall abide by the
requirements, rules and regulations on continuing professional education to be
promulgated by the Professional Regulatory Board of Accountancy, subject to the
approval of the Professional Regulation Commission, in coordination with the
accredited national professional organization of certified public accountants or any
duly accredited educational institutions.
- For this purpose, a CPE Council is hereby created to implement the CPE program.

CPE Objective:
● To provide and ensure the continuous education of a registered professional with
the latest trends in the profession brought about by modernization and scientific
and technological advancements;
 ● To raise and maintain the professional's capability for delivering professional
services;
● To attain and maintain the highest standards and quality in the practice of his
profession;
● To make the profession globally competitive; and ● To promote the general welfare
of the public.

Continuing Professional Education (CPE) – refers to the inculcation assimilation and

acquisition of knowledge, skills, proficiency and ethical and moral values, after the initial
registration of a professional that raise and enhance the professional's technical skills and
competence

CPE program – consists of properly planned and structured activities, the implementation of
which requires the participation of a determinant group of professionals to meet the requirements
of voluntarily maintaining and improving the professional standards and ethics of the profession.

PRC CPE Council:

The PRC CPE Council was created to assist BOA in implementing the CPE program.

Composition of PRC CPE Council:

A. 1 Chairperson (the chairperson shall be chosen from among the members of BOA by the
BOA members themselves) and
B. 2 members
a. First member – the president or, in his absence or incapacity, any officer chosen
by the Board of Directors of PICPA
b. Second member – the president, or in his absence or incapacity, any officer of the
organization of deans or department heads of schools, colleges or universities,
offering the degree requiring licensure examination (BSA); or shall be appointed
by the PRC from 3 recommendees of the BOA concerned. Such recommendees
shall be well-known academicians.

Term of office of CPE Council members:

A. Chairperson – co-terminus with his/her incumbency in the PRC
B. First member – co-terminus with his/her incumbency as officer of the PICPA
C. Second member – co-terminus with his/her incumbency as officer of the organization of
deans or department heads of colleges or universities offering BSA degree

CPE Program:
Program activities and sources of accreditation:
● Seminars
● Conventions
● Masteral degree and doctoral degree
● Authorship
 ● Self-directed learning package
● Post-graduate/in-house training
● Resource speaker
● Peer reviewer
● CPE provider
● CPE program, activities or sources

CPE credit units:

● 120 credit units for 3 years
● Minimum of 15 credit units shall be earned in each year.

Exemption from CPE requirement:

1. Permanent exemption: Upon reaching the age of 65 years old 2.
Temporary exemption: If the following conditions are met:
a. During their stay abroad for at least 2 years immediately prior to the date of
renewal; and
b. Working or practicing his/her profession or furthering his/her studies abroad

Seal and Use of Seal:

- All licensed certified public accountants shall obtain and use a seal of a design prescribed
by the Board bearing the registrant’s name, registration number and title.
The auditor’s reports shall be stamped with said seal, indicating therein his/her current
Professional Tax Receipt (PTR) number, date/place of payment when filed with
government authorities or when used professionally.

Foreign Reciprocity:
- A person who is not a citizen of the Philippines shall not be allowed to practice
accountancy in the Philippines unless he/she can prove, in the manner provided by the
rules of court that, by specific provision of law, the country of which he/she is a citizen,
subject or national admits citizens of the Philippines to the practice of the same profession
without restriction.

Coverage of Temporary or Special Permits:

Special / temporary permit may be issued by the BOA subject to the approval of the PRC
and payment of the fees the latter has prescribed and charged thereof to the following
Foreign CPAs:
● A foreign CPA called for consultation or for a specific purpose which, in the
judgment of the BOA, is essential for the development of the country: Provided,
That his/her practice shall be limited only for the particular work that he/she is being
engaged: Provided, further, That there is no Filipino CPA qualified for such
consultation or specific purposes;
● A foreign CPA engaged as professor, lecturer or critic in fields essential to
accountancy education in the Philippines and his/her engagement is confined to
teaching only; and
 ● A foreign CPA who is an internationally recognized expert or with specialization in
any branch of accountancy and his/her service is essential for the advancement of
accountancy in the Philippines.

Penal Provisions:
- Any person who shall violate any of the provisions of this Act or any of its implementing
rules and regulations as promulgated by the Board subject to the approval of the
Commission, shall, upon conviction, be punished by a fine of not less than fifty thousand
pesos (P 50,000.00) or by imprisonment for a period not exceeding two (2) years or both.

Setting Up and Maintaining an Accounting Practice

Sources: Philippine Accountancy Act of 2004, Continuing Professional Development Act of 2016; prc.gov.ph;

Practice of Public Accountancy

Republic Act No. 9298 or the Philippine Accountancy Act of 2004 provides that the
following forms of organization are allowed for the practice of accountancy:
1. Single proprietorships
2. General partnerships and limited liability partnerships

• A sole proprietor or partnership of the CPAs is known as a firm (CPA firm or audit firm).
• The large CPA firms, in terms of number of personnel and in terms of revenues, have
operations in various parts of the world. These firms usually have affiliations or
correspondent firms in each country.

Requirements for Accreditation for Public Practice of Accountancy

Sole Practitioner
Initial Renewal
Duly accomplished and notarized Application Duly accomplished and notarized Application
Form (affix documentary stamp) Form (affix documentary stamp)
Photocopy of the expired Certificate of
xxx
Accreditation
Photo copy of valid Professional Photocopy of valid professional identification
Identification card card
Duly signed Code of Good Governance of
xxx
the Individual CPA
Duly signed Ethical and technical standards
required of the practice of public xxx
accountancy
Photocopy of valid Professional Tax Receipt Photocopy of valid Professional Tax Receipt
Sworn statement by the CPA, (Please
notarize and affix documentary stamp in the
original copy)
• has a meaningful participation in their respective
internal quality review process;
• has undergone adequate and effective training
(from organizations duly accredited by the Board or
by its duly authorized representatives) on all the
current accounting and auditing standards, code of
ethics, laws and their implementing rules and
regulations, circulars, memoranda, their respective
codes of good governance and other related xxx
documents that are required in the practice of public
accountancy to ensure professional, ethical and
technical standards;
• is of good moral character;
• he/she had not been found guilty by a competent
court and/or administrative body of any case
involving moral turpitude and/or unethical practices;
• has at least three (3) years meaningful experience
in any of the areas of public practice including
taxation as defined in Section 4 Rule 4 of the IRR
of R. A. 9298.

CPA Integrity Pledge xxx

Photocopy of valid National Bureau of
Investigation (NBI) clearance
Detailed description of work
Certificate of Membership in Good Standing
from the current Accredited Integrated
Professional Organization (AIPO) for the
accountancy profession
Certificates of CPD units earned
Payment of prescribed fee of P1,500.00. (In
Cash, Postal Money Order, Manager’s Check
or Bank Draft payable to the
Professional Regulation Commission)
Original copy of authority to practice
profession issued by employer, printed in the
official letter head of the institution/agency
(For Government Employee only)
Short Brown Envelope for the Certificate of
Accreditation
Set of documentary stamps.
Photocopy of valid National Bureau of
Investigation (NBI) clearance
xxx
Certificate of Membership in Good Standing
from the current Accredited Integrated
Professional Organization (AIPO) for the
accountancy profession
Certificates for CPD credit units earned
Payment of prescribed fee of P1,500.00. (In
Cash, Postal Money Order, Manager’s
Check or Bank Draft payable to the
Professional Regulation Commission)
xxx
Short Brown Envelope for the Certificate of
Accreditation
Set of documentary stamps.

Partnership
Initial Renewal
Duly accomplished and notarized Application Duly accomplished and notarized Application
Form (affix documentary stamp) Form (affix documentary stamp)
Photocopy of the expired Certificate of
XXX
Accreditation
Photocopy of the CPAs’ Board Certificates of
XXX
partners and staff member/s
Photo copy of valid Professional Photo copy of valid Professional Identification
Identification cards of partners and staff cards of partners
member/s
Valid NBI Clearance of the partners Valid NBI Clearance of the partners
Photocopy of valid Professional Tax Receipt Photocopy of valid Professional Tax Receipt
(PTR) of partners (PTR) of partners
Duly signed Code of Good Governance by
XXX
the managing partner
Duly signed Copy of internal quality review
XXX
procedures by the managing partner
Duly signed Ethical and technical standards
required of the practice of public XXX
accountancy by the managing partner
Valid Business permit XXX
Sworn statement by the managing partner
stating that all the partners and staff
member/s, (Please notarize and affix XXX
documentary stamp in the original copy)
(same contents as for individuals)
Original copy of authority to practice
profession issued by employer, printed in the
XXX
official letter head of the institution/agency
(For Government Employee only)
Authenticated copy of the Certificate of XXX
Registration issued by the Securities and
Exchange Commission (SEC)
Authenticated copy of the current Articles of
XXX
Partnership
Certificate of Membership in Good Standing Certificate of Membership in Good Standing
of the partners from the current Accredited of the partners from the current Accredited
Integrated Professional Organization (AIPO) Integrated Professional
for the accountancy profession Organization (AIPO) for the accountancy
profession
Certificates for CPD credit units earned by Certificates for CPD credit units earned by
the partners the partners
Payment of the prescribed fee of P2,000.00. Payment of the prescribed fee of P2,000.00.
(In Cash, Postal Money Order, Manager’s (In Cash, Postal Money Order, Manager’s
Check or Bank Draft payable to the Check or Bank Draft payable to the
Professional Regulation Commission) Professional Regulation Commission)
Short Brown Envelope for the Certificate of Short Brown Envelope for the Certificate of
Accreditation Accreditation
Set of documentary stamps. Set of documentary stamps.
Well Known CPA Firms in the Philippines (and their international counterparts)
Local Firm International Counterpart
SGV & Co. (SyCip Gorres Velayo & Co.) Ernst & Young
Manabat Delgado Amper & Co. (formerly
Deloitte Touche Tohmatsu (DTT)
C.L. Manabat & Co.)
Manabat Sanagustin & Co. (formerly Laya
KPMG
Mananghaya & Co.)
Isla Lipana & Co. (formerly Joaquin Cunanan
PricewaterhouseCoopers
& Co.)
BDO Alba Romeo & Co. BDO (Binder Dijker Otto) International
Punongbayan & Araullo Grant Thornton International Ltd.

Meaningful Experience
A meaningful experience shall be considered as satisfactory compliance with the
requirements of RA No. 9298 if it is earned in:

(a) Commerce and Industry

• shall include significant involvement in general accounting, budgeting, tax
administration, internal auditing, liaison with external auditors, representing his/her
employer before government agencies on tax and matters related to accounting or
any other related functions; or
(b) Academe / Education
• shall include teaching for at least three (3) trimesters or two (2) semesters subjects
in either financial accounting, business law and tax, auditing problems, auditing
theory, financial management and management services. Provided, That the
accumulated teaching experience on these subjects shall not be less than three
(3) school years; or
(c) Government
• shall include significant involvement in general accounting, budgeting, tax
administration, internal auditing, liaison with the Commission on Audit or any other
related functions; and
(d) Public Practice
• shall include at least one year as audit assistant and at least two years as auditor
in charge of audit engagement covering full audit functions of significant clients.

Provided, That if the Board finds such experience inadequate to the minimum
requirements for the public practice of accountancy in the course of its evaluation of
his/her application for accreditation to practice public accountancy, the registrant shall be
required to make up such inadequacy from competent sources. Provided, further, that
such meaningful experience shall be certified under oath by the employer where such
meaningful experience was obtained.
Implementing Rules and Regulations Clarified
• Continuing Professional Development o International
Education Standard No. 7 o Framework for
International Standard
• Required 120 units of CPD may be earned in 3 years
o Effective august 6, 2016
o PRC Resolution No. 2016-990 (issued June 23, 2016)

CPAs in public practice are also required to obtain accreditation with the Bureau of Internal
Revenue submitting at least 18 CPD units on taxation obtained w/in one year prior to
application for accreditation.

CPAs in public practice who have publicly listed entities and public interest entity clients
are required to obtain accreditation with Securities and Exchange Commission.

Renewal of Accreditation
• The accreditation shall be for a period of three years
• Failure to renew on the expiration date will entail the payment of surcharges at an
amount prescribed by the Board
• PRBOA shall require as a condition to registration or any renewal to undergo quality
review.

Quality Review Committee (QRC)

As authorized by Annex B of the Rules Covering the Accreditation of CPAs in the Practice
of Public Accountancy, the BOA created a Quality Review Committee (QRC) to conduct
an oversight into the quality of audits of financial statements by CPA practitioners to
determine their compliance with accounting and auditing standards. The QRC is
composed of the following:

Chairman, who had been or is presently a

senior practitioner in public accountancy 1
Six members coming from:
BOA 1
PICPA
Public practice 2
Academe 1
Commerce and Industry 1
Government 1
Total 7

Functions of the QRC are:

a. to conduct quality review on applicants for registration to practice public accountancy
and render a report which shall be attached to the application for registration
 b. to recommend to the BOA the revocation of the Certificate of Registration and the
professional identification card of the CPA practitioner who has not observed quality
assurance measures and who has not complied with the standards of quality
prescribed for the practice of public accountancy.

The need for a quality assurance review system to be implemented arises mainly from
three main sources:
• the Accountancy Law, RA 9828 o The law gives the BOA the power to conduct an
oversight into the quality of audits of financial statements through a review of the quality
control measures instituted by auditors in order to ensure compliance with the
accounting and auditing standards and practices.
• the auditing standards in the Philippines o Philippine Standards of Auditing (PSA) No.
220, Quality Control for an Audit of Financial Statements. This standard deals with
specific responsibilities of personnel of CPA practitioners regarding quality control
procedures for an audit of financial statements.
o Philippine Standards for Quality Control (PSQC) No. 1, Quality Control for Firms
that Perform Audits and Review of Financial Statements, and Other Assurance
and Related Services Engagements.
• a requirement by the international accounting profession (IFAC) to have member
institutes (e.g. PICPA) implement a quality assurance review program as a membership
obligation

Sources of Clients
• The Code of Ethics prohibits solicitation of clients by CPAs.

• Possible Sources of clients:

o Referrals from businessmen through active participation in civic and community
affairs.
o Referrals from clients by maintaining his integrity and rendering prompt and
efficient services to them. o Referrals from financial and government institutions
by keeping his standards high.
o Referrals from other CPAs by active involvement in professional organizations of
CPAs.
o Referrals from legal and other professional firms.

Advertising for the Philippine Accountancy Profession

Generally, advertising and publicity in any medium are acceptable provided:
(a) It has as its objective the notification to the public or such sectors of the public as are
concerned, of matters of fact (e.g., name, address, contact numbers, services offered) in
a manner that is not false, misleading or deceptive;
(b) It is in good taste;
(c) It is professionally dignified; and
 (d) It avoids frequent repetition of, and any undue prominence being given to the name of the
firm or professional accountant in public practice.

The following however shall not be allowed:

(a) Self-laudatory statements
(b) Discrediting, disparaging, or attacking other firms or CPA practitioners
(c) Referring to, using or citing actual or purported testimonials by third parties
(d) Publishing and comparing fees with other CPAs or CPA firms or comparing those services
with those provided by another firm or CPA practitioner
(e) Giving too much emphasis on competitive differences
(f) Using words or phrases which are hard to define and even more difficult to substantiate
objectively
(g) Publishing services in billboard (e.g., tarpaulin, streamers, etc.) advertisements

Circumstances in which publicity is acceptable and the matters to be considered in connection

therewith subject always to the overriding requirements mentioned in the preceding rules:

(a) Awards
It is in the interests of the public and the accountancy profession that any appointment or other
activity of a professional accountant in a matter of national or local importance, or the award of
any distinction to a professional accountant, should receive publicity and that membership of the
professional body should be mentioned. However, the professional accountant should not make
use of any of the aforementioned appointments or activities for personal professional advantage.

(b) Professional Accountants Seeking Employment or Professional Business

Publicity seeking subcontract work may be acceptable if placed only in the professional press and
provided that neither the accountant’s name, address or telephone number appears in the
publicity.

(c) Directories
Entries may include name, address, telephone number, professional description, services offered
and any other information necessary to enable the user of the directory to make contact with the
person or organization to which the entry relates.

(d) Books, Articles, Interviews, Lectures, Radio and Television Appearances

• Professional accountants who author books or articles on professional subjects, may state their
name and professional qualifications and give the name of their organization but shall not give
any information as to the services that firm provides.
• Similar provisions are applicable to participation by a professional accountant in a lecture,
interview or a radio or television program on a professional subject.
• What professional accountants write or say, however, should not be promotional of themselves or
their firm but should be an objective professional view of the topic under consideration.

(e) Training Courses, Seminars, etc.

• A professional accountant may invite clients, staff or other professional accountants to attend
training courses or seminars conducted for the assistance of staff. Other persons should not be
invited to attend such training courses or seminars except in response to an unsolicited request.
• Undue prominence should not be given to the name of a professional accountant in any booklets
or documents issued in connection therewith.

(f) Booklets and Documents Containing Technical Information

Booklets and other documents bearing the name of a professional accountant and giving
technical information for the assistance of staff or clients may be issued to such persons, other
professional accountants or other interested parties.

(g) Staff Recruitment

• Genuine vacancies for staff may be communicated to the public through any medium in which
comparable staff vacancies normally appear. There should not be any suggestion that the
services offered are superior to those offered by other professional accountants in public practice
as a consequence of size, associations, or for any other reason.
• In publications such as those specifically directed to schools and other places of education to
inform students and graduates of career opportunities in the profession, services offered to the
public may be described in a business-like way.
• More latitude may also be permissible in a section of a newspaper devoted to staff vacancies
than would be allowed if the vacancy appeared in a prominent position elsewhere in a newspaper
on the grounds that it would be most unlikely that a potential client would use such media to
select a professional adviser.

(h) Publicity on Behalf of Clients

A professional accountant in public practice may publicize on behalf of clients, primarily for staff.
However, the professional accountant in public practice should ensure that the emphasis in the
publicity is directed towards the objectives to be achieved for the client.

(i) Brochures and Firm Directories

A professional accountant in public practice may issue to clients or, in response to an
unsolicited request, to a non-client:
o A factual and objectively worded of the services provided; and
o A directory setting out names of partners, office addresses and names and address of
associated firms and correspondents.

(j) Stationery and Nameplates

The designation of any services provided by the practice as being specialist nature should not be
permitted. Similar provisions, where applicable, should apply to nameplates.

(k) Announcements
Such announcements should be limited to a bare statement of facts and consideration given to
the appropriateness of the area of distribution of the newspaper or magazine and number of
insertions.
 (l) Inclusion of the Name of the Professional Accountant in Public Practice in a Document
Issued by a Client
• When a client proposes to publish a report by a professional accountant in public practice dealing
with the client’s existing business affairs or in connection with the establishment of a new
business venture, the professional accountant in public practice should take steps to ensure that
the context in which the report is published is not such as might result in the public being misled
as to the nature and meaning of the report.
• The professional accountant in public practice should ensure that this information is not used in
such a way as might lead the public to believe that there is a connection with organization in an
independent professional capacity.

(m) Anniversaries
Such undertaking should be done only every five years of celebration.

(n) Websites
A professional accountant may develop and maintain a website in the Internet in such suitable
length and style which may also include announcements, press releases, publications and such
other necessary and factual information like firm’s name, partners/principals’ name and brief
description of their educational attainment, brief listing of services, postal address, telephone, fax
and e-mail addresses.

Marketing Professional Services

A professional accountant in public practice should not bring the profession into disrepute
when marketing professional services. The professional accountant in public practice
should be honest and truthful and should not:
• Make exaggerated claims for services offered, qualifications possessed or experience
gained; or
• Make disparaging references to unsubstantiated comparisons to the work of another.

Professional Fees
When entering into negotiations regarding professional services, a professional
accountant in public practice may quote whatever fee deemed to be appropriate. The fact
that one professional accountant in public practice may quote a fee lower than another is
not in itself unethical. Nevertheless, there may be threats to compliance with the
fundamental principles arising from the level of fees quoted. For example, a self-interest
threat to professional competence and due care is created if the fee quoted is so low
that it may be difficult to perform the engagement in accordance with applicable
technical and professional standards for that price.

In view of these potential threats, safeguards should be considered and applied as

necessary to eliminate them or reduce them to an acceptable level. Safeguards which
may be adopted include:
• Making the client aware of the terms of the engagement and, in particular, the basis on
which fees are charged and which services are covered by the quoted fee.
• Assigning appropriate time and qualified staff to the task.
 Fees charged for assurance engagements should be a fair reflection of the value of the
work involved and should take into account, among others:
(a) the skill and knowledge required for the type of work involved;
(b) the level of training and experience of the persons necessarily engaged on the work;
(c) the time necessarily occupied by each person engaged on the work; and (d) the degree
of responsibility and urgency that the work entails.

Contingent fees are widely used for certain types of non-assurance engagements. They
may, however, give rise to threats to compliance with the fundamental principles in certain
circumstances. They may give rise to a self-interest threat to objectivity. The significance
of such threats will depend on factors including:
• The nature of the engagement.
• The range of possible fee amounts.
• The basis for determining the fee.
• Whether the outcome or result of the transaction is to be reviewed by an independent third
party.

Safeguards:
• An advance written agreement with the client as to the basis of remuneration.
• Disclosure to intended users of the work performed by the professional accountant in
public practice and the basis of remuneration.
• Quality control policies and procedures.
• Review by an objective third party of the work performed by the professional accountant
in public practice.

Referral Fees
• In certain circumstances, a professional accountant in public practice may receive a
referral fee or commission relating to a client.
o Where the professional accountant in public practice does not provide the specific
service required.
o Commission from a third party (e.g., a software vendor) in connection with the sale
of goods or services to a client.
• A professional accountant in public practice may also pay a referral fee to obtain a client.
o where the client continues as a client of another professional accountant in public
practice but requires specialist services not offered by the existing accountant
• A professional accountant in public practice should not pay or receive a referral fee or
commission, unless the professional accountant in public practice has established
safeguards to eliminate the threats or reduce them to an acceptable level. Such
safeguards may include: o Disclosing to the client any arrangements to pay a referral fee
to another professional accountant for the work referred.
o Disclosing to the client any arrangements to receive a referral fee for referring the
client to another professional accountant in public practice.
o Obtaining advance agreement from the client for commission arrangements in
connection with the sale by a third party of goods or services to the client.
 • A professional accountant in public practice may purchase all or part of another firm on
the basis that payments will be made to individuals formerly owning the firm or to their
heirs or estates. Such payments are not regarded as commissions or referral fees

Methods of Billing Clients

• Actual Time Charges basis or Per Diem basis o Billing is done on the basis of actual time
spent by the staff multiplied by the hourly rates agreed upon.

• Flat or fixed fee basis o Client is billed a flat but all-inclusive pre-arranged amount for the
entire engagement.

• Maximum fee basis o Client is charged on a per diem basis, with the arrangement that the
total charges will not exceed a certain agreed maximum amount.

• Retainer basis o The auditor is paid a fixed pre-determined fee for all services rendered
during a designated period of time either on a monthly, semi-annual or annual basis.