CHAPTER

Professional Standards: GAAS, PSAs,PSQC

MAJOR TOPICS DISCUSSED IN THIS CHAPTER ARE:
Generally Accepted Auditing Standards (GAAS)
Philippine Standards on Auditing(PSAs)
AASC Pronouncements
Overview of PSQC 1
RELEVANT STANDARDS AND PRONOUNCEMENTS:
Generally Accepted Auditing Standards (GAAS)
Philippine Standards on Auditing (PSAs)
Philippine Standard on Quality Control (PSQC) 1
Standards are established to measure the quality of performance of individuals and
organizations. Standards relating to the accounting profession concern themselves with the
professional qualities of CPAs, the judgment exercised in the performance of their professional
engagements, and the Accounting firm's system of quality control.

In the conduct of an audit, professional standards serve as benchmarks against which levels of
quality are measured in terms of the performance of the practitioner's professional
engagements. These standards provide a measure of quality of the work performed by the
auditor and the consistency with which this level of quality is achieved.

The primary purpose of this chapter is to discuss the Generally Accepted Auditing Standards
(GAAS) and its three classifications: General Standards, Standards of Fieldwork, and Standards
of Reporting. Each of the ten GAAS is discussed and explained in the context of a professional
engagement. The application of the relevant concepts in each of the GAAS to the concepts
underlying an audit is also elaborated. A mnemonics strategy is also introduced to be familiar
with the GAAS without the need of much memorization. Furthermore, the structure of the
pronouncements of the Auditing and Assurance Standards Council (AASC) is discussed as well as
the Philippine Standards on Auditing (PSAs) and an overview of the Philippine Standard on
Quality Control (PSQC).

This chapter comprehensively lifts material and provisions from the GAAS, PSAs, and PSQC 1
with comprehensive interpretations and annotations by the author.

Professional Standards
In the conduct of an audit of financial statements, an auditor assumes certain professional
responsibilities. The opinion expressed by the auditor must be based on an examination
conducted in accordance with professional standards. Failure to comply with these standards
exposes the auditor to risks such as loss of respect or even assessment of legal damages.

Professional standards are established to measure the quality of performance of individuals and
organizations. In audit, standards relating to the accounting profession concern themselves
with professional qualities that should be possessed by CPAs, the exercise of professional
judgment in the performance of professional engagements, and the quality control policies and
procedures of CPA firms.

The Board of Accountancy (BOA) promulgated 10 Generally Accepted Auditing Standards

(GAAS) that establish the required level of quality for performing financial statement audits.
These standards must be followed by CPAs when auditing financial statements.

Furthermore, Philippine Standards on Auditing (PSAs) are issued to clarify the meaning of these
ten GAAS. Standards that establish and provide guidance for a CPA firm's quality control
policies and procedures are set forth in the Philippine Standards on Quality Control (PSQC).

Generally Accepted Auditing Standards (GAAS)

The Generally Accepted Auditing Standards (GAAS) represent measures of the quality of the
auditor's performance. These standards should be looked at as a minimum standard of
performance that auditors should follow. In the conduct of an audit, an auditor is assumed to
follow the provisions of the GAAS in order to say that the audit was done in a manner that is
efficient, effective, and with quality.

The ten GAAS are grouped into three classifications:

General Standards (3);
Standards of Fieldwork (3); and
Standards of Reporting (4)
Table 4.1 lists these 10 GAAS.

TABLE 2-2 Generally Accepted Auditing Standards,

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

Standards of Field Work:

1.The work is to be adequately planned and assistants, if any, are to be property supervised.
2. A sufficient understanding of internal control is to be obtained to plan the audit and to
determine the nature, timing, and extent of tests to be performed.
3.Sufficient, competent evidential matter is to be obtained through inspection, observation,
inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial
statements under audit.
Standards of Reporting:
1.The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.
2. The report shall identity those circumstances in which such principles have not been
consistently observed in the current period in relation to the preceding period.
3. Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
4. The report shall contain either an expression of opinion regarding the financial statements
taken as a whole, or an assertion to the effect that an opinion cannot be expressed, When an
overall opinion cannot be expressed, the reasons therefore should be stated. In all cases
where an auditor's name is associated with financial statements, the report should contain a
clear-cut indication of the character of the auditor's work. if any, and the degree of
responsibility the auditor Is taking.

Table 4.1
Generally Accepted Auditing Standards (GAAS)
General Standards (TIP)
The three general standards are concerned with the auditor's qualifications and the quality of
his or her work. These standards are personal in nature in that they deal with auditor training
and proficiency, auditor independence, and the need for due professional care. These
standards apply to all parts of the audit, including fieldwork and reporting.

GENERAL STANDARD # 1:
"The audit is to be performed by a person or persons having adequate technical training
and proficiency as an auditor."

The first general standard recognizes that an individual must have adequate technical training
and proficiency as an auditor. This is gained through formal education, continuing education
programs, and experience. This requirement is usually interpreted to mean college or university
education in accounting and auditing, participation in continuing professional education (CPE)
programs, seminars, trainings, and substantial public accounting experience. A technical
knowledge of the industry in which the client operates is also part of the personal qualifications
of the auditor. It should be recognized that this training is ongoing, with a requirement on the
part of the auditor to stay up-to-date with current accounting and auditing pronouncements.
Auditors should also stay current with developments in the business world that may affect their
clients.

GENERAL STANDARD #2:

"In all matters relating to the assignment, an independence in mental attitude is to be
maintained by the auditor or auditors."

The second general standard requires that the auditor maintain an attitude of independence on
an engagement. Drawing from the discussions in Chapters 1 and 2, it was emphasized that
independence is one of the most important traits and characteristics that a practitioner must
possess, as this confers in them public trust and public confidence. An opinion by an
independent public accountant as to the fairness of a company's financial statements is of
questionable value unless the accountant is truly independent. This ethical consideration
perhaps embodies the most essential factor in the existence of a public accounting profession.
This standard also distinguishes independence in fact and independence in appearance. From
Chapter 1,independence in fact was discussed as “the state of mind that permits the provision
of an opinion without being affected by influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism.” On the other hand, independence in appearance is “the avoidance of facts and
circumstances that are so significant a reasonable and informed third party, having knowledge
of all relevant information, including any safeguards applied, would reasonably conclude that a
firm's or a member of the assurance team's integrity, objectivity, or professional skepticism has
been compromised.”

GENERAL STANDARD #3:

"Due professional care is to be exercised in the planning and performance of the audit
and the preparation of the report."

The third general standard focuses on due professional care. In simple terms, due care means
that the auditor plans and performs his or her duties with a degree of skill commonly possessed
by others in the profession. This standard requires the auditors to plan and carry out every step
of the audit engagement in an alert and diligent manner. Full compliance with this standard
would rule out any negligent acts or material omissions by the auditors. However, this standard
does not require auditors to be Infallible.

Standards of Fieldwork (PIE)

The three standards of fieldwork relate to the actual conduct of the audit, These standards pro.
vide the conceptual background for the audit process. They relate to planning the audit,
obtaining an understanding of the entity and its environment, and obtaining sufficient
appropriate audit evidence.

STANDARD OF FIELDWORK #1:

"The work is to be adequately planned and assistants, lfany, are to be properly super-.
vised.”

The first standard of fieldwork deals with planning and supervision. Proper planning leads to a
more effective audit that is more likely to detect material misstatements and assists in
completing the engagement within a reasonable period of time. This standard also requires that
assistants on the engagement be properly supervised.

It is emphasized that adequate planning is essential to have a satisfactory audit. Without

planning, the audit is likely to be done in a sporadic manner. Supervision is also important in
the conduct of an audit. Most of the fieldwork of an audit is carried out by staff members with
limited professional experience. Successful use of relatively new staff members rely on close
supervision at every level. These concepts extend from providing a specific written audit
program to staff members all the way to review of the work by the partner in charge of the
engagement.

STANDARD OF FIELDWORK # 2:
"A sufficient understanding of internal control is to be obtained to plan the audit and to
determine the nature, timing, and extent of tests to be performed."

The second standard of fieldwork requires that the auditor gain a sufficient understanding of
the auditee's internal control to plan the audit. The degree to which the auditor relies on the
auditee's internal control directly affects the nature, timing, and extent of the work performed
by the independent auditor.

The auditor's understanding of the client and its environment allows him to determine what
can go wrong to have materially misstated financial statements. The auditors must plan and
perform more extensive audit procedures in areas where the risk of material misstatement is
high. Such procedures may comprise tests of internal controls or procedures to substantiate the
financial statement amounts.

Internal control provides assurance that the client's records are reliable. When the auditors find
that internal control is effective, the quantity of other evidence required to substantiate the
financial statement amounts is much less than if controls are weak. This emphasizes that the
auditor's assessment of internal control has a substantial impact on the nature of the audit
process. In addition, if the auditor can identify areas of weakness in a client's internal control,
this information can help him focus on areas where misstatements are more likely to occur.

STANDARD OF FIELDWORK # 3:
"Sufficient, competent evidential matter is to be obtained through inspection, observation,
inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial
statements under audit."

The focus of the third standard of fieldwork is sufficient, competent audit evidence. From the
discussion of the overview and concept of auditing, it was emphasized that the bulk of the work
of the auditor in the conduct of the audit is obtaining and evaluating audit evidence and the
performance of audit procedures to afford a reasonable basis for the expression of an opinion
on the financial statements.

Sufficiency relates to the quantity of audit evidence, while appropriateness relates to the
quality of evidence, that is, its relevance and reliability. When an audit evidence is judged to be
both sufficient and appropriate, that evidence is considered competent. These evidence will be
used by auditors to evaluate and support management assertions in the financial statements.

Standards of Reporting (GIDO)

The four standards of reporting establish some specific directives for the preparation of the
audit report. These standards require that the auditor consider each of the following issues
before rendering the audit report:

 whether the financial statements are presented in accordance with generally accepted
accounting principles (GAAP);

 whether those principles are consistently applied;

 whether all informative disclosures have been made; and

 what degree of responsibility is the auditor taking and the character of the auditor's
work.

STANDARD OF REPORTING # 1:

"The report shall state whether the financial statements are presented in accordance
with generally accepted accounting principles."'

STANDARD OF REPORTING # 2:
"The report shall identify those circumstances in which such principles have not been
consistently observed in the current period in relation to the previous period."

STANDARD OF REPORTING # 3:
“Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.”

STANDARD OF REPORTING # 4:
"The report shall contain either an expression of an opinion regarding the financial
statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed.
When an overall opinion cannot be expressed, the reasons therefore should be stated. In all
cases where an auditor's name is associated with financial statements, the report should
contain a clear-cut indication of the character of the auditor's work, if any, and the degree of
responsibility the auditor is taking."

GAAS:"TIP-PIE-GIDO"
In order to be familiar with the GAAS without the need of much memorization, a mnemonics
strategy can be used in the form of TIP-PIE-GIDO.
TIP pertains to the general standard; PIE pertains to the standards of fieldwork; and GIDO
pertains to the standards of reporting.

GENERAL STANDARDS
T echnical training and proficiency
I ndependence
P rofessional care

STANDARDS OF FIELDWORK
P lanning
I nternal Control
E vidential matter

STANDARDS OF REPORTING
G enerally Accepted Accounting Principles
I nconsistency
D isclosure
O pinion

Philippine Standards on Auditing (PSAs)

The Auditing and Assurance Standards Council (AASC) has been given the task to promulgate
auditing standards, practices, and procedures which shall be generally accepted by the
accountancy profession in the Philippines. To facilitate the preparation by the AASC of its
pronouncements and to attain uniformity of those pronouncements with international auditing
standards, the AASC has approved the adoption of the International Standards on Auditing
(ISAs), International Standards on Assurance Engagements (ISAEs), International Standards on
Review Engagements (ISREs), and International Standards on Related Services (ISRSs) issued by
the International Auditing and Assurance Board (IAASB) created by the International Federation
of Accountants (IFAC). These standards were “Philippinezed “ to suit the requirements of the
Philippines, and thus were named PSAs, PSAEs, PSREs, and PSRSs.

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

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

STANDARDS IN THE ACCOUNTING PROFESSION

Philippine Standards on Auditing(PSAs) for audits of historical financial information

Philippine Standards on Assurance Engagements (PSAEs) for assurance engagements that deal
with subject matters other than historical information
Philippine Standards on Review Engagements (PSREs) for the review of historical financial
information

Philippine Standards on Related Services (PSRSs) for compilation engagements, engagements

to apply agreed-upon procedures to information and other related services engagements as
specified by the AASC
AUTHORITY ATTACHING TO THE STANDARDS ISSUED BY THE AASC
The AASC's Standards contain basic principles and essential procedures together with related
guidance in the form of explanatory and other material, including appendices. The basic
principles and essential procedures are to be understood and applied in the context of the
explanatory and other material that provide guidance for their application. It is therefore
necessary to consider the whole text of a Standard to understand and apply the basic principles
and essential procedures.

The nature of the AASC's Standards requires CPAs to exercise professional judgment in applying
them. In exceptional circumstances, a professional accountant may judge the necessity to
depart from a basic principle or essential procedure of an Engagement Standard to achieve the
objective of the engagement. When such a situation arises, the professional accountant should
be prepared to justify the departure.

Any limitation of the applicability of a specific International Standard is made clear in the
standard.

Philippine Standards on Quality Control (PSQC)

If the public is to rely on the work of the CPA, it is essential that appropriate controls are put in
place to ensure that the work is consistently of high quality. The need for practicing CPAs to
implement and maintain quality control measures is based on the premise that audits are
usually conducted by audit teams. Through implementing quality control policies, CPAs and
accounting firms can ensure that all members of the audit team perform the same level of
quality of work. Quality controls are the policies and procedures adopted by CPAs to provide
reasonable assurance of conformance with professional standards in performing audit and
related services.

The purpose of the Philippine Standard on Quality Control (PSQC) 1 is to establish standards
and provide guidance regarding a firm's responsibilities for its system of quality control for
audits and reviews of historical financial information and for other assurance and related
services engagements. The PSQC 1 is to be read in conjunction with the Code of Ethics for
Professional Accountants in the Philippines.

PSQC 1 provides that a firm should establish a system of quality control designed to provide it
with reasonable assurance that the firm and its personnel comply with professional standards,
and regulatory and legal requirements, and that the report issued by the firm is appropriate in
the circumstances. In this regard, engagement teams:
 Implement quality control procedures that are applicable to the audit engagement;
 Provide the firm with relevant information to enable the functioning of that part of the
firm's system of quality control relating to independence; and
 Are entitled to rely on the firm's systems unless information provided by the firm or
other parties suggest otherwise.
ELEMENTS OF A SYSTEM OF QUALITY CONTROL
A system of quality control consists of:
 policies designed to achieve the objectives of compliance with professional standards
and issuance of appropriate reports; and
 procedures necessary to implement and monitor compliance with those policies.

PSQC 1 applies to all firms. The nature of the policies and procedures developed by individual
firms to comply with the PSQC will depend on various factors such as the size and operating
characteristics of the firm, and whether it is part of a network.

As provided in PSQC 1, the firm's system of quality control should include policies and
procedures addressing each of the following elements:
 Leadership responsibilities for quality within the firm
 Ethical requirements
 Acceptance and continuance of client relationships and specific engagements
 Human resources
 Engagement performance
 Monitoring

Review Questions
1. What is the importance of having a set of professional standards by the accountancy
profession?
2. What is the nature of the GAAS? What is the function of these standards?
3. What are the classifications of the GAAS?
4. What is the nature of the general standards? What important auditing concepts underlie
them?
5. Discuss the nature and scope of the standards of fieldwork and the auditing concepts that
underlie them.
6. What issues are emphasized by the standards of reporting?
7. Discuss the nature of the Philippine Standards on Auditing (PSAs) and the structure of the
pronouncements made by the AASC.
8. What is the purpose of PSQC 1?
9. What is meant by a firm's system of quality control? What comprises this system and why is
it important?
10. What are elements of a system of quality control as provided by PSQC 1?