AUDI 21: AUDITING AND ASSURANCE PRINCIPLE

CHAPTER 1: THE DEMAND FOR ASSURANCE AND analytical procedures, make inquiries of client
AUDITING SERVICES personnel and issues a report that provides
limited (sometimes called negative) assurance.
CERTIFIED PUBLIC ACCOUNTANT Auditing
ASSURANCE - A systematic process of objectively obtaining and
 Audit of FS evaluating evidence regarding assertions about
 Examination of Internal Control economic actions and events to ascertain degree of
 Trust Services correspondence between these assertions and
 Review of FS or Other Information established criteria and communicating the results
 Risk Advisory Services to interested users.
 Others  A systematic process - means an ordered or
NON-ASSURANCE structured series of steps
 Tax Services  Objectively - Impartial attitude must be maintained
 Management Consultancy (fraud investigation and conduct the audit without bias
and IT consultation)  Obtaining and evaluating evidence about assertions
 Compilation services - Test the validity of the assertions/representations
 Agreed-Upon Procedures by gathering evidence and performing audit
 Others procedures to test these assertions.
Assurance  Corresponding criteria - Compliance with standards
- Independent professional services that improve the and other frameworks
quality of information, or its context, for decision  Communicating Results / Reporting - A timely report
makers. is a relevant report
- Services that are designed to enhance the degree
of confidence in the information. CHAPTER 2: INTRODUCTION TO PROFESSIONAL
Elements: ACCOUNTANCY
 three-party relationship (practitioner,
responsible party and intended users) PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA. 9298)
 subject matter (e.g., financial or
management reports) PROFESSIONAL ACCOUNTANT
 criteria (standards) 1. Public Practice
 evidence (supporting documents)  Individual
 written report of assurance  Practice/Staff of Auditing firms
 Independent
Attestation 2. Government
- An assurance service in which attestor (an  Employed by the Government
independent accountant) offers assurance about  Appointed
subject matter (e.g., compliance with debt covenant)  Involved in decision making
that is the responsibility of another party (e.g.,  Civil Service Eligible
manufacturer) 3. Commerce and Industry
- An independent practitioner engaged to issue a  Employed by the business
report on subject matter, or an assertion about a  Involved in decision making
subject matter, that is the responsibility of another  Prepared the Financial Statement
party. 4. Academe
 Professor/Instructor
Attestation services
 Agreed-Upon Procedures Engagement - an Auditing
attestation services in which the independent Types of Auditors:
accountant is engaged to report on an item 1. External Auditors - FS Audits
using procedures the contracting parties agreed Independent auditors who perform
to. audit of client's historical FS. (i.e. SGV,
 Review engagement - an attestation service in individual audit practitioners)
which the independent accountant perform
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 AUDI 21: AUDITING AND ASSURANCE PRINCIPLE
2. Forensic Auditors - Forensic Audits
Hired by clients who perform
investigations on fraud, crime embezzlement or
reconstructing incomplete accounting records.
(i.e. CrFA)
3. Government Auditors - Compliance and
Operational Audits
Independent government body who
audit government offices/agencies (i.e. COA,
BIR, SEC, BSP etc.)
4. Internal Auditors - Internal and Operational
Audits
- Hired by the client as a consultant to check FS,
efficiency of operations and effectiveness of
internal
- Perform independent appraisal activity.
- concerned with all kinds of financial and other
data generated for both internal and external
users.
Types of other Audit Services
1. Internal Audit
- independent
- add value and improve an organization’s
operations
- bringing systematic, disciplined approach to
evaluate and improve the effectiveness of risk
management, control, and government
processes
2. Compliance Auditing
- examination, audit and settlement in
accordance with law and regulation
- determine the extent to which rules, policies,
laws, covenants, or government regulations are
followed by the entity being audited.
3. Operational Audit (performance audit or
management audit)
- future-oriented, independent and systematic
evaluation performed by the internal auditor
for management
4. Forensic Audits
- detect a deter fraudulent activities
Other Non-Assurance Services
1. Agreed-Upon Procedures
- party engaging the professional accountant or
the intended user determines the procedures
and the professional accountant provide a
report of factual findings as a result of
undertaking those procedures.
2. Tax preparation and Planning Services
- assist clients in preparing and filing tax returns
3. Management Advisory Services
- providing advice and assistance concerning an
entity’s organization, human resources,
finances, operations, IT systems, or other
activities.
4. Compilation, Accounting and Data Processing
System Services
- bookkeeping, payroll processing, and
preparing financial statements.
- less assurance than a financial statement audit
General principles governing the audit of financial
statement
 Code of Professional Ethics (CPE) - Auditors
must comply to CPE in order to retain public
confidence and credibility of auditors.
 Philippine Standards on Auditing (PSA) - Basic
principles and essential procedures which
Auditors must follow.
 Professional Skepticism - Auditor must make
critical assessment with a questioning mind.
Reasons/Sources why there is a need for an
independent FS Audit
 Conflict between management and users -
Overly optimistic FS to impress users.
 Expertise - Some users are not equipped with
basic knowledge on reading the FS.
 Remoteness - Users have no direct access to the
financial records
 Financial Consequences - Misleading FS due to
fraud or errors.
CHAPTER 3: THE PUBLIC ACCOUNTING PROFESSION
ENVIRONMENT
CERTIFIED PUBLIC ACCOUNTANT
Pre-Qualification Education Requirements - Degree
in Bachelor of Science in Accountancy.
CPA Licensure Exam - Apply and take the exam
given by PRC - Board of Accountancy
Other Legal and Regulatory Requirement - Take the
Oath, Apply for a license and registration
Core Values
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 AUDI 21: AUDITING AND ASSURANCE PRINCIPLE
Enable the CPAs to retain their unique character and
value as they embrace the changing dynamics of the
global economy.
1. Integrity - honesty
2. Competence - superior technical proficiency by
performing with a high level of expertise and
knowledge.
3. Lifelong Learning - highly value education
beyond certification and continually pursue new
and broad skills and knowledge
4. Objectivity - maintain impartiality and
intellectual honesty by remaining free of
personal bias and conflicts of interest
5. Commitment to excellence - continually deliver
exemplary, high-quality services
6. Relevance in the Global Marketplace - meeting
the ever-changing needs of the world around
them
Core Competencies
Combination of human skills knowledge and technology
to deliver valued outputs
1. Communication Skills - effectively exchange
reliable and meaningful information, using
appropriate context and interpersonal skills
2. Leadership Skills - influencing, inspiring, and
motivating others to facilitate change and
achieve excellence
3. Critical-Thinking and Problem-Solving Skills -
skillful in evaluating facts, challenging
assumptions and applying judgment to develop
relevant solutions
4. Anticipating and Serving Evolving Needs -
identifying strategic directions and
opportunities to meet the evolving needs of
those they serve
5. Synthesizing Intelligence to Insights - expert in
connecting data, performing analysis and using
business acumen to provide astute guidance for
better business decision making
6. Integration and Collaboration - effective at
building strategic alliances and working
collaboratively to provide multidisciplinary
solutions to complex problems
Regulatory and Professional Organizations
A. Regulatory Government Agencies
1. Professional Regulation Commissions (PRC) -
overall jurisdiction over the regulatory
boards in the Philippines
2. Professional Regulatory Board of
Accountancy (BOA) - a chairman and six
members.
- Empowered to administer the
Accountancy Law.
- only body that may issue and revoke
CPA certificates and grant licenses to
practice
3. Securities and Exchange Commissions (SEC)
- regulates the registration and operations
of corporations, partnership and other
forms of associations in the Philippines
- assist in providing investors with
reliable information upon which to make
investment decisions
4. Commission on Audit (COA) - audits or
determines whether government units
handle their funds according to existing
laws and whether their program are being
conducted efficiently and economically
5. Bureau of Internal Revenue (BIR) -
enforcement of the tax laws, rules and
regulations
B. Professional Organizations
1. Philippine Institute of Certified Public
Accountants (PICPA) - accredited national
professional organization of CPAs.
- serves all members in the different
sectors of the accounting profession
Sectoral Organizations:
 Association of CPAs in Public Practice
(ACPAPP)
 Association of CPAs in Education (ACPAE)
 Association of CPAs in Commerce and
Industry (ACPACI)
 Government Association of CPAs (GACPA)
C. Standard-Setting Bodies
1. International Federation of Accountants
(IFAC) - development and enhancement of
the profession to enable it to provide
services of consistently high quality in the
public interest
2. International Accounting Standards Board
(IASB) - 14 board members (12 of whom are
full-time) reside in 9 countries and have a
variety of functional backgrounds.
- single set of high quality, global
accounting standards that require
transparent and comparable information in
general purpose financial statements
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3. Financial Reporting Standards Council
(FRSC) - assist the Board in carrying out its
powers and functions particularly the
adoption of International Financial
Reporting Standards in the Philippines
4. International Auditing Practices Committee
(IAPC) - standing committee of the Council
of IFAC and is responsible for the
development and issuance on behalf of the
Council
5. Auditing and Assurance Standard Council
(AASC) - assigned to assist the Board in
carrying out its powers and functions
particularly the adoption of auditing and
assurance standards in the Philippines
AUDITOR’S LEGAL LIABILITY
To:
 Client
 Third Parties
From:
 Undetected improper or inadequate disclosure
 Undetected inappropriate valuation
Legal Concepts Related to Auditor's Liability
1. Due professional care / prudent person concept
- auditors are not infallible and can make errors
in judgment but are expected to exercise the
same reasonable care with which others in the
profession would perform in similar
circumstances
2. Sources of Responsibility (common law or
statutory law) - laws that have been developed
through court decisions rather than through
government statutes (common law). Body of
laws passed by legislative bodies such as
Congress (statutory law).
3. Degree of Wrongdoing (ordinary negligence,
gross negligence or constructive fraud, and
fraud) - absence of reasonable care that can be
expected of a person in a set of circumstances;
if they do not do what reasonably prudent
auditors should do in the circumstances
(ordinary negligence). If they consistently fail to
follow the standards of the profession on an
engagement (gross negligence).
4. Lack of privileged communication
5. Liability for acts of others
AUDITOR’S DEFENSE AGAINST CLIENT SUITS
 Lack of duty to perform the service
 Audit was performed using reasonable care
 Absence of causal connection
 Client owns actions contributed to the loss
 Statute of limitation on the action has expired
AUDITOR’S DEFENSE AGAINS THIRD PARTY LAWSUIT
 Nonnegligent performance (conducted based
on Standards of Auditing)
 Lack of privity of contract (not liable to ordinary
negligence) (limitations of liability to the parties
to a given contract)
 Absence of causal connection (nonreliance on
the financial statements by the user)
 Statute of limitation on the action has expired
It is important to remember that while auditors have
important responsibilities, management is primarily
responsible for maintaining effective internal control
and for ensuring the fairness of the company's financial
statements.
The auditor's responsibility to provide reasonable
assurance with respect to errors, fraud and illegal acts
clearly shapes the auditor's environment and the work
the he or she performs.
Challenges
CPAs are called to make Professional Judgments
 Increasingly complex accounting transactions
 Some people still think that Auditors attest
material fraud
 Complexity of computer system
 Globalization as companies expand their
operations outside the country
 Time pressure in completing audit tasks
 Retain clients as most of the business (usually
SMEs) cannot offer high retainer's fee.
Credibility Crisis
To address the said crisis...
 CPA can do public practice once they are also
accredited by BOA
 CPA can sign the AFS once they are accredited
by both BOA and BIR, depending on the type of
Corporation it may also require accreditation
with SEC
 CPAs are all bound to comply with the Revised
Code of Ethics for Professional Accountants
 BOA conduct Quality Assurance Review (QAR)
for those CPA who will renew their
accreditation
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CHAPTER 4: MANAGEMENT OF PUBLIC ACCOUNTING
PRACTICE
Public Accounting Firm Organization (page 67)
AUDITING POSITIONS
1. Audit Partner
 overall quality of each audit
 signs the audit report
 accepting ultimate responsibility for each
audit
 involved in maintaining client relationships,
planning audits, and evaluating the audit
findings
 resolving technical matters (application of
accounting principles or which auditing
procedures are to be performed)
2. Audit Manager/Supervisor
 administers important aspects of audit
engagements
 scheduling the audit work to be done with
client personnel
 assigning work to audit staff
 supervising staff
 reviewing staff work
 often responsible for controlling staff time
and overseeing billing and collections
 keep the audit partner apprised of
significant developments during the audit
3. In-charge (Senior) Auditor
 Work under the direction of audit managers
and assist them in administering the audit
 Participate in audit planning and provide
direct supervision to staff auditors
 Review work performed by staff auditors
and summarize audit findings for the audit
partner to review
4. Staff Auditor
 Perform various audit procedures
 Gather audit evidence to use as a basis for
the audit reports
 Perform procedures that relate to a variety
of aspects of a client’s activities
Philippine System of Quality Management (PSQM)
 Replaces Philippine System of Quality Control
(PSQC)
 Firms are required to have systems of quality
management designed
 implemented by December 15, 2022
 Components (MERGER IA):
M- monitoring and remediation process
E - ethical requirements that are relevant
R - risk assessment process
G - governance and leadership
E - engagement performance
R - resources
I - information and communication
A - acceptance and continuance of client
relationships
Objectives:
 provide reasonable assurance that firms Fulfill
responsibilities in accordance with professional
standards
 issued engagement report is appropriate
(2022 ADDENDUM: NEXT)
CHAPTER 5: PROFESSIONAL ETHICS
Ethical behavior by professionals is necessary to
maintain public confidence in the profession, and in the
services provided by members of that profession.
The ethical requirements for CPAs are similar to the
ethical requirements of other professions. The major
difference between other professional groups and CPAs
is independence.
Independence in fact exists when the auditor is actually
able to maintain an unbiased attitude throughout the
audit, whereas independence in appearance is
dependent on others’ interpretation of this
independence and hence their faith in the auditor.
The public interest is defined as the community’s
collective well-being. CPAs handle ethical conflicts best
by acting with integrity, objectivity, and due
professional care and by having a genuine interest in
serving the public.
An ethical dilemma is a situation that a person faces in
which a decision must be made about the appropriate
behavior.
Ethical responsibility for acts of non-CPAs under a CPA’s
supervision falls under the latter’s jurisdiction. A CPA
shall not permit others to carry out on his behalf, either
with or without compensation, acts which, if carried out
by the CPA, would place him in violation of the Code of
Ethics.
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Added to your vocabulary:
 Tortfeasor – One that commits a tort. Categories:
 Tort – A wrong that is committed by someone who 1. Created by the profession, legislation or regulation
is legally obligated to provide a certain amount of 2. Safeguards in work environment
carefulness in behavior to another and that causes
injury to that person, who may seek compensation Safeguards are necessary to eliminate or reduce the
in a civil suit for damages. threats to an acceptable level
 Scienter - Knowledge that one's actions are wrong
or contrary to law, where such knowledge is an Rationalizing Unethical Behavior
element of a criminal offense o r a basis for liability  Everybody Does It
 Everyone else is doing it and therefore it is
Code of Ethics for Professional Accountants in the acceptable.
Philippines
1. Approved by PRC and BOA on February 20, 2018  If It’s Legal, It’s Ethical
2. Resolution No. 18, Series of 2018, provided for the  Using this argument relies heavily on the
Adoption of 2016 Code of Ethics perfection of law.
3. The 2018 Code of Ethics for Professional  Likelihood of Discovery and Consequences
Accountants consists of three parts, namely:  This philosophy relies on evaluating the
PART A – General Application of the Code likelihood that someone else will discover the
PART B – Professional Accountants in Public behavior.
Practice
PART C – Professional Accountants in Business CODE OF ETHICS RULES
APPLICABILITY TO CPAS IN PUBLIC PRACTICE
Fundamental Principles (PICCO) 1. Conflict of Interest (Sec. 220)
1. Professional Behavior  A conflict of interest creates a threat to
2. Integrity objectivity and may create threats to other
3. Confidentiality fundamental principles.
4. Competence and Due Care  If a conflict of interest is identified, the
5. Objectivity professional accountant in public practice shall
evaluate
Characteristics and Values Associated with Ethical  The significance of relevant interests and
Behavior relationships;
1. Integrity  The significance if the threats created by
2. Honesty performing the professional service(s), and shall
3. Promise Keeping apply safeguards, when necessary, to eliminate
4. Loyalty (Fidelity) or reduce the threats to an acceptable level.
5. Fairness
6. Caring for Others 2. Marketing and Professional Services (250)
7. Respect for Others  When a professional accountant in public
8. Professional Citizenship practice solicits new work through advertising
9. Pursuit of Excellence or other forms of marketing, there may be
10. Accountability potential threats to compliance with
fundamental principles (e.g., self-interest
Threats to the Compliance with the Fundamental threat to professional behavior).
Principles (FASSI)  A professional accountant in public practice
1. Familiarity should not bring the profession into disrepute
2. Advocacy when marketing professional services. The
3. Self-interest professional accountant should be honest and
4. Self-review truthful and should be guided by the provisions
5. Intimidation / adverse / Undue Influence in the PRCBOA Resolution No. 126, series 2008,
on Rules on Advertising and Promotion for the
Safeguards to Mitigate or Eliminate Threats Practice of Accountancy in the Philippines.

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3. Gifts and Hospitality (260)
 Where gifts or hospitality is made in the normal
course of business without the specific intent to
influence decision making or to obtain
information, it may be conclude that any threat
to compliance with fundamental principles is at
an acceptable level. When the threats cannot
be eliminated or reduced to an acceptable level
through the application of safeguards, the
professional accountant in public practice
should not accept such offer.
 Accepting significant gifts may arise to self-
interest threat to objectivity.
4. Custody of Client Assets (270)
 A professional accountant in public practice
entrusted with money or other assets shall:
a) Keep such assets separate from personal or
firm assets.
b) Use such assets only for the purpose for
which they are intended.
c) At all times, be ready to account for those
assets, and any income, dividends or gains
generated, to any person entitled to such
accounting.
d) Comply with all relevant laws and regulations
relevant to the holding of and accounting for
such assets
5. Independence (290)
 Independence of mind is a state of mind that
permits the CPA to perform an attest service
without being affected by influences that might
compromise professional judgment, thereby
allowing that individual to act with integrity and
to exercise objectivity and professional
skepticism.
 Independence in appearance requires the
avoidance of circumstances that might cause a
reasonable and informed third party, aware of
all information, including safeguards applied, to
reasonably conclude that the integrity,
objectivity, or professional skepticism of an
audit firm or member of the attest engagement
team has been compromised.
6. Financial Relationships
The Code restricts the financial interest that an auditing
may have either in the client itself or with client
personnel.
a. A financial interest is an ownership interest in
an equity or a debt security issued by an entity;
such interest may be direct or indirect.
b. A direct financial interest includes an
investment in the client, such as owning capital
stock or providing loans to the client.
c. An indirect financial interest generally involves
an intermediary of some sort.
Concerning direct and indirect financial
relationships of external auditors:
a. All direct financial interests are prohibited,
regardless of amount
b. Material indirect financial interests are
prohibited.
7. Loan and guarantees (290.117)
 A loan, or a guarantee of a loan, from an audit
client is a bank or a similar institution to a
member of the audit team, or a member of that
individual’s immediate family, does not create a
threat to independence if the loan or guarantee
is made under normal lending procedures,
terms, and conditions. Example of such loans
include home mortgages, bank overdrafts, car
loans and credit card balances.
8. Business Relationship (290.123)
 A business relationship between the external
auditor and the client or a member of the
auditor’s immediate family, in a closely-held
entity when the audit client or a director or
officer of the client or any group thereof, also
holds an interest in that entity does not create
threats to independence if:
 The business relationship is insignificant to
the firm, the member of the audit team and
the immediate family member, and the
client;
 The financial interest is immaterial to the
investor or groups of investors; and
 The financial interest does not give the
investor, or group of investors the ability to
control the closely-held entity
9. Employment with an Audit Client (290.133)
Independence would be deemed to be compromised
unless:
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a. The individual is not entitled to any benefits or
payments from the firm, unless made in an
accordance, with fixed pre-determined
arrangements, and any amount owed to the
individual is not material to the firm; and
b. The individual does not continue to participate
or appear to participate in the firm’s business or
professional activities
10. Temporary Staff Assignments (290.140)
Generally, the lending of staff by a firm to an audit
client may create a self-review threat. However, such
assistance may be given for only a short period of time
and the firm’s personnel shall not be involved in:
a. Providing non-assurance services that would
not be permitted under this code, or
b. Assuming management responsibilities
11. Providing Non-Attest Services (290.154)
 While the CPAs should not perform
management functions or make management
decisions for the attest client, they may provide
advice, research materials, and
recommendations to assist the client. In such
circumstances the client must agree to
a. Assume all management responsibilities
b. Oversee the services, by designing an individual,
preferably within senior management, who
possesses suitable skill, knowledge, and/or
experience.
c. Evaluate the adequacy and the results of the
services performed.
d. Accept responsibility for the results of the
services.
e. Establish and maintain internal control,
including monitoring ongoing activities.
12. Preparing Accounting Records and Financial
Statements (290.164)
 Providing an audit client with accounting and
bookkeeping services such as preparing
accounting records and financial statements
creates a self-review threat when the firm
subsequently audits the financial statements.
 The firm may provide services related to the
preparation of accounting records and financial
statements to an audit client that is not a public
interest entity where the services are of a
routine or mechanical creature, so long as any
self-review threat created is reduced to an
acceptable level.
13. Valuation Services (290.171)
 Performing valuation services for an audit client
may create a self-review threat. The
significance of any threat created shall be
evaluated.
14. Tax Return Preparation (290.177)
 Providing tax return preparation service does
not generally create a threat to independence if
the client takes responsibility for the returns
including any significant judgments made.
 Based on historical information and principally
involved analysis and presentation of such
historical information under existing law
15. Internal Audit Services (290.190)
 The provision of the internal audit services
creates a self-review threat to the
independence if the firm uses the internal audit
work in the course of a subsequent external
audit.
16. IT System Services (290.196)
 Providing system services may create a self-
review threat to threat to independence
depending on the nature of services and IT
systems.
17. Litigation and Support Services (290.202)
 Litigation support services may create a self-
review threat or advocacy threat.
18. Legal Services (290.204)
 Legal services that support an audit client in
executing legal action (e.g., legal advice, legal
due diligence and restructuring) may create
self-review threats.
19. Recruiting Services (290.209)
 Providing recruiting services to an audit client
may create self-interest, familiarity or
intimidation threats. The existence and
significance of any threat will depend on factors
such as:
 the nature of the requested assistance;
and
 the role of the person to be recruited
20. Fees-Relative Size (290.215)
 A professional accountant in practice may
quote whatever fee deemed to be appropriate.
However, a self-interest threat to professional
competence and due care is created if the fee
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quoted is so low that it may be difficult to e. Alternative courses of action.
perform the engagement in accordance with
applicable technical and professional standards  Having considered the relevant factors, a
for that price professional accountant shall determine the
appropriate course of action, weighing the
21. Fees Overdue (290.218) consequences of each possible course of action.
 lf fees owed by a client to a public accounting If the matter remains unresolved, the
firm are long overdue, it may appear that the professional accountant may wish to consult
firm's prospects for collection depend upon the with other appropriate persons within the firm
nature of the CPA’s report on the current or employing organization for help in obtaining
financial statements. Thus, the public resolution.
accounting firm's independence is considered
impaired if fees for professional services
rendered more than one year prior to the audit
report date for the current year's audit have not
been collected before issuance of the CPA’s
report for the current year.

22. Contingent Fees (290.219)

 Contingent fees are fees calculated on a
predetermined basis relating to the outcome of
a transaction or the result of the services
performed by the firm. A fee is not regarded as
being contingent if established by a court or
other public authority
23. Compensation and Evaluation Services
(290.223)
 A self-interest threat is created when a
member of an audit team is evaluated on or
compensated for selling non-assurance services
to that audit client. The significance of the
threat shall be evaluated and if the threat is not
at an acceptable level, the firm shall either
revise the compensation plan or evaluation
process for that individual or apply safeguards
to eliminate or reduce the threat to an
acceptable level.

Resolving Ethical Conflict

 The professional accountant may be required to
resolve a conflict in complying with the
fundamental principles.
 When initiating either a formal or informal
conflict resolution process, the following
factors, either individually or together with
other factors, may be relevant to the resolution
process:
a. Relevant facts;
b. Ethical issues involved;
c. Fundamental principles related to the
matter in question;
d. Established internal procedures; and

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