ACT 144: Auditing in Specialized Industries

PUBLIC ACCOUNTING PROFESSION

Characteristics/Attributes of a Profession:

a. Mastery of a particular intellectual skill, acquired by training and education;

b. 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
c. 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:

a. 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.
b. In acting in the public interest a professional accountants observe and comply with the ethical
requirements of the Code of Ethics for professional accountants in the Philippines .
c. 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.

The Code of Ethics for CPAs in the Philippines – the document that contains the norms
and principles governing the practice of the accountancy profession in the highest standards
of ethical conduct

Objectives of the Accountancy Profession:

1. To work to the highest standards of professionalism

2. To attain the highest levels of performance, and
3. 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:

a. Sound financial accounting and reporting

b. Effective financial management and
c. 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 Public Accounting:

1. Regulatory Government Agencies:

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

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:

1. Financial Reporting Standards Council (FRSC) – assists BOA in the

establishment and promulgation of GAAP in the Philippines
2. Auditing and Assurance Standards Council (AASC) – created to assist BOA
in the establishment and promulgation of GAAS in the Philippines
3. Education Technical Council (ETC) – assists BOA in continuously upgrading
accounting education in the Philippines
4. 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
Functions of the QRC:

a. Conduct quality review on applicants for registration to practice accountancy

and render a report which shall be attached to the application for registration.
b. Recommend to the BOA the revocation of the Certificate of Registration and
the Professional Identification Card of CPAs who has not observed the quality
control measures and who has not complied with the standards of quality
prescribed for the practice of public accountancy
 c.
In the event that the QRC cannot accomplish the aforesaid functions for any
reason whatsoever, the BOA or its duly authorized representatives may
conduct the required quality review.
5. 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
Laws governing the registration:

 Civil Code of the Phils. – for partnerships

 Corporation Code of the Phils. – for corporations
 Securities Regulation Code

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
Principal duties of the COA:
a. Examine, audit and settle all accounts pertaining to the revenue or receipts and
expenditures or uses of government funds and property.
b. Act as central accounting office of the government (Keep the general accounts
pertaining thereof and preserve the vouchers pertaining thereof),
c. Define the scope of its audit and examination.
d. Promulgate accounting and auditing rules and regulations including those for the
prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of
funds and property.
 e. Submit to the President, at the time fixed by law, an annual financial report of the
government, its subdivisions, agencies and instrumentalities, including GOCCs, and
recommend measures necessary to improve their efficiency and effectiveness.
f. Perform such other duties and functions as may be prescribed by law.

 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:
1. Natural-born citizens of the Philippines
2. At least thirty-five years of age at the time of their appointment
3. 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
4. Not have been candidates for any elective position in the elections
immediately preceding their appointment

 COA Audit: The COA conducts a comprehensive audit that includes financial,
compliance, and management audits.
 At no time shall all Members of the COA belong to the same profession.

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

ESTABLISHMENT, ORGANIZATION AND MANAGEMENT OF A PUBLIC

ACCOUNTING FIRM

Allowed Forms of Organization for the Practice of Public Accountancy:

a. Single practitioners (individual CPAs) or sole proprietorship, and

b. Partnership of CPAs (general partnerships and limited liability partnerships)

Corporation form of CPA/Audit firm is not allowed in the Philippines.

Allowed Names for the Practice of Accountancy:

1. Individual CPA: Shall use his/her registered name (the name registered with the BOA and
the PRC and as printed on his/her CPA certificate)
For example: Jessie Garcia, CPA

2. Firms: Shall use the duly registered and authorized firm name appearing in the registration
documents issued by the DTI or any other proper government office/s and such firm name
shall include the real name of the sole proprietor as printed in his/her CPA certificate
For example: Denver Roncal and Associates
 3. Partnerships:
 In case of registered partnership – shall use the partnership name as indicated in the
Articles of Partnership and certificate of registration issued by the SEC
 In case of unregistered partnership – shall use the partnership name indicated in the
Articles of Partnership
For example: Sycip, Gorres, Velayo & Company

In case of death or withdrawal of all partners, the surviving partner may continue to practice
under the partnership name for a period of not more than 2 years after becoming a sole
proprietor.

Prohibition on Use of Name: CPAs shall practice only under a name allowed by law and:

 Shall NOT include any fictitious name

 Shall NOT indicate specialization (such as tax specialist or expert)
 Shall NOT misleading as to the type of organization

Registration for Accreditation with the BOA and PRC:

 Registration for accreditation with the BOA and PRC is required for CPAs (individuals, firms
and partnerships, including its partners and staff members) before they can engage in public
accountancy.
 They shall not commence public practice until a valid Certificate of Registration to
practice public accountancy has been issued to such CPA(s). The Certificate of
Accreditation attests that the applicant is duly accredited to practice public accountancy in
the Philippines.

 Basic requirements for registration:

a. Application for registration (accomplished in a form prescribed by the BOA, in triplicate,
and duly signed by the applicant CPA)
b. Submission of registration documents such as:
 Certificate of registration issued by the SEC together with the certified copy of the
current Articles of Partnership for registered partnerships, or
 Certified copy of the Articles of partnership for unregistered partnership, or
 Certified copy of the certificate of registration of Firm name with the DTI and other
proper government agencies.
c. A minimum of three (3) years meaningful experience in any of the areas of practice of
accountancy
d. Compliance with the quality review (this is a required condition prior to registration or
renewal any thereof

The BOA created Quality Review Committee (QRC) to conduct quality review on
applicants for registration to practice accountancy and render a report which shall be
attached to the application for registration.

 Validity of registration for accreditation is for a period of 3 years (renewable after 3 years on
or before September 30 on the year of expiry). The registration of applicants approved
during any month of the year shall expire on December 31 on the third year following its
approval.

Example: If the application for registration of a CPA firm is approved on July 31, 2004,
the registration shall expire on December 31, 2006 and therefore it shall file for renewal
 on or before September 30, 2006 for the three year period beginning January 1, 2007.
The next renewal will be on or before September 30, 2009.

Tax and other Legal Requirements:

a. Payment of privilege tax as a CPA on occupations with the city or municipality where they
practice public accountancy
b. Business permits (from local and national government)
c. Accreditation with other government agencies:
a. SEC – also accredits external auditors
 An external auditor should file with the SEC a representation letter for audit clients
whenever his audit client files its financial statements with the SEC
b. BSP – Rendering/offering of independent audits to banks and other financial institutions
under BSP supervision requires BSP accreditation
c. BIR – also accredits external auditors

Foreign CPAs:

 The practice of accountancy in the Philippines is limited to Filipino CPAs.

 A foreign CPA is not allowed to be as owner, sole proprietor, partner or any staff thereof,
unless he/she is qualified to practice accountancy in the Philippines (unless the foreign CPA
qualifies to practice under Sections 34 and 35 of RA 9298.)
 Under no circumstances shall the correspondent relationship, membership, or business
dealings with foreign CPAs be a scheme for the foreign CPAs to engage in the practice of
public accountancy in the Philippines which under the present laws is limited to Filipino CPAs

Hierarchy/ Ranks/Levels within a CPA Firm:

1. Partners – owners of the CPA/Auditing 2. Senior or Senior-in-charge

firm
Duties and responsibilities:
 Determine operating policies of the
firm
 Select and hire audit staff
 Obtain clients
 Establish contracts with clients (sign
engagement letter)
 Approve billings to clients
 Assume overall responsibility for each
engagement
 Plan and review all phases of the
audit
 Approve and sign the report and firm
correspondence (such as audit report
and other documents
3. Managers / Supervisors
Duties and responsibilities:
 Directly responsible to the manager or
the partner
 Take charge of field work
 Prepares audit program for a specific
engagement (subject to review by
superiors)
 Assigns particular phases of audit to
staff auditors
 Directly supervises staff auditors
 Perform more important audit
procedures
 Reviews non-financial records such as
articles of incorporation and by-laws
 Discusses with clients or with the
partner or manager problems or
questions that arise in the course of
the audit
 Assemble audit working papers
 Prepare income tax returns
 Prepares the original draft of audit
report and audited financial statements
(subject to review and approval by the
partner or manager/supervisor)
4. Junior or staff auditor/assistant
 Duties and responsibilities: Duties and responsibilities:

 Act as liaison between partners and  Prepare analyses, schedules,

other team members reconciliations and reports of findings
 Prepare the overall audit plan  Verify footings, extensions and
 Discuss with clients items of material postings on accounting records
importance (such as problems that  Trace evidence such as examination of
may arise in course of the audit) vouchers supporting a disbursement
 Directly supervise senior auditors  Observe client’s physical count of
 Review working papers inventories
 Draft the report  Performs other tasks as may be
 Discuss reports and results to clients assigned
and settle accounting problems with
the client
 Take charge of training programs

Professional Fees:

1. Amount of fees to be charged to clients: Fees charged should be a fair reflection of the
value of the professional services, taking into account the following:
a. The skill and knowledge required
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

 A fee lower than previous fee is acceptable if calculated using the above factors.
 Other factors to be considered are those influenced by legal, social and economic
conditions in the Philippines.

No standard amount of fee: A CPA in public practice may determine or quote whatever
fee deemed appropriate. He may quote a fee lower than another but not too low (or
significantly lower) nor excessive. If fees that are too low:

 It is considered unethical
 There would be a risk of a perception that the quality of work could be impaired

2. Methods of billing clients (billing arrangements): The methods of determining professional

fees are:
a. Per diem basis – the charges are based on the actual time spent at a rate depending on the
experience and expertise of the members of the engagement team
 Also known as actual time charges basis
 It is computed as actual time spent x rate per hour as agreed upon
b. Fixed fee or Flat fee basis – lump-sum fee for the entire engagement. The charges for
out-of-pocket expenses are separate from the audit fee and are to be billed separately
c. Maximum fee basis – a combination of fixed fee and per diem basis. The billing is similar to
per diem basis subject to a maximum limit as agreed between the practitioner and the client
d. Retainer fee basis – the client pays a uniform/fixed monthly charge, plus additional fee
annually, payable upon submission of the audit report

Out-of-pocket expenses – reimbursable expenses, in addition to the professional fees,

that are chargeable to the client, such as:

 Traveling expenses
 Supplies
 Billing arrangements should be clearly defined, preferably in writing, before the start of
the engagement to help in avoiding misunderstanding with respect to fees.

3. Prohibition against contingent fee: An assurance engagement should not be performed for a
fee that is contingent on the result of the assurance work or on items that are the subject matter
of the assurance engagement.

Contingent fee – a fee calculated on a predetermined basis relating to the outcome or result of
a transaction or the result of the work performed

 Contingent fee is unacceptable billing arrangement because it impairs independence and

objectivity.

Examples of contingent fees:

a. Fee based on % of audited net income

b. Fee based upon % of the acquisition price of another company
c. Fee based on amount of taxes saved
d. Tax preparation where the fee will be based on whether the CPA signs the tax return
prepared
e. Fee based on amount of insurance settlement
f. Fee is charged if bank loan is obtained/approved
g. No fee will be charged unless specific finding or result is obtained

Not considered contingent fees:

a. If fixed by a court or other public authority

b. If determined based on the results of judicial or government agency
proceedings
c. If authorized by statute
d. If approved by a member body as generally accepted practice for certain
professional services

Some reasons why the above are not considered contingent fees:

 Fees fixed by courts and other public authority, although may be uncertain in
nature at that moment, are not known and cannot be influenced by the auditor
and the client.
 Fees based on determination by taxing authorities are a matter of judicial
proceedings which do not involve third parties.

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:

a. NOT make exaggerated claims for services offered, qualifications possessed or experience
gained; or
b. NOT make disparaging references to unsubstantiated comparisons to the work of another.

If the professional accountant in public practice is in doubt whether a proposed form of

advertising or marketing is appropriate, the professional accountant in public practice should
 consult with the relevant professional body.

Publicity, Solicitation and Advertising:

 Publicity – the communication to the public of facts about a professional accountant which
are not designed for the deliberate promotion of that professional accountant
 Solicitation – the approach to a potential client for the purpose of offering professional
services
 Advertising – the communication to the public of information as to the services or skills
provided by professional accountants in public practice with a view to procuring professional
business

Rules on Solicitation, Advertising and Referrals:

a. Solicitation of clients – prohibited by the Code of Ethics

b. Advertising (or other form of marketing) – not allowed
 Advertising is a form of solicitation
c. Payment or receipt of commission – not allowed
d. Referral – allowed
e. Payment or receipt of referral fee – not allowed

Sources of Clients:

a. Referrals from businessmen, clients (present or previous), financial and government

institutions, other CPAs, and legal and other professional firms
b. Walk-in clients

Death or disability of an Individual CPA, and Dissolution or Liquidation of a Firm or

Partnership of CPAs:

 Such must be reported to the BOA by any designated staff member of the Individual CPA, or
by the sole practitioner of a firm (or his/her designated staff member if the proprietor is
unavailable), or by the managing partner (or any designated partner in case the managing
partner in case the managing partner is unavailable) not later than 30 days from the date of
such death, dissolution, or liquidation
 The report must be:
a. In affidavit form – in case of Individual CPA or a Firm
b. A certified copy of dissolution or liquidation papers filed with the SEC – in case of a
partnership
 Failure to notify the BOA shall subject the designated individual to penalty.

Fees and Penalties:

 Fee – Fee for initial registration, renewal, or request for reinstatement: P1,000 or to such an
amount as the PRC may prescribe
 Penalties:
 Suspension of CPA certificate, certificate of registration (to practice), and professional
identification card. If the violator is criminally liable, such party responsible shall be
proceeded against criminally, independent of any action therein provided.
 Subject to the approval of the PRC, the BOA may, for justifiable reasons, lift the sanctions
imposed on violators.

Examples of Violations of the IRR:

a. Engaging in public accounting practice without first registering with the BOA and the PRC
b. Continuing to engage in public accounting practice after the expiration of registration
c. Continuing to engage in public accounting practice after suspension, revocation or withdrawal
of registration
d. Giving any false information, data, statistics, reports or other statement which tend to
mislead, obstruct, or obscure the registration of an Individual CPA, Firm or Partnership of
CPAs under the IRR
e. Giving any misrepresentation to the effect that registration was secured when in truth and in
fact, it was not secured
f. Failure or refusal to undergo quality review
g. Failure to comply with the requirements on accomplishment of the application for
registration, including submission of required documents