Auditing theory
211. Advantages of Sole Proprietorship Form of
Organization
a. The practitioner is his own boss and is
independent.
b. He does not keep regular office hours.
c. He can earn more than a mere salaried
employee can.
d. He can attain self-fulfillment or
satisfaction from the success of his own
practice.
212. Disadvantages of Sole Proprietorship Form of
Organization
a. He assumes all the risk and
responsibilities of entrepreneurship.
b. His income may not be regular and
therefore should be supplemented from
other sources.
c. He must rely on his own judgment in
making decisions.
213. Advantages of Partnership Form of
Organization
a. The practice has greater stability and
continuity.
b. Responsibility, risks and cost of practice
can be shared.
c. Opportunity for specialization is
increased.
d. A partnership can handle larger
engagements more efficiently and
adequately.
e. Partners can combine their talent,
resources, time and experience to serve
the clients better.
214. Disadvantages of Partnership Form of
Organization
a. Personal differences between partners
may arise and therefore good and close
working relationships may not be
established.
b. One partner may feel that the other
partner is not contributing to the welfare
of the firm.
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215. Prohibition against the Organization of
Corporations for the Practice of Public Accountancy
a. As a legal requirement, corporate
practice of CPAs is prohibited in the
Philippines.
b. The reporting requirements of
corporation are generally higher than
those of partnerships. As a professional
firm which usually involve sensitive
information, the less transparent the
better.
c. Corporate practice also requires annual
audit. No accounting firm want to be
audited by their competitors.
d. Tax rate for unincorporated business is
generally more favorable than that for
incorporated ones.
e. Major accounting firm enjoys global
exposure. The structure is complex. In
order to avoid further complication, they
may prefer to operate under partnership
in all regions, regardless of the
allowance of corporate practice in some
countries.
Public Accounting Firm Organization
217. Audit Partner
He or she is concerned about the overall
quality of each audit. An audit partner signs the
audit report, accepting ultimate responsibility for
each audit, and is generally involved in maintaining
client relationships, planning audits and evaluating
the audit findings.
218. Audit Manager/Supervisor
He or she administers important aspects of
audit engagements, scheduling the audit work to be
done with client personnel, assigning work to audit
staff, supervising staff and reviewing staff work.
219. Senior (In-Charge) Auditor
He or she works under the direction of audit
managers and assist them in administering the
audit. They generally participate in audit planning
and provide direct supervision to staff auditors.
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Auditing theory
They also review work performed by staff auditors
and summarize audit findings for the audit partner
to review.
220. Staff (Associate) Auditor
He or she performs various audit procedures
and gather audit evidence to be used as basis for
the audit reports. They may perform procedures
that relate to a variety of aspects of a client’s
activities.
***
221. Representation Letter to the SEC
A CPA in public practice should file with the
Securities and Exchange Commission a the firm. The promotion of a quality-oriented
representation letter for audit clients he has which
are required to file with the said government agency
(SEC) their financial statements.
222. Marketing Professional Services
When a professional accountant in public
practice solicits new work through advertising or
other forms of marketing, there may be potential
threats to compliance with the fundamental
principles.
Moreover, 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. Make exaggerated claims for services
offered, qualifications possessed or
experience gained; or
b. Make disparaging references to
unsubstantiated comparisons to the
work of another.
223. Quality Control System
It refers to a set of policies and procedures
designed to provide reasonable assurance that the
public accounting firm complies with professional
standards.
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224. Elements of a System of Quality Control
a. Leadership responsibilities for quality
within the firm
b. Ethical requirements
c. Acceptance and continuance of client
relationships and specific engagements
d. Human resources
e. Engagement performance
f. Monitoring
225. Leadership Responsibilities for Quality within
the Firm
The firm’s leadership and the examples it
sets significantly influence the internal culture of
internal culture depends on clear, consistent and
frequent actions and messages from all levels of
the firm’s management emphasizing the firm’s
quality control policies and procedures.
226. Ethical Requirements
The firm’s policies and procedures
emphasize the fundamental principles (integrity,
objectivity, professional competence and due care,
confidentiality, and professional behavior), which
are reinforced in particular by:
a. The leadership of the firm;
b. education and training;
c. monitoring; and
d. A process of dealing with non-
compliance
Independence requirements are also needed
to be achieved by implementing appropriate
safeguards (e.g., At least annually, the firm shall
obtain written confirmation of compliance with its
policies and procedures on independence from all
firm personnel required to be independent by the
Revised Code of Ethics).
227. Acceptance and Continuance of Client
Relationships and Specific Engagements
An audit firm shall undertake or continue
relationships and engagements where it can
reasonably assure that:
a. It is competent to perform the
engagement and has the capabilities,
time and resources to do so;
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Auditing theory
b. It can comply with ethical requirements;
and
c. It has considered the integrity of the
client and does not have information
that would lead it to conclude that the
client lacks integrity.
The specific policies and procedures related
to this matter will be discussed further during the
risk assessment phase of the audit.
228. Where the Firm Obtains Information that
Would Have Caused it to Decline an Engagement if
that Information Had Been Available Earlier
The policies and procedures on the
continuance of the engagement and the client
relationship shall include the consideration of:
a. The professional and legal
responsibilities that apply to the
circumstances, including whether there
is a requirement for the firm to report to
the person or persons who made the
appointment or, in some cases, to
regulatory authorities; and
b. The possibility of withdrawing from the
engagement or from both the
engagement and the client relationship.
229. Human Resources
The firm shall establish policies and
procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the
capabilities, competence and commitment to
ethical principles. The following are the personnel
issues to be addressed by such policies and
procedures:
a. Recruitment
b. Performance evaluation
c. Capabilities
d. Competence
e. Career development
f. Competence
g. Promotion
h. Compensation
i. Estimation of personnel needs
230. Engagement Performance
The firm promotes consistency in the quality
of the engagement performance through its policies
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and procedures. This is often accomplished
through written or electronic manuals, software
tools or other forms of standard documentation.
Matters addressed may include:
a. How engagement teams are briefed on
the engagement to obtain
understanding of the objectives of their
work;
b. Processes for complying with applicable
engagement standards;
c. Processes of engagement supervision,
staff training and coaching;
d. Methods of reviewing the work
performed, the significant judgments
made and the form of report being
issued;
e. Appropriate documentation of the work
performed and of the timing and extent
of the review; and
f. Processes to keep all policies and
procedures current.
231. Supervision
Supervision involves directing the efforts of
assistants who are involved in accomplishing the
objectives of the audit and determining whether
those objectives were accomplished. Elements of
supervision include instructing assistants, keeping
informed of significant problems encountered,
reviewing the work performed, and dealing with
differences of opinion among firm personnel. The
extent of supervision appropriate in a given
instance depends on many factors, including the
complexity of the subject matter and the
qualifications of persons performing the work.
232. Review
The work of the members of the audit team
is important for the success of the engagement.
Therefore, the firm needs to make sure the good
quality of each output. This requires proper review
and supervision from the person who has better
experiences and knowledge.
233. Consultation
It includes discussion, at the appropriate
professional level, with individuals within or outside
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the firm who have specialized expertise, to resolve
a difficult or contentious matter.
234. Differences of Opinion
As necessary, the engagement partner
informs members of the engagement team that
they may bring matters involving differences of
opinion to the attention of the engagement partner
or others within the firm as appropriate without fear
of reprisals.
235. Engagement Quality Control Review
It ordinarily involves discussion with the
engagement partner, a review of the financial
statements or other subject matter information and
the report, and, in particular, consideration of
whether the report is appropriate. It also involves a
review of selected working papers relating to
significant judgments the engagement team made
and the conclusions they reached.
236. Engagement Quality Control Reviewer
He or she conducts the review in a timely
manner at appropriate stages during the
engagement so that significant matters may be
promptly resolved to the reviewer’s satisfaction
before the report is issued.
237. Monitoring
Its objective is to provide reasonable
assurance that the policies and procedures relating
to the system of quality control are relevant,
adequate, operating effectively and complied with
in practice. It includes an ongoing consideration
and evaluation of the firm’s system of quality
control including a periodic inspection of a
selection of completed engagements.
238. Documentation
Its purpose is to provide evidence of the
operation of each element of an audit firm’s system
of quality control.
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Approaches to Auditing
240. Risk-Based Audit Approach
It is an audit approach that begins with an
assessment of the types and likelihood of
misstatements in account balance and then adjusts
the amount and type of audit work, to the likelihood
of material misstatements occurring in account
balances.
a. The auditor performs an understanding
of the business, and assesses the risks
involved in the industry sector
(competition, trends, new products on
the market, past client issues)
b. Management provides a set of accounts
c. The auditor identifies risk areas (low,
medium, high)
d. The auditor inquires about controls in
place to mitigate those risks (usually
high-risk areas are the main concern)
e. The auditor tests those controls in place
and subsequently re-assesses the prior
risk ratings
f. Auditor performs analytical reviews on
low risk areas (if adequate, with minimal
substantive testing)
g. Auditor performs analytical reviews on
medium/high risk areas with intensive
substantive testing.