AUDITING THEORY RED SIRUG

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

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

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:

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 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.

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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

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