NORTHERN LUZON ADVENTIST COLLEGE

DEPARTMENT OF BUSINESS EDUCATION

COURSE: ASSURANCE PRINCIPLE, GOOD GOVERNANCE, AND PROFESSIONAL ETHICS

LESSON 2: THE PROFESSIONAL STANDARDS

I. Introduction

When auditing financial statements, an auditor assumes certain

professional responsibilities. Auditor’s opinion 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 public respect or even
assessment of legal damages.

II. Learning Outcomes

After reading this chapter, the students should be able to:

 Explain generally accepted auditing standards
 Discuss quality control system

III. Integration of Faith:

For we aim at what is honorable not only in the Lord's sight but also in the
sight of man. 2 Corinthians 8:21

IV. Topics for Reading:

Book/Reference: Auditing Theory – a guide in understanding PSA
(Salosagcol, et al)

Additional Readings:
Introduction to auditing
https://bit.ly/3hLUugJ
https://bit.ly/2X7Sl7j
https://pwc.to/33093cx
https://bit.ly/2BBnJDs
 TOPIC: THE PROFESSIONAL STANDARDS

When auditing financial statements, an auditor assumes certain professional

responsibilities. Auditor’s opinion 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 public respect or even assessment of legal
damages.

Standards are established to measure the quality of performance of individuals

and organizations. Standards relating to the accounting profession concern themselves
with CPAs’ professional qualities, the judgment exercised by the CPAs in the
performance of their professional engagement, and the CPA firm’s quality control
policies and procedures.

The Board of Accountancy promulgated ten generally accepted auditing

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

Philippine Standards on Auditing (PSAs) are issued to clarify the meaning of these
ten GAAs. Auditing procedures are the means used by the auditors in attaining the
quality required by the standards.

 Generally Accepted Auditing Standards (GAAS)

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.
These ten GAAS are grouped into general, fieldwork and reporting standards.
General Standards

1. The examination is to be performed by person or persons having adequate

technical training and proficiency as an auditor.
2. In all matters relating to an engagement, an independence in mental attitude is
to be maintained by the auditor.
3. Due professional care is to be exercised in the performance of the audit and in
the preparation of the report.

Standards of Fieldwork

4. The work is to be adequately planned and assistants, if any, are to be properly

supervised.
5. There is to be a proper study and evaluation of existing internal control as a basis
for reliance thereon and for the determination of the resultant extent of the tests
to which auditing procedures are to be restricted.
6. 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 examination.

Standards of Reporting

7. The report shall state whether the financial statements are presented in
accordance with generally accepted accounting principles.
8. The report shall identify those circumstances in which principles have not been
consistently observed in the current period in relation to the preceding period.
9. Informative disclosures are to be regarded as reasonably adequate unless
otherwise stated in the report.
10. The report shall either contain 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 the financial statements, the report should contain a clear-cut
indication of the character of the auditor’s examination if any and the degree of
responsibility he is taking.
 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 accounting profession in the Philippines.

Adoption of International Standards

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 Standards on Related Services (ISRSs) issued by the
International Auditing and Assurance Board (IAASB) created by the International
Federation of Accountants (IFAC).

In addition to these standards, Practices 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 practices
statements issued by 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.

 SYSTEM OF QUALITY CONTROL

If the public is to rely on the professional CPA’s work, it is essential that

appropriate controls are put in place to ensure that their work is consistently of high
quality. The need for practicing CPAs to implement and maintain quality control
measures is derived from the fact that audits are usually conducted by audit teams. It is
only by implementing quality control policies and procedures that CPAs can ensure
that all members of the audit teams perform the same level of quality of work.

Quality controls are policies and procedures adopted by CPAs to provide

reasonable assurance of conforming with professional standards in performing audit
and related services.
 Under Philippine Standards on Quality Control (PSQC) 1, a firm has an obligation
to 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 are appropriate in the
circumstances. In this regard, engagement teams:

 Implement quality control procedures that are applicable to audit engagement

 Provide the firm with relevant information to enabling 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

PSA 220 states that audit firm should implement policies and procedures
designed to ensure that all audits are conducted in accordance with PSAs.

The quality control policies and procedures adopted by audit firms vary
depending on the firm’s size and nature of its practice, costs benefit considerations and
other factors. PSA 220 has identified the following quality control policies that may serve
as a guide to audit firms in establishing their own system of quality control.

1. LEADERSHIP RESPONSIBILITIES FOR QUALITY

The firm should establish policies and procedures designed to promote an
internal culture based on recognition that quality is essential in the performance
of the engagements.

The engagement partner should take responsibility for the overall quality on
each audit engagement to which the partner is assigned. The engagement
partner should set example regarding the quality of audit by emphasizing
through actions and messages the importance of performing work that complies
with professional standards, complying with the firm’s quality control policies and
procedures, and issuing appropriate audit reports.

2. ETHICAL REQUIREMENTS
The firm should establish policies and procedures designed to provide it with
reasonable assurance that the firm and its personnel comply with ethical
requirements, which include:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior

The engagement partner should consider whether members of the engagement

team have complied with these ethical principles. Any issues involving
 engagement team member’s non-compliance with ethical requirements must
be properly resolved and documented.

3. INDEPENDENCE
The firm should establish policies and procedures designed to provide it with
reasonable assurance that the members of the engagement team, the firm and,
where applicable, the network firms maintain independence when providing
assurance services.
The engagement partner should form a conclusion on compliance with
independence requirements that apply to the audit engagement. The
engagement partner should
a. Obtain relevant information to identify circumstances and relationships
that create threats to independence;
b. Evaluate information on identified breaches of the firm’s independence
policies and procedures to determine whether they create a threat to
independence;
c. Take appropriate safeguards to eliminate such threats or reduce them
to an acceptable level; and
d. Document conclusions on independence and the basis for such
conclusion.

4. ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS

The firm should establish policies and procedures for the acceptance of client
relationships and specific engagements, designed to provide it with reasonable
assurance that it will only undertake or continue relationships and engagement
whether:
a. Has considered the integrity of the client
b. Is competent to perform the engagement and has the capabilities, time
and resources to do so; and
c. Can comply with ethical requirements.

The engagement partner should be satisfied that appropriate procedures

regarding the acceptance and continuance of client relationships and specific
audit engagement have been followed and that conclusions reached in this
regard are appropriate and have been documented.

5. HUMAN RESOURCES and ASSIGNMENT

The firm should 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 necessary to perform the
engagement. Such policies and procedures should address issues concerning
personnel.
 Recruitment;
 Performance evaluation, compensation and promotion;
  Capabilities and competence;
 Career development; and
 Assignment of engagement teams

The engagement partner should be satisfied that the engagement team

collectively has the appropriate capabilities, competence and time to perform
the audit engagement in accordance with professional standards, and
regulatory and legal requirements, and to enable an auditor’s report that is
appropriate in the circumstances to be issued.

6. ENGAGEMENT PERFORMANCE
The firm should establish policies and procedures designed to provide it with
reasonable assurance
 that engagements are performed in accordance with professional
standards and other regulatory and legal requirements; and
 that the audit report issued is appropriate in the circumstances.

The engagement partner should take responsibility for the direction, supervision,
review and overall performance of the audit engagement.

a. Direction
Assistants should be informed of their responsibilities, the nature of the
entitty’s business, potential problems that may arise and the detailed
approach to the performance of the engagement.

b. Supervision
This involves monitoring the progress of the audit, resolving accounting
and audit issues, and considering the level of consultation appropriate
for the engagement.

c. Review
Work performed by assistants should be reviewed to consider whether
the audit procedures, evidence and documentation are appropriate to
support the conclusion reached.

d. Consultation
The firm should establish policies and procedures that encourage firm
personnel to seek assistance from authoritative sources either within or
outside the firm.

The engagement partner should

i. Be responsible for the engagement team undertaking appropriate
consultation on difficult and contentious matters;
ii. Be satisfied that members of the engagement team have
undertaken appropriate consultation during the course of the
 engagement, both within the engagement team and others at
the appropriate level within outside the firm;
iii. Be satisfied that the nature and scope of, and conclusions
resulting from such consultations are documented and agreed
with the party consulted;
iv. Determine that conclusions resulting from consultations have been
implemented.

e. Engagement Quality Control Review

The firm should establish policies and procedures requiring an
engagement quality control review that provides an objective
evaluation of the significant judgments made and conclusions reached
in formulating the auditor’s report.

This requires the engagement partner:

i. To determine that an engagement quality control reviewer has
been appointed;
ii. To discuss significant matters arising during the audit engagement,
including those identified during the quality control review, with
the engagement quality control reviewer; and
iii. Not to issue the auditor’s report until the completion of the
engagement quality control review.

f. Differences of Opinion
The engagement team should follow the firm’s policies and procedures
for dealing with and resolving differences of opinion that arise within the
engagement team, with those consulted and, where applicable,
between the engagement partner and the engagement quality control
reviewer.

The engagement partner should inform the members of the engagement

team to bring matters involving differences of opinion to the attention of
the engagement partners or others within the firm as appropriate without
fear of reprisals. The audit report should not be issued until the matter
involving differences of opinion is resolved.

7. MONITORING
The continued adequacy and operational effectiveness of quality control
policies and procedures is to be monitored. Policies and procedures must be
adopted to provide reasonable assurance that the systems of quality control are
relevant, adequate and operating effectively.
The firm’s quality control policies and procedures should be communicated to its
personnel in a manner that provides reasonable assurance that the policies and
procedures are understood and implemented.

 QUALITY CONTROL REVIEW

Recognizing the importance of professional accountants’ services to the society, the
government has also taken steps to ensure that CPAs work to the highest standards
which can reasonably be expected from them. The government thru the Professional
Regulatory Board of Accounting (BOA) has required all the CPA firms and individual
CPAs in public practice to obtain certificate of accreditation to practice public
accountancy. Such certificate is valid for three years and can be renewed after
complying with the requirements of the Board of Accountancy.

As a condition to the renewal of the certificate of accreditation to practice public

accountancy, the Board requires individual CPAs and CPA firms to undergo a quality
control review to ensure that these CPAs comply with accounting and auditing
standards and practices.

The PRC has created a Quality Review Committee (QRC) which shall conduct a
quality review on applicants for registration to practice public accountancy and
shall recommend the revocation of the certificate of registrations of CPAs who have
not observed the quality control measures or those who have not complied with the
standards of quality prescribed for the practice of public accountancy.