MODULE 3: THE PROFESSIONAL STANDARDS

I. Description
This module discusses on the professional standards governing the audit of the financial
statements.

II. Objectives
After completing the module, the students are expected to:

 Define and comply with the standards

III. Duration
Start: Week 4
End: Week 4

IV. Learning Contents

A. GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)

GAAS represent measures of the quality of the auditor’s performance. These standards
are the minimum standard of performance that auditors should follow.

1. General Standards (TIP)

a. Technical training and proficiency

The examination should be performed by person/s having adequate technical
training and proficiency as auditor.

b. Independence
In all matters relating to an engagement, independence in mental attitude is
to be maintained by an auditor.

c. Professional Care
Due professional care is to be exercised in the performance of audit and in
preparation of the report.

2. Standards of Fieldwork (PIE)

a. Planning
The work is to be adequately planned and assistants if any are to be properly
supervised.

b. Internal Control consideration

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Desiree D. Cemefrania, CPA
 Proper study and evaluation of existing internal control as a basis for the
reliance thereon and for the determination of the resultant extent of the tests
to which auditing procedures are to be restricted.

c. Evidential matter
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.

3. Standards of Reporting (GIDO)

a. Generally Accepted Accounting Principles (GAAP)

The report shall state whether the financial statements are presented in all
material respects with the GAAP.

b. Inconsistency
The report shall identify circumstances in which principles have not been
consistently observed in the current period in relation to the preceding report.

c. Disclosure
Informative disclosures are to be regarded adequate unless otherwise stated
in the report.

d. Opinion
The report shall contain an expression of the opinion regarding the financial
statements, taken as a whole, or an assertion to the effect that an opinion
cannot be expressed, the reasons should be stated.

B. PHILIPPINE STANDARDS ON AUDITING

Auditing and Assurance Standards Council (AASC)

The Auditing and Assurance Standards Council (AASC) was created in December 2005,
under the Philippine Accountancy Act of 2004, by the Professional Regulation
Commission upon the recommendation of the Board of Accountancy (BOA). The AASC
is tasked to assist the BOA to establish and promulgate auditing standards in the
Philippines.

The AASC replaced the Auditing Standards and Practices Council (ASPC), which was
previously responsible for the promulgation of auditing standards, practices and
procedures, considered as generally accepted auditing standards in the Philippines.

The AASC shall have 18 regular members with a term of three years, renewable for
another term, coming from the following:

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 The structure of AASC pronouncements are as follows:

Framework for Assurance Engagements:

1. Audit – PHILIPPINE STANDARDS ON AUDITING (PSA)
2. Review

3. Other Assurance Engagements

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 Related Services – Philippine Standards on Related Engagements
4. Agreed Upon Procedures
5. Compilation Services

The International Auditing and Assurance Standards Board (IAASB) is an independent

standard-setting body that serves the public interest by setting high-quality international
standards for auditing, quality control, review, other assurance, and related services, and by
facilitating the convergence of international and national standards. In doing so, the IAASB
enhances the quality and uniformity of practice throughout the world and strengthens public
confidence in the global auditing and assurance profession.

They were founded in March 1978 and were previously known as International Auditing
Practices Committee (IAPC). In 1991, the IAPC’s guidelines were recodified as International
Standards on Auditing (ISAs). In 2001, a comprehensive review of the IAPC was
undertaken, and in 2002, the IAPC was reconstituted as the International Auditing and
Assurance Standards Board (IAASB).

International Federation of Accountants (IFAC) a global organization for the accountancy

profession created the IAPC.

At present, AASC pronouncements are mainly adopted from the standards and practice
statements issued by the IAASB.
 International Standards on Auditing (ISAs)
 International Standards on Assurance Engagements (ISAEs)
 International Standards on Review Engagements (ISREs)
 International Standards on Related Services (ISRSs)

The AASC undertakes a review of the standards and practices statements issued by the
IAASB to determine if these can be adopted in the Philippines with or without changes, after
considering any local requirements imposed by the law or practice.

C. SYSTEM OF QUALITY CONTROL

Quality controls are policies and procedures adopted by CPAs to provide reasonable
assurance of conforming to professional standards in performing audit and related

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 services. Quality Controls ensure that all members of the audit team perform the same
level of quality of work.

Under the Philippine Standards on Quality Control (PSQCs) 1 (Quality Controls for
Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance
and Related Services Engagements) that:

A firm has an obligation to establish a system of quality control to provide reasonable

assurance that the firm and its personnel
 comply with the professional standards and regulatory and legal requirements
 that proper report issued by the firm are appropriate in the circumstances.

Elements of Quality Control Policies and Procedures

PSA 220 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 on Audits

The engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned.

The actions of the engagement partner and appropriate messages to the other
members of the engagement team, in taking responsibility for the overall quality on
each audit engagement, emphasize:

a. The importance to audit quality of performing work that complies with

professional standards and regulatory and legal requirements;
b. The importance to audit quality of complying with the firm’s quality control
policies and procedures as applicable;
c. The importance to audit quality of issuing auditor’s reports that are
appropriate in the circumstances
d. The importance to audit quality of the engagement team’s ability to raise
concerns without fear of reprisals
e. The fact that quality is essential in performing audit engagements.

2. Relevant Ethical Requirements

Throughout the audit engagement, the engagement partner shall remain alert,
through observation and making inquiries as necessary, for evidence of
noncompliance with relevant ethical requirements by members of the engagement
team. Such noncompliance should be documented and appropriate actions should
be determined.

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 The Philippine Ethics Code establishes the fundamental principles of professional ethics,
which include:
a. Integrity
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior.

3. Independence

The engagement partner shall form a conclusion on compliance with independence

requirements that apply to the audit engagement. In doing so, the engagement
partner shall:

a. Obtain relevant information from the firm and, where applicable, network
firms, to identify and evaluate circumstances and relationships that create
threats to independence;

b. Evaluate information on identified breaches, if any, of the firm’s

independence policies and procedures to determine whether they create a
threat to independence for the audit engagement; and

c. Take appropriate action to eliminate such threats or reduce them to an

acceptable level by applying safeguards, or, if considered appropriate, to
withdraw from the audit engagement, where withdrawal is permitted by law or
regulation. The engagement partner shall promptly report to the firm any
inability to resolve the matter for appropriate action.

4. Acceptance and Continuance of Client Relationships and Audit Engagements

The engagement partner shall be satisfied that appropriate procedures regarding the
acceptance and continuance of client relationships and audit engagements have
been followed, and shall determine that conclusions reached in this regard are
appropriate.

If the engagement partner obtained information that would have caused the firm to
decline the audit engagement had that information been available earlier, the
engagement partner shall communicate that information promptly to the firm, so that
the firm and the engagement partner can take the necessary action

PSQC 1 (Redrafted) requires the firm to obtain information considered necessary in

the circumstances before accepting an engagement with a new client, when deciding
whether to continue an existing engagement, and when considering acceptance of a
new engagement with an existing client. Such information in determining the
conclusions are as follows:

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 a. The integrity of the principal owners, key management and those charged with
governance of the entity;

b. Whether the engagement team is competent to perform the audit engagement

and has the necessary capabilities, including time and resources;

c. Whether the firm and the engagement team can comply with relevant ethical
requirements; and

d. Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship

5. Assignment of Engagement Teams

The engagement partner shall be satisfied that the engagement team, and any
auditor’s experts who are not part of the engagement team, collectively have the
appropriate competence and capabilities to:

a. Perform the audit engagement in accordance with professional standards and

regulatory and legal requirements; and
b. Enable an auditor’s report that is appropriate in the circumstances to be
issued.

The firm should establish policies and procedures on this matter. Such should
include, but are not limited:

a. Recruitment
b. Performance evaluation, compensation and promotion
c. Capabilities and competence
d. Career development
e. Assignment of engagement teams

6. Engagement Performance

The engagement partner shall take responsibility for:

a. The direction, supervision and performance of the audit engagement in

compliance with professional standards and regulatory and legal
requirements; and

Direction of the engagement team involves informing the members of the

engagement team of matters such as:

 Their Responsibilities and the need to comply with relevant ethical

requirements
 Objectives of the work to be performed

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  The nature of the business
 Risk-related issues
 Problems that may arise
 The detailed approach of the engagement

Discussion among members of the engagement team allows less experienced

members to raise questions with more experienced members so that appropriate
communication can occur within the engagement team. Appropriate teamwork
and training assist less experienced members of the engagement team to clearly
understand the objectives of the assigned work.

Supervision - The engagement partner should monitor the progress of the audit,
resolve audit issues and consider level of consultation appropriate for the
engagement.

The engagement partner shall take responsibility for reviews being performed in
accordance with the firm’s review policies and procedures.

Consultation - the firm should establish policies and procedures in encouraging

firm personnel to seek assistance from authoritative sources within or outside the
firm.

b. The auditor’s report being appropriate in the circumstances.

V. References

 Auditing Theory by J. Salosagcol, Tiu and Hermosilla

 Philippine Standards on Quality Control 1 (PSQC 1) - Quality Controls for Firms that
Perform Audits and Reviews of Financial Statements, and Other Assurance and
Related Services Engagements
 ifac.org
 aasc.org.ph
 https://www.iaasb.org/
 PSA 220 - QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS

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Desiree D. Cemefrania, CPA