Fundamentals of Assurance Services

SOURCES: Philippine Framework for Assurance Engagements, PSA 120, Public Accountancy Profession
(Cabrera 2013-2014 Edition)

ASSURANCE ENGAGEMENT

“Assurance engagement” means an engagement in which a practitioner expresses a

conclusion designed to enhance the degree of confidence of the intended users other
than the responsible party about the outcome of the evaluation or measurement of a
subject matter against criteria.

Nature of Assurance Engagement

Assurance refers to the auditor’s satisfaction as to the reliability of an assertion being

made by one party for use by another party. To provide such assurance, the auditor
assesses the evidence collected as a result of procedures conducted and expresses
a conclusion. The degree of satisfaction achieved and, therefore, the level of
assurance which may be provided is determined by the procedures performed and
their results.

Objective of an Assurance Engagement

The objective of an assurance engagement is for a professional accountant to evaluate

or measure a subject matter that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides the intended user with a
level of assurance about that subject matter. Assurance engagements performed by a
professional accountant are intended to enhance the credibility of information about a
subject matter by evaluating whether the subject matter conforms in all material
respects with suitable criteria, thereby improving the likelihood that the information will
meet the needs of an intended user.
Elements of an Assurance Engagement
A. A Three Party Relationship involves a practitioner, a responsible party, and
intended users;
a. Practitioner - The term “practitioner” as used in this Framework is broader than
the term “auditor” as used in PSAs and PSREs, which relates only to
practitioners performing audit or review engagements with respect to historical
financial information.A practitioner may be requested to perform assurance
engagements on a wide range of subject matters. Some subject matters may
require specialized skills and knowledge beyond those ordinarily possessed by
an individual practitioner.

The practitioner is satisfied that those persons carrying out the engagement
collectively possess the requisite skills and knowledge, and that the practitioner
has an adequate level of involvement in the engagement and understanding of
the work for which any expert is used.

b. Responsible Party
The responsible party is the person (or persons) who:
(a) In a direct reporting engagement, is responsible for the subject
matter; or
(b) In an assertion-based engagement, is responsible for the subject
matter information (the assertion), and may be responsible for the
subject matter.

- An example of when the responsible party is responsible for

both the subject matter information and the subject matter, is
when an entity engages a practitioner to perform an assurance
engagement regarding a report it has prepared about its own
sustainability practices.
- An example of when the responsible party is responsible for the
subject matter information but not the subject matter, is when a
government organization engages a practitioner to perform an
assurance engagement regarding a report about a private
company’s sustainability practices that the organization has
prepared and is to distribute to intended users. The responsible
party may or may not be the party who engages the practitioner
(the engaging party).

c. Intended Users - are the person, persons or class of persons for whom the
practitioner prepares the assurance report.
The responsible party can be one of the intended users, but not the only
one.

B. An appropriate subject matter;

The subject matter, and subject matter information, of an assurance
engagement can take many forms, such as:
• Financial performance or conditions (for example, historical or
prospective financial position, financial performance and cash flows) for
which the subject matter information may be the recognition,
 measurement, presentation and disclosure represented in financial
statements.
• Non-financial performance or conditions (for example, performance of
an entity) for which the subject matter information may be key indicators
of efficiency and effectiveness.
• Physical characteristics (for example, capacity of a facility) for which
the subject matter information may be a specifications document.
• Systems and processes (for example, an entity’s internal control or IT
system) for which the subject matter information may be an assertion
about effectiveness.
• Behavior (for example, corporate governance, compliance with
regulation, human resource practices) for which the subject matter
information maybe a statement of compliance or a statement of
effectiveness.

Subject matters have different characteristics, including the degree to which

information about them is qualitative versus quantitative, objective versus
subjective, historical versus prospective, and relates to a point in time or covers
a period. Such characteristics affect the:
(a) Precision with which the subject matter can be evaluated or
measured against criteria; and
(b) The persuasiveness of available evidence. The assurance report
notes characteristics of particular relevance to the intended users.

An appropriate subject matter is:

(a) Identifiable, and capable of consistent evaluation or measurement
against the identified criteria; and
(b) Such that the information about it can be subjected to procedures
for gathering sufficient appropriate evidence to support a reasonable
assurance or limited assurance conclusion, as appropriate.

C. Suitable criteria
Criteria are the benchmarks used to evaluate or measure the subject matter
including, where relevant, benchmarks for presentation and disclosure. Criteria
can be formal, for example in the preparation of financial statements, the
criteria may be Philippine Financial Reporting Standards; when reporting on
internal control, the criteria may be an established internal control framework
or individual control objectives specifically designed for the engagement; and
when reporting on compliance, the criteria may be the applicable law,
regulation or contract. Examples of less formal criteria are an internally
developed code of conduct or an agreed level of performance (such as the
number of times a particular committee is expected to meet in a year).

Suitable criteria exhibit the following characteristics:

(a) Relevance: relevant criteria contribute to conclusions that assist
decision- making by the intended users.
(b) Completeness: criteria are sufficiently complete when relevant factors
that could affect the conclusions in the context of the engagement
 circumstances are not omitted. Complete criteria include, where
relevant, benchmarks for presentation and disclosure.
(c) Reliability: reliable criteria allow reasonably consistent evaluation or
measurement of the subject matter including, where relevant,
presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners.
(d) Neutrality: neutral criteria contribute to conclusions that are free from
bias.
(e) Understandability: understandable criteria contribute to conclusions
that are clear, comprehensive, and not subject to significantly different
interpretations.

Criteria need to be available to the intended users to allow them to understand

how the subject matter has been evaluated or measured. Criteria are made
available to the intended users in one or more of the following ways:
(a) Publicly.
(b) Through inclusion in a clear manner in the presentation of the
subject matter information.
(c) Through inclusion in a clear manner in the assurance report.
(d) By general understanding, for example the criterion for measuring
time in hours and minutes.

The practitioner plans and performs an assurance engagement with an attitude

of professional skepticism to obtain sufficient appropriate evidence about
whether the subject matter information is free of material misstatement.

Professional Skepticism
The practitioner plans and performs an assurance engagement with an
attitude of professional skepticism recognizing that circumstances may
exist that cause the subject matter information to be materially
misstated. An attitude of professional skepticism means the practitioner
makes a critical assessment, with a questioning mind, of the validity of
evidence obtained and is alert to evidence that contradicts or brings into
question the reliability of documents or representations by the
responsible party.

D. Sufficiency and Appropriateness of Evidence

- Sufficiency is the measure of the quantity of evidence.
- Appropriateness is the measure of the quality of evidence; that is, its relevance and
its reliability.
Accordingly, the sufficiency and appropriateness of evidence are interrelated.
However, merely obtaining more evidence may not compensate for its poor
quality.

The reliability of evidence is influenced by its source and by its nature, and is
dependent on the individual circumstances under which it is obtained. Generalizations
about the reliability of various kinds of evidence can be made; however, such
generalizations are subject to important exceptions. Even when evidence is obtained
 from sources external to the entity, circumstances may exist that could affect the
reliability of the information obtained. For example, evidence obtained from an
independent external source may not be reliable if the source is not knowledgeable.
While recognizing that exceptions may exist, the following generalizations about the
reliability of evidence may be useful:
● Evidence is more reliable when it is obtained from independent sources
outside the entity.
● Evidence that is generated internally is more reliable when the related
controls are effective.
● Evidence obtained directly by the practitioner (for example, observation
of the application of a control) is more reliable than evidence obtained
indirectly or by inference (for example, inquiry about the application of
a control).
● Evidence is more reliable when it exists in documentary form, whether
paper, electronic, or other media (for example, a contemporaneously
written record of a meeting is more reliable than a subsequent oral
representation of what was discussed).
● Evidence provided by original documents is more reliable than evidence
provided by photocopies or facsimiles.

The practitioner considers the relationship between the cost of obtaining evidence and
the usefulness of the information obtained. However, the matter of difficulty or expense
involved is not in itself a valid basis for omitting an evidence gathering procedure for
which there is no alternative. The practitioner uses professional judgment and
exercises professional skepticism in evaluating the quantity and quality of evidence,
and thus its sufficiency and appropriateness, to support the assurance report.
E. Written Assurance Report - A written assurance report in the form appropriate to a
reasonable assurance engagement or a limited assurance engagement.

The practitioner provides a written report containing a conclusion that conveys the
assurance obtained about the subject matter information. ISAs, ISREs and ISAEs
establish basic elements for assurance reports. In addition, the practitioner considers
other reporting responsibilities, including communicating with those charged with
governance when it is appropriate to do so.

Classification and Types of Assurance Engagements

Assertion-based Engagements and Direct Reporting Engagements

Assertion-based Engagements
- In some assurance engagements, the evaluation or measurement of the
subject matter is performed by the responsible party, and the subject matter
information is in the form of an assertion by the responsible party that is made
available to the intended users.

Direct Reporting Engagements

- The practitioner either directly performs the evaluation or measurement of the
subject matter, or obtains a representation from the responsible party that has
 performed the evaluation or measurement that is not available to the intended
users. The subject matter information is provided to the intended users in the
assurance report.

There are two types of assurance engagement a practitioner is permitted to perform: a

reasonable assurance engagement and a limited assurance engagement.
● Reasonable Assurance Engagement
- The objective of a reasonable assurance engagement is a reduction in
assurance engagement risk to an acceptably low level in the circumstances of
the engagement as the basis for a positive form of expression of the
practitioner’s conclusion.

● Limited Assurance Engagement

- The objective of a limited assurance engagement is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the
engagement, but where that risk is greater than for a reasonable assurance
engagement, as the basis for a negative form of expression of the practitioner’s
conclusion.

Assurance Services
● Audit Services - the auditor's opinion enhances the credibility of financial statements
by providing a high, but not absolute, level of assurance. Absolute assurance in
auditing is not attainable as a result of such factors as the need for judgment, the use
of testing, the inherent limitations of any accounting and internal control systems and
the fact that most of the evidence available to the auditor is persuasive, rather than
conclusive, in nature.

The objective of an audit of financial statements is to enable the auditor to express an

opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework. The phrase used to
express the auditor's opinion is “present fairly, in all material respects.” A similar
objective applies to the audit of financial or other information prepared in accordance
with appropriate criteria.

In forming the audit opinion, the auditor obtains sufficient appropriate audit evidence
to be able to draw conclusions on which to base that opinion.

● Review Services - the auditor provides a moderate level of assurance that the
information subject to review is free of material misstatement. This is expressed in the
form of negative assurance.

The objective of a review of financial statements is to enable an auditor2 to state

whether, on the basis of procedures which do not provide all the evidence that would
be required in an audit, anything has come to the auditor's attention that causes the
auditor to believe that the financial statements are not prepared, in all material
respects, in accordance with an identified financial reporting framework. A similar
objective applies to the review of financial or other information prepared in accordance
with appropriate criteria.
 A review comprises inquiry and analytical procedures which are designed to review
the reliability of an assertion that is the responsibility of one party for use by another
party. While a review involves the application of audit skills and techniques and the
gathering of evidence, it does not ordinarily involve an assessment of accounting and
internal control systems, tests of records and of responses to inquiries by obtaining
corroborating evidence through inspection, observation, confirmation and
computation, which are procedures ordinarily performed during an audit.

Although the auditor attempts to become aware of all significant matters, the
procedures of a review make the achievement of this objective less likely than in an
audit engagement, thus the level of assurance provided in a review report is
correspondingly less than that given in an audit report.

Non-Assurance Services

Engagements covered by Philippine Standards for Related Services, such as agreed-upon

procedures engagements and compilations of financial or other information.

● For agreed-upon procedures, as the auditor simply provides a report of the factual
findings, no assurance is expressed. Instead, users of the report assess for themselves
the procedures and findings reported by the auditor and draw their own conclusions
from the auditor's work.

In an engagement to perform agreed-upon procedures, an auditor is engaged to carry

out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings. The recipients
of the report must form their own conclusions from the report by the auditor.

The report is restricted to those parties that have agreed to the procedures to be
performed since others, unaware of the reasons for the procedures, may misinterpret
the results.

● In a compilation engagement, although the users of the compiled information derive

some benefit from the accountant’s involvement.

In a compilation engagement, the accountant is engaged to use accounting expertise

as opposed to auditing expertise to collect, classify and summarize financial
information. This ordinarily entails reducing detailed data to a manageable and
understandable form without a requirement to test the assertions underlying that
information. The procedures employed are not designed and do not enable the
accountant to express any assurance on the financial information. However, users of
the compiled financial information derive some benefit as a result of the accountant's
involvement because the service has been performed with due professional skill and
care.

● The preparation of tax returns where no conclusion conveying assurance is expressed.

● Consulting (or advisory) engagements, such as management and tax consulting.
 Non-Audit Assurance Engagements and Related Services
SOURCES: Philippine Framework for Assurance Engagements, PSRE 2400, PSRE 2401, PSA 120, PSAE 3400,
PSRS 4400, PSRS 4410, Public Accountancy Profession (Cabrera 2013-2014 Edition)

Review Engagements

● Reviews of Historical Financial Information

Objective of a Review Engagement

The objective of a review of financial statements is to enable an auditor to state
whether, on the basis of procedures which do not provide all the evidence that
would be required in an audit, anything has come to the auditor's attention that
causes the auditor to believe that the financial statements are not prepared, in
all material respects, in accordance with generally accepted accounting
principles in the Philippines (negative assurance).

General Principles of a Review Engagement

The auditor should comply with the “Code of Professional Ethics for Certified
Public Accountants” promulgated by the Board of Accountancy. Ethical
principles governing the auditor's professional responsibilities are:
(a) independence;
(b) integrity;
(c) objectivity;
(d) professional competence and due care;
(e) confidentiality;
(f) professional behavior; and
(g) technical standards.
- The auditor should conduct a review in accordance with this PSA.
- The auditor should plan and perform the review with an attitude of professional
skepticism recognizing that circumstances may exist which cause the financial
statements to be materially misstated.
- For the purpose of expressing negative assurance in the review report, the
auditor should obtain sufficient appropriate evidence primarily through inquiry
and analytical procedures to be able to draw conclusions.

Scope of a Review
The procedures required to conduct a review of financial statements should be
determined by the auditor having regard to the requirements of this PSA,
relevant professional bodies, legislation, regulation and, where appropriate, the
terms of the review engagement and reporting requirements.

Moderate Assurance
A review engagement provides a moderate level of assurance that the
information subject to review is free of material misstatement, this is expressed
in the form of negative assurance.
Terms of Engagement
The auditor and the client should agree on the terms of the engagement. The
agreed terms would be recorded in an engagement letter or other suitable form
such as a contract.

Planning
In planning a review of financial statements, the auditor should obtain or update
the knowledge of the business including consideration of the entity's
organization, accounting systems, operating characteristics and the nature of
its assets, liabilities, revenues and expenses.

Work Performed by Others

When using work performed by another auditor or an expert, the auditor should
be satisfied that such work is adequate for the purposes of the review.

Documentation
The auditor should document matters which are important in providing
evidence to support the review report, and evidence that the review was carried
out in accordance with this PSA.

Procedures and Evidence

The auditor should apply judgment in determining the specific nature, timing
and extent of review procedures. The auditor will be guided by such matters
as:
● Any knowledge acquired by carrying out audits or reviews of the
financial
statements for prior periods.
● The auditor's knowledge of the business including knowledge of the
accounting principles and practices of the industry in which the entity
operates.
● The entity's accounting systems.
● The extent to which a particular item is affected by management
judgment.
● The materiality of transactions and account balances.

- The auditor should apply the same materiality considerations as would be

applied if an audit opinion on the financial statements were being given.
- The auditor should inquire about events subsequent to the date of the financial
statements that may require adjustment of or disclosure in the financial
statements. The auditor does not have any responsibility to perform procedures
to identify events occurring after the date of the review report.
- If the auditor has reason to believe that the information subject to review may
be materially misstated, the auditor should carry out additional or more
extensive procedures as are necessary to be able to express negative
assurance or to confirm that a modified report is required.

Conclusions and Reporting

 - The review report should contain a clear written expression of negative
assurance. The auditor should review and assess the conclusions drawn from
the evidence obtained as the basis for the expression of negative assurance.
- Based on the work performed, the auditor should assess whether any
information obtained during the review indicates that the financial statements
are not presented fairly, in all material respects, in accordance with generally
accepted accounting principles in the Philippines.

The review report should:

(a) state that nothing has come to the auditor's attention based on the
review that causes the auditor to believe the financial statements are
not presented fairly, in all material respects in accordance with generally
accepted accounting principles in the Philippines (negative assurance);
or
(b) if matters have come to the auditor's attention, describe those
matters that impair a fair presentation, in all material respects in
accordance with generally accepted accounting principles in the
Philippines, including, unless impracticable, a quantification of the
possible effect(s) on the financial statements, and either:

- The auditor should date the review report as of the date the review is
completed, which includes performing procedures relating to events occurring
up to the date of the report. However, since the auditor's responsibility is to
report on the financial statements as prepared and presented by management,
the auditor should not date the review report earlier than the date on which the
financial statements were approved by management.

● Review of Interim Financial Information

General Principles of a Review of Interim Financial Information

- The auditor should comply with the ethical requirements relevant to the audit
of the annual financial statements of the entity. These ethical requirements
govern the auditor’s professional responsibilities in the following areas:
independence, integrity, objectivity, professional competence and due care,
confidentiality, professional behavior, and technical standards.
- The auditor should implement quality control procedures that are applicable to
the individual engagement.
- The auditor should plan and perform the review with an attitude of professional
skepticism, recognizing that circumstances may exist that cause the interim
financial information to require a material adjustment for it to be prepared, in all
material respects, in accordance with the applicable financial reporting
framework.

Objective of an Engagement to Review Interim Financial Information

- The objective of an engagement to review interim financial information is to
enable the auditor to express a conclusion whether, on the basis of the review,
anything has come to the auditor’s attention that causes the auditor to believe
that the interim financial information is not prepared, in all material respects, in
 accordance with an applicable financial reporting framework. The auditor
makes inquiries, and performs analytical and other review procedures in order
to reduce to a moderate level the risk of expressing an inappropriate conclusion
when the interim financial information is materially misstated.

Agreeing the Terms of the Engagement

- The auditor and the client should agree on the terms of the engagement.

Procedures for a Review of Interim Financial Information

- Understanding the Entity and its Environment, Including its Internal Control
- The auditor should have an understanding of the entity and its environment,
including its internal control, as it relates to the preparation of both annual and
interim financial information, sufficient to plan and conduct the engagement so
as to be able to:
(a) Identify the types of potential material misstatement and consider
the likelihood of their occurrence; and
(b) Select the inquiries, analytical and other review procedures that will
provide the auditor with a basis for reporting whether anything has come
to the auditor’s attention that causes the auditor to believe that the
interim financial information is not prepared, in all material respects, in
accordance with the applicable financial reporting framework.

- In order to plan and conduct a review of interim financial information, a recently

appointed auditor, who has not yet performed an audit of the annual financial
statements in accordance with PSAs, should obtain an understanding of the
entity and its environment, including its internal control, as it relates to the
preparation of both annual and interim financial information.

Inquiries, Analytical and Other Review Procedures

- The auditor should make inquiries, primarily of persons responsible for financial
and accounting matters, and perform analytical and other review procedures to
enable the auditor to conclude whether, on the basis of the procedures
performed, anything has come to the auditor’s attention that causes the auditor
to believe that the interim financial information is not prepared, in all material
respects, in accordance with the applicable financial reporting framework.
- The auditor should obtain evidence that the interim financial information agrees
or reconciles with the underlying accounting records.
- The auditor should inquire whether management has identified all events up to
the date of the review report that may require adjustment to or disclosure in the
interim financial information.
- The auditor should inquire whether management has changed its assessment
of the entity’s ability to continue as a going concern. When, as a result of this
inquiry or other review procedures, the auditor becomes aware of events or
conditions that may cast significant doubt on the entity’s ability to continue as
a going concern, the auditor should:
(a) Inquire of management as to its plans for future actions based on its
going concern assessment, the feasibility of these plans, and whether
 management believes that the outcome of these plans will improve the
situation; and
(b) Consider the adequacy of the disclosure about such matters in the
interim financial information.
- When a matter comes to the auditor’s attention that leads the auditor to
question whether a material adjustment should be made for the interim financial
information to be prepared, in all material respects, in accordance with the
applicable financial reporting framework, the auditor should make additional
inquiries or perform other procedures to enable the auditor to express a
conclusion in the review report.

Evaluation of Misstatements
- The auditor should evaluate, individually and in the aggregate, whether
uncorrected misstatements that have come to the auditor’s attention are
material to the interim financial information.

Auditor’s Responsibility for Accompanying Information

- The auditor should read the other information that accompanies the interim
financial information to consider whether any such information is materially
inconsistent with the interim financial information.
- If a matter comes to the auditor’s attention that causes the auditor to believe
that the other information appears to include a material misstatement of fact,
the auditor should discuss the matter with the entity’s management.

Communication
- When, as a result of performing the review of interim financial information, a
matter comes to the auditor’s attention that causes the auditor to believe that it
is necessary to make a material adjustment to the interim financial information
for it to be prepared, in all material respects, in accordance with the applicable
financial reporting framework, the auditor should communicate this matter as
soon as practicable to the appropriate level of management.
- When, in the auditor’s judgment, management does not respond appropriately
within a reasonable period of time, the auditor should inform those charged with
governance.

Departure from the Applicable Financial Reporting Framework

- The auditor should express a qualified or adverse conclusion when a matter
has come to the auditor’s attention that causes the auditor to believe that a
material adjustment should be made to the interim financial information for it to
be prepared, in all material respects, in accordance with the applicable financial
reporting framework.

Limitation on Scope
- A limitation on scope ordinarily prevents the auditor from completing the review.
- When the auditor is unable to complete the review, the auditor should
communicate, in writing, to the appropriate level of management and to those
charged with governance the reason why the review cannot be completed, and
consider whether it is appropriate to issue a report.
 Going Concern and Significant Uncertainties
- If adequate disclosure is made in the interim financial information, the auditor
should add an emphasis of matter paragraph to the review report to highlight a
material uncertainty relating to an event or condition that may cast significant
doubt on the entity’s ability to continue as a going concern.
- If a material uncertainty that casts significant doubt about the entity’s ability to
continue as a going concern is not adequately disclosed in the interim financial
information, the auditor should express a qualified or adverse conclusion, as
appropriate. The report should include specific reference to the fact that there
is such a material uncertainty.
- The auditor should consider modifying the review report by adding a paragraph
to highlight a significant uncertainty (other than a going concern problem) that
came to the auditor’s attention, the resolution of which is dependent upon future
events and which may affect the interim financial information.

Documentation
- The auditor should prepare review documentation that is sufficient and
appropriate to provide a basis for the auditor’s conclusion and to provide
evidence that the review was performed in accordance with this PSRE and
applicable legal and regulatory requirements.

● Examination of Prospective Financial Information

Philippine Standard on Assurance Engagements (PSAE) 3400 establishes
standards and provides guidance on engagements to examine and report on
prospective financial information including examination procedures for best-
estimate and hypothetical assumptions. This PSAE does not apply to the
examination of prospective financial information expressed in general or
narrative terms, such as that found in management’s discussion and analysis
in an entity’s annual report, though many of the procedures outlined herein may
be suitable for such an examination.

The general guidelines include the following:

Acceptance of Engagement

- Before accepting an engagement to examine prospective financial information,

the auditor would consider, among other things:
○ The intended use of the information.
○ Whether the information will be for general or limited distribution.
○ The nature of the assumptions, that is, whether they are best-estimate
or hypothetical assumptions.
○ The elements to be included in the information.
○ The period covered by the information.

- The auditor should not accept, or should withdraw from, an engagement when
the assumptions are clearly unrealistic or when the auditor believes that the
prospective financial information will be inappropriate for its intended use.
 - The auditor and the client should agree on the terms of the engagement.

Knowledge of the Business

- The auditor should obtain a sufficient level of knowledge of the business to be

able to evaluate whether all significant assumptions required for the preparation
of the prospective financial information have been identified. The auditor would
also need to become familiar with the entity’s process for preparing prospective
financial information, for example, by considering:
○ The internal controls over the system used to prepare prospective
financial information and the expertise and experience of those persons
preparing the prospective financial information.
○ The nature of the documentation prepared by the entity supporting
management’s assumptions.
○ The extent to which statistical, mathematical and computer-assisted
techniques are used.
○ The methods used to develop and apply assumptions.
○ The accuracy of prospective financial information prepared in prior
periods and the reasons for significant variances.

- The auditor should consider the extent to which reliance on the entity’s
historical financial information is justified.

Period Covered

- The auditor should consider the period of time covered by the prospective
financial information. Since assumptions become more speculative as the
length of the period covered increases, as that period lengthens, the ability of
management to make best-estimate assumptions decreases. The period would
not extend beyond the time for which management has a reasonable basis for
the assumptions. The following are some of the factors that are relevant to the
auditor’s consideration of the period of time covered by the prospective
financial information:
■ Operating cycle, for example, in the case of a major construction project
the time required to complete the project may dictate the period
covered.
■ The degree of reliability of assumptions, for example, if the entity is
introducing a new product the prospective period covered could be
short and broken into small segments, such as weeks or months.
Alternatively, if the entity’s sole business is owning a property under
long-term lease, a relatively long prospective period might be
reasonable.
■ The needs of users, for example, prospective financial information may
be prepared in connection with an application for a loan for the period
of time required to generate sufficient funds for repayment.
Alternatively, the information may be prepared for investors in
 connection with the sale of debentures to illustrate the intended use of
the proceeds in the subsequent period.

Examination Procedures

- When determining the nature, timing and extent of examination procedures,

The auditor’s considerations should include:
● the likelihood of material misstatement;
● the knowledge obtained during any previous engagements;
● management’s competence regarding the preparation of
prospective financial information;
● the extent to which the prospective financial information is
affected by the management’s judgment; and
● the adequacy and reliability of the underlying data.
- The auditor should obtain written representations from management regarding
the intended use of the prospective financial information, the completeness of
significant management assumptions and management’s acceptance of its
responsibility for the prospective financial information.

Presentation and Disclosure

- When assessing the presentation and disclosure of the prospective financial
information, in addition to the specific requirements of any relevant statutes,
regulations or professional standards, the auditor will need to consider whether:
a. the presentation of prospective financial information is informative and
not misleading;
b. the accounting policies are clearly disclosed in the notes to the
prospective financial information;
c. the assumptions are adequately disclosed in the notes to the
prospective financial information. It needs to be clear whether
assumptions represent management’s best-estimates or are
hypothetical and, when assumptions are made in areas that are
material and are subject to a high degree of uncertainty, this uncertainty
and the resulting sensitivity of results needs to be adequately disclosed;
d. the date as of which the prospective financial information was prepared
is disclosed. Management needs to confirm that the assumptions are
appropriate as of this date, even though the underlying information may
have been accumulated over a period of time;
e. the basis of establishing points in a range is clearly indicated and the
range is not selected in a biased or misleading manner when results
shown in the prospective financial information are expressed in terms
of a range; and
f. any change in accounting policy since the most recent historical
financial statements is disclosed, along with the reason for the change
and its effect on the prospective financial information.

Such a report would:

 ● State whether, based on the examination of the evidence supporting
the assumptions, anything has come to the auditor’s attention which
causes the auditor to believe that the assumptions do not provide a
reasonable basis for the prospective financial information.
● Express an opinion as to whether the prospective financial information
is properly prepared on the basis of the assumptions and is presented
in accordance with generally accepted accounting principles in the
Philippines.

● State that:
○ actual results are likely to be different from the prospective
financial information since anticipated events frequently do not
occur as expected and the variation could be material. Likewise,
when the prospective financial information is expressed as a
range, it would be stated that there can be no assurance that
actual results will fall within the range, and
○ in the case of a projection, the prospective financial information
has been prepared for (state purpose), using a set of
assumptions that include hypothetical assumptions about future
events and management’s actions that are not necessarily
expected to occur. Consequently, readers are cautioned that the
prospective financial information is not used for purposes other
than that described.

- When the auditor believes that the presentation and disclosure of the
prospective financial information is not adequate, the auditor should express a
qualified or adverse opinion in the report on the prospective financial
information, or withdraw from the engagement as appropriate.
- When the auditor believes that one or more significant assumptions do not
provide a reasonable basis for the prospective financial information prepared
on the basis of best-estimate assumptions or that one or more significant
assumptions do not provide a reasonable basis for the prospective financial
information given the hypothetical assumptions, the auditor should either
express an adverse opinion in the report on the prospective financial
information, or withdraw from the engagement.
- When the examination is affected by conditions that preclude application of one
or more procedures considered necessary in the circumstances, the auditor
should either withdraw from the engagement or disclaim the opinion and
describe the scope limitation in the report on the prospective financial
information.

Level of Assurance
In a Review Engagement, the auditor provides a moderate level of assurance that the
information subject to review is free of material misstatement. This is expressed in the form of
negative assurance.
Agreed-Upon Procedures

Objective of an Agreed-upon Procedures Engagement

The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings.

Defining the Terms of the Engagement

The auditor should ensure with representatives of the entity and, ordinarily, other
specified parties who will receive copies of the report of factual findings, that there is a
clear understanding regarding the agreed procedures and the conditions of the
engagement.

Documentation
The auditor should document matters which are important in providing evidence to
support the report of factual findings, and evidence that the engagement was carried
out in accordance with this PSA and the terms of the engagement.

Procedures and Evidence

The auditor should carry out the procedures agreed upon and use the evidence
obtained as the basis for the report of factual findings.

Reporting
- The report on an agreed-upon procedures engagement needs to describe the purpose
and the agreed-upon procedures of the engagement in sufficient detail to enable the
reader to understand the nature and the extent of the work performed.

In an engagement to perform agreed-upon procedures, an auditor is engaged to carry out

those procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings. The recipients of the report must
form their own conclusions from the report by the auditor. The report is restricted to those
parties that have agreed to the procedures to be performed since others, unaware of the
reasons for the procedures, may misinterpret the results.

Level of Assurance
For agreed-upon procedures, as the auditor simply provides a report of the factual findings,
no assurance is expressed. Instead, users of the report assess for themselves the procedures
and findings reported by the auditor and draw their own conclusions from the auditor's work.

Compilation of Financial Information

Objective of a Compilation Engagement

The objective of a compilation engagement is for the accountant to use accounting
expertise, as opposed to auditing expertise, to collect, classify and summarize financial
information.

Defining the Terms of the Engagement

 The accountant should ensure that there is a clear understanding between the client
and the accountant regarding the terms of the engagement.

Documentation
The accountant should document matters which are important in providing evidence
that the engagement was carried out in accordance with this PSA and the terms of the
engagement.

Procedures
- The accountant should obtain a general knowledge of the business and operations of
the entity and should be familiar with the accounting principles and practices of the
industry in which the entity operates and with the form and content of the financial
information that is appropriate in the circumstances.
- The accountant should read the compiled information and consider whether it appears
to be appropriate in form and free from obvious material misstatements. In this sense,
misstatements include:
• Mistakes in the application of generally accepted accounting principles in the
Philippines.
• Nondisclosure of generally accepted accounting principles in the Philippines
and any known departures therefrom.
• Nondisclosure of any other significant matters of which the accountant has
become aware.
The generally accepted accounting principles in the Philippines and any known
departures therefrom should be disclosed within the financial information,
though their effects need not be quantified.
- If the accountant becomes aware of material misstatements, the accountant should try
to agree appropriate amendments with the entity. If such amendments are not made
and the financial information is considered to be misleading, the accountant should
withdraw from the engagement.

Responsibility of Management
- The accountant should obtain an acknowledgment from management of its
responsibility for the appropriate presentation of the financial information and of its
approval of the financial information.
- The financial information compiled by the accountant should contain a reference such
as "Unaudited," "Compiled without Audit or Review" or "Refer to Compilation Report"
on each page of the financial information or on the front of the complete set of financial
statements.

In a compilation engagement, the accountant is engaged to use accounting expertise as

opposed to auditing expertise to collect, classify and summarize financial information. This
ordinarily entails reducing detailed data to a manageable and understandable form without a
requirement to test the assertions underlying that information. The procedures employed are
not designed and do not enable the accountant to express any assurance on the financial
information. However, users of the compiled financial information derive some benefit as a
result of the accountant's involvement because the service has been performed with due
professional skill and care.
Level of Assurance
In a compilation engagement, although the users of the compiled information derive some
benefit from the accountant’s involvement, no assurance is expressed in the report.
 Audit of Historical Financial Information
SOURCES: Philippine Framework for Assurance Engagements, PSA 120, PSA 200, Public Accountancy
Profession (Cabrera 2013-2014 Edition)

AUDITING
- Defined by the American Accounting Association, Auditing is a systematic process by
which a competent, independent person objectively obtains and evaluates evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and communicating
the results to interested users.

1. Systematic process – auditing involves structured/logical series of sequential

steps or procedures known as the audit process.
2. Objectively obtaining and evaluating evidence – auditing involves gathering
and evaluating sufficient appropriate audit evidence that will support the
auditor’s opinion
○ Objectivity refers to the combination of impartiality, intellectual honesty
and freedom from conflicts of interest.
○ Audit evidence is the information obtained by the auditor in arriving at
the conclusions on which the audit opinion is based.
3. Assertions about economic actions and events – assertions are the subject
matter of auditing
○ In the context of audit of financial statements, assertions are
representations of management, explicit or otherwise, that are
embodied in the financial statements. Assertions include the accounts,
balances/amounts and disclosures appearing on the face of the
financial statements (and in the notes to financial statements) and which
the management claims to be free of misstatements.
○ Audit evidence gathered and evaluated by the auditor may support or
contradict the assertions of management.
4. Established criteria – the standards or benchmarks that are needed to judge
the validity of the assertions on the financial statements.
○ In the context of audit of financial statements, the established criteria
are the applicable financial reporting framework (for example, the
PFRS).
5. Ascertain the degree of correspondence between assertions and
established criteria – The auditor’s objective is to determine whether the
assertions conform with established criteria, that is, whether the financial
statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework (such as the PFRS).
6. Communicating the results to the interested users – The ultimate objective
of audit is the communication of audit findings/opinion on the fairness of the
financial statements to interested users.
○ Communicating results is achieved through issuance of a written audit
report which contains the audit opinion (or disclaimer of opinion).
 ○ Interested users are the wide variety of financial statements users who
rely on the auditor’s opinion such as the stockholders, creditors,
potential investors and creditors, management, government agencies,
and the public (in general).

Assurance, Attestation and Audit Services Distinguished

- Similarity: These services are often used interchangeably because they encompass
the same decision-process
- Differences: Scope of services
a. “Assurance services” is broader in scope and in concept than either auditing
or attestation. It encompasses both audit and attestation services. Otherwise
stated, attestation and audit services are subsets of assurance services.
b. “Attestation services” is broader than audit because attest function is beyond
historical FS. Attestation services cover even non-GAAP FS.
c. Auditing, particularly FS audit, is a type of assurance and attestation service
that involves examination of historical FS prepared in accordance with GAAP.

Types of Audits
1. According to objectives or nature of assertion.
● Financial statement audit – an audit conducted to determine whether the
financial statements of an entity are fairly presented in accordance with an
identified financial reporting framework (or PFRS)
○ An audit of financial statements is the type of audit most frequently
performed by CPAs (due to the widespread use of audited financial
statements) on a fee basis and for more than one client.
Financial audit is also called:
■ External audit – because it is performed by external auditors,
whether individual CPAs or CPA firms, who are not employees
of the client
■ Independent audit – because the auditor is independent of the
client subject to audit
■ Financial Audit
● Compliance audit: a review of an entity’s degree of compliance with applicable
laws and rules/regulations or contracts; usually performed by government
auditors.
● Operational audit involves a systematic review and evaluation of the specific
operating units (or procedures, methods or activities) of an organization in
relation to specified objectives for the purpose of measuring/assessing its
performance in terms of efficiency and effectiveness of operations, identifying
opportunities for improvement and making recommendations to improve
performance (such as introduction of controls to reduce waste).
- Also called performance audit or management audit
- Usually performed by internal auditors
- Efficiency relates to use of its resources, while effectiveness relates to
accomplishing objectives.

Major differences between financial and operational auditing:

 ● The financial audit is oriented to the past whereas an operational audit
concerns performance for the future.
● The financial audit report is distributed to many readers whereas the
operational audit report goes to a few managers.
● Financial audits are limited to matters that directly affect the financial
statements whereas operational audits cover any aspect of efficiency and
effectiveness.

2. According to types of auditor or their affiliation with the entity being examined:
● External / Independent Audit
- performed by practitioners or independent CPAs who offer their
professional services for a fee to various clients on a contractual basis
- Independent or external auditors are not employees of the client
- External audit complements internal audit
● Internal Audit
- performed by the entity's own employees known as internal auditors.
- internal auditors investigate and appraise the effectiveness and
efficiency of operations and internal controls of the firm

Internal auditing is defined as "an independent, objective assurance and consulting

activity designed to add value and improve an organization's operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of risk management, control, and
governance processes."

Internal auditing includes the audit of:

● Financial and operating information
● Compliance with policies, plans, procedures, laws, regulations, and contracts
● The means of safeguarding assets and verifying their existence
● The economy and efficiency with which resources are employed; and
● Operations or programs to ascertain whether results are consistent with
established objectives and goals and whether they are being carried out as
prescribed.

- Internal auditing is an appraisal control that measures and evaluates other

controls. The increased complexity and sophistication of business operations
have required management to rely on this appraisal control.
- Internal auditors review the adequacy of the company's internal control system
primarily to ascertain whether the system provides reasonable assurance that
the company's objectives and goals will be achieved efficiently and
economically.
a. Efficient performance implies the use of minimal resources to meet
the company's objectives and goals.
b. Economical performance is the accomplishment of objectives and
goals at a cost commensurate with the task.
The overall objective of Internal Auditing is to assist the members of the
organization, particularly management and board of directors, in the effective
discharge of their responsibilities

● Government Auditing
- A governmental audit is typically designed to determine whether the
auditee has complied with applicable laws and regulations.

The scope of government audit may extend beyond FS audit to include:

A. FS audit
B. Performance Audit (includes: program results (effectiveness) audit and
economy and efficiency audit)
C. Compliance Audit

- Government auditors are required to prepare a written report on the

entity's internal control and assessment of control risk made as part of
a financial statement audit. The auditor's report should include the
following:

1. The scope of the auditor's work in obtaining an understanding

of the entity's internal control and in his/her assessment of
control risk.
2. The entity's significant controls including those that are
established to ensure compliance with laws and regulations that
have a material impact on the financial statements.
3. The conditions, including the identification of material
weaknesses, identified as a result of the auditor's work.

- The Government Auditing Standards require auditors to prepare a

written report on the entity's internal control. This report should include
the conditions, including the identification of material weaknesses,
discovered as a result of the auditor's work. However, the report should
not give any form of assurance on the design and effectiveness of the
entity's internal control.
- Government auditors are required to obtain an understanding of the
possible financial statement effects of laws and regulations having
direct and material effects on amounts reported. Also, they are required
to make an assessment whether management has identified such laws
that might have such effects.
- The audit of a government program involves obtaining information
about the costs, outputs, benefits, and effects of the program. Auditors
attempt to measure the accomplishments and relative success of the
program based on the actual intent of the legislation that established
the program.
Objective, Scope and Limitations of Financial Statement Audit
- The objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework. The phrase used to
express the auditor’s opinion is “present fairly, in all material respects”. A similar
objective applies to the audit of financial or other information prepared in accordance
with appropriate criteria.
- The purpose of an audit is to enhance the degree of confidence of intended users in
the financial statements. This is achieved by the expression of an opinion by the auditor
on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework. In the case of most
general purpose frameworks, that opinion is on whether the financial statements are
presented fairly, in all material respects, in accordance with the framework. An audit
conducted in accordance with PSAs and relevant ethical requirements enables the
auditor to form that opinion.

Scope of the Audit

- The auditor’s opinion on the financial statements deals with whether the
financial statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework. Such an opinion is common to all
audits of financial statements. The auditor’s opinion therefore does not assure,
for example, the future viability of the entity nor the efficiency or effectiveness
with which management has conducted the affairs of the entity.
- In some jurisdictions, however, applicable laws and regulations may require
auditors to provide opinions on other specific matters, such as the effectiveness
of internal control, or the consistency of a separate management report with
the financial statements.

Overall Objectives of the Auditor

In conducting an audit of financial statements, the overall objectives of the auditor are:
I. To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
II. To report on the financial statements, and communicate as required by the
PSAs, in accordance with the auditor’s findings.
In all cases of when reasonable assurance cannot be obtained and a qualified opinion
in the auditor’s report is insufficient in the circumstances for purposes of reporting to
the intended users of the financial statements, the PSAs require that the auditor
disclaim an opinion or withdraw from the engagement, where withdrawal is legally
permitted.

Ethical Requirements Relating to an Audit of Financial Statements

The auditor shall comply with relevant ethical requirements, including those
pertaining to independence, relating to financial statement audit engagements.
 The auditor is subject to relevant ethical requirements, including those
pertaining to independence, relating to financial statement audit engagements.
Relevant ethical requirements ordinarily comprise Parts A and B of the Code
of Ethics for Professional Accountants in the Philippines (the Code of Ethics)
related to an audit of financial statements together with national requirements
that are more restrictive.

Part A of the Code of Ethics establishes the fundamental principles of

professional ethics relevant to the auditor when conducting an audit of financial
statements and provides a conceptual framework for applying those principles.
The fundamental principles with which the auditor is required to comply by the
Code of Ethics are:
● Integrity
● Objectivity
● Professional competence and due care
● Confidentiality
● Professional behavior.
Part B of the Code of Ethics illustrates how the conceptual framework is to be
applied in specific situations.

In the case of an audit engagement it is in the public interest and, therefore,

required by the Code of Ethics, that the auditor be independent of the entity
subject to the audit. The Code of Ethics describes independence as comprising
both independence of mind and independence in appearance. The auditor’s
independence from the entity safeguards the auditor’s ability to form an audit
opinion without being affected by influences that might compromise that
opinion. Independence enhances the auditor’s ability to act with integrity, to be
objective and to maintain an attitude of professional skepticism.

Professional Skepticism
The auditor shall plan and perform an audit with professional skepticism
recognizing that circumstances may exist that cause the financial statements
to be materially misstated.

Professional skepticism includes being alert to, for example:

● Audit evidence that contradicts other audit evidence obtained.
● Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence.
● Conditions that may indicate possible fraud.
● Circumstances that suggest the need for audit procedures in addition
to those required by the PSAs.

Maintaining professional skepticism throughout the audit is necessary if the

auditor is, for example, to reduce the risks of:
● Overlooking unusual circumstances.
● Over generalizing when drawing conclusions from audit observations.
● Using inappropriate assumptions in determining the nature, timing, and
extent of the audit procedures and evaluating the results thereof.
 The auditor cannot be expected to disregard past experience of the honesty
and integrity of the entity’s management and those charged with governance.
Nevertheless, a belief that management and those charged with governance
are honest and have integrity does not relieve the auditor of the need to
maintain professional skepticism or allow the auditor to be satisfied with less-
than- persuasive audit evidence when obtaining reasonable assurance.

Professional Judgment
The auditor shall exercise professional judgment in planning and performing an
audit of financial statements.

Professional judgment is essential to the proper conduct of an audit. This is

because interpretation of relevant ethical requirements and the PSAs and the
informed decisions required throughout the audit cannot be made without the
application of relevant knowledge and experience to the facts and
circumstances. Professional judgment is necessary in particular regarding
decisions about:
● Materiality and audit risk.
● The nature, timing, and extent of audit procedures used to meet the
requirements of the PSAs and gather audit evidence.
● Evaluating whether sufficient appropriate audit evidence has been
obtained, and whether more needs to be done to achieve the objectives
of the PSAs and thereby, the overall objectives of the auditor.
● The evaluation of management’s judgments in applying the entity’s
applicable financial reporting framework.
● The drawing of conclusions based on the audit evidence obtained, for
example, assessing the reasonableness of the estimates made by
management in preparing the financial statements.

Professional judgment needs to be exercised throughout the audit. It also

needs to be appropriately documented. In this regard, the auditor is required to
prepare audit documentation sufficient to enable an experienced auditor,
having no previous connection with the audit, to understand the significant
professional judgments made in reaching conclusions on significant matters
arising during the audit.

Inherent Limitations of an Audit

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent
limitations of an audit, which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor’s opinion being persuasive
rather than conclusive. The inherent limitations of an audit arise from:
● The nature of financial reporting
The preparation of financial statements involves judgment by
management in applying the requirements of the entity’s
applicable financial reporting framework to the facts and
 circumstances of the entity. In addition, many financial
statement items involve subjective decisions or assessments or
a degree of uncertainty, and there may be a range of acceptable
interpretations or judgments that may be made.
● The nature of audit procedures
There are practical and legal limitations on the auditor’s ability to obtain
audit evidence. For example:
- There is the possibility that management or others may not
provide, intentionally or unintentionally, the complete
information that is relevant to the preparation and presentation
of the financial statements or that has been requested by the
auditor. Accordingly, the auditor cannot be certain of the
completeness of information, even though the auditor has
performed audit procedures to obtain assurance that all relevant
information has been obtained.
- Fraud may involve sophisticated and carefully organized
schemes designed to conceal it. Therefore, audit procedures
used to gather audit evidence may be ineffective for detecting
an intentional misstatement that involves, for example, collusion
to falsify documentation which may cause the auditor to believe
that audit evidence is valid when it is not. The auditor is neither
trained as nor expected to be an expert in the authentication of
documents.
- An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such
as the power of search, which may be necessary for such an
investigation.
● The need for the audit to be conducted within a reasonable period of
time and at a reasonable cost.
- The matter of difficulty, time, or cost involved is not in itself a
valid basis for the auditor to omit an audit procedure for which
there is no alternative or to be satisfied with audit evidence that
is less than persuasive. Appropriate planning assists in making
sufficient time and resources available for the conduct of the
audit. Notwithstanding this, the relevance of information, and
thereby its value, tends to diminish over time, and there is a
balance to be struck between the reliability of information and its
cost.

Because of the inherent limitations of an audit, there is an unavoidable risk that

some material misstatements of the financial statements may not be detected,
even though the audit is properly planned and performed in accordance with
PSAs. Accordingly, the subsequent discovery of a material misstatement of the
financial statements resulting from fraud or error does not by itself indicate a
failure to conduct an audit in accordance with PSAs.
However, the inherent limitations of an audit are not a justification for the auditor
to be satisfied with less-than-persuasive audit evidence. Whether the auditor
has performed an audit in accordance with PSAs is determined by the audit
 procedures performed in the circumstances, the sufficiency and
appropriateness of the audit evidence obtained as a result thereof and the
suitability of the auditor’s report based on an evaluation of that evidence in light
of the overall objectives of the auditor.

Information Risk
The primary economic reason for an audit of financial statements is the demand
by external users for reliable or fairly stated financial statements that they will
use in making economic decisions. Thus, the market for auditing services is
driven by demand by external financial statements users.

An audit can help reduce information risk - risk that the financial statements
that will be used for decision-making are materially misleading, unreliable or
inaccurate.

Four conditions/reasons that gave rise to a demand for independent audit of

financial statements:
- Potential conflict of interest between users and preparers of the financial
information can result in biased information – Client management may
not be objective in financial reporting. It may provide impressive but
biased, unrealistic, or misleading financial statements to obtain benefits
that it seeks. On the other hand, financial statement users need
unbiased, realistic, or reliable financial statements.
- Remoteness of users – Users do not have access to entity’s records to
personally verify the reliability of the financial information.
- Complexity of subject matter requires expertise – Expertise is often
required for information preparation and verification. Users of financial
statements are not equipped with the necessary skills, competence, and
knowledge of complexities of accounting and auditing to determine
whether the financial statements are reliable.
- Consequence for decision making – Financial statements are used for
important decisions that involve significant amount of money. If a
decision is based on misleading financial information, it could have
substantial financial or economic consequences on decision makers.

Another condition that gave rise to demand for audit of financial statements is
the stewardship or agency theory which means that management wants the
credibility an audit adds to the financial statement to enhance stewardship of
the financial statement and to lessen the owner’s mistrust of the management.

To reduce Information Risk:

The management or users of their financial statements may adopt any or all of
the following approaches:
1. Allow users to verify information.
 The user may go to the business establishment to examine
records and obtain information about the reliability of the
statement. Although impractical because of costs, this is usually
adopted by BIR examiners or a business intending to purchase
another business.
2. Users share information risk with management.
If users rely on inaccurate financial statements and as a
consequence incurs a financial loss, a lawsuit may be brought
against management to recover part of such loss.
3. Have the financial statements audited.
As an expert in the application of financial reporting standards,
the independent auditor further enhances the quality of financial
reporting.
 The Professional Practice of Accounting
Sources: Philippine Accountancy Act of 2004, Continuing Professional Development Act of 2016

Scope of Practice. – The practice of accountancy shall include, but not limited to, the
following:

A. Practice of Public Accountancy - shall constitute in a person, be it his/her individual

capacity, or as a partner or as a staff member in an accounting or auditing firm, holding
out himself/herself as one skilled in the knowledge, science and practice of accounting,
and as a qualified person to render professional services as a certified public
accountant; or offering or rendering, or both, to more than one client on a fee basis or
otherwise, services such as the audit or verification of financial transaction and
accounting records; or the preparation, signing, or certification for clients of reports of
audit, balance sheet, and other financial, accounting and related schedules, exhibits,
statements or reports which are to be used for publication or for credit purposes, or to
be filed with a court or government agency, or to be used for any other purpose; or the
design, installation, and revision of accounting system; or the preparation of income
tax returns when related to accounting procedures; or when he/she represents clients
before government agencies on tax and other matters related to accounting or renders
professional assistance in matters relating to accounting procedures and the recording
and presentation of financial facts or data.
B. Practice in Commerce and Industry - shall constitute in a person involved in decision
making requiring professional knowledge in the science of accounting, or when such
employment or position requires that the holder thereof must be a certified public
accountant.
C. Practice in Education/Academe - shall constitute in a person in an educational
institution which involve teaching of accounting, auditing, management advisory
services, finance, business law, taxation, and other technically related subjects:
Provided, That members of the Integrated Bar of the Philippines may be allowed to
teach business law and taxation subjects.
D. Practice in the Government- shall constitute in a person who holds, or is appointed
to, a position in an accounting professional group in government or in a government–
owned and/or controlled corporation, including those performing proprietary functions,
where decision making requires professional knowledge in the science of accounting,
or where a civil service eligibility as a certified public accountant is a prerequisite.

Characteristics/Attributes of a Profession:
● Mastery of a particular intellectual skill, acquired by training and education
● 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
● 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:

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

Objectives of the Accountancy Profession:

● To work to the highest standards of professionalism
● To attain the highest levels of performance, and
● 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:
● Sound financial accounting and reporting
● Effective financial management and
● 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 Accountancy

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.
- The Professional Regulatory Board of Accountancy, hereinafter referred to as
the Board, under the supervision and administrative control of the Professional
Regulation Commission, hereinafter referred to as the Commission, shall be
composed of a chairman and six (6) members to be appointed by the President
of the Philippines from a list of three (3) recommendees for each position and
ranked by the Commission, from a list of five (5) nominees for each position
submitted by the accredited national professional organization of certified
public accountants. The Board shall elect a vice-chairman from among its
members for a term one (1) year. The chairman shall preside in all meetings of
the Board and in the event of a vacancy in the office of the chairman, the vice-
chairman shall assume such duties and responsibilities until such time as a
chairman is appointed.

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:

● Financial Reporting Standards Council (FRSC) – assists BOA in the
establishment and promulgation of GAAP in the Philippines.
● Auditing and Assurance Standards Council (AASC) – created to assist
BOA in the establishment and promulgation of GAAS in the Philippines.
● Education Technical Council (ETC) – assists BOA in continuously
upgrading accounting education in the Philippines.
● 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.
● 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.
 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.

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

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.

Standard-Setting Bodies
a. Local/Domestic:
● Financial Reporting Standards Council (FRSC) – accounting standard-
setting body/council created by the BOA
○ BIR representation. The BIR, although represented in the FRSC, is not
represented in the AASC.
○ Appointment. The Chairman and members of the FRSC and AASC
shall be appointed by the PRC upon the recommendation of the BOA
in connection with the APO (PICPA).
○ Term of office. The Chairman and members of both the FRSC and
AASC shall have a term of 3 years renewable for another term.
○ Main function of FRSC and AASC: To assist BOA in carrying out its
powers and functions on monitoring the conditions affecting the practice
of accountancy and adoption of such measures, including promulgation
of accounting and auditing standards, rules and regulations and best
practices

Chairman 1

BOA 1

SEC 1

BSP 1

BIR 1

COA 1
A major organization composed of preparers and users of FS 1

Accredited National Professional Organization of CPAs (APO) - PICPA

- Public Practice 2

- Commerce and Industry 2

- Academe/Education 2

- Government 2 8

Total Members 15

● Auditing and Assurance Standards Council (AASC)

- Auditing Standard - Setting Body/Council created by the BOA.

Chairman 1

BOA 1

SEC 1

BSP 1

COA 1

Association or organization of CPAs in active public practice of accountancy 1

Accredited National Professional Organization of CPAs (APO) - PICPA

- Public Practice 6

- Commerce and Industry 1

- Academe/Education 1

- Government 1 9

Total Members 15

b. Foreign/International:
● International Federation of Accountants (IFAC)
- The recognized global/worldwide organization for the accountancy
profession.
- The International Federation of Accountants (IFAC) is the worldwide
organization for the accountancy profession. Founded in 1977, its
mission is “to serve the public interest, IFAC will continue to strengthen
the worldwide accountancy profession and contribute to the
development of strong international economies by establishing and
promoting adherence to high-quality professional standards, furthering
the international convergence of such standards and speaking out on
public interest issues where the profession’s expertise is most relevant.”
 IFAC is comprised of 158 members and associates in 123 countries
worldwide, representing approximately 2.5 million accountants in public
practice, industry and commerce, the public sector, and education. No
other accountancy body in the world and few other professional
organizations have the broad-based international support that
characterizes IFAC.

● International Accounting Standards Board (IASB)

- the international accounting standard-setting body.
- Foreign counterpart of the FRSC
- Its issuances are called IFRS
- It replaced the International Accounting Standards Committee (IASC)

● International Auditing and Assurance Standards Board (IAASB) –

international auditing standard-setting body
- Foreign counterpart of the AASC
- It replaced the International Auditing Practices Committee (IAPC)

Both the IASB and IAASB are under the IFAC.

Professional and Sectoral Organizations

a. Philippine Institute of Certified Public Accountant (PICPA)

- the globally-recognized and integrated national professional organization of
CPAs in the Philippines accredited by the BOA and the PRC. PICPA is
designated as the accredited professional organization (APO) in the
Philippines.
- The Mission of PICPA is to enhance the integrity of the accountancy profession,
serve the best interest of its members and other stakeholders, and contribute
to the attainment of the country's national objectives.
- PICPA must renew its accreditation once every three years.

b. Sectoral Organizations
● Serve the needs of CPAs in different scopes of practice
● Provide seminars, programs and workshops that specifically serve the interests
of the CPAs in their respective sectors
● Each sector has its own organization as follows:
1. Public Practice – Association of CPAs in Public Practice (ACPAPP)
2. Commerce and Industry – Association of CPAs in Commerce and
Industry (ACPACI)
3. Education/Academe – Association of CPAs in Education (ACPAE)
4. Government – Government Association of CPAs (GACPA)

Continuing Professional Development

 - Provides that compliance with the Continuing Professional Development Act of
2016 is a mandatory requirement in the renewal of Professional Identification
Cards.
- Sec 32 of Republic Act 9298, otherwise known as the “Philippine Accountancy
Act of 2004”, states that all certified public accountants (CPAs) shall abide by
the requirements, rules and regulations on continuing professional education to
be promulgated by the Professional Regulatory Board of Accountancy, subject
to the approval of the Professional Regulation Commission, in coordination with
the accredited national professional organization of certified public accountants
or any duly accredited educational institutions.
- For this purpose, a CPE Council is hereby created to implement the CPE
program.

CPE Objective:
● To provide and ensure the continuous education of a registered professional
with the latest trends in the profession brought about by modernization and
scientific and technological advancements;
● To raise and maintain the professional's capability for delivering professional
services;
● To attain and maintain the highest standards and quality in the practice of his
profession;
● To make the profession globally competitive; and
● To promote the general welfare of the public.

Continuing Professional Education (CPE) – refers to the inculcation assimilation and

acquisition of knowledge, skills, proficiency and ethical and moral values, after the initial
registration of a professional that raise and enhance the professional's technical skills and
competence

CPE program – consists of properly planned and structured activities, the implementation of
which requires the participation of a determinant group of professionals to meet the
requirements of voluntarily maintaining and improving the professional standards and ethics
of the profession.

PRC CPE Council:

The PRC CPE Council was created to assist BOA in implementing the CPE program.

Composition of PRC CPE Council:

A. 1 Chairperson (the chairperson shall be chosen from among the members of BOA by
the BOA members themselves) and
B. 2 members
a. First member – the president or, in his absence or incapacity, any officer
chosen by the Board of Directors of PICPA
b. Second member – the president, or in his absence or incapacity, any officer of
the organization of deans or department heads of schools, colleges or
 universities, offering the degree requiring licensure examination (BSA); or shall
be appointed by the PRC from 3 recommendees of the BOA concerned. Such
recommendees shall be well-known academicians.

Term of office of CPE Council members:

A. Chairperson – co-terminus with his/her incumbency in the PRC
B. First member – co-terminus with his/her incumbency as officer of the PICPA
C. Second member – co-terminus with his/her incumbency as officer of the organization
of deans or department heads of colleges or universities offering BSA degree

CPE Program:
Program activities and sources of accreditation:
● Seminars
● Conventions
● Masteral degree and doctoral degree
● Authorship
● Self-directed learning package
● Post-graduate/in-house training
● Resource speaker
● Peer reviewer
● CPE provider
● CPE program, activities or sources

CPE credit units:

● 120 credit units for 3 years
● Minimum of 15 credit units shall be earned in each year.

Exemption from CPE requirement:

1. Permanent exemption: Upon reaching the age of 65 years old
2. Temporary exemption: If the following conditions are met:
a. During their stay abroad for at least 2 years immediately prior to the date of
renewal; and
b. Working or practicing his/her profession or furthering his/her studies abroad

Seal and Use of Seal:

- All licensed certified public accountants shall obtain and use a seal of a design
prescribed by the Board bearing the registrant’s name, registration number and title.
The auditor’s reports shall be stamped with said seal, indicating therein his/her current
Professional Tax Receipt (PTR) number, date/place of payment when filed with
government authorities or when used professionally.

Foreign Reciprocity:
- A person who is not a citizen of the Philippines shall not be allowed to practice
accountancy in the Philippines unless he/she can prove, in the manner provided by
the rules of court that, by specific provision of law, the country of which he/she is a
citizen, subject or national admits citizens of the Philippines to the practice of the same
profession without restriction.
Coverage of Temporary or Special Permits:
Special / temporary permit may be issued by the BOA subject to the approval of the
PRC and payment of the fees the latter has prescribed and charged thereof to the
following Foreign CPAs:
● A foreign CPA called for consultation or for a specific purpose which, in the
judgment of the BOA, is essential for the development of the country: Provided,
That his/her practice shall be limited only for the particular work that he/she is
being engaged: Provided, further, That there is no Filipino CPA qualified for
such consultation or specific purposes;
● A foreign CPA engaged as professor, lecturer or critic in fields essential to
accountancy education in the Philippines and his/her engagement is confined
to teaching only; and
● A foreign CPA who is an internationally recognized expert or with specialization
in any branch of accountancy and his/her service is essential for the
advancement of accountancy in the Philippines.

Penal Provisions:
- Any person who shall violate any of the provisions of this Act or any of its implementing
rules and regulations as promulgated by the Board subject to the approval of the
Commission, shall, upon conviction, be punished by a fine of not less than fifty
thousand pesos (P 50,000.00) or by imprisonment for a period not exceeding two (2)
years or both.
 Setting Up and Maintaining an Accounting Practice
Sources: Philippine Accountancy Act of 2004, Continuing Professional Development Act of 2016; prc.gov.ph;

Practice of Public Accountancy

Republic Act No. 9298 or the Philippine Accountancy Act of 2004 provides that the following
forms of organization are allowed for the practice of accountancy:
1. Single proprietorships
2. General partnerships and limited liability partnerships

 A sole proprietor or partnership of the CPAs is known as a firm (CPA firm or audit
firm).
 The large CPA firms, in terms of number of personnel and in terms of revenues, have
operations in various parts of the world. These firms usually have affiliations or
correspondent firms in each country.

Requirements for Accreditation for Public Practice of Accountancy

Sole Practitioner
Initial Renewal
Duly accomplished and notarized Application Duly accomplished and notarized Application
Form (affix documentary stamp) Form (affix documentary stamp)
Photocopy of the expired Certificate of
xxx
Accreditation
Photo copy of valid Professional Photocopy of valid professional identification
Identification card card
Duly signed Code of Good Governance of
xxx
the Individual CPA
Duly signed Ethical and technical standards
required of the practice of public xxx
accountancy
Photocopy of valid Professional Tax Receipt Photocopy of valid Professional Tax Receipt
Sworn statement by the CPA, (Please
notarize and affix documentary stamp in the
original copy)
 has a meaningful participation in their respective
internal quality review process;
 has undergone adequate and effective training
(from organizations duly accredited by the Board or
by its duly authorized representatives) on all the
current accounting and auditing standards, code of
ethics, laws and their implementing rules and
regulations, circulars, memoranda, their respective xxx
codes of good governance and other related
documents that are required in the practice of
public accountancy to ensure professional, ethical
and technical standards;
 is of good moral character;
 he/she had not been found guilty by a competent
court and/or administrative body of any case
involving moral turpitude and/or unethical practices;
 has at least three (3) years meaningful experience
in any of the areas of public practice including
taxation as defined in Section 4 Rule 4 of the IRR
 of R. A. 9298.
CPA Integrity Pledge
Photocopy of valid National Bureau of
Investigation (NBI) clearance
Detailed description of work
Certificate of Membership in Good Standing
from the current Accredited Integrated
Professional Organization (AIPO) for the
accountancy profession
Certificates of CPD units earned
Payment of prescribed fee of P1,500.00. (In
Cash, Postal Money Order, Manager’s
Check or Bank Draft payable to the
Professional Regulation Commission)
Original copy of authority to practice
profession issued by employer, printed in the
official letter head of the institution/agency
(For Government Employee only)
Short Brown Envelope for the Certificate of
Accreditation
Set of documentary stamps.
xxx
Photocopy of valid National Bureau of
Investigation (NBI) clearance
xxx
Certificate of Membership in Good Standing
from the current Accredited Integrated
Professional Organization (AIPO) for the
accountancy profession
Certificates for CPD credit units earned
Payment of prescribed fee of P1,500.00. (In
Cash, Postal Money Order, Manager’s
Check or Bank Draft payable to the
Professional Regulation Commission)
xxx
Short Brown Envelope for the Certificate of
Accreditation
Set of documentary stamps.

Partnership
Initial Renewal
Duly accomplished and notarized Application Duly accomplished and notarized Application
Form (affix documentary stamp) Form (affix documentary stamp)
Photocopy of the expired Certificate of
XXX
Accreditation
Photocopy of the CPAs’ Board Certificates of
XXX
partners and staff member/s
Photo copy of valid Professional Photo copy of valid Professional
Identification cards of partners and staff Identification cards of partners
member/s
Valid NBI Clearance of the partners Valid NBI Clearance of the partners
Photocopy of valid Professional Tax Receipt Photocopy of valid Professional Tax Receipt
(PTR) of partners (PTR) of partners
Duly signed Code of Good Governance by
XXX
the managing partner
Duly signed Copy of internal quality review
XXX
procedures by the managing partner
Duly signed Ethical and technical standards
required of the practice of public XXX
accountancy by the managing partner
Valid Business permit XXX
Sworn statement by the managing partner
stating that all the partners and staff
member/s, (Please notarize and affix XXX
documentary stamp in the original copy)
(same contents as for individuals)
Original copy of authority to practice
profession issued by employer, printed in the
XXX
official letter head of the institution/agency
(For Government Employee only)
Authenticated copy of the Certificate of XXX
Registration issued by the Securities and
Exchange Commission (SEC)
Authenticated copy of the current Articles of
Partnership
Certificate of Membership in Good Standing
of the partners from the current Accredited
Integrated Professional Organization (AIPO)
for the accountancy profession
Certificates for CPD credit units earned by
the partners
Payment of the prescribed fee of P2,000.00.
(In Cash, Postal Money Order, Manager’s
Check or Bank Draft payable to the
Professional Regulation Commission)
Short Brown Envelope for the Certificate of
Accreditation
Set of documentary stamps.
XXX
Certificate of Membership in Good Standing
of the partners from the current
Accredited Integrated Professional
Organization (AIPO) for the accountancy
profession
Certificates for CPD credit units earned by
the partners
Payment of the prescribed fee of P2,000.00.
(In Cash, Postal Money Order, Manager’s
Check or Bank Draft payable to the
Professional Regulation Commission)
Short Brown Envelope for the Certificate of
Accreditation
Set of documentary stamps.

Well Known CPA Firms in the Philippines (and their international counterparts)
Local Firm International Counterpart
SGV & Co. (SyCip Gorres Velayo & Co.) Ernst & Young
Manabat Delgado Amper & Co. (formerly
Deloitte Touche Tohmatsu (DTT)
C.L. Manabat & Co.)
Manabat Sanagustin & Co. (formerly Laya
KPMG
Mananghaya & Co.)
Isla Lipana & Co. (formerly Joaquin Cunanan
PricewaterhouseCoopers
& Co.)
BDO Alba Romeo & Co. BDO (Binder Dijker Otto) International
Punongbayan & Araullo Grant Thornton International Ltd.

Meaningful Experience
A meaningful experience shall be considered as satisfactory compliance with the
requirements of RA No. 9298 if it is earned in:

(a) Commerce and Industry

 shall include significant involvement in general accounting, budgeting, tax
administration, internal auditing, liaison with external auditors, representing
his/her employer before government agencies on tax and matters related to
accounting or any other related functions; or
(b) Academe / Education
 shall include teaching for at least three (3) trimesters or two (2) semesters
subjects in either financial accounting, business law and tax, auditing
problems, auditing theory, financial management and management services.
Provided, That the accumulated teaching experience on these subjects shall
not be less than three (3) school years; or
(c) Government
 shall include significant involvement in general accounting, budgeting, tax
administration, internal auditing, liaison with the Commission on Audit or any
other related functions; and
 (d) Public Practice
 shall include at least one year as audit assistant and at least two years as
auditor in charge of audit engagement covering full audit functions of
significant clients.

Provided, That if the Board finds such experience inadequate to the minimum requirements
for the public practice of accountancy in the course of its evaluation of his/her application for
accreditation to practice public accountancy, the registrant shall be required to make up such
inadequacy from competent sources. Provided, further, that such meaningful experience
shall be certified under oath by the employer where such meaningful experience was
obtained.

Implementing Rules and Regulations Clarified

 Continuing Professional Development
o International Education Standard No. 7
o Framework for International Standard
 Required 120 units of CPD may be earned in 3 years
o Effective august 6, 2016
o PRC Resolution No. 2016-990 (issued June 23, 2016)

CPAs in public practice are also required to obtain accreditation with the Bureau of Internal
Revenue submitting at least 18 CPD units on taxation obtained w/in one year prior to
application for accreditation.

CPAs in public practice who have publicly listed entities and public interest entity clients are
required to obtain accreditation with Securities and Exchange Commission.

Renewal of Accreditation
 The accreditation shall be for a period of three years
 Failure to renew on the expiration date will entail the payment of surcharges at an
amount prescribed by the Board
 PRBOA shall require as a condition to registration or any renewal to undergo quality
review.

Quality Review Committee (QRC)

As authorized by Annex B of the Rules Covering the Accreditation of CPAs in the Practice of
Public Accountancy, the BOA created a Quality Review Committee (QRC) to conduct an
oversight into the quality of audits of financial statements by CPA practitioners to determine
their compliance with accounting and auditing standards. The QRC is composed of the
following:
 Chairman, who had been or is presently a
senior practitioner in public accountancy 1
Six members coming from:
BOA 1
PICPA
Public practice 2
Academe 1
Commerce and Industry 1
Government 1
Total 7

Functions of the QRC are:

a. to conduct quality review on applicants for registration to practice public
accountancy and render a report which shall be attached to the application for
registration
b. to recommend to the BOA the revocation of the Certificate of Registration and the
professional identification card of the CPA practitioner who has not observed
quality assurance measures and who has not complied with the standards of
quality prescribed for the practice of public accountancy.

The need for a quality assurance review system to be implemented arises mainly from three
main sources:
 the Accountancy Law, RA 9828
o The law gives the BOA the power to conduct an oversight into the quality of
audits of financial statements through a review of the quality control measures
instituted by auditors in order to ensure compliance with the accounting and
auditing standards and practices.
 the auditing standards in the Philippines
o Philippine Standards of Auditing (PSA) No. 220, Quality Control for an Audit
of Financial Statements. This standard deals with specific responsibilities of
personnel of CPA practitioners regarding quality control procedures for an
audit of financial statements.
o Philippine Standards for Quality Control (PSQC) No. 1, Quality Control for
Firms that Perform Audits and Review of Financial Statements, and Other
Assurance and Related Services Engagements.
 a requirement by the international accounting profession (IFAC) to have member
institutes (e.g. PICPA) implement a quality assurance review program as a
membership obligation

Sources of Clients
 The Code of Ethics prohibits solicitation of clients by CPAs.

 Possible Sources of clients:

o Referrals from businessmen through active participation in civic and
community affairs.
 o Referrals from clients by maintaining his integrity and rendering prompt and
efficient services to them.
o Referrals from financial and government institutions by keeping his standards
high.
o Referrals from other CPAs by active involvement in professional
organizations of CPAs.
o Referrals from legal and other professional firms.

Advertising for the Philippine Accountancy Profession

Generally, advertising and publicity in any medium are acceptable provided:
(a) It has as its objective the notification to the public or such sectors of the public as are
concerned, of matters of fact (e.g., name, address, contact numbers, services
offered) in a manner that is not false, misleading or deceptive;
(b) It is in good taste;
(c) It is professionally dignified; and
(d) It avoids frequent repetition of, and any undue prominence being given to the name
of the firm or professional accountant in public practice.

The following however shall not be allowed:

(a) Self-laudatory statements
(b) Discrediting, disparaging, or attacking other firms or CPA practitioners
(c) Referring to, using or citing actual or purported testimonials by third parties
(d) Publishing and comparing fees with other CPAs or CPA firms or comparing those
services with those provided by another firm or CPA practitioner
(e) Giving too much emphasis on competitive differences
(f) Using words or phrases which are hard to define and even more difficult to
substantiate objectively
(g) Publishing services in billboard (e.g., tarpaulin, streamers, etc.) advertisements

Circumstances in which publicity is acceptable and the matters to be considered in

connection therewith subject always to the overriding requirements mentioned in the
preceding rules:

(a) Awards
 It is in the interests of the public and the accountancy profession that any appointment or
other activity of a professional accountant in a matter of national or local importance, or the
award of any distinction to a professional accountant, should receive publicity and that
membership of the professional body should be mentioned. However, the professional
accountant should not make use of any of the aforementioned appointments or activities for
personal professional advantage.

(b) Professional Accountants Seeking Employment or Professional Business

 Publicity seeking subcontract work may be acceptable if placed only in the professional press
and provided that neither the accountant’s name, address or telephone number appears in
the publicity.

(c) Directories
 Entries may include name, address, telephone number, professional description, services
offered and any other information necessary to enable the user of the directory to make
contact with the person or organization to which the entry relates.

(d) Books, Articles, Interviews, Lectures, Radio and Television Appearances

 Professional accountants who author books or articles on professional subjects, may state
their name and professional qualifications and give the name of their organization but shall
not give any information as to the services that firm provides.
 Similar provisions are applicable to participation by a professional accountant in a lecture,
interview or a radio or television program on a professional subject.
 What professional accountants write or say, however, should not be promotional of
themselves or their firm but should be an objective professional view of the topic under
consideration.

(e) Training Courses, Seminars, etc.

 A professional accountant may invite clients, staff or other professional accountants to attend
training courses or seminars conducted for the assistance of staff. Other persons should not
be invited to attend such training courses or seminars except in response to an unsolicited
request.
 Undue prominence should not be given to the name of a professional accountant in any
booklets or documents issued in connection therewith.

(f) Booklets and Documents Containing Technical Information

 Booklets and other documents bearing the name of a professional accountant and giving
technical information for the assistance of staff or clients may be issued to such persons,
other professional accountants or other interested parties.

(g) Staff Recruitment

 Genuine vacancies for staff may be communicated to the public through any medium in which
comparable staff vacancies normally appear. There should not be any suggestion that the
services offered are superior to those offered by other professional accountants in public
practice as a consequence of size, associations, or for any other reason.
 In publications such as those specifically directed to schools and other places of education to
inform students and graduates of career opportunities in the profession, services offered to
the public may be described in a business-like way.
 More latitude may also be permissible in a section of a newspaper devoted to staff vacancies
than would be allowed if the vacancy appeared in a prominent position elsewhere in a
newspaper on the grounds that it would be most unlikely that a potential client would use such
media to select a professional adviser.

(h) Publicity on Behalf of Clients

 A professional accountant in public practice may publicize on behalf of clients, primarily for
staff. However, the professional accountant in public practice should ensure that the
emphasis in the publicity is directed towards the objectives to be achieved for the client.

(i) Brochures and Firm Directories

 A professional accountant in public practice may issue to clients or, in response to an
unsolicited request, to a non-client:
o A factual and objectively worded of the services provided; and
 o A directory setting out names of partners, office addresses and names and address
of associated firms and correspondents.

(j) Stationery and Nameplates

 The designation of any services provided by the practice as being specialist nature should not
be permitted. Similar provisions, where applicable, should apply to nameplates.

(k) Announcements
 Such announcements should be limited to a bare statement of facts and consideration given
to the appropriateness of the area of distribution of the newspaper or magazine and number
of insertions.

(l) Inclusion of the Name of the Professional Accountant in Public Practice in a

Document Issued by a Client
 When a client proposes to publish a report by a professional accountant in public practice
dealing with the client’s existing business affairs or in connection with the establishment of a
new business venture, the professional accountant in public practice should take steps to
ensure that the context in which the report is published is not such as might result in the
public being misled as to the nature and meaning of the report.
 The professional accountant in public practice should ensure that this information is not used
in such a way as might lead the public to believe that there is a connection with organization
in an independent professional capacity.

(m) Anniversaries
 Such undertaking should be done only every five years of celebration.

(n) Websites
 A professional accountant may develop and maintain a website in the Internet in such suitable
length and style which may also include announcements, press releases, publications and
such other necessary and factual information like firm’s name, partners/principals’ name and
brief description of their educational attainment, brief listing of services, postal address,
telephone, fax and e-mail addresses.

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:
 Make exaggerated claims for services offered, qualifications possessed or
experience gained; or
 Make disparaging references to unsubstantiated comparisons to the work of another.

Professional Fees
When entering into negotiations regarding professional services, a professional accountant
in public practice may quote whatever fee deemed to be appropriate. The fact that one
professional accountant in public practice may quote a fee lower than another is not in itself
unethical. Nevertheless, there may be threats to compliance with the fundamental principles
arising from the level of fees quoted. For example, a self-interest threat to professional
competence and due care is created if the fee quoted is so low that it may be difficult to
perform the engagement in accordance with applicable technical and professional
standards for that price.

In view of these potential threats, safeguards should be considered and applied as

necessary to eliminate them or reduce them to an acceptable level. Safeguards which may
be adopted include:
 Making the client aware of the terms of the engagement and, in particular, the basis
on which fees are charged and which services are covered by the quoted fee.
 Assigning appropriate time and qualified staff to the task.

Fees charged for assurance engagements should be a fair reflection of the value of the work
involved and should take into account, among others:
(a) the skill and knowledge required for the type of work involved;
(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.

Contingent fees are widely used for certain types of non-assurance engagements. They
may, however, give rise to threats to compliance with the fundamental principles in certain
circumstances. They may give rise to a self-interest threat to objectivity. The significance of
such threats will depend on factors including:
 The nature of the engagement.
 The range of possible fee amounts.
 The basis for determining the fee.
 Whether the outcome or result of the transaction is to be reviewed by an independent
third party.

Safeguards:
 An advance written agreement with the client as to the basis of remuneration.
 Disclosure to intended users of the work performed by the professional accountant in
public practice and the basis of remuneration.
 Quality control policies and procedures.
 Review by an objective third party of the work performed by the professional
accountant in public practice.

Referral Fees
 In certain circumstances, a professional accountant in public practice may receive a
referral fee or commission relating to a client.
o Where the professional accountant in public practice does not provide the
specific service required.
o Commission from a third party (e.g., a software vendor) in connection with the
sale of goods or services to a client.
 A professional accountant in public practice may also pay a referral fee to obtain a
client.
o where the client continues as a client of another professional accountant in
public practice but requires specialist services not offered by the existing
accountant
  A professional accountant in public practice should not pay or receive a referral fee
or commission, unless the professional accountant in public practice has established
safeguards to eliminate the threats or reduce them to an acceptable level. Such
safeguards may include:
o Disclosing to the client any arrangements to pay a referral fee to another
professional accountant for the work referred.
o Disclosing to the client any arrangements to receive a referral fee for referring
the client to another professional accountant in public practice.
o Obtaining advance agreement from the client for commission arrangements in
connection with the sale by a third party of goods or services to the client.
 A professional accountant in public practice may purchase all or part of another firm
on the basis that payments will be made to individuals formerly owning the firm or to
their heirs or estates. Such payments are not regarded as commissions or referral
fees

Methods of Billing Clients

 Actual Time Charges basis or Per Diem basis
o Billing is done on the basis of actual time spent by the staff multiplied by the
hourly rates agreed upon.

 Flat or fixed fee basis

o Client is billed a flat but all-inclusive pre-arranged amount for the entire
engagement.

 Maximum fee basis

o Client is charged on a per diem basis, with the arrangement that the total
charges will not exceed a certain agreed maximum amount.

 Retainer basis
o The auditor is paid a fixed pre-determined fee for all services rendered during
a designated period of time either on a monthly, semi-annual or annual basis.
 Regulation of the Public Accounting Practice
Sources: Philippine Accountancy Act of 2004; PRC Resolution 2019-1146 ; Continuing Professional Development Act of 2016

Qualifications of Applicants for Examinations

Any person applying for examination shall establish the following requisites to the satisfaction of
the Board that he/she:
(a) is a Filipino citizen;
(b) is of good moral character;
(c) is a holder of the degree of Bachelor of Science in Accountancy conferred by a school,
college, academy or institute duly recognized and/or accredited by the CHED or other
authorized government offices; and
(d) has not been convicted of any criminal offense involving moral turpitude.
The following documents shall be submitted in support of the above requirements:
a. Certificate of Live Birth in National Statistics Office (NSO) Security Paper;
b. Marriage Contract in NSO Security Paper for married female applicants;
c. College diploma with indication therein of date of graduation and Special Order Number
unless it is not required;
d. Baccalaureate Transcript of Records with indication therein of date of graduation and
Special Order Number unless it is not required;
e. National Bureau of Investigation (NBI) Clearance;
f. Other documents that the Board may require.
Scope of Examination
The licensure examination for certified public accountants shall cover, but are not limited to, the
following subjects:
(a) Theory of Accounts
(b) Business Law and Taxation
(c) Management Services
(d) Auditing Theory
(e) Auditing Problems
(f) Practical Accounting Problems I
(g) Practical Accounting Problems II
The Board, subject to the approval of the Commission, may revise or exclude any of the subjects
and their syllabi, and add new ones as the need arises.
PRBOA Resolution No. 262 Series of 2015 effectively changed the scope of each of the
examination.

Old Subject New Subject

Practical Accounting Problems I
Theory of Accounts
Practical Accounting Problems II
Financial Accounting and Reporting (P1)
Advanced Financial Accounting and Reporting
(P2)
 Management Services Management Advisory Services
Auditing Theory
Auditing
Auditing Problems
Taxation
Business Law and Taxation Regulatory Framework for Business
Transactions

Notable Changes:
1. Theory components of practical examinations are infused to their problem-solving
counterparts (Practical Accounting problems and theory of accounts; Auditing theory and
Auditing problems)
2. Business Law is now separated from Taxation.

Rating in the Licensure Examination

To be qualified as having passed the licensure examination for accountants:

• a candidate must obtain a general average of seventyfive percent (75%), with no grades
lower than sixty-five percent (65%) in any given subject.
In the event a candidate obtains the rating of seventy-five percent (75%) and above in at least a
majority of subjects as provided for in this Act, he/she shall receive a conditional credit for the
subjects passed

• Provided, That a candidate shall take an examination in the remaining subjects within two
years from the preceding examination
Provided, further, That if the candidate fails to obtain at least a general average of seventy-five
percent (75%) and a rating of at least sixtyfive percent (65%) in each of the subjects reexamined,
he/she shall be considered as failed in the entire examination.

Report of Ratings
The Board shall submit to the Commission the ratings obtained by each candidate within ten (10)
calendar days after the examination, unless extended for just cause. Upon the release of the
results of the examination, the Commission shall send by mailing the rating received by each
examinee at his/her given address using the mailing envelope submitted during the examination.
Failing Candidates to Take Refresher Course
Any candidate who fails in two (2) complete Certified Public Accountant Board Examinations shall
be disqualified from taking another set of examinations unless he/she submits evidence to the
satisfaction of the Board that he/she enrolled in and completed at least twenty-four (24) units of
subject given in the licensure examination.
For purposes of this Act, the examination in which the candidate was conditioned together with
the removal examination on the subject in which he/she failed shall be counted as one complete
examination.

Issuance of Certificates of Registration and Professional Identification Card

A certificate of registration shall be issued to examinees who pass the licensure examination
subject to payment of fees prescribed by the Commission. The Certificate of Registration shall
bear the signature of the chairperson of the Commission and the chairman and members of the
Board, stamped with the official seal of the Commission and of the Board, indicating that the
person named therein is entitled to the practice of the profession with all the privileges appurtenant
thereto. The said certificate shall remain in full force and effect until withdrawn, suspended or
revoked in accordance with this Act.
A Professional Identification Card bearing the registration number, date of issuance, expiry date,
duly signed by the chairperson of the Commission, shall likewise be issued to every registrant
renewable every three (3) years.

Practice of Accountancy
Prohibition in the Practice of Accountancy

• No person shall practice accountancy in this country, or use the title “Certified Public
Accountant”, or display or use any title, sign, card, advertisement, or other device to
indicate such person practices or offers to practice accountancy, or is a certified public
accountant, unless such person shall have received from the Board a Certificate of
Registration and be issued a professional identification card or a valid temporary/special
permit duly issued to him/her by the Board and the Commission
Vested Rights: Certified Public Accountants Registered When This Law is Passed

• All certified public accountants registered at the time this law takes effect shall
automatically be registered under the provisions hereof, subject however, to the provisions
herein set forth as to future requirements. Certificates of Registration held by such persons
in good standing shall have the same force and effect as though issued after the passage
of this Act.
Meaningful Experience
A meaningful experience shall be considered as satisfactory compliance with the requirements of
Section 28 of RA No. 9298 if it is earned in
a. Commerce and Industry
• shall include significant involvement in general accounting, budgeting, tax administration,
internal auditing, liaison with external auditors, representing his/her employer before
government agencies on tax and matters related to accounting or any other related
functions; or
 b. Academe/Education
• shall include teaching for at least three (3) trimesters or two (2) semesters subjects in
either financial accounting, business law and tax, auditing problems, auditing theory,
financial management and management services. Provided, That the accumulated
teaching experience on these subjects shall not be less than three (3) school years; or

c. Government
• shall include significant involvement in general accounting, budgeting, tax administration,
internal auditing, liaison with the Commission on Audit or any other related functions; and

d. Public Practice
• shall include at least one year as audit assistant and at least two years as auditor in charge
of audit engagement covering full audit functions of significant clients.
Provided, That if the Board finds such experience inadequate to the minimum requirements for
the public practice of accountancy in the course of its evaluation of his/her application for
accreditation to practice public accountancy, the registrant shall be required to make up such
inadequacy from competent sources. Provided, Further, That such meaningful experience shall
be certified under oath by the employer where such meaningful experience was obtained.
Continuing Professional Development
Objectives – The CPD program shall have these objectives:
i. To provide and ensure the continuous education of a registered professional with the latest
trends in the profession brought about by modernization and scientific and technological
advancements;
ii. To raise and maintain the professional’s capability for delivering professional services;
iii. To attain and maintain the highest standards and quality in the practice of his profession;
iv. To make the professional globally competitive; and
v. To promote the general welfare of the public.
Continuing Professional Development (CPD)

• refers to the inculcation, assimilation and acquisition of knowledge, skills, proficiency and
ethical and moral values, after the initial registration of a professional that raise and
enhance the professional’s technical skills and competence.
Nature

• The CPD program consists of properly planned and structured activities, the
implementation of which requires the participation of a determinant group of professionals
to meet the requirements of voluntarily maintaining and improving the professional
standards and ethics of the profession.
Rationale

• Voluntary compliance with the CPD program is an effective and credible means of
ensuring competence, integrity and global competitiveness of professionals in order to
allow them to continue the practice of their profession.
CPD Credit Units – under RA 9298

• The total CPD credit units for registered accounting professionals shall be sixty (60) credit
units for three (3) years, provided that a minimum of fifteen (15) credit units shall be earned
in each year.
• Any excess credit units in one year may be carried over to the succeeding years within
the three-year period.
• Excess credit units earned shall not be carried over to the next three-year period except
credit units earned for doctoral and master’s degrees. One credit hour of CPD program,
activity or source shall be equivalent to one (1) credit unit.
CPD Credit Units – under new regulations
RA 10912 (CPD Law)

• Applicable only for accreditation renewal

• The total CPD credit units for registered accounting professionals shall be one hundred
twenty (120) credit units for three (3) years, provided that a minimum of twenty (20) credit
units shall be earned in each year.
PRC Resolution 2019-1146 (Amending the IRR of CPD Act of 2016)

• Professionals working overseas are not covered by the CPD requirements

• Newly licensed professionals shall not be covered by the CPD requirement for the first
renewal cycle after obtaining their license
• The various CPD councils shall reduce the required CPD credits to a minimum, which
shall not be more than fifteen (15), as provided for under applicable laws.
Increase minimum CPD units from 60 hours to 120 hours or equivalent learning units over a 3-
year period, for all CPAs regardless of area/sector of practice
From Thematic to Competence Areas, to make it consistent with International Education
Standards Competence areas to be categorized into:
A. TECHNICAL COMPETENCE – 30 units (Area A)
1. Standards Applicable to Professional Practice (18 units)
2. Laws, Rules & Regulations affecting Professional Practice (6 units)
3. Environment of the Practice (6 units)
B. PROFESSIONAL SKILLS (5 units) (Area B)
e.g.: Decision making, leadership, management & supervision
C. PROFESSIONAL VALUES, ETHICS & ATTITUDES (5 units) (Area C)
e.g.: Social Responsibility Principles and interventions

Exemption from CPD Requirements; Procedures

Permanent Exemption
A registered professional shall be permanently exempted from CPD requirements upon reaching
the age of 65 years old. To avail of this exemption, the professional must:
i. Submit an application for exemption which should include the following data:
1. Full name, residence address and phone number of applicant
2. PRC License Number
3. Employment history
a) Position
b) Name of employer
c) Address of employer
ii. Submit an authentic or authenticated copy of birth certificate. If birth certificates is not
available, submit any of the following: Voter’s ID or Driver’s License.
Temporary Exemption
A registered professional who is working or practicing his/her profession or furthering his/her
studies abroad shall be temporarily exempted from compliance with CPD requirement during the
period of his/her stay abroad, provided that he/she has been out of the country for at least two
years immediately prior to the date of renewal.
Any professional availing of this temporary exemption must:
i. Submit an application for temporary exemption, to include the following data:
1. Full name, residence address and phone number of applicant;
2. PRC License Number;
3. Degree obtained; college or university attended, year graduated;
4. Principal area of professional work;
5. If employed:
a) Position
b) Name of employer
c) Address of employer
d) Certificate of employment
6. If furthering studies abroad, certificate of enrollment from college or university
where presently enrolled.
ii. Submit original, or authenticated copy of passport, photocopy of inside front cover, page
2, and the page/s containing visa of country, indicating date of arrival/departure.
A permanent exempt registered professional shall be allowed to renew his/her License without
complying with the CPD requirements upon his/her accomplishment and submission of the
necessary papers as previously mentioned and upon payment of the annual registration fee for
three (3) years for as long as he/she continues to be out of the country.