CHAPTER 1:

THE DEMAND FOR AUDITING AND ASSURANCE SERVICES

ECONOMIC DEMAND FOR AUDITING

Why do many of the largest companies spend millions of pesos each year for their annual audit? Is it worth
asking why an entity would decide to spend so much money on an audit? Is it because these audits are required
by law? While true in certain circumstances, this answer is far too simplistic. Although audits are often utilized in
situation where they are not required by law, audits were in demand long before Securities Laws and the Bureau
of Internal Revenue required them.
The demand for auditing can be understood as the need for accountability when business owners hire others to
manage their businesses, as is typical in modern corporations. Until the late 18th and early 19th centuries, most
organizations were relatively small and were owned and operated as sole proprietorships or partnerships.
Because businesses were generally run by their owners and borrowing was limited, accountability to outside
parties often was minimal.
The birth of modern accounting and auditing occurred during the industrial revolution, when companies became
larger and needed to raise capital to finance expansion. Over time, capital markets developed, enabling
companies to raise the investment capital necessary to expand new markets, finance expensive research and
development, and fund the buildings, technology, and equipment needed to deliver products to market.
A capital market allows a public company to sell small pieces of ownership (i.e., stocks) or to borrow money in
the form of thousands of small loans (i.e., bonds) so that vast amounts of capital can be raised from a wide
variety of investors and creditors. A public company is a company that sells its stocks or bonds to the public,
giving the public a valid interest in the proper use of the company’s resources.
Thus, the growth of the modern corporation led to diverse groups of owners who are not directly involved in
running the business (shareholders) and the use of professional managers hired by the owners to run the
corporation on a day-to-day basis. In this setting, the managers serve as agents for the owners (who are
sometimes referred to as principals) and fulfill a stewardship function by managing the corporation’s assets.
It is important to understand that the relationship between an owner and manager often results in
information asymmetry between the two parties. Information asymmetry means that the manager generally
has more information about the “true” financial position and results of operations of the entity than does the
absentee owner.
WHAT ARE ASSURANCE SERVICES?
The name Assurance Services is used to describe the broad range of information enhancement services
performed by a certified public accountant (CPA) that are designed to enhance the degree of confidence in the
information.
In general, assurance services consist of two (2) types:
a. those that increase the reliability of information and
b. those that involve putting information in a form or context that facilitates decision making.

A significant portion of the assurance services provided by CPAs is referred to as Attestation Services. To
attest to information means to provide assurance as to its reliability. In an attestation engagement, CPAs provide
a report on subject matter or an assertion about that subject matter. One of the most sought-after attestation
services is the examination or audit of historical financial statements.
In this book, we will focus on the Audit and Assurance Services that involve reliability enhancement.

PHILOSOPHY OF AN AUDIT
As the amount of capital involved and the number of potential owners increase, the potential impact of
accountability also increases. The auditor’s role is to determine whether the reports prepared by the manager
conform to the contract’s provisions. Thus, the auditor’s verification of the financial information adds credibility
to the report and reduces information risk, or the risk that information circulated by a company’s management
will be false misleading. Reducing information risk potentially benefits both the owner and the manager.
Economic decisions are made under conditions of uncertainty; there is always a risk that the decision maker will
select the wrong alternative and incur a significant loss. The credibility added to the information by auditors
actually reduces the decision maker’s risk. To be more precise, the auditors reduce information risk, which is the
risk that the financial information used to make a decision is materially misstated.
Businesses, institutions and individuals must maintain records of their financial condition and progress.
These records are necessary to evaluate and guide business operations, to determine financial status, to meet
legal requirements and to serve as a basis for credit. Creditors and investors, present and prospective, may
wish to study the financial statements of many enterprises for credit extension and investment purposes.
Government agencies will need financial reports to help them carry out the duties imposed upon them by law
internal management needs financial reports for planning, directing and controlling business operations.

These parties, therefore, need reliable and credible financial information. The process employed to
establish the reliability or unreliability of the financial statements and supporting records is referred to as an
Audit Examination. Auditing of financial records has become an important factor in the dissemination of
financial information and the services of the independent certified public accountant are considered
indispensable. Increasingly, his written report is required to add credibility to the financial statements.
A free-market economy can exist only if there is sharing of reliable information among parties that have an
interest in the financial performance of an organization. The market is further strengthened if the information is
transparent and unbiased – that is, the data is not presented in such a way that it favors one party over another.
An organization’s reported information must reflect the economics of its transactions and the current economic
condition of both its assets and any obligations owed.
In a Financial Statement Audit, the auditors undertake to gather evidence to obtain high level of assurance
that financial statements are free of material misstatements due to fraud or errors and that they are presented in
accordance with appropriate accounting framework.
The External Audit is intended to enhance the confidence that users can place on management-prepared
financial statements. When the auditor has no reservations about management’s financial statements or internal
controls, the report is referred to as an unqualified audit report.
Auditors serve a number of parties, but the most important is the public, as represented by investors, lenders,
workers, and others who make decisions based on financial information about an organization. Auditing requires
the highest level of technical competence, freedom from bias, and concern for integrity of the financial reporting
process. In essence, auditors should view themselves as guardians of the capital markets.

THE PUBLIC EXPECTS AUDITORS TO

(a) find fraud,
(b) require accounting principles the best portray the spirit of the concepts adopted by accounting standard
setters, and
(c) be independent of management. When it comes to being independent, auditors must not only be independent
in fact, but they must act in a manner that ensures that they are independent in appearance.
An independent auditor’s opinion contained in the audit report provides both internal and external users with
input to making logical and informed decisions about financial position, managerial performance and economic
vulnerability. Without auditors, decisions such as these are more likely to be made from biased financial
information resulting from a business entity’s undisclosed errors, irregularities or illegal acts.

IMPORTANCE OF AUDITED FINANCIAL STATEMENTS

Audited financial statements are the accepted means by which business corporations report their operating
results and financial position. The word audited, when applied to financial statements, means that the balance
sheet and the statements of income, retained earnings, and cash flows are accompanied by an audit report
prepared by independent public accountants, expressing their professional opinion as to the fairness of the
company’s financial statements.
Of course, reporting in accordance with an agreed-upon set of accounting principles does not solve the problem
by itself. Because the manager is responsible for reporting on the results of his or her own actions, which the
absentee owner cannot directly observe, the manager is in a position to manipulate the reports. Again, the owner
adjusts for this possibility by assuming that the manager will manipulate the reports to his or her benefit and by
reducing the manager’s compensation accordingly. It is at this point that the demand for auditing arises. If the
manager is honest, it may very well be in the manager’s self-interest to hire an auditor to monitor and
independently report to the owner on his or her activities. The owner likely will be willing to invest more in the
business and to pay the manager more if the manager can be held accountable for how he or she uses the
owner’s invested resources.
Financial statements prepared by management and transmitted to outsiders without first being audited by
independent accountants leave a credibility gap. In reporting on its own administration of the business,
management can hardly be expected to be entirely impartial and unbiased. Independent auditors have no
material personal or financial interest in the business; their reports can be expected to be impartial and free from
bias.
Unaudited financial statements may have been honestly, but carelessly, prepared. Liabilities may have been
overlooked and omitted from the balance sheet. Assets may have been overstated as a result of arithmetical
errors or due to a lack of knowledge of financial accounting and reporting standards. Net income may have been
exaggerated because expenses were capitalized or because sales transactions were recorded in advance of
delivery dates.
Finally, there is the possibility that unaudited financial statements have been deliberately falsified in order to
conceal theft and fraud or as a means of inducing the reader to invest in the business or to extend credit. Although
deliberate falsification of financial statements is not common, it does occur and can cause devastating losses to
persons who make decisions based upon such misleading statements.
For all these reasons (accidental errors, lack of knowledge of accounting principles, unintentional bias, and
deliberate falsification), financial statements may depart from financial accounting and reporting standards
principles. Audits provide users with assurance that the financial statements are presented in accordance with
the financial accounting principles and reporting standards.

Figure 1-1 presents an overview of the potential financial statement users and the decisions they make based
on the financial reports.

Figure 1-1: Users of Audited Financial Statements

Users & Types of Decisions
1. Management - review performance, make operational decisions. Report results to capital markets
2. Stockholders - buy or sell stock
3. Bondholders - buy or sell bonds
4. Financial Institutions - evaluate loan decisions, considering interest rates, terms, and risk
5. Taxing Authorities - determine taxable income and tax due
6. Regulatory Agencies - develop regulations and monitor compliance
7. Labor Unions - make collective bargaining decisions
8. Court System - assess the financial position of a company in litigation
9. Vendors - assess credit risk
10. Retired Employees - protect employees from surprises concerning pensions and other post-retirement
benefits

THE ASSURANCE ANALOGY AND THE PHILIPPINE STANDARDS ON AUDITING (PSAs)

An AUDIT provides reasonable assurance of detecting material misstatements of the financial statements (both
errors and fraud) and noncompliance with laws that have a direct and material effect on the determination of
financial statement amounts. Although an audit does not obtain reasonable assurance of detecting
noncompliance with laws that have only an indirect effect on the financial statements, the auditors remain alert
for such situations. If instances of noncompliance are discovered, regardless of type, the auditors should
carefully evaluate their effects on the financial statements.
Currently, the International Auditing and Assurance Standards Board (IAASB) issues pronouncements designed
to foster the development of consistent worldwide auditing standards while the Auditing and Standards Practice
Council of the Philippines (AASC) reviews and recommends for approval to the PRC- BOA their adoption as the
Philippine Standards on Auditing (PSAs).
In the Philippines, the law that regulates the PRACTICE OF ACCOUNTANCY (RA 9298) provides that the
Professional Regulatory Board of Accountancy shall monitor the conditions affecting the practice of accountancy
and adopt such measures to enhance and maintain the high professional, ethical and auditing standards
including promulgation of accounting and auditing standards, domestic and international. International financial
markets would be facilitated if auditing and accounting standards were more uniform.
In summary, auditing is in demand because it plays a valuable role in monitoring the contractual
relationships between the entity and its stockholders, managers, employees, and debt holders. Certified
public accountants have been charged with providing audit services because of their traditional reputation of
competence, independence, objectivity, and concern for the public interest. As a result, they are able to add
credibility to information produced and reported by management to outside parties.
 CHAPTER 2:
PROFESSIONAL PRACTICE OF ACCOUNTANCY: AN OVERVIEW

ACCOUNTANCY AS A PROFESSION
In our society, professions are generally recognized as elite occupational classifications. Ernest Greenwood in
his article Attributes of a Profession (1957) sets forth five major characteristics of an ideal profession. These are
(1) systematic body of theory, (2) professional authority, (3) community sanction, (4) regulative code and (5) a
culture. Professional accountants satisfy these said attributes of a profession.

• Systematic Theory

The underlying theory of the public accounting profession consists of accounting theory — financial
accounting and reporting standards and practices and auditing standards - a science of validation.
Knowledge in systematic theory can be achieved best through formal college-level education in an
academic environment.

• Professional Authority

Clients who use the service of a professional often do not really understand their own needs. The
professional thus determines what is good or bad for the client and the client accedes to this professional
judgment. The basis for the professional accountant's (CPA's) authority is his expertise in the systematic
theory of accounting and auditing.

• Community Sanction

Admission to the public accounting profession is controlled. To become a professional accountant (CPA),
a candidate must satisfy government educational and experience requirements and pass the CPA
Licensure Board Examinations.

This licensing system is controlled by the Professional Regulation Commission through the Board of
Accountancy. Also, although professional accountants (CPAs) are responsible to the community for their
actions, it is generally accepted that a professional's performance should be judged by standards
established by a profession itself.

• Regulations Code

The powers and privileges granted to the public accounting profession by the community effectively
constitute a monopoly. To prevent abuse of this monopoly and to discipline its members, the Rules of
Professional Conduct or Code of Ethics have been promulgated and made legally binding through the
Accountancy Law.

• A Culture

The CPA is a member of a time-honored profession and the status of the profession and the
responsibilities that accompany this status affect his/her behavior in society. Accounting has developed
a professional culture as evidenced by such factors as the formal norms of the code of ethics, the informal
rules that guide relationships among practitioners and the traditions and myths that have arisen
concerning the CPA examinations.

The most recent revision in the Code of Ethics for Professional Accountants in the Philippines made
effective on April 6, 2016 states

"A profession is distinguished by certain characteristics including:

• 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)."
WHO IS A PROFESSIONAL ACCOUNTANT?
A professional accountant is an individual who holds a valid certificate issued by the Board of Accountancy
(i.e., Certified Public Accountant), whether he/she be in public practice, industry, commerce, the public sector or
education. This professional accountant may belong to any of the following sectors:

• Professional Accountant in Public Practice. A professional accountant, irrespective of functional

accountant in classification (for example, audit, tax or consulting) in a firm that provides professional
services. This term is also used to refer to a firm of professional accountants in public practice.

• Professional Accountant in Business. A professional accountant employed or engaged in an executive

or non-executive capacity in such areas as commerce, industry, service, the public sector, education, the
not-for-profit sector, regulatory bodies or professional bodies, or a professional accountant contracted by
such entities. The professional accountant in this group may be in any of the following sub-sectors:

a) commerce and industry;

b) education; and
c) government.

SCOPE OF PRACTICE
The Philippine Accountancy Act of 2004 (RA. 9298) Article 1, Section 4, paragraphs (a) to (d) spell out the scope
of the practice of accountancy as follows:

a) Practice of Public Accountancy. This shall constitute in a person, be it in 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, statement of
financial position, 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. This 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. This shall constitute in a person in an educational institution which

involves teaching of accounting, auditing, management advisory services, finance, business law,
taxation, and other technically related subjects.

d) Practice in the Government. This shall constitute in a person who holds, or is appointed to, a position
in the 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.

ASSURANCE, ATTEST, AND AUDITING SERVICES DEFINED

Accounting professionals can perform various services that provide assurance about the reliability and relevance
of information given by one party to another. The broadest category of such services is simply called assurance
services. Attest services are a subset of assurance services, and auditing is a type of attest service. Many times
these terms are used interchangeably because they are related, and at a general level, they encompass the
same process: the evaluation of evidence to determine whether information has been recorded and presented
in accordance with a predetermined set of criteria, together with the issuance of a report that indicates the degree
of correspondence.
Assurance Services
In the late 1990s, the accounting profession expanded the potential breadth of auditors’ activities beyond auditing
and attest services to include a broader set of assurance services. Extending auditors’ activities to assurance
services allows reporting not only on the reliability and credibility of information but also on the relevance and
timeliness of that information. Assurance services are defined as follows:
Assurance services are independent professional services that improve the quality of information, or its context,
for decision makers.
The definition captures some important concepts. First, the definition focuses on decision making. Making good
decisions requires quality information, which, in the context of the broad set of assurances services, can be
financial or nonfinancial. Second, it relates to improving the quality of information or its context. An assurance
service engagement can improve quality through increasing confidence in the information’s reliability and
relevance. Context can be improved by clarifying the format and background with which the information is
presented. Third, the definition includes “independence”, which relates to the objectivity of the application of
professional judgment and due care by the provider. To summarize, assurance services can include almost any
service provided by accounting professionals that involves capturing information, improving its quality, or
enhancing its usefulness for decision makers.

Attest Services
Auditors have a reputation for independence and objectivity. As a result, various parties frequently request that
auditors attest to information beyond historical financial information. However, professional standards did not
allow for such services until the profession established a separate set of attestation standards in 1986. These
standards provide the following definition for attest services:
Attest services occur when a practitioner is engaged to issue … a report on subject matter, or an assertion about
subject matter, that is the responsibility of another party.
Notice that this definition is broader than the one previously discussed for auditing because it is not limited to
economic events or actions. The subject matter of attest services can take many forms, including prospective
information, analyses, systems and processes, and even the specific actions of specified parties. Note that
financial statement auditing is a particular, specialized form of an attest service.

Audit Services
Auditing is a systematic process of objectivity obtaining and evaluating 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 interest users.
The phrase “systematic process” implies that there should be a well-planned and thorough approach for
conducting an audit. This approach involves “objectivity in obtaining and evaluating evidence”. In other words,
the auditor must search for audit evidence and objectively evaluate the relevance and validity of the evidence
he or she finds. The type, quantity, and reliability of evidence will vary between audits, but the process of
obtaining and evaluating evidence makes up most of the auditor’s activities on any audit. As our analogy of
auditing illustrates, the evidence gathered by the auditor must relate to relevant assertions, which in auditing
pertain to economic actions and events. The auditor compares the evidence gathered to management’s financial
statement assertions in order to assess “the degree of correspondence between those assertions and
established criteria.” While different types of “criteria” might be available in various settings, financial accounting
and reporting standards principles usually serve as the basis for evaluating management’s assertions in the
context of a financial statement audit.

RELATIONSHIP AMONG ASSURANCE, ATTEST, AND AUDITING SERVICES

It is important to understand the relationship among the range of services that are offered by CPAs, because
different professional standards apply to each type of service. Figure 2-1 illustrates the universe of services that
may be offered by CPAs and the relationships among these services. As shown, CPAs provide both assurance
and non-assurance services but a few, specially of the management consulting type, overlap. Certain
management consulting services have assurance aspects. It also illustrates that attestation services are only a
portion of the assurance services that are offered by CPAs.

This textbook focuses primarily on financial statements auditing because it represents the major type of
assurance service offered by most public accounting firms. In addition, in many instances, the approach,
concepts, methods, and techniques used for financial statement audit also apply to other attest and assurance
service engagements.
Figure 2-1: The Relationship among Assurance, Auditing, Attest, and Services

ASSURANCE SERVICES NONASSURANCE SERVICES

Attestation Services Tax Services

• Audits of Financial Statements

• Examination of Internal Control
• Trust Services, e.g., WebTrust and SysTrust
• Reviews of Financial Statements or Other
Information
• Agreed-Upon Procedures Engagements
Management Consulting Services
• Fraud Investigations
• Information Technology Consulting

Other Assurance Services Other Non-assurance Services

• CPA ElderCarePrime Plus Services • Compilation, Accounting and Data

• CPA Performance View Services Processing System Services
• CPA Risk Advisory Services • Others
• Others

TYPES OF AUDITORS
1. External Auditors

CPA firms have as their primary responsibility the performance of audits of the published historical
financial statements of all publicly traded- companies, most other reasonably large companies and many
smaller companies and noncommercial organizations. Because of the widespread use of audited
financial statements, it is common to use the terms CPA firms, independent auditor, or auditor,
synonymously.

CPA firms can perform operational auditing as well as compliance auditing as part of their management
consultancy services.

2. Internal Auditors

Internal auditors could be CPA firms hired by the entity as consultants or employees of individual
companies who perform independent appraisal activity within the organization such as review of
accounting, financial and other operations as a basis for service to management. They provide
management with valuable information for making decisions concerning effective operation of its
business.

The internal auditor is therefore concerned with all kinds of financial and other data generated for both
internal and external users. Likewise, the internal auditor is also engaged in evaluating the efficiency of
resource utilization (operational auditing), the effectiveness with which entity objectives are attained
(management or performance auditing and routine compliance auditing).

To be able to operate effectively, an internal auditor must be independent of the line functions in an
organization and may report directly to the audit committee or board of directors.

3. Government Auditors

Several government agencies perform a significant number of audits. These include the Commission on
Audit (COA) and the Bureau of Internal Revenue.

COA Auditors
Government auditors from COA determine whether the government agencies and other entities that use
public funds:

a) present their financial statements fairly in accordance with Financial Reporting Standards and
applicable laws and regulations,
b) conduct the programs with economy and efficiency,
c) desired results are achieved.

Many of the COA's audit responsibilities are the same as those of a CPA firm. But since the authority for
expenditures and receipts of governmental agencies is defined by law, there is considerable emphasis
on compliance in these audits. Also, an increasing effort of the COA's audit efforts has been devoted to
 evaluating the operational efficiency and effectiveness of various government programs. As a result of
their great responsibility for auditing government expenditures, their eligibility to be CPAs, their
opportunities for performing operational audit, their use of advanced auditing concepts, COA auditors are
highly regarded in the auditing profession.

BIR Examiners

BIR audits affect individuals as well as businesses. A form of compliance auditing, BIR audits or
examinations are designed to determine whether the taxpayers have complied with the tax laws. These
audits can be regarded solely as compliance audits.

An auditor involved in these areas must have considerable tax knowledge and auditing skills to conduct
an effective audit.

Regulatory Auditors

Other auditors include SEC, Bangko Sentral ng Pilipinas, Cooperative Commission, Office of Insurance
Commission and other government agency examiners who check on the solvency and compliance of the
various institutions and business firms with appropriate laws and regulations.

4. Forensic Auditors

Forensic auditors are employed by corporations, government agencies, public accounting firms, and
specialized consulting and investigative services firms. They are specially trained in detecting,
investigating, and deterring fraud and white-collar crime (see the discussion of forensic auditing later in
this chapter). Some examples of situations where forensic auditors are often involved include

• Reconstructing incomplete or damaged accounting records to settle an insurance claim over

inventory valuation.
• Probing money-laundering activities by tracking and reconstructing cash transactions.
• Identify and investigating transactions and assets in business or marital disputes. Investigating
and documenting embezzlement allegations and negotiating insurance settlements.

TYPES OF OTHER AUDIT SERVICES

In addition to the financial statement audit, there are four (4) major types of audits:
a) Internal audits
b) Compliance audits
c) Operational audits
d) Forensic audits

a) Internal Audit

Nature

Internal auditing is 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 f risk management, control,
and government processes.

Objective and Scope

The objective of internal auditing is to assist all members of management in the effective discharge of
their responsibilities, by furnishing them with analyses, appraisals, recommendations, and pertinent
comments concerning the activities reviewed. The internal auditor is concerned with any phase of
business activity where he or she can be of service to management. This involves going beyond the
accounting and financial records to obtain a full understanding of the operations under review. The
attainment of this overall objective involves such activities as:

Reviewing and appraising the soundness, adequacy, and application of accounting, financial, and other
operational controls, and promoting effective control at reasonable cost.
Ascertaining the extent of compliance with established policies, plans, and procedures.
 Ascertaining the extent to which company assets are accounted for and safeguarded from losses of all
kinds.
Ascertaining the reliability of management data developed within the organization.
Appraising the quality of performance in carrying out assigned responsibilities.
Recommending operating improvements.

b) Compliance Auditing – which is the examination, audit and settlement in accordance with law and
regulation.

A compliance audit determines the extent to which rules, policies, laws, covenants, or government
regulations are followed by the entity being audited. For example, a university may be required to obtain
an audit to ensure that applicable rules and policies are being followed with respect to the granting of
student loans. Another example of compliance auditing is the examination of tax returns of individuals
and companies by the Internal Revenue Service for compliance with the tax laws.

c) Operational audit

This is a future-oriented, independent and systematic evaluation performed by the internal auditor for
management of the operational activities controlled by top-, middle-, and lower-level management for the
purpose of improving organizational profitability and increasing the attainment of the other organizational
objectives.

An operational audit involves a systematic review of part or all of an organization’s activities to evaluate
whether resources are being used effectively and efficiently. The purpose of an operational audit is to
provide assurance, assess performance, identify areas for improvement, and develop recommendations
with respect to operational effectiveness and efficiency. Sometimes this type of audit is referred to as a
performance audit or management audit.

Operational audits present different challenges than financial statement audit or compliance audits
because operational audits often require the auditor to identify or create objective, measurable criteria
against which to assess effectiveness and efficiency. Some operational audits, such as information
technology (IT) or cybersecurity audits, require specialized skills and expertise. Operational auditing has
increased in importance in recent years, and this trend will likely continue. An example of an operational
audit is when an entity auditor to assess the efficiency and effectiveness of its use of information
technology resources.

d) Forensic Audits

The purpose of a forensic audit is to detect a deter fraudulent activities. Forensic auditing has increased
significantly in recent years. As we mentioned above in discussing forensic auditors, some examples of
where a forensic audit might be conducted include business or employee fraud, various other types of
criminal investigations where money or other assets are involved, and matrimonial disputes involving
division of assets.

TYPES OF OTHER ATTEST SERVICES

Auditors can provide numerous types of attest services regarding almost any subject matter. For example, an
auditor might be asked to attest to the nature and quantity of inventory stored in an entity’s warehouse so that
the entity can obtain a bank loan with the inventory as collateral. A promising new area of attestation services
relates to assertions companies make about sustainability-claimed reductions in carbon emissions or appropriate
handling of hazardous waste.

OTHER NON-ASSURANCE SERVICES

In addition to audit, attest, and assurance services, many public accounting firms perform other broad categories
of non-assurance services.

• Agreed-Upon Procedures

An agreed-upon procedures engagement, in which the party engaging the professional accountant, or
the intended user determines the procedures, and the professional accountant provides a report of factual
findings as a result of undertaking those procedures. This is not an assurance engagement.
• Tax Preparation and Planning Services

Many public accounting firms have tax professionals that assist clients in preparing and filing tax returns,
providing advice on tax and estate planning, and representing clients on tax issues before the Internal
Revenue Service or tax courts.

• Management Advisory Services

Management advisory services (MAS) involve providing advice and assistance concerning an entity’s
organization, human resources, finances, operations, IT systems, or other activities. Another significant
MAS service area is helping public companies implement effective internal control over financial reporting
in preparation for an integrated audit to be performed by a different public accounting firm. Due to
independence requirements, CPA firms perform MAS primarily for private entities or for public companies
for whom they do not provide a financial statement audit. The large public accounting firms all have very
robust MAS consulting practices for non-audit clients.

• Compilation, Accounting and Data Processing System Services

Public accounting firms perform a number of accounting-related services for their nonpublic or non-audit
clients. These services include bookkeeping, payroll processing, and preparing financial statements.
When a public accounting firm prepares the financial statements of companies, the services are known
as compilations. These forms of services provide less assurance than a financial statement audit.
 CHAPTER 1: SUPPLEMENTARY VIDEO

AUDITS are some ways that we check whether management are telling the truth in the financial
statements. And all of this comes from the invention of the factory and the steam engine which resulted
In something called mass production. Now the Industrial Revolution which is where we really saw
factories and the steam engine.

INDUSTRY COTTAGE – the term that historians used to identify production that was completed before
the start of the industrial revolution. It involved people producing goods on a very small scale in their
homes and was not centralized in one location.
- industry was i made one thing i sold one thing and it was only just me and a small number of
people.

MASS PRODUCTION meant that companies needed more money to be able to buy the equipment and
the machines that went into production lines. So, where were they going to get the money? Well they
could go to a bank and apply for some money, or they could try and get some shareholders to invest.

Auditing standards are our guide, they tell us what we should be doing on the audit, and they are legally
enforceable under the corporation’s act.

AUSTRALIAN AUDITING STANDARDS (ASA) 200.3 says

the purpose of an audit is to enhance the degree of confidence of intended users in the financial report.
this is achieved by the expression of an opinion by the auditor on whether the financial report is
prepared in all material respects, in accordance with the applicable financial reporting framework.

enhance the degree of confidence, if we have information that is more reliable and more accurate for
decision making.

intended users, are typically our shareholders but a bank might order an audit report so anybody who
the people who pay commission the audit report.

opinion, is our output

Opinion is not a guarantee, we are not guaranteeing the quality of management, we are not
guaranteeing the quality of the investment or the company. we're simply saying that what they're
reporting in the financial statements is truthful and fair in accordance with the accounting standards.
this is an important misconception that an audit is some sort of guarantee, it's definitely not.

applicable financial reporting framework, is essentially your accounting standards.

CORPORATE GOVERNANCE describes the framework of rules, relationships systems and processes
within and by which authority is exercised and controlled. So, it's really all about making sure that
there's accountability all right and remember that accountability is of management of the company and
the board of directors.

corporate governance structures are multi-party, it's not just the auditor so when we think about
corporate governance and an entity they’re essentially managed by management.

management, are there looking after the entity

shareholders, employ management and our shareholders also have the board of directors.
regulators, provide regulations on the board and management.
auditors, what they're really doing is they're saying we're keeping an eye on management on behalf of
the shareholders.
So, everybody is working together as part of this corporate governance framework, and it requires all of
the parties to work together now remember our auditors have to follow audit standards those are
actually set by our regulators.

subset of the board of directors is called the AUDIT COMMITTEE,

AUDIT work closely with audit committees

•Audit committee is comprised of only independent directors all right so those are non-executive
directors’ people who are not CEOs and according to the good corporate governance guides.
• Responsible for the oversight of the financial reporting process, so that's all of our reporting
from internal data out to external parties.
Common responsibilities:
• Ensure corporate reporting process and internal controls are adequate.
• Review the appropriateness of accounting judgements made during the preparation of the
financial report.
• Scope, adequacy, and fees for the audit
• Receive reports from the internal auditors.

The Audit Committee is responsible for negotiating with the auditor, what's the audit going to be about,
how long is it going to take what's the fee going to be and finally they also receive reports.

Audit committee takes the independent audit reports of the internal auditors as well these are the
people who are really responsible for financial reporting and it's important that our audit committee
members have accounting skills financial reporting skills understanding of audits as well so they can
work well with us.

WHY DO WE HAVE AUDITS?

Early 1900s there's some research that indicates that there were certain reasons why people
Actually, got audits:
• To have a lower cost of capital.
• Companies provide information to users to help them make this business decisions and when it
comes to those decisions, they make decisions about their investment. Investors have a limited
resource, and they have that limited resource is cash, so they need to decide on a regular basis.
• Users want the report to be checked by having an independent expert examine it (to enhance its
credibility)
- Shareholders can make the most appropriate decision because really what shareholders
want is optimal decision making comes when they have accurate and complete information.
• Users are not themselves in a position to establish the credibility of the information they are
presented with.

The role of the auditor and that's why audits are so important within our society because it helps keep
those financial markets flowing and information accurate for decision making.

WHY DO WE HAVE ASSURANCE?

The purpose of assurance is to overcome the issues of:

• Conflict of interest – managers may present biased information as they are also evaluated of the
information.
• Consequence - information provides forms the basis of many user’s decisions.
Information provided to users have consequences if we make a sub-optimal decision, because
we have inaccurate information.
• Complexity - many users do not have the expertise required to determine the quality of
information presented.
 • Remoteness - the separation of owners from management prevents users from accessing
information quality.
- there's a big distance between the users and managers of the firm and the intermediaries
the board so therefore we need to make sure that we have our audit report to help bridge
that gap of information because there is that remoteness

WHAT IS THE OUTPUT OF AN AUDIT?

Two types of audit opinion:

• Unqualified opinion - means that you're giving the financial statements the big tick that they're
telling the truth, so everything is true and fair and meets the accounting standards. in an audit a
qualified opinion is not a good thing. So, unqualified is the positive message that most
companies are looking for.
1. Emphasis of Matter Paragraph (EOM) or Other Matter Paragraph (OM) - generally
when we want to flag other information to the attention of the shareholder, we're
saying that you know everything's correct it's true and fair

• Modified Opinion

there are two reasons why we might modify the audit opinion for a client reason,
1. Disagree with management - could be a number or a disclosure. we disagree with them
and it's important.
2. Scope limitation - is when we don't have sufficient and appropriate audit evidence.

Modified opinion really breaks down into and there's different levels of severity.
1. Qualified - if things are not quite right but small and contained.
2. Adverse - if something is not quite right on a much larger scale
3. Disclaimer - if we have a scope limitation and it's quite large.

DO AUDITS HAVE VALUE?

To shareholders an audit will have value because it helps them make sure that they've got accurate and
credible information for their decision making.

3 HYPOTHESES EXPLAINING DEMAND FOR ASSURANCE

1. Agency Theory between managers and investors (stewardship hypothesis)

- where you know managers are self-interested and they might not be truthful.
2. Information Hypothesis - investors and other stakeholders want to know that the information
prepared by management is reliable (i.e true and fair)
- shareholders want accurate information for their decision making

3. Insurance Hypothesis - shifting the financial responsibility onto auditors if there are losses from
litigation

WHAT THE PROFESSION SAYS

• Auditors are independent and objective
• Auditors have significant expertise and produce a high-quality audit.

CHINESE WALLS - divisions within the organizations making sure that there's no conflicts of interest.
WHAT DRIVES THESE DIFFERENT OPINIONS?

where the profession says yeah audits are great and the journalists are saying oh audits might not be so
high quality because they're not independent what drives these different opinions?

AUDITOR'S EXPECTATION GAP

What is the expectation gap in audit?

Although the expectation gap in audit was defined in a number of different ways throughout the years,
it is most commonly known as ‘the difference between what the public expects from the auditing
profession and what the auditing profession actually provides’.

However, ACCA defines the expectation gap in audit as ‘the difference between what the general public
thinks auditors do and what the general public would like auditors to do’. The expectation gap in audit is
a topic that attracts attention. It broadly measures public concern about audit.

Historically, some in the profession might have portrayed the gap as being due to the public’s lack of
understanding rather than being a legitimate concern. We do not agree. Even though there might be a
gap in knowledge, that doesn’t cancel the calls for auditors to do more or better.

The gap doesn’t seem to have narrowed since the term was first used. The persistence of the
expectations gap reflects, in part, the fact that public expectations of audit can grow in line with what
auditors can accomplish.

THE THREE GAPS

While it’s common to refer to ‘the expectation gap’, in truth there are several gaps. We suggest a new
approach to addressing the expectation gap. We propose thinking about the gap as having three
components: the knowledge gap, the performance gap and the evolution gap. We then propose
addressing each of these separately.

A wide knowledge gap can make it harder to understand the true evolution gap. For example if they are
unaware of policies that are already in place. The performance gap focuses on areas where auditors do
not do what auditing standards or regulations require. This could be because of insufficient focus on
audit quality or differences in interpretation of auditing standard between practitioners and regulators.

A figure of the three gaps: knowledge gap; performance gap and evolution gap. Below the three gaps
are three horizontal arrows pointing in both directions. Under each of the point there is text explaining
how the gaps are linked together. From left to right: what the public think auditors do; What auditors
actually do; what auditors are supposed to do; what the public wants auditors to do. All of these lead
down to the audit expectation gap

ADDRESSING THE EXPECTATION GAP IN AUDIT

There is an urgent need for audit to evolve and to listen to the public’s legitimate concerns about audit.
It’s vital to ensure that the knowledge and performance gap components are addressed as part of
properly addressing the evolution of the audit profession.
Closing the expectation gap in audit will support a more constructive discussion about how audit can
evolve to meet society’s expectations of it. We call upon all stakeholders connected to the audit
profession, including professional accountancy bodies, audit firms, regulators, journalists and politicians
to contribute towards reducing the expectation gap in audit.

WHAT IS THE AUDITOR'S LEGAL OBLIGATION?

Corporations Act - is our legal requirement it governs companies’ directors, liquidators etc.

Responsibilities under the corporation act 2001

1. Management is responsible for the preparation and fair representation of appropriate accounts.
2. auditors are responsible for the auditor’s report which assures members that the financial
report
• is in accordance with the law including compliance with accounting standards (s 296)
• provides a true and fair view of the company (s 297)
3. Section 3078 of the Corporations Act requires auditors to conduct audits and reviews of
financial reports in accordance with auditing standards.

KEY TAKE AWAYS

1) audits are part of the corporate governance framework
2) audits are not a guarantee
3) audit require three important components
a. third party that receives the information (shareholders)
b. info to be assured - financial report
c. agreed upon criteria

THE ETHICS OF AUDIT

Ethics is really important because remember that idea that we have to be independent well part of that
is also that we need to be ethical because if we have ethics and as a profession then it's more likely that
we are trustworthy and that trustworthiness means that when we give an opinion people rely on it, they
trust it, and they can go forward with confidence in using that information.

CONCEPTUAL FRAMEWORK for professional ethics, this is not just auditors, so this is for all accountants
so the things that we're required to have include factors such as:

1. Professional competence and due care - we need to have the right skills we need to apply
ourselves when we're doing our job.
2. Integrity - when things get tough, and we might have to report something a breach of ethics or
breach of independence then we're willing to do that for the greater good of the profession and
the general public
3. Objective - we're not influenced by outside information, we're always making our own mind
4. Confidential - we agree to keep information that we have access to be confidential. So, any
information that we have from our clients we want to make sure that we keep it confidential
and when we sign our agreement to do an audit, we actually sign a confidentiality agreement.
5. Professional Behavior - we agree that we're going to behave in a professional manner with our
clients and with each other at all times
6. Independence - is the cornerstone of audit, if we're not independent and we're biased, people,
won't trust our opinion and then our opinion won't have any value.

AUDITOR INDEPENDENCE

a) “Independence is the cornerstone of the auditing profession”

 b) It is a key characteristic of an auditor
c) In order for auditors to add credibility the financial reports or other subject matter they
need to remain independent
d) Independence is one of the fundamental ethical virtues or principles required by the code.
Auditors are required to have independence of fact and in appearance.

AUDITOR INDEPENDENCE: ETHICAL REQUIREMENTS

• The test for independence is a reasonable person test. Would a reasonable person having access
to all facts consider that the auditor is independent?
• Auditors have obligation to be independent.
• Ethical rules emphasize both (the code 120.12 A1 & 400.5)

➢ Independence of Mind (Actual Independence). state of mind that permits the

expression of a conclusion without being affected by bias and personal interests; to
allow the exercise of professional judgment without undue pressures or influences.
Related to integrity objectivity and strength of character.

➢ Independence in Appearance (Perceived). How others will view the auditor. The
avoidance of facts and circumstances that would lead to others concluding the auditor’s
integrity and objectivity has been compromised.

OTHER CORPORATIONS ACT REQUIREMENTS

• S324CA - ensure no conflicts of interest exist

• S324CI - key audit personnel cannot become a director company secretary or members of senior
management of a client until a two-year cooling off has been held.
• S324FA - audit partners can only stay on the audit for five years - must rotate to another partner.
they cannot be involved for at least two successive years
• S3000(11)(b) - companies must disclose fees paid to the auditor for audit and non-audit services

THREATS TO AUDITOR INDEPENDENCE

1. Self-Interest - exists if the auditor holds a direct or indirect financial interest in the company or
depends on the client for a major fee that is outstanding.

2. Self-Review - exists if the auditor is auditing his own work or work that is done by others in the
same firm.

3. Familiarity - exists if the auditor is too personally close to or familiar with employees, officers,
or directors of the client company.

4. Advocacy - exists if auditor is involved in promoting the client, to the point where their
objectivity is potentially compromised.

5. Intimidation – exists if the auditor is intimidated by management or its directors to the point
that they are deterred from acting objectively and intimidation comes up even more strongly if
you've already colluded with the client to do something you weren't supposed to do.

MAJOR THREATS TO AUDITOR INDEPENDENCE

AEPS 110, section 290 provides a specific guidance on independence requirements for audit
engagements including areas such as
 Auditor employment relationships. A member of the assurance team cannot be employed by
the client

Financial and business relationships are at threat including

- Investments in audit clients and loans to and from clients

When total fees generated from a client represent a large proportion of the auditor's total
revenue, real, or perceived financial dependency on the client may create self-interest or
intimidation threat

Fees from clients must be collected promptly. Overdue fees may create a self-interest threat.

Provision of non-audit services can be threats, including.

- Preparing accounting records and financial reports
- Internal audit or valuation services
- Taxation services
- Design and implementation of financial its systems
- Recruitment of senior management

HOW DO WE PROTECT INDEPENDENCE

• Safeguards fall into 2 broad categories:

For an auditor are,

1. safeguards created by the profession, legislation, or regulation – education,

professional standards, monitoring and disciplinary processes and inspections and
reviews.
2. safeguards within the work environment (firmwide and engagement specific) -
independence and quality control policies and procedures.

• safeguards are intended to eliminate or reduce threats to an acceptable and reasonable level.

KEY TAKEAWAYS

• independence is critical for audits

• threats do exist
• safeguards can be implemented
• must be continually evaluated
MARK JHON V. PILOT MARK JHON V. PILOT
MARK JHON V. PILOT MARK JHON V. PILOT

Managerial Economics
Auditing and Assurance Principles
Auditing and Assurance: Concepts and Applications 1
Accounting for Special Transactions
Accounting for Business Combinations
Updates In Financial Reporting Standards
Income Taxation
International Business and Trade

If Taxable Income is:
Not over P 10,000
Over P 10,000 but not over P 30,000
Over P 30,000 but not over P 70,000
Over P 70,000 but not over P 140,000
Note : Effective January 1, 1999, the maximum rate will be changed to 33% and 32% on January 1, 2000.
BIR Form 1701 (ENCS)-Page 4
Tax Due is: If Taxable Income is: Tax Due is:
5%
P 500 + 10 % of the excess over P 10,000
Over P 140,000 but not over P 250,000P 22,500 + 25 % of the excess over P 140,000
P 2,500 + 15 % of the excess over P Over
30,000P 250,000 but not over P 500,000
P 50,000 + 30 % of the excess over P 250,000
P 8,500 + 20 % of the excess over POver
70,000P 500,000 P 125,000 + 34 % of the excess over P 500,000
BIR Form 1701 - Annual Income Tax Return
Guidelines and Instructions

Who shall file:
This return shall be filed in triplicate by the following individuals regardless of
amount of gross income:
1) A resident citizen engaged in trade, business, or practice of profession within and
without the Philippines.
2) A resident alien, non-resident citizen or non-resident alien individual engaged in
trade, business or practice of profession within the Philippines.
3) A trustee of a trust, guardian of a minor, executor/administrator of an estate, or any
person acting in any fiduciary capacity for any person, where such trust, estate, minor, or
person engaged in trade or business.
For individuals engaged in trade or business or in the exercise of their profession and
receiving compensation income as well, this return shall be used in declaring their income.
An individual whose sole income has been subjected to final withholding tax pursuant
to Sec. 57 (A) of the Tax Code, or who is exempt from income tax pursuant to the Tax Code
and other laws, is not required to file an income tax return.
Married individuals shall file a return for the taxable year to include the income of
both spouses, computing separately their individual income tax based on their respective
total taxable income. Where it is impracticable for the spouses to file one return, each
spouse may file a separate return of income. If any income cannot be definitely attributed to
or identified as income exclusively earned or realized by either of the spouses, the same
shall be divided equally between the spouses for the purpose of determining their
respective taxable income.
The income of unmarried minors derived from property received from a living parent
shall be included in the return of the parent except (1) when the donor’s tax has been paid
on such property, or (2) when the transfer of such property is exempt from donor’s tax.
If the taxpayer is unable to make his own return, the return may be made by his duly
authorized agent or representative or by the guardian or other person charged with the care
of his person or property, the principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties provided for erroneous, false or
fraudulent returns.
When and Where to File
The income tax return shall be filed with any Authorized Agent Bank (AAB)
located within the territorial jurisdiction of the Revenue District Office where the taxpayer
is required to register/where the taxpayer has his legal residence or place of business in the
Philippines. In places where there are no AABs, the returns shall be filed with the
Revenue Collection Officer or duly Authorized City or Municipal Treasurer of the Revenue
District Office where the taxpayer is required to register/where the taxpayer has his legal
residence or place of business in the Philippines. In case taxpayer has no legal residence or
place of business in the Philippines, the return shall be filed with the Office of the
Commissioner or Revenue District Office No. 39, South Quezon City.
th
This return shall be filed on or before the fifteenth (15 ) day of April of each year
covering income for the preceding taxable year.
(It is suggested, however, that the tax return be filed with the appropriate collection
agent of the Revenue District Office where the taxpayer is required to register.)
When and Where to Pay
Upon filing this return, the total amount payable shall be paid to an Authorized
Agent Bank (AAB). In places where there are no AABs, the tax shall be paid with the
Revenue Collection Officer or duly Authorized City or Municipal Treasurer who will issue
a Revenue Official Receipt (BIR Form 2524)). When the tax due exceeds P2,000.00, the
taxpayer may elect to pay in two equal installments, the first installment to be paid at the
time the return is filed and the second, on or before July 15 of the same year.
Where the return is filed with an AAB, the lower portion must be duly machine
validated and stamped received to serve as receipt of payment. The machine validation
shall reflect the amount paid, the date of payment and the transaction code and the stamp
mark shall show the name of the AAB, branch code, teller’s code and the teller’s initial.
The AAB shall also issue an Official Receipt as additional proof of payment.
Overwithholding of income tax on compensation due to the fault of the employee
shall be forfeited in favor of the government.
Personal and additional exemption
The filer’s civil status shall be indicated by marking with an “x” the appropriate box.
The amount of personal exemption are as follows:
a. For single individual, P 20,000
widow/widower or married
individual judicially decreed as
legally separated with no qualified
dependents, estate and trust
b. For Head of the Family P 25,000
c. For married individual earning P 32,000
income
In the case of married individuals where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption.
An additional exemption of P8,000.00 shall be allowed for each qualified dependent
child not exceeding four (4). The additional exemption for dependents shall be claimed by
the husband, who is deemed the head of the family unless he explicitly waives his right in
favor of his wife.
In the case of legally separated spouses, additional exemption may be claimed only
by the spouse who has custody of the child or children; Provided, that the total amount of
additional exemptions that may be claimed by both shall not exceed the maximum
additional exemptions allowed by the Tax Code.
If the spouse or any of the dependents dies or if any of such dependents marries,
becomes twenty-one (21) years old or becomes gainfully employed during the taxable year,
the taxpayer may still claim the same exemptions as if the spouse or any of the dependents
died, or as if such dependents married, became twenty-one (21) years old or became
employed at the close of such year.
Gross Taxable Compensation Income
The gross taxable compensation income of the taxpayer does not include SSS, GSIS,
Medicare and Pag-ibig Contributions, and Union Dues of individuals.
Deductions
A taxpayer engaged in business or in the practice of profession shall choose either the
optional or itemized (described below) deduction. He shall indicate his choice by marking
with “X” the appropriate box, otherwise, he shall be deemed to have chosen itemized
deduction. The choice made in the return is irrevocable for the taxable year covered.
Optional Standard Deduction – A maximum of 10% of their gross income shall be
allowed as deduction in lieu of the itemized deduction. This type of deduction shall not be
allowed for non-resident aliens engaged in trade or business. A taxpayer who opts to avail
of this deduction need not submit the Account Information Return (AIF)/Financial
Statements.
Itemized Deduction - There shall be allowed as deduction from gross income all the
ordinary and necessary expenses paid or incurred during the taxable year in carrying on or
which are directly attributable to, the development, management, operation and/or conduct
of the trade, business or exercise of a profession including a reasonable allowance for
salaries, travel, rental and entertainment expenses.
Itemized deduction includes also interest, taxes, losses, bad debts, depreciation,
depletion, charitable and other contributions, research and development, pension trust,
premium payments on health and/or hospitalization insurance.
Premium payment on health and/or hospitalization insurance of an individual
taxpayer, including his family, in the amount of P = 2,400 per year, per family, may be
deducted from his gross income: Provided, that said taxpayer, including his family, has a
yearly gross income of not more than P = 250,000. In case of married taxpayers, only the
spouse claiming the additional exemption for dependents shall be entitled to this deduction.
Definition of Terms
"Head of the Family" means an unmarried or legally separated man or woman with
one or both parents, or with one or more brothers, sisters, or with one or more legitimate,
recognized natural or legally adopted children living with and dependent upon him for their
chief support, where such brothers or sisters or children are not more than twenty one (21)
years of age, unmarried and not gainfully employed, or where such children, brothers or
sisters, regardless of age are incapable of self-support because of mental or physical defect.
The term also includes a benefactor of a senior citizen under Republic Act 7432.
"Dependent Child" means a legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent is not more than twenty one
(21) years of age, unmarried and not gainfully employed or if such dependent, regardless of
age, is incapable of self-support because of mental or physical defect.
Penalties
There shall be imposed and collected as part of the tax:
1. A surcharge of twenty five percent (25%) for each of the following violations:
a) Failure to file any return and pay the amount of tax or installment due
on or before the due dates;
b) Filing a return with a person or office other than those with whom it is
required to be filed;
c) Failure to pay the full or part of the amount of tax shown on the return,
or the full amount of tax due for which no return is required to be filed,
on or before the due date;
d) Failure to pay the deficiency tax within the time prescribed for its
payment in the notice of Assessment (Delinquency Surcharge).
2. A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case any
payment has been made on the basis of such return before the discovery of the falsity
or fraud, for each of the following violations:
a) Willful neglect to file the return within the period prescribed by the
Code or by rules and regulations; or
b) In case a false or fraudulent return is willfully made.
3. Interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by rules and regulations, on any unpaid amount of tax, from the date
prescribed for the payment until it is fully paid.
4. Compromise penalty.
Attachments Required
1. Account Information Form and the Certificate of the independent CPA except for
taxpayers who opted for the Optional Standard Deduction. (The CPA Certificate is
required if the gross quarterly sales, earnings, receipts or output exceed P 150,000);
2. Certificate of Income Tax Withheld on Compensation (BIR Form 2316);
3. Certificate of Income Payments Not Subjected to Withholding Tax (BIR Form 2304);
4. Certificate of Creditable Tax Withheld at Source (BIR Form 2307);
5. Duly Approved Tax Debit Memo, if applicable;
6. Waiver of husband's right to claim additional exemption, if applicable;
7. Proof of prior years' excess credits, if applicable;
8. Proof of Foreign Tax Credits, if applicable; and
9. For amended return, proof of tax payment and the return previously filed.

Change of Status
If the taxpayer marries or should have additional dependent(s) as defined above
during the taxable year, the taxpayer may claim the corresponding personal or additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such
year.
Note: All background information must be properly filled up.
• Box No. 1 refers to transaction period and not the date of filing this return.
• The last 3 digits of the 12-digit TIN refers to the branch code.
• TIN = Taxpayer Identification Number.
ENCS