June 9, 2016

SEC NOTICE

Notice is hereby given that the Commission En Banc in its meeting on

03 May 2016 resolved to issue Financial Reporting Bulletin (FRB) No. 19, the
details of which are as follows:
Bulletin Date Subject Clarification/Details
No. Matter

19 3 Expectations In line with the continuing effort to promote quality

May for an control standards in external audit, the following
2016 Effective principles on the expectation for an effective
Audit audit function are required to be observed by
Function independent auditors. The FRB basically contains
the responsibilities of the external auditor some of
which are actually covered by the requirements
under Philippine Standards on Auditing (PSA). The
PSAs are the standards that the external auditors
are required to apply when they conduct a
financial statement audit.
Consistent with the PSA, the principles herein
highlight the responsibilities of the external auditor
when conducting an audit of financial
statements. They provide guidelines on how
external auditors are expected to carry out audit
engagements to obtain the overall objective of
an audit of financial statement, i.e., expression of
an opinion on the fairness of the financial
statements.
The member-agencies of the Financial Sector
Forum, namely, the Securities and Exchange
Commission, Bangko Sentral ng Pilipinas, Insurance
Commission and Philippine Deposit Insurance
Commission, had agreed that these principles for
an effective external audit function be adopted in
their
respective supervisory jurisdictions.
Expectations for an effective audit function:
a) In forming an opinion, the external auditor
shall identify and assess the risks of material
misstatement in the company's financial
statements, taking into consideration its
operations, control environment and its
components as well as the company's
financial reporting systems.
b) The assessment shall take into account
qualitative aspects of the company's
accounting practices, including indicators
of possible biases in management's
judgment.
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 c) The external auditor should assess and
communicate to the company's audit
committee the results of its assessment on
the capability of company's management
to the extent possible, the strength of its
control environment, and the adequacy of
the company's accounting/information
systems to comply with financial and
prudential reporting responsibilities.
d) The external auditor shall conclude whether
it has obtained reasonable assurance that
the financial statements, as a whole, are
free from material misstatement, whether
due to fraud or error. That conclusion shall
include an evaluation of the following:
1) Whether sufficient appropriate audit
evidence has been obtained;
2) Whether uncorrected misstatements
are material, individually or in
aggregate; and
3) Compliance with the applicable
framework.
e) If material error or fraud is discovered, the
external auditor shall immediately bring such
information to the attention of the audit
committee or the board of directors.
Moreover, the external auditor shall report to
the SEC such material error or fraud and
other matters as prescribed under existing
regulations.
f) In particular, the external auditor shall
evaluate whether, in view of the
requirements of the applicable financial
reporting framework:
1) The financial statements adequately
disclose the significant accounting
policies selected and applied;
2) The accounting policies selected and
applied are appropriate and
consistent with the applicable
financial reporting framework;
3) The accounting estimates made by
management are reasonable;
4) The methodologies, assumptions and
valuation practices including
provisioning for loan losses are
appropriate and consistent with the
applicable financial reporting
framework;
5) The information presented in the
financial statements are relevant,
reliable, comparable and
understandable;
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 6) The financial
adequate statements
disclosures providethe
to enable
intended users to understand the
effect of material transactions and
events on the information conveyed
in the financial statements; and
7) The terminologies used in the financial
statements, including the title of each
financial statement, are appropriate.
g) In carrying out the audit of a company's
financial statements, the external auditor
recognizes that a particular company has
characteristics that generally distinguish it
from most other business enterprises, and
which the external auditor takes into
account in assessing the level of inherent
risk. Examples of key audit areas and
exposures that merit special audit
consideration for a company include, but
need not be limited to, impairment and loan
loss provisioning, financial instruments
measured at fair value, liabilities, related
party transactions and disclosures.
h) While the provisioning requirements under
the prescribed financial reporting framework
and regulatory rules and regulations may
differ, external auditors are expected to look
into the soundness of the assumptions and
methodologies used under both regimes. In
addition, external auditors should also look
into the adequacy and propriety of
documentation of significant differences
between the valuations used for financial
reporting purposes and for regulatory
purposes.
i) External auditors should also assess the
adequacy and propriety of disclosures on
related party transactions. The external
auditors should exercise sound judgment on
whether mere compliance with disclosure
requirements prescribed under the
applicable financial reporting framework
already provides sufficient information to
make a conclusion on whether the
transactions are done at arm's length terms.
j) While the external auditor has the sole
responsibility for the audit report and for
determining the nature, timing and extent of
audit procedures, much of the work of
internal auditing can be useful to the
external auditor in the audit of the financial
statements. The external auditor, therefore,
as part of the audit assesses the internal
audit function insofar as the external auditor
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 believes that it will be relevant in
determining the nature, timing and extent of
the external audit procedures.
k) The auditor is expected to exercise
professional judgment in areas such as:
1) Assessing inherent and control risk
and the risk of material misstatement
due to fraud or error;
2) Deciding upon the nature, timing and
extent of the audit procedures;
3) Evaluating the results of those
procedures; and
4) Assessing the reasonableness of the
judgments and estimates made by
management in preparing the
financial statements.
l) While many areas of financial reporting
require significant judgments (i.e., by
management when implementing the
standards and auditors when interpreting
the standards during the audit process), it is
expected that similar transactions will be
accounted for in a manner that is consistent
with the accounting standards and
consistent across companies in the same
industry.
m) The external auditor should maintain an
attitude of professional skepticism
throughout the planning and performance
of the audit, recognizing that circumstances
may exist that cause the financial
statements to be materially misstated.
Specific areas where professional skepticism
is particularly important include, among
others, fair value measurements, related
party relationships and transactions, going
concern assessments, and in auditing
significant unusual or highly complex
transactions.
n) The external auditor should promote a two-
way communication with those charged
with the governance. The subject of the
communication may include the following:
1) The responsibilities of the external
auditor in relation to the financial
statement audit, and an overview of
the planned scope and timing of the
audit;
2) Information relevant to the external
audit; and
3) Timely observations arising from the
external audit that are significant and
relevant to the companies' financial
reporting process, including
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 inappropriate accounting treatment

that may result in tax violation.

o) The external auditor should document its
discussions with the company's board of
directors and the audit committee. Where
there are differences between regulations
and the applicable financial reporting
framework, as when there is more than one
option allowed, discussions on the treatment
adopted in the financial statements should
be duly minuted. The external auditors are
nonetheless, expected to recommend
compliance with regulatory accounting
treatment particularly when such is likewise
acceptable under the applicable financial
reporting framework.
p) The external auditor is expected to charge
only reasonable audit fees. In determining
reasonable fees, the following may be
considered:
1) Expected hours needed to complete
the scope of work envisioned in the
audit plan;
2) Complexity of the activities and
structure of the company;
3) Level of internal audit assistance;
4) Level of fees being charged by other
audit firms; and
5) Quality of audit services.
In this respect, the external auditor is
expected to ensure that the audit fees
will be set at an amount that will not in
any way compromise the quality of the
audit.
q) The external audit team is expected to be
composed of members whose collective
skills and competence are commensurate
with the size and complexity of operations
of the company.

June 9, 2016, Mandaluyong City, Philippines. CAIHTE

(SGD.) TERESITA J. HERBOSA

Chairperson

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