LESSON 2: THE PROFESSIONAL STANDARD

Standards are established to measure the quality of performance of individuals and

organizations. Standards relating to the accounting profession concern themselves with CPAs
professional qualities, the judgment exercised by the CPAs in the performance of their
professional engagement, and the CPA firm’s quality control policies and procedures.
Generally Accepted Auditing Standards (GAAS) – it represents measures of the quality of the
auditor’s performance. These standards should be looked at as a minimum standard of
performance that auditors should follow. These ten GAAS are grouped into general, fieldwork,
and reporting standards.
❖ General Standards
1. The examination is to be performed by person or persons having adequate technical
training and proficiency as an auditor.
2. In all matters relating to an engagement, an independence in mental attitude is to be
maintained by the auditor.
3. Due professional care is to be exercised in the performance of the audit and in the
preparation of the report.

❖ Standards of Fieldwork
4. The work is to be adequately planned and assistants, if any, are to be properly
supervised.
5. There is to be s proper study and evaluation of existing internal control as a basis for
reliance thereon and for the determination of the resultant extent of the tests to which
auditing procedures are to be restricted.
6. Sufficient competent evidential matter is to be obtained through inspection,
observation, inquiries and confirmations to afford a reasonable basis for an opinion
regarding the financial statements under examination.

❖ Standard of Reporting
7. The report shall state whether the financial statements are presented in accordance
with generally accepted accounting principles.
8. The report shall identify those circumstances in which principles have not been
consistently observed in the current period in relation to the preceding period.
9. Informative disclosures are to be regarded as reasonably adequate unless otherwise
stated in the report.
10. The report shall either contain an expression of opinion regarding the financial
statements, taken as a whole, or an assertion to the effect that an opinion cannot be
expressed. When an overall opinion cannot be expressed, the reasons therefore should
be stated.

SYSTEM OF QUALITY CONTROL

Quality controls are policies and procedures adopted by CPAs to provide reasonable assurance
of conforming with professional standards in performing audit and related services.
Under Philippine Standards on Quality Control (PSQC) 1, a firm has an obligation to establish a
system of quality control designed to provide it with reasonable assurance that the firm and its
personnel comply with professional standards and regulatory and legal requirements, and that
the report issued by the firm are appropriate in the circumstances. In this regard, engagement
teams:
● Implement quality control procedures that are applicable to audit engagement;
● Provide the firm with relevant information to enabling the functioning of that part of the
firm’s system of quality control relating to independence; and
● Are entitled to rely on the firm’s systems unless information provided by the firm or other
parties suggest otherwise.
Elements of a System of Quality Control
PSA 220 states that audit firm should implement policies and procedures designed to ensure
that all audits are conducted in accordance with PSAs.
The quality control policies and procedures adopted by audit firms vary depending on the firm’s
size and nature of its practice, cost benefit considerations and other factors. PSA 220 has
identified the following quality control policies that may serve as a guide to audit firms in
establishing their own system of quality control.
LEADERSHIP RESPONSIBILITIES FOR QUALITY ON AUDITS
The firm should establish policies and procedures designed to promote an internal culture based
on recognition that quality is essential in the performance of the engagements.
The engagement partner should take responsibility for the overall quality on each audit
engagement to which the partners is assigned. The engagement partner should set example
regarding the quality of audit by emphasizing through actions and messages the importance of
performing work that complies with professional standards, complying with the firm’s quality
control policies and procedures, and issuing appropriate audit reports.
ETHICAL REQUIREMENTS
The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with ethical requirements, which include:
a. Integrity
b. Objectivity;
c. Professional Competence and Due Care;
d. Confidentiality
e. and Professional Behavior
The engagement partner should consider whether members of the engagement team have
complied with these ethical principles. Any issues involving engagement team member’s non-
compliance with ethical requirements must be properly resolved and documented.
INDEPENDENCE
The firm should establish policies and procedures designed to provide it with reasonable
assurance that the members of the engagement team, the firm and, where applicable, the
network firms maintain independence when providing assurance services.
The engagement partner should form a conclusion on compliance with independence
requirements that apply to the audit engagement. The engagement partners should
a. Obtain relevant information to identify circumstances and relationships that create
threats to independence;
b. Evaluate information on identified breaches of the firm’s independence policies and
procedures to determine whether they create threat to independence;
c. Take appropriate safeguards to eliminate such threats or reduce them to an acceptable
level; and
d. Document conclusion on independence and the basis for such conclusion.
ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS
The firm should establish policies and procedures for the acceptance and continuance of client
relationships and specific engagements, designed to provide it with reasonable assurance that it
will only undertake or continue relationships and engagement where it:
a. Has considered the integrity of the client;
b. Is competent to perform the engagement and has the capabilities, time and resources to
do so; and
c. Can comply with ethical requirements.
The engagement partner should be satisfied that appropriate procedures regarding the
acceptance and continuance of client relationships and specific audit engagement have been
followed, and that conclusions reached in this regard are appropriate and have been
documented.
HUMAN RESOURCES AND ASSIGNMENT
The firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment to
ethical principles necessary to perform the engagement. Such policies and procedures should
address issues concerning personnel
● Recruitment;
● Performance evaluation, compensation and promotion;
● Capabilities and competence;
● Career development; and
● Assignment of engagement teams
The engagement partner should be satisfied that the engagement team collectively has the
appropriate capabilities, competence and time to perform the audit engagement in accordance
with professional standards, and regulatory and legal requirements, and to enable an auditor’s
report that is appropriate in the circumstances to be issued.
ENGAGEMENT PERFORMANCE
The firm should establish policies and procedures designed to provide it with reasonable
assurance
● That engagements are performed in accordance with professional standards and other
regulatory and legal requirements; and
● That the audit report issued is appropriate in the circumstances.
The engagement partner should take responsibility for the direction, supervision, review, and
overall performance of the audit engagement.
● Direction
Assistants should be informed of their responsibilities, the nature of the entity’s business,
potential problems that may arise and the detail approach to the performance of the
engagement.
● Supervision
This involves monitoring the process of the audit, resolving accounting and audit issues,
and considering the level of consultation appropriate for the engagement.
● Review
Work performed by assistants should be reviewed to consider whether the audit
procedures, evidence and documentation are appropriate to support the conclusion
reached.
● Consultation
The firm should establish policies and procedures that encourage firm personnel to seek
assistance from authoritative sources either within or outside the firm.
The engagement partner should:
a. Be responsible for the engagement team undertaking appropriate consultation on difficult
and contentious matters;
b. Be satisfied that members of the engagement team have undertaken appropriate
consultation during the course of the engagement, both within the engagement team and
others at the appropriate level within or outside the firm;
c. Be satisfied that the nature and scope of, and conclusions resulting from such
consultations are documented and agreed with the party consulted;
d. Determine the conclusions resulting from consultations have been implemented.
Engagement Quality Control Review
The firm should establish policies and procedures requiring an engagement quality control
review that provides an objective evaluation of the significant judgments made and conclusions
reached in formulating the auditor’s report.
This requires the engagement partner:
a. To determine that an engagement quality control reviewer has been appointed;
b. To discuss significant matters arising during the audit engagement quality control
reviewer; and
c. Not to issue the auditor’s report until the completion of the engagement quality control
review.
The firm should establish policies and procedures setting out the scope of quality control review,
criteria for the eligibility of the reviewer, and documentation of the quality control review.
Differences of Opinion
The engagement team should follow the firm’s policies and procedures for dealing with and
resolving differences of opinion that arise within the engagement team, with those consulted
and, where applicable, between the engagement partner and the engagement quality control
reviewer.
The engagement partner should inform the members of the engagement team to bring matters
involving differences of opinion to the attention of the engagement partner or others within the
firm as appropriate without fear of reprisals. The audit report should not be issued until the
matter involving differences of opinion is resolved.
MONITORING
The continued adequacy and operational effectiveness of quality control policies and procedures
is to be monitored. Policies and procedures must be adopted to provide reasonable assurance
that the systems of quality control are relevant, adequate and operating effectively.
The firm’s quality control policies and procedures should be communicated to its personnel in a
manner that provides reasonable assurance that the policies and procedures are understood and
implemented.
QUALITY CONTROL REVIEW
Recognizing the importance of professional Accountants services to the society, the
government has also taken steps to ensure that CPAs work to the highest standards which can
reasonably be expected from them. the government thru the Professional Regulatory Board of
Accountancy (BOA) has required all CPA firms and individual CPAs in public practice to obtain a
certificate of accreditation to practice public accountancy. Such certificate is valid for three
years and can be renewed after complying with the requirements of the Board of Accountancy.
 As a condition to the renewal of the certificate of accreditation to practice public
accountancy, the Board requires individual CPAs and CPA firms to undergo a quality control
review to ensure that these CPAs comply with accounting and auditing standards and practices.
The PRC has created a Quality Review Committee (QRC) which shall conduct a quality
review on applicants for registration to practice public accountancy and shall recommend the
revocation of the certificate of registrations of CPAs who have not observed the quality control
measures or those who have not complied with the standards of quality prescribed for the
practice of public accountancy.