COLLEGE OF SCIENCE AND TECHNOLOGY

Cagamutan Norte, Leganes, Iloilo - 5003

Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

COO – FORM 12

SUBJECT TITLE: AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES

INSTRUCTOR: HARVEY S. CHEN, CPA, MBA
SUBJECT CODE: AT2

FINALS MODULE

Topic 1: AGREED-UPON PROCEDURES AND COMPILATION ENGAGEMENTS

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to

1. Understand the general principles for agreed-upon procedures engagements;

2. Prepare a report on AUPs;
3. Understand the general principles for compilation engagements; and
4. Prepare a compilation report.

NOTES:

1.1 Agreed-Upon Procedures (AUP) Engagement

Related services comprise of agreed-upon procedures (AUPs) and compilations

engagements.

Independence is not required of the practitioner when performing related services.

The Philippine Standards on Related Services (PSRSs) provide standards and

guidance on related service engagements.

PSRS 4400 (Revised), “Agreed-Upon Procedures Engagement”, defines an agreed-

upon procedures (AUPs) engagement as an engagement in which a practitioner is
engaged to carry out procedures to which the practitioner and the engaging party (and
if relevant, other parties) have agreed and to communicate the procedures and the
related findings in an agreed-upon procedures report.

Because the specified parties require that findings be independently derived, the
services of a practitioner are obtained to perform procedures and report his or her
findings. The specified parties and the practitioner agree upon the procedures to be
performed by the practitioner that the specified parties believe are appropriate.
Because the needs of the specified parties may vary widely, the nature, timing, and
extent of the agreed-upon procedures may vary as well; consequently, the specified
parties assume responsibility for the sufficiency of the procedures since they best
understand their own needs.

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 An engagement to perform agreed-upon procedures may involve performing certain
procedures concerning individual items of financial data, a financial statement, or even
a complete set of financial statements.

The report is often 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.

An agreed-upon procedures engagement provides no assurance. Instead, users of

the report assess for themselves the procedures and findings reported by the
practitioner and draw their own conclusions from the practitioner’s work.

Independence is not required in performing agreed-upon procedures engagements.

However, national ethical codes, laws or regulations, other professional requirements,
or conditions of a contract, program, or arrangement relating to the subject matter for
the AUPs engagement may specify requirements pertaining to independence.

1.2 Practitioner’s Responsibility in AUPs Engagement

In performing an agreed-upon procedures engagement, the practitioner should:

a. Comply with the relevant ethical requirements of the IESBA Code.

b. Conduct an agreed-upon procedures engagement in accordance with Philippine
Standards on Related Services 4400 (Revised).
c. Comply with PSQM.
d. Comply with the terms of the engagement.
e. Exercise professional judgment

The responsibility of the practitioner is to carry out the procedures and report the
findings. The practitioner assumes the risk that misapplication of the procedures may
result in inappropriate findings being reported. Furthermore, the practitioner assumes
the risk that appropriate findings may not be reported or may be reported inaccurately.
The practitioner's risks can be reduced through adequate planning and supervision and
due professional care in performing the procedures, determining the findings, and
preparing the report.

The practitioner should have adequate knowledge in the specific subject matter to
which the agreed-upon procedures are to be applied. He or she may obtain such
knowledge through formal or continuing education, practical experience, or
consultation with others.

The practitioner has no responsibility to determine the differences between the agreed-
upon procedures to be performed and the procedures that the practitioner would have
determined to be necessary had he or she been engaged to perform another form of
attest engagement. The procedures that the practitioner agrees to perform pursuant
to an agreed-upon procedures engagement may be more or less extensive than the
procedures that the practitioner would determine to be necessary had he or she been
engaged to perform another form of engagement.

1.3 Procedures Performed in an AUP Engagement

To satisfy the requirements that the practitioner and the specified parties agree upon
the procedures performed or to be performed and that the specified parties take
responsibility for the sufficiency of the agreed-upon procedures for their purposes,
ordinarily the practitioner should communicate directly with and obtain affirmative
acknowledgment from each of the specified parties.

For example, this may be accomplished by meeting with the specified parties or by
distributing a draft of the anticipated report or a copy of an engagement letter to the
specified parties and obtaining their agreement. If the practitioner is not able to
communicate directly with all of the specified parties, the practitioner may satisfy these
requirements by applying any one or more of the following or similar procedures.

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 a. Compare the procedures to be applied to written requirements of the specified
parties.
b. Discuss the procedures to be applied with appropriate representatives of the
specified parties involved.
c. Review relevant contracts with or correspondence from the specified parties.

The practitioner should not report on an engagement when specified parties do not
agree upon the procedures performed or to be performed and do not take responsibility
for the sufficiency of the procedures for their purposes.

The procedures that the practitioner and specified parties agree upon may be as limited
or as extensive as the specified parties desire. However, mere reading of an assertion
or specified information about the subject matter does not constitute a procedure
sufficient to permit a practitioner to report on the results of applying agreed-upon
procedures.

In some circumstances, the procedures agreed upon evolve or are modified over the
course of the engagement. In general, there is flexibility in determining the
procedures as long as the specified parties acknowledge responsibility for the
sufficiency of such procedures for their purposes. Matters that should be agreed upon
include the nature, timing, and extent of the procedures.

The practitioner should not agree to perform procedures that are overly subjective and
thus possibly open to varying interpretations. Terms of uncertain meaning (such as
general review, limited review, check, or test) should not be used in describing the
procedures unless such terms are defined within the agreed-upon procedures.

The practitioner should obtain evidential matter from applying the agreed-upon
procedures to provide a reasonable basis for the finding or findings expressed in his
or her report, but need not perform additional procedures outside the scope of the
engagement to gather additional evidential matter.

Examples of appropriate procedures include the following:

a. Inquiries
b. Observation
c. Execution of a sampling application after agreeing on relevant parameters
d. Inspection of specified documents evidencing certain types of transactions or
detailed attributes thereof
e. Confirmation of specific information with third parties
f. Comparison of documents, schedules, or analyses with certain specified attributes
g. Performance of specific procedures on work performed by others (including the
work of internal auditors
h. Performance of mathematical computations

1.4 Agreed-Upon Procedures Report

The agreed-upon procedures report should be in writing. It should 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.

An agreed-upon procedures report may appear as follows:

AGREED-UPON PROCEDURES REPORT ON

PROCUREMENT OF XYZ PRODUCTS

Addressee

Purpose of this Agreed-Upon Procedures Report

Our report is solely for the purpose of assisting (Engaging Party) in determining whether its
procurement of XYZ products is compliant with its procurement policies and may not be suitable
for another purpose.

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Responsibilities of the Engaging Party and the Responsible Party

(Engaging party) has acknowledged that the agreed-upon procedures are appropriate for the
purpose of the engagement.

(Responsible party), as identified by (Engaging Party), is responsible for the subject matter on
which the agreed-upon procedures are performed.

Practitioner’s Responsibilities

We have conducted the agreed-upon procedures engagement in accordance with the Philippine
Standard on Related Services (PSRS) 4400 (Revised), Agreed-Upon Procedures Engagements.
An agreed-upon procedures engagement involves our performing the procedures that have been
agreed with (Engaging Party), and reporting the findings, which are the factual results of the
agreed-upon procedures performed. We make no representation regarding the appropriateness
of the agreed-upon procedures.

This agreed-upon procedures engagement is not an assurance engagement. Accordingly, we

do not express an opinion or an assurance conclusion.

Had we performed additional procedures, other matters might have come to our attention that
would have been reported.

Professional Ethics and Quality Management

We have complied with the ethical requirements in (describe the relevant ethical requirements).
For the purpose of this engagement, there are no independence requirements with which we are
required to comply.

Our firm applies Philippine Standard on Quality Management (PSQM) 1, Quality Management
for Firms that Perform Audits or Reviews of Financial Statements, Other Assurance or Related
Services Engagements, and accordingly, maintains a comprehensive system of quality
management including policies or procedures regarding compliance with ethical requirements,
professional standards and applicable legal and regulatory requirements.

Procedures and Findings

We have performed the procedures below, which were agreed upon with (Engaging Party), on
the procurement of XYZ products.

Procedures Findings

1. Obtain from management of (responsible We obtained from management a listing of all

Party) a listing of all contracts signed
between January 1, 2022 and December
31, 2022 for XYZ products (“listing”) and
identify all contracts valued at over
P1,000,000.
contracts for XYZ products which were signed
between January 1, 2022 and December 31,
2022.
Of the 125 contracts on the listing, we identified
37 contracts valued at over P1,000,000.

2. For each identified contract valued at over
P1,000,000 on the listing, compare the
contract to the records of bidding and
determine whether the contract was
subject to bidding by at least 3 contractors
from (Responsible Party)’s “pre-qualified
Contractors List”.
We inspected the records of bidding related to
the 37 contracts valued at over P1,000,000.
We found that all of the 37 contracts were
subject to bidding by at least 3 contractors from
the (responsible Party)’s “Pre-qualified
Contractors List”.

3. For each identified contract valued all
over P1,000,000 on the listing, compare
to the amount payable per the signed
contract to the amount ultimately paid by
(Responsible Party) to the contractor and
determine whether the amount ultimately
paid is within P5,000,000 on the agreed
amount in the contract.
We obtained the signed contracts for the 37
contracts valued at over P1,000,000 on the
listing and compared the amounts payable in
the contracts to the amounts ultimately paid by
(Responsible Party) to the contractor.
We found that the amounts ultimately paid
were within P5,000 of the agreed amounts in all
of the 37 contracts with no exceptions noted.

Practitioner’s signature

Date of practitioner’s report

Practitioner’s address

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1.5 Compilation Engagement

Management may request a practitioner to assist with the preparation and

presentation of financial information of an entity.

PSRS 4410 (Revised), “Compilation Engagements”, defines a compilation as an

engagement in which a practitioner applies accounting and financial reporting
expertise to assist management in the preparation and presentation of financial
information of an entity in accordance with an applicable financial reporting framework,
and reports as required by PSRS 4410 (Revised).

Compilation entails reducing detailed data to a manageable and understandable form

without a requirement to verify the accuracy or completeness of the assertions
underlying that information.

Engagements to provide limited assistance to a client in the preparation of financial

statements is not considered an engagement to compile financial information.

The value of a compilation engagement performed to users of financial information

results from the application of the practitioner’s professional expertise in accounting
and financial reporting and compliance with professional standards, including relevant
ethical requirements, and the clear communication of the nature and extent of the
practitioner’s involvement with the compiled financial information.

Since a compilation engagement is not an assurance engagement, a compilation

engagement does not require the practitioner to verify the accuracy or completeness
of the information provided by management for the compilation, or otherwise to gather
evidence to express an audit opinion or a review conclusion on the preparation of the
financial information.

As with agreed-upon procedures engagements, independence is also not required in

performing compilation engagements.

Management retains responsibility for the financial information and the basis on which
it is prepared and presented. That responsibility includes application by management
of the judgment required for the preparation and presentation of the financial
information, including the selection and application of appropriate accounting policies
and, where needed, developing reasonable accounting estimates.

When are Compilations Required?

Financial information that is the subject of a compilation engagement may be required

for various purposes including:

a. To comply with mandatory periodic financial reporting requirements established in

law or regulation.

b. For purposes unrelated to mandatory financial reporting under relevant law or

regulation, including for example:

 For management or those charged with governance, prepared on a basis

appropriate for their particular purposes (such as preparation of financial
information for internal use).
 For periodic financial reporting undertaken for external parties under a contract
or other form of agreement (such as financial information provided to a funding
body to support provision or continuation of a grant).
 For transactional purposes, for example to support a transaction involving
changes to the entity’s ownership or financing structure (such as for a merger
or acquisition).

1.6 Practitioner’s Responsibility in Compilation Engagements

The practitioner’s objectives in a compilation engagement are to:

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 a. Apply accounting and financial reporting expertise to assist management in the
preparation and presentation of financial information in accordance with an
applicable financial reporting framework based on information provided by
management.
b. Report in accordance with the requirements of PSRS 4410 (Revised).

In performing a compilation engagement, a practitioner should:

a. Comply with the relevant ethical requirements of the IESBA Code.

b. Conduct a compilation engagement in accordance with Philippine Standards on
Related Engagements 4410 (Revised).
c. Comply with the requirements of PSQM.
d. Exercise professional judgment in conducting a compilation engagement.
e. Agree and comply with the terms of the engagement.

1.7 Practitioner’s Responsibility in Compilation Engagements

The practitioner shall obtain an understanding of the following matters sufficient to be

able to perform the compilation engagement:

a. The entity’s business and operations, including the entity’s accounting system and
accounting records.
b. The applicable financial reporting framework, including its application in the entity’s
industry.

The practitioner shall compile the financial information using the records, documents,
explanations and other information, including significant judgments, provided by
management.

The practitioner shall discuss with management, or those charged with governance as
appropriate, those significant judgments, for which the practitioner has provided
assistance in the course of compiling the financial information.

Prior to completion of the compilation engagement, the practitioner shall read the
compiled financial information in light of the practitioner’s understanding of the entity’s
business and operations, and of the applicable financial reporting framework.

If, in the course of the compilation engagement, the practitioner becomes aware that
the records, documents, explanations or other information, including significant
judgments, provided by management for the compilation engagement are incomplete,
inaccurate or otherwise unsatisfactory, the practitioner shall bring that to the attention
of management and request the additional or corrected information.

If the practitioner is unable to complete the engagement because management has

failed to provide records, documents, explanations or other information, including
significant judgments, as requested, the practitioner shall withdraw from the
engagement and inform management and those charged with governance of the
reasons for withdrawing.

If the practitioner becomes aware during the course of the engagement that:

a. The compiled financial information does not adequately refer to or describe the
applicable financial reporting framework;
b. Amendments to the compiled financial information are required for the financial
information not to be materially misstated; or
c. The compiled financial information is otherwise misleading,

the practitioner shall propose the appropriate amendments to management.

If management declines, or does not permit the practitioner to make the proposed
amendments to the compiled financial information, the practitioner shall withdraw
from the engagement and inform management and those charged with governance of
the reasons for withdrawing.

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 If withdrawal from the engagement is not possible, the practitioner shall determine
the professional and legal responsibilities applicable in the circumstances.

The practitioner shall obtain an acknowledgement from management or those charged

with governance, as appropriate, that they have taken responsibility for the final
version of the compiled financial information.

1.8 Compilation Report

An important purpose of the practitioner’s report is to clearly communicate the nature

of the compilation engagement, and the practitioner’s role and responsibilities in the
engagement.

The practitioner’s compilation report is not a vehicle to express an opinion or

conclusion on the financial information in any form.

The practitioner’s report issued for the compilation engagement shall be in writing,
and shall appear as follows:

PRACTITIONER’S COMPILATION REPORT

Addressee

We have compiled the accompanying financial statements of HSC Company based

on information you have provided. These financial statements comprise the
statement of financial position of HSC Company as at December 31, 2022, the
statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and a summary of significant
accounting policies and other explanatory information.

We performed this compilation engagement in accordance with Philippine

Standard on Related Services 4410 (Revised), Compilation Engagements.

We have applied our expertise in accounting and financial reporting to assist you
in the preparation and presentation of these financial statements in accordance
with Philippine Financial Reporting Standards for Small- and Medium-sized
Entities (PFRS for SMEs). We have complied with relevant ethical requirements,
including principles of integrity, objectivity, professional competence and due
care.

These financial statements and the accuracy and completeness of the information
used to compile them are your responsibility.

Since a compilation engagement is not an assurance engagement, we are not

required to verify the accuracy or completeness of the information you provided
to us to compile these financial statements. Accordingly, we do not express an
audit opinion or a review conclusion on whether these financial statements are
prepared in accordance with PFRS for SMEs.

Practitioner’s signature

Date of the practitioner’s report

Practitioner’s address

Exercises:

Choose the correct answer:

1. Which statement is correct regarding agreed-upon procedures engagement?

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 a. Its objective is for the practitioner to carry out procedures of an accounting nature
to which the practitioner and the entity and any appropriate third parties have
agreed and to report on factual findings.
b. Users of the report assess for themselves the procedures and findings reported by
the practitioner and draw their own conclusions.
c. The report is usually not restricted to those who have agreed to the procedures to
be performed.
d. None of these.

2. Which of the following ethical principles governing the practitioner’s professional

responsibilities for AUPs is usually not required of practitioners?

a. Objectivity. c. Integrity
b. Confidentiality. d. Independence.

3. The report on an agreed-upon procedures engagement needs to describe the purpose

and the agreed-upon procedures of the engagement in sufficient details. The report
should appropriately include the “title”

a. Agreed-Upon Procedures Report.

b. Report on Agreed Procedures and Findings.
c. Report of Findings.
d. CPA’s Report of Agreed-upon Procedures.

4. The AUPs Report should contain:

a. A statement that the engagement was performed in accordance with the PSRS
applicable to agreed-upon procedures engagements, or with relevant national
standards or practices.
b. Identification of the purpose for which the agreed-upon procedures were
performed.
c. Both A and B.
d. Neither A nor B.

5. An AUPs Report should include

a. A listing of the general procedures performed.

b. A statement that the procedures performed do not constitute either an audit or a
review and, as such, no assurance is expressed.
c. A statement that an AUPs engagement involves performing of substantive
procedures.
d. A statement that AUPs engagements are assurance engagements that practitioners
may perform.

6. The objective of a compilation engagement is for the practitioner to use

____________________.

a. Accounting expertise.
b. Auditing expertise.
c. Taxation expertise.
d. All of these.

7. Unless required by law or regulation, the practitioner shall not accept a compilation
engagement unless the practitioner is able to

a. Identify the intended use by management of the financial information to be

compiled, and be satisfied that there is a rational purpose for the engagement.
b. Determine whether the financial reporting framework adopted by management for
compilation of the financial information is acceptable.
c. Both A and B
d. Neither A nor B.

8. In relation to compilation engagements, management have responsibilities which

include:

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 a. Preparation of the financial information in accordance with the applicable financial
reporting framework, including the fair presentation of the financial information,
where relevant.
b. Selection of appropriate accounting policies under the financial reporting
framework where needed.
c. Both A and B.
d. Neither A nor B.

9. Which of the following procedures is ordinarily not performed by a practitioner in a

compilation engagement?

a. Reading the financial statements to consider whether they are free of obvious
mistakes.
b. Obtain knowledge and understanding of the entity’s business and operations,
including the entity’s accounting system and accounting records.
c. Applying analytical procedures.
d. An understanding of the applicable financial reporting framework, including its
application in the entity’s industry, sufficient to be able to compile the financial
information.

10. Both a compilation and an AUPs engagement

a. Require the issuance of a report that includes either an opinion or a conclusion.

b. Require understanding of the internal controls of the client entity.
c. Are non-assurance engagements.
d. Are restricted to terms of distribution of reports.

END OF TOPIC 1

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Topic 2: REGULATIONS OF THE ACCOUNTANCY PROFESSION

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to

1. Understand the purpose of the Accountancy Law;

2. Identify the functions of the Board of Accountancy;
3. Understand the nature of and requirements for the CPA Board Examinations;
4. Identify the different areas of practice of accountancy;
5. Explain the importance of continuing professional development for CPAs;
6. Be familiar with the financial reporting and auditing standard setting bodies in
the Philippines; and
7. Understand the rules of advertising for professional accountants.

NOTES:

2.1 Accountancy Law

Republic Act 9298, otherwise known as the “Philippine Accountancy Act of 2004”
is the law that governs the practice of the accountancy profession in the Philippines is
It was approved on May 13, 2004. It has the following objectives:

a. The standardization and regulation of accounting education.

b. The examination for registration of Certified Public Accountants.
c. The supervision, control and regulation of the practice of accountancy in the
Philippines.
 Practice of Public Accountancy.
 Practice in Commerce and Industry.
 Practice in Education/Academe.
 Practice in the Government.

2.2 Board of Accountancy

The Board of Accountancy (Board or BOA) is the body that regulates the practice
of accountancy profession in the Philippines. It was created through the passage of
Act No. 3105 on March 17, 1923 with the authority to promulgate rules and
regulations, to set professional standards for the accounting profession practice, and
to issue CPA certificates to those who have qualified in accordance with the
requirements of the law.

The Board is under the administrative supervision of the Professional Regulation

Commission (Commission or PRC).

Composition of the BOA

The Board is composed of:

a. A chairman – presides in all meetings of the Board

b. 6 members

They are to be appointed by the President of the Philippines from a list of 3

recommendees for each position and ranked by the Professional Regulation

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Commission (PRC), from a list of 5 nominees for each position submitted by the
Accredited Integrated Professional Organization (AIPO).

The Board will elect a vice chairman from among its members. In the event of a
vacancy in the office of the chairman, the vice-chairman assumes such duties and
responsibilities until a chairman is appointed.

The BOA should be equitably represented by the 4 sectors in the accountancy practice.

The terms of office are as follows:

a. The chairman and the members of the Board have 3-year terms.
b. Any vacancy occurring within the term of a member shall be filled up for the
unexpired portion of the term only.
c. 1-year resting period is required if the member has served for 2 consecutive terms.
d. Maximum term is 12 years (4 terms).
e. The vice-chairman of the Board has a 1-year term.

Qualifications of the Members of the BOA

A member of the BOA must:

a. Be a natural-born citizen and a resident of the Philippines.

b. Be a duly registered CPA with at least ten 10 years of work experience in any scope
of practice of accountancy.
c. Be of good moral character and must not have been convicted of crimes involving
moral turpitude.
d. Not have any pecuniary interest, directly or indirectly, in any school, college,
university or institution conferring an academic degree necessary for admission to
the practice of accountancy or where review classes in preparation for the licensure
examination are being offered or conducted, nor shall he/she be a member of the
faculty or administration thereof at the time of his/her appointment of the Board.
e. Not be a director or officer of the AIPO (PICPA) at the time of appointment.

Powers and Functions of the BOA

The BOA acts as a collegial body and has the specific powers, function and
responsibilities to

a. Prescribe and adopt the rules and regulations necessary for carrying out the
provisions of R.A. 9298.

b. Supervise the registration, licensure and practice of accountancy in the Philippines.

c. Administer oaths in connection with the administration of R.A. 9298.

d. Issue, suspend, revoke, or reinstate the Certificate of Registration for the practice
of the accountancy profession.

e. Adopt an official seal of the Board.

f. Prescribe and/or adopt a Code of Ethics for the practice of accountancy.

g. Monitor the conditions affecting the practice of accountancy and adopt such
measures as may be deemed proper for the enhancement and maintenance of high
professional, ethical, accounting and auditing standards.

h. 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.

i. Investigate violations of R.A. 9298 and the rules and regulations promulgated
hereunder and for this purpose, to issue summons, subpoena and subpoena ad
testicandum and subpoena duces tecum to violators or witness thereof and compel
their attendance to such investigation or hearing and the production of documents
in connection therewith.

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 The Board upon approval of the Commission may delegate the fact-finding aspect
of such investigations to the accredited national professional organization of
Certified Public Accountants (e.g., PICPA).

j. Make such investigations as it deems necessary to determine whether any person

has violated R.A. 9298, any accounting or auditing standard or rules duly
promulgated by the Board as part of the rules governing the practice of
accountancy.

k. Issue a cease or desist order to any person, association partnership or corporation

engaged in violation of any provision of R.A. No. 9298, any accounting or auditing
standards or rules duly promulgated by the Board as part of the rules governing
the practice of accountancy in the Philippines.

l. Punish for contempt of the Board, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court.

m. Prepare, adopt, issue and amend the syllabi of the subjects for examinations in
consultation with the academe.

n. Determine and prepare questions for the licensure examination which shall strictly
be within the scope of the syllabi of the subjects for exanimations as well as
administer, correct and release the results of the licensure examinations.

o. Ensure, in coordination with the Commission on Higher Education (CHED) or other

authorized government offices, that all higher educational instruction and offering
of accountancy, including accounting review centers and/or CPD providers offering
accounting seminars, comply with the policies, standards and requirements of the
course prescribed by CHED or other authorized government offices or CPD Council
as the case may be in the areas of curriculum, faculty, library and facilities.

p. Exercise such other powers as may be provided by laws as well as those which
may be implied from, or which are necessary or incidental to the carrying out of,
the express powers granted to the Board to achieve the objectives and purposes
of R.A. 9298.

All records of the Board, including administrative and other investigative cases
conducted by the Board, are under the custody of the PRC. Such records may include
applications for examination, examination questions, answer sheets, and other records
and documents pertaining to the CPA licensure examinations.

The policies, resolution, rules and regulations, issued or promulgated by the Board are
subject to review and approval of the PRC. However, the Board’s decisions, resolutions
or orders rendered in administrative cases are subject to review only if on appeal.

Grounds for Suspension or Removal of the Members of BOA

The President of the Philippines, upon the recommendation of the PRC, has the power
to suspend or remove any member of the Board on the following grounds:

a. Neglect of duty or incompetence.

b. Violation or tolerance of any violation of R.A. 9298 or the Code of Ethics for
Professional Accountants and the technical and professional standards for CPAs.
c. Final judgment of crimes involving moral turpitude.
d. Manipulation or rigging of the CPA licensure examination results, disclosure of
secret and confidential information in the examination questions prior to the
conduct of the said examination, or tampering of grades.

2.3 Board Licensure Examination for CPAs

The Licensure Examination for Certified Public Accountants (LECPA), in accordance

with R.A. 9298, covers the following subjects:

a. Management Services
b. Business Law and Taxation
c. Theory of Accounts
d. Auditing Theory

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e. Auditing Problems
f. Practical Accounting Problems I
g. Practical Accounting Problems II

Per issuance of BOA Resolution No. 262, Series of 2015, the number of subjects
starting the May 2016 LECPA is reduced from 7 to 6, to include:

a. Management Advisory Services

b. Regulatory Framework for Business Transaction
c. Taxation
d. Auditing
e. Financial Accounting and Reporting
f. Advanced Financial Accounting and Reporting

LECPA Syllabi

Syllabi are documents showing the outline embodying topics and concepts of major
subjects prescribed in specific course of study to serve as the basis for test questions
in the CPA licensure examinations.

The BOA, subject to the approval of the PRC, may revise or exclude any of the subjects
and their syllabi, and add new ones as the need arises provided the change shall not
be more often than every 3 years.

Qualifications of BLECPA Applications

Any person applying for examination shall establish the following requisites to the
satisfaction of the BOA 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.
d. Has not been convicted of any criminal offense involving moral turpitude.

The following documents are required to be submitted by the applicant to the PRC:

a. Certificate of Live Birth in Philippine Statistics Authority (PSA) 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 BOA may require.

CPA Board Examination Rating

In order to pass the CPA licensure examination, a candidate must obtain a general
average of 75%, with no grades lower that 65% in any given subject.

 Conditional Status:

 Conditional credit is given for the subjects passed in the event a candidate
obtains the rating of 75% and above in at least a majority of subjects.
 A period of 2 years within which to take the remaining subjects.
 In order to pass the examination, the said examinee has to obtain at least a
general average of 75%, and a rating of at least 65% in each of the subjects
re-examined.
 The examination, in which the candidate obtained a conditional status, together
with the removal examination on the subjects in which he failed is counted as
one complete examination.

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  Failed:

 Any candidate who fails in 2 complete CPA Board Examinations is disqualified

from taking another set of examinations unless he submits evidence to the
satisfaction of the Board that he enrolled in and completed at least 24 units of
subjects given in the LECPA.
 Such refresher course should be offered only by an educational institution
granting a degree of Bachelor of Science in Accountancy.
 The candidates may take the aforesaid subjects in the regular course offering,
or in a special refresher course duly accredited by the BOA.

The BOA is required to submit to the PRC the ratings obtained by each candidate within
10 calendar days after the examination, unless extended for just cause.

Upon the release of the results of the examination, the PRC shall send by mail the
rating received by each examinee at the given address using the mailing envelope
submitted during the application for examination. The report of rating may also be
accessed in the PRC website. Moreover, such report of rating may also be distributed
to the successful examinees during their mass oath taking as new registered CPAs.

Oath of Profession

All successful examinees are required to take an oath of profession before entering
into the practice of profession, and such oath of profession may be administered by
any of the following:

a. Any member of the Board of Accountancy.

b. Any government official authorized by the Professional Regulation Commission.
c. Any person authorized by law to administer oath.

3.4 Certificate of Registration and Professional Identification Card

To those who have successfully passed the licensure examination and have taken the
oath of profession, the following shall be issued:

a. Certificate of Registration (COR).

 A certificate bearing a registration number, issued to an individual, by the PRC,

upon recommendation by the BOA, signifying that the individual has complied
with all the legal and procedural requirements for such issuance including
having successfully passed the LECPA.
 Includes the signature of the Chairperson of the PRC and the Chairman and
Members of the BOA.
 Stamped with the official seal of the PRC and of the BOA, indicating that the
person named therein is entitled to practice of the profession with all the
privileges appurtenant thereto.
 May be issued to persons admitted to practice the CPA profession without
examination under reciprocity or other international agreements.

b. Professional Identification Card (PIC) or Professional License.

 Issued by the PRC to successful examinees or registrants.

 Includes the signature of the Chairperson of the PRC.
 Includes the registration number, date of issuance and expiry date.
 Valid for 3 years and renewable every 3 years.

CERTIFIED PUBLIC ACCOUNTANT

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 A CPA should indicate, on the documents he signs, uses or issues in connection with
the practice of profession, the number of his Certificate of Registration, with its the
date of issuance and the duration of validity, Professional Identification Card number,
Professional Tax Receipt number issued by the City/Municipality, and Accreditation
numbers, as deemed appropriate.

Refusal to Issue COR and PIC

The following are considered grounds for denial of issuance of COR and PIC:

a. Conviction by a court of competent jurisdiction of a criminal offense involving moral

turpitude.
b. Guilty of immoral and dishonorable conduct.
c. Unsound mind.
d. Misrepresentation in the application for examination.

The registration shall not be refused and a name shall not be removed from the roster
of CPAs on conviction for a political offense or for an offense which shall not, in the
opinion of the BOA, either from the nature of the offense or from the circumstances of
the case, disqualify a person from practicing accountancy under R.A. 9298.

Suspension, Revocation, and Reissuance of COR and PIC

The BOA has the power, upon due notice and hearing, to suspend or revoke the
practitioner’s COR and PIC, or suspend the practitioner from the practice of profession
for:

a. Any of the causes or grounds for denial of registration.

b. Any unprofessional or unethical conduct or malpractice.
c. Violation of any of the provisions of R.A. 9298, and its implementing rules and
regulations, the Code of Ethics for Professional Accountants and the technical and
professional standards of practice for CPAs.

After the expiration of 2 years from the date of revocation of a COR and upon
application and for reasons deemed proper and sufficient, and after being convinced
of the applicant’s remorse and rehabilitation, the BOA may reinstate the validity of a
revoked COR and may no longer require the applicant to take another examination.

Replacement of Lost COR

A new COR may be issued to replace lost, destroyed, or mutilated certificate upon
payment of the required fees. The BOA is required to issue a resolution, subject to
the approval by the PRC, in granting a petition for reinstatement to the practice of
accountancy.

3.5 Practice of Accountancy

No person shall practice accountancy in the Philippines, or use the title “Certified Public
Accountant”, or use the abbreviated title “CPA” or display or use any title, sign, card
advertisement, or other device to indicate such person is a Certified Public Accountant,
unless such person:

a. Have received from the BOA a Certificate of Registration and been issued a
Professional Identification Card, or
b. Have a valid temporary/special permit duly issued to him/her by the BOA and the
PRC.

All CPAs shall abide by the requirements, rules and regulations on continuing
professional development (CPD) as promulgated by the BOA, subject to the approval
of the PRC, in coordination with the APO.

Scope of Practice of Accountancy

Practice of Public Accountancy constitutes in a person, be it his/her individual

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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 CPA, 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 transactions and accounting records.

 The preparation, signing, or certification for client of reports of audit, statement
of financial position and other financial, accounting and related schedules,
exhibits, statement or reports which are to be used by shareholders or for
publication or for credit purposes, or to be filed with a court or government
agency, or to be used any other purpose.
 The design, installation, review and revision of accounting systems and
controls, or the preparation and/or review of income tax returns when related
to accounting and auditing procedures.
 When he/she represents his/her clients before government agencies on tax and
other matters related to accounting.
 Renders professional assistance in matters relating to accounting procedures
and the recording and presentation of financial facts or data.

Practice in Commerce and Industry constitutes in a person, involved in decision

making requiring professional knowledge in the science of accounting, as well as the
accounting aspects of finance and taxation, or when he/she represents his/her
employer before government agencies on tax and other matters related to accounting;
or when such employment or position requires that the holder thereof must be a CPA.

R.A. 9298 states that any position in any business or company in the private sector
which has a paid-up capital of at least P5,000,000 and/or an annual revenue of at least
P10,000,000, whose function requires supervising the recording of financial
transactions, preparation of financial statements, coordinating with the external
auditors for the audit of such financial statements and other related functions, must
be occupied only by duly registered CPA.

Practice in Education/Academe constitutes in a person in an educational institution

which involve teaching of accounting, auditing, management advisory services,
accounting aspect of finance, business law, taxation, and other technically related
subjects. Members of the Integrated Bar of the Philippines may be allowed to teach
business law and taxation subjects. Furthermore, the position of either the dean or
the department chairman or its equivalent that supervises the Bachelor of Science in
Accountancy program of an educational institution must be occupied only by duly
registered CPA.

Practice in the Government constitutes in a person, who holds, or is appointed to,

a position in an accounting professional group in government or in a GOCC
(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 CPA is a prerequisite.

Meaningful Experience

Meaningful experience in the practice of accountancy is earned in the following areas:

a. In commerce and industry, a 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.
b. In the academe/education, teaching for at least 3 trimesters or 2 semesters
subjects in either financial accounting, business law and tax, auditing problems,
auditing theory, financial management and management services. The
accumulated teaching experience on these subjects should not be less than 3
school years.
c. In government, a significant involvement in general accounting, budgeting, tax
administration, internal auditing, liaison with the Commission on Audit or any other
related functions.

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d. In public practice, at least 1 year as audit assistant and at least 2 years as auditor
in charge of audit engagement covering full audit functions of significant clients.

As a matter of proof of having acquired a meaningful experience in the practice of

accountancy, it shall be certified under oath by the employer where such meaningful
experience was obtained.

CPA Seal

All registered CPAs shall obtain and use a seal of a design prescribed by the BOA
bearing the registrant’s name, registration number and title.

 Circular in form with smaller circle within.

 Upper portion of the space between the circles – Name of the CPA
 Lower portion of the space between the circles – CPA Registration Number
 Middle of the smaller circle – “CPA”

The auditor’s report shall be stamped with said seal, indicating therein his/her current
PTR number and date/place of payment when filed with government authorities or
when used professionally.

Affixing the CPA’s seal and signature is an indication of compliance by the CPA of the
requisite accounting and auditing standards and rules.

Foreign Reciprocity

A person who is not a citizen of Philippines shall not be allowed to practice accountancy
in the Philippines unless he/she can prove that the country of which he/she is a citizen
admits citizens of the Philippines to the practice of the same profession without
restriction.

A foreign applicant who desires to practice public accountancy in the Philippines needs
also to comply with the accreditation requirements.

Special Permits

Special permits are issued to foreign nationals who desire to practice accountancy in
the Philippines, in lieu of the required COR. Special permits may be issued to:

a. 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 is limited only for the particular work that he/she is being engaged,
and there is no Filipino CPA who is qualified for such consultation or specific
purposes.
b. A foreign CPA engaged as professor, lecture or critic in fields essential to
accountancy education in the Philippines and the engagement is confined to
teaching only.
c. 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.

Practice of Public Accountancy

 Practice of public accountancy must be carried in the form of a single proprietorship

or a partnership.

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 The partnership may be carried on in the form of general partnership or a limited
liability partnership.
 Corporations are not allowed to practice public accountancy in the Philippines.
 Sole practitioners and partners of partnership organized to practice public
accountancy must be registered CPAs, and must have secured a Certificate of
Accreditation from the BOA and PRC.

In the case of an individual CPA, he shall do business under his registered name with
the BOA and PRC, and as printed in his CPA Certificate.

In the case of firms, they shall do business under their respective duly registered and
authorized firm name appearing in the registration documents issued by the
Department of Trade and Industry (DTI) and such firm shall include the real name of
the sole proprietor as printed in his CPA Certificate.

In the case of registered partnerships, they shall do business under their respective
partnership names as indicated in their current Articles of Partnership and Certificates
of Registration issued by the Securities and Exchange Commission (SEC).

In all cases, a CPA is not allowed to include any fictitious name, indicates specialization
or is misleading as to the type of organization.

CPAs who are to engage in the practice of public accountancy must register with the
PRC and the BOA and such registration is valid for 3 years and may be renewed every
3 years on or before September 30 on the year of expiry.

The registration of applicants approved during any month of the year shall expire on
December 31 on the third year following its approval. For example, if the application
of registration was approved on June 15, 2020, the registration shall expire on
December 31, 2022 and therefore it shall be renewed on or before September 30,
2022.

Accreditation of CPAs

Not all registered CPAs can conduct an audit and sign on audited financial statements
of business entities. Before an independent CPA can perform an audit of financial
statements, he must register and seek accreditation from various bodies.

The Board of Accountancy (BOA) is the professional regulatory board of

accountancy under Professional Regulations Commission (PRC). BOA requires
accreditation of all CPAs in the Philippines who wish to conduct audits and sign on
audited financial statements.

Accreditation from the Bureau of Internal Revenue (BIR) is also required for those
CPAs who sign on the audited financial statements for sole proprietorship,
partnerships, corporations and other associations. BIR accreditation also applies to
CPA practitioners who sign on tax returns and communications, and represent
themselves on behalf of their clients/taxpayer.

Certain Securities and Exchange Commission (SEC) regulated entities are

required to have their financial statements to be audited and signed by SEC-accredited
CPAs only.

BSP accreditation is required for CPAs who wish to audit financial statements of entities
(e.g., banks and non-bank intermediaries) regulated by the Bangko Sentral ng
Pilipinas (BSP).

CDA accreditation and IC accreditation are also required for audits of cooperatives
registered with the Cooperative Development Authority (CDA) and corporations
registered and under the supervision of the Insurance Commission (IC),
respectively.

A Certificate of Accreditation shall be issued to a registered CPA who is able to

complete the requirements of the accreditation process (including CPD units) and show
proof that he is entitled to practice public accountancy. Such certificate is issued by

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 the PRC upon a favorable recommendation of the BOA, and shall be valid for 3 years
and renewable every 3 years.

Professional accountants in commerce and industry and in education must also comply
with the accreditation requirements set by the BOA.

3.6 Continuing Professional Development (CPD)

R.A. 10912, otherwise known as the “Continuing Professional Development Act

of 2016” defines CPD as the inculcation of advanced knowledge, skills and ethical
values in a post-licensure specialized or in an inter- or multi-disciplinary field of study
for assimilation into professional practice, self-directed research and/or lifelong
learning.

CPD is aimed at the development and maintenance of professional competence, and it

provides continual development of the professional knowledge, professional skills,
professional values, ethics and attitudes, and the competence achieved during initial
professional development.

The CPD Act of 2016 lapsed into law on July 21, 2016 and took effect on August 16.
2016. Its implementation, however, started on March 1, 2017 upon the effectivity of
Resolution No. 1032 or the Implementing Rules and Regulations (IRR) of R.A. 10912.

CPD Council

The Continuing Professional Development Council or CPD Council is created to

promote, ensure and implement the continuous improvement of knowledge, skills and
competencies of professionals, in accordance with the national, regional and
international standards of practice. It is composed of:

a. Chairperson
 A member of the BOA so chosen by the BOA to sit in the CPD Council.
 Term of office is co-terminus with his incumbency in the BOA unless sooner
replaced by the BOA through a resolution, subject to approval of the PRC.

b. Two (2) members.

 First member
- The president, or any officer chosen by the Board of Directors of the PICPA.
- Has a term of office of 2 years unless sooner replaced through a resolution
by the PICPA.

 Second member
- The president, or any officer of the organization of deans or department
heads of schools, colleges or universities offering the degree requiring
licensure examination.
- Has a term of office of 2 years unless sooner replaced through a resolution
by the organization of deans or heads of departments.

The powers and functions of the CPD Council are:

a. Ensuring the adequate and appropriate provision of CPD programs for the
profession.
b. Evaluating and acting on application for accreditation of CPD providers and their
CPD programs.
c. Ensuring that the CPD programs offered by CPD providers are reasonably priced
and are accessible to all professionals.
d. Monitoring and evaluating the implementation by the CPD providers of their
programs, set qualifications for designated monitors and develop a monitoring tool.
e. Assessing regularly and upgrading criteria for accreditation of CPD providers and
CPD programs.
f. Conducting researches, studies and benchmarking for international alignment of
CPD programs.
g. Issuing operational guidelines.

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h. Developing mechanisms for the validation, accreditation and recognition of self-
directed learning, prior/informal learning, online learning, and other learning
processes through professional work experience.
i. Performing such other functions related or incidental to the implementation of the
CPD.

CPD Provider

A CPD provider refers to a natural or a juridical person accredited by the CPD Council
to conduct CPD programs.

The accreditation of CPD providers is valid for 3 years and renewable for another 3
years, depending on the CPD Council’s evaluation of their performance and compliance
to the Council.

CPD Programs

CPD Program refers to a set of learning activities accredited by the CPD Council such
as seminars, workshops, technical lectures or subject matter meetings, non-degree
training lectures and scientific meetings, modules, tours and visits, which equip the
professionals with advanced knowledge, skills and values in specialized or in an inter-
or multidisciplinary field of study, self-directed research and/or lifelong learning.

The CPD Programs consist of activities that range from structured to nonstructured
activities, which have learning processes and outcomes. These include the following:

a. Formal learning. Educational arrangements such as curricular qualifications and

teaching-learning requirements that take place in education and training
institutions recognized by relevant national authorities, and which lead to diplomas
and qualifications.

b. Nonformal learning. Learning that has been acquired in addition or alternatively

to formal learning, which may be structured and made more flexible according to
educational and training arrangements.

c. Informal learning. Learning that occurs in daily life assessed, through the
recognition, validation and accreditation process, and which can contribute to a
qualification.

d. Self-directed learning. Learning activities such as online training,

local/international seminars/non-degree courses, institution/ company-sponsored
training programs, and the like, which did not undergo CPD accreditation but may
be applied for and awarded CPD units by the respective CPD Council.

e. Online learning. Structured or unstructured learning initiatives, which make use of

the internet and other web-based Information and Communications Technology
solutions.

f. Lifelong learning. Learning activities undertaken throughout life for the

development of competencies and qualifications of the professional.

g. Professional work experience. Any participation that a professional gains while

working in a specific field.

The matrix for CPD programs activities or sources, as provided by PRC Resolution
2017-254, is shown below:

PROGRAM/ACTIVITY CREDIT UNIT(S) SUPPORTING DOCUMENT(S)

SEMINARS/WORKSHOPS (Training Offered by Accredited CPD Providers, Face to Face or

Online)

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 Participant
 Resource Speaker
 Panelist/Reactor
 Facilitator/ Moderator
 CPD Monitor
 In-Service Training / On-
the-Job Training
Approved credit units  Certificate of attendance with no.
for the program of hours
 Seminar program and list of
participants
3 CU per hour  Photocopy of certificate
 Copy of papers
 Program invitation
2 CU per hour  Certification from sponsoring org.
 Copy of program
1 CU per hour  Certification from sponsoring org.
 Copy of program
Twice the number of  Monitoring report
approved credit units  Certificate of appearance
for the program  Authority to monitor
Maximum of 20 CU for a 12-  Certificate of training
month period or a fraction  Training description
thereof upon completion

ACEDEMIC TRACK (must be applied within 5 years after completion)

 Master’s Degree or 60 CU for compliance period  University certification

Equivalent
 Doctoral Degree or
Equivalent
Additional 30 CU for compliance
 Bachelor of Laws
Additional 30 CU for compliance  Certificate of admission to the
 Professional certifications,
such as CMA, CFA, CFE,
CIA, CISA, etc.
 Foreign Language
Certifications
 Professorial Chair
 Internship/Specialty/Sub-
specialty Program
 Fellowship Grant
- Participant
- Resource Speaker
- Researcher
 Post Graduate
Diploma/Certificate
upon completion of degree
60 CU for compliance period
upon completion of candidacy
period upon completion of
degree
30 CU for compliance period  University certification
upon completion of degree  Diploma and transcript of records
period upon passing the Bar
exams
10 CU per professional
certification obtained from
2010 and subsequent years
10 CU for each foreign
language certification
15 CU per year
10 CU per year
2 CU per grant
4 CU per grant
5 CU per grant
Maximum of 30 CU for an 18-
month period or a fraction
thereof upon completion
 Diploma and transcript of records
 University certification
 Diploma and transcript of records
Philippine Bar
 Copy of Professional Certificate
duly authenticated by certifying
organization
 Copy of certificate of completion
and proficiency
 Certificate of grant or
appointment paper
 Certification from host institution
 Certificate of completion
 Certification from the granting
institution
 Certificate of fellowship
 Diploma
 Certification from the institution

SELF-DIRECTED OR LIFELONG LEARNING (Training Offered by Non-Accredited CPD

Providers, Face-to-Face or Online)

 Participant
 Resource Speaker
 Panelist/Reactor
 Facilitator/ Moderator
 In-Service Training /
On-the-Job Training
Credit units for the program
as evaluated by the CPD
Council
3 CU per hour
2 CU per hour
1 CU per hour
Maximum of 20 CU for a 12-
month period or a fraction
thereof upon completion
 Certificate of attendance with no.
of hours
 Seminar program and list of
participants
 Photocopy of certificate
 Copy of papers
 Program invitation
 Certification from sponsoring org.
 Copy of program
 Certification from sponsoring org.
 Copy of program
 Certificate of training
 Training description

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 Program / Training Module 10 CU per module  Copy of module and evaluation
Development
 Technical Paper 5 CU per technical paper  Certification of completion and
approval
 Article Published in a Refereed / Peer Reviewed Professional Journal
Local International  Copy of published article
- Author(s) 10 CU 10 CU  Table of contents
For multiple authors, divide
CU equally among them
- Peer Reviewer 2 CU per article
 Pamphlet / Book or Monograph
20 CU for 40 CU for  Copy of published book
single single author
- Author(s) author for for book or
pamphlet monograph
(less than (more than
100 pages) 100 pages)
For multiple authors, divide
CU equally among them
- Editor Maximum of 20 CU
 Article in Magazine/ Maximum of  Proof of publication of article
Newspaper relevant to the 5 CU per article
topics in the Competence For multiple authors, divide CU
Areas equally among them
 Study Tours/Visits 2 CU per day (maximum  Certification from sponsoring
of 20 CU per tour) institution
 Active Committee 2 CU per meeting attended up  Certification of Attendance and
Membership in FRSC, to maximum of 24 CU per CPD compliance
AASC, PIC and others calendar year
 Consultancy (e.g. Citizen CU for other voluntary  Subject to prior determination
Participatory Audit, services subject to prior and approval by the Joint CPD
Government Bidding and approval by the Joint CPD Committee
Procurement Observers) Committee
 Socio-Civic Activities (e.g., 3 CU per hour  Project proposal
Mentors in Go! Negosyo  Photos
Mentor-Me program, etc.)
 Recognition / Title (e.g., Full credit units for  Copy of certificate from the
Fellows, Hall of Fame compliance period subject to awarding body
Award, Outstanding approval by the CPD Council
Professional, Lifetime
Achievement Awardee)

SUCH OTHER ACTIVITIES TO BE RECOMMENDED BY THE CPD COUNCIL AND APPROVED

BY THE BOA AND THE PRC

CPD Credit Units

CPD credit unit refers to the value of an amount of learning that can be transferred
to a qualification achieved from formal, informal or non-formal learning setting
including professional work experience wherein credits can be accumulated to
predetermined levels for the award of a qualification.

PRC Resolution 2019-1146 took effect on March 1, 2019 and provided a "transition
period" for all Philippine professionals. Under the said resolution:

 OFWs are not covered by the CPD requirement.

 Newly licensed CPAs are not covered by the CPD requirement for their first
renewal cycle.
 All other CPAs renewing their Professional ID Card will need 15 CPD units of
training (can be under any Competence Area).

CPAs seeking BOA accreditation will still need to comply with the 120 CPD units
required by BOA. These CPD units must be obtained from the following Competence
Areas:

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 a. Technical competence. The ability to apply professional knowledge to perform a
role to a defined standard.
 Standards applicable to professional practice.
 Laws, rules and regulations affecting professional practice.
 Environment of the practice

b. Professional skills. The various types of abilities required to apply professional

knowledge, and professional values, ethics, and attitudes appropriately and
effectively in a professional context. It includes professional development activities
that enhance the CPA’s intellectual, interpersonal, communication, and personal
and organizational skills.

c. Professional values, ethics and attitudes. The professional behavior and

characteristics that identify professional accountants as members of the profession,
and they include the principles of conduct generally associated with and considered
essential in defining the distinctive characteristics of professional behavior.

Competence Areas of
Minimum Required Credit Units
Professional Development
a. Technical Competence 30
b. Professional Skills 5
c. Professional Values, Ethics & Attitudes 5

Out of the 120 CPD units required, 80 CPD units are considered flexible, that is, they
can be obtained under any competence area based on the CPA’s choice.

Moreover, a CPA can only get a maximum of 48 CPD units (40% of 120 CPD units)
for self-directed learning.

3.7 Philippine Institute of Certified Public Accountants

The Philippine Institute of Certified Public Accountants (PICPA) was founded in

November 1929 by a group of illustrious pioneers in the accounting profession and the
following objectives were established:

a. To promote and maintain high professional and ethical standards among CPAs.
b. To advance the science of accounting.
c. To develop and improve accounting education.
d. To encourage cordial relations among accountants.
e. To protect the COR of CPAs granted by the Republic of the Philippines.

The PICPA was recognized by the PRC as the accredited professional organization
(APO) or accredited integrated professional organization (AIPO) of CPAs in the
Philippines on October 2, 1975, per accreditation no. 15. All registered CPAs whose
names appear in the roster of CPAs shall be united and integrated through their
membership in a one and only registered and accredited national professional
organization of registered and licensed CPAs. PICPA is registered with the Securities
and Exchange Commission as a non-profit corporation.

Other professional organizations were also established to complement the objective of

the PICPA. These organizations represent the four areas or sectors of practice of
accountancy in the Philippines and are as follows:

 Association of CPAs in Public Practice (ACPAPP)

 Association of CPAs in Commerce and Industry (ACPACI)
 National Association of CPAs in Education (nACPAE)
 Government Association of CPAs (GACPA)

In order to maintain its recognition as the APO/AIPO of CPAs by the PRC, the PICPA
must meet the following requirements, as prescribed by R.A. 9298:

a. It is established for the benefit and welfare of the CPAs, the advancement of their
profession, and the attainment of other professional ends.
b. Its membership is open to all registered CPAs without discrimination.

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 c. Its membership shall include CPAs in all sectors, namely, public practice, commerce
and industry, academe/education and government.
d. It shall have a creditable plan to enlist into active membership within 3 years, at
least a majority of the CPAs in the practice of accountancy.
e. It shall have adequate chapters/regions in major areas in the Philippines to
effectively attend to the needs of its members.
f. It shall be judicious and prudent in the management of its financial resources and
for this purpose its chapter/region/national office and their respective foundation
shall keep proper books of accounts and submit annual financial statements
thereof.
g. It shall have a full time career executive director who shall implement the policies
promulgated by the PICPA Board of Directors and shall have direct supervision over
the PICPA Secretariat.
h. It is duly registered as a non-stock corporation or association by the Securities and
Exchange Commission (SEC).
i. It has paid the prescribed accreditation fees.

3.8 Standard-Setting Bodies

Through the power of R.A. 9298, the PRC, upon the recommendation of BOA, created
an accounting standard setting body known as the Financial Reporting Standards
Council (FRSC) and an auditing standards setting body known as the Auditing and
Assurance Standards Council (AASC) to assist the BOA in carrying out its power and
functions.

Financial Reporting Standards Council (FRSC)

The Financial Reporting Standards Council (FRSC) was established to replace the
Accounting Standards Council (ASC) as the accounting standard-setting body in the
Philippines. It shall be composed of 15 members, as follows:

Chairman (had been or presently a senior practitioner in any scope

of accounting practice) 1
Board of Accountancy (BOA) 1
Securities and Exchange Commission (SEC) 1
Commission on Audit (COA) 1
Bangko Sentral ng Pilipinas (BSP) 1
Bureau of Internal Revenue (BIR) 1
An major organization composed of preparers and users of financial
Statements 1
Accredited Professional Organization (APO) of CPAs
Public Practice 2
Commerce and Industry 2
Education 2
Government 2 8
15

The Auditing and Assurance Standards Council (AASC) was formed to replace
the Auditing Standards and Practices Council (ASPC) as the auditing standard-setting
body in the Philippines. It shall be composed of 15 members, as follows:

Chairman (had been or presently a senior practitioner in public

accountancy) 1
Board of Accountancy (BOA) 1
Securities and Exchange Commission (SEC) 1
Commission on Audit (COA) 1
Bangko Sentral ng Pilipinas (BSP) 1
An association or organization of CPAs in active public practice of
accountancy 1
Accredited Professional Organization (APO) of CPAs
Public Practice 6
Commerce and Industry 1
Education 1
Government 1 9
15

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 The chairman and members of both the FRSC and AASC have a 3-year term, which is
renewable for another term.

Through the issuance of BOA Resolution 2020-22, however, the membership in the
AASC was increased from 15 to 18. Out of the 3 new members, 2 representatives will
come from the small-and-medium-sized practitioners, and 1 representative will come
from the Insurance Commission. The BOA also agreed to remove from the AASC the
representative from government. Instead, another representative will come from
public practice.

3.9 Rules on Advertising

Advertising refers to the communication to the public of information as to the services

or skills provided by professional accountants in public practice with a view to procuring
professional business, while publicity is the communication to the public of facts about
a professional accountant which are not designed for the deliberate promotion of that
professional accountant.

Ordinarily, advertising and publicity in any medium are acceptable, provided:

 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.
 It is in good taste.
 It is professionally dignified.
 It avoids frequent repetition of, and any undue prominence being given to the
name of the firm or professional accountant in public practice.

Conversely, the following means are unprofessional and therefore are not allowed:

 Self-laudatory statements.
 Discrediting, disparaging, or attacking other CPA practitioners.
 Referring to, using or citing actual or purported testimonials by third parties.
 Publishing and comparing fees with other CPAs or comparing those services
with those provided by another CPA practitioner.
 Giving too much emphasis on competitive difference.
 Using words or phrases which are hard to define and even more difficult to
substantiate objectively.
 Publishing services in billboard (e.g., tarpaulin, streamers, etc.)
advertisements.
 Identifying the name of a client in advertising or marketing material produced
to promote his practice (unless the client gives its written consent).
 Using the term “Accredited” or any similar words or phrases calculated to
convey the same meaning if the claimed accreditation has already expired.

The following are examples of circumstances in which publicity is acceptable:

a. Any award of any distinction given to a professional accountant may receive

publicity provided the professional accountant should not make use of it for
personal professional advantage.
b. A professional accountant may write a letter or make a direct approach to another
professional accountant when seeking employment or professional business,
provided that the CPA must not make a direct offer of employment to an employee
of another CPA without first seeking the latter’s consent.
c. A professional accountant may be listed in a directory and 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.
d. Professional accountants who author books or articles on professional subjects may
state their name, professional qualifications, and the name of their organization
but shall not give any information as to the services that the firm provides.
e. A professional accountant may invite clients, staff or other professional accountants
to attend training courses or seminars conducted for the assistance of
staff. However, other persons should not be invited to attend such training courses
or seminars except in response to an unsolicited request.

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 f. A professional accountant in public practice may issue to clients or, in response to
an unsolicited request, to a non-client, a factual and objectively worded of the
services provided and a directory setting out names of partners, office addresses
and names and address of associated firms and correspondents.
g. Professional accountants should not designate themselves as specialists or experts
in particular areas of the accounting practice.
h. A professional accountant may hold press and other media releases or
announcements, or media covered events undertaken to commemorate their
anniversaries in public practice. Such undertaking, however, should be done only
every five years of celebration.
i. A professional accountant may develop and maintain a website in the Internet in
such suitable length and style.

Exercises:

Choose the correct answer:

1. The chairman and members of the BOA are appointed by the

a. Commission.
b. APO.
c. President of the Philippines upon from a list of 3 recommendees for each position
and ranked by the PRC, from a list of 5 nominees for each position submitted by
the PICPA.
d. President of the Philippines upon from a list of 3 recommendees for each position
and ranked by the PICPA, from a list of 5 nominees for each position submitted by
the PRC.

2. Which of the following is incorrect regarding the required qualification of members of

the BOA?

a. Must be a citizen and a resident of the Philippines.

b. Must be a duly registered CPA with at least 10 years of work experience in any
scope of practice of accountancy.
c. Must be of good moral character.
d. Must not have any pecuniary interest in any school, university where review classes
in preparation for the licensure examination are being offered or conducted.

3. Which of the following is not a function of the Board?

a. To adopt an official seal of the Board.

b. To issue, suspend, revoke, reinstate the Certificate of Registration for the practice
of the accountancy profession.
c. To delegate its power to determine and prepare test questions for the BLECPA.
d. To ensure, in coordination with CHED, that all higher educational instruction and
offering of accountancy, comply with the policies, standards and requirements of
the course prescribed by CHED.

4. The following statements relate to CPA examination ratings. Which one is incorrect?

a. To pass the CPA examination, candidates should obtain a general weighted average
of at least 75%, with no rating in any subject less than 65%.
b. Candidates who obtain a rating of 75% and above in at least four subjects shall
receive a conditional credit for the subjects passed.
c. Candidates who fail in four complete CPA examinations shall no longer be allowed
to take the examination a fifth time.
d. Candidates that are previously conditioned shall take the examination in the
remaining subjects within 2 years from the preceding examination.

5. Which statement is false regarding Certificate of Registration (COR)?

a. It shall be issued to examinees who pass the licensure examination.

b. It shall bear the signature of the chairperson of the PRC and the chairman and
members of the BOA.

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 c. It shall be stamped with the official seal of the PRC and of the BOA.
d. It may never be revoked, suspended or withdrawn once issued.

6. The seal of the CPA shall be circular in form with a smaller circle within and in the
upper portion of the space between the circles shall be engraved the

a. Name of the individual CPA, firm or partnership.

b. CPA registration number of the individual CPA, proprietor of the firm or the signing
partner of the partnership.
c. Letters “CPA”.
d. None of the above.

7. A resource speaker in a CPD seminar would earn _____ per hour.

a. 3 CU c. 7 CU
b. 5 CU d. 10 CU

8. Which body is created through the RA 9298 and is intended to replace the ASC as the
accounting standard-setting body in the Philippines?

a. FRSC c. PICPA
b. AASC d. SEC

9. Which is false in relation to the composition of AASC?

a. The Chairman must be presently or had been a senior practitioner in public

accountancy.
b. 1 representative shall come from the BOA, SEC, BSP, COA and an association or
organization of CPAs in active public practice of accountancy, respectively.
c. 1 representative shall come from the ACPACI, ACPAE and GACPA, respectively.
d. 5 representatives shall come from the ACPAPP.

10. In order to maintain its recognition as the APO/AIPO by the PRC, the PICPA must meet
several criteria. Which is not one of them?

a. It is established for the benefit and welfare of all CPAs.

b. Its membership shall include CPAs in all sectors.
c. It shall have a creditable plan to enlist into active membership within 2 years, at
least a majority of the CPAs in the practice of accountancy.
d. It is duly registered as a nonstock corporation by the SEC.

END OF TOPIC 3

Page 27 of 60
Topic 3: QUALITY MANAGEMENT

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to

1. Identify the purpose of a system of quality management (QM);

2. Explain the different elements of a system of quality management;
3. Describe the purpose of an engagement quality review;
4. Identify the qualifications of an engagement quality reviewer; and
5. Identify the purpose of a quality assurance review (QAR).

NOTES:

3.1 System of Quality Management

Philippine Standard on Quality Management (PSQM) 1 deals with a firm’s

responsibilities to design, implement and operate a system of quality management for
audits or reviews of financial statements, or other assurance or related services
engagements.

A system of quality management operates in a continual and iterative manner and is

responsive to changes in the nature and circumstances of the firm and its
engagements. For the purposes PSQM 1, a system of quality management addresses
the following eight components:

a. The firm’s risk assessment process

b. Governance and leadership
c. Relevant ethical requirements
d. Acceptance and continuance of client relationships and specific engagements;
e. Engagement performance
f. Resources
g. Information and communication
h. The monitoring and remediation process.

PSQM 1 requires the firm to apply a risk-based approach in designing, implementing

and operating the components of the system of quality management in an
interconnected and coordinated manner such that the firm proactively manages the
quality of engagements performed by the firm.

The risk-based approach includes:

a. Establishing quality objectives. The quality objectives established by the firm

consist of objectives in relation to the components of the system of quality
management that are to be achieved by the firm. The firm is required to establish
the aforementioned quality objectives and any additional quality objectives
considered necessary by the firm to achieve the objectives of the system of quality
management.

b. Identifying and assessing risks to the achievement of the quality objectives

(referred to as quality risks). The firm is required to identify and assess quality
risks to provide a basis for the design and implementation of responses.

c. Designing and implementing responses to address the quality risks. The nature,
timing and extent of the firm’s responses to address the quality risks are based on
and are responsive to the reasons for the assessments given to the quality risks.

At least annually, the individual(s) assigned ultimate responsibility and accountability

for the system of quality management, on behalf of the firm, evaluates the system of
quality management and concludes whether the system of quality management
provides the firm with reasonable assurance that the objectives of the system are
being achieved.

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 Objective

The objective of the firm is to design, implement and operate a system of quality
management for audits or reviews of financial statements, or other assurance or
related services engagements performed by the firm, that provides the firm with
reasonable assurance that:

a. The firm and its personnel fulfill their responsibilities in accordance with
professional standards and applicable legal and regulatory requirements, and
conduct engagements in accordance with such standards and requirements.
b. Engagement reports issued by the firm or engagement partners are appropriate in
the circumstances.

3.2 The Firm’s Risk Assessment Process

The firm shall design and implement a risk assessment process to establish quality
objectives, identify and assess quality risks and design and implement responses to
address the quality risks.

The firm shall identify and assess quality risks to provide a basis for the design and
implementation of responses. In doing so, the firm shall:

a. Obtain an understanding of the conditions, events, circumstances, actions or

inactions that may adversely affect the achievement of the quality objectives,
including:

 With respect to the nature and circumstances of the firm, those relating to:

- The complexity and operating characteristics of the firm.

- The strategic and operational decisions and actions, business processes and
business model of the firm.
- The characteristics and management style of leadership.
- The resources of the firm, including the resources provided by service
providers.
- Law, regulation, professional standards and the environment in which the
firm operates.
- In the case of a firm that belongs to a network, the nature and extent of
the network requirements and network services, if any.

 With respect to the nature and circumstances of the engagements performed

by the firm, those relating to:

- The types of engagements performed by the firm and the reports to be

issued.
- The types of entities for which such engagements are undertaken.

b. Take into account how, and the degree to which, the conditions, events,
circumstances, actions or inactions may adversely affect the achievement of the
quality objectives.

The firm shall design and implement responses to address the quality risks in a manner
that is based on, and responsive to, the reasons for the assessments given to the
quality risks.

In designing and implementing responses, the firm shall include the following
responses:

a. The firm establishes policies or procedures for:

 Identifying, evaluating and addressing threats to compliance with the relevant

ethical requirements.
 Identifying, communicating, evaluating and reporting of any breaches of the
relevant ethical requirements and appropriately responding to the causes and
consequences of the breaches in a timely manner.

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 b. The firm obtains, at least annually, a documented confirmation of compliance with
independence requirements from all personnel required by relevant ethical
requirements to be independent.

c. The firm establishes policies or procedures for receiving, investigating and

resolving complaints and allegations about failures to perform work in accordance
with professional standards and applicable legal and regulatory requirements, or
non-compliance with the firm’s policies or procedures.

d. The firm establishes policies or procedures that address circumstances when:

 The firm becomes aware of information subsequent to accepting or continuing

a client relationship or specific engagement that would have caused it to decline
the client relationship or specific engagement had that information been known
prior to accepting or continuing the client relationship or specific engagement;
or
 The firm is obligated by law or regulation to accept a client relationship or
specific engagement.

e. The firm establishes policies or procedures that:

`
 Require communication with those charged with governance when performing
an audit of financial statements of listed entities about how the system of
quality management supports the consistent performance of quality audit
engagements.
 Address when it is otherwise appropriate to communicate with external parties
about the firm’s system of quality management.
 Address the information to be provided when communicating externally,
including the nature, timing and extent and appropriate form of
communication.

f. The firm establishes policies or procedures that address engagement quality

reviews, and require an engagement quality review for:

 Audits of financial statements of listed entities.

 Audits or other engagements for which an engagement quality review is
required by law or regulation.
 Audits or other engagements for which the firm determines that an engagement
quality review is an appropriate response to address one or more quality risk(s).

The firm shall establish policies or procedures that are designed to identify information
that indicates additional quality objectives, or additional or modified quality risks or
responses, are needed due to changes in the nature and circumstances of the firm or
its engagements. If such information is identified, the firm shall consider the
information and when appropriate:

a. Establish additional quality objectives or modify additional quality objectives

already established by the firm.
b. Identify and assess additional quality risks, modify the quality risks or reassess the
quality risks.
c. Design and implement additional responses, or modify the responses.

3.3 Governance and Leadership

The firm shall establish the following quality objectives that address the firm’s
governance and leadership, which establishes the environment that supports the
system of quality management:

a. The firm demonstrates a commitment to quality through a culture that exists

throughout the firm, which recognizes and reinforces:

 The firm’s role in serving the public interest by consistently performing quality
engagements;
 The importance of professional ethics, values and attitudes;

Page 30 of 60
  The responsibility of all personnel for quality relating to the performance of
engagements or activities within the system of quality management, and their
expected behavior; and
 The importance of quality in the firm’s strategic decisions and actions, including
the firm’s financial and operational priorities.

b. Leadership is responsible and accountable for quality.

c. Leadership demonstrates a commitment to quality through their actions and

behaviors.

d. The organizational structure and assignment of roles, responsibilities and authority

is appropriate to enable the design, implementation and operation of the firm’s
system of quality management.

e. Resource needs, including financial resources, are planned for and resources are
obtained, allocated or assigned in a manner that is consistent with the firm’s
commitment to quality.

3.4 Relevant Ethical Requirements

The firm shall establish the following quality objectives that address the fulfillment of
responsibilities in accordance with relevant ethical requirements, including those
related to independence:

a. The firm and its personnel:

 Understand the relevant ethical requirements to which the firm and the firm’s
engagements are subject.
 Fulfill their responsibilities in relation to the relevant ethical requirements to
which the firm and the firm’s engagements are subject.

b. Others, including the network, network firms, individuals in the network or network
firms, or service providers, who are subject to the relevant ethical requirements to
which the firm and the firm’s engagements are subject:

 Understand the relevant ethical requirements that apply to them.

 Fulfill their responsibilities in relation to the relevant ethical requirements that
apply to them.

3.5 Acceptance and Continuance of Client Relationships and Specific

Engagements

The firm shall establish the following quality objectives that address the acceptance
and continuance of client relationships and specific engagements:

a. Judgments by the firm about whether to accept or continue a client relationship or

specific engagement are appropriate based on:

 Information obtained about the nature and circumstances of the engagement

and the integrity and ethical values of the client (including management, and,
when appropriate, those charged with governance) that is sufficient to support
such judgments.
 The firm’s ability to perform the engagement in accordance with professional
standards and applicable legal and regulatory requirements.

b. The financial and operational priorities of the firm do not lead to inappropriate
judgments about whether to accept or continue a client relationship or specific
engagement.

3.6 Engagement Performance

The firm shall establish the following quality objectives that address the performance
of quality engagements:

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 a. Engagement teams understand and fulfill their responsibilities in connection with
the engagements, including, as applicable, the overall responsibility of engagement
partners for managing and achieving quality on the engagement and being
sufficiently and appropriately involved throughout the engagement.

b. The nature, timing and extent of direction and supervision of engagement teams
and review of the work performed is appropriate based on the nature and
circumstances of the engagements and the resources assigned or made available
to the engagement teams, and the work performed by less experienced
engagement team members is directed, supervised and reviewed by more
experienced engagement team members.

c. Engagement teams exercise appropriate professional judgment and, when

applicable to the type of engagement, professional skepticism.

d. Consultation on difficult or contentious matters is undertaken and the conclusions

agreed are implemented.

e. Differences of opinion within the engagement team, or between the engagement

team and the engagement quality reviewer or individuals performing activities
within the firm’s system of quality management are brought to the attention of the
firm and resolved.

f. Engagement documentation is assembled on a timely basis after the date of the

engagement report, and is appropriately maintained and retained to meet the
needs of the firm and comply with law, regulation, relevant ethical requirements,
or professional standards.

3.7 Resources

The firm shall establish the following quality objectives that address appropriately
obtaining, developing, using, maintaining, allocating and assigning resources in a
timely manner to enable the design, implementation and operation of the system of
quality management:

Human Resources

Personnel are hired, developed and retained and have the competence and capabilities
to:

a. Consistently perform quality engagements, including having knowledge or

experience relevant to the engagements the firm performs; or
b. Perform activities or carry out responsibilities in relation to the operation of the
firm’s system of quality management.

Personnel demonstrate a commitment to quality through their actions and behaviors,

develop and maintain the appropriate competence to perform their roles, and are held
accountable or recognized through timely evaluations, compensation, promotion and
other incentives.

Individuals are obtained from external sources (i.e., the network, another network
firm or a service provider) when the firm does not have sufficient or appropriate
personnel to enable the operation of firm’s system of quality management or
performance of engagements.

Engagement team members are assigned to each engagement, including an

engagement partner, who have appropriate competence and capabilities, including
being given sufficient time, to consistently perform quality engagements.

Individuals are assigned to perform activities within the system of quality management
who have appropriate competence and capabilities, including sufficient time, to
perform such activities.

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 Technological Resources

Appropriate technological resources are obtained or developed, implemented,

maintained, and used, to enable the operation of the firm’s system of quality
management and the performance of engagements.

Intellectual Resources

Appropriate intellectual resources are obtained or developed, implemented,

maintained, and used, to enable the operation of the firm’s system of quality
management and the consistent performance of quality engagements, and such
intellectual resources are consistent with professional standards and applicable legal
and regulatory requirements, where applicable.

Service Providers

Human, technological or intellectual resources from service providers are appropriate

for use in the firm’s system of quality management and in the performance of
engagements, taking into account the relevant quality objectives.

3.8 Information and Communication

The firm shall establish the following quality objectives that address obtaining,
generating or using information regarding the system of quality management, and
communicating information within the firm and to external parties on a timely basis to
enable the design, implementation and operation of the system of quality
management:

a. The information system identifies, captures, processes and maintains relevant and
reliable information that supports the system of quality management, whether
from internal or external sources.

b. The culture of the firm recognizes and reinforces the responsibility of personnel to
exchange information with the firm and with one another.

c. Relevant and reliable information is exchanged throughout the firm and with
engagement teams, including:

 Information is communicated to personnel and engagement teams, and the

nature, timing and extent of the information is sufficient to enable them to
understand and carry out their responsibilities relating to performing activities
within the system of quality management or engagements.
 Personnel and engagement teams communicate information to the firm when
performing activities within the system of quality management or
engagements.

d. Relevant and reliable information is communicated to external parties, including:

 Information is communicated by the firm to or within the firm’s network or to

service providers, if any, enabling the network or service providers to fulfill
their responsibilities relating to the network requirements or network services
or resources provided by them.
 Information is communicated externally when required by law, regulation or
professional standards, or to support external parties’ understanding of the
system of quality management.

3.9 Monitoring and Remediation Process

The firm shall establish a monitoring and remediation process to:

a. Provide relevant, reliable and timely information about the design, implementation
and operation of the system of quality management.
b. Take appropriate actions to respond to identified deficiencies such that deficiencies
are remediated on a timely basis.

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Designing and Performing Monitoring Activities

The firm shall design and perform monitoring activities to provide a basis for the
identification of deficiencies.

In determining the nature, timing and extent of the monitoring activities, the firm shall
take into account:

a. The reasons for the assessments given to the quality risks.

b. The design of the responses.
c. The design of the firm’s risk assessment process and monitoring and remediation
process.
d. Changes in the system of quality management.
e. The results of previous monitoring activities, whether previous monitoring activities
continue to be relevant in evaluating the firm’s system of quality management and
whether remedial actions to address previously identified deficiencies were
effective.
f. Other relevant information, including complaints and allegations about failures to
perform work in accordance with professional standards and applicable legal and
regulatory requirements or non-compliance with the firm’s policies or procedures
established in accordance with PSQM 1, information from external inspections and
information from service providers.

The firm shall include the inspection of completed engagements in its monitoring
activities and shall determine which engagements and engagement partners to select.
In doing so, the firm shall:

a. Take into account the matters listed above.

b. Consider the nature, timing and extent of other monitoring activities undertaken
by the firm and the engagements and engagement partners subject to such
monitoring activities.
c. Select at least one completed engagement for each engagement partner on a
cyclical basis determined by the firm.

The firm shall establish policies or procedures that:

a. Require the individuals performing the monitoring activities to have the

competence and capabilities, including sufficient time, to perform the monitoring
activities effectively.
b. Address the objectivity of the individuals performing the monitoring activities. Such
policies or procedures shall prohibit the engagement team members or the
engagement quality reviewer of an engagement from performing any inspection of
that engagement.

Evaluating Findings and Identifying Deficiencies

The firm shall evaluate findings to determine whether deficiencies exist, including in
the monitoring and remediation process.

Evaluating Identified Deficiencies

The firm shall evaluate the severity and pervasiveness of identified deficiencies by:

a. Investigating the root cause(s) of the identified deficiencies. In determining the

nature, timing and extent of the procedures to investigate the root cause(s), the
firm shall take into account the nature of the identified deficiencies and their
possible severity.
b. Evaluating the effect of the identified deficiencies, individually and in aggregate,
on the system of quality management.

Responding to Identified Deficiencies

The firm shall design and implement remedial actions to address identified deficiencies
that are responsive to the results of the root cause analysis.

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 The individual(s) assigned operational responsibility for the monitoring and
remediation process shall evaluate whether the remedial actions:

a. Are appropriately designed to address the identified deficiencies and their related
root cause(s) and determine that they have been implemented.
b. Implemented to address previously identified deficiencies are effective.

If the evaluation indicates that the remedial actions are not appropriately designed
and implemented or are not effective, the individual(s) assigned operational
responsibility for the monitoring and remediation process shall take appropriate action
to determine that the remedial actions are appropriately modified such that they are
effective.

Findings About a Particular Engagement

The firm shall respond to circumstances when findings indicate that there is an
engagement(s) for which procedures required were omitted during the performance
of the engagement(s) or the report issued may be inappropriate. The firm’s response
shall include:

a. Taking appropriate action to comply with relevant professional standards and

applicable legal and regulatory requirements.
b. When the report is considered to be inappropriate, considering the implications and
taking appropriate action, including considering whether to obtain legal advice.

Ongoing Communication Related to Monitoring and Remediation

The individual(s) assigned operational responsibility for the monitoring and

remediation process shall communicate on a timely basis to the individual(s) assigned
ultimate responsibility and accountability for the system of quality management and
the individual(s) assigned operational responsibility for the system of quality
management:

a. A description of the monitoring activities performed.

b. The identified deficiencies, including the severity and pervasiveness of such
deficiencies.
c. The remedial actions to address the identified deficiencies.

The firm shall communicate the matters described above to engagement teams and
other individuals assigned activities within the system of quality management to
enable them to take prompt and appropriate action in accordance with their
responsibilities.

3.10 Evaluating the System of Quality Management

The individual(s) assigned ultimate responsibility and accountability for the system of
quality management shall evaluate, on behalf of the firm, the system of quality
management.

The evaluation shall be undertaken as of a point in time, and performed at least

annually.

Based on the evaluation, the individual(s) assigned ultimate responsibility and

accountability for the system of quality management shall conclude, on behalf of the
firm, one of the following:

a. The system of quality management provides the firm with reasonable assurance
that the objectives of the system of quality management are being achieved.
b. Except for matters related to identified deficiencies that have a severe but not
pervasive effect on the design, implementation and operation of the system of
quality management, the system of quality management provides the firm with
reasonable assurance that the objectives of the system of quality management are
being achieved; or

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 c. The system of quality management does not provide the firm with reasonable
assurance that the objectives of the system of quality management are being
achieved.

If the individual(s) assigned ultimate responsibility and accountability for the system
of quality management reaches the conclusion described in (b) and (c) above, the firm
shall:

a. Take prompt and appropriate action; and

b. Communicate to:
 Engagement teams and other individuals assigned activities within the system
of quality management to the extent that it is relevant to their responsibilities;
and
 External parties in accordance with the firm’s policies or procedures

The firm shall undertake periodic performance evaluations of the individual(s) assigned
ultimate responsibility and accountability for the system of quality management, and
the individual(s) assigned operational responsibility for the system of quality
management. In doing so, the firm shall take into account the evaluation of the system
of quality management.

3.11 Engagement Quality Review

An engagement quality review is an objective evaluation of the significant

judgments made by the engagement team and the conclusions reached thereon,
performed by the engagement quality reviewer and completed on or before the date
of the engagement report.

The engagement quality reviewer’s evaluation of significant judgments is performed

in the context of professional standards and applicable legal and regulatory
requirements.

However, an engagement quality review is not intended to be an evaluation of whether

the entire engagement complies with professional standards and applicable legal and
regulatory requirements, or with the firm’s policies or procedures.

Engagement Quality Reviewer

An engagement quality reviewer refers to a partner, other individual in the firm, or

an external individual, appointed by the firm to perform the engagement quality
review.

The firm shall establish policies or procedures that set forth the criteria for eligibility
to be appointed as an engagement quality reviewer. An engagement quality reviewer
is not a member of the engagement team, and should

a. Have the competence and capabilities, including sufficient time, and the
appropriate authority to perform the engagement quality review.
b. Comply with relevant ethical requirements, including in relation to threats to
objectivity and independence of the engagement quality reviewer.
c. Comply with provisions of law and regulation, if any, that are relevant to the
eligibility of the engagement quality reviewer.

Threats to the objectivity created by an individual being appointed as an engagement

quality reviewer should also be addressed. As such, the engagement quality reviewer
should/is:

a. Not be selected by the engagement partner.

b. Not otherwise participate in the engagement during the period of review.
c. Not make decisions for the engagement team
d. Not subject to other considerations that would threaten the reviewer’s objectivity.

An engagement quality reviewer should take overall responsibility for the performance
of the engagement quality review and for determining the nature, timing and extent

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 of the direction and supervision of the individuals assisting in the review, and the
review of their work.

In performing the engagement quality review, the engagement quality reviewer

should:

e. Read, and obtain an understanding of, information communicated by the

engagement team regarding the nature and circumstances of the engagement and
the entity; and the firm related to the firm’s monitoring and remediation process,
in particular identified deficiencies that may relate to, or affect, the areas involving
significant judgments made by the engagement team.

f. Discuss with the engagement partner and, if applicable, other members of the
engagement team, significant matters and significant judgments made in planning,
performing and reporting on the engagement.

g. Based on the information obtained in (a) and (b), review selected engagement
documentation relating to the significant judgments made by the engagement
team and evaluate:

 The basis for making those significant judgments, including, when applicable to
the type of engagement, the exercise of professional skepticism by the
engagement team.
 Whether the engagement documentation supports the conclusions reached.
 Whether the conclusions reached are appropriate.

h. For audits of financial statements, evaluate the basis for the engagement partner’s
determination that relevant ethical requirements relating to independence have
been fulfilled.

i. Evaluate whether appropriate consultation has taken place on difficult or

contentious matters or matters involving differences of opinion and the conclusions
arising from those consultations.

j. For audits of financial statements, evaluate the basis for the engagement partner’s
determination that the engagement partner’s involvement has been sufficient and
appropriate throughout the audit engagement such that the engagement partner
has the basis for determining that the significant judgments made and the
conclusions reached are appropriate given the nature and circumstances of the
engagement.

The engagement quality reviewer should also review the

a. Financial statements and the auditor’s report thereon, including, if applicable, the
description of the key audit matters (for audits of financial statements).
b. Financial statements or financial information and the engagement report thereon
(for review engagements).
c. The engagement report, and when applicable, the subject matter information (for
other assurance and related services engagements).

3.12 Quality Assurance Review

Quality Assurance Review (QAR) is a study, appraisal or review by an independent

Quality Assurance Review Office (QARO) of the quality of audit of financial
statements and the adoption of best practices through a review of the quality control
measures instituted by CPA practitioners to ascertain compliance with prescribed
professional, ethical and technical standards of public practice.

An executive committee, which is composed of four (4) members from the BOA and
three (3) representatives from the Accredited Integrated Professional Organization
(AIPO), has the full power and authority to set policies and to supervise the operation
of QARO, including setting policies that will ensure effective implementation of the
Quality Assurance Review (QAR) program.

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 The Chairman of the Executive Committee shall be appointed by the BOA. The term
of office of the Committee Chairman and members shall not exceed 3 years, unless
replaced by the BOA.

The Chairman and the members should not be in active practice of public accountancy
during their terms in the Executive Committee.

The QARO’s personnel are appointed by the Executive Committee, and are composed
of the Head (Chief Inspector), Chief of Administration, and Quality Assurance
Reviewers or such other employees that may be necessary to carry out effectively the
functions of the QARO.

The Chief Inspector of the QARO exercises administrative supervision and control over
the QARO, and selects the CPA Practitioners to be reviewed for the year, in accordance
with the 3-year QAR plan.

The Chief of Administration reports directly to the Chief Inspector and is responsible
for the non-technical aspect of the QAR program.

The QAR program covers all CPAs in the public practice sector.

Exercises:

Choose the correct answer:

1. The main purpose of implementing a system of quality management is to provide the

firm with reasonable assurance that

a. The firm and its personnel will comply with PSAs and legal requirements to enable
the firm to issue an appropriate report.
b. The audit will be performed in accordance with PSAs.
c. The firm will issue a report that is appropriate in the circumstances.
d. All of the above.

2. Which of the following is one of the elements of a CPA firm’s quality management
system?

a. Determination of fees. C. Resources.

b. Complying with laws and regulations. D. Control environment.

3. A quality management policy that requires firm to establish policies and procedures
designed to promote an internal culture based on the recognition that quality is
essential in performing engagements.

a. Governance and leadership. c. Risk assessment process.

b. Human resources. d. Monitoring.

4. A quality control policy that requires personnel in the firm to adhere to independence,
integrity, objectivity, confidentiality and professional behavior, relates to

a. Ethical requirements. c. Human resources.

b. Monitoring. d. Information and communication.

5. Who is responsible for an engagement and its performance, and for the report that is
issued on behalf of the firm, and who, where required, has the appropriate authority
from a professional, legal or regulatory body?

a. Engagement partner. c. CPA firm.

b. Engagement team. d. Engagement quality reviewer.

6. The implementation of quality management procedures that are applicable to the

individual audit engagement is the responsibility of the

a. CPA firm.

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 b. Engagement team.
c. Engagement quality reviewer.
d. Expert contracted by the firm in connection with the audit engagement.

7. For audits of financial statements of listed entities, the engagement partner should not
issue the auditor’s report until completion of the

a. Engagement quality review. c. Management review.

b. Engagement team review. d. Engagement partner review.

8. A process designed to provide an objective evaluation, on or before the date of the

report, of the significant judgments the engagement team made and the conclusions
it reached in formulating the report.

a. Engagement quality review. c. Monitoring.

b. Inspection. d. Peer review.

9. Which body has the power to conduct an oversight into the quality of audits of financial
statements through the review of quality management measures instituted by
auditors?

a. BOA. c. SEC.
b. PRC. d. BIR.

10. The operation of the QARO shall be supervised by a(an)

a. Supervisory Board. c. Executive Committee.

b. Oversight Committee. d. Professional Regulations Commission.

END OF TOPIC 3

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Topic 4: ETHICAL REQUIREMENTS FOR PROFESSIONAL ACCOUNTANTS

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to

1. Be familiar with the Code of Ethics for Professional Accountants;

2. Understand the fundamental principles that CPAs should follow;
3. Enumerate and explain the different threats to compliance with the
fundamental principles;
4. Apply the appropriate safeguards to reduce or eliminate the identified threats;
5. Elaborate on the ethical requirements for professional accountants in public
practice and professional accountants in business; and
6. Apply the independence requirements for professional accountants in public
practice.

NOTES:

4.1 Code of Ethics for Professional Accountants

The Code of Ethics for Professional Accountants (Code) in the Philippines is

currently based on the 2020 edition of the Code of Ethics for Professional
Accountants issued by the International Ethics Standards Board for Accountant
(IESBA). It is completely rewritten under a new structure and is renamed the
International Code of Ethics for Professional Accountants (including
International Independence Standards).

The International Ethics Standards Board for Accountants (IESBA) is an

independent standard-setting body that develops an internationally appropriate Code
of Ethics for Professional Accountants (the Code). Its objective is to serve the public
interest by setting high-quality ethics standards for professional accountants. The
IESBA’s long-term goal is the convergence of the Code's ethical standards for
professional accountants, including auditor independence standards, with those issued
by regulators and national standard setters.

Professional accountants should consider the general ethical requirements of the Code
as the basic principles which they should follow in performing their work. However, it
is not practical to establish ethical requirements which apply to all situations and
circumstances that professional accountants may encounter.

The Code is divided into:

Part 1 – Complying with the Code, Fundamental Principles and

Conceptual Framework

Section 100 Complying with the Code

Section 110 The Fundamental Principles
Subsection 111 Integrity
Subsection 112 Objectivity
Subsection 113 Professional Competence and Due Care
Subsection 114 Confidentiality
Subsection 115 Professional Behavior
Section 120 The Conceptual Framework

Part 2 – Professional Accountants in Business

Section 200 Applying the Conceptual Framework – Professional Accountants

in Business
Section 210 Conflicts of Interest
Section 220 Preparation and Presentation of Information
Section 230 Acting with Sufficient Expertise
Section 240 Financial Interest, Compensation and Incentives Linked to

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 Financial Reporting and Decision Making
Section 250 Inducements, Including Gifts and Hospitality
Section 260 Responding to Non-Compliance with Laws and Regulations
Section 270 Pressure to Breach the Fundamental Principles

Part 3 – Professional Accountants in Public Practice

Section 300 Applying the Conceptual Framework – Professional Accountants in

Public Practice
Section 310 Conflicts of Interest
Section 320 Professional Appointments
Section 321 Second Opinions
Section 330 Fees and Other Types of Remuneration
Section 340 Inducements, Including Gifts and Hospitality
Section 350 Custody of Client Assets
Section 360 Responding to Non-compliance with Laws and Regulations

Part 4A – Independence for Audit and Review Engagements

Section 400 Applying the Conceptual Framework to Independence for Audit and
Review Engagements
Section 410 Fees
Section 411 Compensation and Evaluation Policies
Section 420 Gifts and Hospitality
Section 430 Actual or Threatened Litigation
Section 510 Financial Interests
Section 511 Loans and Guarantees
Section 520 Business Relationships
Section 521 Family and Personal Relationships
Section 522 Recent Service with an Audit Client
Section 523 Serving as a Director or Officer of an Audit Client
Section 524 Employment with an Audit Client
Section 525 Temporary Personnel Assignments
Section 540 Long Association of Personnel (Including Partner Rotation) with
an Audit Client
Section 600 Provision of Non-Assurance Services to an Audit Client
Subsection 601 Accounting and Bookkeeping Services
Subsection 602 Administrative Services
Subsection 603 Valuation Services
Subsection 604 Tax Services
Subsection 605 Internal Audit Services
Subsection 606 Information Technology Systems Services
Subsection 607 Litigation Support Services
Subsection 608 Legal Services
Subsection 609 Recruiting Services
Subsection 610 Corporate Finance Services
Section 800 Reports on Special Purpose Financial Statements that Include a
Restriction on Use and Distribution (Audit and review
Engagements)

Part 4B – Independence for Assurance Engagements Other than Audit and

Review Engagements

Section 900 Applying the Conceptual Framework to Independence for

Assurance Engagements Other than Audit and Review
Engagements
Section 905 Fees
Section 906 Gifts and Hospitality
Section 907 Actual or Threatened Litigation
Section 910 Financial Interests
Section 911 Loans and Guarantees
Section 920 Business Relationships
Section 921 Family and Personal Relationships
Section 922 Recent Service with an Assurance Client
Section 923 Serving as a Director or Officer of an Assurance Client
Section 924 Employment with an Assurance Client

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 Section 940 Long Association of Personnel with an Assurance Client
Section 950 Provision of Non-Assurance Services to Assurance Clients
Other than Audit and Review Engagement Clients
Section 990 Reports that Include a Restriction on Use and Distribution
(Assurance Engagements Other than Audit and review
Engagements)

A profession is distinguished by the following characteristics:

a. Mastery of a particular intellectual skill, acquired by training and education.

b. Adherence by its members to a common code of values and conduct established
by its administrating body, including maintaining an outlook which is essentially
objective.
c. Acceptance of a duty to society as a whole.

A distinguishing mark of the accountancy profession is its acceptance of the

responsibility to act in the public interest; hence, a professional accountant’s
responsibility is not exclusively to satisfy the needs of an individual client or employer.
In acting in the public interest, defined as the collective well-being of the community
of people and institutions the professional accountant serves, a professional
accountant should comply with the ethical requirements of the Code of Ethics.

Professional accountant refers to an individual who holds a valid Certificate of

Registration (COR) and current Professional Identification Card (PIC) issued by the
Board of Accountancy and the Professional Regulation Commission, whether he/she
be in the public practice, industry or commerce, public sector, or education.

4.2 Fundamental Principles

In order to achieve the objectives of the accountancy profession, professional

accountants are required to observe a number of prerequisites or fundamental
principles. These are integrity, objectivity, professional competence and due care,
confidentiality, and professional behavior.

Integrity

The principle of integrity requires all professional accountants to be straightforward

and honest in their professional and business relationships. Integrity also implies fair
dealing and truthfulness. Accordingly, a professional accountant should not be
associated with reports, returns, communications and other information that:

 Contain a materially false and misleading statement.

 Contain statement and information furnished recklessly.
 Omit or obscure information acquired to be included to avoid statement to be
misleading.

Objectivity

The principle of objectivity imposes an obligation on all professional accountants not

to compromise their professional and business judgment because of bias, conflict of
interest or the undue influence of others.

Professional Competence and Due Care

The principle of professional competence requires all professional accountants to

maintain professional knowledge and skill at the level required to ensure that clients
or employers receive competent professional service.

The principle of due care requires professional accountants to act diligently in

accordance with applicable technical and professional standards when providing
professional services.

Professional accountants are not allowed to portray themselves as having expertise or

experience which they do not possess.

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 Professional competence involves two separate phases, and these are:

 Attainment of professional competence, which requires initially a high standard

of general education followed by specific education, training and examination
in professionally relevant subjects, and usually a period of work experience.
 Maintenance of professional competence, which requires a continuing
awareness of development in the accountancy profession including relevant
pronouncements on accounting, auditing and other regulations and statutory
requirements (e.g., earning continuing professional development or CPD units).

Confidentiality

The principle of confidentiality imposes an obligation on professional accountants to

refrain from disclosing outside the firm or employing organization confidential
information acquired as a result of professional and business relationships, and refrain
from using confidential information acquired to their personal advantage or the
advantage of third parties. However, disclosure of confidential information may be
required or allowed when:

a. Disclosure is permitted by law and is authorized by the client or the employer.

b. Disclosure is required by law.

 Production of documents or other provision of evidence in the course of legal
proceedings.
 Disclosure to the appropriate public authorities of infringements of the law that
come to light.

c. There is a professional duty or right to disclose.

 To comply with the quality review of a member body or professional body.
 To respond to an inquiry or investigation by a member body or regulatory body.
 To protect the professional interests of a professional accountant in legal
proceedings.
 To comply with technical standards and ethics requirements.

Professional Behavior

The principle of professional behavior requires professional accountants to comply

with relevant laws and regulations and avoid any action that the professional
accountant knows or should know may discredit the profession.

Professional accountants are allowed to market and promote themselves as long as it

does not bring the profession into disrepute. Therefore, professional accountants
should be honest and truthful, and avoid making exaggerated claims for the services
they are able to offer, the qualifications they possess, or experiences they have gained.
Moreover, they should not make disparaging references or unsubstantiated
comparisons to the work of others.

4.3 Threats to Compliance with Fundamental Principles

The professional accountant shall identify threats to compliance with the fundamental
principles. Threats are classified into:

a. Self-interest threat. The threat that a financial or other interest will

inappropriately influence the professional accountant’s judgment or behavior.

b. Self-review threat. The threat that a professional accountant will not

appropriately evaluate the results of a previous judgment made; or an activity
performed by the accountant, or by another individual within the accountant’s firm
or employing organization, on which the accountant will rely when forming a
judgment as part of providing a current activity.

c. Advocacy threat. The threat that a professional accountant will promote a client’s
or employing organization’s position to the point that his/her objectivity is
compromised.

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 d. Familiarity threat. The threat that due to a long or close relationship with a client,
or employing organization, a professional accountant will be too sympathetic to
their interests or too accepting of their work.

e. Intimidation threat. The threat that a professional accountant will be deterred

from acting objectively because of actual or perceived pressures, including
attempts to exercise undue influence over the accountant.

The professional accountant should follow a conceptual framework which specifies

an approach to:

a. Identify threats to compliance with the fundamental principles.

b. Evaluate the threats identified.
c. Address the threats by eliminating or reducing them to an acceptable level.

When applying the conceptual framework, the professional accountant shall:

a. Exercise professional judgment.

b. Remain alert for new information and to changes in facts and circumstances.
c. Use the reasonable and informed third party test.

When the professional accountant identifies a threat to compliance with the

fundamental principles, he shall evaluate whether such a threat is at an acceptable
level. An acceptable level is a level in which a professional accountant using the
reasonable and informed third party test would likely conclude that the accountant
complies with the fundamental principles.

When the identified threats are not at an acceptable level, the professional accountant
shall address the threats by

a. Eliminate the circumstances that are creating the threat.

b. Reducing the threat to an acceptable level by applying safeguards.
c. Decline or end the specified professional activity.

4.4 Ethical Requirements for Professional Accountants in Business

Professional accountants in business (PAIB) include professional accountants

employed, engaged or contracted in an executive or non-executive capacity in such
areas as commerce, industry or service, the public sector, education, the not-for-profit
sector, and regulatory or professional bodies.

Threats

a. Self-Interest Threat

 Holding a financial interest in, or receiving a loan or guarantee from the

employing organization.
 Participating in incentive compensation arrangements offered by the employing
organization.
 Inappropriate personal use of corporate assets.
 Concern over employment security
 Commercial pressure from a supplier of the employing organization (e.g., being
offered a gift or special treatment).

b. Self-Review Threat

 Determining the appropriate accounting treatment for a business combination

after performing the feasibility study that supported the acquisition decision.

c. Advocacy Threat

 Having the opportunity to manipulate information in a prospectus in order to

obtain favorable financing.

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d. Familiarity Threat

 Being responsible for the employing organization’s financial reporting when an

immediate or close family member employed by the entity makes decisions that
affect the entity’s financial reporting.
 Long association with business contacts influencing business decisions.
 Accepting a gift or preferential treatment, unless the value is trivial and
inconsequential.

e. Intimidation Threat

 Threat of dismissal or replacement of the PAIB or a close or immediate family

member over a disagreement about the application of an accounting principle
or the way in which financial information is to be reported.
 A dominant personality attempting to influence the decision making process, for
example with regard to the awarding of contracts or the application of an
accounting principle.

Conflicts of Interest

A professional accountant in business has a professional obligation to comply with the

fundamental principles. However, there may be times when their responsibilities to
an employer and the professional obligations to comply with the fundamental principles
are in conflict. A professional accountant in business should support his or her
organization’s legitimate and ethical objectives and the rules and procedures drawn
up in support of them. Nevertheless, an employee cannot legitimately be required to:

 Act contrary to law or regulation.

 Act contrary to technical or professional standards.
 Lie to, or otherwise intentionally mislead others, in particular the auditors of
the employing organization or regulators.
 Facilitate unethical or illegal earnings management strategies.
 Issue a financial or non-financial report that materially misrepresents the facts,
including statements in connection with the financial statements, tax
compliance, legal compliance or reports required by securities regulators.

Intimidation or any other threats created from the aforementioned pressures should
be evaluated and addressed through the application of safeguards to eliminate them
or reduce them to an acceptable level.

Examples of situations in which conflicts of interest may arise include:

 Serving in a management or governance position for two employing

organizations and acquiring confidential information from one employing
organization that could be used by the professional accountant to the
advantage or disadvantage of the other employing organization.
 Undertaking a professional activity for each of two parties in a partnership
employing the professional accountant to assist them to dissolve their
partnership.
 Preparing financial information for certain members of management of the
entity employing the professional accountant who are seeking to undertake a
management buy-out.
 Serving in a governance capacity in an employing organization that is approving
certain investments for the company where one of those specific investments
will increase the value of the personal investment portfolio of the professional
accountant or an immediate family member.
 Being responsible for selecting a vendor for the accountant’s employing
organization when an immediate family member of the professional accountant
could benefit financially from the transaction.

Preparation and Reporting of Information

Professional accountants in business are often involved in the preparation and

reporting of information that may either be made public or used by others inside or
outside the employing organization. He should prepare or present such information

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fairly, honestly, and in accordance with relevant professional standards so that the
information will be understood in its context.

A professional accountant in business who prepares the financial statements of an

employer should ensure that those statements are prepared and presented in
accordance with the applicable financial reporting framework (e.g., PFRSs). If,
however, a professional accountant in business is pressured to prepare or report
information to mislead others, or to become associated with misleading information
through actions of others, self-interest or intimidation threats to integrity, objectivity
or professional competence and due care are created.

Safeguards shall be applied to eliminate the threats or reduce it to an acceptable level.

As such, professional accountants in business may consult with superiors within the
employing organization, the audit committee or those charged with governance of the
organization, or with a relevant professional body. Where the threats created cannot
be reduce to an acceptable level, the professional accountant in business should
dissociate himself from the misleading information, or may consider resigning from
the employing organization, if deemed necessary.

Acting with Sufficient Expertise

A professional accountant in business should only undertake significant tasks for which
he has, or can obtain, sufficient specific training or experience. When undertaking
such work, he should not mislead the employer as to the degree of expertise or
experience he possesses. If necessary, expert advice and assistance should be sought.

A threat to compliance with the fundamental principle of professional competence and

due care may be created when a professional accountant in business is asked to
perform his duties under the following circumstances:

a. Insufficient time for properly performing the relevant duties.

b. Incomplete or restricted information for performing duties properly.
c. Insufficient experience, training and education.
d. Inadequate resources for the proper performance of the duties.

Financial Interests

Professional accountants in business may have financial interests, have knowledge of

financial interests of immediate or close family members, which could give rise to
threats to compliance with fundamental principles. For instance, self-interest threats
to objectivity or confidentiality may be created where the professional accountant in
business or an immediate or close family member:

 Holds a direct or indirect financial interest in the employing organization and

the value of that financial interest could be directly affected by decisions made
by the professional accountant in business.
 Is eligible for a profit-related bonus and the value of that bonus could be directly
affected by decisions made by the professional accountant in business.
 Holds, directly or indirectly, share options in the employing organization, the
value of which could be directly affected by decisions made by the professional
accountant in business.
 Participates in compensation arrangements which provide incentives to achieve
performance targets or to support efforts to maximize the value of the
employing organization’s shares, for example, through participation in long-
term incentive plans which are linked to certain performance conditions being
met.

Inducements

A professional accountant in business or an immediate or close family member may

be offered an inducement, such as gifts, hospitality, preferential treatment and
inappropriate appeals to friendship or loyalty.

An inducement made to unduly influence actions or decisions, encourage illegal

behavior, or obtain confidential information creates self-interest threats to objectivity

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 and confidentiality. When inducements are accepted and are followed by threats to
make it public, intimidation threats to objectivity and confidentiality are created when

A professional accountant in business may be in a situation where he is under pressure

to offer inducements to subordinate the judgment of another individual or
organization, influence a decision-making process or obtain confidential information.
Such an offer should not be made by a professional accountant in business.

Non-Compliance with Laws and Regulations (NOCLAR)

When a senior professional accountant in business becomes aware of a NOCLAR, the

following steps should be undertaken:

a. Obtain an understanding of the matter.

b. Address the matter.
c. Assess response of superior.
d. Determine whether further action is needed.
e. Determine whether to disclose the matter to an appropriate authority.
f. Document the matter.

4.5 Ethical Requirements for Public Practitioners

A professional accountant in public practice (PAPP) refers to a professional

accountant, irrespective of functional classification (e.g., audit, tax or consulting) in a
firm that provides professional services. It may also refer to a firm of professional
accountants in public practice.

A firm is an organization engaged in the practice of public accountancy consisting of:

a. A sole practitioner or partnership of professional accountants.

b. An entity that controls such parties, through ownership, management or other
means.
c. An entity controlled by such parties, through ownership, management or other
means.

Threats

a. Self-Interest Threat

 Having a direct financial interest in a client.

 Having undue dependence on total fees from a client.
 Quoting a low fee to obtain a new engagement and the fee is so low that it
might be difficult to perform the professional service in accordance with
applicable technical and professional standards for that price.
 Concerned about the possibility of losing a significant client.
 Having a close business relationship with a client.
 Entering into employment negotiations with the client.
 Entering into a contingent fee arrangement relating to an assurance
engagement.
 Having access to confidential information that might be used for personal gain.
 Discovering a significant error when evaluating the results of a previous
professional service performed by a member of the accountant’s firm.

b. Self-Review Threat

 Issuing an assurance report on the effectiveness of the operation of financial

systems after implementing the systems.
 Having prepared the original data used to generate records that are the subject
matter of the assurance engagement.
 Performing a service for an assurance client that directly affects the subject
matter information of the assurance engagement.
 A member of the assurance team being, or having recently been, a director or
officer of the client.

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  A member of the assurance team being, or having recently been, employed by
the client in a position to exert significant influence over the subject matter of
the engagement.

c. Advocacy Threat

 Promoting the interests of, or shares in, a client.

 Acting as an advocate on behalf of an client in litigation or disputes with third
parties.
 Lobbying in favor of legislation on behalf of a client.

d. Familiarity Threat

 Having a close or immediate family member who is a director or officer of the

client.
 A director or officer of the client or an employee in a position to exert
significant influence over the subject matter of the engagement having
recently served as the engagement partner.
 An audit team member having a long association with the audit client.
 Accepting gifts or preferential treatment from a client, unless the value is
trivial or inconsequential.
 A director or officer of the client or an employee in a position to exert
significant influence over the subject matter of the engagement having
recently served as the engagement partner.

e. Intimidation Threat

 Being threatened with dismissal from a client engagement or the firm because
of a disagreement about a professional matter.
 Feeling pressured to agree with the judgment of a client employee because
the client has more expertise on the matter in question.
 Being informed that a planned promotion will not occur unless the accountant
agrees with an inappropriate accounting treatment.
 Having accepted a significant gift from a client and being threatened that
acceptance of this gift will be made public.
 Being threatened with litigation by the client.
 Being pressured to reduce inappropriately the extent of work performed in
order to reduce fees.
 An audit client indicating that it will not award a planned non-assurance
contract to the firm if the firm continues to disagree with the client’s
accounting treatment for a particular transaction.

Client’s Operating Environment

The PAPP’s evaluation of the level of the threat might be impacted by the client’s
operating environment (formerly referred to as ‘safeguards within the client’s
systems and procedures’ under the 2016 IESBA Code):

a. The client requires appropriate individuals other than management to ratify or

approve the appointment of a firm to perform an engagement.
b. The client has competent employees with experience and seniority to make
managerial decisions.
c. The client has implemented internal procedures that facilitate objective choices in
tendering non-assurance engagements.
d. The client has a corporate governance structure that provides appropriate
oversight and communications regarding the firm’s services.

Work Environment Within the Accountant’s Firm

and Its Operating Environment

The PAPP’s evaluation of the level of the threat might be impacted by the work
environment within the accountant’s firm and its operating environment:

a. Leadership that promotes compliance with the fundamental principles and

establishes the expectation that assurance team members will act in the public
interest.

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b. Policies or procedures for establishing and monitoring compliance with the
fundamental principles by all personnel.
c. Compensation, performance appraisal and disciplinary policies and procedures that
promote compliance with the fundamental principles.
d. Management of the reliance on revenue received from a single client.
e. The engagement partner having authority within the firm for decisions concerning
compliance with the fundamental principles, including decisions about accepting on
providing services to a client.
f. Educational, training and experience requirements.
g. Processes to facilitate and address internal and external concerns or complaints.

Safeguards

a. Assigning additional time and qualified personnel to required tasks when an

engagement has been accepted might address a self-interest threat.
b. Having an appropriate reviewer who was not a member of the team review the
work performed or advise as necessary might address a self-review threat.
c. Using different partners and engagement teams with separate reporting lines for
the provision of non-assurance services to an assurance client might address self-
review, advocacy or familiarity threats.
d. Involving another firm to perform or re-perform part of the engagement might
address self-interest, self-review, advocacy, familiarity or intimidation threats.
e. Disclosing to clients any referral fees or commission arrangements received for
recommending services or products might address a self-interest threat.
f. Separating teams when dealing with matters of a confidential nature might address
a self-interest threat.

Accepting a Client

Potential threats to integrity or professional behavior may be created from

questionable issues associated with the client, such as client involvement in illegal
activities (such as money laundering), dishonesty or questionable financial reporting
practices

Professional accountants in public practice should avoid accepting engagements which

they are not competent to carry out. Nevertheless, professional accountants may seek
advice and assistance from experts so as to enable them to satisfactorily perform such
engagements.

Replacing an Existing Professional Accountant

A professional accountant in public practice who is asked to replace another

professional accountant in public practice should determine whether there are any
reasons for not accepting the proposed engagement. A direct communication with the
existing accountant, preferably in writing, should be made to establish the facts and
circumstances behind the proposed change so that the professional accountant in
public practice can make a decision on whether to accept the engagement or not.

If permission is granted, the existing accountant should provide information in an

honest and clear manner. If permission to discuss matters with the existing
accountant, however, was not obtained, the professional accountant in public practice
should try to obtain information through inquiries of third parties or background
investigation on senior management of the prospective client. When the threats
involved are so significant and no safeguards are available to reduce or eliminates
such threats, a professional accountant in public practice should decline the
engagement.

Conflict of Interest

A conflict of interest not only creates a threat to objectivity but also threats to the
other fundamental principles. Such threats may be created when:

 The professional accountant provides a professional service related to a

particular matter for two or more clients whose interests with respect to that
matter are in conflict.

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  The interests of the professional accountant with respect to a particular matter
and the interests of the client for whom the professional accountant provides a
professional service related to that matter are in conflict.

Examples of situations in which conflicts of interest may arise include:

 Providing a transaction advisory service to a client seeking to acquire an audit

client of the firm, where the firm has obtained confidential information during
the course of the audit that may be relevant to the transaction.
 Advising two clients at the same time who are competing to acquire the same
company where the advice might be relevant to the parties’ competitive
positions.
 Providing services to both a vendor and a purchaser in relation to the same
transaction.
 Preparing valuations of assets for two parties who are in an adversarial position
with respect to the assets.
 Representing two clients regarding the same matter who are in a legal dispute
with each other, such as during divorce proceedings or the dissolution of a
partnership.
 Providing an assurance report for a licensor on royalties due under a license
agreement when at the same time advising the licensee of the correctness of
the amounts payable.
 Advising a client to invest in a business in which, for example, the spouse of
the professional accountant in public practice has a financial interest.
 Advising a client on the acquisition of a business which the firm is also
interested in acquiring.
 Providing strategic advice to a client on its competitive position while having a
joint venture or similar interest with a major competitor of the client.
 Advising a client on the purchase of a product while having a commission
agreement with one of the potential vendors of that product or service.

Non-Compliance with Laws and Regulations (NOCLAR)

When a professional accountant engaged to perform an audit of financial statements

becomes aware of a NOCLAR, the following steps should be undertaken:

a. Obtain an understanding of the matter.

b. Address the matter.
c. Communicate with respect to group audits (if applicable).
d. Assess response of management and those charged with governance.
e. Determine whether further action is needed.
f. Determine whether to disclose the matter to an appropriate authority.
g. Document the matter.

Second Opinions

A company that is not an existing client may ask a professional accountant in public
practice to provide a second opinion on the application of accounting, auditing or other
standards or principles to specific circumstances. Providing second opinion, however,
may give rise to threats to professional competence and due care especially when it is
not based on the same set of facts that were made available to the existing accountant,
or is based on inadequate evidence.

Professional Fees

Professional fees should be a fair reflection of the value of the professional services
performed for the client, taking into account:

 The skill and knowledge required for the type of work involved.
 The level of training and experience of the persons engaged on the work.
 The time necessary occupied by each person engaged on the work.
 The degree of responsibility and urgency that the work entails.

Professional fees should normally be computed on the basis of appropriate rates per
hour or per day (per diem) for the time of each person engaged in performing
professional services. These rates should be based on the fundamental premise that

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 the organization and conduct of the professional accountant in public practice and the
services provided to clients are well planned, controlled and managed.

A professional accountant in public practice is allowed to charge a client a lower fee

than has previously been charged for similar services, provided the fee has been
calculated appropriately and the work is to be carried out in a professional and diligent
manner.

Contingent fees are widely used for certain types of non-assurance engagements. They
may, however, create self-interest threat to compliance with the fundamental principle
of objectivity under certain circumstances.

Referral Fee or Commission

A professional accountant in public practice may receive a fee for referring a continuing
client to another professional accountant in public practice or other expert. A referral
fee may also be paid to obtain a client, for example, where the client continues as a
client of another professional accountant in public practice but requires specialized
services not offered by the existing accountant. The receipt and payment of referral
fees, however, creates a self-interest threat to objectivity and professional competence
and due care.

A professional accountant in public practice is also allowed to receive a commission

from a third party (for example, a software vendor) in connection with the sale of
goods or services to a client. Nevertheless, accepting such a commission creates a
self-interest threat to objectivity and professional competence and due care.

Gifts and Hospitality

A professional accountant in public practice, or an immediate or close family member,

may be offered gifts and hospitality from a client. Accepting a gift from a client,
however, may create a self-interest or familiarity threat to objectivity. An intimidation
threat to objectivity may result from the possibility of such offers being made public.

Custody of Client Assets

A professional accountant in public practice should not assume custody of client monies
or other assets unless allowed by law. Client monies refer to any monies (including
documents of title to money e.g., bills of exchange, promissory notes, and documents
of the title which can be converted into money e.g. bearer bonds) received by a
professional accountant in public practice to be held or paid out on the instruction of
the person from whom or on whose behalf they are received.

The holding of client assets may create a self-interest threat to professional behavior
and a self-interest threat to objectivity. Therefore, a professional accountant in public
practice entrusted with money (or other assets) belonging to others should:

a. Keep such assets separately from personal or firm assets.

b. Use such assets only for the purpose for which they are intended.
c. At all times be ready to account for those assets and any income, dividends, or
gains generated, to any persons entitled to such accounting.
d. Comply with all relevant laws and regulations relevant to the holding of and
accounting for such assets.

In addition, a professional accountant in public practice should not hold client assets if
there is reason to believe that they were obtained from illegal activities, such as money
laundering.

4.6 Independence Requirements for Public Practitioners

In performing an assurance engagement, a professional accountant in public practice

must possess both:

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  Independence of mind. The state of mind that permits the expression of a
conclusion without being affected by influences that compromise professional
judgment, allowing an individual to act with integrity, and exercise objectivity
and professional skepticism.
 Independence in appearance. The avoidance of facts and circumstances that
are so significant that a reasonable and informed third party, having knowledge
of all relevant information, including safeguards applied, would reasonably
conclude a firm’s, or a member of the assurance team’s, integrity, objectivity
or professional skepticism has been compromised.

For financial statement audit clients, the members of the assurance team, the firm and
network firms are required to be independent of the financial statement audit client.

For assurance engagements where the client is not a financial statement audit client,
the members of the assurance team and the firm are required to be independent of
the assurance client.

For assurance engagements where the client is not a financial statement audit client,
and the report is expressly restricted for use by identified users, the members of the
assurance team are required to be independent of the client. In addition, the firm
should not have a material direct or indirect financial interest in the client.

Financial Interests

Direct financial interest pertains to financial interest owned directly by and under
the control of an individual or entity (including those managed on a discretionary basis
by other), or beneficially owned through a collective investment vehicle, estate, trust
or other intermediary over which the individual or entity has control. Conversely, a
financial interest is considered to be indirect when it is beneficially owned through a
collective investment vehicle, estate, trust or other intermediary over which the
individual or entity has no control.

For purposes of the Code, immediate family includes spouse (or equivalent) or
dependent, while close family includes parent, non-dependent child and sibling.

 If a member of the audit team, a member of his immediate family, or a firm has a
direct financial interest or a material indirect financial interest in the audit client,
self-interest threat is created. Therefore, a member of the audit team, a member
of that individual’s immediate family, or the firm shall not have a direct financial
interest or a material indirect financial interest in the client:

The firm may, however, perform the engagement if the member of the audit team,
his immediate family, or the firm:

a. Disposes the direct financial interest prior to the individual becoming a member
of the audit team; or
b. Disposes the indirect financial interest in total or dispose of a sufficient amount
of it so that the remaining interest is no longer material prior to the individual
becoming a member of the audit team.

Also, the member of the audit team may be removed from the audit engagement.

 If a member of the audit team, a member of that individual’s immediate family, or

a firm has a direct or material indirect financial interest in an entity that has a
controlling interest in the audit client, and the client is material to the entity, a self-
interest threat is created. Therefore, a member of the audit team, a member of
that individual’s immediate family, or the firm shall have such a financial interest:

The only actions appropriate to permit the firm to perform the engagement would
be to:

a. Dispose of the financial interest in total; or

b. Dispose of a sufficient amount of it so that the remaining interest is no longer
material.

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 If the firm or a member of the audit team, or a member of that individual’s
immediate family, has a financial interest in an entity and an audit client also has
a financial interest in that entity, a self-interest threat may be created. However,
no such threat is created if these interests are immaterial and the audit client
cannot exercise significant influence over the entity.

If such interest is material to any party, and the audit client can exercise significant
influence over the other entity, no safeguards could reduce the threat to an
acceptable level. Accordingly, the firm shall not have such an interest and any
individual with such an interest shall, before becoming a member of the audit team,
either:

a. Dispose of the interest; or

b. Dispose of a sufficient amount of the interest so that the remaining interest is
no longer material.

Loans and Guarantees

A loan from, or a guarantee thereof by, an audit client that is a bank or a similar
institution, to the firm would not create a threat to independence provided:

 The loan is made under normal lending procedures, terms and requirements.
 The loan is immaterial to both the firm and the audit client.

A loan from, or a guarantee thereof by, an audit client that is a bank or a similar
institution, to a member of the audit team or their immediate family would not create
a threat to independence as long as the loan is made under normal lending procedures,
terms and requirements (e.g., home mortgages, bank overdrafts, car loans and credit
card obligations which are normally available to other credit card holders).

Deposits made by, or brokerage accounts of, a firm or a member of the audit team
with an audit client that is a bank, broker or similar institution would not create a
threat to independence provided the deposit or account is held under normal
commercial terms.

A self-interest threat could be created if the firm, or a member of the audit team,
makes a loan to an audit client that is not a bank or similar institution, or guarantees
such an audit client's borrowing. However, such loan or guarantee is allowed if the
amount is immaterial to both the firm or the member of the audit team and the
immediate family member, and the audit client.

Close Business Relationship

A close business relationship between a firm or a member of the assurance team and
the assurance client or its management, or between the firm, a network firm and an
audit client, involves a commercial or common financial interest and may create self-
interest and intimidation threats. Examples include:

 Having a material financial interest in a joint venture with the assurance client
or a controlling owner, director, officer or other individual who performs senior
managerial functions for that client.
 Arrangements to combine one or more services or products of the firm with one
or more services or products of the assurance client and to market the package
with reference to both parties.
 Distribution or marketing arrangements under which the firm acts as a
distributor or marketer of the assurance client’s products or services, or the
assurance client acts as the distributor or marketer of the products or services
of the firm.

Family or Personal Relationship

Family and personal relationships between a member of the assurance team and a
director, an officer or certain employees, depending on their role, of the assurance
client, may create self-interest, familiarity or intimidation threats.

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Former member of the assurance team is now employed with the assurance
client

The independence of a firm or a member of the assurance team may be threatened if

a director, an officer or an employee of the assurance client in a position to exert direct
and significant influence over the subject matter of the assurance engagement has
been a member of the assurance team or partner of the firm. Such circumstances
may create familiarity and intimidation threats particularly when significant
connections remain between the individual and his or her former firm.

Former officer, director or employee of the assurance client is now a member

of the assurance team

To have a former officer, director or employee of the assurance client serve as a

member of the assurance team may create self-interest, self-review and familiarity
threats, particularly when he has to report on the subject matter that he had previously
prepared while still with the assurance client.

Serving as an officer or director on the board of an assurance client

If a partner or employee of the firm serves as an officer or as a director on the board

of an assurance client, the self-review and self-interest threats created would be so
significant no safeguard could reduce the threats to an acceptable level. Serving as a
company secretary in an assurance client is not allowed because it may create self-
review and advocacy threats.

Long Association

Using the same senior personnel on an audit engagement over a prolonged period may
create familiarity and self-interest threats.

In an audit of a PIE, an individual shall not act as a key audit partner (KAP) for a
period of more than 7 years (the time-on period).

A public interest entity (PIE) is a listed entity, any entity defined by regulation or
legislation as a public interest entity, or any entity for which the audit is required by
regulation or legislation to be conducted in compliance with the same independence
requirements that apply to the audit of listed entities.

An individual shall not act in any of the following roles, or a combination of such roles:

a. The engagement partner (EP);

b. The individual appointed as responsible for the engagement quality control review
or the engagement quality reviewer; or
c. Any other key audit partner (OKAP).

After the time-on period, the individual shall serve a “cooling-off” period.

The maximum 7-year time-on period is calculated on a cumulative basis and need not
be consecutive. Moreover, the count of years shall not be restarted unless the
individual ceases to act as a KAP for a minimum period. The minimum period is a
consecutive period equal to at least the cooling-off period required based on the role
of KAP involved.

Exceptions to the 7-year maximum time-on period requirement:

a. In rare cases due to unforeseen circumstances outside the firm’s control, a KAP
whose continuity is especially important to audit quality may be permitted to serve
an additional year as a KAP.

b. When an audit client becomes a PIE, the length of time the KAP has served the
audit client in that capacity should be considered in determining the timing of
rotation.
If the individual has served the audit client as a KAP for 5 years or less when the
client becomes a PIE, the number of years the individual may continue to serve

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 the client in that capacity before rotating off the engagement is 7 years less the
number of years already served. As an exception, if the individual has served the
audit client as a KAP for 6 or more years when the client becomes a PIE, the
individual may continue to serve in that capacity for a maximum of 2 additional
years before rotating off the engagement.

c. When a firm has only a few people with the necessary knowledge and experience
to serve as a KAP, rotation of KAPs might not be possible.

For audits of PIEs, the 2018 IESBA Code requires the following rules in
determining the cooling-off period of

a. If the individual has acted as the engagement partner (EP) for 7 cumulative
years, the cooling-off period shall be 5 consecutive years.
b. If the individual has acted as the engagement quality reviewer (EQ reviewer)
for 7 consecutive years, the cooling-off period shall be 3 consecutive years.
c. If the individual acted has acted as any other key audit partner (OKAP), the
cooling-off period shall be 2 consecutive years.

If an individual has undertaken a combination of key audit partner roles on the audit
of a PIE during the 7-year time-on period, the following rules apply in determining the
required cooling-off period:

a. If the individual has acted in a combination of KAP roles and served as the EP for
4 or more cumulative years, the cooling-off period shall be 5 consecutive years.
b. If the individual has acted in a combination of KAP roles and served as the EQ
reviewer for 4 or more cumulative years, the cooling-off period shall be 3
consecutive years.
c. If the individual has acted in a combination of EP and EQ reviewer roles for 4 or
more cumulative years, the cooling-off period shall be 5 consecutive years if the
individual has been the EP for 3 or more years.
d. If the individual has acted in a combination of EP and EQ reviewer roles for 4 or
more cumulative years, the cooling-off period shall be 3 consecutive years if the
individual has been the EP for less than 3 years.
e. If the individual has not served as the EP and EQ reviewer for at least 4 years, the
cooling-off period shall be 2 consecutive years.

This new provision become became effective only for audits of financial statements for
periods beginning on or after December 15. 2018 (effectively beginning with calendar
2019 audits)

Note: There is no cooling-off requirement for a KAP in relation to an audit client

that is not a public interest entity.

Providing non-assurance services to assurance clients

Providing non-assurance services to audit clients may create self-review, self-interest

and advocacy threats to the independence of the firm or members of the audit team.

Whether an activity is a management responsibility depends on the circumstances and

requires the exercise of judgment. Examples of activities that would generally be
considered a management responsibility include:

 Setting policies and strategic direction.

 Directing and taking responsibility for the actions of the entity’s employees.
 Authorizing transactions.
 Deciding which recommendations of the firm or other third parties to
implement.
 Taking responsibility for the preparation and fair presentation of the financial
statements in accordance with the applicable financial reporting framework.
 Taking responsibility for designing, implementing and maintaining internal
control.

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Preparing Accounting Records

The firm may provide services related to the preparation of accounting records and
financial statements to an audit client that is not a public interest entity where the
services are of a routine or mechanical nature, so long as any self-review threat
created is reduced to an acceptable level.

In contrast, the provision of accounting and bookkeeping services, including payroll

services and the preparation of financial statements or financial information which
forms the basis of the financial statements on which the audit report is provided, on
behalf of an audit client that is a public interest entity, may impair the independence
of the firm or network firm, or at least give the appearance of impairing independence.
However, such services may be provided in emergency situations.

Valuation Services

A valuation comprises the making of assumptions with regard to future developments,

the application of certain methodologies and techniques, and the combination of both
in order to compute a certain value, or range of values, for an asset, a liability or for
a business as a whole.

A self-review threat may be created when a firm or network firms performs a valuation
for a financial statement audit client that is to be incorporated into the client’s financial
statements.

Taxation Services

Tax return preparation services involve assisting clients with their tax reporting
obligations by drafting and completing information, including the amount of tax due
required to be submitted to the applicable tax authorities. Such services also include
advising on the tax return treatment of past transactions and responding on behalf of
the audit client to the tax authorities’ requests for additional information and analysis.
Providing such services do not generally create a threat to independence if
management takes responsibility for the returns.

Preparing calculations of current and deferred tax liabilities (or assets) for an audit
client for the purpose of preparing accounting entries that will be subsequently audited
by the firm creates a self-review threat.

Tax planning or other tax advisory services comprise a broad range of services, such
as advising the client how to structure its affairs in a tax efficient manner or advising
on the application of a new tax law or regulation. A self-review threat may be created
where the advice will affect matters to be reflected in the financial statements.

An advocacy or self-review threat may be created when the firm represents an audit
client in the resolution of a tax dispute once the tax authorities have notified the client
that they have rejected the client’s arguments on a particular issue and either the tax
authority or the client is referring the matter for determination in a formal proceeding,
for example before a tribunal or court.

Internal Audit Services

A self-review threat may be created when a firm, or network firm, provides internal
audit services to an audit client. Internal audit services may comprise an extension of
the firm’s audit service beyond requirements of PSAs, assistance in the performance
of a client’s internal audit activities or outsourcing of the activities.

IT Systems Services

The provision of services by a firm or network firm to an audit client that involves the
design and implementation of financial information technology systems that are used
to generate information forming part of a client's financial statements may create a
self-review threat.

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Lending of Staff

The lending of staff by a firm, or network firm, to an audit client may create a self-
review threat when the individual is in a position to influence the preparation of a
client’s accounts or financial statements. In practice, such assistance may be given
especially in emergency situations but the firm's or network firm's personnel should
not be involved in making management decisions, approving or signing agreements or
other similar documents, or exercising discretionary authority to commit the client.

Litigation Support Services

Litigation support services may include such activities as acting as an expert witness,
calculating estimated damages or other amounts that might become receivable or
payable as the result of litigation or other legal dispute, and assistance with document
management and retrieval in relation to a dispute or litigation. These services may
create a self-review or advocacy threat.

Legal Services

Legal services are defined as any services for which the person providing the services
must either be admitted to practice before the Courts of the jurisdiction in which such
services are to be provided, or have the required legal training to practice law. Legal
services encompass both corporate and commercial services to clients, such as
contract support, litigation, mergers and acquisition advice and support, and the
provision of assistance to client's internal legal departments.

The provision of legal services by a firm, or network firm, to an entity that is a financial
audit client may create both self-review and advocacy threats.

If a partner or an employee of the firm or network firm is appointed as General Counsel

for legal affairs to a financial statement audit client, self-review and advocacy threats
are created. The position of General Counsel is generally a senior management
position with broad responsibility for the legal affairs of a company and consequently,
no member of the firm or network firm should accept such an appointment for a
financial statement audit client.

Recruiting senior management

The recruitment of senior management for an assurance client, such as those in a

position to affect the subject of the assurance engagement, may create self-interest,
familiarity or intimidation threats. However, the firm could generally provide such
services as reviewing the professional qualifications of a number of applicants and
provide advice on their suitability for the post, and produce a short-list of candidates
for interview, provided the criteria was specified by the assurance client.

Corporate finance and similar activities

The provision of corporate finance services, advice or assistance to an assurance client

(e.g., promoting, dealing in, or underwriting of an assurance client's shares) may
create advocacy and self-review threats. Moreover, committing the assurance client
to the terms of a transaction or consummating a transaction on behalf of the client
would create a threat to independence so significant no safeguard could reduce the
threat to an acceptable level.

Unpaid Fees

A self-interest threat may be created if fees due from an audit client remain unpaid for
a long time, especially if a significant part is not paid before the issue of the audit
report for the following year.

Contingent Fees

Contingent fees are fees calculated on a predetermined basis relating to the outcome
or result of a transaction or the result of the work performed. A contingent fee charged
by a firm in respect of an assurance engagement creates self-interest threat. Fees are

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 not regarded as being contingent if a court or other public authority has established
them.

Gifts and Hospitality

Accepting gifts or hospitality from an assurance client may create self-interest and
familiarity threats, unless the value is clearly insignificant.

Actual Litigation or Threatened Litigation

When litigation takes place, or appears likely, between the firm or a member of the
assurance team and the assurance client, a self-interest or intimidation threat may be
created.

Exercises:

Choose the correct answer:

1. All of the following are distinguishing characteristics of a profession, except

a. Mastery of a particular intellectual skill, acquired by training and education.

b. Adherence by its members to a common code of values and conduct.
c. Acceptance of a duty to society as a whole.
d. Holding a master’s degree or any other post-graduate degree.

2. The principle of professional competence and due care imposes certain obligations of
professional accountants. Which of the following is not one of those obligations required
by this principle?

a. To act diligently in accordance with applicable technical and professional standards.

b. To have a continuing duty to maintain professional knowledge and skill.
c. To obtain professional knowledge to enable them to fulfill their responsibilities.
d. To be fair, intellectually honest and free of conflict of interest.

3. The essence of confidentiality imposes an obligation on professional accountants to refrain

from

a. Disclosing confidential information to another party even if the client authorizes the
disclosure.
b. Disclosing information to defend themselves in case of litigation.
c. Disclosing information to a major shareholder of a client company that seeks
accounting information after the management declined to disclose it.
d. Responding to an inquiry or investigation conducted by the Professional Regulatory
Board of Accountancy.

4. Familiarity threat may be created under the following situations, except

a. A member of the engagement team having a close or immediate family relationship

with a director or officer of the client.
b. A member of the engagement team having a close or immediate family relationship
with an employee of the client who is in a position to exert direct and significant
influence over the subject matter of the engagement.
c. A former partner of the firm being a director of the client or an employee in a position
to exert direct and significant influence over the subject matter of the engagement.
d. A member of the assurance team being employed by the client in a position to exert
direct and significant influence over the subject matter of the engagement.

5. A professional accountant in public practice who is asked to provide a second opinion on

the application of accounting, auditing or other standards or principles to specific
circumstances or transactions or on behalf of a company or an entity that is not an existing
client may give rise to threats to compliance with the fundamental principles of

a. Integrity. c. Professional behavior.

b. Professional competence and due care. d. Confidentiality.

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6. Professional fees should be a fair reflection of the value of the professional services
performed for the client, taking into account the following, except

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.
d. The attainment of specific findings.

7. If a member of the assurance team, or their immediate family member, has a direct
financial interest, or a material indirect financial interest, in the assurance client, the self-
interest threat created would be so significant. The only safeguards available to eliminate
the threat or reduce it to an acceptable level would least like include

a. Disposal of the direct financial interest prior to the individual becoming a member of
the assurance team.
b. Disposal of the indirect financial interest in total prior to the individual becoming a
member of the assurance team.
c. Disposal of a sufficient amount of the indirect financial interest so that the remaining
interest is no longer material prior to the individual becoming a member of the
assurance team.
d. Removal the member of the assurance team from the firm.

8. Which of the following circumstances least likely create familiarity threat?

a. A member of the assurance team having an immediate family member or close family
member who is a director or officer of the assurance client
b. A former partner of the firm being a director, officer of the assurance client or an
employee in a position to exert direct and significant influence over the subject matter
of the assurance engagement.
c. Long association of a senior member of the assurance team with the assurance client.
d. Acceptance of gifts or hospitality, which is insignificant in value, from the assurance
client, its directors, officers or employees.

9. The audit client company has not paid its 2019 audit fees. According to the Code of
Professional Ethics, for the firm to be considered independent with respect to the 2020
audit, the 2019 audit fees must be paid

a. Before the 2020 work is completed. c. Before the 2020 report is issued.
b. Before the 2020 work is started. d. On the date of the 2020 audit report.

10. Inducements may take many forms, except

a. Gifts. c. Hospitality.
b. Preferential treatment. d. Appropriate appeals to friendship.

END OF TOPIC 4

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References:

1. Chen, Harvey S., CPA, MBA (2021-2022). Auditing Theory – Volume 2.

2. Whittington, O. Ray, CPA, PhD (2016). Wiley CPAexcel Exam Review Study Guide.

3. Gleim, Irvin. Auditing & Systems (16th Edition).

4. PSRS 4400 (Revised), “Agreed-Upon Procedures Engagement”

5. PSRS 4410 (Revised), “Compilation Engagements”

6. 2020 IESBA Code of Ethics for Professional Accountants

7. RA 9298 (Philippine Accountancy Act of 2024)

8. PSQM 1

9. PSQM 2

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