AUDITING THEORY

TOPIC 2: CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANT IN THE PHILIPPINES

 Based on well-founded standards of right and wrong that prescribe what humans ought to do, usually in
ETHICS terms of rights, obligations, benefits to society, fairness, or specific virtues
 A system of moral principles

 Represents a set of moral principles, rules of conduct or values

CODE OF  Intended to assist members in understanding the difference between right and wrong and in applying that
ETHICS understanding to their decisions
 Applied when an individual has to decide from various alternatives regarding moral principles.

WHY IS THERE A NEED FOR A CODE

OF ETHICS?
 Acceptance of its responsibility to act in
the public interest which is the collective
well-being of the community of people
and institutions the CPA serves
 All recognized professions have
developed codes of professional ethics.
 Profession's attempt to achieve a
number of common interests and by its
observance of certain fundamental
principles for that purpose.
FOUR BASIC NEEDS TO BE MET (CPCQ)
 Credibility
 Professionalism
 Confidence
 Quality of Services
CHARACTERISTICS OF A PROFESSION
 Mastery of a particular intellectual skill, acquired by training and education,
 Adherence by its members to a common code of values and conduct
established by its administrating body, including maintaining an outlook
which is essentially objective, and
 Acceptance of a duty to society as a whole

WORKING GROUPS

DISCUSSION EXPOSURE
PUBLIC
PAPER DRAFT

INTRODUCTION TO THE CODE

ADOPTION TO THE  The Board has the power and function to prescribe and/or adopt a Code of Ethics for the
CODE practice of accountancy

PICPA BOA
Philippine Institute of Certified RECOMMENDED TO
Board of Accountancy
Public Accountant

IESBA – International Ethics Standards Board for Accountants

IFAC
International Federation of IASB – International Accounting Standards Board
Accountants

IAASB – International Auditing Assurance Standards Board

CODE AS “BASIC  Professional accountants should consider the ethical requirements as the basic principles
PRINCIPLES” which they should follow in performing their work.

 The code has been published with a purpose of reflecting the accountancy profession’s
PURPOSE OF THE recognition of its public interest responsibility.
CODE  With this, the following overarching requirements have been set out in the Code to
exemplify this responsibility.

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 FUNDAMENTAL PRINCIPLES INTERNATIONAL INDEPENDENCE
CONCEPTUAL FRAMEWORK
(COBID) STANDARDS
 Confidentiality  Identify  Established for audits, reviews and
 Objective  Evaluate THREATS other assurance engagements
 Professional Behavior  Address regarding threats to independence
 Integrity specific to these engagements.
 Professional Competence and
Due Care

STRUCTURE AND APPLICABILITY OF THE CODE

PART 1: Complying with the Code, Fundamental Principles, and Conceptual Framework
PART 2: Professional Accountants in Business (PAIB)
PART 3: Professional Accountants in Public Practice (PAPP)
PART 4: International Independence Standards
PART 4A: Independence for Audit and Review Engagements
PART 4B: Independence for Assurance Engagements other than Audit and Review Engagements
GLOSSARY

PART 1: COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES, AND CONCEPTUAL FRAMEWORK

COMPLYING WITH THE CODE

RULE  All PAs shall comply with the Code
CONFLICTING  When a professional accountant performs services in a country other than the home country
REQUIREMENTS OF and differences on specific matters exist between ethical requirements of the two countries,
TWO COUNTRIES apply the ethical requirements with stricter provisions.
 The international Code is intended to serve as a model on which to base national ethical
guidance.
CONFLICT WITH  The accountancy profession throughout the world operates in an environment with different
LOCAL LAWS cultures and regulatory requirements.
 In those instances where a national requirement is in conflict with a provision in the Code, the
national requirement would prevail.

BREACH OF THE CODE

The PA who identifies a breach of any other provision of the Code shall (EAR):
PROVISIONS OF THE  Evaluate the significance and impact of the breach; and
CODE  Take whatever Actions might be available immediately to address the consequences
 Determine whether to Report the breach to the relevant parties
INTERNATIONAL
INDEPENDENCE  Apply requirements of Parts 4A and 4B
STANDARDS

FUNDAMENTAL PRINCIPLES (COBID)

 To respect the confidentiality of information acquired as a result of professional and business
Confidentiality
relationships.
 To exercise professional or business judgment without being compromised by bias, conflict of
Objectivity interest, or undue influence of, or undue reliance on, individuals, organizations, technology or other
factors.
 To comply with relevant laws and regulations, behave in a manner consistent with the profession's
Professional responsibility to act in the public interest in all professional activities and business relationships, and
Behavior avoid any conduct that the professional accountant knows or should know might discredit the
profession.
Integrity  To be straightforward and honest in all professional and business relationships
 To attain and maintain professional knowledge and skill at the level required to ensure that a client
Professional
or employing organization receives competent professional service, based on current technical and
Competence
professional standards and relevant legislation
and Due Care
 To act diligently and in accordance with applicable technical and professional standards.

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CONCEPTUAL FRAMEWORK
SELF – REVIEW
(The threat that a professional
accountant will not appropriately
evaluate the results of a previous
judgment made)
SELF – INTEREST
(The threat that a financial or other
interest will inappropriately influence a
PA's judgment or behavior)
FAMILIARITY
(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)

ADVOCACY INTIMIDATION
(The threat that a professional FUNDAMENTAL (The threat that a professional accountant will
accountant will promote a client's or PRINCIPLES be deterred from acting objectively because
employing organization's position to (COBID) of actual or perceived pressures, including
the point that the accountant's attempts to exercise undue influence over the
objectivity is compromised) accountant)

The conceptual framework specifies a three-step approach for PAs to:

1. Identify – threats to compliance with fundamental principles (I-FASS)
2. Evaluate – the threats identified
3 – STEP
3. Address – the threats by eliminating or reducing them to an acceptable level.
APPROACH OF
 Eliminating the circumstances, including interests or relationships, that are creating the
THE CONCEPTUAL
threats;
FRAMEWORK
 Applying safeguards, where available and capable of being applied, to reduce the threats
to an acceptable level; or
 Declining or ending the specific professional activity

When applying the conceptual framework, the PA shall:

 Have an inquiring mind
 Exercise professional judgment
 Use the reasonable and informed third-party test

BIAS – Conscious or unconscious bias affects the exercise of professional judgment when identifying, evaluating and
addressing threats to compliance with the fundamental principles. Examples of biases include the following:
A tendency to use an initial piece of information as an anchor against which subsequent is
Anchoring Bias
inadequately assessed.
A tendency to favor output generated from automated systems, even when human reasoning
Automation Bias
or contradictory information raises questions as to whether such output is reliable or fit for purpose.
A tendency to place more weight on events or experiences that immediately come to mind
Availability Bias
or are readily available than on those that are not.
A tendency to place more weight on information that corroborates an existing belief than
Confirmation Bias
information that contradicts or casts doubt on that belief.
A tendency for a group of individuals to discourage individual creativity and responsibility
Groupthink
and as a result reach a decision without critical reasoning or consideration of alternatives.
Overconfidence A tendency to overestimate one's own ability to make accurate assessments of risk or other
Bias judgments or decisions.
A tendency to base an understanding on a pattern of experiences, events or beliefs that is
Representation Bias
assumed to be representative.
Selective A tendency for a person's expectations to influence how the person views a particular matter
Perception or person.

FORMING A CONCLUSION

The PA is required to "step back" through the following actions:

1. Review any significant judgments made or conclusions reached; and
2. Use the reasonable and informed third party test.

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 PART 2: PROFESSIONAL ACCOUNTANTS IN BUSINESS (PAIB)
PAIBS play an important role as to the reliability of information that investors, creditors, employing organizations and other
sectors of the business community, as well as governments and the general public, may rely upon. As such, the second part
of the Code details on how PAIBS should apply the Conceptual Framework approach presented in Part 1. It also includes the
discussion of the following circumstances that may create threats to compliance with fundamental principles:
MAIN FUNDAMENTAL
CIRCUMSTANCES MAIN THREATS/CREATED
PRINCIPLE/S AFFECTED
Conflict of Interest Self – Interest Objectivity
Preparation and Presentation of Information Self – Interest; Intimidation All
Professional Competence and Due
Acting with Sufficient Expertise Self – Interest
Care
Financial Interest, Compensation and Self – Interest Objectivity; Confidentiality
Incentives
Inducements, Including Gifts and Self – Interest; Familiarity; Integrity; Objectivity; Professional
Hospitality Intimidation Behavior
Responding to Non-compliance with Laws
Self – Interest; Intimidation Integrity; Professional Behavior
and Regulations (NOCLAR)
Pressure to Breach the Fundamental
Self – Interest All
Principles

Communication Required

Communicating with Those Charged with Governance

The PA shall determine the appropriate individuals within the employing organization's governance structure with whom to
communicate. The PA may consider:
✓ The nature and importance of the circumstances; and
✓ The matter to be communicated.

If a PA communicates with individuals who have both management and governance responsibilities, the PA shall be satisfied
that communication with those individuals adequately informs all of those in governance role.

PART 3: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE (PAPP)

MAIN FUNDAMENTAL PRINCIPLE/S

CIRCUMSTANCES MAIN THREATS/CREATED
AFFECTED
Conflict of Interest Self – Interest Objectivity
Professional Appointments All All
Second Opinions Self – Interest Professional Competence and Due Care
Fees and Other Types of Professional Competence and Due Care;
Self – Interest
Remuneration Objectivity
Inducements, Including Gifts and Self – Interest; Familiarity; Integrity; Objectivity and Professional
Hospitality Intimidation Behavior
Custody of Client Assets Self – Interest Objectivity; Professional Behavior
Responding to Non-compliance with
Self – Interest; Intimidation Integrity; Professional Behavior
Laws and Regulations (NOCLAR)

RESPONDING TO NOCLAR IN AUDITS OF FINANCIAL STATEMENTS

Determining whether to
Becoming aware of the Documentation
disclose to appropriate
matter
authority

Obtaining an
Determine whether
understanding of the
further action needed
matter

Communicate with
Addressing the matter
respect to groups

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 RESPONDING TO NOCLAR IN NON – AUDITS SERVICES

Becoming aware of the

Seeking advice Documentation
matter

Obtaining an
Determining whether
understanding of the
further action needed
matter

Addressing the matter Communicating the

with management and matter to the entity’s
TCWG external auditor

Communicating with Those Charged with Governance

The PA shall determine the appropriate individuals within the employing organization's governance structure with whom to
communicate. The PA may consider:
 The nature and importance of the circumstances; and
 The matter to be communicated.

PART 4: INTERNATIONAL INDEPENDENCE STANDARDS

The Code has specifically set out IISS to apply the conceptual framework and address the threats to compliance with these
overarching requirements. The IISS are composed of two parts as follows:
Part 4A - Independence for Audit and Review Engagements which applies when performing audit or review
engagements.
Part 4B - Independence for Assurance Engagements Other than Audit and Review Engagements which applies when
performing assurance engagements that are not audit or review engagements.

PART 4A: INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS

INDEPENDENCE
INDEPENDENCE OF MIND INDEPENDENCE IN APPEARANCE
The state of mind that permits the expression of a The avoidance of facts and circumstances that are so
conclusion without being affected by influences that significant that a reasonable and informed third party would
compromise professional judgment, thereby allowing an be likely to conclude that a firm's or an audit or assurance
individual to act with integrity, and exercise objectivity and team member's integrity, objectivity or professional
professional skepticism. skepticism has been compromised.

PERIOD DURING WHICH INDEPENDENCE IS REQUIRED

ENGAGEMENT PERIOD
INDEPENDENCE
REQUIREMENT
PERIOD COVERED BY FS AUDIT REPORT
DATE

START OF AUDIT
WORK
START OF PERIOD END OF THE
OF THE FS PERIOD OF THE FS

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 CIRCUMSTANCES THREAT/S CREATED
Fees (Relative Size; Overdue Fees; Contingent Fees) Self – interest; Intimidation
Compensation and Evaluation Policies Self – interest
Gifts and Hospitality Self – interest; Familiarity; Intimidation
Actual or Threatened Litigation Self – interest; Intimidation
Financial Interest Self – interest
Loans and Guarantees Self – interest
Business Relationships Self – interest; Intimidation
Family and Personal Relationship Self – interest; Familiarity; Intimidation
Recent Service with and Audit Client Self – interest; Self – review; Familiarity
Serving as a Director or Officer of an Audit Client Self – interest; Self – review
Employment with an Audit Client Self – interest; Familiarity; Intimidation
Temporary Personnel Assignments Self – interest; Advocacy; Familiarity
Long Association of Personnel (including partner rotation) with and Audit Client Self – interest; Familiarity
Self – interest; Self – review;
Provision of Non-assurance Services to and Audit Client
Familiarity; Intimidation
Reports on Special Purposes FS that includes Restriction to Use and
All
Distribution (audit and review engagements)

ROTATION PERIOD
 7-year "time-on period" - Key Audit Partner (KAP) roles are not allowed for a period > 7
cumulative years
 After the 7-year time-on period, the individual shall serve a "cooling- off" period as follows:
a. 5-year cooling off - Engagement Partner
PUBLIC INTEREST
b. 3-year cooling off - Engagement Quality Control Reviewer (EQCR)
ENTITY
c. 2-year cooling off - Other KAP Role

Note: If the individual acted in a combination of KAP roles and served as the engagement
partner for 4 or more cumulative years, the cooling-off period shall be 5 consecutive years
NOT A PUBLIC
Firm shall determine an appropriate period to address the threats
INTEREST ENTITY

BREACH OF THE CODE

If a breach of independence has been identified, the firm shall:
1. End, suspend or eliminate the interest or relationship
2. Consider whether any legal or regulatory requirements apply to the breach
INTERNATIONAL 3. Promptly communicate the breach in accordance with its policies and procedures
INDEPENDENCE 4. Evaluate the significance of the breach and its impact on the firm's objectivity and ability
STANDARDS to issue an audit report, and
5. Depending on the significance of the breach, determine whether:
a. To end the audit engagement, or
b. It is possible to take action that addresses the consequences

PART 4B: INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS

BREACH OF THE CODE

The independence requirements under Part 4B applies to assurance engagements other than audits
and reviews.

These assurance engagements may include:

SCOPE OF PART 1. Assurance on an entity's key performance indicators.
4B 2. Assurance on an entity's compliance with law or regulation.
3. Assurance on performance criteria, such as value for money, achieved by a public sector body.
4. Assurance on the effectiveness of an entity's system of internal control.
5. Assurance on an entity's greenhouse gas statement.
6. An audit of specific elements, accounts or items of a financial statement.
INDEPENDENCE Similar provisions with Part 4A.
REQUIREMENTS

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 CIRCUMSTANCES THREAT/S CREATED
Fees (Relative Size; Overdue Fees; Contingent Fees) Self – interest; Intimidation
Gifts and Hospitality Self – interest; Familiarity; Intimidation
Actual or Threatened Litigation Self – interest; Intimidation
Financial Interest Self – interest
Loans and Guarantees Self – interest
Business Relationships Self – interest; Intimidation
Family and Personal Relationship Self – interest; Familiarity; Intimidation
Recent Service with and Audit Client Self – interest; Self – review; Familiarity
Serving as a Director or Officer of an Audit Client Self – interest; Self – review
Employment with an Assurance Client Self – interest; Familiarity; Intimidation
Long Association of Personnel (including partner rotation) with and Audit Self – interest; Familiarity
Client
Provision of Non-assurance Services Assurance Clients other than Audit Self – interest; Self – review; Familiarity;
and Review Engagement Clients Intimidation
Reports on Special Purposes FS that includes Restriction to Use and
Distribution (assurance engagements other than audit and review All
engagements)

BREACH OF THE CODE

If a firm concludes that a breach of a requirement in this Part has occurred, the firm
shall:
1. End, suspend or eliminate the interest or relationship that created the breach;
INTERNATIONAL
2. Evaluate the significance of the breach and its impact on the firm's objectivity and
INDEPENDENCE STANDARDS
ability to issue an assurance
3. Determine whether action can be taken that satisfactorily addresses the
consequences of the breach.

ADDITIONAL INFORMATION
Sources of safeguards include the following:
1. Safeguards provided by the profession, legislation, rules and regulations, or standards
2. Safeguards within the client's systems, processes and procedures
3. Safeguards in the work environment (Firm-wide and engagement-specific)