Chapter 2 THE PROFESSIONAL STANDARDS

When auditing financial statements, an auditor assumes certain professional responsibilities. Auditor9s
opinion must be based on an examination conducted in accordance with professional standards. Failure
to comply with these standards exposes the auditor to risks such as loss of public respect or even
assessment of legal damages.

Standards are established to measure the quality of performance of individuals and organizations.
Standards relating to the accounting profession concern themselves with CPAs9 professional qualities, the
judgment exercised by the CPAs in the performance of their professional engagement, and the CPA firm9s
quality control policies and procedures.

The Board of Accountancy promulgated ten generally accepted auditing standards (GAAS) that establish
required level of quality for performing financial statement audits. These standards must be followed by
CPAs when auditing financial statements.

Philippine Standards on Auditing (PSAs) are issued to clarify the meaning of these ten GAAS. Auditing
procedures are the means used by the auditors in attaining the quality required by the standards.

 Generally Accepted Auditing Standards (GAAS)

 General Standards

1. The examination is to be performed by a person or persons having adequate technical training and
proficiency as an auditor. 2. In all matters relating to an engagement, an independency in mental attitude
is to be maintained by the auditor. 3. Due professional care is to be exercised in the performance of the
audit and in the preparation of the report.

 Standards of Fieldwork

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

 Standards of Reporting

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

In all cases, where an auditor9s name is associated with the financial statements, the report should
contain a clear-cut indication of the character of the auditor9s examination if any and the degree of
responsibility he is taking.

 PHILIPPINE STANDARDS ON AUDITING (PSAs)

The Auditing and Assurance Standards Council (AASC) has been given the task to promulgate auditing
standards, practices and procedures which shall be generally accepted by the accounting profession in the
Philippines. The structure of AASC pronouncements is shown in Figure 2.2.

 Adoption of International Standards

To facilitate the preparation by the AASC of its pronouncements and to attain uniformity of those
pronouncements with international auditing standards, the AASC has approved the adoption of the
International Standards on Auditing (ISAs), International Standards on Assurance Engagements (ISAEs),
International Standards on Review Engagement (ISREs) and International Standards on Related Services
(ISRSs) issued by the International Auditing and Assurance Board (IAASB) created by the International
Federation of Accountants (IFAC).

In addition to these standards, Practices Statements are also issued to provide practical assistance to
auditors in implementing the standards and to promote good practice in the accountancy profession.

In this connection, the AASC undertakes a review of the standards and practices statements issued by
IAASB to determine if these can be adopted in the Philippines with or without changes, after considering
any local requirements imposed by law or practice.

 SYSTEM OF QUALITY CONTROL

conducted by audit teams. It is only by implementing quality control policies and procedures that CPAs
can ensure that all members of the audit teams perform the same level of quality of work.

Quality controls are policies and procedures adopted by CPAs to provide reasonable assurance of
conforming with professional standards in performing audit and related services.

Under Philippine Standards on Quality Control (PSQC) 1, a firm has an obligation to establish a system of
quality control designed to provide it with reasonable assurance that the firm and its personnel comply
with professional standards and regulatory and legal requirements, and that the report issued by the firm
are appropriate in the circumstances. In this regard, engagement teams:

 Implement quality control procedures that are applicable to audit engagement;  Provide the firm with
relevant information to enabling the functioning of that part of the firm9s system of quality control
relating to independence; and  Are entitled to rely on the firm9s systems unless information provided by
the firm or other parties suggest otherwise.  Elements of a System of Quality Control

PSA 220 states that audit firm should implement policies and procedures designed to ensure that all
audits are conducted in accordance with PSAs.

The quality control policies and procedures adopted by audit firms vary depending on the firm9s size and
nature of its practice, cost benefit and other factors. PSA 220 has identified the following quality control
policies that may serve as a guide to audit firms in establishing their own system of quality control.

 LEADERSHIP RESPONSIBILITIES FOR QUALITY ON AUDITS

The firm should establish policies and procedures designed to promote an internal culture based on
recognition that quality is essential in the performance of the engagements.

The engagement partner should take responsibility for the overall quality on each audit engagement to
which the partner is assigned. The engagement partner should set example regarding the quality of audit
by emphasizing through actions and messages the importance of performing work that complies with
professional standards, complying with the firm9s quality control policies and procedures, and issuing
appropriate audit reports.

 ETHICAL REQUIREMENTS

The firm should establish policies and procedures designed to provide it with reasonable assurance that
the firm and its personnel comply with ethical requirements, which include: a. Integrity; b. Objectivity; c.
Professional competence and due care; d. Confidentiality; and e. Professional behavior
The engagement partner should consider whether members of the engagement team have complied with
these ethical principles. Any issues involving engagement team member 8s noncompliance with ethical
requirements must be properly resolved and documented.

 INDEPENDENCE

The firm should establish policies and procedures designed to provide it with reasonable assurance that
the members of the engagement team, the firm and, where applicable, the network firms maintain
independence when providing assurance services.

The engagement partner should form a conclusion on compliance with independence requirements that
apply to the audit engagement. The engagement partner should a. Obtain relevant information to identify
circumstances and relationships that create threats to independence; b. Evaluate information on
identified breaches of the firm9s independence policies and procedures to determine whether they
create a threat to independence; c. Take appropriate safeguards to eliminate such threats or reduce them
to an acceptable level; and d. Document conclusions on independence and the basis for such conclusion.

 ACCEPTANCE AND CONTINUANCE 0F CLIENT RELATIONSHIPS

The firm should establish policies and procedures for the acceptance and continuance of client
relationships and specific engagements, designed to provide it with reasonable assurance that it will only
undertake or continue relationships and engagement where it: a. Has considered the integrity of the
client; b. Is competent to perform the engagement and has the capabilities, time and resources to do so;
and c. Can comply with ethical requirements.

The engagement partner should be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and specific audit engagement have been followed and that
conclusions reached in this regard are appropriate and have been documented.

 HUMAN RESOURCES and ASSIGNMENT

The firm should establish policies and procedures designed to provide it with reasonable assurance that it
has sufficient personnel with the capabilities, competence, and commitment to ethical principles
necessary to perform the engagement. Such policies and procedures should address issues concerning
personnel

 Recruitment;  Performance evaluation, compensation and promotion;  Capabilities and competence;

The engagement partner should be satisfied that the engagement team collectively has the appropriate
capabilities, competence and time to perform the audit engagement in accordance with professional
standards, and regulatory and legal requirements, and to enable an auditor9s report that is appropriate in
the circumstances to be issued.

 ENGAGEMENT PERFORMANCE

The firm should establish policies and procedures designed to provide it with reasonable assurance  that
engagements are performed in accordance with professional standards and other regulatory and legal
requirements; and  that the audit report issued is appropriate in the circumstances.

The engagement partner should take responsibility for the direction, supervision, review and overall
performance of the audit engagement.

 Direction
Assistants should he informed of their responsibilities, the nature of the entity9s business, potential
problems that may arise and the detailed approach to the performance of the engagement.

 Supervision

This involves monitoring the progress of the audit, resolving accounting and audit issues, and considering
the level of consultation appropriate for the engagement.  Review

Work performed by assistants should be reviewed to consider whether the audit procedures, evidence
and documentation are appropriate to support the conclusion reached.

 Consultation

The firm should establish policies and procedures that encourage firm personnel to seek assistance from
authoritative sources either within or outside the firm.

The engagement partner should:

a. Be responsible for the engagement team undertaking appropriate consultation on difficult and
contentious matters; b. Be satisfied that members of the engagement team have undertaken appropriate
consultation during the course of the engagement, both within the engagement team and others at the
appropriate level within or outside the firm; c. Be satisfied that the nature and scope of, and conclusions
resulting from such consultations are documented and agreed with the party consulted; d. Determine
that conclusions resulting from consultations have been implemented.

 Engagement Quality Control Review

The firm should establish policies and procedures requiring an engagement quality control review that
provides an objective evaluation of the significant judgments made and conclusions reached in
formulating the auditor9 s report.

This requires the engagement partner: a. To determine that an engagement quality control reviewer has
been appointed; b. To discuss significant matters arising during the audit engagement, including those
identified during the quality control review, with the engagement quality control reviewer; and c. Not to
issue the auditor8s report until the completion of the engagement quality control review.

The firm should establish policies and procedures setting out the scope of quality control review criteria
for the eligibility of the reviewer, and documentation of the quality control review.

 Differences of Opinion
The engagement team should follow the firm9s policies and procedures for dealing with and resolving
differences of opinion that arise within the engagement team, with those consulted and, where
applicable, between the engagement partner and the engagement quality control reviewer.
The engagement partner should inform the members of the engagement team to bring matters involving
differences of opinion to the attention of the engagement partner or others within the firm as appropriate
without fear of reprisals. The audit report should not be issued until the matter involving differences of
opinion is resolved MONITORING

The continued adequacy and operational effectiveness of quality control policies and procedures is to be
monitored. Policies and procedures must be adopted to provide reasonable assurance that the systems of
quality control are relevant, adequate and operating effectively.

The firm9s quality control policies and procedures should be communicated to its personnel in a manner
that provides reasonable assurance that the policies and procedures are understood and Implemented.

 QUALITY CONTROL REVIEW Recognizing the importance of professional accountants9 services to the
society, the government has also taken steps to ensure that CPAs work to the highest standards which can
reasonably be expected from them. The government thru the Professional Regulatory Board of
Accountancy (BOA) has required all CPA firms and individual CPAs in public practice to obtain a certificate
of accreditation to practice public accountancy. Such certificate is valid for three years and can be
renewed after complying with the requirements of the Board of Accountancy.

As a condition to the renewal of the certificate of accreditation to practice public accountancy, the Board
requires individual CPAs and CPA firms to undergo a quality control review to ensure that these CPAs
comply with accounting and auditing standards and practices.

The PRC has9 created at Quality Review Committee (QRC) which shall conduct a quality review on
applicants for registration to practice public accountancy and shall recommend the revocation of the
certificate of registrations of CPAs who have not observed the quality control measures or those who
have not complied with the standards of quality prescribed for the practice of public accountancy.