Ch 13

Chapter 13C
Independence
Chapter 13 The Code of Ethics & The
Philippine Accountancy Act of 2004
December 15, 2022 Information available in audio.

Report Coverage
Independence
Two Phases of Independence
Engagement Period
Independence Requirement
Independence Interpretations and Rulings

Independence
Taking an unbiased viewpoint
in the performance of the
examination and in the
preparation of the report.
An essential element of the

CPA profession.
If the assurance engagement is to enhance

the credibility of an information, it is important
that users of this information perceive the
professional accountant as being objective
and impartial.
If the assurance engagement is to enhance
the credibility of an information, it is important
that users of this information perceive the
professional accountant as being objective
and impartial.
Two Phases of Independence of mind
Independence The auditor’s perception of his

own independence.
The independence of mind & the
independence in appearance.
Independence in
Appearance
The public’s perception of the

professional accountant’s
Back to Agenda independence.
Engagement Period
The members of the assurance team and the firm
should be independent of the assurance client
during the period of assurance engagement.
In case of a financial statement audit engagement,

the engagement period includes the period covered
by the financial statements reported on by the firm.
START END
When the assurance team Assurance report is issued.
begins to perform assurance EXCEPT when the assurance
services. engagement is of recurring nature.
Member of
Network
Assurance Firm
Firm
Team
Audit or
REQUIRED REQUIRED REQUIRED
Review
Independent
Requirement Non-Audit
REQUIRED REQUIRED
NOT
Assurance REQUIRED
Independence is required
only whenever the
professional accountant Non-Audit
provides assurance services. Assurance
REQUIRED
NOT NOT
with REQUIRED REQUIRED
Restrictions
Back to Agenda
Independence Interpretations
and Rulings
Ø Financial interest
Ø Loans and guarantees
Ø Close Business Relationships
Ø Family and Personal Relationships
Ø Recent service with an assurance client
Ø Serving as an officer or director on the Board of Assurance Clients
Ø Entering Employment with a Client
Ø Long association with assurance clients
Ø Provision of Accounting and Bookkeeping Services to an Audit Client
Ø Provision of Technical Assistance to an Audit Client
Ø Provision of Valuation Services to an Audit Client
Independence Interpretations
and Rulings
Ø Provision of Administrative Services to an Assurance Client
Ø Preparation of Tax Return to an Audit Client
Ø Current and Deferred Tax Calculations
Ø Assisting in the Resolution of Tax Dispute
Ø Provision of legal services to assurance clients
Ø Recruiting Senior Management
Ø Fees-Relative Size
Ø Fees-overdue
Ø Contingent Feed
Ø Compensation and Evaluation Policy
Ø Gifts and hospitality
Ø Actual or threatened litigation
Independence Interpretations & Rulings
CIRCUMSTANCE REQUIREMENT
1. Financial Interest Direct if the beneficial owner has control over

the investment vehicle or the ability to
influence its investment decisions thus impair
independence•
For indirect, it does not impair independence

unless material.
2. Loans and guarantee If the client is financial institution: does not

impair independence provided:
Immaterial to firm and client
Made under normal procedures
If not a financial institution will impair

independence unless the loan is immaterial to
both parties.
3. Close business relationship It might involve a commercial or common

financial interest and may create self-interest
and intimidation threats.
Ex. of CBR,
Having a material financial interest in a joint
venture with the assurance client.
Close business relationships can be considered

indirect financial interest unless it is
immaterial and the relationship is insignificant.
4. Family and personal When a member of the audit team has a close
relationships family member who the audit team member
knows has a direct financial interest or a
material indirect financial interest in the audit
client, the significance depends whether:
Nature of relationship
Materiality of the financial interest to the
close family member
4. Family and personal Safeguards in case of significant threat:

relationships Remove the individual from the assurance
team
Structuring the responsibilities of the
assurance team, hence the team member
does not deal with matters within the
responsibility of the immediate family
member.
4. Family and personal Independence is impaired when a member of

relationships an audit team has an immediate family
member who is a director, an officer or an
employee with ability to influence the subject
matter of the audit
5. Recent service with an Independence is impaired if,

assurance client During the period covered by assurance
report, a member of the assurance team
had served as a director, an officer or an
employee of the assurance client in a
position to influence the subject matter of
the assurance engagement.
6. Serving as an officer or Independence is impaired if,

director on the Board of A partner or employee of a firm serves as
Assurance Clients an officer or a director on the board of an
assurance client.
Not impaired if,
Serves as an honorary member on the
board of a non-stock non-profit
organization that is an assurance client
7. Entering Employment with Independence is impaired if;

a Client An assurance team member participates in
the assurance engagement knowing that
he/she will, or might, join the client some
time in the future.
The member of the audit team is a former
director, officer or an employee to exert
significant influence in the preparation of FS
(cannot issue report covering the period
when he is still employed)
7. Entering Employment with Independence is impaired if;

a Client If a former member of the audit team or
partner of the firm has joined the audit
client in such a position and a significant
connection remains between the firm and
the individual.
7. Entering Employment with Safeguards:

a Client Removing the individual from the assurance
team: or
Having an appropriate reviewer review any
significant judgement made by that
individual while on the team.
7. Entering Employment with Safeguards:

a Client Removing the individual from the assurance
team: or
Having an appropriate reviewer review any
significant judgement made by that
individual while on the team.
8. Long Association with Familiarity threats are created by using the

Assurance Clients same senior personnel on an audit
engagement over a long period of time
Safeguards:
Rotating the senior personnel off the audit
team.
Independent quality reviews.
8. Long Association with If a firm concludes that the level of the threat
Assurance Clients can only be addressed by rotating the
personnel, the firm should determine an
appropriate period during which the individual
will not:
Be a member of the engagement team for
the audit engagement;
Provide quality control for the audit
engagement; or
Exert direct influence on the outcome of the
audit engagement.
8. Long Association with For audits of a public interest entities, an

Assurance Clients individual cannot act in any of the following
roles for a period of more than seven
cumulative years (the “time-on” period)
The engagement partner

The quality control reviewer; or
Any other key audit partner role.
8. Long Association with Time-on Cooling-off

Assurance Clients Period Period
Engagement 7 years 5 years

Partner
Quality Control 7 years 3 years

Reviewer
Other Key Audit 7 years 2 years

Partner Role
9. Provision of Accounting Creates self-review threat if the firm

and Bookkeeping Services to subsequently audits the financial statements.
an Audit Client
Accordingly, a professional accountant
should not provide accounting and
bookkeeping services to an audit client.
9. Provision of Accounting On the other hand, accounting and

and Bookkeeping Services to bookkeeping services that are routine or
an Audit Client mechanical in nature can be provided to an
audit client so long as:
The audit client is not a public interest
entity; and
Any self-review threat created is reduced to
an acceptable level.
10. Provision of Technical The auditor and the client management may
Assistance to an Audit Client have discussions about:
The application of accounting standards or
policies and financial statement disclosure
requirements.
The appropriateness of financial and
accounting control and the methods used
in determining the stated amounts of assets
and liabilities.
Proposing adjusting journal entries.
11. Provision of Valuation A valuation comprises the making of

Services to an Audit Client assumptions with regard to future
developments, the application of appropriate
methodologies and techniques and the
combination of both to compute a certain
value, or range of values, for an asset, a liability
or for a business as a whole.
11. Provision of Valuation A CPA firm shall not provide a valuation

Services to an Audit Client service to an audit client if the valuation
service would have a material effect,
individually or in the aggregate, on the financial
statements on which the firm will express an
opinion.
12. Provision of Administrative Administrative services involve assisting

Services to an Assurance clients with their routine or mechanical
Client tasks within the normal course of operations.
Such services require little to no professional
judgment and are clerical in nature.
Ex.,
1. Word processing services
2. Preparing administrative or statutory forms
for client approval
13. Preparation of Tax Return Tax return preparation services involve:

to an Audit Client Assisting clients with their tax reporting
obligations by drafting and compiling
information, including the amount of tax due
(usually on standardized form) required to
be submitted to the tax authorities.
13. Preparation of Tax Return Tax return preparation services involve:

to an Audit Client 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 (for example, providing
explanations of technical support for the
approach being taken).
14. Current and Deferred Tax Preparing calculations of current and deferred
Calculations 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.
14. Current and Deferred Tax A professional accountant may be allowed to

Calculations provide this service to an audit client, provided:
The client is not a public interest entity;

Appropriate safeguards are in placed to
reduce the threat to an acceptable level,
such as using different personnel or having
an appropriate reviewer to review the audit
worked or the service performed.
15. Assisting in the Resolution An advocacy threat is created when the

of Tax Dispute professional accountant represents the audit
client in a resolution of a tax dispute.
Accordingly, a professional accountant

should not represent an audit client before
a court in the resolution of a tax matter
when the amounts involved are material to the
financial statements in which the professional
accountant will express an opinion.
16. Provision of legal services If advocate – impaired hence should not do

to assurance clients this along with audit.
If advisor – will not impair independence

provided safeguards are applied.
17. Recruiting Senior The recruitment of a senior management for an

Management assurance client impair the CPA’s
independence, especially if the firm makes the
ultimate hiring decisions.
On the contrary, the firm could not perform

consulting services such as reviewing the
qualifications of the applicants and provide
advice on their suitability for the post.
18. Fees-Relative Size When the total fees generated from an

assurance client represent a large proportion
of the total fees of that firm, the dependence
on that client and concern about losing the
client create a self-interest or intimidation
threat. Increasing the client base in the firm
reduces dependence on a particular client.
18. Fees-Relative Size 2. Discuss whether either a pre-issuance or

post-issuance review might be a safeguard to
address the threat created by the total fees
received by the firm from the client, and if so,
apply it.
Pre-issuance - a professional accountant
performs an engagement quality control
review of that engagement
Post-issuance review - a professional
body performs a review of the second
year’s audit.
19. Fees-overdue Generally the firm is expected to require

payment of such fees before audit report is
issued.
20. Contingent Fees Contingent fees charged by a firm with respect

to an assurance engagement will impair the
CPA’s independence.
A firm shall not enter into contingent fee
arrangement.
A fee is not regarded as being contingent if
established by a court or other public
authority.
21. Compensation and A self-interest threat is created when an audit

Evaluation Policy team member for a particular audit is
evaluated on or compensated for selling non-
assurance services to that audit client.
The level of the self-interest threat will depend

on:
What proportion of the compensation or
evaluation is based on the sale of such
services.
21. Compensation and The role of the individual on the audit team;
Evaluation Policy Whether the sale of such non-assurance
services influences promotion decisions
Accordingly, a firm should not evaluate or

compensate a key audit partner based on
that partner’s success in selling non-
assurance services to the partner’s audit
client.
22. Gifts and hospitality Accepting gifts and hospitality from an

assurance client creates a self-interest,
familiarity or intimidation threat.
A professional accountant should not

accept gifts and hospitality from an
assurance client, unless the value is trivial and
inconsequential.
23. Actual or Threatened May create self-interest and intimidation

Litigation threat.
The relationship between the CPA and the

client must be characterized by honesty,
truthfulness and full disclosure.
Chapter 13C
Independence
Chapter 13 The Code of Ethics & The
Philippine Accountancy Act of 2004
December 15, 2022 Information available in audio.

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Chapter 13C

December 15, 2022 Information available in audio.

Two Phases of Independence

Independence Interpretations and Rulings

An essential element of the

If the assurance engagement is to enhance

Independence The auditor’s perception of his

The public’s perception of the

In case of a financial statement audit engagement,

1. Financial Interest Direct if the beneficial owner has control over

For indirect, it does not impair independence

2. Loans and guarantee If the client is financial institution: does not

If not a financial institution will impair

3. Close business relationship It might involve a commercial or common

Close business relationships can be considered

4. Family and personal Safeguards in case of significant threat:

4. Family and personal Independence is impaired when a member of

5. Recent service with an Independence is impaired if,

6. Serving as an officer or Independence is impaired if,

7. Entering Employment with Independence is impaired if;

7. Entering Employment with Independence is impaired if;

7. Entering Employment with Safeguards:

7. Entering Employment with Safeguards:

8. Long Association with Familiarity threats are created by using the

8. Long Association with For audits of a public interest entities, an

The engagement partner

8. Long Association with Time-on Cooling-off

Engagement 7 years 5 years

Quality Control 7 years 3 years

Other Key Audit 7 years 2 years

9. Provision of Accounting Creates self-review threat if the firm

9. Provision of Accounting On the other hand, accounting and

11. Provision of Valuation A valuation comprises the making of

11. Provision of Valuation A CPA firm shall not provide a valuation

12. Provision of Administrative Administrative services involve assisting

13. Preparation of Tax Return Tax return preparation services involve:

13. Preparation of Tax Return Tax return preparation services involve:

14. Current and Deferred Tax A professional accountant may be allowed to

The client is not a public interest entity;

15. Assisting in the Resolution An advocacy threat is created when the

Accordingly, a professional accountant

16. Provision of legal services If advocate – impaired hence should not do

If advisor – will not impair independence

17. Recruiting Senior The recruitment of a senior management for an

On the contrary, the firm could not perform

18. Fees-Relative Size When the total fees generated from an

18. Fees-Relative Size 2. Discuss whether either a pre-issuance or

19. Fees-overdue Generally the firm is expected to require

20. Contingent Fees Contingent fees charged by a firm with respect

21. Compensation and A self-interest threat is created when an audit

The level of the self-interest threat will depend

Accordingly, a firm should not evaluate or

22. Gifts and hospitality Accepting gifts and hospitality from an

A professional accountant should not

23. Actual or Threatened May create self-interest and intimidation

The relationship between the CPA and the

December 15, 2022 Information available in audio.

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