Chapter 2 THE PROFESSIONAL STANDARDS When auditing financial statements, an auditor assumes certain professional responsibilities. Auditor’s 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 concem. themselves with CPAs’ professional qualities, the judgment exercised by the CPAs in the performance of their professional _ engagement, and the CPA firm’s quality control policies and procedures: 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) GAAS sepresent measures of the quality of the auditor's performance. These standards should: be, looked at as a minimum standard of performance that auditors should follow. These ten GAAS are grouped into general, fieldwork and reporting standards. 35 Scanned with CamScannerFeneraly Accepted Auditing Standards Auditing Standards (GAAS) oe Standards of Standards of en . ti Standards Fieldwork Reporting es «Technical Pranning Generally Training and : Accepted Proficiency, Tarernal Control Accounting Consideration Principles + Independence Evidential Taconsistency + Professional matter Disclosure care Opinion General Standards med by person of persons having 1. The examination is to be perfor cy as an auditor. adequate technical training and proficie! 2, In all matters relating to an engagement, 9 independence 1" mental attitude is to be maintained by the auditor. 3. Due professional care is to be exercised in the per the audit and in the preparation of the report. formance of 36 Scanned with CamScanner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 auditor’s name is associated with the financial statements, the report shoukt contain a clear-cut indication of the character of the auditor’s examination if any and the degree of responsibility he is taking. 37 Scanned with CamScanner@ PHILIPPINE STANDARDS ON AUDITING (PSAs) The Auditing and Assurance Standards Council (AASQ) has been given the task to promulgate auditing standards, practices and procedures which shall be generally accepted in the Philippines. The structure of AASC pronouncements is shown below. AASC PRONOUNCEMENTS Framework for Assurance Engagements C= J = =] Related Services £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 Taternational Standards on Auditing (ISAs), International Standards on -Assurance Engagements (ISAEs), International Standards on Review Engagement (ISREs) and International Standards on Related Scanned with CamScanner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 If the public is to rely on the professional CPAs’ work, it is essential that appropriate controls are put in place to ensure that their work is consistently of high quality. The need for practicing CPAs to implement and maintain quality control measures is derived from the fact that audits are usually conducted by audit téams. 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 to provide 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. , 39 Scanned with CamScannerELEMENTS OF QUALITY CONTROL POLICIES AND PROCEDURES Audit firms are required to implement quality control policies and procedures in order to ensure that all audits are conducted in accordance with PSAs, The quality control policies and procedures adopted by audit firms vary depending on the firm’s size and nature of its practice, cost benefit considerations and other factors. PSA 220 has identified the following quality control policies that may serve as a guide to audit. firms in _ establishing theit own system of quality control. {3 LEADERSHIP RESPONSIBILITIES The firm should establish policies and procedures designed to promote an internal culture based on recognition that quality is essenitial 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 firm’s quality control policies and procedures, issuing appropriate audit reports, and the engagement's team ability to raise concerns without fear of reprisals, VVV Scanned with CamScannerfi ETHICAL REQUIREMENTS The firm should establish policies and procedures designed to provide reasonable assurance that the firm and its personnel comply with ethical requirements, which include: r Professional competence and due care; “} Confidentiality; and 7 Professional behavior The engagement partner should consider whether members of the cngagement team have complied with these ethical principles. Any issues involving engagement team member’s non-compliance with ethical requirements must be properly resolved and documented. =] INDEPENDENCE ~ The firm should establish policies and procedures designed to provide reasonable assurance that the members of the engagement team, the firm and, where applicable, the network firms maintain independence when providing audit services. The engagement partner should form a conclusion on compliance with independence requirements that apply to the audit engagement. The engagement partner should: > Obtain relevant information to identify circumstances and relationships that create threats to independence; » Evaluate information on identified breaches of the firm’s independence policies and procedures to determine whether they create a threat to independence; > Take appropriate safeguards to eliminate such threats or reduce them to an acceptable level; and > Document conclusions on independence and the basis for such conclusion. 41 Scanned with CamScannerACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS The firm should establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide reasonable assurance that it will only undertake or continue relationships and engagement where it: > Has considered the integrity of the client; > Is competent to perform the engagement and has the capabilities, time and resources to do so; and > 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 are appropriate and have been documented. &] HUMAN RESOURCES AND ASSIGNMENT The firm should establish policies and procedures designed to provide 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 aad competence; > Career development; and > Assignment of engagement teams The engagement partner should be satisfied that the engagement team collectively has the appropriate capabilities, competence and time to perform the audit engagement in accordance with professional standards, and regulatory and legal requirements, and to enable an auditor’s report that is appropriate in the circumstances to be issued. 42 Scanned with CamScanner§2 ENGAGEMENT PERFORMANCE The firm should establish policies and procedures designed to provide reasonable assurance that engagements ate 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. 1. Direction Assistants should be informed of their responsibilities, the nature of the entity’s business, potential problems that may arise and the detailed approach to the performance of the engagement. 2. Supervision The engagement partner should monitor the progress of the audit, resolve accounting and audit issues, and consider the level of consultation appropriate for the engagement. 3. Review Work performed by assistants should be reviewed to consider whether the audit procedures, evidence and documentation are appropriate to support the conclusion reached. 4, Consultation The firm should establish policies and procedures that encourage firm personnel to seck assistance from authotitative sources either within or outside the firm. 43 Scanned with CamScanner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 7 iS have been implemented. . Engagement Quality Control Review The firm should establish policies and procedures requiring an engagement quality control review that provides an objective evaluation of the significant judgments made and conclusions reached in formulating the auditor’s report. This requires the engagement partner: a. To determine that an engagement quality control reviewer has been appointed; b. To discuss significant matters arising during the audit erigagement, including those identified during the quality control review, with the engagement quality control reviewer; and c. Not to issue the auditor's report until the completion of the engagement quality control review. The firm should establish policies and procedures setting out the scope of quality control review, criteria for the eligibility of the teviewer, and documentation of the quality control review. Scanned with CamScanner6. Differences of Opinion ‘The engagement team should follow the firm’s policies and procedures for dealing with and resolving differences of opinion that atise 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 teport should not be issued until the matter involving differences of opinion is resolved. & MONITORING The continued adequacy and operational effectiveness of quality control policies and procedures is to be monitored. Policies and procedures must be adopted to provide reasonable assurance that the systems of quality control are relevant, adequate and operating effectively. The firm’s quality control policies and procedures should be communicated to its personnel in.a manner that provides reasonable assurance that the policies and procedures are understood and ‘implemented. 45 Scanned with CamScanner@ QUALITY ASSURANCE REVIEW Recognizing the importance of professional accountants’ services to the society, the government has also taken steps to ensure that CPAs work to the highest standards which can reasonably be expected from them. ‘The government thru the 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 BOA. ‘As.acondition to the renewal of the certificate of accreditation to practice public accountancy, the Board requires individual CPAs and CPA firms to undergo a quality assurance review to ensure that these CPAs comply with accounting and auditing standards and practices. The PRC is supposed to create a Quality Review Committee (QRC) which shall conduct a quality review on the audits conducted by CPAs in public practice. Based on the results of the quality review, the QRC may 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 accousitancy. - As of today, the QRC has riot yet been created. Nevertheless, regulatory agencies like the Securities and Exchange Commission (SEC) have initiated Programs to ensure that CPA firms are implementing appropriate quality control policies and procedures that would enable these firms to comply with the professional standards when providing professional services. Scanned with CamScanner