MODULE 2: THE PROFESSIONAL STANDARDS

A. Philippine Standards on Auditing

B. Quality Control
C. Elements of a System of Quality Control

WEEK: 2

TIME ALLOTMENT: 3 Hours

CONSULTATION HOURS: Sunday 9:00- 12:00 NN

OBJECTIVES/ LEARNING OUTCOMES:

1. Recall all the basic concept of Professional Standards;
2. Apply properly the Philippine Standards on Auditing; and
3. Remember all the elements of system of quality control.

LEARNING CONTENT:
THE PROFESSIONAL STANDARDS

INTRODUCTION
This module first presents an overview of the attest function and professional standards and then presents
details on a CPA’s professional responsibilities related to ethics, quality control, and certain other
responsibilities. After the overview, the module presents the AICPA Code of Professional Conduct. The
remainder of the module includes coverage of a number of other areas related to a CPA’s professional
responsibilities with which you should be familiar.

You should expect a significant number of questions from the AICPA Code of Professional Conduct, and
somewhat fewer from each of the other areas. Also expect a simulation question in which you must show
your research skills relating to finding particular information in the AICPA Code of Professional Conduct

DISCUSSION

A. Philippine Standards on Auditing

The professional Regulatory Commission (PRC), upon the recommendation of the Board of Accountancy
(BOA) has created Auditing and Assurance Standards Council (AASC). The AASC has been given the task
to promulgate auditing standards, practices and procedures which shall become generally accepted by
the accounting profession in the Philippines. These standards establish the minimum level of quality for
performing financial statement audits. These standards must be observed by CPAs when auditing
financial statements to be able to draw reasonable conclusions about the financial statements.

Adaptation of International Standards

To facilitate the preparation by the AASC of its pronouncements with international auditing standards,
the AASC approved the adaptation of the International Standards on Auditing (IASs), International
Standards on Assurance Engagement (ISAEs), International Standards on Review Services (ISRSs)
issued by the International Standards 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 laws or practice.

Working Procedures
The AASC members have been assigned to workgroups and each workgroup is assigned specific ISA and
IAPSs to review. After the review of specific ISAs or IAPS has been performed, an exposure draft is
distributed to interested organizations and persons for comments. Issuance of exposure draft requires
the approval of the majority of AASC members.
 The comments and suggestions received as a result of the exposure of proposed auditing standards or
statements are then considered by AASC and the exposure draft is revised as appropriate. When the
revised draft is approved, it is issued as a final PSA or PAPS.

Issuance of final auditing standards, interpretations and statements requires approval of at least nine
members of AASC.

The final standard and statement shall be submitted to the Professional Regulatory Commission through
the Board of Accountancy for approval after which the pronouncements become operative from the
effective date stated therein.

B. 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 on 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
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 adapted by CPAs to provide reasonable assurance of
conforming to professional standards in performing audit and related services.

Under the Philippine Standards on Quality Control (PSQC) 1, a firm has an obligation to establish a
system of quality control designed to provide with reasonable assurance that the firm and its personnel
comply with the professional standards and regulatory and legal requirements, and that the reports
issued by the firms 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 part of the firm’s system
of quality control relating to independence; and
 Are entitled to rely on the firm’s system unless information provided by the firm or other parties
suggest otherwise.

C. 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 adapted 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 their own quality control system.

1. Leadership Responsibility for Quality on Audit. 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 engagement. The engagement partner should take responsibility for
the overall quality on each audit engagement to which the partner is assigned.

2. 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:
1. Integrity;
2. Objectivity;
3. Professional competence and due care;
4. Confidentiality; and
5. Professional behaviour

The engagement partner should consider whether members of the engagement team have
complied with these ethical principles. Any issues involving engagement team member’s non-
compliance with the ethical requirements must be properly resolved and documented in the
working paper.
3. Independence. The firm should establish policies and procedures designed to provide in with
reasonable assurance that the members of the engagement team, the firm and where applicable,
the network firm maintaining independence. The engagement partner should form a conclusion
on compliance with independence requirements that apply to the audit engagement. The
engagement partner should
1. Obtain relevant information to identify circumstances and relationships that create threats to
independence;
2. Evaluate information on identified breaches of the firm’s independence policies and
procedures to determine whether they create a threat to independence;
3. Take appropriate safeguards to eliminate such threats or reduce them to an acceptable level;
and
4. Document conclusions on independence and the basis for such conclusion.

4. 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 it with reasonable assurance that it will undertake or continue relationships
and engagement where it:
1. Has considered the integrity of the client;
2. Is competent to perform the engagement and has the capabilities , time and resources to do
so; and
3. Can comply with ethical requirements.

5. 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;
1. Recruitment;
2. Performance evaluation, compensation, and promotion;
3. Capabilities and competence;
4. Career development; and
5. Assignment of engagement teams

6. 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 regulatory and legal requirements, and for the auditor’s report that is
issued to be appropriate in the circumstances. The engagement partner should take responsibility
for the direction, supervision, review and overall performance of the audit engagement.
a. Direction. Assistant should be informed of their responsibilities, the nature of the entity’s
business, potential problems that may arise and the detailed approached to the performance
of the engagement.

b. Supervision. This involves monitoring the process of the audit, resolving accounting and
audit issues, and considering the level of consultation appropriate for the engagement.

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

d. Conclusion. The firm should established policies and procedures that encourage firm
personnel to seek assistance from authoritative sources either within or outside the firm. The
engagement partner should:
i. Be responsible for the engagement team undertaking appropriate consultation on difficult
and contentious matters;
ii. Be satisfied that members of the engagement team have undertaken appropriate
consultation during the course of the engagement, both within the engagement team and
other at the appropriate level within or outside the firm;
iii. Be satisfied that the nature and scope of , and conclusions resulting from such consulting
are documented and agreed with the party consulted; and
iv. 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 and objective evaluation of the significant judgments made and conclusions reached
in formulating the auditor’s report. This requires the engagement partner:
1. To determine that an engagement quality control reviewer has been appointed;
2. To discuss significant matters arising during the audit engagement including those identified
during the quality control review, with the engagement quality control reviewer; and
3. Not to issue the auditor’s report until the completion of the engagement quality control review.
Difference of Opinion
The engagement team should follow the firm’s 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.
7. 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 system 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
matter that provides reasonable assurance that the policies and procedures are understood and
implemented.
SUMMARY:
The professional qualifications required of the independent auditor are those of a person with the education
and experience to practice as such. They do not include those of a person trained for or qualified to engage
in another profession or occupation.
In the observance of generally accepted auditing standards, the independent auditor must exercise his
judgment in determining which auditing procedures are necessary in the circumstances to afford a
reasonable basis for his opinion. His judgment is required to be the informed judgment of a qualified
professional person.
A firm has a responsibility to ensure that its personnel comply with the professional standards applicable to
its accounting and auditing practice. A system of quality control is broadly defined as a process to provide
the firm with reasonable assurance that its personnel comply with applicable professional standards and the
firm's standards of quality. The policies and procedures designed to implement the system in one segment
of a firm's practice may be the same as, different from, or interrelated with the policies and procedures
designed for another segment, but the purpose of the system is the same for all segments of a firm's
practice.
A firm's system of quality control encompasses the firm's organizational structure and the policies adopted
and procedures established to provide the firm with reasonable assurance of complying with professional
standards. The nature, extent, and formality of a firm's quality control policies and procedures should be
appropriately comprehensive and suitably designed in relation to the firm's size, the number of its offices,
the degree of authority allowed its personnel and its offices, the knowledge and experience of its personnel,
the nature and complexity of the firm's practice, and appropriate cost-benefit considerations.
Any system of quality control has inherent limitations that can reduce its effectiveness. Variance in an
individual's performance and understanding of (a) professional requirements or (b) the firm's quality control
policies and procedures affects the degree of compliance with a firm's prescribed quality control policies and
procedures and, therefore, the effectiveness of the system.
REFERENCES:
1. Salosagcol, J. CPA (2018). Auditing Theory: A guide to Understanding PSA. GIC Enterprises & Co.,
Inc. C.M Recto, Manila, Philippines.
2. Cabrera, M. CPA (2010). Assurance Principles, Professional Ethics and Good Governance. GIC
Enterprise & Co., Inc. Sampaloc, Manila, Philippines.

Congratulations for finishing the Module 2! Keep up the good work.

Prepared by: Reviewed/Approved:

AIZA P. RUMAUAC, CPA LILY MAE M. KIMAYONG, MBA

Instructor Vice President for Academic Affairs