AUDITING AND CHAPTER TWO:

ASSURANCE THE PROFESSIONAL

STANDARDS
PRINCIPLES
THE PROFESSIONAL STANDARDS
When auditing financial statements, an auditor assumes certain professional
responsibilities. Auditor’s opinion must be based on 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.
The BOA promulgated ten generally accepted auditing standards (GAAS) that
establish required level of quality for performing financial statement audits.

Philippine Standards on Auditing (PSAs) are issued to clarify the meaning of these
ten GAAS.
GENERALLY ACCEPTED AUDITING
STANDARDS
GAAS represent measures of the quality of the auditor’s performance. These
standards should be looked at as a minimum standard of performance that the
auditors should follow. These ten GAAS are grouped into general, fieldwork and
reporting standards.
 GENERAL STANDARDS (TIP)
T - Technical Training and Proficiency
The auditor must have adequate technical training and proficiency to perform the
audit.
I – Independence
The auditor must maintain independence in mental attitude in all matters relating to
the audit.
P - Professional Care
The auditor must exercise due professional care in the performance of the audit and
the preparation of the auditor's report.
 FIELDWORK STANDARDS (PIC)

P - Planning
The auditor must adequately plan the work and must properly supervise any assistants.

I – Internal Control Consideration

The auditor must obtain a sufficient understanding of the entity and its environment, including its
internal control, to assess the risk of material misstatement of the financial statements whether due
to error or fraud, and to design the nature, timing, and extent of further audit procedures.

C – Corroborative Evidence
The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to
afford a reasonable basis for an opinion regarding the financial statements under audit.
 REPORTING STANDARDS
A – Accordance with GAAP

The auditor must state in the auditor's report whether the D – Disclosure
financial statements are presented in accordance with
generally accepted accounting principles. If the auditor determines that informative disclosures in
the financial statements are not reasonably adequate, the
C – Consistency auditor must so state in the auditor's report.

The auditor must identify in the auditor's report those E – Expression of an opinion
circumstances in which such principles have not been
consistently observed in the current period in relation to The auditor's report must either express an opinion
the preceding period. regarding the financial statements, taken as a whole, or
state that an opinion cannot be expressed. When the
auditor cannot express an overall opinion, the auditor
should state the reasons in the auditor's report. In all cases
where an auditor's name is associated with financial
statements, the auditor should clearly indicate the
character of the auditor's work, if any, and the degree of
responsibility the auditor is taking, in the auditor's report.
SYSTEMS OF QUALITY CONTROL
If the public is to rely on the professional CPA’s 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
ELEMENTS OF A SYSTEM QUALITY
CONTROL
The firm shall establish and maintain a system of quality control that includes
policies and procedures that address each of the following elements: (HARLEM)
(a) Leadership responsibilities for quality within the firm.
(b) Relevant ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
(A) LEADERSHIP RESPONSIBILITIES
FOR QUALITY WITHIN THE FIRM

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 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, and issuing appropriate audit reports.
(B) RELEVANT 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
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 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 for of the firm’s 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
(C) ACCEPTANCE AND CONTINUANCE OF CLIENT
RELATIONSHIPS AND SPECIFIC ENGAGEMENTS.

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.
(D) HUMAN RESOURCES.
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;
•Career development; and
•Assignment of engagement teams
(E) ENGAGEMENT PERFORMANCE
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;
•Career development; and
•Assignment of engagement teams
(E) 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
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 of the
performance of the engagement.
2. SUPERVISION
This involves monitoring the progress of the audit, resolving accounting and audit
issues, and considering 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.
CONSULTAT
ION
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 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.
5. 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 engagement, 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 reviewer, and documentation of the quality control
review.
6. DIFFERENCES 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.

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 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.
QUALITY
CONTROL
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 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 has created a 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 of those who
have not complied with the standards of quality prescribed for the practice of public accountancy.
SOURCE: AUDITING THEORY
2018 EDITION BY JEKELL
SALOSAGCOL, MICHAEL TIU,
AND ROEL HERMOSILLA