ATENEO DE NAGA UNIVERSITY

ACCM 456 Integrated Accounting

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AUDITING THEORY 2nd Sem 2018-2019

 (PSQC1)QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL
INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES
 (PSA220)QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS
 (PSA 210) AGREEING TERMS OF AUDIT ENGAGEMENTS

Introduction

1. A distinguishing mark of the profession is acceptance of its responsibility to the public. 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.

2. One way to reflect this responsibility is for registered firms to establish Systems of quality control that ensure conformity
with the professional standards and code of ethics relevant to professional work.

3. The need for practicing CPAs to implement and maintain quality control measures is derived from the fact that audits are
usually conducted by the audit teams. It is only be implementing the quality control policies and procedures the CPAs
ensure that all members of the audit teams perform the same level of quality work.

Part of the Function of Board of Accountancy (BOA) R.A. 9298 section 9

 Conduct of oversight into the quality of audits of financial statements.
 Through a review of the quality control measures instituted by auditors.
 To ensure compliance with the accounting and auditing standards and practices.

BOA Requirements (IRR of R.A. 9298)

 Condition to registration or any renewal of individual CPAs, Firms or Partnerships of CPAs to undergo quality
review in a manner specified by the Board.
 Compliance with the above requirement through a quality performed for other purposes which is substantially
equivalent to quality review of the Board.
 Copy of internal quality review procedures being implemented to ensure compliance with the professional,
ethical and technical standards required of the practice of accountancy.

Regulatory Requirements: SEC

 Additional requirements for accredited firms and auditors are propped in the rule in order to implement the
Quality Assurance Review System (QARS) of the commission.
 Allow the commission through its Examiner-Accountant who holds a written authority to conduct an on-site
examination.
 Examination shall include but not limited to:
o Interview o Photocopy
o Inspection o Relevant records and documents

4. For a CPA firm, quality control comprises the methods and used to ensure that the firm meets its professional
responsibilities to clients and others. This methods include organizational structure of the CPA firm and the procedures
the firm establishes.

5. Quality Control is closely related but distinct from auditing standards. To ensure that the principles in auditing
standards are followed on every audit, a CPA firm follows specific quality control procedures that help it meet those
standards consequently on every audit engagement. Quality controls are therefore established for the entire CPA firm,
whereas auditing standards are applicable to individual engagements.

6. To ensure compliance with the relevant measures of quality in the provision of CPA services, quality control policies &
procedures must be implemented by the firm. The following standards cover quality control:
a. PSQC1 quality control for firms that perform Audits & Reviews of Historical information & other assurance & related
services engagement.
b. PSA220, Quality Control for Audits of Historical Information.
c. PSA210, Agreeing the Terms of Audit Engagement

Philippine Standard on Quality Control 1

1. This PSQC 1 applies to all firms of professional accountants in respect of audits and reviews of financial statements, and
other assurance and related services engagements.

2. The firm should establish a system of quality control designed to provide it with reasonable assurance that:
a. The firm & its personnel comply with professional standards and regulatory & legal requirements, and
b. That reports issued by the firm or engagement partners are appropriate in the circumstances.

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 Generally Accepted Auditing Standards:
 General Standards – those applying to the auditor and audit firm.
o The audit must be performed by a person having adequate Technical training and proficiency as an auditor.
o The auditor must maintain Independence in mental attitude in all matters relating to the audit.
o The auditor must exercise Due professional care in the performance of the examination and the preparation
of the report.

 Fieldwork Standards – those applying the conduct of the audit.

o The auditor must adequately plan the work and must properly supervise any assistance.
o The auditor must obtain a sufficient understanding the entity and its environment, including its
internal control, to assess the risk of material misstatement of the financial statements whether due to
fraud or error, and to design the nature, timing and extent of further audit procedures.
o The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to
afford a reasonable basis of an opinion regarding the financial statements.

 Reporting standards – those applying to communicating the auditor’s opinion

o The auditor must state in the auditor’s report whether the financial statements are presented fairly in all
material respects and in accordance with the financial reporting framework.
o When the auditor determines that informative disclosures are not reasonably adequate, the auditor
must state in the auditor’s report.
o The auditor must either express an opinion regarding the financial statements, taken as a whole, or
state that the opinion cannot be expressed in the auditor’s report.

3. The firm shall establish and maintain a system of quality control that includes policies and procedures that address each
of the following ELEMENTS:
a. Leadership responsibility 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

4. The firm shall document its policies and procedures and communicate them to the firm’s personnel

PSA 220 : Quality Control for an Audit of Financial Statements.

 The purpose of PSA220 is to establish standards and provide guidance on the quality control:
 Policies & procedures of an audit regarding audit work generally; and
 Procedures regarding the work delegated to assistants on an individual audit.
 Quality Control policies & procedures should be implemented at BOTH the level of audit firm and on individual audits.
 The audit firm should implement quality control policies & procedures designed to ensure all audits are conducted
in accordance with PSAs or relevant national standards or practices.
 The nature timing and extent of an audit firm’s QC policies & procedures depend on the number of factors such as
the following:
 Size and nature of its practice
 Geographical dispersion
 Organization
 Appropriate cost- benefit consideration

1. Leadership responsibilities for quality on audits (“tone at the top”)

 The firm should promote a culture that quality is essential in performing engagements and should establish
policies and procedures that support that culture. The firm’s managing board of partners, assumes ultimate
responsibility for the firm’s system of quality control.
 Example, the firm’s training program emphasize the importance of quality work, and this is
reinforce in performance evaluation and compensation decisions.
 Any person with operational responsibility for quality control should have sufficient and appropriate experience
and ability to identify quality control issues.
 The engagement partner shall take responsibility for the over-all quality on each audit
engagement to which that partner assigned.
 Perform work that complies with professional standards and regulatory and legal requirements,
and Issue reports that are appropriate in circumstances.

2. Relevant Ethical Requirement

 All personnel on engagements should maintain independence in fact and in appearance, perform all
professional responsibilities with integrity, and maintain objectivity in performing their professional
responsibilities.
 The firm should establish policies and procedures to provide reasonable assurance that the firm and its
personnel comply with relevant ethical requirements.
o The PSQC1 pay particular attention to the importance of providing reasonable assurance of
maintaining independence.
o At least annually, the firm should obtain written confirmation of compliance with independence policies
and procedures from firm personnel.
 Through the audit engagement, the engagement partner shall remain alert, through observation and making
inquiries as necessary, for evidence of noncompliance with relevant ethical requirements by members of the
engagement team.
 The engagement partner shall form a conclusion on noncompliance with independence requirements that apply
to the audit engagement.

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  The Philippine Ethics Code establishes the fundamental principles of professional ethics, which include:
o Integrity;
o Objectivity;
o Professional competence and due care;
o Confidentiality; and
o Professional behavior.
 The fundamental principles are reinforced in particular by:
o The leadership of the firm;
o Education and training;
o Monitoring; and
o A process for dealing with non-compliance
 The engagement partner should consider whether members of the engagement team have complied with the
relevant ethical requirements. Any issues involving engagement team member’s non-compliance with the
ethical requirements must be properly resolve and documented in the working papers.

3. Acceptance & continuance of client relationships & specific engagements

 Policies and procedures should provide reasonable assurance of accepting and continuing client relationships
where the firm
o Is competent to perform the engagement
o Can comply with legal and ethical requirements
o Has considered client integrity
 Information such as the following assists the engagement partner in determining whether the conclusions
reached regarding the acceptance and continuance of client relationships and audit engagements are
appropriate:
o The integrity of the principal owners, key management and those charged with governance of the
entity;
o Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
o Whether the firm and the engagement team can comply with relevant ethical requirements; and
o Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.
 The engagement partner shall be satisfied that appropriate procedures regarding the acceptance, and
continuance of client relationships and audit engagements have been followed, and shall determine that
conclusions reached in this regard are appropriate.
 Consideration of whether the firm has the competence, capabilities, and resources to undertake a new
engagement from a new or an existing client involves reviewing the specific requirements of the engagement
and the existing partner and staff profiles at all relevant levels, and including whether:
o Firm personnel have knowledge of relevant industries or subject matters
o Firm personnel have experience with relevant regulatory or reporting requirements, or the ability to
gain the necessary skills and knowledge effectively;
o The firm has sufficient personnel with the necessary competence and capabilities;
o Experts are available, if needed;
o Individuals meeting the criteria and eligibility requirements to perform engagement quality control
review are available, where applicable; and
o The firm is able to complete the engagement within the reporting deadline

4. HUMAN RESOURCES – ASSIGNMENT OF ENGAGEMENT TEAMS

 The firm should establish policies and procedures designed to provide it with reasonable assurance that is has
sufficient personnel with capabilities, competence and commitment to ethical principles necessary to perform
the engagement. Such policies and procedures should address issues concerning personnel:
1. Recruitment and retention, professional qualification
2. Continuing professional development and training
3. Work experience and coaching by senior staff
4. Performance evaluation, career development, compensation and promotion;
5. The estimation of personnel needs; and
6. Assignment of engagement teams.

Recruitment and Retention:

 Effective recruitment processes and procedures help the firm select individuals of integrity who have the
capacity to develop the competence and capabilities necessary to perform the firm’s work and possess the
appropriate characteristics to enable them to perform competently.
 Standard job interview procedures, including documentation of the process;
 Standard for entry, immediate, and senior level qualifications; and
 Provide candidates with an explanation of the expected qualifications during recruitment process

Professional Qualification:
 Verifying academic, and professional credentials and checking references;
 Clarifying gaps in time for candidates’ resumes;
 Considering credit and criminal records checks;

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  BSA Graduate
 Certified Public Accountant (CPA)
 Excellent communication skills
 Interpersonal skills
 Above average IQ

Continuing Professional development and training:

 Entry needs of entry level personnel
 Based on job requirement
 Comply with minimum regulatory requirement
 Should include both technical, soft skills required to achieve work requirements.
 Prepare staff for the requirement of next level

Work Experience and Coaching by senior staff:

 Senior personnel within the firm shall guide junior personnel as they perform their task and as they
go up the ladder of the firm.

Performance Evaluation:
 Assessment of staff during a particular engagement and particular period.
 Performance evaluation shall be performed by senior personnel. Within the organization and should
be discussed to staff evaluated.
 Basis of promotion is standards are met

Promotion:
 Organization structure
 Standards for each level within the organization
 When a person is eligible for promotion?
 Who will recommend and who will approved the promotion?

Compensation:
 Standard salary for entry level organization.
 Standards for each level within the organization.

Assignment of engagement team:

 Name and role of engagement partner are communicated to management and TCWG.
 Partner assigned has the necessary skill, experience and competence.
 Clearly defined responsibility

 The engagement partner shall be satisfied that the engagement team, and any auditor’s experts who are not
part of the engagement team, collectively have the appropriate competence and capabilities to:
 Perform the audit engagement in accordance with professional standards and applicable legal and
regulatory requirements, and
 Enable an auditor’s report that is appropriate in the circumstances to be issued.

 Policies and procedures should be established to provide the firm with assurance that:
 All new personnel should be qualified to perform their work competently.
 Work is assigned to personnel who have adequate technical training and proficiency.
 All personnel should participate in continuing professional education and development activities that
enable them to fulfill their assigned responsibilities.
 Personnel selected for advancement have the qualifications necessary for the fulfillment of their
assigned responsibilities.

5. ENGAGEMENT PERFORMANCE

 Policies and procedures should exist to ensure that the work is performed by engagement personnel meets
applicable standards, regulatory requirements, and the firm’s standards of quality.
a) Policies and procedures should address:
1) Matters relevant to promoting consistency of engagement performance.
2) Role of engagement partner
3) Planning, Supervision and Review
4) Consultation
5) Differences of opinion
6) Engagement Quality Control Review
b) The firm’s review responsibility policies and procedures should be determined on the basis that suitably
experienced team members review work performed by other engagement team members.
c) The firm should establish policies and procedure for addressing and resolving differences of opinion
within the audit team, with those consulted and, where applicable, between the engagement partner and
the engagement quality control reviewer; such policies and procedures should:
1) Enable members of the engagement team to document disagreements and conclusions
reached.
2) Require that conclusions reached be documented and implemented and the report not be
released until the matter is resolved.

Role of the Engagement partner

 The engagement partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned
 Sign the report

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  Acts as the engagement leader
 Conclude for firms independence
 Ensure acceptance and continuance procedure are performed.
 Communicate to firm any information that will affect the firm’s decision to accept the engagement.
 ensure collective competence of the engagement team
 Ensure supervision
 Ensure engagement is performed in accordance with professional standards and applicable legal and
regulatory requirements.
 Communication with clients and Those Charged With Governance (TCWG)
 Taking responsibility on the engagement through appropriate consultation on difficult and
contentious matters.
 Determining when assignment of quality control review should be performed.

Planning, Supervision and Review

 All engagements the firm undertakes must be adequately planned, supervised, and reviewed according to the
standards of the profession and the firm.

Planning
 It is best practice to have the engagement team start planning well before beginning the fieldwork to ensure
that:
o Any significant issues have been identified during the acceptance and continuance review are
appropriately addressed;
o The partners and staff selected to work on the engagement are available, scheduled and assigned.
o Third party involvement and work of specialist and other service provides considered and secured;
o Engagement team is briefed to facilitate an understanding of each team member’s respective
objectives.

Supervision
 Address and communicate significant issues arising during the engagement, assess their implications, and
modify planned approach, if necessary.
 Monitor the engagement progress, including the efficiency and effectiveness of time spent on different elements
of engagements.
 Provide or arrange assistance or necessary expertise on complex matters, judgments, estimates, and
interpretations; and
 Identify and communicate other issues requiring further consultation or consideration during the engagement.

Review
 It is suggested that the engagement partner conduct timely reviews of
o Critical areas of judgment, especially those relating to difficult or contentious matters,
o Significant risks; and
o Any other areas the engagement partners considers important at appropriate stages during the
engagement to enable significant matters to be resolved on a timely basis.
o assignment of a quality control reviewer for each engagement is recommended (required for Public Interest
Entities)
o The quality control reviewer must be sufficiently capable and experienced.
o Completion review
o A finalize review.

Consultation
 appropriate consultation takes place on difficult and contentious matters;
 Sufficient resources are available to enable appropriate consultation to take place.
 The nature and scope of, and conclusions resulting from consultation are documented and are agreed by
both individual consulted and are implemented.
 Suggested issues for consultation could include:
o A probable going-concern issue;
o Suspected or discovered fraud or other irregularities;
o Questions about management integrity.
 Consultation should be documented and should include:
o Facts about consultations
o Opinion of the engagement team and reference
o Opinion of the person/group consulted
o Conclusion reached and basis of the conclusion.

ENGAGEMENT QUALITY CONTROL REVIEW

 For audits of financial statements of listed entities, and those other audit engagements, if any, for which
the firm has determined that an engagement quality control review is required, the engagement partner
shall:
a) Determine that an engagement quality control review has been appointed.
b) Discuss significant matters arising during audit engagement, including those identified during the
engagement quality review, with the engagement quality reviewer, and
c) NOT date the auditor’s report until the completion of the engagement quality control review.

1. Listed entity – An entity whose shares, stock or debt are quoted or listed on a recognized stock
exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent
body.

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 Differences of Opinion between Audit Team, Engagement Partner and Engagement Quality Reviewer
 The firm should establish policies and procedures addressing and resolving differences of opinion within
the audit team, with those consulted and, where applicable between engagement partner and the
engagement quality control reviewer.
 Such policies and procedures should:
o Enable members of the engagement team to document disagreements and conclusions reached.
o Require the conclusions reached be documented and implemented and the report not be released
until the matter is resolved.
 Where the engagement quality control reviewer makes recommendation that the engagement partner
does not accept and the matter is not resolved to the reviewer’s satisfaction, the report should not be
issued until the matter is resolved following the firm’s procedures for dealing differences of opinion.

When is the non-audit engagement subject to quality control review?

 Criteria that the firm considers when determining other than audit of financial statements of listed entities are
to be subject to an engagement quality control reviewer should include the following:
1. The nature of the engagement, including the extent to which is involves a matter of public interest
2. The identification of unusual circumstances or risks in an engagement or class of engagements.
3. Whether laws or regulations require an engagement quality control review.

6. MONITORING – A firm should establish policies and procedures designed to provide it with reasonable assurance
that the policies and procedures relating to the system of quality control are relevant, adequate, operating effectively,
and complied with in practice.
 Such policies and procedures should include an ongoing consideration and evaluation of the firm’s system of
quality control, including a periodic inspection of a selection of completed engagements.
 The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation
of:
o Adherence to professional standards and regulatory and legal requirements;
o Whether the system of quality control has been appropriately designed and effectively implemented;
and
o Whether the firm’s quality control policies and procedures have been appropriately applied, so that
reports that are issued by the firm or engagement partners are appropriate in the circumstances.
 The firm entrusts responsibility for the monitoring process to a partner or other persons with sufficient and
appropriate experience and authority in the firm to assume that responsibility.
 Monitoring of the firm’s system of quality control is performed by competent individuals covers both the
appropriateness of the design and the effectiveness of the operation of the system of quality control.
 The engagement partner shall consider the results of the firm’s monitoring process as evidenced in the latest
information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that
information may affect the audit engagement.

DOCUMENTATION

The auditor shall include in the audit documentation:

a) Issues identified with respect to compliance with relevant ethical requirements and how they will
resolved.
b) Conclusion on compliance with independence requirements that apply to audit engagement, any
relevant discussions with the firm that support these conclusions,
c) Conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements.
d) The nature and scope of and conclusions resulting from consultations undertaken during the course
of the audit engagement.

PSA 210 AGREEING TERMS OF AUDIT ENGAGEMENT

1. Assurance engagements, which include audit engagements, may only be accepted when the practitioner considers that
relevant ethical requirements such as independence and professional competence will be satisfied (PSAE par 17). The
auditor’s responsibilities in respect of ethical requirements in the context of the acceptance of an audit engagement and
in so far as they are within the control of the auditor are dealt with in PSA 220.

2. The objective of the auditor is to accept or continue an audit engagement only when the basis upon which it is to be
performed has been agreed, through:
 Establishing whether the preconditions for an audit are present; and
 Confirming that there is a common understanding between the auditor and management and where appropriate,
those charged with governance of the terms of the audit engagement.

Preconditions for an Audit

 the use by management of an acceptable financial reporting framework in the preparation of the financial
statements; and
 The agreement of management and, where appropriate, those charged with governance to premise on which an
audit is conducted.

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3. Audit engagement letters
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of
written agreement and shall include:
a) The objective & scope of the audit of FSs
b) The responsibilities of the auditor
c) The responsibilities of management
d) Identification of the applicable financial reporting framework for preparation of the financial statements; and
e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that
there may be circumstances in which a report may differ from its expected form and content.

4. Acceptance of change in audit engagement

1. An auditor, who before the completion of the engagement, is requested to change the engagement to one which
provides a lower level of assurance, should consider the appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result to:
a. A change in circumstances affecting the need of the service
b. A misunderstanding as to the nature of an audit or related service originally requested; and
c. A restriction on the scope of engagement, whether imposed by management or cause by circumstances.
3. A change would not be considered reasonable if it appeared that the change relates to information that is incorrect,
incomplete or otherwise satisfactory.
4. Before agreeing to change an audit engagement to a related service, an auditor would also consider any legal or
contractual implications of the change.
5. if the auditor conclude that there is reasonable justification to change the engagement and if the audit work
performed complies with the PSAs applicable to the changed engagement, the report issued be that appropriate for
the revised terms of engagement.
6. In order to avoid confusing the reader, the report would not include reference to:
a. The original engagement; or
b. Any procedures that may have been performed in the original engagement, except where the engagement
is changed to undertake agreed-upon-procedures.
7. Where the terms of the engagement are changed, the auditor and the client should agree on the new terms.
8. The auditor should not agree to a change of engagement where there is no reasonable justification for doing so.
9. If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original
engagement, the auditor should withdraw and consider whether there is any obligation, contractual or otherwise,
to report to other parties, such as the board of directors or shareholders, the circumstances necessitating the
withdrawal.

“Your character is defined by what you do when nobody is looking.” – Rene J. Buenaventura

“Change your thoughts and you change your world.” – Norman Vincent Peale

“The most important ingredient of leadership is CHARACTER. Most proficiencies can be learned, but what is inside you is
something that is difficult to change.” – Jesse M. Robredo

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