1.

0 Auditing Theory
2.0 Auditing Practice
2.1 Governance, Ethics, and Quality Management
2.1.1 Corporate Governance

- The system of rules, practices, and processes by which a firm is directed and controlled
- Essentially involves balancing the interests of a company’s may stakeholders (external and internal)
- Shows the company’s direction and business integrity
 Builds trust
 Promotes financial liability

1) Board of Directors – direct influencer

2) Management
3) Shareholders

 Good corporate governance

- Board composition, diversity, and refreshment, and leadership structure
- Long-term strategy, corporate purpose, and sustainability issues
- Good governance practices and ethical corporate culture
- Human capital management
- Compensation discussion and analysis
- Shareholder and stakeholder engagement

4P’s
1) People
2) Process
3) Performance
4) Purpose

 Principles
1) Accountability
- The obligation and responsibility to give an explanation or reason for the company’s
actions and conduct
 Regular intervals
 Balanced and understandable assessment
2) Transparency
- Openness, a willingness by the company to provide clear information to shareholders to
and other stakeholder
 Have confidence in decision making
3) Fairness
- To provide an opportunity for shareholders to vocalize their grievances and address any
issues
4) Responsibilities

2.1.2 Ethical Standards and Responsibilities of Professional Accountants

Revised Code of Ethics for CPAs in the Philippines

- establishes a conceptual framework for all professional accountants to ensure compliance
with the five fundamental principles of ethics:
 Integrity
- Straightforward and honest in all professional and business relationships
 Objectivity
- Should not allow bias, conflict of interest or undue influence of others.
 Professional Competence and Due Care
- Has a continuing duty to maintain professional knowledge and skill at the level required to
ensure that a client or employer receives competent professional services based on current
developments in practice, legislation and techniques
- Should act diligently and in accordance with applicable technical and professional
standards when providing professional services
 Confidentiality
- Should respect the confidentiality of information acquired as a result of professional and
business relationships and should not disclose any such information to third parties
without proper and specific authority unless there is a legal or professional right or duty to
disclose
- Confidential information acquired as a result of professional and business relationships
should not be used for the personal advantage of the professional accountant or third
parties.
 Professional Behavior
- Should comply with the relevant laws and regulations and should avoid any action that
discredits the profession
 2.1.3 System of Internal Management (Quality Control)

The firm has an obligation to establish and maintain a system of quality control to provide it with reasonable
assurance that:
 The firm and its personnel comply with professional standards and regulatory and legal requirements
 Reports issued by the firm or engagement partners are appropriate in the circumstances

2.1.3.1 Elements of a System of Quality Management

2.1.3.1.1 Leadership Responsibilities

 Establishment of policies and procedures

Leadership responsibilities for quality within the firm
 Promote an internal culture recognizing that quality is essential
 Chief Executive Officer (CEO) or equivalent
 Managing Board of Partners or equivalent
 Any person assigned operational responsibility for the firm has sufficient and appropriate
experience and ability and the necessary authority to assume that responsibility

2.1.3.1.2 Ethical Requirements

Relevant ethical requirements

 Designed to provide it with reasonable assurance that the firm and its personnel comply
with relevant ethical requirements
 Fundamental principles which are reinforced in particular by:
a) The leadership of the firm
b) Education and training
c) Monitoring
d) A process for dealing with non-compliance
 Maintaining independence – required by relevant ethical requirements

2.1.3.1.3 Acceptance and Continuance

Acceptance and continuance of client relationships and specific engagements

 Designed to provide the firm with reasonable assurance that it will only undertake or
continue relationships and engagements where the firm:
 Considers the integrity of the client and does not have the information that
would lead it to conclude that the client lacks integrity
 Is competent to perform the engagement and has the capabilities, time, and
resources to do so
 Can comply with ethical requirements

2.1.3.1.4 Human Resources

 Has sufficient personnel with competence, capabilities, and commitment to ethical

principles necessary to:
 Perform engagements in accordance with professional standards and applicable
legal and regulatory requirements
 Enable the firm or engagement partners to issue reports that are appropriate in
the circumstances
 Examples of relevant personnel issues
a) Recruitment
b) Performance evaluation
c) Capabilities, including time to perform assignments
d) Competence
e) Career development
f) Promotion
g) Compensation
h) Estimation of personnel needs
 Assignment of engagement teams
- Assign responsibility for each engagement to an engagement partner
- Policies and procedures
 Identity and role of the engagement partner are
communicated to key members of client management and
those charged with governance
 Has the appropriate capabilities, competence, authority and
time to perform the roles
 The responsibilities of the engagement partner are clearly
defined and communicated to that partner
 Include systems to monitor the workload and availability of
engagement partners so as to enable these individuals to
 have the sufficient time to adequately discharge their
responsibilities

2.1.3.1.5 Engagement Performance

 Engagement are performed in accordance with professional standards and applicable legal
and regulatory requirements
 That the firm or the engagement partner issue reports that are appropriate in the
circumstances
 Includes:
 Matters relevant to promoting consistency in the quality of engagement
performance
- Often accomplished through written or electronic manuals, software
tools or other forms of standardized documentation, and industry or
subject matter-specific guidance materials
- All members of the engagement team understand the objectives of the
work to perform
- Appropriate team-working and training are necessary to assist less
experiences members of the engagement team to clearly understand
the objectives of he assigned work
 Supervision responsibilities
- Tracking the progress of the engagement
- Considering the competence and capabilities of individual members of
the engagement team, whether they have sufficient time to carry out
their work, whether they understand their instructions, and whether
they understand their instructions and whether the work is being
carried out in accordance with the planned approach to the
engagement
- Addressing significant matters arising during the engagement,
considering their significance and modifying the planned approach
appropriately
- Identifying matters for consultation or consideration by more
experienced engagement team members during the engagement
 Review responsibilities
- Determined on the basis that more experiences engagement team
members, including the engagement partner, review work performed
by less experienced team members
- Consideration
a) The work has been performed in accordance with
professional standards and applicable legal regulatory
requirements
b) Significant matters have been raised for further
consideration
c) Appropriate consultations have taken place and the resulting
conclusions have been documented and implemented
 Consultation
 Appropriate consultation takes place on difficult or contentious matters
 Sufficient resources are available to enable appropriate consultation to take
place
 The nature and scope of such consultations are documented
 Conclusions resulting from consultations are documented and implemented
 Engagement quality control review (EQCR)
 A process:
- Designed to provide an objective evaluation, on or before the date of
the report, of the significant judgments the engagement team made
and the conclusions it reached in formulating the report
- For audit of financial statements of listed entities, and those other
engagements, if any, for which the firm has determined and EQCR is
required
 Policies and procedures setting out:
- The nature, timing, and extent of an EQCR
- Criteria for the eligibility of engagement quality control reviewers
- Documentation requirements for an EQCR
 Differences of Opinion
 Dealing with and resolving differences of opinion within the engagement team,
with those consulted and, where applicable, between the engagement partner and
the engagement partner and the EQCR
 Requires:
- Conclusion reached be documented and implemented
- Report not be dated until the matter is resolved
 Engagement documentation
  Completion of the assembly of final engagement files
 Confidentiality, safe custody, integrity, accessibility and irretrievability of
engagement documentation
 Retention of engagement documentation

2.1.3.1.6 Monitoring

 An ongoing consideration and evaluation of the firm’s system of quality control

 A periodic inspection of a selection of completed engagements, designed to provide the
firm with reasonable assurance that its system of quality control is operation effectively
 Provide an evaluation of:
 Adherence to standards
 System of quality control has been appropriately designed and effectively
implemented
 Quality control policies and procedures have been appropriately applied
 Performed by competent individuals and covers both the:
 Appropriateness of the design
 Effectiveness of the operation of the system quality control

2.1.3.1.7 Documentation of the System of Quality Management

 Document its policies and procedures and communicate to the firm’s personnel
 Describe the quality control policies and procedures and the objectives they are
designed to achieve
 It should include the message that each individual has personal responsibility for
quality and expected to comply with these policies and procedures
 Recognize the importance of obtaining feedback on its quality control system
from its personnel

2.1.4 Regulatory Requirements Related to The Practice, Accreditation and Regulation

of Public Accounting and Auditing Services

1. Registration
a. Within 90 days from the effective date of this revised rules and regulations (Sec. 31, Art. 4),
individual CPAs, firms, partnerships who/which are not yet registered shall register with the
Board and the Commission
i. With current and valid registration, need to submit only the additional requirements
ii. The registration shall be valid for a period of 3 years and may be renewed every 3
years on or before September 30 on the year of expiry upon compliance of the
requirement
iii. The registration of applicants approved during any month of the year shall expire on
December 31 on the third year following its approval
- Example