Management of a Public

Accounting Practice
Code of Ethics for CPAs
Fundamental ethical principles
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behavior
Independence
• Independence of mind • Independence in appearance
 the state of mind that permits  the avoidance of facts and
the expression of a conclusion circumstances that are so
without being affected by significant that a reasonable and
influences that compromise informed third party would be
professional judgment, thereby likely to conclude that a firm’s or
allowing an individual to act with an audit or assurance team
integrity, and exercise member’s integrity, objectivity
objectivity and professional or professional skepticism has
skepticism. been compromised

 Do you think one is significantly more important than the other?

 In which type of engagement is independence most important?
Assurance or non-assurance engagements?
Professional skepticism
• An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error
or fraud, and a critical assessment of audit evidence.
Threats to the fundamental ethical principles
1. Self-interest threat
2. Self-review threat
3. Familiarity threat
4. Advocacy threat
5. Intimidation threat
Immediate family
Spouse, spousal equivalent, dependent

Close family
Parent, sibling, nondependent child
Direct financial interest vs. indirect financial interest
Marketing professional services
Gifts and hospitality
Custody of client’s assets
Financial relationships
Employment with audit client
Temporary staff assignment
Providing non-attest services
Preparing accounting records and financial statements
Valuation services, tax return preparation, internal audit services, IT
systems services, litigation support services, legal services, recruiting
services
Professional fees
• Can an auditing firm charge a fee higher than that charged by
another firm?
• Can an auditing firm charge a fee lower than that charged by
another firm?

• Fees that is so low it could compromise the quality of the audit

• Overdue fees
• Contingent fees
System of Quality Management
Objectives
To provides the firm with reasonable assurance that:

• The firm and its personnel fulfill their responsibilities in

accordance with professional standards and applicable legal
and regulatory requirements, and conduct engagements in
accordance with such standards and requirements

• Engagement reports issued by the firm or engagement partners

are appropriate in the circumstances.
Components
1. The firm’s risk assessment process
2. Governance and leadership
3. Relevant ethical requirements
4. Acceptance and continuance of client relationships and
specific engagements
5. Engagement performance
6. Resources
7. Information and communication
8. Monitoring and remediation process
Firm’s Risk Assessment Process
• design and implement a risk assessment process to establish quality
objectives, identify and assess quality risks and design and implement
responses to address the quality risks
• establish the quality objectives specified by this ISQM and any
additional quality objectives considered necessary
• identify and assess quality risks to provide a basis for the design and
implementation of responses
• shall design and implement responses to address the quality risks
• establish policies or procedures that are designed to identify
information that indicates additional quality objectives, or additional or
modified quality risks or responses, are needed due to changes in the
nature and circumstances of the firm or its engagements
Quality objectives – The desired outcomes in relation to the components of
the system of quality management to be achieved by the firm.

Quality risk – A risk that has a reasonable possibility of: (i) Occurring; and (ii)
Individually, or in combination with other risks, adversely affecting the
achievement of one or more quality objectives.

Response – Policies or procedures designed and implemented by the firm to

address one or more quality risk(s):
(i) Policies are statements of what should, or should not, be done to address
a quality risk(s). Such statements may be documented, explicitly stated in
communications or implied through actions and decisions.
(ii) Procedures are actions to implement policies.
Governance and leadership
The firm shall establish the following quality (establishes the environment that
supports the system of quality management)
• The firm demonstrates a commitment to quality through a culture that
exists throughout the firm.
• Leadership is responsible and accountable for quality.
• Leadership demonstrates a commitment to quality through their actions and
behaviors.
• The organizational structure and assignment of roles, responsibilities and
authority is appropriate to enable the design, implementation and operation
of the firm’s system of quality management.
• Resource needs, including financial resources, are planned for and
resources are obtained, allocated or assigned in a manner that is consistent
with the firm’s commitment to quality.
Relevant ethical requirements
• The firm and its personnel:
Understand the relevant ethical requirements to which the firm and the firm’s
engagements are subject; and
Fulfill their responsibilities in relation to the relevant ethical requirements to
which the firm and the firm’s engagements are subject.

• Others, including the network, network firms, individuals in the network

or network firms, or service providers, who are subject to the relevant
ethical requirements to which the firm and the firm’s engagements are
subject:
Understand the relevant ethical requirements that apply to them; and
Fulfill their responsibilities in relation to the relevant ethical requirements that
apply to them.
The firm obtains, at least annually, a documented confirmation of
compliance with independence requirements from all personnel
required by relevant ethical requirements to be independent.
Acceptance and continuance of client
relationships and specific engagements
• Judgments about whether to accept or continue a client
relationship or specific engagement are appropriate based on
nature and circumstances of the engagement and the integrity and
ethical values of the client
ability to perform the engagement
• The financial and operational priorities of the firm do not lead to
inappropriate judgments about whether to accept or continue a
client relationship or specific engagement. Examples:
Client is able to pay but client is unethical
Professional fee is so low
Engagement performance
• Engagement teams understand and fulfill their responsibilities
• Review of work
• Resources are assigned or made available to engagement teams
• Professional judgment and professional skepticism
• Consultation on difficult or contentious matters
• Differences of opinion
• Engagement documentation is assembled on a timely basis
• Final assembly of working papers
• Retention of working papers
Engagement performance
• Engagement teams understand and fulfill their responsibilities
• Review of work
• Resources are assigned or made available to engagement teams
• Professional judgment and professional skepticism
• Consultation on difficult or contentious matters
• Differences of opinion
• Engagement documentation is assembled on a timely basis
• Final assembly of working papers – not more than 60d from audit report date
• Retention of working papers – no shorter than 5 yrs from audit report date
• Engagement quality review
• An objective evaluation of the significant judgments made by the
engagement team and the conclusions reached thereon, performed by
the engagement quality reviewer and completed on or before the date
of the engagement report.

Publicly listed entities

As required by law
As the firm deems appropriate
Resources
• Human resources
Personnel hired, developed and retained are competent and capable
Personnel demonstrate commitment to competence
Evaluations, compensation, promotion, incentives
Personnel are obtained from external sources when the firm does not
have sufficient or appropriate personnel
Assignment of personnel to engagement teams
• Technological resources
• Intellectual resources
• Service providers
Information and communication
• The information system identifies, captures, processes and maintains relevant and reliable
information that supports the system of quality management, whether from internal or
external sources.
• The culture of the firm recognizes and reinforces the responsibility of personnel to
exchange information with the firm and with one another.
• Relevant and reliable information is exchanged throughout the firm and with engagement
teams, including:
• Information is communicated to personnel and engagement teams, and the nature, timing and extent of
the information is sufficient to enable them to understand and carry out their responsibilities relating
to performing activities within the system of quality management or engagements; and
• Personnel and engagement teams communicate information to the firm when performing activities
within the system of quality management or engagements.
• Relevant and reliable information is communicated to external parties, including:
• Information is communicated by the firm to or within the firm’s network or to service providers, if any,
enabling the network or service providers to fulfill their responsibilities relating to the network
requirements or network services or resources provided by them; and
• Information is communicated externally when required by law, regulation or professional standards, or
to support external parties’ understanding of the system of quality management.
Monitoring and remediation process
• Inspection of completed engagements
• Select at least one completed engagement for each engagement
partner on a cyclical basis determined by the firm.
• The firm shall evaluate findings to determine whether deficiencies exist
• The firm shall evaluate the severity and pervasiveness of identified
deficiencies
• The firm shall design and implement remedial actions to address
identified deficiencies
• Communicate on a timely basis to the individual(s) assigned ultimate
responsibility and accountability for the system of quality management
and the individual(s) assigned operational responsibility for the system
of quality management
Big 5 Auditing Firms in the Philippines
Auditing Firm Network Firm
SGV & Co. Ernst & Young
Isla Lipana & Co. PricewaterhouseCoopers
RG Manabat & Co. KPMG
Navarro Amper & Co. Deloitte

Punongbayan & Araullo Grant Thornton

 Staff/associates
 In-charge/senior
associates
 Managers
 Partners
Methods of Billing Clients
1. Actual time charges / per diem basis
 Billing is done on the basis of actual time spent by the staff multiplied by the
hourly rates agreed upon.
2. Flat or fixed fee basis
 Client is billed a flat but all-inclusive pre-arranged amount for the entire
engagement.
3. Maximum fee basis
 Client is charged on a per diem basis, with the agreement that the total
charges will not exceed a certain agreed maximum amount.
4. Retainer basis
 The auditor is paid a fixed predetermined fee for all services rendered during a
designated period of time either on a monthly, semi-annual or annual basis.
5. Out-of-pocket expenses