CHAPTER8

PHILIPPINESTANDARDSONAUDITING
Questions
1.

Foreign public accounting firms have found that to retain their multinational
clients, they have had to develop the capacity to provide services worldwide.
Although the roots of at least two of the big firms in the United States are
traceable to European ancestry, public accounting firm involvement in
international activities has paralleled the gradual involvement of businesses in
international activities. In the early 1900s, some public accounting firms
established representative offices in foreign countries. As business activity
expanded, the firms opened offices in foreign cities. During the 1970s, some
countries forced these firms to close their offices. To be able to serve their
clients, the firms established correspondent relationships with locally owned
accounting firms; in these relationships, local partners remain separate, local,
autonomous organizations. Because domestic and foreign partners in a
correspondent relationship agree to follow a common code of ethics and practice
guidelines, each is able to rely on the work the other performs. A big firm
auditing a U.S. business with significant activities in France, for example, would
rely on its Paris office to audit the activities of the business in France.
The largest firms have organized worldwide partnerships to achieve a greater
uniformity of quality, to facilitate management of personnel, and to coordinate
research and professional development of personnel. Many small public
accounting firms establish correspondent relationships with foreign public
accounting firms or join a federation. Firms in a federation call on one another
to perform services for clients, following agreed-upon standards in conducting
the work they do for one another.

2.

Yes. According to paragraph 10 of the Preface to Philippine Standards on

Auditing and Related Services, an auditor may, in exceptional circumstances,
judge it necessary to depart from a PSA in order to more effectively achieve the
objective of an audit. When such a situation arises, the auditor should be
prepared to justify the departure.

3.

No. According to paragraph 14 of the Preface to the Philippine Standards on

Auditing and Related Services, PAPSs are issued to provide practical
assistance to auditors in implementing the PSAs or to promote good practice.
These Statements are not intended to have the authority of the PSAs.

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4.

Refer to page 329, paragraph 6 of PSA 120.

5.

Refer to page 329, paragraph 6 of PSA 120.

6.

Refer to pages 329 and 330, paragraphs 8, 9 and 10 of PSA 120.

Multiple Choice Questions

1.
2.
3.
4.
5.

D
B
B
D
C

6.
7.
8.
9.
10.

C
C
D
D
A*

11.

* b and d are also options available to the auditor

Cases
1.

The PICPA currently develops independence and ethical standards, quality

control standards, and auditing and attestation standards that apply to its
members. However, PICPA standards are applicable to the audits and auditors
of nonpublic clients based on general acceptance by the courts, and adoption by
state boards of accountancy and other regulatory bodies. The AICPA also has a
voluntary peer review program, and enforces its standards on its members.
The PCAOB was given the legal authority to develop independence and ethical
standards, quality control standards, and auditing and attestation standards that
apply to public company auditors and integrated audits. The PCAOB also is
charged with performing inspections of registered audit firms, and may sanction
the firms for noncompliance with its standards and the provisions of SarbanesOxley Act.
The state boards of accountancy regulate CPA firms and CPAs in the various
states and jurisdictions. They have the authority to establish their own
standards, but have generally adopted the standards of other bodies such as the
PICPA and the PCAOB. A state board enforces its standards in its state or
jurisdiction and has the authority to revoke a CPA firm or individual CPAs
right to practice in the state.

2.

Applicable Technical and Professional Standards

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It was inappropriate for Arnold to hire the two students to conduct the
audit. The audit must be conducted by persons with proper education
and experience in the field of auditing. Although a junior assistant has
not completed his formal education, he or she may help in the conduct
of the audit as long as there is proper supervision and review.

Because of the financial interest in whether the bank loan is granted,

Arnold is not independent.

Arnold did not review the work or the judgments of the assistants and
clearly failed to adhere to this standard.

Arnold accepted the engagement without considering the availability of

competent staff. Arnold failed to supervise the assistants and did not
adequately plan the work.

Arnold and the assistants did not obtain the require understanding of
the entity and its environment, including internal control.

Arnold acquired no evidence that would support the financial

statements. Merely checking the mathematical accuracy of the records
and summarizing the accounts is inadequate.

Arnold's report makes no reference to applicable reporting framework.

Because Arnold did not conduct a proper audit, the report should state
that no opinion can be expressed.

In this case both the statements and the auditor's report lack adequate
disclosures.

Although Arnolds report contains an expression of opinion, such opinion is not

based on the results of a proper audit. Arnold should disclaim an opinion
because he failed to conduct an audit in accordance with Philippine Standards on
Auditing (PSAs).
3.

(a) When the auditors discover illegal acts by a public client, they should
consider three major factors. First, the auditors should consider the effect
of the acts on the client's financial statements, including the possibility of
fines and loss of business. To comply with the applicable reporting
framework, the financial statements must reflect the material effects of
illegal acts.
Second, the illegal acts may affect the auditors' assessment of the integrity
of management. In deciding whether to continue to serve the client, the
auditors should consider the nature of the illegal acts and management's
response to the acts after they are uncovered.

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Third, the auditors should consider whether the occurrence of the illegal act
indicates that there is a material weakness in the companys internal control
over financial reporting.

(b) The following courses of action are available to the auditors:

(1)

The auditors could issue an unqualified opinion and take no further

steps regarding the illegal activities. This course of action could be
argued on the basis that the effect of the acts on the financial
statements is not material. If the auditors take this course of
action, they should also consider whether the illegal act and related
actions by management and the board indicate a material weakness
exists that would affect their report on internal control over
financial reporting.

(2)

The auditors could issue a qualified opinion because the financial

statements depart from the applicable reporting framework, in that
they fail to disclose the illegal acts. This course of action could be
argued on the basis that any illegal activities by the client are
material, especially when management fails to take any steps to
prevent the acts. If the auditors take this course of action, they
should also consider whether the illegal act and related actions by
management and the board indicate a material weakness exists that
would affect their report on internal control over financial
reporting.

(3)

The auditors could withdraw from the engagement, because the client's failure to take actions to prevent such activities indicates that
Generic's management lacks sufficient integrity.

(c) We believe that the auditors should consider withdrawing from the
engagement. Generic's top management seems far too complacent
regarding these activities. Their refusal to take any action to prevent the
acts in the future provides a signal to lower level management that top
management approves of illegal acts. The auditors clearly should question
the integrity of management in this situation.
4.

The following memorandum summarizes the response of Alice Borromeo, CPA,

to the request of a client for extension of the attest function to the problem of
pollution control.
Dear Jenny:

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As much as I support your strenuous efforts to minimize air and water

pollution from the manufacturing operations of your company, there are specific
reasons which make it impossible for me as a CPA to attest to the extent of your
accomplishments in this area along the lines you have suggested. When we
perform the attest function with respect to your financial statements each year,
we are expressing our professional opinion that your financial statements are
prepared in conformity with certain standards, or applicable reporting
framework.
In order for us to attest to the effectiveness of your pollution control
program, recognized standards would have to be established in this field. No
such standards presently exist for a factory to the best of my knowledge. Of
course the national government has set standards for exhaust emissions on
automobile engines and we could, by retaining independent consulting
engineers, obtain a basis for attesting to the compliance of a given automobile
engine to those standards.
We are quite willing to extend the attest function in various directions
if we can find a basis for objective comparison of a given operation with a
clearly defined standard. Perhaps your engineering department can develop
some specific quantitative data on the industrial waste from your operations.
We might then be able to perform the necessary examination of such data to
enable us to attest to the validity of your representations as to your operations.
Of course, this would not be the same thing as providing your relative position
in the industry. After reviewing this possibility with your engineering staff, if
you would like to discuss the matter further with us, we will be glad to meet
with you.
Sincerely,
Alice Borromeo