PART A: GENERAL APPLICATION b.

Acting as an advocate on behalf of the client in litigation or in resolving disputes

with third parties
Fundamental Principles- PCOPI
4. Familiarity Threat
 Professional Competence and Due Care a. Member of engagement team has an immediate or close family member that is the
o Competence i. Director or officer of the client
 Attainment- education, exam, experience ii. Employee with significant influence
 Maintenance b. Former partner of firm is a director or officer or employee with significant influence
 Confidentiality over the subject matter of engagement
o When an auditor can disclose c. Engagement team’s Senior member’s long association of the client
 Permitted by client 5. Intimidation Threats
 Permitted by law a. Threats to litigation or dismissal or replacement
 Professional duty/ as defense
 Objectivity
 Professional Behavior Safeguards
 Integrity
-actions or other measures that eliminates threats or reduces them to an acceptable level

1. Safeguards created by the profession, legislation or regulation

Conceptual Framework Approach a. Education, Exam, Experience
b. Continuing professional education
1. Identify threats to compliance with fundamental principles c. Corporate Governance
2. Evaluate the significance of identified threats- both quantitative and qualitative d. Professional Standards
3. Apply safeguards when necessary e. External review of firm’s quality control system
2. Safeguards in the work environment
a. Firm-wide safeguards
Threats to Compliance- SSAFI i. More on policies and procedures and making sure all employees are aware
and following them
1. Self-Interest b. Engagement-specific safeguards
a. Direct or material indirect financial interest i. Rotation of senior assurance team personnel
b. Undue dependence on fees ii. Involving a third party to review the work done
c. Potential employment iii. Discuss ethical issues with those charges with governance
2. Self-Review 3. Additional Safeguards for CPAs in public practice of which they may rely, but NOT solely rely
a. Member of engagement team is on the safeguards of the client
i. Former director or officer of client a. Safeguards within the client’s systems and procedures
ii. Employee with significant influence i. Competent employees
iii. Involved in preparation of data to generate FS ii. Implemented internal procedures that ensure objectivity
iv. Involved in design or implementation iii. Has a corporate governance structure
b. Discovery of significant error during re-evaluation of the work of the professional
accountant in public practice When there are no safeguards available, the last resort is to eliminate the activity creating the threat
3. Advocacy or refuse to accept or continue the engagement.
a. Promoter of securities in a client
PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE  Safeguard: contact existing accountants

Professional Appointment

1. Client Acceptance Fees and Other Types of Remuneration

a. Threats to integrity and professional behavior
b. Safeguards 1. Professional Fees should be a reflection of
i. Obtain knowledge and understanding of the client  Skill and knowledge
2. Engagement Acceptance  Level of training and experience
a. Threats to competence and due care  Time to perform services
b. Safeguards  Degree of responsibility
i. Obtain understanding on business and industry
Low fees are not unethical but if fees are quotes so low then there is a threat to competence
ii. Agree on a realistic time frame
and due care
3. Changes in Professional Appointment (existing is replaced by new accountant)
a. Threats to competence and due care i. Safeguards
b. Safeguards 1. Make client aware the terms of the engagement and the basis for the remuneration
i. Discuss with existing accountants (have to obtain permission from client 2. Assign qualified and competent staff
first) 2. Contingent Fees
ii. If cannot obtain permission, inquire third parties
c. Successor accountants has the burden of initiating communication with Fees received for a specific finding or achievement
predecessor accountants after obtaining expressed permission with the client  Self-Interest Threat: the significance of which is based on factors
Conflict of Interest i. Nature of engagement
ii. Range of possible fee amounts
 Threat to objectivity iii. Basis for determining the fee
o When you own a business that competes directly with the client iv. Whether result is to be reviewed by a third party
 Threat to objectivity and confidentiality  Safeguards
o When you have 2 engagements that are in conflict with one another i. advance agreement
 Safeguards ii. disclosure
1. Disclosure- notify client iii. review by an objective third party
2. Control- create an ethical wall In your mind; use confidentiality agreements 3. Referral Fees and Commission
signed by employees and partners; separate engagement teams  Self-interest threat to objectivity and competence and due care
3. Avoidance  Receipt and payments have the same threats
 Referral Fee- referring a continuing client to another professional accountant
Second Opinions
 Commission- professional account act as INTERMEDIARY between client and
-an accountant in public practice is asked to give a second opinion on the accounting, auditing or vendor
reporting application to specific circumstances
A professional accountant should not pay or receive referral fees or commissions UNLESS it
 Threats to professional competence and due care has established appropriate SAFEGUARDS OF disclosures or advanced agreements.
o Why?
 Second opinion may not be based on the same set of FS
 Inadequate evidence
 A professional accountant may purchase all or a part of a firm on the basis that Objectivity- All Services
payments are made to original owners and not to heirs or estates. This is NOT
Safeguards
considered as referral fees or commissions.
 Withdraw from the engagement
 Supervisory procedures (compensating control)
Marketing Professional Services  Terminate financial or business relationship that causes the threat
 Discuss issue with higher levels of management
 Self-interest threat to professional behavior
 Discuss issue with those charged with governance
 Should not
o Make exaggerated claims
o Make unsubstantiated comparisons to the work of another
 Info should include INDEPENDENCE
o Name 1. Independence of Mind- auditor’s perception
o Contact number 2. Independence in Appearance- public perception
o Services offered
o Address Both are required.
 General Rule: Any form of advertisement is ALLOWED. 1. Engagement Period
a. Starts when assurance team begins to perform assurance services
b. Ends when
Gifts and Hospitality i. When engagement is recurring by nature: issue of assurance report
ii. When engagement is expected to recur: notification by either party
 Self-Interest Threat to objectivity
that professional relationship has terminated OR issuance of final
 ALLOWED as long as immaterial
assurance report WHICHEVER COMES LATER
c. For financial statement audits
i. Starts: period covered by the financial statements reported on by
Custody of Client Assets
the firm or accountant begins audit review or attestation procedures
A public accountant should not take custody of the client’s assets unless it is permitted by such as signing of engagement letter WHICHEVER COME EARLIER
law or in compliance with legal duties 2. Independence Requirement
a. Only for ASSURANCE services
 Self-interest threat to objectivity
 Safeguards Is independence required?
o Keep assets separately from personal or firm assets 3 types of Assurance Assurance Team Firm Network Firm
o Use only for the purpose intended Audit yes yes yes
o Keep an account on income and expenses of such assets Non-Audit (unrestricted) yes yes no
o Make inquiries of the source of such assets Non-Audit (restricted) yes no no
 Additional requirement for Non-Audit(restricted): No material DIRECT AND i. Provision of taxation services to assurance clients
INDIRECT financial interest in an assurance client. i. Will not impair as long as you are assisting such as tax compliance
 Network firm is a group of accounting for the purpose of cooperation provision of taxation opinions and assistance in the resolution of tax
disputes
j. Provision of legal services to assurance clients
3. Independence Interpretations and Rulings i. Advocacy- impairs
a. Financial Interest ii. Advisory-does not impair
i. Control = direct iii. Independence is impaired when a CPA provides corporate finance
i. Material and immaterial impairs services such as underwriting securities
ii. no control = indirect k. Recruiting senior management
i. only material impairs i. IMPAIRS
b. Loans and Guarantees ii. Managerial decision will always impair independence
i. Loan to Financial institution does not impair if l. Fees-overdue
i. Loan is immaterial to both firm and client i. IMPAIRED when previous year’s fees are unpaid if at the time the
ii. Usual business assurance report is issued
ii. Loan to Nonfinancial institutions does not impair if m. Contingent Fees
i. Immaterial i. IMPAIRS
c. Close Business Relationship ii. NOT considered contingent fees
i. INDIRECT FINANCIAL INTEREST i. Fixed by court or other public authority
ii. Only impairs if material ii. Based on judicial or government agency proceedings
d. Family and Personal Relationships n. Gifts and Hospitality
i. Impairs if it is an IMMEDIATE FAMILY MEMBER o. Actual or threatened litigation
e. Past Employment with an assurance client
i. Only within the engagement period
f. Serving as an officer or director on the Board of Assurance Clients
i. Director/ Officer = independence is impaired
ii. Honorary Member = No impairments
g. Long Association with assurance clients Close Family = parents, siblings, children
i. Senior personnel/ lead engagement is rotated every 5 years
Immediate Family = spouse
h. Provision of accounting and bookkeeping services to assurance clients
i. Listed entities: FIRMS CANNOT PROVIDE SUCH SERVICES
ii. Non-listed entities: FIRMS CAN
iii. Exceptions
i. Client accepts responsibility for results
ii. Firm does not assume management decisions
iii. Personnel providing services are not members of the
assurance team