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1.

Why would the owners of Lakeside, as well as the company’s banks, require (c) the cost of advertising would outweigh any savings which might result
that an annual audit be made by an independent CPA firm? from competition, and it would be borne ultimately by clients; and
(d) small or new practitioners would be unlikely to have the financial
PSA 120 (Framework of PSA) par 20 resources to match the advertising of larger or more established practices.
The objective of an audit of financial statements is to enable the auditor to Generally, advertising and publicity in any medium are acceptable provided:
express an opinion whether the financial statements are prepared, in all material a. It has as its objective the notification to the public or such sectors of the
respects, in accordance with an identified financial reporting framework. The public as are concerned, of matters of fact (e.g., name, address, contact numbers,
phrase used to express the auditor's opinion is “present fairly, in all material services offered) in a manner that is not false, misleading or deceptive;
respects.” A similar objective applies to the audit of financial or other information b. It is in good taste;
prepared in accordance with appropriate criteria. c. It is professionally dignified; and
d. It avoids frequent repetition of, and any undue prominence being given
par 22 The auditor's opinion enhances the credibility of financial statements by to the name of the firm or professional accountant in public practice.
providing a high, but not absolute, level of assurance. Absolute assurance in The following however shall not be allowed:
auditing is not attainable as a result of such factors as the need for judgment, the a. Self-laudatory statements
use of testing, the inherent limitations of any accounting and internal control b. Discrediting, disparaging, or attacking other firms or CPA practitioners
systems and the fact that most of the evidence available to the auditor is c. Referring to, using or citing actual or purported testimonials by third parties
persuasive, rather than conclusive, in nature 2
d. Publishing and comparing fees with other CPAs or CPA firms or comparing
An annual audit is required to be made by an independent CPA firm because of those services with those provided by another firm or CPA practitioner
the following reasons; a potential conflict between those who prepare e. Giving too much emphasis on competitive differences
information and those who use information, information can have a substantial f. Using words or phrases which are hard to define and even more difficult
economic consequences for decision maker, expertise is often required for to substantiate objectively
preparing and verifying information and users of information are prevented from g. Publishing services in billboard (e.g., tarpaulin, streamers, etc.)
directly assessing the quality information. An annual audit is needed in order to advertisements
assist users in verifying the reliability of the financial information.
SECTION 250 Marketing Professional Services 250.1 When a professional
2. Can an accounting firm hope to accrue any real benefits from a marketing accountant in public practice solicits new work through advertising or other forms
campaign such as the one carried out by Abernethy and Chapman? Should the of marketing, there may be a threat to compliance with the fundamental
management of a company select its auditors based on advertisements? principles. For example, a self-interest threat to compliance with the principle of
professional behavior is created if services, achievements, or products are
Advertising and promotion may be considered ethical and acceptable under marketed in a way that is inconsistent with that principle.
certain provisions provided in BOA Resolution No. 126, Series of 2008.
Reasons for not allowing advertisement include:
(a) advertising can lead to undue competition between and among
practitioners, and thus may cause a decline in the quality of service;
(b) advertising would encourage a more commercial approach within the
profession thus reducing clients’ trust in CPAs and also increasing the likelihood
of CPAs neglecting their ethical duties;
3. This case implies that no auditor with the firm of Abernethy and Chapman 6. For purposes of the PSAs, the following terms have the meanings attributed
has an in-depth understanding of the audio equipment business. Is a CPA firm below:
allowed to accept an engagement without having established the necessary (a) Auditor’s expert – An individual or organization possessing expertise in a field
expertise to oversee the audit? Would the knowledge required to audit an other than accounting or auditing, whose work in that field is used by the auditor
audio equipment company differ significantly from that needed in the to assist the auditor in obtaining sufficient appropriate audit evidence. An
examination of a car dealership? auditor’s expert may be either an auditor’s internal expert (who is a
partner3 or staff, including temporary staff, of the auditor’s firm or a network
PSA 220 (Framework) Par.12 Art.08 The engagement partner shall be satisfied firm), or an auditor’s external expert. (Ref: Para. A1-A3)
that appropriate procedures regarding the acceptance and continuance of client (b) Expertise – Skills, knowledge and experience in a particular field.
relationships and audit engagements have been followed, and shall determine (c) Management’s expert – An individual or organization possessing expertise in a
that conclusions reached in this regard are appropriate. field other than accounting or auditing, whose work in that field is used by the
entity to assist the entity in preparing the financial statements.
A8. PSQC 1 (Redrafted) requires the firm to obtain information considered
necessary in the circumstances before accepting an engagement with a new Par.A7
client, when deciding whether to continue an existing engagement, and when An auditor who is not an expert in a relevant field other than accounting or
considering acceptance of a new engagement with an existing client.4 auditing may nevertheless be able to obtain a sufficient understanding of that
Information such as the following assists the engagement partner in determining field to perform the audit without an auditor’s expert. This understanding may be
whether the conclusions reached regarding the acceptance and continuance of obtained through, for example:
client relationships and audit • Experience in auditing entities that require such expertise in the preparation
engagements are appropriate: of their financial statements.
• The integrity of the principal owners, key management and those charged • Education or professional development in the particular field. This may
with governance of the entity; include formal courses, or discussion with individuals possessing expertise in the
• Whether the engagement team is competent to perform the audit relevant field for the purpose of enhancing the auditor’s own capacity to deal
engagement and has the necessary capabilities, including time and resources; with matters in that field. Such discussion differs from consultation with an
• Whether the firm and the engagement team can comply with relevant auditor’s expert regarding a specific set of circumstances encountered on the
ethical requirements; and engagement where
• Significant matters that have arisen during the current or previous audit that expert is given all the relevant facts that will enable the expert to provide
engagement, and their implications for continuing the relationship. informed advice about the particular matter.7
• Discussion with auditors who have performed similar engagements.
Stated in Section 330 of Code of Ethics for Professional Accountants the
fundamental principle of Professional Competence and Due Care, a professional
accountant should not undertake any engagement or accept an employment
which he or she cannot reasonably expect to discharge with professional
competence, Professional accountant should apply knowledge and skills and
experience with due professional care.

PSA 620 USING THE WORK OF AN AUDITOR’S EXPERT


4. Many business encounter significant uncertainties yet most opinions do not PSA 570 GOUNG CONCERN
include an extra paragraph. Why did Lakeside’s problem with its store number 19. If adequate disclosure is made in the financial statements, the auditor shall
six lead the auditors to provide the additional warning? express an unmodified opinion and include an Emphasis of Matter paragraph in
the auditor’s report to:
PSA 706 EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS (a) Highlight the existence of a material uncertainty relating to the event or
IN THE INDEPENDENT AUDITOR’S REPORT condition that may cast significant doubt on the entity’s ability to continue asa
Emphasis of Matter Paragraphs in the Auditor’s Report going concern; and to
6. If the auditor considers it necessary to draw users’ attention to a matter (b) Draw attention to the note in the financial statements that discloses the
presented or disclosed in the financial statements that, in the auditor’s judgment, matters set out in paragraph 18.
is of such importance that it is fundamental to users’ understanding of the
financial statements, the auditor shall include an Emphasis of Matter paragraph in 5. Lakeside has recently created a profit-sharing bonus plan? Why might such an
the auditor’s report provided the auditor has obtained sufficient appropriate incentive be a special concern to an auditor?
audit
evidence that the matter is not materially misstated in the financial statements. PSA 315 IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
Such a paragraph shall refer only to information presented or disclosed in the THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
financial statements. A36. Internal measures may highlight unexpected results or trends requiring
management to determine their cause and take corrective action (including, in
7. When the auditor includes an Emphasis of Matter paragraph in the auditor’s some cases, the detection and correction of misstatements on a timely basis).
report, the auditor shall: Performance measures may also indicate to the auditor that risks of
(a) Include it immediately after the Opinion paragraph in the auditor’s report; misstatement of related financial statement information do exist. For example,
(b) Use the heading “Emphasis of Matter,” or other appropriate heading; performance measures may indicate that the entity has unusually rapid growth or
(c) Include in the paragraph a clear reference to the matter being emphasized and profitability when compared to that of other entities in the same industry. Such
to where relevant disclosures that fully describe the matter can be found in the information,
financial statements; and particularly if combined with other factors such as performance-based bonus or
(d) Indicate that the auditor’s opinion is not modified in respect of the matter incentive remuneration, may indicate the potential risk of management bias in
emphasized. the preparation of the financial statements.

A1. Examples of circumstances where the auditor may consider it necessary to Philippine Framework for Assurance engagements Par 40
include an Emphasis of Matter paragraph are: Professional Skepticism The practicioner plans and perform an assurance
• An uncertainty relating to the future outcome of exceptional litigation or engagement with an attitude of professional scepticism recognizing that
regulatory action. circumstances may exist that cause the subject matter information to be
• Early application (where permitted) of a new accounting standard (for example, materially misstated.
a new An auditor must maintain an attitude of professional scepticism in performing an
Philippine Financial Reporting Standard) that has a pervasive effect on the audit. There is a possibility of material misstatement due to fraud and in revenue
financial statements in advance of its effective date. recognition that fraud may arise due to pressures or incentives on management
• A major catastrophe that has had, or continues to have, a significant effect on through inappropriate revenue recognition. Since the bonus system is newly
the entity’s financial position. implemented, it is possible that there would be a manipulation of sales such as
false sales or not recording of expenses.
Reporting on the operation of financial systems after being involved in their
6. Rogers wants Abernethy and Chapman to assist his company in developing design or implementation may create Self Review Threat. Independence in an
new accounting systems. Does a CPA firm face an independence problem in auditing means taking n unbiased viewpoint in the performance of the
auditing the output of systems that its own employees have designed and examination and in the preparation of the report.
installed?
A firm should not provide accounting and bookkeeping services for an
SECTION 290 INDEPENDENCE―AUDIT AND REVIEW ENGAGEMENTS CONTENTS audit client that is a public interest entity. The provision of such services may
290.6 Independence comprises: impair the CPA’s independence, or atleast give the appearance of impairing
(a) Independence of Mind The state of mind that permits the expression of a independence. Emergency or unusual situations would only impair the CPA’s
conclusion without being affected by influences that compromise professional independence provided that; the client accepts responsibility for the result of the
judgment, thereby allowing an individual to act with integrity and exercise work, the firm does not assume or make any managerial decisions, personnel
objectivity and professional skepticism. providing the services are not members of the assurance team.
(b) Independence in Appearance The avoidance of facts and circumstances that
are so significant that a reasonable and informed third party would be likely to 7. In recent years, many CPA firms have been acquired by larger (often national
conclude, weighing all the specific facts and circumstances, that a firm’s, or a or international) firms. Why might a large organization consider purchasing an
member of the audit team’s, integrity, objectivity or professional skepticism has accounting firm such as Abernethy and Chapman? Why might Abernethy and
been compromised Chapman agree to be acquired? Is this “merger mania” good for the accounting
profession?
SECTION 100 Introduction and Fundamental Principles
100.12 Threats may be created by a broad range of relationships and Philippine Standard on Quality Control 1 (Redrafted) QUALITY CONTROL FOR
circumstances. When a relationship or circumstance creates a threat, such a FIRMS THAT PERFORM AUDITS AND REVIEWS OF FINANCIAL STATEMENTS, AND
threat could compromise, or could be perceived to compromise, a professional OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS)
accountant’s compliance with the fundamental principles. A circumstance or
relationship may create more than one threat, and a threat may affect A18. Consideration of whether the firm has the competence, capabilities, and
compliance with more than one fundamental principle. Threats fall into one or resources to undertake a new engagement from a new or an existing client
more of the following categories: involves reviewing the specific requirements of the engagement and the existing
partner and staff profiles at all relevant levels, and including whether:
Self-review threat – the threat that a professional accountant will not  Firm personnel have knowledge of relevant industries or subject matters;
appropriately evaluate the results of a previous judgment made or service  Firm personnel have experience with relevant regulatory or reporting
performed by the professional accountant, or by another individual within the requirements, or the ability to gain the necessary skills and knowledge
professional accountant’s firm or employing organization, on which the effectively;
accountant will rely when forming a judgment as part of providing a current  The firm has sufficient personnel with the necessary competence and
service; capabilities;
 Experts are available, if needed;
Circumstances in which; A member of the engagement team being, or  Individuals meeting the criteria and eligibility requirements to perform
having recently been, and employee of client in a position to exert direct and engagement quality control review are available, where applicable; and
significant influence over the subject matter of the engagement, Performing  The firm is able to complete the engagement within the reporting
services for a client that directly affect the subject matter of the engagement, deadline.
A40. A firm needing to consult externally, for example, a firm without appropriate
internal resources, may take advantage of advisory services provided by:
• Other firms;
• Professional and regulatory bodies; or
• Commercial organizations that provide relevant quality control services. Before
contracting for such services, consideration of the competence and capabilities of
the external provider helps the firm to determine whether the external provider
is suitably qualified for that purpose.

Mergers and Acquisitions 290.33 When, as a result of a merger or acquisition, an


entity becomes a related entity of an audit client, the firm shall identify and
evaluate previous and current interests and relationships with the related entity
that, taking into account available safeguards, could affect its independence and
therefore its ability to continue the audit engagement after the effective date of
the merger or acquisition.

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