Chapter 2: Professional

Standards
 Standards

 Are established to:

 Guide performance
 Provide criteria to measure performance of
individuals and organization
 Professional Standards

 Professional standards covers PUBLIC ACCOUNTING

FIRMS who performs audit
 The standards address the following
1. Engagement performance requirements
2. Quality Control Standards (CPA Firm requirements)
3. Individual personal standards
 Generally Accepted Auditing
Standards (GAAS)

 Is the auditing standards issued by American Institute

of Certified Public Accountants (AICPA) adopted in
the Philippines
 These are the standards for the auditors’ work in
fulfilling the overall objective of financial statement
audit
 These represents the measure of quality of auditor’s
performance and should be looked as minimum
standard of performance
 Generally Accepted Auditing
Standards (GAAS)

 In the Philippines, it is the Auditing and Assurance

Standards Council (AASC) has been given the task to
promulgate auditing standards, practices and
procedures.
 AASC approves the adoption of International
standards locally.
 AASC also release Practice statements to provide
practical assistance to auditors for implementing the
standards
AASC Pronouncements
AASC
Pronouncements

Framework for
Assurance
Engagement

Agreed-upon
Audit Review
procedures

Phil Standards on Phil Standards on

Phil Standards on
Review Assurance
Auditing
Engagements Engagements

Phil Review Phil Assurance

Philippine Auditing
Engagements Engagements
Practice Statements
Practice Standards Practice Statement
 Principles Underlying a GAAS Audit 1/6

 Purpose of an audit
 Premise of an audit
 Personal responsibilities of the auditor
 Auditor actions in performing the audit
 Reporting results of an audit

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 Principles Underlying a GAAS Audit 2/6

 Purpose of an audit—Provide an opinion on financial

statements are in accordance with the applicable
financial reporting framework.
 The framework is ordinarily GAAP.
 The applicable framework corresponds to the “suitable
criteria” of an attest engagement.

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 Principles Underlying a GAAS Audit 3/6

 Premise of an audit—Management (and those

charged with governance) have responsibility to:
 Prepare financial statements in accordance with
applicable financial reporting framework.
 Provide auditor with needed information and
unrestricted access to those in the entity.

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 Principles Underlying a GAAS Audit 4/6

 Personal responsibility of the auditor—Appropriate

competence and capabilities to perform audit in
accordance with standards, including maintaining
professional skepticism and exercising professional
judgment throughout the audit.
 Professional skepticism—A questioning mind and a
critical assessment of audit evidence.

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 Principles Underlying a GAAS Audit 5/6

 Auditor actions in performing the audit

 Obtain reasonable assurance about whether financial
statements are free from error or fraud.
 The auditor is unable to obtain absolute assurance due
to:
 Nature of financial reporting.
 Nature of audit procedures.
 Need to conduct audit within a reasonable period of time.

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 Principles Underlying a GAAS Audit 6/6

 Reporting the results of an audit—Express in a

written report an opinion on findings (or statement
that opinion cannot be expressed).
 The opinion is on whether the financial statements are
in accordance, in all material respects, with the
applicable financial reporting framework.

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 The 10 Generally Accepted Auditing Standards

General Standards
Standards of Field Work
Reporting Standards

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 General Standards

 Adequate technical training and

proficiency
 Independence in mental attitude is to
be maintained
 Due professional care is to be
exercised

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 Standards of Field Work

 Auditor must adequately plan and properly

supervise work
 Auditor must obtain a sufficient
understanding of entity, and its environment,
including internal control to assess risk of
material misstatement and to design further
audit procedures
 Auditor must obtain sufficient appropriate
audit evidence to afford a reasonable basis for
the opinion

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 Standards of Reporting

 State whether the financial statements are presented in

accordance with GAAP
 Identify circumstances in which such principles have not
been consistently applied
 Informative disclosures are adequate unless otherwise
stated in the report
 Report should clearly state the degree of responsibility
being assumed by the auditors by expressing an opinion or
stating that one cannot be expressed, and the reason
therefor

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Quality Control on Audit of FS

 Philippine Standard on Auditing 220 (Redrafted)

QUALITY CONTROL FOR AN AUDIT OF FINANCIAL
STATEMENTS
 Philippine Standards on Quality Control
Elements of Quality Control
What’s the difference?
 PSA 220:
Elements of Quality Control

PSA 220 PSQC 1

• Leadership Responsibilities for • Leadership responsibilities for
Quality on Audits quality within the firm;
• Relevant ethical requirements • Relevant ethical requirements;
Independence • Acceptance and continuance of
• Acceptance and continuance of client relationships and specific
clients and engagements • engagements;
• Assignment of engagement • Human resources;
teams • Engagement performance; and
• Engagement performance • Monitoring.
• Monitoring
• Documentation

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 Leadership responsibilities for quality within
the firm

PSA 220 The engagement partner shall take responsibility for the
overall quality on each audit engagement to which that
partner is assigned.

PSQC 1 The actions of the engagement partner and appropriate

messages to the other members of the engagement team, in
taking responsibility for the overall quality on each audit
engagement, emphasize:
a. The importance to audit quality;
b. The fact that quality is essential in performing audit
engagements.

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Relevant ethical requirements
 Relevant ethical requirements
PSA 220 Throughout the audit engagement, the engagement partner shall:
• remain alert, through observation and making inquiries as necessary,
for evidence of noncompliance with relevant ethical requirements by
members of the engagement team.
• determine the appropriate action in case of noncompliance

The engagement partner shall form a conclusion on compliance with

independence requirements that apply to the audit engagement. In
doing so, the engagement partner shall:
(a) Obtain relevant information from the firm and, where applicable,
network firms, to identify and evaluate circumstances and
relationships that create threats to independence;

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 Relevant ethical requirements

PSA 220 b) Evaluate information on identified breaches, if any, of the firm’s

(continu independence policies and procedures to determine whether they
ation) create a threat to independence for the audit engagement; and
c) Take appropriate action to eliminate such threats or reduce them
to an acceptable level. The engagement partner shall promptly
report to the firm any inability to resolve the matter for
appropriate action.
PSQC 1 The Philippine Ethics Code establishes the fundamental principles of
professional ethics, which include: (a) Integrity; (b) Objectivity; (c)
Professional competence and due care; (d) Confidentiality; and (e)
Professional behavior.

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 Relevant ethical requirements

PSQC 1 Independence
In case there are threats to independence that can’t be eliminated or
reduced to an acceptable level, the partner reports to the relevant
person(s) within the firm to determine appropriate
action, which may include:
• eliminating the activity or interest that creates the
threat, or
• withdrawing from the audit engagement, where withdrawal is
legally permitted.

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 Acceptance and Continuance

PSA 220 • The engagement partner shall be satisfied that appropriate procedures
regarding acceptance and continuance of client relationships and audit
engagement have been followed and conclusions reached are appropriate

• If the engagement partner obtains information that would have caused

the firm to decline the audit engagement had that information been
available earlier, the engagement partner shall communicate that
information promptly to the firm, so that the firm and the engagement
partner can take the necessary action
PSQC 1 Firm will undertake to continue relationships and engagements only where
the firm:
1. Has considered client integrity.
2. Is competent to perform the engagement.
3. Can comply with legal and ethical requirements.
4. Significant matters that have arisen during the current or previous
audit engagement, and their implications for continuing the relationship

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 Assignment of Engagement Teams

PSA 220 The engagement partner shall be satisfied that the engagement team and those
outside of the team, collectively have the appropriate competence and capabilities
to:
a. Perform audit engagement in accordance with professional standards,
regulatory and legal requirements
b. Enable to issue appropriate auditor’s report
PSQC 1 The engagement partner shall consider the following when considering the
appropriate competence and capabilities expected of the engagement team:
• Experience and understanding of the nature of client’s business
• Understanding of professional standards and legal and regulatory requirements
• Technical expertise
• Knowledge of the industry
• Ability to render professional judgment
• Understanding of the firm’s quality control policies and procedures
 Engagement Performance
PSA The engagement partner is responsible for:
220 • Direction, supervision and performance of audit engagement.

REVIEW
• Reviews being performed in accordance with the firm’s review policies and procedures
• Review of the audit documentation and discussion with the engagement team, be
satisfied that sufficient appropriate audit evidence has been obtained to support the
conclusions reached and for the auditor’s report to be issued.

CONSULTATION
The engagement partner shall:
• Take responsibility for the engagement team undertaking appropriate consultation on
difficult or contentious matters
• Be satisfied that members of the engagement team have undertaken appropriate
consultation during the course of the engagement
• Be satisfied that the nature and scope of, and conclusions resulting from, such
consultations are agreed with the party consulted
• Determine that conclusions resulting from such consultations have been implemented
 Engagement Performance
PSA
220 Engagement Quality Review
• engagement quality control review is required for audits of financial statements of listed
entities
• The engagement partner shall:
 Determine that an engagement quality control reviewer has been appointed
 Discuss significant matters arising during the audit engagement
 Not date the auditor’s report until the completion of the engagement quality
control review
• For objective evaluation of the significant judgments made by the engagement team
the engagement partner shall evaluate the:
 Discussion of significant matters with the engagement partner
 Review of the financial statements and the proposed auditor’s report
 Review of selected audit documentation relating to the significant judgments the
engagement team made and the conclusions it reached
 Evaluation of the conclusions reached in formulating the auditor’s report and
consideration of whether the proposed auditor’s report is appropriate
 Engagement Performance
PSA
220 When performing quality review, the engagement partner should:
 Evaluate firm’s independence in relation to the audit engagement
 Whether appropriate consultation has taken place on matters involving
differences of opinion
 Whether audit documentation supports the conclusion
PSQC1 • Refer to handouts
 Monitoring

PSA 220 • monitoring process is designed to provide the firm with reasonable assurance
that its policies and procedures relating to the system of quality control are
relevant, adequate, and operating effectively
PSQC 1 • PSQC 1 (Redrafted) requires the firm to establish a monitoring process designed
to provide it with reasonable assurance that the policies and procedures relating
to the system of quality control is relevant, adequate and operating effectively

• A deficiency in the firm’s system of quality control does not necessarily indicate
that a particular audit engagement was not performed in accordance with
professional standards and regulatory and legal requirements, or that the
auditor’s report was not appropriate

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 Documentation

PSA 220 The auditor shall document:

• Issues identified with respect to compliance with relevant ethical requirements
and how they were resolved
• Conclusions on compliance with independence requirements
• Conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements
• The nature and scope of, and conclusions resulting from, consultations
undertaken during the course of the audit engagement

The engagement quality reviewer shall document:

• The procedures required by the firm’s policies on engagement quality control
review have been performed
• The engagement quality control review has been completed on or before the
date of the auditor’s report
• The reviewer is not aware of any unresolved matters that would cause the
reviewer to believe that the significant judgments the engagement team made
and the conclusions they reached were not appropriate

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 Documentation

PSQC1 Documentation of consultations with other professionals that involve difficult or

contentious matters that is sufficiently complete and detailed contributes to an
understanding of:
• The issue on which consultation was sought; and
• The results of the consultation, including any decisions taken, the basis for those
decisions and how they were implemented.

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