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Module in Values Education: (Code of Professional Ethics for CPA)

Independent Auditor’s Report

To the Shareholders of CRC-ACE and subsidiaries

Report on the Audit of the Financial Statements

Opinion

We have audited the consolidated financial statements of CRC-ACE and subsidiaries (the group), which
comprise the consolidated statements of financial position as at December 31, 2020 and 2021, and the
consolidated statements of comprehensive income, consolidated statements of changes in equity and
consolidated statements of cash flows for each of the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Group as at December 31, 2020 and 2021, and its consolidated financial
performance and its consolidated cash flows for each of the years then ended in accordance with Philippine
Financial Reporting Standards (PFRS).

Basis for Opinion

We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Financial Statements
section of our report. We are independent of the Group in accordance with the Code of Ethics for
Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are
relevant to our audit of the financial statements in the Philippines, and we have fulfilled our ethical
responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Responsibilities of Management and those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance
with PFRS, and for such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Groups ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern
basis of accounting unless management either intends to liquidate the Group or to cease operation, or has no
realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
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opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with PSAs will always detect a material misstatement when its exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:

 Identify and assess the risk s of material misstatement of the financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
 Obtain an understanding of internal control relevant to the audit and in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Group’s internal control.
 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
 Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Groups ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to
the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Group to cease to continue as a going
concern.
 Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.

Signature

Auditor’s address

Date

Lesson 1: THE PROFESSIONAL STANDARDS (first week and Second week)

When auditing financial statements, an auditor assumes certain professional responsibilities. Auditor’s opinion
must be based on an examination conducted in accordance with professional standards. Failure to comply with
these standards exposes the auditor to risks such as loss of public respect or even assessment of legal damages.

Standards are established to measure the quality of performance of individuals and organizations. Standards
relating to the accounting profession concern themselves with CPAs professional qualities, the judgment
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exercised by the CPAs in the performance of their professional engagement, and the CPA firm’s quality
control policies and procedures.

The Board of Accountancy promulgated ten generally accepted auditing standards (GAAS) that establish
required level of quality for performing financial statement audits. These standards must be followed by CPAs
when auditing financial statements.

Philippines Standards on Auditing (PSAs) are issued to clarify the meaning of these ten GAAS. Auditing
procedures are the means used by the auditors in attaining the quality required by the standards.

 Generally Accepted Auditing Standards (GAAS)

GAAS represent measures of the quality of the auditor’s performance. These standards should be looked at as
a minimum standard of performance that auditors should follow. These ten GAAS are grouped into general,
fieldwork, and reporting standards.

General Standards
1. The examination is to be performed by person or persons having adequate technical training and
proficiency as an auditor.
2. In all matters relating to an engagement, an independence in mental attitude is to be maintained by
the auditor.
3. Due professional care is to be exercised in the performance of the audit and in the preparation of
the report.

Standards of Fieldwork

4. The work is to be adequately planned and assistants, if any, are to be properly supervised.
5. There is to be s proper study and evaluation of existing internal control as a basis for reliance
thereon and for the determination of the resultant extent of the tests to which auditing procedures
are to be restricted.
6. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries
and confirmations to afford a reasonable basis for an opinion regarding the financial statements
under examination.

Standard of Reporting

7. The report shall state whether the financial statements are presented in accordance with generally
accepted accounting principles.
8. The report shall identify those circumstances in which principles have not been consistently
observed in the current period in relation to the preceding period.
9. Informative disclosures are to be regarded as reasonably adequate unless otherwise stated in the
report.
10. The report shall either contain an expression of opinion regarding the financial statements, taken
as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall
opinion cannot be expressed, the reasons therefore should be stated.

SYSTEM OF QUALITY CONTROL

If the public is to rely on the professional CPAs’ work, it is essential that appropriate controls are put in place
to ensure that their work is consistently of high quality. The need for practicing CPAs to implement and
maintain quality control measures is derived from the fact that audits are usually conducted by audit teams. It
is only by implementing quality control policies and procedures that CPAs can ensure that all members of the
audit teams perform the same level of quality of work.
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Quality controls are policies and procedures adopted by CPAs to provide reasonable assurance of conforming
with professional standards in performing audit and related services.

Under Philippine Standards on Quality Control (PSQC) 1, a firm has an obligation to establish a system of
quality control designed to provide it with reasonable assurance that the firm and its personnel comply with
professional standards and regulatory and legal requirements, and that the report issued by the firm are
appropriate in the circumstances. In this regard, engagement teams:

 Implement quality control procedures that are applicable to audit engagement;

 Provide the firm with relevant information to enabling the functioning of that part of the firm’s system
of quality control relating to independence; and
 Are entitled to rely on the firm’s systems unless information provided by the firm or other parties
suggest otherwise.

Elements of a System of Quality Control

PSA 220 states that audit firm should implement policies and procedures designed to ensure that all audits are
conducted in accordance with PSAs.

The quality control policies and procedures adopted by audit firms vary depending on the firm’s size and
nature of its practice, cost benefit considerations and other factors. PSA 220 has identified the following
quality control policies that may serve as a guide to audit firms in establishing their own system of quality
control.

LEADERSHIP RESPONSIBILITIES FOR QUALITY ON AUDITS

The firm should establish policies and procedures designed to promote an internal culture based on recognition
that quality is essential in the performance of the engagements.

The engagement partner should take responsibility for the overall quality on each audit engagement to which
the partners is assigned. The engagement partner should set example regarding the quality of audit by
emphasizing through actions and messages the importance of performing work that complies with professional
standards, complying with the firm’s quality control policies and procedures, and issuing appropriate audit
reports.

ETHICAL REQUIREMENTS

The firm should establish policies and procedures designed to provide it with reasonable assurance that the
firm and its personnel comply with ethical requirements, which include:

a. Integrity
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and professional behavior

The engagement partner should consider whether members of the engagement team have complied with these
ethical principles. Any issues involving engagement team member’s non-compliance with ethical
requirements must be properly resolved and documented.

INDEPENDENCE

The firm should establish policies and procedures designed to provide it with reasonable assurance that the
members of the engagement team, the firm and, where applicable, the network firms maintain independence
when providing assurance services.
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The engagement partner should form a conclusion on compliance with independence requirements that apply
to the audit engagement. The engagement partners should

a. Obtain relevant information to identify circumstances and relationships that create threats to
independence;
b. Evaluate information on identified breaches of the firm’s independence policies and procedures to
determine whether they create threat to independence;
c. Take appropriate safeguards to eliminate such threats or reduce them to an acceptable level; and
d. Document conclusion on independence and the basis for such conclusion.

ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS

The firm should establish policies and procedures for the acceptance and continuance of client relationships
and specific engagements, designed to provide it with reasonable assurance that it will only undertake or
continue relationships and engagement where it:

a. Has considered the integrity of the client;

b. Is competent to perform the engagement and has the capabilities, time and resources to do so; and
c. Can comply with ethical requirements.

The engagement partner should be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and specific audit engagement have been followed, and that conclusions
reached in this regard are appropriate and have been documented.

HUMAN RESOURCES AND ASSIGNMENT

The firm should establish policies and procedures designed to provide it with reasonable assurance that it has
sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to
perform the engagement. Such policies and procedures should address issues concerning personnel

 Recruitment;
 Performance evaluation, compensation and promotion;
 Capabilities and competence;
 Career development; and
 Assignment of engagement teams

The engagement partner should be satisfied that the engagement team collectively has the appropriate
capabilities, competence and time to perform the audit engagement in accordance with professional standards,
and regulatory and legal requirements, and to enable an auditor’s report that is appropriate in the circumstances
to be issued.

ENGAGEMENT PERFORMANCE

The firm should establish policies and procedures designed to provide it with reasonable assurance

 That engagements are performed in accordance with professional standards and other regulatory and
legal requirements; and
 That the audit report issued is appropriate in the circumstances.

The engagement partner should take responsibility for the direction, supervision, review, and overall
performance of the audit engagement.

 Direction
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Assistants should be informed of their responsibilities, the nature of the entity’s business, potential
problems that may arise and the detail approach to the performance of the engagement.
 Supervision
This involves monitoring the process of the audit, resolving accounting and audit issues, and
considering the level of consultation appropriate for the engagement.
 Review
Work performed by assistants should be reviewed to consider whether the audit procedures, evidence
and documentation are appropriate to support the conclusion reached.
 Consultation
The firm should establish policies and procedures that encourage firm personnel to seek assistance
from authoritative sources either within or outside the firm.

The engagement partner should:

a. Be responsible for the engagement team undertaking appropriate consultation on difficult and
contentious matters;
b. Be satisfied that members of the engagement team have undertaken appropriate consultation during
the course of the engagement, both within the engagement team and others at the appropriate level
within or outside the firm;
c. Be satisfied that the nature and scope of, and conclusions resulting from such consultations are
documented and agreed with the party consulted;
d. Determine that conclusions resulting from consultations have been implemented.

Engagement Quality Control Review

The firm should establish policies and procedures requiring an engagement quality control review that
provides an objective evaluation of the significant judgments made and conclusions reached in formulating the
auditor’s report.

This requires the engagement partner:

a. To determine that an engagement quality control reviewer has been appointed;

b. To discuss significant matters arising during the audit engagement quality control reviewer; and
c. Not to issue the auditor’s report until the completion of the engagement quality control review.

The firm should establish policies and procedures setting out the scope of quality control review, criteria for
the eligibility of the reviewer, and documentation of the quality control review.

Differences of Opinion

The engagement team should follow the firm’s policies and procedures for dealing with and resolving
differences of opinion that arise within the engagement team, with those consulted and, where applicable,
between the engagement partner and the engagement quality control reviewer.

The engagement partner should inform the members of the engagement team to bring matters involving
differences of opinion to the attention of the engagement partner or others within the firm as appropriate
without fear of reprisals. The audit report should not be issued until the matter involving differences of
opinion is resolved.

MONITORING

The continued adequacy and operational effectiveness of quality control policies and procedures is to be
monitored. Policies and procedures must be adopted to provide reasonable assurance that the systems of
quality control are relevant, adequate and operating effectively.
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The firm’s quality control policies and procedures should be communicated to its personnel in a manner that
provides reasonable assurance that the policies and procedures are understood and implemented.

QUALITY CONTROL REVIEW

Recognizing the importance of professional accountants services to the society, the government has also taken
steps to ensure that CPAs work to the highest standards which can reasonably be expected from them. the
government thru the Professional Regulatory Board of Accountancy (BOA) has required all CPA firms and
individual CPAs in public practice to obtain a certificate of accreditation to practice public accountancy. Such
certificate is valid for three years and can be renewed after complying with the requirements of the Board of
Accountancy.

As a condition to the renewal of the certificate of accreditation to practice public accountancy, the Board
requires individual CPAs and CPA firms to undergo a quality control review to ensure that these CPAs comply
with accounting and auditing standards and practices.

The PRC has created a Quality Review Committee (QRC) which shall conduct a quality review on applicants
for registration to practice public accountancy and shall recommend the revocation of the certificate of
registrations of CPAs who have not observed the quality control measures or those who have not complied
with the standards of quality prescribed for the practice of public accountancy.

Multiple Choice Questions

1. In the auditing environment, failure to meet auditing standards is often:

a. an accepted practice
b. a suggestion of negligence
c. conclusive evidence of negligence
d. tantamount to criminal behavior
2. Requirements for training, independence and due professional care are included in which group of the
generally accepted auditing standards?
a. Fieldwork
b. General
c. Reporting
d. Quality control
3. The general standards of the generally accepted auditing standards include a requirement that
a. The fieldwork to be adequately planned.
b. The auditor’s report to state whether the financial statements are presented in conformity with
PFRS.
c. Due professional care be exercised by the auditor.
d. The auditor to obtain sufficient, competent evidential matter.
4. Under GAAS, which of the following reflects a concept from the general group?
a. The confirmation of account receivable.
b. Completing an internal control questionnaire.
c. The initial planning of the audit with the audit partner, manager, senior, staff and client
personnel.
d. The assignment of audit personnel to an engagement where they have no financial interest.
5. What is the general character of the three generally accepted auditing standards classified as general
standards?
a. Criteria for competence, independence, and professional care of individuals performing the
audit.
b. Criteria of evidence gathering.
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c. Criteria for the content of the auditors’ report on financial statements and related footnote
disclosures.
d. The requirements for the planning, of the audit and supervision of assistants, if any.
6. Which of the following is an element of a CPA firm’s quality control system that should be considered
in establishing its quality control policies and procedures?
a. Complying with laws and regulations
b. Using statistical sampling techniques
c. Independence
d. Consideration of audit risk and materiality.
7. Which of the following is one of the element of CPA firm’s quality control system?
a. Leadership responsibilities
b. Computer assisted audit techniques
c. Control activities
d. Control environment
8. Which of the following quality control objectives would be least important to the auditor?
a. Engagement performance
b. Human resources
c. Determination of audit fee
d. Independence
9. Which of the following quality control procedures relates to
a. Hiring
b. Direction
c. Professional development
d. Advancement
10. Within the context of quality control, the primary purpose of continuing professional education and
training activities is to enable a CPA firm to provide its personnel with:
a. Technical training that assures proficiency as a valuation expert.
b. Professional education that is required in order to perform with due professional care.
c. Knowledge required to fulfill assigned responsibilities.
d. Knowledge required to perform a peer review.

EVALUATION:

Discussed Professional Standards

Lesson 2: THE CODE OF PROFESSIONAL ETHICS (3-6 weeks)

A distinguishing mark of the accounting profession is the acceptance of its responsibility to the public.
As professionals, the accountants’ responsibility is not exclusively to protect the interest of their
clients or employers. Instead, the interest of the public must always be their paramount concern.

In today’s modern environment, many segments of society are increasingly dependent for decision-
making on information for which they have no control. They turn to professional accountants for
assistance in assessing the reliability of some of this information. Every failure by an accountant to
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comply with professional standards makes it difficult for the profession to maintain the reputation for
integrity, objectivity, and competence that it has acquired over its many years of service to the public.

In order to maintain public trust and confidence in the accountancy profession, professional
accountants must adhere to standards of ethical conduct: standards of conduct that embody and
demonstrate integrity, objectivity, and concern to the public rather than self-interest.

The Philippine Institute of Certified Public Accountants (PICPA) being a member of the International
Federations of Accountants (IFAC) is obliged and committed to support the work of IFAC. The Code
of Ethics for Professional Accountants in the Philippines is based on the IFAC Code of Ethics for
Professional Accountants.

The Code of Ethics for Professional Accountants in the Philippines is divided into three parts. Part A
establishes fundamental principles of professional ethics and provides a conceptual framework that
professional accountants shall apply. Part B and C describe how the conceptual framework applies
certain situations and provide examples of appropriate safeguards that address threats to compliance
with fundamental principles. Part B applies to profession accountants in public practice while Part C
applies to professional accountants in business.

 PART A- General Application

In acting in the public interest, professional accountants have to observe a number of prerequisites or
fundamental principles.

Integrity

A professional accountant should be straightforward and honest in professional and business

relationships. Integrity implies not merely honesty but it requires being brave enough to fight
for what you believe in. Not telling lies is honesty, but a man of integrity will always be
willing to speak out and ask difficult questions when the circumstances warrant. Therefore, if
the CPA believes that the financial statements are materially misleading, the CPA is not
acting with integrity if he remains silent or disclaims an opinion on the financial statements.
The principle of integrity requires the CPA to stand up for what he believes is true.

A professional accountant should not be associated with information where he believes that
the information contains incorrect, incomplete or misleading statements.

Objectivity

The principle of objectivity imposes the obligation on all professional accountants to be fair,
intellectually honest and free of conflicts of interest. A professional accountant should be fair
and should not allow prejudice or bias, conflict of interest or influence of others to override
objectivity.

CPAs in public practice may render audit, tax, and management advisory services. Others
may prepare financial statements, perform internal auditing services, and serve in financial
and management capacities in industry, education, and government. Regardless of services or
capacity, CPAs should maintain objectivity, and avoid any subordination of their judgment
when rendering professional services.
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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. A
professional accountant should continually strive to improve his knowledge and skills to
ensure that a client or employer receives the advantage of competent professional service
based on up-to-date developments in practice, legislation and techniques.

Professional competence is divided into two separate phases:

a. Attainment of professional competence through formal education, professional

examination and a period of experience.
b. Maintenance of professional competence by being aware of all the developments
affecting the profession and adopting a program to ensure quality in the
performance of professional services.

Moreover, the professional accountant should apply knowledge, skills and experience with
due professional care. Due care encompass the responsibility to perform professional
services in accordance with technical and professional standards, carefully, thoroughly and on
a timely basis. A professional accountant’s authority in a professional capacity have
appropriate training and supervision.

Confidentiality

A professional accountant should respect the confidentiality of information acquired during

the course of performing professional services and should not use or disclose any such
information without proper and specific authority or unless there is a legal or professional
right or duty to disclose.

Confidentiality is not only a matter of disclosure of information. Accountants who acquire

information in the course of performing services shall neither use nor appear to use that
information for personal advantage or for the advantage of a third party.
However, confidential information may be disclosed under the following circumstances:

1. Disclosure is permitted by the client or employer;

2. Disclosure is required by law such as compliance with a subpoena issued by a court in the
course of legal proceedings.
3. There is a professional duty or right to disclose confidential information. For example,
the professional accountant may disclose confidential information to defend himself if
sued by his client or employer. In addition, a professional accountant may also disclose
confidential information to comply with the quality assurance review or any investigation
conducted by the Board of Accountancy (BOA).

Professional Behavior

A professional accountant should comply with relevant laws and regulations and refrain from
any conduct which might bring discredit to the profession.

Conceptual framework Approach

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It is impossible to define every situation that creates threats to compliance with fundamental
principles. Consequently, the code establishes a conceptual framework approach that requires
a professional accountant to

1. Identify threats to compliance with fundamental principles

2. Evaluate the significance of threats identified; and
3. Apply safeguards, when necessary, to eliminate the threats or reduce them to an
acceptable level.

This approach is aimed at assisting the professional accountants in complying with ethical
requirements and meeting their responsibility to act in the public interest.

Threats to Compliance with the Fundamental Principles

The circumstances in which the professional accountants operate may create threats to
compliance with fundamental principles. Such threats fall into one or more of the following
categories:

1. Self-interest;
2. Self- review;
3. Advocacy;
4. Familiarity; and
5. Intimidation.

Self-Interest Threat is the threat that a financial or other interest will inappropriately the professional
accountant’s judgment or behavior. Examples of circumstances that may create self- interest threat include:

(a) A direct financial interest or material indirect financial interest in a client

(b) A loan or guarantee to or from a client or any of its directors or officers
(c) Undue dependence on total fees from a particular client
(d) Concern about the possibility of losing the engagement
(e) Having a close business relationship with a client
(f) Potential employment with a client
(g) Contingent fees relating to an engagement

Self-Review Threats is the threat that a professional accountant will not objectivity evaluate the results of the
previous judgment made or service performed in forming a conclusion about the subject matter of the
engagement.

Examples of circumstances that may create self –review threat include:

(a) A member of the engagement team being, or having recently been, a director or officer of the client
(b) A member of the engagement team being, or having recently been, an employee of the client in a
position to exert direct and significant influence over the subject matter of the engagement
(c) Performing services for a client that directly affect the subject matter of the engagement
(d) Preparation of original data used to generate financial statements or preparation of other records that
are the subject matter of another engagement.
(e) Reporting on the operation of financial systems after being involved in their design or
implementation.
(f) The discovery of a significant error during reevaluation of the work of the professional accountant in
public practice.
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Advocacy Threats is the threat that a professional accountant will promote a client’s or employer’s position to
the point that the professional accountant’s objectivity is compromised.

Examples of circumstances that may create this threat include:

(a) Dealing in, or being a promoter of, share or other securities in a client; and
(b) Acting as an advocate on behalf of client in litigation or in resolving disputes with third parties.

Familiarity Threats is the threat that a professional accountant will promote a client’s or employer’s position
to the point that the professional accountants’ objectivity is compromised.

Examples of circumstances that may create familiarity threat include:

(a) A member of the engagement team having an immediate family member or close family member
who is a director or officer of the client.
(b) A member of the engagement team having an immediate family member or close family member
who, as an employee of the assurance client, is in a position to exert direct and significant influence
over the subject matter of the engagement
(c) A former partner of the firm being a director, officer of the client or an employee in a position to
exert direct and significant influence over the subject matter of the engagement.
(d) Long association of a senior member of the engagement team with the client.
(e) Acceptance of gifts or preferential treatment, unless the value is clearly insignificant, from a client,
its directors, officers or employees.

Intimidation Threat is the threat that the professional accountant will be deterred from acting objectivity
because of actual or perceived pressures, including attempts to exercise undue influence over the professional
accountant.

Examples of circumstances that may create this threat include:

(a) Being threatened with litigation

(b) Being threatened with dismissal or replacement over principle
(c) Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.

Safeguards

A professional accountant shall evaluate any threats to compliance with the fundamental principles. Both
quantitative and qualitative factors must be considered in evaluating the significant of a threat. Once a
significant threat has been identified and evaluated, appropriate safeguards should be considered and applied as
necessary.

Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. The
nature of the safeguards to be applied will vary depending upon the circumstances. Consideration should
always be given to what a reasonable and informed third party having knowledge of all relevant information
including safeguards applied, would reasonably conclude to be unacceptable. The consideration will be
affected by matters such as the significance of the threat, the nature of the engagement and the structure of the
firm.

Safeguards fall into two broad categories:

1. Safeguard created by the profession, legislation or regulation; and

2. Safeguards in the work environment

The firm and the members of the assurance team should select appropriate safeguards to eliminate or reduce
threats, other than those that are clearly insignificant, to an acceptable level.
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Safeguards created by the profession, legislation or regulation, include the following:

(a) Educational, training and experience requirements for entity into the profession;
(b) Continuing education requirements;
(c) Corporate governance regulations;
(d) Professional standards and monitoring and disciplinary processes; and
(e) External review of a firm’s quality control system

Safeguard in the work –environment consist of firm wide safeguards and engagement specific safeguards.

Firm-wide safeguards in the work environment may include:

 Leadership of the firm that stresses the importance of compliance with the fundamental principles.
 Leadership of the firm that establishes the expectation that members of an assurance team will act in
the public interest.
 Policies and procedures to implement and monitor quality control of engagements.
 Documented policies regarding the identification of threats to compliance with the fundamental
principles, the evaluation of the significance of these threats and the identification and the application
of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an
acceptable level.
 For firms that perform assurance engagement, documented independence policies regarding the
identification of threats to independence, the evaluation of the significance of these threats and the
evaluation and application of safeguards to eliminate or reduce the threats, other than those that are
clearly insignificant, to an acceptable level.
 Documented internal policies and procedures requiring compliance with the fundamental principles.
 Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a
single client.
 Using different partners and engagement teams with are not members of an engagement teams from
inappropriately influencing the outcome of the engagement.
 Timely communication of a firm’s policies and procedures, including any changes to them, to all
partners and professional staff, and appropriate training and education on such policies and
procedures.
 Designating a member of senior management to be responsible for overseeing the adequate
functioning of the firm’s quality control system.
 Advising partners and professional staff of those assurance clients and related entities from which they
must be independence.
 A disciplinary mechanism to promote compliance with policies and procedures to encourage and
empower staff to communicate to senior levels within the firm any issue relating to compliance with
the fundamental principles that concerns them.

Engagement specific safeguards may include:

 Involving an additional professional accountant to review the work done or otherwise advise as
necessary.
 Consulting an independent third party, such as a committee of independent directors, a professional
regulatory body or another professional accountant.
 Discussing ethical issues with those charged with governance of the client.
 Disclosing to those charged with governance of the client the nature of services provided and extent of
fees charged.
 Involving another firm to perform or reperform part of the engagement.
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 Rotating senior assurance team personnel.

In addition to the above safeguards, professional accountants in public practice may also be able to rely on
safeguards that the client has implemented. Safeguards within the client’s systems and procedures may
include:

 When a client appoints a firm in public practice to perform an engagement, persons other than
management ratify or approve the appointment.
 The client has competent employees with experience and seniority to make managerial decisions.
 The client has implemented internal procedures that ensure objective choices in commissioning non-
assurance engagements.
 The client has a corporate governance structure that provides appropriate oversight and
communications regarding the firm’s services.

Although these safeguards could also reduce the threat to compliance with fundamental principles, it is not
possible for professional accountant to rely solely on these safeguards to reduce threats to an acceptable level.

In certain situations, no safeguards are available to eliminate or reduce the threat to an acceptable level.
Hence, the only possible actions would be to eliminate the activities or interest creating the threat, or to refuse
to accept or continue the engagement.

PART B –Professional Accountants in Public Practice

PROFESSIONAL APPOINTMENT

 Client Acceptance
Before accepting a new client relationship, a professional accountant in public practice should
consider whether acceptance would create any threats to compliance with the fundamental principles.
Potential threats to integrity and professional behavior may be created if the client is involved in
illegal activities or if the client’s owners or management lack integrity.

Appropriate safeguards may include obtaining knowledge and understanding of the client, its owners,
managers and those responsible for its governance and business activities or securing the client’s
commitment to improve corporate governance practices or internal controls.

 Engagement Acceptance
A professional accountant in public practice should agree to provide only those services that he is
competent to perform. A self-interest threat to competence and due care principle is created if the
engagement team does not possess, or cannot acquire, the competence necessary to properly carry out
the engagement.

Appropriate safeguards may include:

 Acquiring an appropriate understanding of the nature of the client’s business, the complexity of its
operations, the specific requirements of the engagement and the purpose, nature and scope of the work
to be performed.
 Acquiring knowledge of relevant industries or subject matters.
 Possessing or obtaining experience with relevant regulatory or reporting requirements.
 Assigning sufficient staff with the necessary competencies.
 Using experts where necessary.
 Agreeing on a realistic time frame for the performance of the engagement.
 15

 Complying with quality control policies and procedures designed to provide reasonable assurance that
specific engagements are accepted only when they can be performed competently.

Changes in a Professional Appointment

A professional accountant in public practice who is asked to replace another professional accountant in public
practice, or who is considering tendering for an engagement currently held by another professional accountant
in public practice, should determine whether there are any reasons, professional or other, for not accepting the
engagement, such as circumstances that threaten compliance with the fundamentals principles. For example,
there may be a threat to professional competence and due care if a professional accountant in public practice
accepts the engagement before knowing all the pertinent facts.

Appropriate safeguards may include:

 Discussing the client’s affairs fully and freely with the existing accountant;
 Asking the existing accountant to provide known information on any facts or circumstances, that, the
existing accountant’s opinion, the proposed accountant should be aware of before deciding whether to
accept the engagement;
 When replying to requests to submit tenders, starting in the tender that, before accepting the
engagement, contact with the existing accountant will be requested so that inquiries may be made as to
whether these are any professional or other reasons why the appointment should not be accepted.

A professional accountant in public practice will ordinarily need to obtain the client’s permission, preferably in
writing, to initiate discussion with an existing accountant. If the proposed accountant is unable to
communicate with the existing accountant, the proposed accountant should try to obtain information about any
possible threats by other means such as through inquiries of third parties or background investigations on
senior management or those charged with governance of the client.

CONFLICTS OF INTEREST

A professional accountant in public practice should take reasonable steps to identify circumstances that could
pose a conflict of interest. For example, a threat to objectivity may be created when a professional accountant
in public practice competes directly with a client or has a joint venture or similar arrangement with a major
competitor of a client. A threat to objectivity or confidentiality may also be created when a professional
accountant in public practice performs services for clients whose interests are in conflict or the clients are in
dispute with each other in relation to the matter or transaction in question.
Depending upon the circumstances giving rise to the conflict, safeguards should ordinarily include the
professional accountant in public practice.

 Notifying the client of the firm’s business interest or activities that may represent a conflict of interest,
and obtaining their consent to act in such circumstances; or
 Notifying all known relevant parties that the professional accountant in public practice is acting for
two or more parties in respect of a matter where their respective interests are in conflict, and obtaining
their consent to so act; or
 Notifying the client that the professional accountant in public practice does not act exclusively for any
one client in the provision of proposed services (for example, in a particular market sector or with
respect to a specific service) and obtaining their consent to so act.

Additional safeguards that should also be considered include:

 The use of separate engagement teams; and

 16

 Procedures to prevent access to information (e.g., strict physical separation of such teams, confidential
and secure data filing); and
 Clear guidelines for members of the engagement team on issues of security and confidentiality; and
 The use of confidentiality agreements signed by employees and partners of the firm; and
 Regular review of the application of safeguards by a senior individual not involved with relevant
client engagements.

SECOND OPINIONS

A professional accountant in public practice who is asked to provide a second on the application of accounting,
auditing, reporting or other standards or principles to specific circumstances or transactions by or on behalf of
a company or an entity that is not an existing client may give rise to threats to compliance with the
fundamental principles. For example, there may be a threat to professional competence and due care in
circumstances where the second opinion is not based on the same set of facts that were made available to the
existing accountant, or is based on inadequate evidence. The significance of the threat will depend on the facts
and assumptions relevant to the expression of a professional judgment.

Appropriate safeguards may include seeking client permission to contact the existing accountant, describing
the limitations surrounding any opinion in communications with the client and providing the existing
accountant with a copy of the opinion. If the company or entity seeking the opinion will not permit
communication with the existing accountant, a professional accountant in public practice should consider
whether, taking all the circumstances into account, it is appropriate to provide the opinion sought.

FEES AND OTHER TYPES OF REMUNERATION

Professional Fees

Professional fees should be a fair reflection of the value of the professional services performed for the client,
taking into account:

(a) The skill and knowledge required for the type of professional services involved:
(b) The level of training and experience of the persons necessarily engaged in
performing the professional services;
(c) The time necessary occupied by each person engaged in performing the
professional services; and
(d) The degree of responsibility that performing those services entails.

The fact that one professional accountant in public practice may quote a fee lower than another is not in itself
unethical. Nevertheless, there may be a self-interest threat to professional competence and due care created if
the fee quoted is so low that it may be difficult to perform the engagement in accordance with applicable
technical and professional standards for that price.

Appropriate safeguards which may be adopted include:

 Making the client aware of the terms of the engagement and, in particular, the basis on which fees are
charged and which services are covered by the quoted fee.
 Assigning appropriate time and qualified staff to the risk

Contingent Fees

Contingent fees may give rise to a self-interest threat to objectivity. The significance of such threats will
depend on factors including:
 17

 The nature of the engagement.

 The range pf possible fee amounts.
 The basis for determining the fee.
 Whether the outcome or result of the transaction is to be reviewed by an independent third party.

Appropriate Safeguards may include:

 An advance written agreement with the client as to the basis of remuneration.

 Disclosure to intended users of the work performed by the professional accountant in public practice
and the basis of remuneration.
 Quality control policies and procedures.
 Review by an objective third party of the work performed by the professional accountant in public
practice.

Referral Fee or Commission

In certain circumstances, a professional accountant in public practice may receive referral fee or commission
relating to a client. For example, where the professional accountant in public practice does not provide the
specific service required, a fee may be received for referring a continuing client to another professional
accountant in public practice may receive a commission from a third party (e.g., software vendor) in
connection with the sale of goods or services to a client. Accepting such a referral fee or commission may give
rise to self-interest threats to objectivity and professional competence and due care.

A professional accountant in public practice sometimes pays a referral fee to obtain a client. For example,
where the client continues as a client of a professional accountant in public practice but requires specialized
services not offered by the existing accountant. The payment of such a referral fee may also create a self-
interest threat to objectivity and professional competence and due care.

A professional accountant in public practice should not pay or receive a referral fee or commission, unless the
professional accountant in public practice has established safeguards to eliminate the threats or reduce them to
an acceptable level. Such safeguards may include:

 Disclosing to the client any arrangements to pay a referral fee to another professional accountant for
the work referred.
 Disclosing to the client any arrangements to receive a referral fee for referring the client to another
professional accountant in public practice.
 Obtaining advance agreement from the client for commission arrangements in connection with the
sale by a third party of goods or services to the client.

A professional accountant in public practice may purchase all part of another firm on the basis that payments
will be made to individuals formerly owning the firm or to their heirs or estates. Such payments are not
regarded as commissions or referral fees for the purpose of this rule.

MARKETING PROFESSIONA SERVICES

When a professional accountant in public practice solicits new work through advertising or other forms of
marketing, a self-interest threat to professional behavior is created if services, achievements or products are
marketed in a way that is inconsistent with that principle.

A professional accountant in public practice should not bring the profession into disrepute when marketing
professional services. The professional accountant in public practice should be honest and truthful and should
not:
 18

 Make exaggerated claims for services offers, qualifications possessed or experience gained; or
 Make disparaging references to unsubstantiated comparisons to the work of another.

Generally, any form of advertisement is allowed.

GIFTS AND HOSPITALITY

A professional accountant in public practice, or an immediate or close family member, may be offered gifts
and undue hospitality from a client. Such an offer ordinarily gives rise to threats to compliance with the
fundamental principles. For example, self-interest threats to objectivity may be created if a gift from a client is
accepted; intimidation threats to objectivity may result from the possibility of such offers being made publicly.

Appropriate safeguards should be considered and applied as necessary to eliminate them or reduce them to an
acceptable level. When the threats cannot be eliminated or reduced to an acceptable level through the
application of safeguards, a professional accountant in public practice should not accept such an offer.

CUSTODY OF CLIENT ASSETS

A professional accountant in public practice should not assume custody of client monies or other assets unless
permitted to do so by law and, if so, in compliance with any additional legal duties imposed on a professional
accountant in public practice holding such assets.

The holding of client assets creates self-interest threat to professional behavior and may be a self-interest threat
to objectivity. To safeguard against such threats, a professional accountant in public practice entrusted with
money (or other assets) belonging to others should:

 Keep such assets separately from personal or firm assets;

 Use such assets only for the purpose for which they are intended;
 At all times, be ready to account for those assets, and any income, dividends or gains generated, to any
persons entitled to such accounting; and
 Make appropriate inquiries of the source of such assets comply with all relevant laws and regulations
relevant to the holding of and accounting for such assets.

OBJECTIVITY – ALL SERVICES

A professional accountant in public practice should consider when providing any professional service whether
there are threats to compliance with the fundamental principle of objectivity resulting from having interests in,
or relationships with, a client or directors, officers or employees. For example, a familiarity threat to
objectivity may be created from a family or close personal or business relationship.

A professional accountant in public practice who provides an assurance service is required to be independent
of the assurance client. The existence of threats to objectivity when providing any professional service will
depend upon the particular circumstances of the engagement and the nature of the work that the professional
accountant in public practice is performing.

A professional accountant in public practice should evaluate the significance of identified threats and, if they
are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them
or reduce them to an acceptable level. Such safeguards may include:

 Withdrawing from the engagement team.

 Supervisory procedures.
 Terminating the financial or business relationship giving rise to the threat.
 Discussing the issue with higher levels of management within the firm.
 Discussing the issue with those charged with governance of the client.
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INDEPENDENCE

Independence in auditing means taking an unbiased viewpoint in the performance of the examination and in
the preparation of the report. Independence is an essential element of the CPA profession. If the assurance
engagement is to enhance the credibility of an information, it is important that users of this information
perceive the professional accountant as being objective and impartial. The CPAs reports on financial
information will be of little or no value to the financial statement readers if the readers are aware that the CPAs
are not independent with respect to their clients.

Section 290 of the Code of Ethics provides a framework for identifying, evaluating and responding to threats
to independence. It outlines the threats to independence including the appropriate safeguards capable of
eliminating the threats or reducing them to an acceptable level.

There are two phases of independence; the independence of mind and independence in appearance.
Independence of mind is the auditor’s perception of his own independence. A state of mind that permits the
expression of a conclusion without being affected by influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise objectivity and professional skepticism.
Independence in appearance, on the other hand, refers to the public’s perception of the professional
accountant’s independence. It is the avoidance of facts and circumstances that are so significant that a
reasonable and informed third person would reasonably conclude that the firm’s integrity, objectivity and
professional skepticism had been compromised.

The Code of Ethics does not only require the professional accountants to maintain independence in mental
attitude, but professional accountants should also avoid circumstances which would cause the public to doubt
their independence.

Engagement Period

The members of the assurance team and the firm should be independent of the assurance client during the
period of the assurance engagement. The period of the engagement starts when the assurance team. Begins to
performs assurance services and ends when the assurance report is issued, except when the assurance
engagement is of a recurring nature. If the assurance engagement is expected to recur, the period of the
assurance engagement ends with the notification by either party that the professional relationship has
terminated or the issuance of the final assurance report, whichever comes later.

In the case of a financial statement audit engagement, the engagement period includes the period covered by
the financial statements reported on by the firm.

Independence Requirement

Not all services provided by professional accountants would require independence. Independence is required
only whenever the auditor provides assurance services. For the purpose of applying the principle of
independence, assurance engagements are classified into three namely: financial statement audit, non-audit
(not restricted) and non-audit (restricted).

 For financial statement audit engagements, the members of the assurance team, the firm and network
firms are required to be independent of the audit client.
 For non- audit assurance engagements, where the distribution of the report is not restricted, the
members of the assurance team and the firm must be independent of the assurance client.
 20

 For non-audit assurance engagements, where the distribution of the report is restricted to specified
users, the members of the assurance team must be independent of the assurance client. In addition, the
firm should not have any material financial interest in an assurance client.

The table below summarizes the independence requirements of different assurance engagements.

Member of
Assurance team Firm Network firm
Audit yes yes yes
Non-audit (not restricted) yes yes no
Non-audit (restricted) yes no no

Note: As an additional requirement for non-audit (restricted) assurance engagements, the firm should not have
any material financial interest (whether direct or indirect) in an assurance client.
 Independence Interpretations and Rulings
It is impossible to describe all situations that could impair the CPA’s independence. The following
independence interpretations and rulings, however, may serve as guidelines to professional
accountants:

Financial interest

In evaluating the significance of threat created by a financial interest, it is important to determine

materiality of the financial interest and the type of financial interest.

When evaluating the type of financial interest, consideration should be given to the fact that financial
interests range from those where the individual has no control over the investment vehicle of financial
interest held to those where individual has control over financial interest or is able to influence
investment decisions. When control exists, the financial interest should be considered direct.
Conversely, when the individual has no control over the financial interest, the financial interest should
be considered indirect.

Any direct financial interest in an assurance client, whether material or immaterial, impairs the CPA’s
independence. But in the case of an indirect financial interest, the interest must be material in order to
impair the CPA’s independence.

Loans and guarantees

A loan from, or a guarantee thereof by, an assurance client that is a financial institution will not impair
the CPA’s independence provided the loan is:
1. Immaterial to both the firm and assurance client; or
2. Made under normal lending procedures, terms and requirements of the financial
institution.
A loan to or from an assurance client that is not a financial institution or a guarantee of assurance
client’s borrowing will normally impair the CPAs independence unless the amount of the loan or
guarantee is immaterial to the firm and assurance client.

 Close Business Relationships

A close business relationship between a firm or a member of the assurance team and the assurance
client or its management, or between the firm, a network firm and a financial statement audit client,
will involve a commercial or common financial interest and may create self-interest and intimidation
threats. The following are examples of such relationships:
1. Having a material financial interest in a joint venture with the assurance client
 21

2. Arrangements to combine one or more services or products of the firm with one or more services
products of the assurance client.
3. Distribution or marketing arrangements under which the firm acts as a distributor or marketer of
the assurance client’s products or services, or the assurance client acts as the distributor or
marketer of the products or services of the firm.

Close business relationships can be considered as an indirect financial interest and therefore would
impair the professional accountant’s independence unless such financial interest is immaterial and the
relationship is clearly insignificant.

 Family and personal relationships

It is impracticable to describe in detail the significance of threats that family and personal
relationships may create. In evaluating the significance of threats create. In evaluating the
significance of threats created by family and personal relationships, the CPA should consider the
closeness of the relationship and the role of the family member within the assurance client.

Independence is impaired, when a member of an assurance team has an immediate family member
who is a director, an officer or an employee of an assurance client in a position to influence the subject
matter of the assurance engagement.

 Past employment with an assurance client

Independence is impaired if, during the period covered by the assurance report, a member of the
assurance team had served as a director, an officer or an employee of the assurance client in a position
to influence the subject matter of the assurance engagement. Hence, CPA’s cannot issue an assurance
report covering any period during which the CPA was employed in a management capacity. To do so
would violate the basic concept that one cannot act independently in evaluating his or her own work.

 Serving as an officer or director on the Board of Assurance Clients

Independence of the CPA is impaired if a partner or employee of a firm or network firm serves as an
officer or a director on the board of an assurance client. However, serving as an honorary member on
the board of an assurance client, will not impair the CPA’s independence provided that the CPA does
not participate in the management or operations of the assurance client.

 Long association with assurance clients

Using the same senior personnel and/or lead engagement partner on an assurance engagement for a
long period of time may create familiarity threat. Nevertheless, this threat can be reduced to an
acceptable level by employing adequate safeguards such as rotating the personnel and independent
quality reviews. Furthermore, when auditing financial statements of listing entities, it is required that
lead engagement partners be rotated at least once every five years.

 Provision of accounting and bookkeeping services to assurance clients.

A firm or network firm should not provide accounting and bookkeeping services for an audit client
that is a public interest entity. The provision of such services may impair the CPA’s independence, or
at least give the appearance of impairing independence.

The provision of accounting and bookkeeping services to audit clients in emergency or other unusual
situations would not impair the CPA’s independence provided:
1. The client accepts responsibility for the results of the work;
 22

2. The firm does not assume or make any managerial decisions; and
3. Personnel providing the services are not members of the assurance team

 Provision of taxation services to assurance clients

Provision of taxation services such as tax compliance, planning, provision of taxation opinions and
assistance in the solution of tax disputes will not impair the CPA’s independence.

 Provision of legal services to assurance clients

When providing legal services to an assurance client, it is important to make a distinction between
advocacy services and advisory services.

Acting as an advocate of an audit client in the resolution of a dispute or litigation where the amount
involved is material to the financial statements of an audit client will impair the CPA’s independence.
Hence, the firm should not perform this type of service for an audit client.

On the other hand, legal services to support an audit client in the execution of the transaction (e.g.
legal advice, contract support, legal due diligence and restructuring) will not impair the CPA’s
independence provided adequate safeguards are employed.

In addition, independence is usually impaired when a CPA provides corporate finance services to an
assurance client. Hence, services such as promoting or underwriting the client’s securities or
consummating business transactions in behalf of the client are not compatible with providing
assurance services.

 Recruiting Senior Management

The recruitment of a senior management for an assurance client will normally impair the CPA’s
independence specially if the firm makes the ultimate hiring decisions. On the contrary, the firm
could perform consulting services as reviewing the qualifications of the applicants and provide advice
on their suitability for the post.

 Fees- overdue

The CPA’s independence is impaired if, at the time of issuing the assurance report, the prior year’s
professional fees due from the client remains unpaid. Hence, the payment of such fees should be
required before the report is issued.

 Contingent fees

Contingent fees charged by a firm respect to an assurance engagement will impair the CPA’s
independence. Thus, a professional accountant shall not provide professional services under an
arrangement whereby no fees will be charged unless specific findings is attained.

Fees are not to be regarded as contingent if these are

1. Fixed by a court or other public authority
2. Determined based on the results judicial or government agency proceedings.

 Gifts and hospitality

A professional accountant should neither accept nor offer gifts or entertainment which might
reasonably be believed to have a significant and improper influence on their professional judgment or
 23

with those they deal with. A professional accountant’s acceptance of more than a token gift from an
assurance client impairs his or her independence.

 Actual or threatened litigation

Litigation involving the firm or a member of the assurance team and the assurance client may create
self-interest and intimidation threats. The relationship between the CPA and the client must be
characterized by honesty, truthfulness, and full disclosure. Such a relationship may not exist when
litigation places the CPA and the client’s management in an adversarial position. Hence, CPA in
litigation with a client must evaluate the situation to determine whether the significance of litigation
affects the client’s confidence in the auditor’s independence.

Multiple choice: Encircle the best answer.

1. Under the Code of Ethics, independence is most likely impaired when

a. An immediate family member of a member of the audit team is a director of the client.
b. The firm purchases goods and services from the client.
c. The firm prepares a client’s tax returns.
d. The firm and the client have an insignificant business relationship involving an immaterial
financial interest.
2. Which of the following fundamental ethical principles prohibits association of professional
accountants with reports, returns, communications or other information that is believed to contain a
materially false or misleading statement?
a. Integrity c. professional competence and due care
b. Objectivity d. confidentiality
3. If the fee quoted for a professional service is so low, it may be difficult for the CPA to perform the
engagement in accordance with applicable technical and professional standards for that price. This
situation may create a self-interest threat to
a. Professional competence and due care
b. Objectivity
c. Integrity
d. Professional behavior
4. As far as financial statements are concerned, this is the attribute that most clearly differentiates an
external auditor from client management:
a. Integrity c. Independence
b. Competence d. Updated information
5. Integrity is required of a CPA performing:
a. Audits, but not any other professional services
b. All assurance services, but not other professional services.
c. All assurance and tax services, but not other professional services.
d. All professional services.
6. Which of the following statements best describes why the CPA profession has deemed it essential to
promulgate a code of professional ethics and to establish a mechanism for enforcing observation of the
Code?
a. A distinguishing mark of a profession is its acceptance of responsibility to the public
b. A pre-requisite to success is the establishment of an ethical code that primarily defines the
professional’s responsibility to clients and colleagues.
c. A requirement of most state laws calls for the profession to establish a code of ethics.
 24

d. An essential means of self-protection for the profession is the establishment of flexible ethical
standards by the profession.
7. The fundamental principle of integrity requires a CPA to
a. Be straightforward and honest in performing professional services.
b. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to
override objectivity.
c. Perform professional services with due care, competence and diligence
d. Act in a manner consistent with the good reputation of the profession and refrain from any
conduct which might bring discredit to the profession.

8. The fundamental principle requires a CPA not to use or disclose information acquired during the
course of performing professional services without proper and specific authority:
a. Objectivity c. Professional behavior
b. Professional competence and due care d. confidentiality
9. These are policies and procedures designed to eliminate or to reduce threats to fundamental principles
to an acceptable level.
a. Internal controls c. safeguards
b. Control activities d. segregation of duties
10. Objectivity in the Code refers to a CPA’s ability:
a. To maintain an impartial attitude on all matters which come under the CPA’s review.
b. To independently distinguish between accounting practices that are acceptable and those that
are not.
c. To be unyielding in all matters dealing with auditing procedures.
d. To independently choose between alternate accounting principles and auditing standards.
11. Under the Code of Ethics, independence is most likely impaired when
e. An immediate family member of a member of the audit team is a director of the client.
f. The firm purchases goods and services from the client.
g. The firm prepares a client’s tax returns.
h. The firm and the client have an insignificant business relationship involving an immaterial
financial interest.
12. Familiarity threat could be created under the following circumstances, except
a. A member of the engagement team is the spouse of the accounting manager of the client.
b. A member of the engagement team is the spouse of one of the members of the Board of Directors
of the client.
c. Senior personnel of the engagement team having a long association with the assurance client.
d. A professional accountant accepting gifts from a client whose value is inconsequential of trivial.
13. Which of the following fundamental ethical principles prohibits association of professional
accountants with reports, returns, communications or other information that is believed to contain a materially
false or misleading statement?
c. Integrity c. professional competence and due care
d. Objectivity d. confidentiality
14. An audit client’s description that its financial statements are prepared in accordance with a particular
applicable financial reporting framework is appropriate only if
a. The financial statements are in substantial compliance with that framework.
b. The financial statements adequately disclose the significant accounting policies selected and
applied.
c. The terminology used in the financial statements, including the title of each financial statement, is
appropriate.
d. The financial statements comply with all the requirements of that framework that are effective
during the period covered by the financial statements.
15. Which of the following circumstances may create self-interest threats for a professional accountant in
public practice?
 25

a. A financial interest in a client or jointly holding a financial interest with a client.

b. Performing a service for a client that directly affects the subject matter of the assurance
engagement.
c. Being threatened with litigation.
d. Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.
16. When financial statements of the prior year are presented together with those of the current year, the
current auditor should express an audit opinion on the financial statements of the prior year if
a. The current auditor has audited the statements of the prior year.
b. The client requests the current auditor to review the financial statements of the prior year and
report thereon.
c. The prior auditor previously disclaimed an opinion on the prior year financial statements.
d. The statements of the prior year were unaudited.
17. An accountant may perform an agreed-upon procedures engagement regarding prospective financial
statements provided that
a. Use of the report is to be restricted to the specified users.
b. The prospective financial statements are also examined.
c. Responsibility for the sufficiency of the procedures performed is taken by the accountant.
d. Negative assurance is expressed on the prospective financial statements taken as a whole.
18. An auditor’s report on financial statements prepared in accordance with the financial reporting provisions
of a contract (that is, a special purpose framework) to comply with the provisions of that contract should
include all of the following except
a. An opinion as to whether the financial statements are presented fairly, in all material respects, in
accordance with the financial reporting provisions of the contract.
b. A statement that indicates the basis of accounting used.
c. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
d. Reference to the note to the financial statements that describes the basis of presentation.
19. A CPA has been engaged to perform review services for a client. Identify which of the following is a
correct statement.
a. The CPA must perform the basic audit procedures necessary to determine that the statements are
in conformity with the applicable financial reporting framework.
b. The financial statements are primarily representations of the CPA.
c. The CPA may prepare the statements from the books but may not assist in adjusting and closing
the books.
d. The CPA is performing an assurance engagement other than an audit of the financial statements.

20. Which of the following procedures is usually the first step in reviewing the financial statements of an
entity?
a. Make preliminary judgments about risk and materially to determine the scope and nature of the
procedures to be performed.
b. Obtain a general understanding of the entity’s organization, its operating characteristics, and its
products or services.
c. Assess the risk of material misstatement arising from fraudulent financial reporting and the
misappropriation of assets.
d. Perform a preliminary assessment of the operating efficiency of the entity’s internal control
activities.
21. A continuing accountant is one who has been engaged to audit, review, or compile and report on the
financial statements of the current period and one or more consecutive periods immediately prior to the current
 26

period. A continuing accountant who performs the same or a higher level of service with respect to the
financial statements of the current period should
a. Update his/her report on the financial statements of a prior period.
b. Disclaim any assurance on the prior periods’ statements.
c. Reissue the report on the financial statements of a prior period.
d. Express an adverse opinion with respect to the prior period’s financial statements.
22. The Philippine Standards on Assurance Engagements (PSAEs) are to be applied in
a. Assurance engagements dealing with subject matters other than historical financial information.
b. Compilation engagements and agreements to apply agreed-upon procedures to information.
c. The audit or review of historical financial information.
d. Assurance engagements dealing with historical financial information.
23. The report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-upon
procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of
the work performed. The report of factual findings should not contain
a. Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon procedures).
b. Identification of the purpose for which the agreed-upon procedures were performed.
c. A description of the auditor’s factual findings including sufficient details of errors and exceptions
found.
d. Statement that the procedures performed constitute an audit and, as opinion is expressed.
24. The government agency is responsible for the registration of corporations and partnerships, as well as
monitoring of compliance with the Corporation Code, Civil Code provisions on partnerships, Foreign
Investments Act, and other related laws.
a. Bangko Sentral ng Pilipinas (BSP)
b. Securities and Exchange Commission (SEC)
c. Bureau of Internal Revenue(BIR)
d. Philippine Stock Exchange (PSE)

EVALUATION

1. Discussed the fundamentals principles of Code of Professional Ethics for CPA?

2. Explain the threats to fundamental principles?

3. Give the specific safeguards to these threats to fundamental principles.

4. Cite an example like cases inside the company (the actual situation)?
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Lesson 3. Good Working Condition Work Values: Basic Employee Right

Your newest recruit, Brandon, has been working with your team for several weeks now, and you're wondering
if you made a mistake in hiring him.

His workplace values are very different from those of your team, and from the values of your organization as a
whole.

Your core team members care passionately about doing work that helps others. They value teamwork, and
they're always willing to pitch in or stay late if someone is behind on an important deadline. This has led to a
culture of trust, friendliness, and mutual respect within the team.

Brandon, on the other hand, wants to climb the corporate ladder. He's ambitious and ruthless, and he wants to
focus on projects that will either build his expert status or achieve a public win. The problem is that his core
career values clash with the core values of your team. This divide is causing infighting and bad feeling within
the group.

We all have our own workplace values. And, while you can't always make sure that each person's values are
perfectly aligned, you can try to hire people who fit. In this article, we'll look at how you can better recognize
and understand these values – the attitudes that "make them tick."
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Importance of Workplace Values

Your workplace values are the guiding principles that are most important to you about the way that you work.
You use these deeply held principles to choose between right and wrong ways of working, and they help you
make important decisions and career choices.

Some (possibly conflicting) examples of workplace values include:

 Being accountable.

 Making a difference.

 Focusing on detail.

 Delivering quality.

 Being completely honest.

 Keeping promises.

 Being reliable.

 Being positive.

 Meeting deadlines.

 Helping others.

 Being a great team member.

 Respecting company policy and rules, and respecting others.

 Showing tolerance.

Your organization's workplace values set the tone for your company's culture, and they identify what your
organization, as a whole, cares about. It's important that your people's values align with these.

When this happens, people understand one another, everyone does the right things for the right reasons, and
this common purpose and understanding helps people build great working relationships. Values alignment
helps the organization as a whole to achieve its core mission

What is working condition?

Working condition refers to the safety and healthfulness of the workplace, particularly the physical work
environment and the procedures followed in performing the work. Labor history is a witness to some poor and
even dangerous working conditions, long working hours, want of needed vacations, insufficient safety
measures, exploitation of women, and sweatshops have been introduced during the industrial revolution.

The term factory generally refers to a large establishment employing scares of people involved in mass
production of industrial or consumer goods. Sweatshops, on the other hand, is usually a small manufacturing
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establishment, for instance, a garment factory, where tired employees work long hours under substandard
conditions and for a low wages.

Working conditions comprise the multiple aspects of the workplace, such as the structure of the workforce,
physical environment, working time issues, organizational environment (job content and job control), social
environment and psychosocial risks, and work –related outcomes. The structure of the workforce consist of
sector affiliation, employment status and size of the company organization.

The physical environment involves exposure to dangerous substances, heavy loads, and corporal risks. The
working time issues include weekly hours, commuting time, shift work, and a typical work patterns. In the
organizational environment, job content refers to repetitive tasks, and pace of work, while the social
environment refers to psychosocial risks including harassment and discrimination in offices and factories.

Work- related outcomes are concerned with perceptions of health risk, work absences and job satisfaction. All
of these are factors that directly or indirectly affect working conditions. The insurance industry has regularly
classified some jobs to be more risky to health and safety than others. For instance, pilots, flight attendants,
military personnel, police officers, firemen, security guards, drivers, and seamen are doing jobs that carry
greater amount of corporal risks than other jobs, where such risk factor is considered in the compensation
package.

What is the so- called systems approach in the workplace?

An important component of working conditions is an area of safety engineering and public health that deals
with the protection of workers’ health through control of the work environment to reduce or eliminate hazards.
Business managers know too well that industrial accidents and unsafe working conditions can result in
temporary or permanent injury, illness, or even death. Unsafe working conditions also take a toll in terms of
reduced efficiency and, in the long run, loss in productivity.

In recent years, engineers have attempted to develop a systems approach (termed safety engineering) to
industrial accident prevention. Because accidents arise from the interaction of workers and their work
environments, both must be carefully examined to reduce the risk of injury. Injury can result from poor
working conditions, the use of improperly designed equipment and tools, fatigue, distraction, lack of skill, and
risk taking.

Are good working conditions a factor to business success?

Companies are seen to have an increasing interest in being known as a company where the current and
prospective employees view workplace policies and practices favorably. Observers say there is a positive
relationship between socially responsible workplace programs and business success.

Nike, for instance, regularly monitors its supply chain and subcontractors in India, Pakistan, and other
developing nations, to make sure that they provide good working conditions for their workers.

Among the benefits of this positive relationship are reduced operating costs, enhanced financial performance,
increased stock value, increased productivity, enhanced employee commitment and loyalty, the ability to
attract and retain talented employees, reduced absenteeism, and protection and enhancement of reputation. In
this particular sense, working conditions of the highest standards can become a major factor in employee
productivity and eventually in the financial performance of any business.

Equal Employment Opportunities and Affirmative Action

What do you mean by equal job opportunity, job discrimination, and affirmative action?
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Equal job opportunity is a labor policy that prohibits business from discriminating against otherwise-qualified
people with disabilities. Employers must not discriminate in job application procedures; the hiring,
advancement, or discharge of employees; employee compensation; job training; and any other terms,
conditions, privileges of employment.

Job discrimination refers to the unjust act of differentiating one group of people not on the basis of personal
merit but on the basis of partiality or bias. In the workplace, when you distinguish between two people on the
basis of non-job criteria, then that act may constitute a pattern of job discrimination.

Affirmative action involves polices to increase opportunities for ethnics minorities by favoring them in hiring
and promotion, college admissions, and the awarding of government contracts. Depending upon the situation,
“minorities” might include any underrepresented group, especially one defined by race, ethnically or gender.

In general, government, businesses, or educational institutions undertake affirmative action to remedy the
effects of past discrimination against a group, whether by a specific entity, such corporation or by society as a
whole.

What is the right to work?

The right to work is part and parcel of the right to life and the duty to sustain it. The right to work is
fundamental because it flows from nature, as it is born in every person. The human person is created to work,
to till the soil and raise cattle, to subdue the earth and its natural resources. Social responsibility, which is both
corporate and governmental, means making an attempt to fill up this innate vacuum in the human person.

What is the right to work fundamental to all?

1. People work to survive. The first moral – philosophical reason why people have to work is to
satisfy some survivals needs, those unavoidable physical and biological necessities in life. There
is no need to explain why basic survival requirements necessarily include the compulsion to live
with honor and dignity. How can society expect someone to live with honor and dignity when
that someone does not even have adequate work?
2. The second reason is the natural obligation to support our dependents. With work,
entrepreneurship, or any means of livelihood, we provide shelter, education, and daily bread for
our dependent. What happens now if the breadwinner is jobless?
3. And the third reason is psychological, which means people work to gain and maintain self-
respect. In this sense, work becomes the highway to develop oneself. With self-development
comes our calling to cooperate in social progress, peace and order, and betterment of society.
Needless to say, joblessness means restlessness, in as much as joblessness breeds all sorts of
crime, looting, mob rule, and social disorder.

The right to work is so fundamental that even if there is a just cause for dismissal and after due process any
legislative court may rule against dismissal from work due to the fact that the right to work is a basic privilege
very much related to the right to life.

Work of human hands/mind. Something beautiful happens when the human person works with his mind,
left brain, imagination, or muscle. Laborers do their jobs not only for money but for personal achievement,
growth, satisfaction and other social values. The market system itself and the business processes are greatly
benefited when these immaterial values that flow from human labor are fully recognized.

What is the right to equal employment opportunities?

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Equality in employment embraces all without discrimination: women, the aged, and racial minorities.
Employers cannot and should not discriminate in job application procedures; the hiring, advancement, or
discharge of employees; employee compensation; job training; and any other terms, conditions, and privileges
of employment.

The next level is that the right to equal job opportunity encourages businesses to employ qualified people with
disabilities. This human resources management policy is based on legal imperatives and on natural laws (life
and dignity of the human person).

The virtue of justice obliges the government and every employer or company to maximize benefits for them
and this means more business institutions must be willing to share bountiful resources to the marginalized
members of society. In some countries, for example, disabled and old members of society are given the chance
to work in fast-food chains and some factories on certain days of the week, and given the opportunity to
receive appropriate salaries.

In the Philippines and other countries, there are stores and cafeterias whose servers and waitresses are deaf and
mute. San Miguel Corporation once employed disabled people in its packaging and bottling sections.
McDonald’s restaurants in Hongkong, Singapore, and other Asian cities employ senior citizens.

What is the right to just wage and compensation?

In legal sense, the just wages is the minimum wage that will not only enable the worker to meet the bare cost
of living, but will also provide a means of desirable improvements in the quality of life. Just wage is not only
something to get by but also the means to enjoy a good quality of life.

For the wages to be just, some allowances for contingencies should be considered because common sense
imposes, for instance, that wage may increase accordingly when prices of commodities increase. The
minimum wage is set by the government to protect low-paid employees against all types of exploitation by
setting a floor in which their remuneration cannot further fall.

Labor contracts must always be determined by justice, and by one principle greater and more ancient than the
free consent of contracting parties: that the wage should not be less than enough to support a worker. This also
includes the means of livelihood for his wife and children.

Everyone has a basic right to just and proper wage, determined according to some criteria of justice and of
course in proportion to the available resources. A just wage is a means to provide for the worker and his
family a manner of living in keeping with the dignity of the human person. Anything less is morally
unacceptable.

What is the basic employee right to security of tenure?

Security of tenure is a basic right of both public and private employees. Security of tenure means that, in case
of regular employment, the services of any one of the workers cannot just be determined except for a just cause
or after a due process. The employee right to due process consists of an objective evaluation of his/ her case, a
fair hearing and a chance to appeal, a process very fundamental in firing and even in demoting. This right is
both legal and moral.

Do employees have the right to be trained, to grow, and to develop?

Change (like taxes and death) is inevitable. Change is what ancient philosophers and modern-hi-tech experts
refer to as the only permanent thing in the world. “planned changes within the organization (like expansion,
acquisition, downsizing, or reengineering) and unplanned changes (political turmoil, natural calamities,
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terrorist attacks, regional recession, ect.) make it necessary for all personnel to update their competencies or
acquire new ones.

Change can actually make the knowledge and skills one has learned today obsolete in the near future, and that
is the reason why there is a need to train. The training is an empowerment that consists of a few simple step
and a lot of persistence and it is both your right and duty.

EVALUATION

1. Enumerates and discuss the basic right employees’ rights?

2. Cites an example like cases (actual cases inside the company)?

3. Discuss briefly the working condition of workers or employee needed in their jobs?

Lesson 4: Auditor’s Responsibility

Auditor’s Responsibility for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with PSAs will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of users taken
on the basis of these financial statements.
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Chapter 4

The fair presentation of the financial statements in accordance with the applicable financial reporting
standards is the responsibility of the client’s management. The auditor’s responsibility is to design the
audit to provide reasonable assurance of detecting material misstatements in the financial statements.
These misstatements may emanate from
1. Error,
2. Fraud, and
3. Noncompliance with Laws and Regulations

ERROR

The term “error refers to unintentional misstatements in the financial statements, including the
omission of an amount or a disclosure, such as:

 Mathematical or clerical mistakes in the underlying records and accounting data.

 An incorrect accounting estimate arising from oversight or misinterpretation of facts.
 Mistake in the application of accounting policies.

FRAUD

Fraud refers to intentional act by one or more individuals among management, those charged with
governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal
advantage. Although fraud is a broad legal concept, the auditor is primarily concerned with fraudulent
acts that cause a material misstatement in the financial statements.

Types of Fraud

There are two types of fraud that are relevant to financial statement audit. Misstatement resulting
from fraudulent financial reporting and misappropriation of assets.
1. Fraudulent financial reporting involves intentional misstatements or omissions of
amounts or disclosures in the financial statements to deceive financial statement users.
This type of fraud is also known as management fraud because it usually involves
members of management or those charged with governance. This may involve
 Manipulation, falsification or alteration of records or documents
 Misrepresentation in or intentional omission of the effects of transactions from
records or documents
 Recording of transactions without substance
 Intentional misapplication of accounting policies
2. Misappropriation of assets or employee fraud involves theft of an entity’s assets
committed by the entity’s employees. This may include
 Embezzling receipts
 Stealing entity’s assets such as cash, marketable securities, and inventory
 Lapping of accounts receivable

This type of fraud is often accompanied by false or misleading records or documents in

order to conceal the fact that the assets are missing.

Fraud involves motivation to commit it and a perceived opportunity to do so. For

example, an employee might be motivated to steal company’s assets because this
employee lives beyond his means. Also, a member of management may be forced to
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manipulate the financial statements in order to meet an overly optimistic projection. A

perceived opportunity to commit fraud may exist when there is no proper segregation of
duties among employees or when management believes that internal control can be easily
circumvented.

The primary factor that distinguishes fraud from error is whether the underlying cause of
misstatement in the financial statements is intentional or unintentional. Although the
auditor may be able to identify opportunities for fraud to be perpetrated, it is often
difficult, if not impossible, for the auditor to determine intent, particularly in matters
involving management judgment, such as accounting estimates and the appropriate
application of accounting principles. Consequently, the auditor’s responsibility for the
detection of fraud and error is essentially the same.

Responsibility of Management and those Charged with Governance

The responsibility for the prevention and detection of fraud and error rests with both management and
those charged with the governance of the entity. In this regard, PSA 240 requires

 Management to establish a control environment and to implement internal control policies

and procedures designed to ensure, among others, the detection and prevention of fraud and
error.
 Individuals charged with governance of an entity to ensure the integrity of an entity’s
accounting and financial reporting systems and that appropriate controls are in place.

Auditor’s Responsibility

Although the annual audit of financial statements may act as deterrent to fraud and error, the auditor is
not and cannot be held responsible for the prevention of fraud and error. The auditor’s responsibility
is to design the audit to obtain reasonable assurance that the financial statements are free from
material misstatements, whether caused by error or fraud.

PLANNING PHASE

1. When planning an audit, the auditor should make inquiries of management about the possibility
of misstatements due to fraud and error. Such inquiries may include
 Management’s assessment of risks due to fraud
 Controls established to address the risks
 Any material error or fraud that has affected the entity or suspected fraud that the entity is
investigating

The auditor’s inquiries of management may provide useful information concerning the risk of
material misstatements in the financial statements resulting from employee fraud. However, such
inquiries are unlikely to provide useful information regarding the risk of material misstatements in
the financial statements resulting from management fraud. Accordingly, the auditor should also
inquire of those individual in charge of governance to seek their views on the adequacy of
accounting and internal control systems in place, the risk of fraud and error, and the integrity of
management.
2. The auditor should assess the risk that fraud or error may cause the financial statements to contain
material misstatements. In this regards, PSA 240 requires the auditor to specifically “ assess the
risk of material misstatements due to fraud and consider that assessment in designing the audit
procedures to be performed.”
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The fact that fraud is usually concealed can make it very difficult to detect. Nevertheless, using
the auditor’s knowledge of the business, the auditor may identify events or conditions that
provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already
have occurred. Such events or conditions are referred to as “fraud risk factors”. Fraud risk
factors do not necessarily indicate the existence of fraud, however, they often have been present
in circumstances where frauds have occurred. Examples of fraud risk factors taken from PSA
240 are set out at the end of this chapter.

Judgements about the increased risk of material misstatements due to fraud may influence the
auditor’s professional judgments in the following ways:

 The auditor may approach the audit with a heightened level of professional skepticism.
 The auditor’s ability to assess control risk at less than high level may be reduced and the
auditor should be sensitive to the ability of the management to override controls.
 The audit team may be selected in ways that ensure that the knowledge, skill, and ability of
personnel assigned significant responsibilities are commensurate with the auditor’s
assessment of risk.
 The auditor may decide to consider management selection and application of significant
accounting policies, particularly those related to income determination and asset valuation.

TESTING PHASE

3. During the course of the audit, the auditor may encounter circumstances that may indicate the
possibility of fraud or error. For example, there are discrepancies found in the accounting
records, conflicting or missing documents or lack of cooperation from management. In these
circumstances, the auditor should perform procedures necessary to determine whether material
misstatement exist.
4. After identifying material misstatement in the financial statements, the auditor should consider
whether such a misstatement resulted from a fraud or an error. This is important because errors
will only result to an adjustment of financial statements but fraud may have other implications on
an audit.

If the auditor believes that the misstatement is, or may be the result of fraud, but the effect on the
financial statements is not material, the auditor should
 Refer the matter to the appropriate level of management at least one level above those
involved, and
 Be satisfied that, given the position of the likely perpetrator, the fraud has no other
implications for other aspects of the audit or that those implications have been adequately
considered.

However, if the auditor detects a material fraud or has been unable to evaluate whether the effect on
financial statement is material or immaterial, the auditor should

 Consider implication for other aspects of the audit particularly the reliability of management
representations.
 Discuss the matter and the approach to further investigation with an appropriate level of that
is at least one level above those involved,
 Attempt to obtain evidence to determine whether a material fraud in fact exists and, if so,
their effect, and
 Suggest that the client consult with legal counsel about questions of law.

COMPLETION PHASE
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5. The auditor should obtain a written representation from the client’s management that
 It acknowledges its responsibility for the implementation and operations of accounting and
internal control systems that are designed to prevent and detect fraud and error;
 It believes the effects of those uncorrected financial statement misstatements aggregated by
the auditor during the audit are immaterial, both individually and in the aggregate to the
financial statements taken as whole. A summary of such items should be included in or
attached to the written representation;
 It has disclosed to the auditor all significant facts relating to any frauds or suspected frauds
known to management that may have affected the entity; and
 It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
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