Code of Ethics For Professional Accountants

Page 1 of 16 | AUD Handouts No.
02
CODE OF ETHICS
RAYMUND FRANCIS A. ESCALA, CPA, MBA
CODE OF ETHICS FOR PROFESSIONAL

ACCOUNTANTS
RAYMUND FRANCIS A. ESCALA, CPA MBA
INTRODUCTION OF THE CODE

PURPOSE
The Code has been published with a purpose of reflecting the accountancy profession’s recognition of its public interest
responsibility. With this, the following overarching requirements have been set out in the Code to exemplify this
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responsibility:
Overarching
Discussion
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Requirement
Fundamental principles of ethics for These principles establish the standard of behavior expected of a professional
professional accountants accountant (COBID).
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1. Integrity,
2. Objectivity,
3. Professional competence and Due care,
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4. Confidentiality, and
5. Professional Behavior.
Conceptual Framework The professional accountants shall apply the framework in order to identify,
evaluate and address threats to compliance with the fundamental principles.
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International Independence Established for audits, reviews and other assurance engagements regarding threats
Standards to independence specific to these engagements.
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STRUCTURE
Presented below is a diagram representing the materials found on the new edition of the Code:
PART 1: Complying with the Code, Fundamental Principles and Conceptual Framework
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Part 2: Professional Accountants in

Part 3: Professional Accountants in Public Practice (PAPPs)
Business (PAIBs)
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Part 4B: Independence for Assurance

Part 4A: Independence for Audit and
Engagements other than Audit and
Review Engagements
Review Engagements
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Notes:
 Part 1 is applicable to all professional accountants (PAs).
 Part 2 is applicable to PAIBs when performing professional activities. PAIBs include PAs engaged or contracted in
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an executive or non-executive capacity in, for example:

o Commerce, industry or service.
o The public sector.
o Education.
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o The not-for-profit sector.

o Regulatory or professional bodies.
Part 2 is also applicable to PAPPs when performing professional activities pursuant to their relationship with the
firm, whether as a contractor, employee or owner.
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 Part 3 is applicable to PAPPs.

 Parts 4A and 4B comprise the International Independence Standards.
Part Effective Date

Parts 1, 2 and 3 As of June 15, 2019
Part 4A - relating to independence for audit and review Effective for audits and reviews of financial statements for
engagements periods beginning on or after June 15, 2019.
Part 4B - relating to independence for assurance Effective for periods beginning on or after June 15, 2019;
engagements with respect to subject matter covering periods otherwise, it will be effective as of June 15, 2019.
Note: Early adoption is permitted.
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CODE OF ETHICS
PART 1 - COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK
Complying with the Code
A PA shall comply with the Code. In the case that laws or regulations preclude a PA from complying with certain parts
of the Code, the laws and regulations shall prevail and the PA shall comply with all other parts of the code. This
requirement relates to the fundamental principle of professional behavior which requires the PA to comply with Code.
Breaches of the Code

Presented below is a table of requirements pertaining to breaches of compliance with the Code.
Breach Requirements
of International Independence Refer to Parts 4A and 4B of the Code.
Standards
of any other provision of the The PA who identifies a breach of any other provision of the Code shall (EAR):
Code 1. Evaluate the significance and impact of the breach; and
2. Take whatever Actions might be available immediately to address the
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consequences; and
3. Determine whether to Report the breach to the relevant parties.
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Fundamental Principles
There are five fundamental principles of ethics (COBID) that PAs should comply with as presented below:
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Fundamental Principle Definition
Integrity To be straightforward and honest in all professional and business relationships.
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Objectivity Not to compromise professional or business judgments because of bias, conflict of interest or
undue influence of others.
Professional (1) To attain and maintain professional knowledge and skill at the level required to ensure that a
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Competence and Due client or employing organization receives competent professional service; and (2) to act diligently
Care and in accordance with applicable technical and professional standards.
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Confidentiality To respect the confidentiality of information acquired as a result of professional and business
relationships.
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A professional accountant shall continue to comply with the principle of confidentiality even after
the end of the relationship between the accountant and a client or employing organization.
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Professional Behavior To comply with relevant laws and regulations and avoid any conduct that the professional
accountant knows or should know might discredit the profession.
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Conceptual Framework
The environment and circumstances in which a PA renders its services and activities may create threats to compliance
with the fundamental principles as previously discussed. As such, the conceptual framework has been set out on the code
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to set out requirements on how to appropriately deal with these threats.
Three-step Approach of the Conceptual Framework

Details of the three-step approach mentioned previously are presented on the below table:
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Step Discussion
Identifying threats The PA shall identify the threats to compliance with fundamental principles which fall into one or
more of the following categories (I-FASS):
 Self-interest threat – the threat that a financial or other interest will inappropriately influence
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a PA’s judgment or behavior;

 Self-review threat – the threat that a professional accountant will not appropriately evaluate
the results of a previous judgment made;
 Advocacy threat – the threat that a professional accountant will promote a client’s or
employing organization’s position to the point that the accountant’s objectivity is
compromised;
 Familiarity threat – the threat that due to a long or close relationship with a client, or
employing organization, a professional accountant will be too sympathetic to their interests
or too accepting of their work; and
 Intimidation threat – the threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue
influence over the accountant.

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CODE OF ETHICS
Evaluating threats The PA shall evaluate whether such threat is at an acceptable level. Examples of conditions, policies
and procedures relevant in evaluating the levels of the threat are as follows:
 Corporate governance requirements.
 Educational, training and experience requirements for the profession.
 Effective complaint systems which enable the professional accountant and the general
public to draw attention to unethical behavior.
 An explicitly stated duty to report breaches of ethics requirements.
 Professional or regulatory monitoring and disciplinary procedures.
Addressing threats Threats identified that are not at an acceptable level must be addressed in one of three ways (ESE):
a. Eliminating the circumstances, including interests or relationships, that are creating the
threats;
b. Applying safeguards, where available and capable of being applied, to reduce the threats to
an acceptable level; or
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c. Declining or ending the specific professional activity.
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Forming Overall Conclusion
In forming an overall conclusion, through the three-step approach of the Conceptual Framework, the PA is required to
“step back” through the following actions:
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1. Review any significant judgments made or conclusions reached; and
2. Use the reasonable and informed third party test.
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PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESS (PAIBs)
PAIBs play an important role as to the reliability of information that investors, creditors, employing organizations and other
sectors of the business community, as well as governments and the general public, may rely upon. As such, the second
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part of the Code details on how PAIBs should apply the Conceptual Framework approach presented in Part 1. It also
includes the discussion of the following circumstances that may create threats to compliance with fundamental principles:
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Main Fundamental Principle/s
Circumstance Main Threat/s Created
Affected
Conflict of Interest Self-interest Objectivity
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Preparation and presentation of information Self-interest; intimidation All

Acting with sufficient expertise Professional competence and due
Self-interest
care
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Financial Interests, Compensation and Incentives Self-interest Objectivity; Confidentiality

Inducements, Including Gifts and Hospitality Self-interest; Familiarity; Integrity; Objectivity; Professional
Intimidation Behavior
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Responding to Non-compliance with Laws and

Self-interest; Intimidation Integrity; Professional behavior
Regulations (NOCLAR)
Pressure to Breach the Fundamental principles Intimidation All
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As presented previously, PAIBs should comply with the fundamental principles and apply the three-step approach
introduced in the conceptual framework.
Three-step Approach for PAIBs
Step Discussion
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Identifying threats Examples of facts and circumstances that may create threats for PAIBs are as follows:
 Self-interest threat
o A PA holding a financial interest in, or receiving a loan or guarantee from, the
employing organization.
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o A PA participating in incentive compensation arrangements offered by the

employing organization.
o A PA having access to corporate assets for personal use.
o A PA being offered a gift or special treatment from a supplier of the employing
organization.
 Self-review threat
o A PA determining the appropriate accounting treatment for a business combination
after performing the feasibility study supporting the purchase decision.
 Advocacy threat
o A PA having the opportunity to manipulate information in a prospectus in order to
obtain favorable financing.
 Familiarity threat
o A PA being responsible for the financial reporting of the employing organization
when an immediate or close family member employed by the organization makes


CODE OF ETHICS
decisions that affect the financial reporting of the organization.

o A PA having a long association with individuals influencing business decisions.
 Intimidation threat
o A PA or immediate or close family member facing the threat of dismissal or
replacement over a disagreement about:
 The application of an accounting principle.
 The way in which financial information is to be reported.
o An individual attempting to influence the decision-making process of the PA
Evaluating threats PAIB’s evaluation of the level of threat is greatly influenced by the work environment within the
employing organization and its operating environment. Examples of which are as follows:
 Leadership - that stresses the importance of ethical behavior and the expectation that
employees will act in an ethical manner.
 Policies and procedures - that empower and encourage employees to communicate ethics
issues that concern them to senior levels of management without fear of retribution; to
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implement and monitor the quality of employee performance.
 Systems of corporate oversight
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 Strong internal controls
 Recruitment procedures - that emphasize the importance of employing high caliber
competent personnel.
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 Timely communication of policies and procedures - including any changes to them, to
all employees, and appropriate training and education on such policies and procedures.
 Ethics and code of conduct policies.
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Addressing threats Refer to discussions of conflict of interest and pressure to breach fundamental principles for the
examples of actions that might address threats.
Note: In extreme situations, if the circumstances that created the threats cannot be eliminated and
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safeguards are not available or capable of being applied to reduce the threat to an acceptable level,
it might be appropriate for a PA to resign from the employing organization.
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Communicating with Those Charged with Governance (TCWG)
The PA shall determine the appropriate individuals within the employing organization’s governance structure with whom to
communicate. The PA may consider:
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1. The nature and importance of the circumstances; and

2. The matter to be communicated.
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PART 3 – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE (PAPPs)

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PAPPs play an essential role in the efficiency and effectiveness of financial markets and reliability of information. This is
manifested through the professional services that they undertake with various clients across different types of industries.
The third part of the Code details on how PAPPs should apply the Conceptual Framework approach presented in Part 1.
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It also includes the discussion of the following circumstances that may create threats to compliance with fundamental
principles:
Main Fundamental Principle/s
Circumstance Main Threat/s Created
Affected
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Conflict of Interest Self-interest Objectivity

Professional Appointments All All
Second Opinions Professional Competence and Due
Self-interest
Care
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Fees and other types of Remuneration Professional Competence and Due

Self-interest
Care; Objectivity
Inducements, Including Gifts and Hospitality Self-interest; Familiarity; Integrity; Objectivity and Professional
Intimidation Behavior
Custody of Client Assets Self-interest Objectivity; Professional Behavior
Responding to Non-compliance with Laws and Self-interest; Intimidation
Integrity; Professional behavior
Regulations (NOCLAR)


CODE OF ETHICS
Three-step Approach for PAPPs

Step Discussion
Identifying Examples of facts and circumstances that may create threats for PAPPs when undertaking professional
threats services are as follows:
 Self-interest threat
o A PA having a direct financial interest in a client
o A PA quoting a low fee to obtain a new engagement
o A PA having a close business relationship with a client.
o A PA having access to confidential information that might be used for personal gain.
o A PA discovering a significant error when evaluating the results of a previous professional
service performed by a member of the accountant’s firm.
 Self-review threat
o A PA issuing an assurance report on the effectiveness of the operation of financial systems
after implementing the systems.
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o A PA having prepared the original data used to generate records that are the subject matter
of the assurance engagement.
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 Advocacy threat
o A PA promoting the interests of, or shares in, a client.
o A PA acting as an advocate on behalf of a client in litigation or disputes with third parties.
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o A PA lobbying in favor of legislation on behalf of a client.
 Familiarity threat
o A PA having a close or immediate family member who is a director or officer of the client.
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o A director or officer of the client or an employee in a position to exert significant influence
over the subject matter of the engagement, having recently served as the engagement
partner.
o An audit team member having a long association with the audit client.
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 Intimidation threat
o A PA being threatened with dismissal from a client engagement or the firm because of a
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disagreement about a professional matter.
o A PA feeling pressured to agree with the judgment of a client because the client has more
expertise on the matter in question.
o A PA being informed that a planned promotion will not occur unless the accountant agrees
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with an inappropriate accounting treatment.

o A PA having accepted a significant gift from a client and being threatened that acceptance of
this gift will be made public.
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Evaluating PAPP’s evaluation of the level of threat is greatly influenced by the conditions, policies and procedures
threats relating to the following:
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 Client and its Operating Environment – level of threat may be impacted by whether the client
is:
o An audit client and whether the audit client is a public interest entity (PIE);
o An assurance client that is not an audit client; or
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o A non-assurance client
 Firm and its Operating Environment – Examples of the conditions, policies and procedures
are:
o Leadership of the firm
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o Policies or procedures on ethics

o Compensation, performance appraisal and disciplinary policies and procedures
o Management of the reliance on revenue received from a single client.
o Engagement partner’s authority
o Educational, training and experience requirements.
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o Processes to facilitate and address internal and external concerns or complaints

Addressing Sample safeguards that may address threats include:
threats  Assigning additional time and qualified personnel
 Having an appropriate reviewer
 Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client might address self-review, advocacy or familiarity
threats.
 Involving another firm to perform or re-perform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
 Disclosing to clients any referral fees or commission arrangements
 Separating teams when dealing with matters of a confidential nature


CODE OF ETHICS
Communicating with TCWG

The PA shall determine the appropriate individuals within the entity’s governance structure with whom to communicate.
The PA may consider:
1. The nature and importance of the circumstances; and
2. The matter to be communicated.
PART 4 – INTERNATIONAL INDEPENDENCE STANDARDS (IISs)

The Code has specifically set out IISs to apply the conceptual framework and address the threats to compliance with
these overarching requirements. The IISs are composed of two parts as follows:
• Part 4A – Independence for Audit and Review Engagements, which applies when performing audit or review
engagements.
• Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, which applies
when performing assurance engagements that are not audit or review engagements.
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Considerations for Audits, Reviews and Other Assurance Engagements
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The Conceptual Framework of the Code presents the following as additional considerations for audits, reviews and other
assurance engagements:
1. Independence; and
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2. professional skepticism
Independence Professional Skepticism
Independence is comprised of: Note that professional skepticism and the fundamental
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 Independence of mind – the state of mind that principles are inter-related concepts. As such, in an audit of
permits the expression of a conclusion without financial statements, compliance by the PAPP with the
being affected by influences that compromise fundamental principles, individually and collectively, supports
professional judgment, thereby allowing an the exercise of professional skepticism. This can be
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individual to act with integrity, and exercise demonstrated as follows:
objectivity and professional skepticism. 1. Integrity relates to PAs critical assessment of audit
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 Independence in appearance – the avoidance of evidence.
facts and circumstances that are so significant that 2. Objectivity relates to PAs manner of behavior such as
a reasonable and informed third party would be familiarity with client that might compromise PA’s judgment.
likely to conclude that a firm’s or an audit or 3. Professional competence and due care relates to the PA’s
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assurance team member’s integrity, objectivity or application of knowledge of industry or business, design
professional skepticism has been compromised. and performance of procedures and relevant knowledge to
critically assess evidence.
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PART 4A - INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS, WHICH APPLIES WHEN PERFORMING
AUDIT OR REVIEW ENGAGEMENTS
Important note: This Part applies to both audit and review engagements. The term “professional accountant (PA)” refers
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to individual professional accountants in public practice and their firms.
The first section of Part 4A discusses the application of the Conceptual Framework as presented in Part 1.
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Period during which Independence is required

Independence, as required by this Part, shall be maintained during both:
• The engagement period; and
• The period covered by the financial statements.
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General Documentation of Independence for Audit and Review Engagements

Firms are required to document that they are in compliance with the independence requirements of this Part. This is in
particular:
1. When safeguards are applied to address a threat, the firm shall document the nature of the threat and the
safeguards in place or applied; and
2. When a threat required significant analysis and the firm concluded that the threat was already at an acceptable
level, the firm shall document the nature of the threat and the rationale for the conclusion.


CODE OF ETHICS
Merger and Acquisitions

An entity might become a related entity of an audit client because of a merger or acquisition. Such is a threat to
independence and, therefore, to the ability of a firm to continue an audit engagement. In these circumstances, the
following shall be done:
1. The firm shall identify and evaluate previous and current interests and relationships with the related entity after
the effective date of the merger or acquisition; and
2. The firm shall take steps to end any interests or relationships that are not permitted by the Code by the effective
date of the merger or acquisition.
Breach of an Independence Provision for Audit and Review Engagements

Identification of a breach requires the exercise of professional judgment and “step back” approach found on the
conceptual framework. If a breach has been identified, the firm shall:
1. End, suspend or eliminate the interest or relationship
2. Consider whether any legal or regulatory requirements apply to the breach and, if so:
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a. Comply with those requirements; and
b. Consider reporting the breach to a professional or regulatory body as applicable.
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3. Promptly communicate the breach in accordance with its policies and procedures to:
a. The engagement partner;
b. Those with responsibility for the policies and procedures relating to independence;
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c. Other relevant personnel in the firm and, where appropriate, the network; and
d. Those subject to the independence requirements in Part 4A who need to take appropriate action;
4. Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report;
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and
5. Depending on the significance of the breach, determine:
a. Whether to end the audit engagement; or
b. Whether it is possible to take action that satisfactorily addresses the consequences of the breach.
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Other sections of Part 4A discuss circumstances that may create a threat to compliance of the overarching requirements
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of the Code. These other sections and their requirements are summarized on the table below:
Three-step Approach of the Conceptual Framework
Circumstance Identify Evaluate Address
(I-FASS) (Through relevant factors) (Sample
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actions/safeguards)
Fees
• Relative Size Self-interest;  The operating structure of the firm. Increase the client base in
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(e.g. large proportion of Intimidation  Whether the firm is well established or the firm to reduce
fee from a client to total new. dependence on the audit
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fees of the firm)  The significance of the client qualitatively client.

and/or quantitatively to the firm.
• Relative Size Self-interest;  The significance of the client qualitatively  Increase partner’s or
(e.g. large proportion of Intimidation and/or quantitatively to the partner or office’s client base
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fee from a client to total office.  Have an appropriate

revenue of 1 partner or 1  The extent to which the compensation of reviewer
the partner, or the partners in the office,
office of the firm)
is dependent upon the fees generated
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from the client.

• Relative Size Self-interest; When the total fees significantly exceed  Disclose such fact to
(e.g. Client is a Public Intimidation 15%, the firm shall determine whether the TCWG; and
Interest Entity [PIE] for 2 level of the threat is such that a post-  Discuss whether either
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consecutive years and issuance review would not reduce the threat are safeguards and
to an acceptable level. If so, the firm shall apply them
fees from the client >
have a pre-issuance review performed. o Pre-issuance
15% of total fees review
received) o Post-issuance
review
• Overdue Fees Self-interest Refer to Loans and Guarantees  Obtain partial payment
(e.g. Significant part of  Have an appropriate
the fee is unpaid prior to reviewer
issuance of report)
• Contingent Fees A firm shall not charge directly or indirectly a contingent fee for an audit engagement.


CODE OF ETHICS
Compensation and Evaluation Self-interest  What proportion of the compensation  Revise the policy
Policies or evaluation is based on the sale of  Removing that
such services; individual from the
(e.g. Audit team member for a  The role of the individual on the audit audit team
particular audit client is team; and
evaluated on or compensated for  Whether the sale of such non-
selling non-assurance services assurance services influences
to that client) promotion decisions.
Gifts and Hospitality A firm, network firm or an audit team member shall not accept gifts and hospitality
from an audit client, unless the value is trivial and inconsequential. Refer also to
discussion of Inducements in Part 3.
Actual or threatened litigation Self-interest;  Materiality of the litigation  Have an appropriate
intimidation  Whether the litigation relates to a reviewer
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prior audit engagement.  Removing that
individual from the
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audit team
Financial Interests
• Held by the Firm, a Network A direct financial interest (DFI) or a material indirect financial (MIFI) interest in the
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Firm, Audit Team Members audit client shall not be held by:
and Others a. The firm or a network firm;
b. An audit team member, or any of that individual’s immediate family;
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c. Any other partner in the office in which an engagement partner practices in
connection with the audit engagement, or any of that other partner’s
immediate family; or
d. Any other partner or managerial employee who provides non-audit services to
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the audit client, except for any whose involvement is minimal, or any of that
individual’s immediate family.
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• in an Entity Controlling an When an entity has a controlling interest in an audit client and the client is material to
Audit Client the entity, neither the firm, nor a network firm, nor an audit team member, nor any of
that individual’s immediate family shall hold a DFI/MIFI in that entity.
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• Held as trustee Discussions under the first point of financial interests also apply to financial interests in
an audit client held in a trust for which the firm, network firm or individual acts as
trustee, unless:
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a. None of the following is a beneficiary of the trust: the trustee, the audit team
member or any of that individual’s immediate family, the firm or a network firm;
b. The interest in the audit client held by the trust is not material to the trust;
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c. The trust is not able to exercise significant influence over the audit client; and
d. None of the following can significantly influence any investment decision
involving a financial interest in the audit client: the trustee, the audit team
member or any of that individual’s immediate family, the firm or a network firm.
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• In Common with the Audit A firm, or a network firm, or an audit team member, or any of that individual’s
Client immediate family shall not hold a financial interest in an entity when an audit client
also has a financial interest in that entity, unless:
a. The financial interests are immaterial to the firm, the network firm, the audit
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team member and that individual’s immediate family member and the audit
client, as applicable; or
b. The audit client cannot exercise significant influence over the entity.
• Received Unintentionally If a firm, a network firm or a partner or employee of the firm or a network firm, or any of
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that individual’s immediate family, receives a DFI/MIFI in an audit client by way of an

inheritance, gift, as a result of a merger or in similar circumstances and the
interest would not otherwise be permitted to be held under this section, then:
a. If the interest is received by the firm or a network firm, or an audit team
member or any of that individual’s immediate family, the financial interest shall
be disposed of immediately, or enough of an indirect financial interest shall be
disposed of so that the remaining interest is no longer material; or
b. i. If the interest is received by an individual who is not an audit team member,
or by any of that individual’s immediate family, the financial interest shall be
disposed of as soon as possible, or enough of an indirect financial interest
shall be disposed of so that the remaining interest is no longer material; and
ii. Pending the disposal of the financial interest, when necessary the firm shall
address the threat created.


CODE OF ETHICS
Loans and guarantees

• with an audit client Not permitted unless immaterial.
• with an audit client Not permitted unless the loan or guarantee is made under normal lending procedures, terms
that is a bank or and conditions.
similar institution
• with an audit client Not permitted unless immaterial.
that is not a bank or
similar institution
Business relationships
• Between a firm, a These parties shall not have a close business relationship with an audit client or its
network firm or an management unless any financial interest is immaterial and the business relationship is
audit team member insignificant to the client or its management and the firm, the network firm or the audit team
and an audit client or member, as applicable.
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its management
• Common Interests in A firm, a network firm, an audit team member, or any of that individual’s immediate family
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Closely-held entities shall not have a business relationship involving the holding of an interest in a closely-held
entity when an audit client or a director or officer of the client, or any group thereof, also holds
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an interest in that entity, unless:
• The business relationship is insignificant to the firm, the network firm, or the individual
as applicable, and the client;
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• The financial interest is immaterial to the investor or group of investors; and
• The financial interest does not give the investor, or group of investors, the ability to
control the closely-held entity.
• Buying goods or Does not usually create a threat to independence if the transaction is in the normal course of
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services business and at arm’s length.
Family and personal Self-interest;  The individual’s  Removing the individual from the audit
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relationships Familiarity; responsibilities on the team
Intimidation audit team.  Structuring the responsibilities of the
 The role of the family audit team so that the audit team does
member or other not deal with matters that are within the
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individual within the responsibility of the individual with whom

client, and the closeness the audit team member has close
of the relationship. relationship
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Recent service with Self-interest; Service during period covered by Audit Report
audit client Self-review; The audit team shall not include an individual who, during the period
Familiarity covered by the audit report had served as a director or officer of the audit
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threat client or was an employee in a position to exert significant influence over

the preparation of the client’s accounting records or the financial
statements.
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Service Prior to Period covered by the Audit Report

A self-interest, self-review or familiarity threat might be created if, before the
period covered by the audit report, an audit team member had served as a
director or officer of the audit client; or was an employee in a position to
exert significant influence over the preparation of the client’s accounting
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records or financial statements on which the firm will express an opinion.

Serving as a director or officer of an audit client
• As Director or Officer A partner or employee of the firm or a network firm shall not serve as a director or officer of
an audit client of the firm.
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• As Company A partner or employee of the firm or a network firm shall not serve as Company Secretary for
Secretary an audit client of the firm, unless:
a. Permitted under law, professional rules or practice;
b. Management makes all relevant decisions; and
c. The duties and activities performed are limited to those of a routine and administrative
nature
Employment with an A familiarity or intimidation threat might be created if any of the following individuals have
audit client been an audit team member or partner of the firm or a network firm:
a. A director or officer of the audit client.

b. An employee in a position to exert significant influence over the preparation of the
client’s accounting records or the financial statements on which the firm will express
an opinion.


CODE OF ETHICS
Temporary Personnel Self-review;  Nature and scope of work  Conduct of additional review of work
Assignments Advocacy; performed by the performed
Familiarity personnel  Not including the loaned personnel as
audit team member
 Not giving the audit responsibility to the
loaned personnel for function or activity
he performed
Long Association Provisions

Long association may create familiarity and self-interest threats. An example of an action that might eliminate the
familiarity and self-interest threats created by an individual being involved in an audit engagement over a long period of
time would be rotating the individual off the audit team.
Provision of Non-assurance Services to an Audit Client
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Part 4A also sets out the guidance as to provision of non-assurance services to audit client. This is due to the possible
threats to independence created should non-assurance services are provided.
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In evaluating the threats by providing non-assurance services, relevant factors are considered including:
• The nature, scope and purpose of the service.
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• The degree of reliance that will be placed on the outcome of the service as part of the audit.
• The legal and regulatory environment in which the service is provided.
• Whether the outcome of the service will affect matters reflected in the financial statements on which the firm will
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express an opinion.
• The level of expertise of the client’s management and employees with respect to the type of service provided.
• The extent of the client’s involvement in determining significant matters of judgment.
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• The nature and extent of the impact of the service, if any, on the systems that generate information that forms a
significant part of the client’s records and internal controls.
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• Whether the client is a public interest entity (PIE)*.
*If a firm audits a PIE, the following non-assurance services are prohibited:
Prohibited Without Regard to Materiality Prohibited if Material to the Financial Statements
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• Assuming a management responsibility • Valuation services

• Serving as General Counsel • Calculations of current/deferred taxes
• Accounting and bookkeeping services, including • Tax or corporate finance advice that depends on a
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preparing accounting records and financial particular accounting treatment/financial statement

statements presentation with respect to which there is
• Can only be provided to divisions/related reasonable doubt as to its appropriateness
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entities if routine/mechanical, if specified • Acting as an advocate before a public tribunal or

conditions are met. court to resolve a tax matter
• Promoting, dealing in, or underwriting client shares. • Internal audit services relating to internal controls
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• Negotiating for the client as part of a recruiting over financial reporting, financial accounting
service. systems, or financial statement
• Recruiting directors/officers, or senior management amounts/disclosures
who will have significant influence over accounting • Designing/implementing financial reporting IT
records or financial statements systems
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• Evaluating or compensating a key audit partner • Estimating damages or other amounts as part of
based on that partner’s success in selling non- litigation support services
assurance services to the partner’s audit client • Acting as an advocate to resolve a dispute or
litigation
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PART 4B - INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW
ENGAGEMENTS
The scope of Part 4B of the Code is the residual of Part 4A. As such, this part applies to assurance engagements other
than audit and review engagements (referred to as “assurance engagements”). For a detailed discussion of these types of
engagements, kindly refer to Chapter 1.
Note: In this Part, the term “professional accountant (PA)” refers to individual professional accountants in public practice
and their firms.


CODE OF ETHICS
Period during which Independence is required

Similar in Part 4A, independence is required to be maintained during both:
• The engagement period; and
• The period covered by the subject matter information.
General Documentation of Independence for Assurance Engagements Other than Audit and Review
Engagements (Concepts in Part 4A applies to this Part.)
Breach of an Independence Provision for Assurance Engagements Other than Audit and Review Engagements
If a firm concludes that a breach of a requirement in this Part has occurred, the firm shall:
1. End, suspend or eliminate the interest or relationship that created the breach;
2. Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an assurance
report; and
3. Determine whether action can be taken that satisfactorily addresses the consequences of the breach.
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Other sections of Part 4B discuss other circumstances that may create a threat to compliance of the overarching
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requirements of the Code. Some discussions found on Part 4A of this Chapter (refer to application of three-step approach
table) are also applicable to the below circumstances found on Part 4B but are applied in the context of an assurance
engagement other than audit or review:
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1. Fees
a. Relative Size
b. Overdue Fees
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c. Contingent Fees
2. Gifts and hospitality
3. Actual or threatened litigation
4. Loans and Guarantees
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5. Business relationships
a. Between a firm, assurance team member or immediate family and an assurance client or its management
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b. Buying goods or services
6. Family and personal relationships
7. Recent service with assurance client
8. Serving as a director or officer of an assurance client
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On the other hand, the requirements of Part 4B for financial interests are modified and are summarized below.
Financial Interests Requirements
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• Held by the Firm, A DFI/MFI in the assurance client shall not be held by:
Assurance Team a. The firm; or
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Members and b. An assurance team member or any of that individual’s immediate family.
Immediate Family
• in an Entity When an entity has a controlling interest in the assurance client and the client is material to the
Controlling an entity, neither the firm, nor an assurance team member, nor any of that individual’s immediate
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Audit Client family shall hold a direct or material indirect financial interest in that entity.
• Held as trustee Discussions under the first point of financial interests also apply to financial interests in an audit
client held in a trust for which the firm, network firm or individual acts as trustee, unless:
a. None of the following is a beneficiary of the trust: the trustee, the assurance team
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member or any of that individual’s immediate family, or the firm;

b. The interest in the assurance client held by the trust is not material to the trust;
c. The trust is not able to exercise significant influence over the assurance client; and
d. None of the following can significantly influence any investment decision involving a
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financial interest in the assurance client: the trustee, the assurance team member or any
of that individual’s immediate family, or the firm.
• Received If a firm, an assurance team member, or any of that individual’s immediate family, receives a
Unintentionally DFI/MIFI in an assurance client by way of an inheritance, gift, as a result of a merger, or in
similar circumstances and the interest would not otherwise be permitted to be held under this
section, then:
a. If the interest is received by the firm, the financial interest shall be disposed of
immediately, or enough of an indirect financial interest shall be disposed of so that the
remaining interest is no longer material; or
b. If the interest is received by an assurance team member, or by any of that individual’s
immediate family, the individual who received the financial interest shall immediately
dispose of the financial interest, or dispose of enough of an indirect financial interest so
that the remaining interest is no longer material.


CODE OF ETHICS
Provision of Non-assurance Services to Assurance Clients other than Audit and Review Engagement Clients
Before a firm accepts an engagement to provide a non-assurance service to an assurance client, the firm shall determine
whether providing such a service might create a threat to independence.
In evaluating the threats by providing non-assurance services, relevant factors are considered including:
• The nature, scope and purpose of the service.
• The degree of reliance that will be placed on the outcome of the service as part of the assurance engagement.
• The legal and regulatory environment in which the service is provided.
• Whether the outcome of the service will affect matters reflected in the subject matter or subject matter information
of the assurance engagement, and, if so:
o The extent to which the outcome of the service will have a material or significant effect on the subject
matter of the assurance engagement.
o The extent of the assurance client’s involvement in determining significant matters of judgment.
• The level of expertise of the client’s management and employees with respect to the type of service provided.
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In addressing the threats, see the requirement of Conceptual Framework in Part 1.
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Reports that include a restriction on use and distribution (RUD)
Certain modifications to Parts 4A and 4B are permitted in the Code in certain circumstances involving assurance
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engagements where the report includes a RUD. An engagement is eligible to these modifications only if:
1. The firm communicates with the intended users of the report regarding the modified independence requirements
that are to be applied in providing the service; and
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2. The intended users of the report understand the purpose and limitations of the report and explicitly agree to the
application of the modifications. e
ILLUSTRATIVE QUIZZERS
1. Which of the following statements best describes why the profession of certified public accountants has deemed it
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essential to promulgate a code of professional ethics and to establish a mechanism for enforcing observation of the
Code?
A. A pre-requisite to success is the establishment of an ethical code that primarily defines the professional’s
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responsibility to clients and colleagues.

B. A distinguishing mark of a profession is its acceptance of responsibility to the public.
C. A requirement of most state laws calls for the profession to establish a code of ethics.
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D. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the
profession.
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2. The following are the attributes of a profession. Which is not?

A. Systematic body of theory and professional authority
B. Regulative code and culture
C. Maintenance of high integrity and infallible performance
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D. Community sanction
3. Society has attached a special meaning to the term “professional”. A professional is

A. someone who has passed a qualifying exam to enter the job market
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B. a person who is expected to conduct himself or herself at a higher level that the requirements of society’s laws or
regulations
C. any person who receives pay for the services performed
D. someone who has both an education in the trade and on-the-job experience received under an experienced
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supervisor
4. Which statement is incorrect regarding the Code of Ethics for Professional Accountants in the Philippines?
A. Professional accountants refer to persons who are Certified Public Accountants (CPA) and who hold a valid
certificate issued by the Board of Accountancy.
B. Where a national statutory requirement is in conflict with a provision of the IFAC Code, the IFAC Code
requirement prevails.
C. The IFAC Code of Ethics for Professional Accountants is composed of four parts.
D. Professional accountants should consider the ethical requirements as the basic principles which they should
follow in performing their work.


CODE OF ETHICS
5. When a professional accountant performs services in a country other than the home country and differences on
specific matters exist between ethical requirements of the two countries, the following provisions should be applied
A. When the ethical requirements of the country in which the services are being performed are less strict than the
Code of Ethics of the Philippines, then the Code of Ethics of the Philippines should be applied.
B. When the ethical requirements of the country in which services are being performed are stricter than the Code of
Ethics of the Philippines, then the ethical requirements in the country where services are being performed should
be applied.
C. When the ethical requirements of the home country are mandatory for services performed outside that country
and are stricter, then the ethical requirements of the home country should be applied.
D. Any of the above.
6. The principle of professional behavior requires a professional accountant 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.
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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
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bring discredit to the profession.
7. A professional accountant may be associated with a tax return that
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A. Contains a false or misleading statement.
B. Contains statements or information furnished recklessly or without any real knowledge of whether they are true or
false.
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C. Omits or obscures information required to be submitted and such omission or obscurity would mislead the
revenue authorities.
D. Uses of estimates if such use is generally acceptable or if it is impractical under the circumstances to obtain exact
data.
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8. Which of the following is incorrect regarding professional competence?
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A. Professional accountants may portray themselves as having expertise or experience they do not possess.
B. Professional competence may be divided into two separate phases.
C. The attainment of professional competence requires initially a high standard of general education.
D. The maintenance of professional competence requires a continuing awareness of development in the
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accountancy profession.
9. Which of the following is incorrect regarding confidentiality?

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A. Professional accountants have an obligation to respect the confidentiality of information about a client’s or
employer’s affairs acquired in the course of professional services.
B. The duty of confidentiality ceases after the end of the relationship between the professional accountant and the
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client or employer.
C. Confidentiality should always be observed by a professional accountant unless specific authority has been given
to disclose information or there is a legal or professional duty to disclose.
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D. Confidentiality requires that professional accountant acquiring information in the course of performing professional
services neither uses nor appear to use that information for personal advantage or for the advantage of a third
party.
10. If an audit firm discovers threats to independence with respect to an audit engagement, the code indicates that the
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firm should
A. Immediately resign from the engagement.
B. Notify the appropriate regulatory body.
C. Document the issue.
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D. Evaluate the significance of the threats and apply appropriate safeguards to reduce them to an acceptable level.
11. Circumstances that threaten the ability of a professional accountant in business to perform duties with the appropriate
degree of professional competence and due care include the following, except:
A. Insufficient time for properly performing or completing the relevant duties
B. Incomplete, restricted or otherwise inadequate information for performing the duties properly
C. Sufficient experience, training and/or education
D. Inadequate resources for the proper performance of the duties


CODE OF ETHICS
12. Which statement is incorrect regarding employed professional accountants?

A. Employed professional accountants owe a duty of loyalty to their employer as well as to the profession; therefore
there may be no time that the two will be in conflict.
B. A professional accountant, particularly one having authority over others, should give due weight for the need for
them to develop and hold their own judgment in accounting matters and should deal with difference of opinion in a
professional way.
C. When undertaking significant tasks for which a professional accountant has not had sufficient specific training or
experience, he or she should not mislead the employer as to the degree of expertise or experience he or she
possesses, and where appropriate, expert advice and assistance should be sought.
D. A professional accountant is expected to present financial information fully, honestly and professionally and so
that it will be understood in its context.
13. The following statements pertain to provisions of Part 2 of the IFAC Code of Ethics for professional accountants.
Which is incorrect?
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A. A professional accountant shall not allow a conflict of interest to compromise professional or business judgment.
B. When the professional accountant knows or has reason to believe that the information with which the accountant
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is associated is misleading, the accountant shall take appropriate actions to seek to resolve the matter.
C. Acting without sufficient expertise creates a self-review threat to compliance with the principle of professional
competence and due care.
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D. A professional accountant shall not offer, or encourage others to offer, any inducement that is made, or which the
accountant considers a reasonable and informed third party would be likely to conclude is made, with the intent to
improperly influence the behavior of the recipient or of another individual.
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14. With regard to marketing professional services, the code indicates that
A. Direct marketing is prohibited.
B. Marketing is allowed if lawful.
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C. Marketing should be honest and truthful.
D. Marketing of audit services is prohibited.
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15. Which of the following is a “self-review” threat to member independence?
A. An engagement team member has a spouse that serves as CFO of the attest client.
B. A second partner review is required on all attest engagements.
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C. An engagement team member prepares invoices for the attest client.

D. An engagement team member has a direct financial interest in the attest client.
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16. According to the standards of the profession, which of the following circumstances will prevent a CPA performing
audit engagements from being independent?
A. Obtaining a collateralized automobile loan from a financial institution client.
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B. Litigation with a client relating to billing for consulting services for which the amount is immaterial.
C. Employment of the CPA’s spouse as a client’s director of internal audit.
D. Acting as an honorary trustee for a not-for-profit organization client.
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17. A client company has not paid its 2020 audit fees. According to the Code of Professional Conduct, for the auditor to
be considered independent with respect to the 2021 audit, the 2020 audit fees must be paid before the
A. 2020 report is issued
B. 2021 report is issued
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C. 2021 field work is started

D. 2022 field work is started
18. Which of the following is an example of a safeguard implemented by the client that might mitigate a threat to
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independence?
A. Required continuing education for all attest engagement team members.
B. Required second partner review of an attest engagement.
C. An effective corporate governance structure.
D. Management selection of the CPA firm.
19. May a CPA hire for the CPA’s public accounting firm a non-CPA systems analyst who specializes in developing
computer systems?
A. Yes, provided the CPA is qualified to perform each of the specialist’s tasks.
B. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s end product.
C. No, because non-CPA professionals are not permitted to be associated with CPA firms in public practice.
D. No, because developing computer systems is not recognized as a service performed by public accountants.


CODE OF ETHICS
20. According to the ethical standards of the profession, which of the following acts is generally prohibited?
A. Issuing a modified report explaining a failure to follow a governmental regulatory agency’s standards when
conducting an attest service for a client.
B. Revealing confidential client information during a quality review of a professional practice by a team from the
Board of Accountancy (BOA).
C. Accepting a contingent fee for representing a client in an examination of the client’s tax return by the Bureau of
Internal Revenue (BIR).
D. Retaining client records after an engagement is terminated prior to completion and the client has demanded their
return.
21. Which statement is incorrect regarding professional fees?

A. Professional fees should normally be computed on the basis of appropriate rates per hour or per day for the time
of each person engaged in performing professional services.
B. The appropriate rates should be based on the fundamental premise that the organization and conduct of the
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professional accountant in public practice and the services provided to clients are well planned, controlled and
managed.
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C. It is for each professional accountant in public practice to determine the appropriate rates.
D. It is not proper for a professional accountant in public practice to charge a client a lower fee than has previously
been charged for similar services
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22. According to the ethical standards of the profession, which of the following acts is generally prohibited?
A. Purchasing a product from a third party and reselling it to a client.
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B. Writing a financial management newsletter promoted and sold by a publishing company.
C. Accepting a commission for recommending a product to an audit client.
D. Accepting engagements obtained through the efforts of third parties.
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23. The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the
assurance engagement may least likely create
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A. Self-interest threat
B. Intimidation threat
C. Advocacy threat
D. Familiarity threat
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24. When a member of the assurance team knows that his or her close family member has a direct financial interest or a
material indirect financial interest in the assurance client, a self-interest threat may be created. Safeguards least likely
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include:
A. The close family member disposing of all or a sufficient portion of the financial interest at the earliest practical
date.
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B. Discussing the matter with those charged with governance, such as the audit committee.
C. Involving a professional accountant who took part in the assurance engagement to review the work done by the
member of the assurance team with the close family relationship or otherwise advise as necessary.
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D. Removing the individual from the assurance engagement.
25. When a professional accountant learns of a material error or omission in a tax return of a prior year, or of the failure to
file a required tax return, the professional accountant has a responsibility to do the following, except
A. Promptly advise the client or employer of the error or omission and recommend that disclosure be made to the
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revenue authorities.
B. Immediately inform the revenue authorities.
C. Take reasonable steps to ensure that the error is not repeated in subsequent tax returns if the professional
accountant concludes that a professional relationship with the client or employer can be continued.
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D. Inform the client or the employer that it is not possible to act for them in connection with that return or other
related information submitted to the authorities if the client or the employer does not correct the error.
26. Which of the following is incorrect regarding independence?

A. Independence consists of independence of mind and independence in appearance.
B. Independence of mind is the state of mind that permits the provision of an opinion without being affected by
influences that compromise professional judgment, allowing an individual to act with integrity, and exercise
objectivity and professional skepticism.
C. Independence in appearance is the avoidance of facts and circumstances that are so significant a reasonable and
informed third party, having knowledge of all relevant information, including any safeguards applied, would
reasonably conclude a firm's or a member of the assurance team’s integrity, objectivity or professional skepticism
had been compromised.
D. Independence is a combination of impartiality, intellectual honesty and a freedom from conflicts of interest.


CODE OF ETHICS
27. Which of the following is incorrect regarding engagement period?

A. The period of the engagement starts when the assurance team begins to perform assurance services and ends
when the assurance report is issued, except when the assurance engagement is of a recurring nature.
B. 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 is earlier.
C. In the case of an audit engagement, the engagement period includes the period covered by the financial
statements reported on by the firm.
D. When an entity becomes an audit client during or after the period covered by the financial statements that the firm
will report on, the firm should consider whether any threats to compliance with fundamental principles may be
created by previous services provided to the audit client.
28. According to Code of Ethics, audit teams are required to be independent of the audit client during the engagement
period and during which other period?
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A. The fiscal year following the period covered by the financial statements.
B. The period covered by the financial statements.
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C. The calendar years that includes any part of the period covered by the financial statements.
D. The two years prior to the period covered by the financial statements.
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29. On June 1, 2020, a CPA obtained a personal loan from a financial institution client for whom the CPA provided
compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the
loan in full on December 31, 2021. On April 3, 2021, the client asked the CPA to audit the client’s financial statements
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for the year ended December 31, 2021. Is the CPA considered independent with respect to the audit of the client’s
December 31, 2021 financial statements?
A. Yes, because the loan was fully secured.
B. Yes, because the CPA was not required to be independent at the time the loan was granted.
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C. No, because the CPA had a loan with the client during the period of a professional engagement.
D. No, because the CPA had a loan with the client during the period covered by the financial statements.
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30. Long association may create familiarity and self-interest threats. An example of an action that might eliminate the
familiarity and self-interest threats created by an individual being involved in an audit engagement over a long period
of time would be rotating the individual off the audit team. Which of the following is incorrect regarding the rules on
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rotation according to IFAC Code of Ethics for Professional Accountant?

A. For entities not publicly traded, the firm shall determine an appropriate period to address possible threats.
B. For public interest entity, when the individual acted as the engagement partner for seven cumulative years, the
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cooling-off period shall be five consecutive years.

C. For public interest entity, when the individual acted in a combination of key audit partner roles and served as the
engagement partner for four or more cumulative years, the cooling-off period shall be five consecutive years.
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D. For public interest entity, where the individual has been appointed as responsible for the engagement quality
control review and has acted in that capacity for seven cumulative years, the cooling-off period shall be two
consecutive years.
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"Dream big and aim your goal toward the stars. You may not be able to reach them, but for sure they will guide
your way through a satisfying successful life. Everything being built is the fruit of a dream. Dream big but above
all, act upon it." - Eduardo Dominguez
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--- END OF HANDOUTS ---

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Page 1 of 16 | AUD Handouts No.

CODE OF ETHICS FOR PROFESSIONAL

INTRODUCTION OF THE CODE

Part 2: Professional Accountants in

Part 4B: Independence for Assurance

an executive or non-executive capacity in, for example:

o The not-for-profit sector.

 Part 3 is applicable to PAPPs.

Part Effective Date

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Breaches of the Code

to set out requirements on how to appropriately deal with these threats.

Three-step Approach of the Conceptual Framework

a PA’s judgment or behavior;

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Preparation and presentation of information Self-interest; intimidation All

Financial Interests, Compensation and Incentives Self-interest Objectivity; Confidentiality

Responding to Non-compliance with Laws and

o A PA participating in incentive compensation arrangements offered by the

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

decisions that affect the financial reporting of the organization.

1. The nature and importance of the circumstances; and

PART 3 – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE (PAPPs)

Conflict of Interest Self-interest Objectivity

Fees and other types of Remuneration Professional Competence and Due

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Three-step Approach for PAPPs

with an inappropriate accounting treatment.

o Policies or procedures on ethics

o Processes to facilitate and address internal and external concerns or complaints

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Communicating with TCWG

PART 4 – INTERNATIONAL INDEPENDENCE STANDARDS (IISs)

to individual professional accountants in public practice and their firms.

Period during which Independence is required

General Documentation of Independence for Audit and Review Engagements

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Merger and Acquisitions

Breach of an Independence Provision for Audit and Review Engagements

fees of the firm)  The significance of the client qualitatively client.

fee from a client to total office.  Have an appropriate

from the client.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

that individual’s immediate family, receives a DFI/MIFI in an audit client by way of an

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Loans and guarantees

individual within the responsibility of the individual with whom

threat client or was an employee in a position to exert significant influence over

Service Prior to Period covered by the Audit Report