CHAPTER 5: QUALITY CONTROL

Standards that cover quality control

1. PSQC1 - QC for firms that persons
audits and reviews of historical
financial
information
&
other
assurance
&
related
services
engagements
2. PSA220 - Quality control for audit of FS

There must be clear, consistent and

frequent actions from all levels of
management stating:
o Perform work that comply w/
standards
and
legal
&
regulatory reqs.
o Issue appropriate reports
These
may
be
incorporated in firms
internal
documentation
and training materials

Firms strategy is subject to overriding

requirement for the firm to achieve
QC.
o Firm must assign management
responsibilities
so
that
commercial
considerations
dont affect quality
o Firms policies addressing perf
evals,
compensation
&
promotion
to
demonstrate
commitment to quality
o Firm devotes resources for
development, documentation &
support for QC procedures

PSQC1

Is to be read in conjunction w/ Code of

Ethics for Professional Accountants in
the Phils.
Applies to all firms
Policies & procedures developed by
firms to comply w/ PSQC1 depend on
factors such as size of
firm,
characteristics, etc.

Firm should establish a system of QC that will

assure:
1. That the firm and its personnel comply
w/ standards and regulatory reqs.
2. That reports issued by firm are
appropriate in the circumstances
System of QC
-

Consists of policies designed to

achieve compliance w/ standards and
issuance of appropriate reports as well
as procedures to implement and
monitor compliance

Elements of system of QC:

1. Leadership responsibility
2. Relevant ethical requirements
3. Acceptance and continuance of client
relationships/engagements
4. HR
5. Engagement performance
6. Monitoring

QC policies & procedures should be

documented and communicated to
personnel
(description, objectives,
message
that
personnel
has
responsibility for quality & expected to
comply)
Feedback from personnel is important
thus encouraged.

LEADERSHIP RESPONSIBILITY

Promote internal culture that quality is

essential in engagements (culture that
recognizes and rewards high quality
work)
Managing BOPs assume ultimate
responsibility for system of QC

CEO/Managing BOPs
-

Person
assigned
to
operational
responsibility for QC
Should have sufficient experience and
necessary authority

Sufficient and appropriate experience and

ability
-

Enables responsible person to identify

QC issues and develop appropriate
policies

Necessary authority
-

Enables
responsible
implement the policies

person

to

ETHICAL REQUIREMENTS
-

Emphasis
should
be
made
on
fundamental
principles
such
as
leadership of the firm, education,

monitoring
compliance

&

dealing

w/

non-

7. Reasons of proposed appointment of

the firm and non-reappointment of
previous firm

Independence requirements
-

Policies and procedures that ensure

that independence is maintained
where required
Should be communicated to those
subject to req.
Threats to independence must be
identified and take appropriate action
Be
notified
of
breaches
of
independence and take appropriate
actions to resolve

Firm Capability,
competence

CONTINUANCE
engagements

1. Has considered the integrity of the

client
2. Is competent and has time &
resources to perform the engagement
3. Can comply w/ ethical requirements

If
there
are
issues
continuance/acceptance,
how
issues
are
resolved
should
documented

in
the
be

Client Integrity
Considerations:
1. Identify business reputation
2. Nature of client operations
3. Information if company has matters of
aggressive interpretation of AS and its
internal control envi
4. If client is interested in making fees as
low as possible
5. Inappropriate limitations in scope of
work
6. If client is involved in money
laundering or other criminal activities

&

1. Knowledge on relevant industries or

ability to gain knowledge effectively
2. Sufficient personnel
3. Expert are available
4. Individuals
meeting
criteria
and
eligibility reqs are available
5. Firm is able to complete engagement
w/in reporting deadline

Occurs when by virtue of a close

relationship w/ an assurance client,
directors, members of assurance team
etc., becomes too sympathetic to
clients interests
Can be avoided through rotation of
engagement partner after a period

ACCEPTANCE
AND
PROCEDURES
Only
undertake/continue
where firm:

time

Considerations:

Familiarity Threats
-

competence,

Upon obtaining information that cause

the firm to decline, they must
consider:
o Report to regulatory authorities
o Possibility of withdrawing
Policies and procedures in auditor
withdrawal
o Discuss appropriate action firm
should take based on relevant
facts
o If they decided to withdraw,
discuss reasons for withdrawal
o Consider whether to remain in
place or report withdrawal to
regulatory bodies
o Document significant issues

HR
-

Policies & procedures should be

designed
to
provide
firms
w/
assurance regarding the sufficiency of
personnel w/ competence

Issues:
1. Recruitment
- Procedures that help the firm select
individuals w/ the capacity and
competence to perform firms work
- Methods to develop competence:
o Prof education
o CPE
o Work experience
o Coaching
2. Performance Evaluation
- Procedures that give due recognition
and reward to development of
competence and commitment to
ethical principles

Steps:
o Make personnel aware of firm
expectation
o Provide personnel w/ evals and
counseling
o Help personnel understand that
advancing to higher positions
depends on performance and
adherence to ethics and failure
to comply may result to
disciplinary action
The size of the firm influence
performance eval. Ex. Smaller firms
may apply less formal performance
eval.
3. Assignment of engagement teams
- Firm should assign responsibility to a
partner. PSQC1 requires that:
o Role of engagement partner is
communicated to key members
of client management & those
w/ governance
o Engagement partner should
have appropriate capabilities
o Responsibility of partner should
be communicated to him
o Firm should assign appropriate
staff w/ necessary capabilities
o Capabilities and competence
should
be
considered
in
assigning engagement teams
and
determining
level
of
supervision
Considerations regarding
engagement teams

assignment

o
o
o
o
o

Supervision and review

-

Includes:
o Tracking
progress
of
engagement
o Considering
capabilities
of
engagement team
o Addressing significant issues
and modifying the planned
approach appropriately
o Identifying
matters
of
consultation

Review responsibilities are determined

on the basis that more experienced
team members review work of less
experienced team members

Factors considered by reviewers:

o If work is done in accordance w/
standards and legal reqs.
o If significant matters have been
raised for consideration
o If
appropriate
consultations
have taken place and if
conclusions are documented
and implemented
o If there is a need to revise the
nature, timing and extent of
work
o If work supports conclusions
reached and if it is documented
o If evidence is sufficient and
appropriate to support report
o If objectives of engagement has
been met

of

1. Understanding & practical experience

with engagements
2. Understanding of standards and
legal/regulatory requirements
3. Appropriate technical knowledge
4. Knowledge of relevant industries
5. Ability
to
apply
professional
judgement
6. Understanding of firms QC policies &
procedures
ENGAGEMENT PERFORMANCE
-

Firms seek to establish consistency in

quality and this can be achieved
through written/electronic manuals,
standardized
documentation
and
industry-specific guidance materials
Matters addressed:

How teams are briefed on the

objectives
Processes for complying w/
engagement standards
Processes
for
engagement
supervision, staff training and
coaching
Methods of reviewing work
performed
Processes to keep policies
current

Consultation
-

Ensures that:
o Appropriate consultation takes
place in difficult matters
o Resources are available to
enable appropriate consultation

Nature
and
scope
of
consultation is documented
o Conclusion from consultation is
documented and implemented
Involves discussion w/ individuals, w/in
or outside the firm, who have the
expertise to resolve difficult matter
Recognized as a strength
o

External Consultants
-

Firms, ex. w/o internal resources, may

take
advantage
of
external
consultants
however
before
contacting,
they
must
consider
whether an external provider is
suitable for that purpose

Documentation of Consultation
-

Agreed by both the one seeking

consultation and the one consulted
Must be sufficiently complete and
detailed to enable understanding
Includes results, decisions, basis of
decisions and implementation

Differences in opinion
-

There must policies and procedures

addressing differences in opinion and
these procedures include:
o Identification of differences @
early stage
o Provide clear guideline as to
successive steps taken after
o Require
documentation
of
resolution and implementation
Report is not issued until matter is
resolved.

Engagement Quality Control Review

Only for appropriate engagements

Involves
objective
evaluation
of
significant judgement of engagement
team and conclusions reached
Discussion w/ engagement partner,
review of report, and if report is
appropriate
Required for listed companies
It is required that EQCR be completed
before report is issued

There should be criteria to determine

if EQCR should be performed
Review
does
not
reduce
responsibilities of engagement partner

When non-audit engagements are subject to

EQCR:
1. Nature of engagement involves a
matter of public interest
2. Identification of unusual risks in an
engagement
3. Law requires
Firms should set out policies regarding:
1. Nature, timing and extent of EQCR
- Extent relies on complexity and
riskiness of engagement
- EQCR is done in a timely manner at
appropriate stages of engagement so
that matters may be promptly
resolved
accdg.
To
reviewers
satisfaction
2. Criteria of eligibility of EQC reviewers
- Should have appropriate and sufficient
technical expertise w/ authority to act
as an engagement partner
- Objectivity
o Reviewer should not be selected
by engagement partner
o Does not participate in the
engagement during period of
review
o Does not make decisions for
engagement team
o Not
subject
to
other
considerations that could affect
objectivity
Another individual w/in or
outside the firm may do
the
reviewing
if
objectivity is hard to be
maintained
bt.
Engagement team and
reviewer or when the firm
is only a small firm/ a sole
practitioner.
3. Documentation requirements for EQCR
- PSQC1 requires documentation that:
o Procedures required by firm on
EQCR has been performed
o EQCR has been performed
before report is issued

Reviewer is not aware of any

unresolved matters that would
make report inappropriate
Completion of the assembly of final
engagement files
o Must be completed on a timely
basis after reports have been
finalized
o Time limit may be by law/by
firms decision accdg. To nature
of engagement
o For audits, not more than 60
days after date of auditors
report
o 2 or more reports in 1 subject
matter,
treat
as
separate
engagement
Confidentiality, safe custody, integrity,
accessibility and retrievability of
documentation
o Personnel
must
observe
confidentiality at all times
unless given authority to do so
or there is a legal duty to do so
o There may be laws that imposes
additional obligation to maintain
confidentiality etc.
o Accessibility/retrievability may
be compromised if info may be
easily added, erased w/o firms
knowledge
o There must be appropriate
controls design to:
Determine when and who
created,
changed/reviewed
the
documentation
Protect the integrity of
info
Prevent
unauthorized
changes
Allow
access
to
documentation only when
it
helps
in
properly
discharging
responsibilities

Examples:
Passwords
Back-up routines
Process of properly
distributing,
processing
and
collating
documentation

Restricting access
and proper storage
of
hard
copy
documentation

Original paper documentation

o Original paper documentation
may be scanned for inclusion in
engagement files for practical
reasons
Generate scanned copies
w/
entire
content
(signatures, annotations
etc.)
Integrate scanned copies
in
engagement
files
including indexing and
signing off
Enable scanned copies to
be retrieved and printed
Retention
of
Engagement
documentation
o Retention may vary based on
nature of engagement and
firms
circumstances,
laws/regulations
o In specific audit engagement, is
is no shorter than 7 years from
date of auditors report or if
later, the date of the groups
auditors report
o Procedures:
Enable
retrieval
and
access to documentation
during retention period
Provide
a
record
of
changes
Enable
authorized
external parties to access
for quality purposes
Ownership
of
engagement
documentation
o Unless stated by law, it belongs
to the firm.
o All working papers, schedules
and memoranda made by a CPA
and his staff, including those
submitted by the client, except
those submitted by CPA to
client, shall be confidential and
remain a property of the CPA, in
the absence of agreement to
the contrary, unless such are
required through subpoena by
court

Matters considered in EQCR:

1. Firms independence
2. Significant
risks
identified
and
responses
3. Judgements made
4. If consultations are done to resolve
differences in opinion and the
conclusions made
5. The significance and dispositions
corrected
and
uncorrected
misstatements identified
6. Matter to be communicated to
management, those charged with
governance and regulatory bodies
7. Whether working papers selected
reflect the work performed and
conclusion reached
8. The appropriateness of the report

Report is not issued until differences in

opinion between engagement partner
and reviewer is not resolved.

o
o

Inspections
-

MONITORING OF QUALITY CONTROL

Purpose:
-

To ensure adherence to standards

legal/regulatory requirements
To know whether system of QC
been appropriately designed
effectively implemented
Whether firms QC policies
procedures
are
appropriate
circumstances

and
has
and

and
in

Responsibility
of
monitoring
is
entrusted by the firm to partner/s or
other persons w/ sufficient experience
and authority to assume responsibility
Matters considered include:
o Analysis of:
New developments in
professional
standards
and reqs. And how they
are reflected in firms
policies
Written confirmation of
compliance on policies on
independence
CPE
Decisions
regarding
acceptance
and
continuance

Determination
of
corrective
actions to be taken and
improvements to be made in
the system
Communication of weaknesses
found to firm personnel
Follow-up by personnel so that
necessary modifications are
promptly made

Procedures design to provide evidence

of compliance by engagement team w/
firms QC policies
Performed on a cyclical basis
At least 1 engagement for each
engagement
partner
over
an
inspection cycle of no more than 3
years
Factors to consider:
o Size of firm
o # of geographical offices
o Results of previous monitoring
o Degree
of
authority
bt.
Personnel and offices
o Nature
and
complexity
of
practice and org
o Risk
associated
w/
engagements and clients
Includes
selection
of
individual
engagements w/o prior notice to
engagement team
The one inspecting must not perform
EQCR
Determining scope, take into account
scope/conclusion
of
independent
external inspection, but it is not a
substitute
Small firms make use suitably
qualified external person

Disposition of Deficiencies noted

Firm
should
evaluate
the
effect
of
deficiencies noted as a result of monitoring
and identify whether they are:
1. Instances
that
dont
necessarily
indicate that firms system of QC is
insufficient, enough to provide it
reasonable assurance
2. Systemic/repetitive deficiencies that
requires prompt corrective action
-

Firm should communicate deficiencies

to relevant engagement partners

Possible recommendations
Take remedial action to
an
individual
engagement/member of
personnel
Communication of finding
to in charge of training
Changes in QC policies
Disciplinary
action
to
those fail to comply
Where results indicate that reports
may
be
inappropriate
during
engagement, firm should determine
further action to comply. It should also
consider legal advice.
o

There must be policies and procedures

dealing w/:
o Complaints and allegations that
work
performed
does
not
comply with standards and legal
reqs.
o Allegations of non-compliance
w/ firms system of QC.

May originate w/in or outside of firm

Communication of the results of monitoring

-

At
least
annually,
firm
should
communicate results of monitoring its
QC system to engagement partner
and managing BOPs
Info communicated include:
o Description
of
monitoring
procedure performed
o Conclusions drawn
o Description
of
systemic,
repetitive deficiency and actions
taken to resolve it

Network firms
-

At least annually, the network

communicates the scope, extent and
results of the monitoring process to
appropriate individuals w/in network
firms
Engagement partners are to rely on
the monitoring process implemented
on the network unless otherwise
advised.

Documentation related to monitoring

1. Sets out monitoring procedures
2. Record evaluation of:
o Adherence to standards and
legal reqs.
o Whether QC is appropriately
designed
and
effectively
implemented
o Whether the reports issued are
appropriate
3. Identifies deficiencies noted, their
effect and sets out basis of whether
further action is necessary
Complaints and Allegations

CHAPTER 6: CODE OF ETHICS

-

In order to maintain public confidence,

members of profession should be
regulated and one of the means is
Code of Ethics

Ethics
-

Bedrock of profession
When ethics is lacking, the foundation
of the profession crumbles

Professional
-

Expected to conduct his/herself @

higher level than most members of
society
o Most
people
feel
more
disappointed
when
professionals commit crime
Responsibility for conduct, including
honorable behavior, even if this means
personal sacrifice

High professional conduct is based on

the need of public confidence in the
quality of service of professionals.
If users of service do not have
confidence, the ability of professionals
to serve is effectively diminished.
Most users dont have the competence
and time to evaluate quality of
performance and thats what PRC and
other regulatory boards are for

Code of Ethics for accountants

-

3. Professional Competence and due care

(Section 130)
-

Professional competence
-

Based on Int. Code of Ethics for

Professional Accountants developed by
IFAC
All CPAs must comply, along w/ other
requirements that and be adopted by
PICPA, BOA and PRC
July
2009,
International
Ethics
Standards BOA (IESBA) issued revised
code of ethics, effective January 1,
2011.
o Clarifies
requirements
for
accountants and strengthened
independence of auditors
Distinguishing mark of accountants is
acceptance of responsibility to act in
the public interest.

PART A: FUNDAMENTAL PRINCIPLES

CONCEPTUAL FRAMEWORK

1. Integrity (Section 110)

- To be straightforward and honest in all
professional
and
business
relationships
- Accountant should not knowingly
associated w/ info that:
o Is materially false/misleading
o Is furnished recklessly
o Omits/obscures info required
- Once aware, accountant should take
steps to be disassociated from that
info.
2. Objectivity (Section 120)
- Not allow bias, conflict of interest or
undue influence to override judgement

Requires exercise of sound judgement

in applying knowledge
o Attainment
o Maintenance
Continuing
awareness
and understanding of
relevant
professional
developments

Diligence
-

Responsibility to act in accordance w/

reqs of assignment carefully and on a
timely basis

AND

Fundamental Principles:

Maintain professional knowledge and

skill at level required to ensure client
receives competent service
Act diligently in accordance to
technical and professional standards
when providing service

A
professional
accountant
should take steps to ensure that
those
working
under
his
authority
have
appropriate
training and supervision
A
professional
accountant
should make clients, employers
etc. aware of the inherent
limitations of services.

4. Confidentiality (Section 140)

- Not disclose info w/o specific authority
unless there is legal duty to disclose
- Info should not be used for personal
advantage
-

Maintain confidentiality even in a

social environment
Dont
disclose
info
even
from
prospective client
Dont disclose info w/in firm/employing
org
Make sure staff and person from whom
advice
is
obtained
respect
accountants duty of confidentiality

In deciding whether to disclose or not:

-

Whether interests of parties could be

harmed if client consents to disclosure

Whether all info is known and

substantiated
or
incomplete,
professional judgement should be
used in determining type of disclosure
Type of communication expected and
to whom
Parties
to
whom
info
was
communicated
are
appropriate
recipients.

Appropriate disclosures
-

Permitted by law and authorized by

client
Required by law
o As evidence in course of legal
proceedings
o Infringements of the law
Professional duty to disclose, not
prohibited by law
o To comply w/ QR of regulatory
bodies
o To
respond
to
query/investigation
of
regulatory bodies
o To protect professional interest
in legal proceedings
o To comply w/ technical standard
and ethical requirements

5. Professional behavior (Section 150)

- To comply w/ laws and regulations and
avoid anything that will discredit
profession
- In marketing, accountants should not
bring profession into disrepute by
being
honest
and
not
making
exaggerated
claims
about
their
services/comparing their work to
others
Conceptual Framework
-

Provides guidance on fundamental

ethical principles
Required to apply to identify threats to
compliance, evaluate them and apply
safeguards to eliminate/reduce them
If
accountant
cannot
implement
safeguard, decline/discontinue from
the professional service involved or
resign
Upon
encountering
unusual
circumstances in w/c following the
code may lead to outcome that is not
of public interest, consult regulatory
bodies

Threats and safeguards

Threats to independence
1. Self-interest threat financial/other
interest will influence accountants
judgement
2. Self-review threat threat that
accountant
wont
appropriately
evaluate
results
of
other
past
judgements
made
from
w/c
accountant rely on making judgement
for current service
3. Advocacy
threat

threat
that
accountant
will
promote
clients/employers position to the
point
where
objectivity
is
compromised
4. Familiarity threats threat that due to
a close relationship , accountant will
be too sympathetic
5. Intimidation threat threat that
accountant may be deferred from
acting
objectively
because
of
actual/perceived pressures
Safeguards
1. Created by profession, legislation or
envi
a. Educational,
training
&
experience req for entry to
profession
b. Continuing prof devlpt reqs
c. Corporate
governance
regulations
d. Prof standards
e. Prof regulatory and monitoring
f. External review by legally
empowered 3rd party
2. In the work environment
3. Safeguards
that
may
increase
likelihood
of
deterring
unethical
behavior
a. Complaints system to draw
attention to unethical behavior
b. Duty to report breaches in
ethical reqs
Ethical conflict resolution
Factors to consider when deciding whether to
initiate formal/informal conflict resolution:
-

Facts
Ethical issues involved
Fundamental principles related
Established internal procedures

Alternative causes of action

Weight consequences of each possible

course of action. Still unresolved?
Consult w/ appropriate persons to help
(managing BOPs or audit committee)
Document issues
Still unresolved? Relevant professional
body or legal advisors. Confidentiality
wont be breached if it is done on an
anonymous basis or w/ a legal advisor
under protection of legal privilege
Still unresolved? Refuse to remain
associated w/ the matter creating the
conflict

PART B PA IN PUBLIC PRACTICE

Threats

Intimidation threats
-

Circumstances that gives rise to threats to

fundamental principles

Self-interest

one member of AT have direct/joint

financial interest w/ client
close business relationship w/ client
concern about losing the client
entering into a contingent fee
arrangement
discovering error when evaluating
results of previous professional service
performed

Self-review threat
-

issuing
assurance
report
on
effectiveness
of
systems
after
designing the system
preparing original data that will be
used
generate
records
in
the
engagement
member of AT recently director/officer
of client
member of AT recently employed by
client to a position that influences
subject matter
performing service to client that
directly affects subject matter

Advocacy Threat
-

promoting shares of client

being advocate of client in litigations

Familiarity threats

member of ET having close/immediate

family
member
that
is
a
director/officer of client
member of ET having close/immediate
family member that is in a position
that directly influences the subject
matter of the client
Director/officer of client recently
served as engagement partner
Accepting gifts
unless value is
insignificant
Long association of senior personnel to
client

Threatened
with
dismissal
from
engagement
Client will not award a planned
nonassurance contract if firm disagree
Threatened with litigation
Pressured to reduce work done by
client to reduce fees
Accountant feeling pressured because
client has more expertise
Accountant being informed by partner
that planned promotion will not occur
unless he/she agrees

Safeguards
Engagement-specific safeguards
-

Have an accountant not involved in

the non-assurance to review or advise
Have an accountant not involved in
the assurance to review or advise
Consult and independent third party
Discuss ethical issues w/ those
charged w/ governance
Disclose nature of services and fees to
those charged w/ governance
Involve
another
firm
to
perform/reperform engagement
Rotation of senior assurance team
personnel

Firm-wide safeguards
-

Leadership stresses compliance w/

fundamental principles
Leadership stresses expectation that
members of AT act in public interest
Policies and procedures for quality
control
Documented policies regarding need
to
identify
threat,
evaluate

significance, apply safeguards and if

not applicable, terminate engagement
Documented
policies
requiring
compliance w/ fundamental principles
Policies to identify relationship bt.
Team and client
Policies to monitor reliance on revenue
from client
Using
different
partners
and
engagement teams
Policies prohibiting non-members of AT
influencing outcome of engagement
Timely
communication
of
firms
policies and procedures
Designating senior management for
overseeing the QC system
Advising staff of those client in w/c
they should be independent from
Disciplinary mechanism to promote
compliance
Policies that
empower
staff
to
communicate to seniors any issue
regarding compliance

Accountant may also rely on safeguard

made by client however not possible
to rely solely to reduce threats.

Safeguards
procedures
-

w/in

clients

systems

and

Client requires persons to approve

appointment
of
firm
performing
engagement
Client has competent employees
Client has implement internal control
Client has corporate governance
structure

Section 210- PROFESSIONAL APPOINTMENT