Gaas and Sqc

7/30/2019 Gaas and Sqc

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• Popularly known as the

• The general guidelines that the auditors must follow in conducting the audit.

• The minimum standards of auditor’s performance that must be achieved on each audit

engagement

• The guidance for measuring the quality of the auditor’s performance

• the principles for the preparation and presentation of financial statements that are

used by the auditor as criteria in determining the overall fairness of the financial

statements; foundation of accounting

• standards/measures/guidance that the auditors must follow when conducting an

audit; foundation of auditing

• the measures of the quality or minimum standard of

auditor’s performance

• the means used (or the acts to be performed) by the

auditor to attain the quality or minimum standard of auditor’s performance

b. "auditing procedures" relate to acts to be performed, whereas

"auditing standards" deal with measures of audit quality and the objectives to be achieved inan audit.

c. Every independent audit engagement involves both auditing standards

and auditing procedures. From one engagement to another engagement, auditing

standards are applied uniformly but auditing procedures may vary.

– standards/criteria which present guidance in the personal qualifications an

auditor must possess to undertake the audit engagement

1. This standard refers to

• of the auditor is primarily met by having professional

education/training and practical experience in auditing

• Competence can also be acquired by the auditor through the following:

Continuing professional development Consulting others if additional technical information is needed

Coaching by more experienced staff

Research to obtain knowledge of client business and industry

• Competence does not include warranting the infallibility of the work performed.

2. This standard requires that the auditor must be impartial when dealing with the

client or without bias with respect to the client entity. The auditor must be independent in factand in appearance.

a. – The state of mind that permits the expression of a conclusion without

being affected by influences that compromise professional judgment, allowing an individual toact with integrity, and exercise objectivity and professional skepticism; this is also known as

“

” or “ .”

b. – The avoidance of facts and circumstances or situations that

are so significant that would lead a reasonable and informed third party or the public to believeor conclude that the auditor is not independent. In other words, independence in appearancerequires that activities or relationships that even suggest or imply a possible lack of

independence must be avoided by the auditor.

• is often called the cornerstone of the profession since it is necessary

to add credibility to the auditor’s work.

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• maintain

public confidence in the profession or to achieve public confidence. The audit opinionand the audit report would be of little or no value if auditor is not independentbecause of absence of public confidence.

• The auditor ultimately decides whether or not he/she is independent.

• Independence in mental attitude cannot be regulated.

• However, to encourage independence in fact and to maintain the appearance of independence, the auditor can have no direct financial interest in the client. “Direct” includes the auditor and members of immediate family. “Financial interest” isownership of equity shares, other client financial instruments, or any other potentialfinancial benefit.

• In addition, there can be no material indirect financial interest such as ownershipthrough a mutual fund.

• To ensure independence, auditor cannot render an opinion on statements of one yearuntil all fees from the prior year audit have been paid.

• To emphasize independence from management, auditor is usually appointed by auditcommittee of the board of directors.

• Independence may be impaired by performing consulting services, especially thosethat involve making management decisions.

3. This standard requires that an auditor, in fulfilling his duties, should act

diligently and carefully, exercise reasonable prudence, and apply judgment in a conscientiousmanner, carefully weighing the relevant factors before reaching a decision.

• Due professional care is often called the " concept. The auditor

should do what the average auditor would do and never less, including review of work

performed by assistants and maintaining an attitude of professional skepticism.

• Due professional care does not mean/imply infallibility or exercise of error-free

judgment . The auditor is not and cannot be held responsible for losses because of errors of pure judgment.

• Exercise of due professional care in the performance of the audit requires:

a. Observance of the standards of field work and reportingb. Critical review of the audit work performed at every level of supervisionc. Degree of skill commonly possessed by others in the professiond. Exercise of the same components of professional care as a reasonableauditor would exercise

e. Exercise of

professional skepticism

– the standards / criteria for planning and evidence-gathering

1.

• Planning involves establishing the overall audit strategy for the engagement and developing

an audit plan. The auditor should also supervise the work of assistants. Supervision is

critical because of assistants’ lack of experience.• Audit programs are designed to enumerate appropriate action, and all work of staff auditors

should be reviewed by a qualified auditor. Audit program is developed before substantive

testing to ensure that adequate planning has occurred.

2.

• As part of the planning activities, the auditor is required to obtain sufficient

understanding of the entity and its environment. This means that the auditor should obtaina more detailed knowledge of the client's business and the environment/industry in whichthe entity operates.

• A sufficient understanding of internal control is to be obtained to plan the audit.

Appropriate internal controls provide the auditor with confidence that material

misstatements will be prevented or detected on a timely basis. Strong internal control implies that the auditor will require less evidence.

Weak internal control implies that the auditor will require more evidence.

3.

• The auditor should obtain sufficient appropriate audit evidence by performing audit

procedures to be able to draw reasonable conclusions on which to base the opinionregarding the financial statements under audit.

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• Evidence gathering is sometimes called substantive testing. Any testing that confirmsthe ending balance of an account is known as a test of a balance. Evidence gatheredto support an account by looking at the various transactions that have affected itduring the period is called a test of details.

• All specific audit work is performed in order to gather evidence.

• The quantity and quality of evidence to be gathered depends on the judgment of theauditor.

• The decision as to how much evidence to be accumulated requires

professional judgment; not provided in the PSAs; the rule is, evidence must besufficient to afford a reasonable basis for opinion

– standards on auditor’s expression of audit opinion through a mediumknown as the auditor’s report

1. Conformity

with GAAP/PFRS is explicit in the auditor’s report

• Explicit statement means that the auditor should state whether or not the financial

statements subject to audit are prepared in accordance with GAAP/PFRS.

• When an overall opinion cannot be expressed, as where the auditor disclaims an opinion,

the reasons therefore should be stated.

2. Consistency is implicit in the auditor’s report

• If there is no material consistency as to application of GAAP/PFRS, no statement as to

consistency is required in the auditor’s report. However, if a material inconsistency exists,auditor shall identify such inconsistency in the auditor’s report.

In short:

• no express statement as to

consistency is necessary because consistency is implicit in the auditor’s report

• auditor shall identify in the

auditor’s report such inconsistency

3. Adequacy of disclosure is implicit in the auditor’s

report. If informative disclosure is adequate, no statement as to adequacy of disclosure isrequired in the auditor’s report. However, if informative disclosure is inadequate, auditormust state such inadequacy in the auditor’s report.

• no statement as to adequacy of disclosure is

necessary because adequacy of disclosure is implicit in the auditor’s report

• auditor must state in the audit report such

inadequacy

4. expression of auditopinion is explicit in the auditor’s report

To indicate the character of the engagement and the degree of responsibility assumed by

the auditor. This would prevent FINANCIAL STATEMENTS users from misinterpreting thedegree of responsibility the auditor is assuming/taking.

Reference to the expression "taken as a whole" in the fourth generally accepted auditing

standard of reporting means that the audit opinion applies equally to a complete set of financial statements and to each individual financial statement.

• The PSAs are interpretations of GAAS, meaning, they are intended to clarify the meaning of "generally accepted auditing standards."

• The PSAs contains basic audit principles and essential procedures together with related guidance in

the form of explanatory and other material which the auditor should follow when conductingfinancial statements audit.

• PSAs apply to independent examination of (historical) financial statements

of any entity conducted for the purpose of expressing an opinion.

• The auditor should conduct an audit in accordance with PSA. Compliance

with PSAs means application of basic audit principles and performance of essential audit

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procedures. Compliance with relevant PSAs is mandatory. Only in exceptional instances wheredeparture from relevant PSA is allowed such as when the auditor believes that the:

Amount involved is insignificant; or

Requirement of the PSA is impractical to perform; or

Requirement of the PSA is impossible to perform.

One of the recognized objectives of the accountancy profession is to attain the highest levels of performance. To achieve this objective, there is a need for assurance that all professional services providedby CPAs are carried out to the highest quality or standards of performance. Reasonable assurance of meeting such need is provided through a system of quality control.

A refers to quality control policies and procedures adopted by CPA firms thatare designed to provide reasonable assurance that the firm and its personnel comply with professionalstandards and regulatory and legal requirements and that reports issued by the firm or engagementpartners are appropriate in the circumstances.

Policies and procedures to providereasonable assurance that all audits are conducted in accordance with PSAs and that audit reports

issued are appropriate in the circumstances

a. – are the objectives and goals to be achieved

b. – are steps/procedures to be taken to:• accomplish the policies adopted, or

• implement and monitor compliance with those policies

Under Philippine Standard on Quality Control 1(PSQC 1) CPA firms are required to establish and implement a system of quality control.

The nature and extent of the SQC developed by CPA firms vary from firm to firm due to various factors such as:

a. Size of the CPA firm

b. Nature of its practicec. Operating characteristics

d. Its organizatione. Geographical dispersionf. Cost-benefit considerationg. Whether it is part of a network

Although the nature and extent of the system of quality controldeveloped by CPA firms vary from one firm to another, a system of quality control must have the followingelements:

1. – The CPA firm should establish policies and

procedures that:

• Promote an internal culture based on recognition that quality is essential in the performance of

the engagements

• Require CPA firm’s leader (CEO/ managing board of partners or its equivalent), to assume

ultimate responsibility for the firm’s system of quality control.2. –

• The CPA firm should establish policies and procedures to provide reasonable assurance that the

firm and its personnel comply with relevant ethical requirements (including independence):

3. The CPA firm

should establish policies and procedures to provide reasonable assurance that the CPA firm will onlyundertake or continue relationships and engagements where it:

a. Has considered the client’s integrity

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

4. – The CPA firm should establish policies and procedures to provide reasonable

assurance that it has sufficient personnel with the capabilities, competence, and commitment to ethicalprinciples necessary to perform the engagement.

5. – The CPA firm should establish policies and procedures to provide

reasonable assurance that engagements are performed in accordance with professional standardsand regulatory and legal requirements, and that the firm or engagement partner issue reports that

are appropriate in the circumstances.

6. – The CPA firm should establish policies and procedures to provide reasonable assurance

that quality control are relevant, adequate and operating effectively and complied with in practice and

should include an ongoing consideration and evaluation of the firm’s system of quality control, includinga periodic inspection of a selection of completed engagements.

The purpose of monitoring compliance with quality control policies and procedures is to provide anevaluation of:

a. Adherence to professional standards and regulatory and legal requirements;b. Whether the quality control system has been appropriately designed and effectively implemented;

andc. Whether the firm’s quality control policies and procedures have been appropriately applied, so that

reports that are issued by the firm or engagement partners are appropriate in the circumstances.

1. The firm should establish policies and procedures designed to

provide it with reasonable assurance that it deals appropriately with:a. Complaints and allegations that the work performed by the firm fails to comply with

professional standards and regulatory and legal requirements; and

b. Allegations of non-compliance with the firm’s system of quality control.

2. The firm should establish policies and procedures requiring appropriate

documentation to provide evidence of the operation of each element of its system of quality control.

GAAS/PSAs relate to each individual audit engagement, whereas

SQC relates to all professional activities/services of the firms practice as a whole.

• To ensure that CPAs work to the highest standards, the government thru the Professional

Regulatory Board of Accountancy (BOA) has required all CPA firms and individual CPAs in publicpractice to obtain a certificate of accreditation to practice public accountancy. Such certificate is validfor three (3) years and can be renewed after complying with the requirements of the BOA.

• As a condition to the renewal of the certificate of accreditation to practice public accountancy, theBOA requires individual CPAs and CPA firms to undergo a quality control review to ensure that these

CPAs comply with accounting and auditing standards and practices.

• The BOA has created a Quality Review Committee (QRC) which shall conduct a quality review on

applicants for registration to practice public accountancy.

• Conducts quality review on applicants for registration, or renewal thereof, to practice public

accountancy

• Render a report on such quality review, which shall be attached to the application for registration

• Recommend to BOA revocation of registration and professional ID cards of CPAs for not observing theSQC requirements

– an oversight into (or study or appraisal of) the quality of audit of FS through a review of quality control measures established by CPA firms and individual CPAs in public practice to ensure

compliance with accounting and auditing standards and practices

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Documents

Gaas and Sqc