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Auditing
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AUDITING THEORY RED SIRUG
ESTABLISHMENT, ORGANIZATION AND MANAGEMENT OF A PUBLIC ACCOUNTING FIRM
Allowed Forms of Organization for the Practice of Public Accountancy:a. Single practitioners (individual CPAs) or sole proprietorship, andb. Partnership of CPAs (general partnerships and limited liability partnerships)
Corporation form of CPA/Audit firm is not allowed in the Philippines.
Allowed Names for the Practice of Accountancy: 1. Individual CPA: Shall use his/her registered name (the name registered with the BOA
and the PRC and as printed on his/her CPA certificate)For example: Jessie Garcia, CPA
2. Firms: Shall use the duly registered and authorized firm name appearing in the registration documents issued by the DTI or any other proper government office/s and such firm name shall include the real name of the sole proprietor as printed in his/her CPA certificateFor example: Denver Roncal and Associates
3. Partnerships: In case of registered partnership – shall use the partnership name as indicated in the
Articles of Partnership and certificate of registration issued by the SEC In case of unregistered partnership – shall use the partnership name indicated in the
Articles of PartnershipFor example: Sycip, Gorres, Velayo & Company
In case of death or withdrawal of all partners, the surviving partner may continue to practice under the partnership name for a period of not more than 2 years after becoming a sole proprietor.
Prohibition on Use of Name: CPAs shall practice only under a name allowed by law and:
Shall NOT include any fictitious name Shall NOT indicate specialization (such as tax specialist or expert) Shall NOT misleading as to the type of organization
Registration for Accreditation with the BOA and PRC: Registration for accreditation with the BOA and PRC is required for CPAs (individuals,
firms and partnerships, including its partners and staff members) before they can engage in public accountancy.
They shall not commence public practice until a valid Certificate of Registration to practice public accountancy has been issued to such CPA(s). The Certificate of Accreditation attests that the applicant is duly accredited to practice public accountancy in the Philippines.
Basic requirements for registration: a. Application for registration (accomplished in a form prescribed by the BOA, in
triplicate, and duly signed by the applicant CPA) b. Submission of registration documents such as:
Certificate of registration issued by the SEC together with the certified copy of the current Articles of Partnership for registered partnerships, or
Certified copy of the Articles of partnership for unregistered partnership, or Certified copy of the certificate of registration of Firm name with the DTI and
other proper government agencies.c. A minimum of three (3) years meaningful experience in any of the areas of practice
of accountancyd. Compliance with the quality review (this is a required condition prior to registration or
renewal any thereof
The BOA created Quality Review Committee (QRC) to conduct quality review on applicants for registration to practice accountancy and render a report which shall be attached to the application for registration.
Validity of registration for accreditation is for a period of 3 years (renewable after 3 years on or before September 30 on the year of expiry). The registration of applicants
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approved during any month of the year shall expire on December 31 on the third year following its approval.
Example: If the application for registration of a CPA firm is approved on July 31, 2004, the registration shall expire on December 31, 2006 and therefore it shall file for renewal on or before September 30, 2006 for the three year period beginning January 1, 2007. The next renewal will be on or before September 30, 2009.
Tax and other Legal Requirements:a. Payment of privilege tax as a CPA on occupations with the city or municipality where
they practice public accountancyb. Business permits (from local and national government)c. Accreditation with other government agencies:
a. SEC – also accredits external auditors An external auditor should file with the SEC a representation letter for audit
clients whenever his audit client files its financial statements with the SECb. BSP – Rendering/offering of independent audits to banks and other financial
institutions under BSP supervision requires BSP accreditationc. BIR – also accredits external auditors
Foreign CPAs: The practice of accountancy in the Philippines is limited to Filipino CPAs. A foreign CPA is not allowed to be as owner, sole proprietor, partner or any staff thereof,
unless he/she is qualified to practice accountancy in the Philippines (unless the foreign CPA qualifies to practice under Sections 34 and 35 of RA 9298.)
Under no circumstances shall the correspondent relationship, membership, or business dealings with foreign CPAs be a scheme for the foreign CPAs to engage in the practice of public accountancy in the Philippines which under the present laws is limited to Filipino CPAs
Hierarchy/ Ranks/Levels within a CPA Firm:1. Partners – owners of the CPA/Auditing
firmDuties and responsibilities: Determine operating policies of the
firm Select and hire audit staff Obtain clients Establish contracts with clients (sign
engagement letter) Approve billings to clients Assume overall responsibility for
each engagement Plan and review all phases of the
audit Approve and sign the report and firm
correspondence (such as audit report and other documents
2. Senior or Senior-in-chargeDuties and responsibilities: Directly responsible to the manager
or the partner Take charge of field work Prepares audit program for a specific
engagement (subject to review by superiors)
Assigns particular phases of audit to staff auditors
Directly supervises staff auditors Perform more important audit
procedures Reviews non-financial records such as
articles of incorporation and by-laws Discusses with clients or with the
partner or manager problems or questions that arise in the course of the audit
Assemble audit working papers Prepare income tax returns Prepares the original draft of audit
report and audited financial statements (subject to review and approval by the partner or manager/supervisor)
3. Managers / SupervisorsDuties and responsibilities: Act as liaison between partners and
other team members Prepare the overall audit plan Discuss with clients items of material
importance (such as problems that may arise in course of the audit)
Directly supervise senior auditors Review working papers Draft the report Discuss reports and results to clients
and settle accounting problems with
4. Junior or staff auditor/assistantDuties and responsibilities: Prepare analyses, schedules,
reconciliations and reports of findings Verify footings, extensions and
postings on accounting records Trace evidence such as examination
of vouchers supporting a disbursement
Observe client’s physical count of inventories
Performs other tasks as may be assigned
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the client Take charge of training programs
Professional Fees:1. Amount of fees to be charged to clients: Fees charged should be a fair reflection of the
value of the professional services, taking into account the following:a. The skill and knowledge requiredb. The level of training and experience of the persons necessarily engaged on the workc. The time necessarily occupied by each person engaged on the work, andd. The degree of responsibility and urgency that the work entails
A fee lower than previous fee is acceptable if calculated using the above factors. Other factors to be considered are those influenced by legal, social and economic
conditions in the Philippines.
No standard amount of fee: A CPA in public practice may determine or quote whatever fee deemed appropriate. He may quote a fee lower than another but not too low (or significantly lower) nor excessive. If fees that are too low:
It is considered unethical There would be a risk of a perception that the quality of work could be impaired
2. Methods of billing clients (billing arrangements): The methods of determining professional fees are:a. Per diem basis – the charges are based on the actual time spent at a rate depending
on the experience and expertise of the members of the engagement team Also known as actual time charges basis It is computed as actual time spent x rate per hour as agreed upon
b. Fixed fee or Flat fee basis – lump-sum fee for the entire engagement. The charges for out-of-pocket expenses are separate from the audit fee and are to be billed separately
c. Maximum fee basis – a combination of fixed fee and per diem basis. The billing is similar to per diem basis subject to a maximum limit as agreed between the practitioner and the client
d. Retainer fee basis – the client pays a uniform/fixed monthly charge, plus additional fee annually, payable upon submission of the audit report
Out-of-pocket expenses – reimbursable expenses, in addition to the professional fees, that are chargeable to the client, such as:
Traveling expenses Supplies
Billing arrangements should be clearly defined, preferably in writing, before the start of the engagement to help in avoiding misunderstanding with respect to fees.
3. Prohibition against contingent fee: An assurance engagement should not be performed for a fee that is contingent on the result of the assurance work or on items that are the subject matter of the assurance engagement.
Contingent fee – a fee calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed
Contingent fee is unacceptable billing arrangement because it impairs independence and objectivity.
Examples of contingent fees:a. Fee based on % of audited net incomeb. Fee based upon % of the acquisition price of another companyc. Fee based on amount of taxes savedd. Tax preparation where the fee will be based on whether the CPA signs the tax
return preparede. Fee based on amount of insurance settlementf. Fee is charged if bank loan is obtained/approvedg. No fee will be charged unless specific finding or result is obtained
Not considered contingent fees:a. If fixed by a court or other public authorityb. If determined based on the results of judicial or government agency
proceedingsc. If authorized by statuted. If approved by a member body as generally accepted practice for certain
professional services
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Some reasons why the above are not considered contingent fees: Fees fixed by courts and other public authority, although may be uncertain
in nature at that moment, are not known and cannot be influenced by the auditor and the client.
Fees based on determination by taxing authorities are a matter of judicial proceedings which do not involve third parties.
Marketing Professional Services: A professional accountant in public practice should not bring the profession into disrepute
when marketing professional services. The professional accountant in public practice should be honest and truthful and should NOT:
a. NOT make exaggerated claims for services offered, qualifications possessed or experience gained; or
b. NOT make disparaging references to unsubstantiated comparisons to the work of another.
If the professional accountant in public practice is in doubt whether a proposed form of advertising or marketing is appropriate, the professional accountant in public practice should consult with the relevant professional body.
Publicity, Solicitation and Advertising: Publicity – the communication to the public of facts about a professional accountant
which are not designed for the deliberate promotion of that professional accountant Solicitation – the approach to a potential client for the purpose of offering professional
services Advertising – the communication to the public of information as to the services or skills
provided by professional accountants in public practice with a view to procuring professional business
Rules on Solicitation, Advertising and Referrals:a. Solicitation of clients – prohibited by the Code of Ethicsb. Advertising (or other form of marketing) – not allowed
Advertising is a form of solicitationc. Payment or receipt of commission – not allowedd. Referral – allowede. Payment or receipt of referral fee – not allowed
Sources of Clients: a. Referrals from businessmen, clients (present or previous), financial and government
institutions, other CPAs, and legal and other professional firmsb. Walk-in clients
Death or disability of an Individual CPA, and Dissolution or Liquidation of a Firm or Partnership of CPAs:
Such must be reported to the BOA by any designated staff member of the Individual CPA, or by the sole practitioner of a firm (or his/her designated staff member if the proprietor is unavailable), or by the managing partner (or any designated partner in case the managing partner in case the managing partner is unavailable) not later than 30 days from the date of such death, dissolution, or liquidation
The report must be:a. In affidavit form – in case of Individual CPA or a Firmb. A certified copy of dissolution or liquidation papers filed with the SEC – in case of a
partnership Failure to notify the BOA shall subject the designated individual to penalty.
Fees and Penalties: Fee – Fee for initial registration, renewal, or request for reinstatement: P1,000 or to such
an amount as the PRC may prescribe Penalties:
Suspension of CPA certificate, certificate of registration (to practice), and professional identification card. If the violator is criminally liable, such party responsible shall be proceeded against criminally, independent of any action therein provided.
Subject to the approval of the PRC, the BOA may, for justifiable reasons, lift the sanctions imposed on violators.
Examples of Violations of the IRR:a. Engaging in public accounting practice without first registering with the BOA and the PRCb. Continuing to engage in public accounting practice after the expiration of registration
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c. Continuing to engage in public accounting practice after suspension, revocation or withdrawal of registration
d. Giving any false information, data, statistics, reports or other statement which tend to mislead, obstruct, or obscure the registration of an Individual CPA, Firm or Partnership of CPAs under the IRR
e. Giving any misrepresentation to the effect that registration was secured when in truth and in fact, it was not secured
f. Failure or refusal to undergo quality reviewg. Failure to comply with the requirements on accomplishment of the application for
registration, including submission of required documents
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