Professional Standards & Systems of Quality Control PDF

Professional Standards & Systems of Quality Control  Popularly known as the Generally Accepted Auditing Standards (GAAS) The general guidelines that the auditors must follow in Auditing Standards conducting the audit....

Professional Standards & Systems of Quality Control  Popularly known as the Generally Accepted Auditing Standards (GAAS) The general guidelines that the auditors must follow in Auditing Standards 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 PAGE 2  GAAP vs. GAAS: GAAP: the principles for the preparation and presentation GAAP VS GAAS of financial statements that are used by the auditor as criteria in determining the overall fairness of the financial statements; foundation of accounting GAAS: standards/measures/guidance that the auditors must follow when conducting an audit; foundation of auditing PAGE 3 10 Generally Accepted Auditing Standards 10 GAAS General Standards of Standard of Standards Field Work Reporting Technical Training and Planning GAAP/PFRS Proficiency Inconsistency in Independence Internal Control GAAP/PFRS Professional Care Evidence Disclosures Opinion PAGE 4 GENERAL STANDARDS -(TIP) standards/criteria which present guidance in the personal qualifications an auditor must possess to undertake the audit engagement PAGE 5  Professional competence 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: Technical Training and Proficiency (T) 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. PAGE 6  1. Independence: 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 fact and in appearance. a. Independence of mind – The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, Independence(I) and exercise objectivity and professional skepticism; this is also known as “independence in fact” or “independence in mental attitude.” b. Independence in appearance – 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 believe or conclude that the auditor is not independent. In other words, independence in appearance requires that activities or relationships that even suggest or imply a possible lack of independence must be avoided by the auditor. PAGE 7  This standard requires that an auditor, in fulfilling his duties, should act diligently and carefully, Professional Due care: (P) exercise reasonable prudence, and apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching a decision. PAGE 8 Standard of Field Work(PIE) the standards / criteria for planning and evidence-gathering PAGE 9  Planning involves establishing the overall audit strategy for the engagement and developing an audit plan. The auditor should also supervise the work of Adequate Planning and proper assistants. Supervision is critical because Supervision(P) 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. PAGE 10  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 obtain a more detailed knowledge of the client's business and the environment/industry in which the entity Internal Control (I) 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. PAGE 11  The auditor should obtain sufficient appropriate audit evidence by performing Sufficient Appropriate audit audit procedures to be able to draw Evidence (E) reasonable conclusions on which to base the opinion regarding the financial statements under audit. PAGE 12 STANDARDS OF REPORTING standards on auditor’s expression of audit opinion (GIDO) through a medium known as the auditor’s report PAGE 13  1. Whether the financial statements are in accordance with GAAP/PFRS: Conformity with GAAP/PFRS (G) 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. PAGE 14  Consistency is implicit in the auditor’s report If there is no material consistency as to Inconsistencies with GAAP/PFRS(I) 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. PAGE 15  Adequacy of disclosure is implicit in the auditor’s Disclosures (D) report. If informative disclosure is adequate, no statement as to adequacy of disclosure is required in the auditor’s report. However, if informative disclosure is inadequate, auditor must state such inadequacy in the auditor’s report. PAGE 16  Objective of 4th standard of reporting: To indicate the character of the engagement and the degree of responsibility assumed by the Opinion (O) auditor. This would prevent FINANCIAL STATEMENTS users from misinterpreting the degree 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. PAGE 17  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 Philippine Standards in Auditing procedures together with related guidance in the form of explanatory and other material which the auditor should follow when conducting financial statements audit. Application of PSAs: PSAs apply to independent examination of (historical) financial statements of any entity conducted for the purpose of expressing an opinion. Compliance with PSA: The auditor should conduct an audit in accordance with PSA. Compliance with PSAs means application of basic audit principles and performance of essential audit procedures. Compliance with relevant PSAs is mandatory. Only in exceptional instances where departure 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. PAGE 18  An audit in accordance with PSAs includes: a. Compliance with PSAs relevant to the audit 1) Compliance with all PSAs relevant to the audit (a PSA is relevant to the audit when the PSA is in effect and the circumstances addressed by the PSA exist) 2.) Having an understanding of the entire text of a PSA (including its application and other explanatory material) to An audit in accordance with PSAs understand its objectives and to apply its requirements properly includes: 3.) Prohibition from the auditor from representing compliance with PSAs in the auditor’s report when he has not complied with the requirements of PSAs relevant to the audit b. The use of the objectives stated in relevant PSAs in planning and performing the audit to achieve the overall objectives of the auditor. In using the objectives, the auditor is required to have regard to the interrelationships among the PSAs. This is because the PSAs deal in some cases with general responsibilities and in others with the application of those responsibilities to specific topics. c. In addition, the auditor should also consider Philippine Auditing Practice Statements (PAPSs). PAPSs provide interpretative guidance and practical assistance to auditors in implementing the PSAs and to promote good practice in the accountancy profession. PAGE 19  a. Objectives – each PSA contains one or more objectives which provide a link between the requirements and the overall objectives of the auditor The objectives in individual PSAs serve to focus the auditor on the desired outcome of the PSA. Contents/Structure of the PSAs a. Requirements (requirements are expressed in the PSAs using “shall”) – the requirements of the PSAs are designed to enable the auditor to achieve the objectives specified in the PSAs, and thereby the overall objectives of the auditor b. Related guidance in the form of application and other explanatory material that are designed to support the auditor in obtaining reasonable assurance PAGE 20  It provides further explanation of the requirements of a PSA and guidance for carrying them out It may explain more precisely what a requirement means or is intended to cover Application and other It may include examples of procedures that may be explanatory material: appropriate in the circumstances. While such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements of an PSA. It may also provide background information on matters addressed in a PSA. It may include appendices which form part of the application and other explanatory material. When appropriate, it may include additional considerations specific to audits of smaller entities and public sector entities. PAGE 21  Introductory material – provides context relevant to a proper understanding of the PSA Introductory material may include, as needed, such matters as explanation of: a. The purpose and scope of the PSA (including how the PSA relates to other PSAs) b. The subject matter of the PSA PSAs may also contain: c. The respective responsibilities of the auditor and others in relation to the subject matter of the PSA d. The context in which the PSA is set Definitions – a description of the meanings attributed to certain terms for purposes of the PSAs → Assist in the consistent application and interpretation of the PSAs → Not intended to override definitions that may be established for other purposes, whether in law, regulation or otherwise PAGE 22 NATURE OF SYSTEM OF QUALITY CONTROL: System of Quality Control in an Audit Engagement: Policies and procedures to provide reasonable assurance that all audits are conducted in accordance with PSAs and that audit reports issued are appropriate in the circumstances PAGE 23  a. Quality control policies – are the objectives and goals to be achieved b. Quality control procedures – are steps/procedures to be taken to: QC policies vs. QC procedures: accomplish the policies adopted, or implement and monitor compliance with those policies Mandatory requirement for CPA firms to establish SQC: Under Philippine Standard on Quality Management 1 and 2 (PSQM 1 and 2) [previously PSQC] CPA firms are required to establish and implement a system of quality control. PAGE 24 Nature and Extent of a System of Quality Control: Size of the CPA firm Nature of its practice Operating characteristics Its organization Geographical dispersion Cost-benefit consideration Whether it is part of a network PAGE 25  Acronym: HEALME (PSQC 1) 1.) Human Resource 2.) Engagement Performance 3.) Accepting and Continuing Client engagement 4.) Leadership Responsibilities Elements of System of Quality Control 5.) Monitoring under PSQM 1: 6.) Ethical Requirements PAGE 26 Human resources a. The CPA firm should establish policies and procedures to provide reasonable assurance that it has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform the engagement. PAGE 27  The CPA firm should establish policies and procedures to provide reasonable assurance that engagements are Engagement performance performed in accordance with professional standards and regulatory and legal requirements, and that the firm or engagement partner issue reports that are appropriate in the circumstances. PAGE 28  The CPA firm should establish policies and procedures to provide reasonable assurance that the CPA firm will only Accepting and Continuing Client undertake or continue relationships and engagements where engagement it: a. Has considered the client’s integrity b. Is competent to perform the engagement and has the capabilities, time and resources to do so; and c. Can comply with ethical requirements PAGE 29 Leadership responsibilities for The CPA firm should establish policies and procedures that: quality within the firm 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 PAGE 30  The CPA firm should establish policies and procedures to Monitoring 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, including a periodic inspection of a selection of completed engagements. PAGE 31 Ethical requirements, including The CPA firm should establish policies and procedures to independence – provide reasonable assurance that the firm and its personnel comply with relevant ethical requirements (including independence): PAGE 32  Establish Quality Objectives – (e.g. a firm may be required by law or regulation to appoint non-executive individuals to the firm’s governance structure and the firm considers it necessary to establish additional quality objectives to Firm’s risk assessment process address the requirements.) Identify and Assess Quality Risks Design and Implement Responses to Address the Quality Risks – pertains to policies and procedures to address the risk PAGE 33  Obtaining, generating or communicating information is generally an ongoing process that involves all personnel Information and Communication and encompasses the dissemination of information within the firm and externally. Information and communication is pervasive to all components of the system of quality management. PAGE 34  The specified responses may address multiple quality risks related to more than one quality objective across different components. For example, policies or procedures for Specified Response complaints and allegations may address quality risks related to quality objectives in resources (e.g., personnel’s commitment to quality), relevant ethical requirements and governance and leadership. The specified responses alone are not sufficient to achieve the objectives of the system of quality management. PAGE 35  In some circumstances, the firm may belong to a network. Networks may establish requirements regarding the firm’s system of quality management or may make services or resources available that the firm may choose to implement Network Requirements and or use in the design, implementation and operation of its Network Services system of quality management. Such requirements or services may be intended to promote the consistent performance of quality engagements across the firms that belong to the network. The extent to which the network will provide the firm with quality objectives, quality risks and responses that are common across the network will depend on the firm’s arrangements with the network. PAGE 36  Documentation provides evidence that the firm complies with this ISQM, as well as law, regulation or relevant ethical requirements. Documentation Documentation may take the form of formal written manuals, checklists and forms, may be informally documented (e.g., e-mail communication or postings on websites), or may be held in IT applications or other digital forms (e.g., in databases). PAGE 37  Thank You