AUDIT PRINCIPLES MODULE 7

Question 1

establishes the basic principles and essential procedures and to provide guidance and to provide guidance regarding a firm’s responsibilities for its system of quality control for audits and reviews of historical financial information, and for other assurance and related services engagements.

Answer 1

PSQC 1 (Philippine Standards on Quality Control 1)

Question 2

Consists of policies designed to achieve the objectives of quality control and the
procedures necessary to implement and monitor compliance with those policies.

Answer 2

System of Quality Control

Question 3

Established and implemented to ensure that a public accounting firm adheres to the
standards of the accounting profession.

Answer 3

System of Quality Control

Question 4

NOT A QUESTION!

The firm shall design a system of quality control designed to:

• provide it with REASONABLE ASSURANCE that the firm and its personnel comply with professional standards and regulatory and legal requirements
• reports issued by the firm or engagement partners are appropriate in the circumstances.

Question 5

Set of policies and procedures designed to provide reasonable assurance that the
public accounting firm complies with professional standards.

Answer 5

Quality control system

Question 6

The nature and extent of quality control procedures depend on factors such as:

Answer 6

1. Its size and nature of its policies
2. Degree of operating autonomy allowed to its personnel
3. The nature of its practice
4. Its organization
5. Its geographic dispersion
6. Appropriate cost/benefit consideration

Question 7

NOTE:

The quality control policies and procedures shall be documented and communicated to the firm’s personnel.

Question 8

Elements of a System of Quality Control:

Answer 8

1. Leadership Responsibilities for Quality within the firm
2. Ethical Requirements
3. Acceptance and Continuance of Client Relationships and Specific Engagements
4. Human Resources
5. Engagement performance
6. Monitoring

MNEMONIC: HARLEM

Question 9

are established to measure the quality of performance of individuals and organizations.

Standards relating to the accounting profession concern themselves with CPA’s professional qualities, the judgment exercised in their professional engagement, and the CPA firm’s quality control policies and procedures

Answer 9

Standards

Question 10

The partner or other person IN the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body

Answer 10

Engagement Partner

Question 11

All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a network firm.

Answer 11

Engagement Team

Question 12

A sole practitioner, partnership, or other entity of professional accountants

Answer 12

Firm

Question 13

A partner, OTHER PERSON in the firm, suitably qualified external person, or a team made up of such individuals, NONE OF WHOM IS PART OF THE ENGAGEMENT TEAM, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments the engagement team made and the conclusions it reached in formulating the report.

Answer 13

ENGAGEMENT QUALITY CONTROL REVIEWER

Question 14

A process designed to provide an OBJECTIVE EVALUATION, ON or BEFORE the date of the report, of the significant judgments the engagement team made, and the conclusions it reached in formulating the report.

Answer 14

ENGAGEMENT QUALITY CONTROL REVIEW

Question 15

An individual OUTSIDE THE FIRM with the competence and capabilities to act as an engagement partner, for example, a partner of another firm, or an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits and reviews of historical financial information, or other assurance or related services engagements, or of an organization that provides relevant quality control services.

Answer 15

SUITABLY QUALIFIED EXTERNAL PERSON

Question 16

The firm shall establish policies and procedures designed to promote an internal
culture based on the recognition that quality is essential in performing engagements.

Answer 16

Leadership Responsibilities for Quality within the firm

Question 17

the ENGAGEMENT PARTNER should take responsibility for the overall quality of each audit engagement to which the partner is assigned

Answer 17

Leadership Responsibilities for Quality within the firm

Question 18

engagement partner should set an example regarding the quality of audit by emphasizing through actions and messages the importance of performing work that complies with professional standards, complying with the firm’s quality control, and issuing appropriate reports

(the engagement partner should be a good example to its staff or members, in order for them to follow and do their work properly)

Answer 18

Leadership Responsibilities for Quality within the firm

Question 19

The FIRM shall establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements

Answer 19

Relevant Ethical Requirements

Question 20

throughout the audit engagement, the engagement partner shall remain alert, through observation and making inquiries as necessary, for evidence of noncompliance with relevant ethical requirements by members of the engagement team

Answer 20

Relevant Ethical Requirements

Question 21

Five Fundamental Ethical Requirements:

Answer 21

1. Integrity
2. Objectivity
3. Professional Competence and Due Care
4. Confidentiality
5. Professional behavior

Question 22

The engagement partner should form a conclusion on compliance with independence requirements that apply to the audit engagement.

Answer 22

Independence

Question 23

1. obtain relevant information to identify circumstances and relationships that creates threats to independence
2. evaluate information on identified breaches of the firm independence policies and procedures to determine whether they create threats to independence
3. take appropriate SAFEGUARDS to eliminate such threats to reduce them to an acceptable level, or if considered appropriate, to withdraw from audit engagement, where withdrawal is permitted by law or regulation

Answer 23

Independence

Question 24

What ruins the independence requirement?

Answer 24

Relationships

Question 25

the FIRM should establish policies and procedures designed to provide it with reasonable that it will only undertake or continue relationships and engagements where the firm: 1. Is COMPETENT to perform the engagement and has the capabilities (CAPABLE), including time and resources, to do so 2. Can comply with relevant ethical requirements (the five fundamental ethical requirements and independence) 3. Has considered the integrity of the client, and does not have information that would lead it to conclude that the client lacks integrity

Answer 25

Acceptance and Continuance of Client Relationships and Specific Engagements

Question 26

Information that would assist engagement partner regarding acceptance and continuance of client relationship:

Answer 26

1. Identity and business reputation of client's principal owners, key management-related parties, and those charged with governance 2. Nature of client's operations, including its business practices 3. Indications that the client might be involved in money laundering or any other criminal activities 4. The reasons for the proposed appointment of the firm and non-reappointment of the previous firm

Question 27

THE POLICIES AND PROCEDURES in assisting engagement partner regarding acceptance and continuance of client relationship may include:

Answer 27

1. obtaining information as deemed necessary 2. if a potential conflict of interest is identified 3. if issues have been identified

Question 28

The FIRM shall establish policies and procedures designed to provide it with reasonable assurance that it has sufficient personnel with the competence, capabilities, and commitment to ethical principles necessary to: (a) Perform engagements in accordance with professional standards and regulatory and legal requirements (b) Enable the firm or engagement partners to issue reports that are appropriate in the circumstances

Answer 28

Human Resources (Assignment of Engagement Teams)

Question 29

THE POLICIES AND PROCEDURES in Human Resources (Assignment of Engagement Teams):

Answer 29

1. Recruitment 2. Performance evaluation, compensation, and promotion 3. Capabilities and competence 4. Career development 5. Assignment of engagement teams

Question 30

The firm shall assign responsibility for each engagement to an engagement partner. The firm should establish policies and procedures requiring that: ▪ The identity and role of the engagement partner are communicated to key members of client management and those charged with governance; ▪ The engagement partner has the appropriate capabilities, competence, authority and time to perform the role; and ▪ The responsibilities of the engagement partner are clearly defined and communicated to that partner.

Answer 30

Assignment of Engagement Teams

Question 31

The engagement partner should be satisfied that the engagement team COLLECTIVELY has the appropriate capabilities, time, and competence to:

Answer 31

o An understanding of, and practical experience with, engagements of a similar nature and complexity through appropriate training and participation o An understanding of professional standards and regulatory and legal requirements. o Appropriate technical knowledge, including knowledge of relevant information technology. o Knowledge of relevant industries in which the clients operate. o Ability to apply professional judgment. o An understanding of the firm’s quality control policies and procedures

Question 32

The firm should establish policies and procedures designed to provide it with reasonable assurance: (a) The engagements are performed in accordance with the professional standards and other regulatory and legal requirements (b) That the audit report issued is appropriate in circumstances

Answer 32

Engagement performance

Question 33

The firm promotes consistency in the quality of engagement performance through its policies and procedures.

Answer 33

Engagement Performance

Question 34

ENGAGEMENT SUPERVISION includes the following:

Answer 34

• Tracking the progress of the engagement. • Considering the competence and capabilities of individual members of the engagement team, whether they have sufficient time to carry out their work, whether they understand their instructions and whether the work is being carried out in accordance with the planned approach to the engagement. • Addressing significant matters arising during the engagement, considering their significance and modifying the planned approach appropriately; and • Identifying matters for consultation or consideration by more experienced engagement team members during the engagement.

Question 35

A REVIEW consists of consideration of whether:

Answer 35

• The work has been performed in accordance with professional standards and regulatory and legal requirements; • Significant matters have been raised for further consideration; • Appropriate consultations have taken place and the resulting conclusions have been documented and implemented; • There is a need to revise the nature, timing, and extent of work performed; • The work performed supports the conclusions reached and is appropriately documented; • The evidence obtained is sufficient and appropriate to support the report; and • The objectives of the engagement procedures have been achieved.

Question 36

The firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel, and, where applicable, others subject to independence requirements (including experts contracted by the firm and network firm personnel), maintain independence where required by the Philippine code.

Answer 36

Independence

Question 37

assistants/staff should be informed of their responsibilities - Their responsibilities, include the need to comply with relevant ethical requirements, and to plan and perform an audit with professional skepticism as required by PSA 220 V - The responsibilities of respective partners where more than one partner is involved in the conduct of audit engagement - Objectives of the work performed - Nature of entity's business - Risk-related issues and any problems that may arise - The detailed approach to the performance of audit engagement 706

Answer 37

DIRECTION

Question 38

monitoring the progress of the audit resolving accounting and audit issues - Tracking the progress of the audit engagement - Considering the competence and capabilities of individual members of the engagement team, including whether they have sufficient time to carry out their work, whether they understand instructions, and whether the work is being carried out in accordance with the planned approach to the audit engagement - Addressing significant matters arising during the audit engagement - Identifying matters for consultation or consideration by more experienced engagement team members during the audit engagement.

Answer 38

Supervision

Question 39

if procedures evidence and documentation are appropriate for the conclusion - Critical areas of judgment, especially those relating to difficult or contentious matters identified during the course of the engagement - Significant risks - Other areas the engagement partner considers important

Answer 39

Review

Question 40

seeking assistance from authoritative sources within or outside the firm on the difficult or contentious matter

Answer 40

Consultation

Question 41

The firm shall establish policies and procedures for dealing with and resolving differences of opinion within the engagement team, with those consulted and, where applicable, between the engagement partner and the engagement quality control reviewer.

Answer 41

Differences of Opinion

Question 42

The firm shall establish policies and procedures for the retention of documentation for a period sufficient to meet the needs of the firm or as required by law or regulation.

Answer 42

Differences of Opinion

Question 43

The firm shall establish policies and procedures requiring, for appropriate engagements, and engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. • Such policies and procedures should: o Require an engagement quality control review for all audits of financial statements of listed entities; o Set out criteria against which all other audits and reviews of historical financial information, and other assurance and related services engagements should be evaluated to determine whether an engagement quality control review should be performed; and o Require an engagement quality control review for all engagements meeting the criteria established in compliance with above paragraph.

Answer 43

Engagement Quality Control Review

Question 44

The firm’s policies and procedures should address the appointment of engagement quality control reviewers and establish their eligibility through: o The technical qualifications required to perform the role, including the necessary experience and authority; and o The degree to which an engagement quality control reviewer can be consulted on the engagement without compromising the reviewer’s objectivity.

Answer 44

Criteria for the Eligibility of Engagement Quality Control Reviewers

Question 45

The firm’s policies and procedures are designed to maintain the objectivity of the engagement quality control reviewer. For example, the engagement quality control reviewer: o Is not selected by the engagement partner; o Does not otherwise participate in the engagement during the period of review; o Does not make decisions for the engagement team; and o Is not subject to other considerations that would threaten the reviewer’s objectivity.

Answer 45

Criteria for the Eligibility of Engagement Quality Control Reviewers

Question 46

Policies and procedures on documentation of the engagement quality control review should require documentation that: o The procedures required by the firm’s policies on engagement quality control review have been performed; o The engagement quality control review has been completed BEFORE the report is issued; and o The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that significant judgments the engagement team made and the conclusions the reached were not appropriate.

Answer 46

Documentation of the Engagement Quality Control Review

Question 47

The engagement partner shall consider the results of the firms monitoring progress as evidenced in the latest information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that information may affect the audit engagement.

Answer 47

Monitoring

Question 48

A deficiency in the firm's system of quality control does not necessarily indicate that a particular audit engagement was nomperformed in accordance with the professional standards and regulatory and legal requirements, or that the auditor's opinion was not appropriate.

Answer 48

Monitoring

Question 49

The firm should establish policies and procedures designed to provide it with reasonable assurance that it deals appropriately with: ▪ Complaints and allegations that the work performed by the firm fails to comply with professional standards and regulatory and legal requirements; and ▪ Allegations of non-compliance with the firm’s system of quality control

Answer 49

Monitoring – complaints and allegations

Question 50

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.

Answer 50

Monitoring – Documentation

Question 51

Systems of quality control in compliance with PSQC 1 (redrafted) are required to be established by

Answer 51

December 15, 2009