Chapter 2
Chapter 2
Chapter 2
PRACTICE OF
PUBLIC
ACCOUNTANCY
Section 4 of the Philippine Accountancy Act of 2004 describes the scope of the
practice of public accountancy as follows:
"Practice of Public Accountancy shall constitute in a person, be it in
his/her individual capacity, or as a partner or as a staff member in an
accounting or auditing firm, holding out himself/herself as one skilled in
the knowledge, science and practice of accounting, and as a qualified
person to render professional services as a certified public accountant; or
offering or rendering, or both, to more than one client on a fee basis or
otherwise, services such as the audit or verification of financial
transaction and accounting records; or the preparation, signing, or
certification for clients of reports ,of audit, balance sheet, and other
financial, accounting and related schedules, exhibits, statements or
reports which are to be used for publication or for credit purposes, or to
be filed with a court or government agency, or to be used for any other
purpose; or the design, installation, and revision of accounting system; or
the preparation of income tax returns when related to accounting
procedures; or when he/she represents clients before government
agencies on tax and other matters related to accounting or renders
professional assistance in matters relating to accounting procedures and
the recording and presentation of financial facts or data."
Most young professionals aspiring to become CPAs usually would like start their
careers working for a CPA firm. After they become CPAs, many leave the firm
to work in industry, government or education. These people may continue to be
CPAs but often give up their right to practice as independent auditors. CPAs
who practice as independent auditors must meet registration requirements to
exercise their right to practice. It is ~ ·)mmon therefore, for accountants to be
CPAs who do not practice as independe11t auditors.
This Commission has the overall jurisdiction over the regulatory boards
in the Philippines among which is the Board of Accountancy. It derives
its authority from the PRC Modernization Act of 2000.
Because large CPA firms usually have clients that must file accounting
reports and the rules and regulations affecting filings with the SEC are
extremely complex, most CPA firms have specialists who spend a large
portion of their time ensuring that their clients satisfy all SEC
requirements.
B. Pmfessional Organizations
C. Standard-Se_t!!_n_g]Jodf~s ----~
In April of2001, the IASB assumed from the IASC the responsibility for
setting international accounting standards. IASB adopted the IASs
issued by the IASC and retained the designation and format of the
Standards. New standards issued by the IASB were designated as
International Financial Reporting Standards (IFRS). In December 2003,
the IASB issued 15 revised IASs, withdrew IAS 15, Information
"1 Chapter 2
Reflecting the Effects of Changhig Prices, and approved and 1s!;ued IFRS
I to 5.
A. Assurance Engagements
Nature ofAssurance Engagements
Although the recent focus of the auditing profession has been on the audit of
financial statements, the concept of assurance services is much broader.
1
"Internal control - Integrated Pramework" The Committee of Sponsoring Organization•; of the
Treadway Commission.
2
"Guidance on Assessing Control - The E:o\o Principles.. Criteria of Control Board, Thc,,_:a:iadian
Institute of Chartered Accountants. _
38 Chapter 2
Under the Philippine Fr~mework for Assurance Engagements there are two
types of assurance engagements that a practitioner is permitted to perform.
These are a reasonable assurance engagement and a limited assurance
engagement.
In forming the audit opinion, the auditor obtains sufficient appropriate audit
ev.idence to be able to draw conclusions on which to base that opinion. The
auditor's opinion enhances the credibility of financial statements by
providing a high, but not absolute, level of assurance. Absolute assurance in
auditing is not attainable as a result of such factors as the need for judgment,
the use of testing, the inherent limitations of any accounting and internal
control systems and the fact that most of the evidence available to the auditor
is persuasive, rather than conclusive, in nature.
40 Chapter2
The growth of the Internet and electronic commerce has extensively affected
the demand for other assurance services. Concerns over privacy, security of
information and the reliability of processes generating infonnation in a real-
time format contributed to an even greater demand for assurance about
computer controls surrounding information transacted electronically. CPAs
can help provide assurance about these functions. Examples of assurance
services related to information technology are assurance over website
controls, assurance about information system reliability and electronic
commerce assurance services.
Some CPA firms are licensed to perform this service to provide assurance to
users of ~eb sites in the Internet. The CPA's electronic Web Trust seal is
affixed to the web site. This seal assures the user that the web site owner has
met established criteria related to business practices, transaction integrity and
information processes. Web Trust is an attestation service and the Web Trus_t
seal is a symbolic representation of the CPA's report- on management
assertions about its disclosure of electronic commerce practices.
Risk Assessment
Eldercare Plus
This assurance service focuses on the needs of the elderly and whether
caregivers are providing services tJTat meet specified objectives or at an
acceptable leve_I. This service might include periodic reporting to family
members about the degree to ·which caregivers are complying with the
contracted. level of care as supervising the investment and accounting for the
elderly individual's e~.ate.
The practitioner is the person who provides the assurance to the intended
users about a subject matter that is the responsibility of another party. 'f he
practitioner gathers evidence to obtain assurance and provide a conclusion to
the intended us,ris about whether a subject matter that is the responsibility of
a party other than the intended users or the practitioner conforms in all
material respects with identified criteria.
The responsible party and the intended user will often but not ncwssarily be
from separate organizations. A responsible party and an intended user may
both be within the same organizatfon, for example, the board of directors
seek assurance about information provided by the accounting department of
that organization.
(i) Practitioner
(iii)lntended Users
The intended users are the perso·n, persons or class of persons fo,· whom
the practitioner prepares the assurance repo11. The responsible ~;;1rty can
be one of the intended users, but not the only one.
Criteria are the benchmarks used to evaluate or measure the subject matter
including, where relevant, benchmarks for presentation and disclosure.
Criteria can be formal, for example in the preparation of financial statements.
the criteria may be Philippine Financial Reporting Standards: when reporting
on internal control, the criteria may be an established internal control
framework or individual control objectives specifically designed for the
engagement~ and when reporting on compliance, the criteria may be the
applicable law, regulation or contract. Examples of less fonnal criteria are
an internally developed code of conduct or an agreed level of performance
(such as the number of times a particular committee is expected to meet in a
year)
(iii) Materiality
3
(a) This includes the risk, in those direct reporting engagements where the subject matter
information is presented only in the practitioner's conclusion, that the practitioner
inappropriately concludes that the subject matter does, in all material respects, conform with the
criteria, for example: "In our opinion, internal control is effective, in all material respects, based
on XYZ criteria."
(b) In addition to assurance engagement risk, the practitioner is exposed to the risk of cxrrcssing
an inappropriate· conclusion when the subject matter information is not materially misst;:• ·t and
risks through the loss from litigation, adverse publicity, or othe"r events arising in r:onncction
with a subject matter reported on. These risks are not part of assurance engagement risk.
52 Chapter2
because of the inherent limitations ofthe design and operation of
internal control; and
(iii)Detection risk: t~ risk that the practitioner will not detect
I
mateilitJ misstat;;ment that exists. .
B. Non-Assurance Engagements
Not all engagements performed. by professional accountants are assurance
engagements. This does not mean that professional accountants do not
undertake such engagements, only that these engagements are not covered by
the Philippine Framework on Assurance Engagements. Other engagements
frequently perfonned by professional· accountants that are not assurance
engagements include the following.
• Agreed-upon procedures.
• Compilation of fi:nancial or other information.
• Preparation of tax returns where no conclusion is expressed, and tax
consulting.
• Management consulting.
• ~ther advisory services.
Practice of Public Accountancy 53
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Tax Services
The public accounting profession has been one of the most highly regarded
professions in the country. But the audits is only as good~ the next engagement
which must be executed well and within the rules of the profession. The new
public practitioner must be more than a "rules person". He or she must be able to
meet the challenges of professional judgment and adhere to standards of
professional excellence and ethics.
To address the current issues on the expectation gap of the CPA's performance.
public regulatirns and regulations within the firm have been adopted to include
the following:
• Setting requirements to ensure that only qualified people are admitted to
the accounting practice.
• Establishing international standards for accounting, reporting and
auditing services.
• Adopting the Revised Code of Ethics for Professional Accountants.
• Developing a program for quality control of public accounting practice.
• Requiring. practicing accountants to comply with continuing professional
development programs.
• Requiring regular, periodic reviews of auditor's compliance with
professional standards.
• Penalizing those found guilty of unacceptable practices.
• Monitoring adequate competition among CPA's.
58 Chapter 2
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REVIEW QUESTIONS AND EXERCISES
Questions
\,. Describe briefly the practice of public accountancy as provided for in the
/ Philippine Accountancy Act of2004.
2. Describe the role of the various organizations that 4lf[ect the practice of .
the accounting professionals in the Philippines.
3. What is meant by an assurance engagement?
4. What is the basic objective of an assurance engagement?
5. Give and explain briefly the most sought-after assurance services among
professional accountants.
6. Distinguish between consulting and assurance services.
7. Give examples of assurance services on infonnation technology.
8. Give and explain briefly three examples of non-assurance services by
professional accountants.
9. Explain the elements of an assurance engagement.
10. Differentiate between assertion.;.based engagements and direct reporting
engagements.
11. What is meant by "criwria" in the context of assurance engagements?
What characteristics must professional accountants possess for them to
be considered suitable?
12. Describe briefly four (4) non-assurance engagements perfonned
frequently. by professional accountants.
13. Describe three (3) emerging consultancy services being offered by
professional accountants.
14. Give and explain briefly at least five (5) initiatives to address the
credibility crisis iri the accountancy profession.
Practice of Public Accountancy 59
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Multiple Choice Questfons
c. Behavior
d. All of the above
13. The decjsion of whether the criteria are suitable involves considering
whether the subject matter of the assurance engagement is capable of
reasonabliY consistent evaluation or measurement using such criteria.
Which of the following characteristics is not considered necessary in
determining whether the criteria are suitable?
a. Relevance
b. Neutrality
c. Reliability
d. Sufficiency
Cases
Required:
(a) Explain how providing assurance about internal control provides
assurance about the.reliability of other information.provided by the
company.
(b) Describe the broad engagement activities that would be involved in
performing an examination of the effectiveness of internal control.
2. Assume that you are a partner with the firm of Santos & Lopez LLP.
You have been asked by Gonzales, Inc., an industrial supply company, to
provide assurance about the change in existing customer satisfaction over
the last tI:iree years. Gonzales' management has indicated that the criteria
it intends to use to evaluate customer satisfaction are a combination of
customer retention rate and increase in peso sales. Gonzales'
management will provide a schedule of the customer satisfaction
measures and a note that describes the criteria used.
Required:
(a) If Gonzales wants to provide.the presentation and CPA's report for
general use by prospective customers, identify any available
standards that provide guidance for such a service and the type or
types of services that your firm could provide.
(b) Describe the factors that you should consider in determining whether
the criteria are suitable.
(c) Assuming that' you conclude that the criteria are suitable, draft your
firm's report assuming that you perform an e~amination of the
subject matter. ·