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Chapter 2

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CHAPTER

PRACTICE OF
PUBLIC
ACCOUNTANCY

Learning Objectives After studying this chapter, you should be


able to:
1. Know the scope of practice of public
accountancy.
2. Enumerate and explain the different
organizations, regulatpry and
professional that influence the
profession.
3. Know the types of services of a
professional accountant in public
practice.
4. Understand the nature and objective of
an assurance engagement.
5. Identify and explain the types of
assurance engagements.
6. Know and explain the non-assurance
services.
7. Be familiar with the challenges faced by
the public accountancy profession.
CHAPTER2

PRACTICE OF PUBLIC ACCOUNTANCY

Practice of Public Accountancy Defined

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."

Article IV, Section 26 of the same law prg_yide-s-.-- -- - - --


"No person shall practice accountancy in this country, or use the title
"Certified- Public Accountant", or use the abbreviated title "CPA" or
display or use any title, sign, card, advertisement, or other device to
indicate thatsu'?h ~~i-Son practices or offers to practice accountancy, or is
-----------Ii-certified public accountant, unless such person shall have received
from the Board a certificate of registration/professional license and be
issued a .professional identification card or a valid temporary/special
permit duly issued to him/her by the Board and the Commission."
30 Chapter 2

Certified Public Accountant


A ~~publi5 accountant (CPA) is a person who, after obtaining the required
education passes an extensive examination and is licensed by the country to
pra9tice as a professional accountant.

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.

Regulatory and Professional Organizations Influencing the


Profession
A. Regulatory Government Agencies

1Professional Regulation Commission (f]J.f;L


PRC administers, implements and enforces the regulatory polici•.::: of the
National Government with respect to the regulation and licensing of the
various professions under its jurisdiction including the maintenance of
professional standards and ethics and the enforcement of the rules and
regulations relative thereto.

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.

2 ·Professional Regul~torYimard-4.Acr nmtancy (!JOA)


This board, consisting of a chairman and six members, is the a~.·-~ncy that
is empoweted to administer the Accountancy Law. As a i·:en!>ing
agency of the government, t,he board is the only body that rr .. y i·;sue and
revoke CFA certificates and grant licenses tu practice. Its iunctions are
provided for in the Philippine Accountancy Act of2004. -~
Practice of Public Accountancy 31

Securities and Exchange Commission (SEC)


This is the government agency that regulates the registration und
operations of corporations, partnership and other forms of associations in
the Philippines.

The overall objective of the Securities and Exchange Commission, an


agency of the national government, is tv assist in providing investors
with reliable information upon which to make investment decisions. To
this end, companies planning to issue new securities to the public must
submit a registration statement to the SEC for approval. They are
required to file detailed· annual reports with the Commission. The
Commission examines these statements for completeness and adequacy
before permitting the company to sell its securities through the stuck
exchange.

The SEC has considerable influence in setting financial reporting


standards ~nd disclosure requirements for financial statements as a result
of its authority for specifying reporting requirements considered
necessary for fair disclosure to investors. It is represented in standard-
setting bodies such as the Philippine Financial Reporting Standards
Council (PFRSC), Auditing Standards and Auditing and Assurance
Standards Council (AASC) and in the Philippine Interpretations
Committee (PIC). The SEC has power to establish rules for any CPA
associated with audited financial statements submitted to the
Commission.

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.

J. Commission on Audit (COA)


Thi~-i~- th~--~~th;rtaudits orOetetmines--whether--gGvemment units
handle their funds according to existing laws and whether their programs
are being conducted efficiently and economically.
32 Chapter 2
4 .Bureau ofIntenial Revenue (BIR)
The Bureau of Internal Revenue is responsible for enforcement of the tax
18,ws, rules and regulations. Its agents conduct compliance audits of the
income tax returns of individuals and ·corporations to determine that
income has been computed and taxes paid as required by the National
Internal Revenue Code.

B. Pmfessional Organizations

/Philippine Institute of Certified Public Accountants (PICPA)


PICPA is the accredited national professional organization of CPAs. It
serves all members in the different sectors of the accounting profession,
namely, public practice, education, government and commerce and
industn'._, through a set of technical and social services. Year-round
professional development programs (seminars, technical sessions,
symposium and dialogues) and regular fellowship and sport activities are
sponsored by the ~sociation for its members. PICPA publishes the
Accountants Journal that contains technical and formal papers, bulletins
and pronouncements released by the Financial Reporting Standards
Council (FRSC) and the Auditing and Assuran~ Standards Council
(AASC).

')._, Sectoral Organizations


The other professional organizations that complement PICPA's
objectives and provide the specific professional development and other
requirements of CPAs in the different sectors are:
I. Association ofCPAs in Public Practice (ACPAPP)
2. Association ofCPAs in Education (ACPAE)
3. Association ofCPAs in Commerce and Industry (ACPACI)
4. Government Association ofCPAs (GACPA)

C. Standard-Se_t!!_n_g]Jodf~s ----~

f, International Federation ofAccountants (IFAC)


IFAC was formally approved in Munich in 1977 and has as-its mission
the development and enhancement of the profession to enable. it to
provide services of consistently high quality in the public interest. It is a
Practice ofPublic Accountancy 33

non-profit, non-governmental, non-political international organization of


accountancy bodies.

Membership in IF AC is open to accountancy bodies recognized by law


or general consensus within their countries as substantial national
organizations of good standing within the accountancy profession (e.g ..
PICPA). Membership in IFAC automatically includes membership in
the International Accounting Standards Committee (IASC).
The Assembly, consisting of one representative from each member
accountancy body elects the members of Council. The work programs of
the Council are imp!emented primarily by smaller working groups, or
standing technical committees which include:
• Education;
• Ethics;
• Financial and Management Accounting;
• ln'formation Technology;
• International Auditing Practices;
• Membership; and
• Public Sector.

J. .International Accounting Standards Board (JASE)


The International Accounting Standards Board (IASB), based in London,
began operations in 200 I. It is funded by //
contributions from the major
accounting firms, private financial instifutions and industrial companies
throughout the world, central ano/{tevelopment banks, and other
international and professional organizations. The 14 Board members ( 12
of whom are full-time) reside ·in ~ countries and have a variety of
functional backgrounds. The oard i.s committed to developing, in the
public interest, a single se~of high quality, global accounting standards
that require transparent and comparable information in general purpose
financial statements. In pursuit of this objective, the Board coopei:ates
with national accounting standard-setters to achieve convergence in
accounting standards around the world.

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.

On December 26, 2004, the Board of Accountancy upon the


recommendation of the FRSC. approved the adoption in the Philippines
of all the new, revised and improved IASs and IFRSs effective January
1, 2005 and designated them as Philippine Financial Reporting Standards
(PFRSs).

Financial Reporting Standards Council


The Commission upon the recommendation of the Board shall within
ninety (90) days from the effectivity of the IRR to R.A. 9298, create an
accounting standard setting body to be kriown as the Financial Reporting
Standards Council (FRSC) to assist the Board in carrying out its powers
and functions provided in Rule II, -Section 9(g).

The FRSC shall be composed of fifteen ( 15) members with a Chairman,


who had been or presently a senior accounting practitioner in any of the
scope of accounting practice and fourteen (14) representatives from the
following:
(a) Board of Accountancy·
(b) Securities and Exchange Commission
(c) Bangko Sentral ng Pilipinas
(d) Bureau of Internal Revenue
(e) A major organization composed of
preparers and users of financial statements
(f) Commission on Audit
(g) Accredited National Professional Organization
ofCPAs
Public Practice 2
Commerce and Industry 2
Academe/Education 2
Government -1
Total
i11temalional Auditing Practici!s Commillee (IAPO

The International Auditing Practices Committee (IA PC) is a standing:


committee of the Council of IF AC and is responsible for the
development and issuance on behalf of the Council, standards and
statements on a variety of audit and attests functions in order to imprm..:
the degree of uniformity of auditing practices and related service~
throughout the ·world. IAPC issues the International Standards on
Auditing (ISAs) that are to be applied in the audit of financial statements.
audit of other information and related services.

Auditing and Assurance Standards Council (AASC)


The Commission upon the recommendation of the Board shall within
ninety (90) days from the-effectivity of the IRR to R.A. 9298, crl'alc an
auditing standard setting body to be known as the Auditing and
Assurance Standards Council (AASC) to assist the Board in carr;ing out
its powers and functions provided in Rule 11, Section 9 (g).

The AASC shall be composed of fifteen ( 15) members with a Chainnan.


who had been or presently a ,senior practitioner in public accountancy
and fourteen ( 14) representatives from various scck·r» of the profession.

However, in 2009, the Board of Accountancy amended the composition


of the AASC as follows:
Chairman
Members:
(a) Board of Accountancy
fb) Securities and Exchange Commission
(c) Bangko Sentral ng Pilipinas
(d) Commission on APdit
(f) An association or organization of CPAs in
active public practice of accountancy
(g) Accredited National Professional
Organization of CPAs
Public Practice 9
Commerce and Industry
Academe/Education _I
Total 1'
J
__ha~rp_te_r_2_______________ ·--·--···
..:.36..:..__c

Types of Services of a Professional Accountant in Public Practice


The following are the most sought .~ after services among professional
accountants.
A. Assurance Services. Examples are:
I . Independent financial statement audit
2. Reviews
3. Other assurance services (e.g:, CPA Web Trust, Business
Performance Measurement Service)
· B. Non-Assurance Services. Examples are:
1. Agreed-upon procedures
2. Compilation
3. Tax
4. Management consultancy/advisory services
5. Accounting and data processing
6. Other non-assurance services (e.g., lnformatiqn Technology System
Services)

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.

Assurance in the context of Philippine Framework for Assurance


Engagements (2006) refers to the auditor's satisfaction as to the reliability of
an assertion being made by one party for use by another party. To provide
such assurance, the auditor assesses the evidence collected as a result of
procedures conducted and expresses a conclusion. The degree of satisfaction
achieved and, therefore, the level of assurance which may be provided is
determined by the procedures performed and their results.
Practice of Public Accountancy 37

· "·, ·ngo2,ement means an engagement in which a practitioner


1, .' , .r.·,.,:,0:iciusion de~igned to enhance the degree of confidence that
'<r ;i;~,· cc ;,,~s can have about the evaluation or measurement of a subject
::er t;k. ;s tli~ responsibility of a party, other than the intended users or the
,'' c1ctition;;r, against criteria. The outcome of the evaluation or measurement
of a subject matter is the information that results from applying the criteria to
the subject matter. For example:
~ The recognition, measurement, presentation and disclosure represented
;;1 th:.: financial statements (outcome) result from applying a financial
. reporting framework for recognition, measurement, presentation and
disclosure, such as Philippine Financial Reporting Standards, (criteria) to
an entity's financial position, financial performance and cash· flows
(subject matter) (e g., independent financial statements audit, review of
prospective financ:al statements).
"' An assertion about the effectiveness of internal control (outcome) results
from applying a framework for evaluating the effectiveness of internal
control, such as COS0 1 or CoCo2 (criteria) to internal control, a process
(subject matter). The term "subject matter information" will be used to
mean the-outcome of the evaluation or measurement of subject matter. It
is the subject matter information about which the practitioner gathers
sufficient appropriate evidence to provide a reasonable basis for
expressing a conclusion in an assurance report (e.g., review of internal
control)

Objective of a11 Assurance Engagement

The obj~ct1ve. of an assurance engagement is for a professional accountant tq


eva hrntc or- measure a subject matter that is the responsibility of another party
a;Sa mst identified suitable criteria, and to express a conclusion that provides
tt•e iill~nded user with a level of assurance about that subject matter.

Assurance engagement pcrtormed by a professional accountant is intended to


enhance the credibility of information about a subject matter by evaluating
whether the subject matter conforms in all material re~pects with suitable
criteria, thereby improving the likelihood that the information will meet the
needs of an intended user.

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

In this regard, the level of assurance provided by the profissional


accountant's conclust'm conveys the degree of confidence that the intended
user may place in the cn:rlibility of the subject matter.

Assertion-Based Engagenk,•f5 vs. Direct Reporting Engagements

Assertion-based .:ngagements are assur..i;, -c engagements that involve the


evaluation or measurement 'of the subject matter by Lile responsible party and
. the subject matter infonnation in the form of an assert!o:1 b' i'.e responsible
party is made available to the intended users. lndt"c\tdent financial
statement audit is an example of this type l'f erll'al!emel\ Anothe.r exampl.e
is when an entity engages a practitioner to perform ;: : ·· "' :,.ance engagement
regarding a report it has prepared about its own su.;;l ::cy practices.

Direct reporting engagement are engagements wi,1,;re the practitioner either


directly performs the evaluation or measurement of the subject matter, or .
obtains a representation from the responsible party that has performed the
evaluation or measurement that is not available to the intended users. The
subject matter is provided to the intended users in the assurance report.

Types ofAssurance Engagements

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.

A reasonable assurance engagement is an engagement that aims to reduce


the assurance engagement risk to an acceptably low level in the
circumstances of the engagement as the basis for a positive form of
expression of the practitioner's conclusion. Examples are engagement
involving independent financial statement audit and review of prospective
financial statements.

A limited assurance engagement is one that aims to reduce the assurance


engagement risk to a level that is acceptable in the circumstance of the
engagement but where that risk is greater than for a reasonable assurance
. engagement as a basis for a negative form of expression of the practitioner's
conclusion. Examples are engagements involving review of non-financial
performance indicators such as capacity of a facility and review of human
Practice of Public Accountancy 39

retwurce practices, internal control, IT systems, corporate governance,


compliance with regulation.

Ot/1er Assurance Services

In addition to audits and reviews, other assurance services that may be


provided by the professional accountants include CPA Web Trust, Eldercare
Plus, Business Performance Measurement Services, b~formation Reliability
Services.

Brief Description of the Assurance Services

Jndepe11dent Financial Statements Audit

The most predominant type of assurance engagement that the professional


accountant may be involved in is the independent financial statements audit,
also commonly referred to as external audit.

An independent financial statement!t' t1udit engagement is an assurance


engagement to provide a high level of assurance that the financial statements
are free of material misstatement. '

The objective of an audit of financial statements is to enable the auditor to


express an opinion whether the financial statements arc prepared, in all
material respects, in accordance with an identified financial reporting
framework. The phrases used to express the auditor's opinion are "give a
true and fair view'· or "present fairly, in all material respects," which are
equivalent terms. A similar objective applies to the. audit of financial or
other information prepared in accordance with appropriate criteria.

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

Review of Financial Statements - PSREs 2400 & 2410


Review involves limited investigation of much narrower scope than an audit
and undertaken for the purpose of providing limited (negative) assurance that
the statements are presented in accordance with identified Fina_!!..cial
-'Reporting Standards. The financial statements may be historical (covering
one whole accounting period or an interim period) or prospective (forecasts
and projections).

The objective of the review is to enable an auditor to state whether on the


basis of procedures which do not provide all the evidence required in an
audit, nothing has come to the auditor's attention that causes the auditor to
believe that the financial statements are not prepared, in all material respects,
in accordance with an identified financial reporting framework. This is
referred to as negative assUFance.

Whereas in an audit, the CPA firm performs an extensive examinatiuri that


accumulates evidence suffjcient to render a higher level of assurance about
the client's financial statem~nt, in a review, the evidence supports a moderate
level of assurance that the information subject to review is free of material
misstatement.

Other Review Engagements

There are other engagements in which a practitioner is engaged to issue or


does issue a written communication that expresses a conclusion with respect
to the reliability of a written asserticm that is the responsibility of another
party. A number of assurance services are natural extensions of the audit u:·
historical financial statements as users seek independent assurances about
other types of information. For example, a financial institution may require
debtors to engage CPAs to provide assurance about the debtors' compliance
with certain covenant provisions stated in the loan agreement. CPA-s may
also provide assurance about the effectiveness of a client's internal controls
over financial reporting. Other examples are review of investt"'1ent
performance statistics for organizations such as mutual jimd,· and computer
software review.
i ractice ofPublic Accountancy 41

Other Assurance Services (PSAE 3000 Revised)

Assurance Services on Information Technology

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.

CPA Web Trust Service

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.

Information System Reliability Service

In these engagements, CPAs provide assurance that an information system


has been designed and operated to produce reliable data including tests of the
system to determine whether the system protects against potential causes of
data defects. Whereas, the Web Trust assurance service is primarily
designed to provide assurance to third-)>arty users of a web site, information
systems reliability services might be performed by CPAs to provide
assurance to management, the board of directors, or third parties about the
reliability of information systems used to generate real-time information.

Assurance Services on Other Types of Informatwn

The Special Committee on Assurance Services of the AICPA has developed


other assurance services designed to enhance the relevance of information.
Examples of these services are:
42 Chapter 2

(a) Business Performance Measurement


(b) Health Care Performance Measurement
( c) Risk Assessments
(d) El_dercare Plus

Business Performance M~asurements Services

A CPA can provide assurance about whether financial and nonfinancial


information being reported from the entity's performance measurement
system (e.g., balanced scorecard) is reliable and whether the performance
measures being used are accurately leading the entity toward meeting its
strategic goals and objectives.

Hemth Care Performance Measurement

Assurance service involves evaluation of the quality of health care, medical


services. and outcome. It looks into the health care delivery system, the
medical services provided, and quality attributes. associated with those
services.

Risk Assessment

Assurance on risk asSessments identifies a set of risks that affect the


organization. It also involves the study of the link between risks and
organization's mission, vision, objectives and strategies and development of
new and relevant measures.

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.

Figure 2.1 shows examples of other assurance services.


Practice of Public Accountancy 43

Figure 2.1 Other Assurance Services Examples

Other Assurance Services These Services Involve


Annual environmental audit Assessing whether company policies effectively
ensure the company's compliance with
environmental standards and laws
Assessment of risks of accumulation, Assessing physical and on-line security risks
distribution, and storage of digital and related controls surrounding data and
information other information stored electronically,
including the adequacy of back-up and off-
site storage
Compliance with trading policies and Examining transactions between trading
procedures partners to ensure that the handling of the
transactions complies with the terms of the
trading agreement or contract, including the
identification of risks surrounding the trade
arrangement.
Compliance with entertainment royalty Assessing whether royalties paid to artists,
agreements authors, and others are in accordance with
royalty agreement provisions
Controls over and risks related to investments, Assessing the processes surrounding a
including policies related to derivatives company's investment activities to identify
risks and to determine the effectiveness of
those processes in meeting the company's
investment objectives
Fraud and illegal acts risk assessment Developing fraud risk profiles and assessing the
adequacy of company systems and policies
in preventing and detecting fraud and illegal
acts
Mystery shopping Performing anonymous shopping to assess
sales personnel interactions with customers
and procedurP.s performed by sales
personnel
ISO 9000 certifications Certifying a company's compliance with ISO
%00 quality control standards, which help
Gnsure company products are of high quality
~
44 Chapter 2

Elements of an Assurance Engagement

An assurance engagement should exhibit the following elements:


(a) A three party relationship involving
(i) a practitioner;
(ii) a responsible party; and
(iii) intended users.
Cb) An appropriate subject matter;
(c) Suitable criteria;
(d) Sufficient appropriate evidence; and
(e) A written assurance report in the form appropriate to a reasonable
assurance engagement or a limited assurance engagement.

(a) Three Party Relationship

Assurance engagements always involve three separate parties:

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

The term "practitioner" as used in the Philippine Framework for


Assurance Engagements is broader than the term "auditor" as used in
PSAs and PSREs, which relates only to practitioners performing audit or
review engagements with respect to historical financial information.
Practice of Public Accountancy 45
-----------
(ii) l« .pm;,ib/e Party

The responsible party is the person (or persons) who:


(a) in a direct reporting engagement, is responsible for the subject
matter; or
(b) in an assertion-based engagement, is responsible for the subject
matter ii1formation (the assertion), and may be responsible for
the subject matter. An example of when the responsible party is
responsible for both the subject matter information and the
subject matter, is when an entity engages a practitioner to
perform an ass~rance engagement regarding a report it has
prepared about its own sustainability practices. An example of
when the responsible party is responsible for the subject matter
information but not the subject matter, is when a government
organization engages a practitioner to perform an assurance
engagement regarding a report about a private company's
sustainability practices that the organization has prepared and is
to distribute to intended users. The responsible party may or
may not be the party who engages the practitioner (the engaging
party).

(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.

In some cases, intended users (for example, bankers and regulators)·


impose a requirement on, or request the responsible party (or the
engaging party if different) to arrange for, 'an assurance engage'ment to be
performed for a specific purpose. When engagements are designed for
specified intended users or a specific purpose, the practitioner considers
inc_luding a restriction in the assurance report that limits its use to those
users or that purpose.
46 Chapter2

(b) Appropriate Subject Matter

The subject matter, and subject mater information, of an assurance


engagement can take many fonns, such as:
• Financial perfonnance or conditions (for example, historical or
prospective financial position, financial performance and cash flows) for
which the subject matter information may be the recognition,
measurement, presentation and disclosure represented in financial
statements.
• Non-financial performance or conditions (for example, performance of
an entity) for which the subject matter information may be key indicators
of efficiency and effectiveness.
• Physical characteristics (for example, capacity of a facility) for which the
subject matter information may be a specifications document.
• Systems and processes (for example, an entity's internal control or IT
system) for which the subject matter information may be an assertion
about effectiveness.
• Behavior (for example, corporate governanct:, compliance with
regulation, human resource practices) for which the subject matter
information maybe a statement of compliance or a statement of
effectiveness.

Subject matters have different characteristics, including the degree to which


information about them is qualitative versus quantitative, objective versus
subjective, historical versus prospective, and relates to a point in time or
covers a period. Such characteristics affect the:
(a) Precision with which the subject matter can be evaluated or
measured against criteria; and
(b) The persuasiveness of available evidence. The assurance report notes
characteristics of particular relevance to the intended users.

An appropriate subject matter is:

(a) Identifiable, and capabfo of consistent evaluation or measurement


against the identified criteria; and
(b) Such that the information about it can be subjected to procedures for
gathering sufficient appropriate evidence to support a reasonable
assurance or limited assurance conclusion, as appropriate.
Practice of Public Accountancy 47

(c) Suitable Criteria

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)

Suitable criteria exhibit the following characteristics:


~

(a) Relevance; relevant criteria contribute to conclusions that assist


decision-making by the intended users.
(b) Comf!_/etene!i_s.: criteria are sufficiently complete when relevant
factors that could affect the conclusions in the context of the
engagement circumstances are not omitted. Complete criteria
include, where relevant, benchmarks for presentation and disclosure.
(c) Reliahili(J!:, reliable criteria allow reasonably consistent evaluation
or measurement of the subject matter including, where relevant,
presentation and disclosure, when used in similar circumstances by
similarly qualified practitioners.
(d) Neutrality neutral criteria contribute to conclusions that are free
from bias.
( e) Uaderstandabi/i()!.: understandable criteria contribute to conclusions
that are clear; comprehensive, and not subject to significantly
different interpretations. The evaluation or measurement of a subject
matter on the basis of the practitioner's own expectations, judgments
and individual experience would not constitute suitable criteria.

Criteria need to be reliable to the intended users to allow them to understand


how the subject mattei;- has been evaluated or measured. Criteria are made
available to the intended users in one or more of the following ways:
(a)· Publicly;
48 Chapter 2

(b) ·Through inclusion in a clear manner in the presentation of'the subject


matter information.
( c) Through inclusion in a clear manner in the assurance report.
/ ( d) By general understanding, for example the criterion for measuring
time in hours and minutes.

(d) Sufficient Appropriate Evidence

The practitioner plans and performs an assurance engagement with an


attitude of professional skepticism to obtain sufficient appropriate evidence
about whether the subject matter information is free of material
misstatement. The practitioner considers materiality, assurance engagement
risk, and the quantity and quality of available evidence when planning and
performing the engagement, in particular when determining· the nature,
timing and extent of evidence-gathering procedures.

(i) Professional Skepticism

The practitioner plans and performs an assurance engagement with an


attitude of professional skepticism recognizing that circumstances may
exist that cause the subject matter information to be materially misstated.
An attitude of professional skepticism means the practitioner makes a
critical assess'ment, with a questioning mind, of the validity of evidence
obtained and is alert to evidence that contradicts or brings into question
the reliability of documents or representations by the responsible party.
For example, an attitude of professional skepticism is necessary
throughout the engagement process for the practitioner to' reduce the risk
. of overlooking suspicious circumstances, of over generalizing when
drawing conclusions from observations, and of using faulty assumptions
in determining the nature, timing and extent of evidence gathering
procedures and evaluating the results thereof.

An assurance engagement rarely involves the authentication of


documentation, nor is the practitioner trained as or expected to be an
expert in such authentication. However, the practitioner considers the
reliability of the information to be used as evidence, for example
photocopies, facsimiles, filmed, digitized or other electronic documents,
including consideration of controls over their preparation· and
· maintenance where relevant.
. Practice of Public Accountancy 49

(ii) Sufficiency and Appropriateness of Evidence

Sufficiency is the measure of the quantity of evidence. Appropriateness


is the measure of the quality of evidence; that is, its relevance and its
reliability. The quantity of evidence needed is affected by the risk of the
subject .matter information being materially misstated (the greater the
risk, the more evidence is likely to be required) and also by the quality of
such evidence (the higher the quality, the less may be required).
Accordingly, the sufficiency and appropriateness of evidence are
interrelated. However, merely obtaining more evidence may not
compensate for its poor quality.

The reliability of evidence is influenced by its source and by its nature,


and is dependent on the indi-vidual circumstances under which it is
obtained.· Generalizations about the reliability of various kinds of
evidence can be made; however, such generalizations are subject to
important exceptions. Even when evidence is obtained from sources
external to the entity, circumstances may exist that could affect the
reliability of the information obtained. For example, evidence obtained
from an independent external spurce may not be reliable if the source is
not knowledgeable. While recognizing that exceptions may exist, the
following generalizations about the reliability of evidence may be useful.
• Evidence is more reliable when it is obtained from independent
sources outside the entity.
• Evidence that is generated internally is mor~ reliable when the
related controls are effective.
• Evidence obtained directly by the practitioner (for example,
obsecvation of the application of a control) is more reliable than
evidence obtained indirectly or by inference (for example,
inquiry about the application of a control).
• Evidence is more reliable when it exists in documentary form,
whether paper, electronic, or other media (for example, a
contemporaneously written record of a meeting is more reliable
than a subsequent oral representatior. of what was discussed).
• Evidence provided by original documents is more rel.iable than
evidence provided by photocopies or facsimiles.
SO Chapter2

The practitioner ordinarily obtains more assurance from consistent


evidence obtained from different sources or of a different nature than
from items of evidence considered individually. ln addition, obtaining
evidence from different sources or of a different nature may indicate that
an individual item of evidence is not reliable. For example,
corroborating information obtained from a source independent of the
entity may increase the assurance the practitioner obtains from a
representation from ttie responsible party. Conversely, when evidence
obtained from one source is inconsistent with that obtained from another,
the practitioner determines what additional evidence-gathering
procedures are necessary to resolve the inconsistency.

The practitioner considers the relationship between the cost of obtaining


_ evidence and the usefulness of the information obtained. However, the
matter of difficulty or expense involved is not in itself a valid basis for
omitting an evidence gathering procedure for which there· is no
alternative. The practitioner uses professional judgment and exercises
professional skepticism in evaluating the quantity and quality of
eviden~, and thus its sufficiency and appropriateness, to support the
assurance report.

(iii) Materiality

Materiality is relevant when the practitioner determines the nature,


timing and extent of evidence-gathering procedures, and when assessing
whether the subject matter information is free of misstatement. When
considering materiality, the practitioner understands and assesses what
factors might influerice the decisions of the intended users. For example,
when the identified criteria allow for variations in the presentation of the
subject matter information, the practitioner considers how the adopted
presentation might influence the decisions of the intended users.
Materiality is considered in the context of quantitative and qualitative
factors, such as relative magnitude, the nature and extent of the effect of
these. factors on the evaluation or measurement of the subject matter, and
the interests of the intended users. The assessment of materiality and the
relative importance of quantitative and qualitative factors in a particular
engagement are matters for the practitioner's judgment.
Practice of Puhlic Accountancy 51

(iv) Assurance Engagement Risk

Assurance engagement risk is the risk that the practitioner expresses an


inappropriate conclusion when the subject matter information is
materially misstated. 3 In a reaso1;able assurance engagement, the
practitioner reduces assurance engagement risk to an acceptably low
level In the circumstances of the engagement to obtain reasonable
assurance as the basis for a positive fonn of expression of the
practitioner's conclusion. The level of assurance engagement risk is
higher in a limited assurance engagement than in a reasonable assurance
engagement because of the different nature, timing or extent of evidence-
gathering procedures. However in a limited assurance engagement, the
combination of the nature, timing and extent of evidence gathering
procedures is at least sufficient for the practitioner to obtain a meaningful
level of assurance as the basis for a negative form of expression. To be
meaningful, the level of assurance obtained by the practitioner is likely to
enhance the intended users' confidence about the subject matter
information to a degree that is clearly more than inconsequential.

In general, assurance engagement risk can be represented by the


following components, although not all of these components will
necessarily be present or significant for all assurance engagements:
(a) The risk that the subject matter information is materially misstated,
which in turn consists of: ·
(i) Inherent risk: the susceptibility of the subject matter information
to a material misstatement, assuming that there are no related
controls; and
(ii) Control risk: the risk that a material misstatement that could
occur- will not be prevented, or detected and corrected, on a
timely basis by related internal controls. When control risk is
relevant to the subject matter, some control risk will always exist

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. .

The degree to which the practitioner considers each of these components


is affected by the engagtmient circumstances, in particular by the nature
of the subject matter and whether a reasonable assurance or a limited
assurance engagement is being perfonned.

(e) Assurance Report

The practitioner provides a written report contammg a conclusion that


conveys the assurance obtained about the subject matter infonnation. ISAs,
lSREs and ISAEs establish basic elements for assurance reports. In addition,
the practitioner considers other reporting responsibilities, including
communicating with those charged with governance when it is appropriate to
do so.

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
--'-----------------------~-------~--

Brief Description of Non-Assurance Services

Agreed-upon Procedures Services

An agreed-upon procedures engagement. in which the party engaging the


professional accountant or the intended user determines the procedures to be
performed and the professional accountant provides a report of factual
findings as a result of undertaking those procedures, is not an assurance
engagement. While the intended user of the report may derive some
assurance from the report of factual findings, the engagement is not intended
to provide, nor does the professional accountant express, a conclusion' that
P.rovides a level of assurance. Rather, the intended user assesses the
procedures and findings and draws his or her own condusions. However, a
professional accountant may undertake an engagement that is similar to an
agreed-upon procedures engagement but which does result in the expression
of a conclusion that provides a level of assurance. Where, in the judgment of
the professional accountant, the procedures agreed to be performed are
appropriate to support the expression of a conclusion that provides a level of
assurance on the subject matter, and the professional accountant intends to do
so, then such an engagement becomes an assurance engagement governed by
the Standard on Assurance Engagement.

Compilation of Financial or Other Information

Compilation services are defined as


"presenting in the form of financial statements that is the
representation of management (owners) without undertaking to
express any assurance on the statements." [PSRS 4410 (formerly
PSA 930)]

The objective of a compilation engagement is for the CPA to use accounting


expertise, as opposed to auditing expertise, to collect, classify and summarize
financial information.

A compilation improvf'S the quality of information by displaying in Financial


Accounting and Reporting Standards format and the practitioner's
identification of obvious errors. Accordingly, it falls within the definition of
an assurance service despite the fact that no assurance is explicit in the
practitioner's report.
54 Chapter 2

Tax Services

A CPA is considered qualified to prepare corporate and intlividual tax returns


for both audit and non-audit· clients. For smaller accounting firms, tax
.services provide a large portion of third revenue. CPAs render two primary
types of tax services: tax compliance and tax planning. Tax compliance
includes the preparation of tax returns for individuals, corporations, estates
and trusts, and others. Tax. planning determines the tax consequences of
planned or potential transactions and suggests the desirable course of action
to minimize the tax liability while achieving the client's objectives.

Management Consulting I Advisory Services

Consulting services are professional services that employ the practitioner's


technical skills, education, observations, experiences, and knowledge of the
analytical approach and procedures used in a consulting engagement. Those
procedures may involve determining client objectives, fact-finding, definition
of problems or opportunities, evaluation of alternatives, formulation of
proposed action, communication of results, implementation, and follow-up.
Examples of consulting services are design and installation of accounting
system, computer risk management, corporate finc:rnce, tax services, E-
business, etc.

Accounting and Data Processing or h?formation Technology System Services

Many acrnunting tirms frequently provide accounting services to small


clients with limited accounting staff. 'fhese services include doing manual or
automated bookkeeping, journalizing, and posting adjusting entries or
preparing (or compiling) financial statements. In performing accounting
services, the firm serves as a substitute for or supplement to the accounting
personnel of the client.
For many years, clients have outsourced or contracted for outside services, to
cut their costs. Recently, large businesses have begun to see "outsourcing"
as an alternative for information system, tax, stock and transfer agency, and
internal auditing. ·
Practice of Public Accou11ta11cy 55

Reports 011 Non-ass11ra11ce Engagements

A practitioner reporting on an engagement that is not an assurance


engagement within the scope of the Framework, clearly distinguishes that
report from an assurance report. So as not to confuse users, a report that is
not an assurance report avoids, for example:
• implying compliance with this Framework. PSAs, PSREs or PSAFs.
• inappropriately using the words ·'assurance.'' "audif' or ''review."
• including a statement that could reasonably be mistaken for a
conclusion designed to enhance the degree of confidence of intended
users about the outcome of the evaluation or measurement of :1
subject matter against criteria.

Having accepted an assurance engagement, a practitioner may not change


that engagement to a non-assurance engagement, or from a reasonable
assurance engagement to a limited assurance engagement without reasonable
justification. A change in circumstances that affects the intended users·
requirements. or a misunderstanding concerning the nature of the
engagement, ordinarily will justify a request for a change in the engagement.
If such a change is made, the practitioner does not disregard evidence that
was obtained prior to the change.

Challenges Faced by the Public Accounting 1~rnfrs~:ion

As a profession, we are in a period of change in which auditors and accountants


are called upon to make professional judgments that best reflect the economics
transactions or current states of economic holdings. Further, audit firms need.
professional staffs that make consistent judgments across a wide variety of
companies, countries, and types of transactions. Thus, professional judgment and
processes with which to make such judgments consistently across both the
breadth of a firm, as well as time, are critical to the future success of each
auditing finn.

Among the significant challenges faced by the profession are:


1. Accounting in highly complex often in part because companies are
entering into, increasingly complex transaction and organizational
standard.
56 Chapter2
2. Audit procedures must be designed to attest material fraud and assure
users that the financial statement are free from fraud.
3. Computer systems are complex. When used properly, they provide
opportunities for effective contracts, but when not used properly, they
1
create additional risks.
4. Many companies are global. The audit firm must operate in multiple
countries that require consistent high quality audits wherever the audit
takes place.
5. There is time pressure to get the audit done and to report more quickly
than ever before.
6. There is a need to generate audit fees sufficient to both
(a)attract new people to the profession and
(b) retain managers and partners, who often operate under having
stress to fulfill this most important obligation. This could meet
resistance from clients who may believe that price changes are
not warranted.

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.

The Accounting Professfon 's Credibility Crisis

A recent survey of users of financial statements particularly the investors,


provides evidence that a gap has existed betWeen what auditors attempt to do in
an audit and the user's expeetations of the audit. This phenomenon, referred to
as the expectation gap, has existed in some form since the inception of modem
auditing. Although CPAs have historically enjoyed a high degree of credibility,
users of audit reports expect auditors to detect both intentional and unintentional
material misstatements and to report when an entity is not likely to survive.
Although audits are not designed for these tasks, changes in audit standards and
practices have been made to better recognize auditor's responsibility for
detecting fraudulent financial reporting and to improve the communication of the
work done by the au~itor.
Practice of Public Accountancy 57

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
----=----------------------------
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
----· ------------------
Multiple Choice Questfons

!. Which of the following is false? Philippine Framework for Assurance


Engagements
a. describe:; the objective and elements of assurance engagements
intended to provide either a reasonable assurance or limited
assurnnce.
b. identitie-. engagements to which Philippine Standards on
Auditing. Philippine Standards on Review Engagements, and
Phitir ,;i c; Standards on Assurance Engagements apply.
c. establis11es standards or provides procedural requirements for the
pe1 frirmancP. of assurance engagements.
d. provides a fame of reference for the Auditing and Assurance
Standards Council in its adoption of International Standards on
Auditing, International Standards on Review Engagements and
International Standards on Assurance Engagements for
application in the Philippines.

2. Which of the following is not an assurance engagement?


a. Compilation
b. Financial statements audit
c. Information reliability services
d. Reviews of prospective financial statements

3. Nonassurance engagements include all of the following except


a. agreed-upon procedures.
b. management consulting.
c. preparation of tax returns where no conclusion is expressed.
d. compliance audit.

4. Assurance engagements should exhibit the following elements except


a. a subject matter.
b. suitable criteria.
c. ·an engagement process.
d. appropriate professional fees.

5. Which of the following forms may the subject matter of an assurance


engagement take?
a. Historical financial information
b. Systems and processes
60 Chapter 2

c. Behavior
d. All of the above

6. Which of the following is not a component of engagement risk?


a. Control risk
I
b. Inherent risk
c. Business risk
d. Detection risk

7. Engagement risk is influenced by the risks associated with the


following except
a. nature and form of the subject matter.
b. nature and form of the criteria applied to the subject.matter.
c. nature and extent of the process used to collect and evaluate
evidence.
d. unreasonably low professional fee.

8. An assurance engagement that provides a high level of assurance that


the financial statements are free of material misstatement is known as
a. review.
b. compilation. 1
c. agreed-upon procedures.
d. independent financial statements audit.

9. Which of the following is not an assurance engagement?


a. Information System Reliability Service
b. Business Performance Mea.Surement
c. Risk Assessment Service
d. Management Consulting Service

I0. When the professional accountant has obtained sufficient appropriate


evidence to conclude that the subject matter conforms in all material
respects with identified suitable criteria, he/she can provide
a. limited level of assurance.
b. absolute assurance.
c. reasonable level of assurance.
d. no assurance.
Practice of Public Accountancy 61

11. A practitioner should plan and conduct the assurance engagement in an


effective manner to meet the objective of the engagement. Which of
the following matters need not be a concern of the practitioner in
planning the work?
a. Criteria to be used
b. Engagement objective
c. Personnel and expertise requirements
d. Specific format of the assurance report

12. In performing an assurance engagement, a professional accountant


typically
a. supplies litigation support services.
b. assesses control risk at a low level.
c. expresses a conclusion about an assertion.
d. provides management consulting advice.

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

14. Which of the following statements is true? Generally,


a. evidence from external sources is less reliable than that generated
internally.
b. evidence generated internally is less reliable when subject to
appropriate control with the entity.
c. evidence obtained directly by the practitioner is more likely to be
reliable than that obtained from the entity.
d. evidence in the form of documents and representations is less
likely to be reliable than oral representations.
62 Chapter 2

Cases

l. ·Effective internal control is of significant concern to regulators,


stockholders, management, and other stakeholders in corporations.
Therefore, CPAs are getting significant requests to provide assurance
about the effectiveness of internal control.

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. ·

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