CHAPTER 5: QUALITY CONTROL 4) Continuance Procedures
5) Human Resources
Introduction 6) Engagement Performance
To ensure compliance with the 7) Monitoring
relevant measure of quality in the
provision of CPA services, quality Sytem of Quality Control
control policies and procedures The quality control policies and
must be implemented by the firm. procedures should be documented
The Following standards of quality and communicated to the firm’s
control: personnel.
1. Philippine Standard on Quality Such communication describes the
Control 1 (PSQC1), Quality quality control policies and
Control for Firms that Perform procedures and the objectives they
Audit and Reviews of Financial are designed to achieve, and
Statements and Other includes the message that each
Assurance and Related individual has a personal
Services Engagements - responsibility for quality and is
applicable to assurance expected to comply with these
services and related services in policies and procedures.
general
2. Philippine Standard on Auditing The firm recognizes the importance
220 (Redrafted), Quality of obtaining feedback on its
Control for an Audit of Financial quality control system from its
Statements personnel. Therefore, the firm
encourages its personnel to
Philippine Standard on Quality communicate their views or
Control 1 concerns on quality control
matters
PSQC 1 is the Philippine Standard
on Quality Control for firms that Leadership Responsibilities for
perform audits and reviews of Quality Within the Firm
financial statements. It also applies
to other assurance and related The firm should promote an
services engagements. internal culture based on the
recognition that quality is essential
Purpose in performing engagements.
To ensure that firms comply
with relevant ethical The firms managing board of
requirements partners , assumes ultimate
To ensure that firms have responsibility for the firm's system
policies and procedures to of quality control.
provide reasonable assurance Such policies and procedures
that they and their personnel should require the firm’s chief
comply with those executive officer (or equivalent)
requirements or, if appropriate, the firm’s
managing board of partners (or
equivalent), to assume ultimate
Elements of a System of responsibility for the firm’s
Quality Control system of quality control.
1) Leadership Responsibilities for
Quality Within the Firm The firm’s leadership and the
2) Ethical Requirements examples it sets significantly
3) Acceptance and
influence the internal culture of identify and understand quality
the firm. control issues and to develop
appropriate policies and
Requirements in Quality within procedures.
the firm:
Necessary authority enables
The promotion of a quality-oriented the person(s) to implement
internal culture depends on clear, those policies and procedures.
consistent and frequent actions
and messages from all levels of the Ethical Requirements
firm’s management emphasizing Emphasis is made on the
the firm’s quality control policies fundamental principles, which are
and procedures, and the reinforced in particular by the
requirement to: Leadership of the firm, Education
and training, Monitoring, and A
process for dealing with non-
compliance.
Independence Requirements
At least annually, the firm
Communications: should obtain written
confirmation of compliance
with its policies and procedures
on independence from all firm
personnel required to be
independent by the code and
national ethical requirements.
Written confirmation may be in
paper or electronic form.
Leadership within the Firm Familiarity Threats
Firm’s leadership to recognize that One of the threats in the
the firm’s business strategy is compliance of fundamental
subject to the overriding principle on ethics, occurs
requirement for the firm to achieve when, by virtue of a close
quality in all the engagements that relationship with an assurance
the firm performs. Accordingly: client, its directors, officers or
employees, a firm or a member
of the assurance team
becomes too sympathetic to
the client's interests.
Fundamental Principles of
Code of Ethics
The Philippine Code establishes the
fundamental principles of
professional ethics, which include:
Person Responsible for Quality
Control System a) Integrity
b) Objectivity
Sufficient and appropriate c) Professional Competence and
experience and ability enables Due Care
the responsible person(s) to d) Confidentiality; and
e) Professional Behavior information to appropriate
personnel so that
Independence
The firm should establish policies (i) The firm and its personnel can
and procedures designed to readily determine whether they
provide it with reasonable satisfy independence
assurance that the firm, its requirements;
personnel and, where applicable, (ii) The firm can maintain and
others subject to independence update its records relating to
requirements (including experts independence; and
contracted by the firm and network (iii) The firm can take appropriate
firm personnel), maintain action regarding identified threats
independence where required by to independence.
the Philippine Code.
Policies and procedures in
Policies and procedures should breaches of independence
enable the firm to: The firm should establish policies
and procedures designed to
Communicate its independence provide it with reasonable
requirements to its personnel assurance that it is notified of
and, where applicable, others breaches of independence
subject to them. requirements, and to enable it to
Identify and evaluate take appropriate actions to resolve
circumstances and such situations
relationships that create
threats to independence, and (a) All who are subject to
to take appropriate action to independence requirements to
eliminate those threats or promptly notify the firm of
reduce them to an acceptable independence breaches of which
level by applying safeguards, they become aware;
or, if considered appropriate, to (b) The firm to promptly
withdraw from the communicate identified breaches
engagement. of these policies and procedures
to:
Such policies and procedures (i) The engagement partner who,
should require: with the firm, needs to address the
breach; and
Engagement partners to provide (ii) Other relevant personnel in the
the firm with relevant information firm and those subject to the
about client engagements, independence requirements who
including the scope of services, to need to take appropriate action;
enable the firm to evaluate the and
overall impact, if any, on (c) Prompt communication to the
independence requirements; firm, if necessary, by the
engagement partner and the other
Personnel to promptly notify the individuals referred to in
firm of circumstances and subparagraph (b)(ii) of the actions
relationships that create a threat taken to resolve the matter, so
to independence so that that the firm can determine
appropriate action can be taken whether it should take further
action.
Relevant Information
The accumulation and A firm receiving notice of a
communication of relevant breach of independence
policies and procedures employees, a firm or a member of
promptly communicates the team becomes too sympathetic
relevant information to to client’s interest
engagement partners, others in
the firm as appropriate and, Accordingly, the firm should
where applicable, experts establish policies and procedures:
contracted by the firm and (a) Setting out criteria for
network firm personnel, for determining the need for
appropriate action. safeguards to reduce the
familiarity threat to an acceptable
Appropriate action by the firm level when using the same senior
and the relevant engagement personnel on an assurance
partner includes applying engagement over a long period of
appropriate safeguards to time; and
eliminate the threats to (b) For all audits of financial
independence or to reduce statements of listed entities,
them to an acceptable level, or requiring the rotation of the
withdrawing from the engagement partner after a
engagement. specified period in compliance with
the Philippine Code.
In addition, the firm provides
independence education to Safeguards to address
personnel who are required to Familiarity Threat
be independent. Therefore, the firm establishes
criteria for determining the need
At least annually, the firm for safeguards to address this
should obtain written threat. In determining appropriate
confirmation of compliance criteria, the firm considers such
with its policies and procedures matters as
on independence from all firm
personnel required to be (a) the nature of the engagement,
independent by the Philippine including the extent to which it
Code. involves a matter of public interest
(b) the length of service of the
Independence Requirement senior personnel on the
engagement
Written confirmation may be in
paper or electronic form. Acceptance and Continuance
Procedures
By obtaining confirmation and The firm should establish policies
taking appropriate action on and procedures for the acceptance
information indicating and continuance of client
noncompliance, the firm relationships and specific
demonstrates the importance engagements, designed to provide
that it attaches to it with reasonable assurance that it
independence and makes the will only undertake or continue
issue current for, and visible to, relationships and engagements
its personnel. where it:
(a) Has considered the integrity of
Familiarity Threat the client and does not have
Threat that occurs on situations information that would lead it to
that by virtue of close relationship conclude that the client lacks
with an assurance engagement integrity;
client, director, officers, or
(b) Is competent to perform the Code, and discussions with
engagement and has the other third parties.
capabilities, time and Inquiry of other firm
resources to do so; and personnel or third parties
(c) Can comply with ethical such as bankers, legal counsel
requirements. and industry peers.
Background searches of
Acceptance and Continuance of relevant databases.
Client Relationships and
Specific Engagements Firm’s capabilities,
The firm should circumstances competence, time and
before accepting an engagement resources
with a new client, when deciding
whether to continue an existing
engagement, and when
considering acceptance of a new
engagement with an existing
client. Where issues have been
identified, and the firm decides to
accept or continue the client
relationship or a specific
engagement, it should document
how the issues were resolved.
Integrity of a client
The firm also considers whether
accepting an engagement from a
new or an existing client may give
rise to an actual or perceived
conflict of interest. Where a
potential conflict is identified, the
frm considers whether it is
appropriate to accept the
engagement.
Deciding whether to continue a
client relationship includes
consideration of significant
matters that have arisen during
the current or previous
engagements, and their
implications for continuing the
relationship.
Sources for information on For example, a client may
Integrity of Client have started to
expand its business
Communications with existing operations into an
or previous providers of area where the firm does
professional accountancy not possess the necessary
services to the client in knowledge or expertise.
accordance with the Philippine
Where the firm obtains information Such policies and procedures
that would have caused it to address the following personnel
decline an engagement if that issues:
information had been available
earlier, policies and procedures on
the continuance of the
engagement and the client
relationship should include
consideration of:
(a) The professional and legal
responsibilities that apply to the
circumstances, including whether Recruitment
there is a requirement for the firm The firms recruitment processes
to report to the person or persons include procedures that help the
who made the appointment or, in firm select individuals of integrity
some cases, to regulatory with capacity to develop the
authorities; and capabilities and competence
necessary to perform the firm’s
(b) The possibility of work.
withdrawing from the
engagement or from both the Capabilities and competence are
engagement and the client developed through a variety of
relationship methods, including the following:
Policies and procedures on
withdrawal
The continuing competence
of the firm’s personnel depends
to a significant extent on an
appropriate level of
continuing professional
development so that
Human Resources personnel maintain their
The firm should establish policies knowledge and capabilities.
and procedures designed to
provide it with reasonable The firm therefore emphasizes
assurance that it has sufficient in its policies and procedures
personnel with the capabilities, the need for continuing training
competence, and commitment to for all levels of firm personnel,
ethical principles necessary to and provides the necessary
perform its engagements in training resources and
accordance with professional assistance to enable personnel
standards and regulatory and legal to develop and maintain the
requirements, and to enable the required capabilities and
firm or engagement partners to competence.
issue reports that are appropriate
in the circumstances. Where internal technical and
training resources are
unavailable, or for any other
reason, the firm may use a competence, authority and
suitably qualified external time to perform the role; and
person for that purpose. (c) The responsibilities of the
engagement partner are clearly
Performance Evaluation defined and communicated to that
The firm’s performance partner.
evaluation, compensation and
promotion procedures give due Policies and procedures include
recognition and reward to the systems to monitor the
development and maintenance of workload and availability of
competence and commitment engagement partners so as
to ethical principles. to enable these individuals to
have sufficient time to
In particular, the firm: adequately discharge their
(a) Makes personnel aware of the responsibilities
firm’s expectations regarding
performance and ethical principles; The firm should also assign
(b) Provides personnel with appropriate staff with the
evaluation of, and counselling necessary capabilities,
on, performance, progress and competence and time to
career development; and perform engagements in
c) Helps personnel understand accordance with professional
that advancement to positions of standards and regulatory and
greater responsibility depends, legal requirements, and to
among other things, upon enable the firm or engagement
performance quality and partners to issue reports that
adherence to ethical principles, are appropriate in the
and that failure to comply with circumstances.
the firm’s policies and procedures
may result in disciplinary action. Engagement Performance
The firm should establish policies
The size and circumstances of and procedures designed to
the firm will influence the structure provide it with reasonable
of the firm’s performance assurance that engagements are
evaluation process. Smaller firms, performed in accordance with
in particular, may employ less professional standards and
formal methods of evaluating the regulatory and legal
performance of their personnel requirements, and that the firm
or the engagement partner issue
Assignment of Engagement reports that are appropriate in
Teams the circumstances.
The firm should assign
responsibility for each engagement Through its policies and
to an engagement partner. The procedures, the firm seeks to
firm should establish policies and establish consistency in the
procedures requiring that: quality of engagement
performance.
(a) The identity and role of the
engagement partner are This is often accomplished
communicated to key members through written or electronic
of client management and those manuals, software tools or
charged with governance; other forms of standardized
(b) The engagement partner has documentation, and industry or
the appropriate capabilities,
subject matter-specific
guidance materials.
Engagement Performance-
Matters addressed include:
Consultation
The firm should establish policies
and procedures designed to
provide it with reasonable
assurance that:
It is important that all members
of the engagement team
understand the objectives of
the work they are to perform.
Appropriate team-working and
training are necessary to assist
less experienced members of
the engagement team to clearly Effective consultation with
understand the objectives of the other professionals requires
assigned work that those consulted be given
all the relevant facts that
Supervision will enable them to provide
informed advice on technical,
ethical or other matters.
Consultation procedures
require consultation with those
having appropriate
knowledge, seniority and
experience within the firm
(or, where applicable, outside
the firm) on significant
technical, ethical and other
matters, and appropriate
documentation and
implementation of conclusions
resulting from consultations.
Review Responsibilities
Review responsibilities are External Consultation
determined on the basis that more A firm needing to consult
experienced engagement team externally, for example, a firm
members, including the without appropriate internal
engagement partner, review work resources, may take advantage of
performed by less experienced advisory services provided by
team members. (a) other firms,
(b) professional and regulatory
Consideration for Reviews bodies, or
(c) commercial organizations that should not be issued until the
provide relevant quality control matter is resolved.
services.
Engagement Quality Control
Before contracting for such Review
services, the firm considers The firm should establish policies
whether the external provider is and procedures requiring, for
suitably qualified for that appropriate engagements, an
purpose. engagement quality control review
that provides an objective
Consultation: Documentation evaluation of the significant
The documentation of judgments made by the
consultations with other engagement team and the
professionals that involve difficult conclusions reached in formulating
or contentious matters is agreed the report.
by both the individual seeking
consultation and the individual Policies and Procedures on
consulted. Engagement Quality Control
Review:
The documentation is sufficiently
complete and detailed to enable
an understanding of:
(a) The issue on which consultation
was sought; and
(b) The results of the consultation,
including any decisions taken, the
basis for those decisions and how
they were implemented.
Consultation: Differences of
Opinion
The firm should establish policies
and procedures for dealing with
and resolving differences of The firm’s policies and procedures
opinion within the engagement should require the completion of
team, with those consulted and, the engagement quality control
where applicable, between the review before the report is
engagement partner and the issued
engagement quality control
reviewer. Conclusions reached Criteria that a firm considers
should be documented and when determining which
implemented. engagements other than audits
of financial statements of
Such procedures encourage listed entities are to be subject
identification of differences of to an engagement quality control
opinion at an early stage, provide review include the following:
clear guidelines as to the
successive steps to be taken 1. The nature of the engagement,
thereafter, and require including the extent to which it
documentation regarding the involves a matter of public interest.
resolution of the differences and 2. The identification of unusual
the implementation of the circumstances or risks in an
conclusions reached. The report engagement or class of
engagements.
3. Whether laws or regulations statements of listed entities
require an engagement quality includes considering the following;
control review.
1. The engagement team’s
Policies and Procedures on evaluation of the firm’s
Engagement Quality Control independence in relation to the
Review: specific engagement.
The firm should establish policies 2. Significant risks identified
and procedures setting out: during the engagement and
(a) The nature, timing and extent the responses to those risks.
of an engagement quality control 3. Judgments made, particularly
review; with respect to materiality and
(b) Criteria for the eligibility of significant risks
engagement quality control
reviewers; and Considerations during an
(c) Documentation requirements Engagement Quality Control
for an engagement quality control Review
review. Whether appropriate
consultation has taken place on
Nature, Timing and Extent of matters involving differences of
the Engagement Quality opinion or other difficult or
Control Review contentious matters, and the
An engagement quality control conclusions arising from those
review ordinarily involves consultations.
discussion with the The significance and
engagement partner, a review disposition of corrected and
of the financial statements or uncorrected misstatements
other subject matter identified during the
information and the report, engagement.
and, in particular, consideration The matters to be
of whether the report is communicated to management
appropriate. and those charged with
It also involves a review of governance and, where
selected working papers applicable, other parties such
relating to the significant as regulatory bodies.
judgments the engagement Whether working papers
team made and the selected for review reflect the
conclusions they reached. work performed in relation to
The extent of the review the significant judgments and
depends on the complexity of support the conclusions
the engagement and the risk reached.
that the report might not be The appropriateness of the
appropriate in the report to be issued.
circumstances.
The review does not reduce the Nature, Timing, and Extent of
responsibilities of the Engagement Quality Control
engagement partner. Review
Considerations during an? Engagement quality control
Engagement Quality Control reviews for engagements other
Review than audits of financial statements
of listed entities may, depending
An engagement quality control on the circumstances, include
review for audits of financial
some or all of these considerations
previously stated.
The engagement quality control
reviewer conducts the review in a
timely manner at appropriate
stages during the engagement so
that significant matters may be
promptly resolved to the
reviewer’s satisfaction before the
report is issued.
Where the engagement quality
control reviewer makes
recommendations that the
engagement partner does not
accept and the matter is not
resolved to the reviewer’s
satisfaction, the report is not
issued until the matter is resolved
by following the firm’s procedures
for dealing with differences of
opinion.
Criteria for the Eligibility of
Engagement Quality Control
Reviewers
The firm’s policies and procedures
should address the appointment of
engagement quality control
reviewers and establish their
eligibility through:
a. The technical qualifications
required to perform the role,
including the necessary
experience and authority; and
b. The degree to which an
engagement quality control
reviewer can be consulted on
the engagement without
compromising the reviewer’s
objectivity.