CODE OF ETHICS

WHY DO Professionals have code of ethics?

• To ensure high standards of competence among a group’s

members
• To regulate and strengthen their relationships
• To promote and protect the image of the profession and the
welfare of the community
 THE CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS
IN THE PHILIPPINES

• Part A – General Application of the Code

• Part B – Professional Accountants in Public Practice
• Part C – Professional Accountants in Business
For discussion purposes, Part A and Part B will be covered.
 PART A – GENERAL APPICATION OF THE CODE

• Conceptual Framework Approach to Compliance

• Fundamental Principles
• Threats and safeguards
• Ethical conflict resolution
 PART B – PROFESSIONAL ACCOUNTANT IN THE PUBLIC
PRACTICE

• Professional Appointment
• Conflicts of Interest
• Second Opinions
• Fees and Other Types of Remuneration
• Marketing Professional Services
• Gifts and Hospitality
 PART B – PROFESSIONAL ACCOUNTANT IN THE PUBLIC
PRACTICE

• Custody of Clients
• Objectivity – All services
• Independence – Audit and Review Engagements
• Independence – Other Assurance Engagements
 FUNDAMENTAL PRINCIPLES (P-I-C-O-P)

a. Professional Competence and Due Care

b. Integrity
c. Confidentiality
d. Objectivity
e. Professional Behavior
 CODE Of ethics: applicability to CPAs in public practice:
Integrity and Objectivity

1. Conflicts of Interest
• If conflict of interest is identified, the professional
accountant in public accounting shall evaluate the
significance of relevant interests and threats created by
performing the professional services
• Apply safeguards, to eliminate or reduce threats to an
acceptable level
 CODE Of ethics: applicability to CPAs in public practice

2. Marketing and Professional Services

• Should not make exaggerated claims for services
offered, qualifications possessed, or experience gained
• Should not make disparaging references to
unsubstantiated comparisons to the work of another
 CODE Of ethics: applicability to CPAs in public practice

3. Gifts and Hospitality

• Self-interest threats may be created if a gift from a
client is accepted
• Threat is at an acceptable level when the gifts offered is
made in the normal course of business without intent to
influence the decision making or to obtain information
 CODE Of ethics: applicability to CPAs in public practice

3. Gifts and Hospitality

• When threats cannot be eliminated or reduced to
an acceptable level through the application of
safeguards, offer should not be accepted
 CODE Of ethics: applicability to CPAs in public practice

4. Custody of Client Assets

• Should not assume custodies of client monies or
other assets unless permitted to do so by law or in
compliance with any additional legal duties
 CODE Of ethics: applicability to CPAs in public practice

5. Independence
• Independence of mind – a state of mind that
permits the CPA to perform an attest service
without being affected by influences that might
compromise professional judgment
 CODE Of ethics: applicability to CPAs in public practice

5. Independence
• Independence in appearance – requires avoidance of
circumstances that might cause a reasonable and
informed third party, to conclude that the integrity,
objectivity, or professional skepticism of an audit firm or
member of the engagement team has been compromised
 INDEPENDENCE REQUIREMENTS IN ASSURANCE
ENGAGEMENTS

• For assurance engagements provided to an audit client,

the member of the assurance team, the firm and network
firms are required to be independent of the client
• For assurance engagements provided to clients that are not
audit clients, when the report is not expressly restricted
for use by identified users, the members of the assurance
team and firm are required to be independent of the client
 INDEPENDENCE REQUIREMENTS IN ASSURANCE
ENGAGEMENTS

• For assurance engagements provided to clients that are

not audit clients, when the assurance report is
expressly restricted for use by identified users, the
members of the assurance team and firm are required
to be independent of the client. In addition, the firm
should not have a material direct or indirect financial
interest in the client.
Checkpoint question:
Checkpoint question:
Threats and Safeguards Approach Process
 STEP 1 : THREATS to independence

1. Self-interest
2. Self-review
3. Advocacy
4. Familiarity
5. Intimidation/Undue influence
 SELF-INTEREST THREAT

• Potential benefit to the accountant, financially

or otherwise, from a financial interest or
financial relationship with a client (i.e, Having
a direct financial interest or material indirect
financial interest with a client)
 Self interest threat : FINANCIAL INTEREST

• An interest in equity or other security, debenture,

loan or other debt instrument of an entity including
rights and obligations to acquire such an interest
and derivatives directly related to such interest
 Self interest threat : FINANCIAL INTEREST

• Direct Financial Interest

• Owned directly by and under the control of an
individual or entity, or;
• Beneficially owned through a collective investment
vehicle, estate, trust, or other intermediary over
which the individual or entity has control
 Self interest threat : FINANCIAL INTEREST

• Indirect Financial Interest

• A financial interest beneficially owned through a
collective investment vehicle, estate, trust, or
other intermediary over which the individual or
entity has no control
 Self interest threat : FINANCIAL INTEREST

 Certain other financial interests may or may not create threats to independence that
cannot be reduced to acceptable, level – impairing independence
Self interest threat : FINANCIAL INTEREST
 ISSUES on INDEPENDENCE REQUIREMENTs FOR CPAs in
public practice
II. Family Relationships

General Rule: CPAs must not have close family members (parent, sibling, or nondependent
child) in key management positions at a client or material financial interest; for immediate
family (spouse or dependent), independence is generally considered impaired if an
immediate family member has a direct financial interest in the client or holds a key
management position, regardless of the materiality of the interest.

Exceptions: Independence may not be impaired if the family member’s role is other than a
key position
 ISSUES on INDEPENDENCE REQUIREMENTs FOR CPAs in
public practice
II. Family Relationships
 ISSUES on INDEPENDENCE REQUIREMENTs FOR CPAs in
public practice
III. Business Relationship

General Rule: Avoid significant business relationships or financial interests between the
audit firm, audit team members, or their immediate families and the audit client, as they
can impair independence.

Exception: A business relationship between the external auditor and the client or a member
of the auditor’s immediate family, in a closely-held entity when the audit client or a director
or officer of the client, or any group thereof, also holds an interest in that entity does not
create threats to independence if:

a. The relationship and financial interest must be insignificant to the firm, audit team
member, and client.

b. The financial interest must be immaterial and not provide control over the entity.
 ISSUES on INDEPENDENCE REQUIREMENTs FOR CPAs in
public practice
IV. Employment with an Audit Client

General Rule: Independence would be deemed to be compromised if a former member of

the audit team or partners joins the audit client as a director or officer, or an employee in a
position to exert significant influence over the preparation of the client’s accounting records
or the financial statements on which the firm will express an opinion

Exception:

1. The individual is not entitled to any benefits or payments from the firm other than fixed,
pre-determined arrangements, and any amount owed to the individual is not material to
the firm; and

2. The individual does not continue to participate or appear to participate in the firm's
business or professional activities.
 ISSUES on INDEPENDENCE REQUIREMENTs FOR CPAs in
public practice
V. Temporary Staff Assignments

General Rule: Lending staff to an audit client can create a self-review threat. Staff should
not be involved in:

1. Providing non-assurance services not allowed by the code.

2. Taking on management responsibilities.

Exception: Assignment is brief enough to manage without significant impact on

independence. Furthermore, implement safeguards to manage the threat, such as:

3. Conducting extra reviews of the work done by the loaned staff.

4. Excluding loaned staff from the audit team.

5. Ensuring loaned staff do not handle audit tasks related to their previous work for the
client.
ISSUES on INDEPENDENCE REQUIREMENTs FOR CPAs in
public practice
VI. Providing Non-attest Services

General Rule: CPAs can provide advice and recommendations but must not perform
management functions or make decisions for the client.

Prohibited Activities for CPA Firms:

1. Set Policies

2. Direct Employees

3. Authorize Transaction

4. Prepare Documents

5. Custody of Assets

6. Supervise Employees

7. Evaluate Controls
ISSUES on INDEPENDENCE REQUIREMENTs FOR CPAs in
public practice
VI. Fees and Remuneration

Fees: Quoting very low fees may compromise professional standards. Referral fees and
commissions can also create self-interest threats; safeguards include disclosure and client
agreement. Independence is impaired if fees overdue for over a year are not collected
before issuing the current year's audit report. Contingent fees based on outcomes are
generally not allowed, except when set by public authorities.

Compensation: Evaluation or compensation of audit team members for selling non-

assurance services can create self-interest threats. Safeguards include removing such
members from the audit team or having their work reviewed by another accountant.
 SELF-REVIEW THREAT

• Accountant will not appropriately evaluate

results of a previous judgment made or service
performed or supervised by the accountant or
the accountant’s firm (i.e., Accountant performs
bookkeeping services for an audit client)
 ADVOCACY THREAT

• Accountant will promote a client’s interest or

position and compromise objectivity (i.e.,
Representing an audit client in the court of
tax appeals)
 FAMILIARITY THREAT

• Accountant will become too sympathetic to the

client’s work or product due to a long or close
relationship with client personnel (i.e.,
Accountant’s immediate family, close relative or
friend is employed by client or director/officer of
the client)
 INTIMIDATION/UNDUE INFLUENCE

• Accountant will not act with objectivity

because of interests opposed to the client’s
interest
 STEP 3: SAFEGUARDS to mitigate or eliminate threats

Safeguards are actions or measures that may

eliminate threats or reduce them to an
acceptable level:
• Safeguards created by profession, legislation or
regulation
• Safeguards in the work environment
 Safeguards created by profession, legislation or regulation

• Educational, training and experience requirements

• Continuing professional development requirements
• Corporate governance regulations
• Professional standards
• External review
 Safeguards in the work environment

Firm-wide safeguards:
• Leadership of the firm
• Quality control of engagements
• Internal policies and procedures
• Monitoring
 Safeguards in the work environment

Engagement-specific safeguards:
• Rotating senior assurance team personnel
• Engagement Quality Review
• Discussing ethical issues with those charged with
governance
OVERVIEW OF RISK-BASED
AUDIT PROCESS
 Risk-Based Audit Approach

Begins with an assessment of the types and likelihood of

misstatements in account balance and then adjusts the
amount and type of audit work, to the likelihood of material
misstatements occurring in the account balances.
 Risk-Based Audit Approach

Under this approach, the auditor performs the following:

1. Identification of the client’s strategy and the processes for developing
that strategy
2.Examination of the core business process and resource management
3. Identification for each of the key processes (as well as subprocesses)
the objectives, inputs, activities, outputs, systems and transactions.
4. Assessment of the risks that the processes will not meet the goals and
controls related to those risks
 Risk-Based Audit Approach

Factors to Consider in Implementing the Audit Risk Model:

• High-risk activities
• Existence of large non-routine transactions
• Matters requiring judgement or management intervention
• Potential for Fraud
 Risk-Based Audit Approach

Limitations of the Audit Risk Model

CPA firms in determining their approach to implementing the audit risk
model should consider the following limitations:
a. Inherent risk is difficult to formally assess.
b. The model treats each risk component as separate and independent
where in fact the components are not independent.
c. Audit risks is judgmentally determined.
d. Audit technology is not so fully developed that each component of
the model can be accurately assessed.
 Risk-Based Audit Vs. Account-Based Audit

Account-based auditing - auditors 1st obtain an understanding of

control and assess control risk for particular types of errors and frauds in
specific accounts and cycle.

Risk-based audit - the audit team views all the activities in the
organization 1st in terms of risks to strategies and objectives and then in
terms of management’s plans and to mitigate the risk.
 Risk-Based Audit Process - Phase I. Risk Assessment

1. Performance of preliminary engagement activities to decide whether

to accept/continue an audit engagement
2. Planning the audit to develop an overall audit strategy and audit plan
3. Performance of risk assessment procedures to identify/assess risk of
material misstatement through understanding the entity
 Risk-Based Audit Process - Phase II. Risk RESPONSE

1. Designing overall responses and further audit procedures to develop

appropriate responses to the assessed risk of material misstatement
2. Implementing responses to assessed risk of material misstatement to
reduce audit risk to an acceptably low level
 Risk-Based Audit Process - Phase III. Reporting

1. Evaluating the audit evidence obtained to determine what additional

audit work (if any) is required.
2. Forming an opinion based on audit findings and preparing the
auditor’s report
 Nature of Risk

Risk - concept used to express uncertainty about events and/or their

outcomes that could have a material effect on the organization.
• Audit Risk
• Engagement Risk
• Financial Reporting Risk
• Business Risk
 Overview of Risk Elements Affecting an Audit

Factors Affecting Business Risk

 Economic climate
 Technological change
 Competition
 Business Volatility
 Geographic location
 Overview of Risk Elements Affecting an Audit

Factors Affecting Financial Reporting Risk

 Competence and integrity of management
 Incentive to management to misstated F.S
 Complexity of transactions
 Internal control

Business risk and financial reporting risk originate with the audit
client and its environment, and these risks then affect the
auditor’s engagement risk and audit risk.
 AUDIT RISK

The auditor can control audit risk in 2 different ways:

1. Avoid audit risk by not accepting certain companies as client, i.e.,
reduce engagement risk to zero
2. Set audit risk at a level that the auditor believes will mitigate the
likelihood that the auditor will fail to identify material misstatements
 Integration of Concepts of Materiality and Risk

1. Risky areas of a business must be identified by the auditors to

determine which account balances are more prone to material
misstatements, how the misstatements might occur and how a client
might be able to cover them up.
2. Auditors need to develop approaches and methodologies to allocate
overall assessments of materiality to individual accounts balances
because some account balances maybe more important to users.
3. Audits involve testing or sampling and thus cannot provide absolute
(100%) assurance that the financial statements are free of material
misstatements without inordinately driving up the cost of an audit.
 Integration of Concepts of Materiality and Risk

4. Not all clients are worth accepting. Since audits rely on testing and to
some extent on the integrity of management, there are some clients
that an audit firm should not accept because the engagement is too
high.
5. Competition for clients among audit firm is high. Clients choose
auditors based on a number of factors including fees, service,
industry knowledge, personal rapport and ability to assist the client.
6. Auditors should understand society’s expectations of financial
reporting to reduce audit risk to an acceptably low level and therefore
minimize lawsuits that the users may possibly bring forth.