CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS · 2020. 8. 25. · CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS RAYMUND FRANCIS A. ESCALA, CPA MBA . REO CPA REVIEW PHILIPPINES . Effectiveness

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CODE OF ETHICS RAYMUND FRANCIS A. ESCALA, CPA, MBA

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

RAYMUND FRANCIS A. ESCALA, CPA MBA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW (074) 665 6774 0916 840 0661 [email protected] MAY 2021 CPA REVIEW SEASON

INTRODUCTION OF THE CODE PURPOSE The Code has been published with a purpose of reflecting the accountancy profession’s recognition of its public interest responsibility. With this, the following overarching requirements have been set out in the Code to exemplify this responsibility:

Overarching Requirement Discussion

Fundamental principles of ethics for professional accountants

These principles establish the standard of behavior expected of a professional accountant (COBID).

1. Integrity, 2. Objectivity, 3. Professional competence and Due care, 4. Confidentiality, and 5. Professional Behavior.

Conceptual Framework The professional accountants shall apply the framework in order to identify, evaluate and address threats to compliance with the fundamental principles.

International Independence Standards

Established for audits, reviews and other assurance engagements regarding threats to independence specific to these engagements.

STRUCTURE Presented below is a diagram representing the materials found on the new edition of the Code:

PART 1: Complying with the Code, Fundamental Principles and Conceptual Framework Part 2: Professional Accountants in

Business (PAIBs) Part 3: Professional Accountants in Public Practice (PAPPs)

Part 4A: Independence for Audit and Review Engagements Part 4B: Independence for Assurance

Engagements other than Audit and Review Engagements

Notes:

Part 1 is applicable to all professional accountants (PAs). Part 2 is applicable to PAIBs when performing professional activities. PAIBs include PAs engaged or contracted in

an executive or non-executive capacity in, for example: o Commerce, industry or service. o The public sector. o Education. o The not-for-profit sector. o Regulatory or professional bodies.

Part 2 is also applicable to PAPPs when performing professional activities pursuant to their relationship with the firm, whether as a contractor, employee or owner.

Part 3 is applicable to PAPPs. Parts 4A and 4B comprise the International Independence Standards.

Part Effective Date Parts 1, 2 and 3 As of June 15, 2019 Part 4A - relating to independence for audit and review engagements

Effective for audits and reviews of financial statements for periods beginning on or after June 15, 2019.

Part 4B - relating to independence for assurance engagements with respect to subject matter covering periods

Effective for periods beginning on or after June 15, 2019; otherwise, it will be effective as of June 15, 2019.

Note: Early adoption is permitted.


RAYMUND FRANCIS A. ESCALA, CPA MBA CODE OF ETHICS

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW (074) 665 6774 0916 840 0661 z [email protected] MAY 2021 CPA REVIEW SEASON




PART 1 - COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK Complying with the Code A PA shall comply with the Code. In the case that laws or regulations preclude a PA from complying with certain parts of the Code, the laws and regulations shall prevail and the PA shall comply with all other parts of the code. This requirement relates to the fundamental principle of professional behavior which requires the PA to comply with Code. Breaches of the Code Presented below is a table of requirements pertaining to breaches of compliance with the Code.

Breach Requirements of International Independence Standards

Refer to Parts 4A and 4B of the Code.

of any other provision of the Code

The PA who identifies a breach of any other provision of the Code shall (EAR): 1. Evaluate the significance and impact of the breach; and 2. Take whatever Actions might be available immediately to address the

consequences; and 3. Determine whether to Report the breach to the relevant parties.

Fundamental Principles There are five fundamental principles of ethics (COBID) that PAs should comply with as presented below: Fundamental Principle Definition Integrity To be straightforward and honest in all professional and business relationships.

Objectivity Not to compromise professional or business judgments because of bias, conflict of interest or

undue influence of others.

Professional Competence and Due Care

(1) To attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service; and (2) to act diligently and in accordance with applicable technical and professional standards.

Confidentiality To respect the confidentiality of information acquired as a result of professional and business relationships. A professional accountant shall continue to comply with the principle of confidentiality even after the end of the relationship between the accountant and a client or employing organization.

Professional Behavior To comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession.

Conceptual Framework The environment and circumstances in which a PA renders its services and activities may create threats to compliance with the fundamental principles as previously discussed. As such, the conceptual framework has been set out on the code to set out requirements on how to appropriately deal with these threats. Three-step Approach of the Conceptual Framework Details of the three-step approach mentioned previously are presented on the below table:

Step Discussion Identifying threats The PA shall identify the threats to compliance with fundamental principles which fall into one or

more of the following categories (I-FASS): Self-interest threat – the threat that a financial or other interest will inappropriately influence

a PA’s judgment or behavior; Self-review threat – the threat that a professional accountant will not appropriately evaluate

the results of a previous judgment made; Advocacy threat – the threat that a professional accountant will promote a client’s or

employing organization’s position to the point that the accountant’s objectivity is compromised;

Familiarity threat – the threat that due to a long or close relationship with a client, or employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work; and

Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant.




Evaluating threats The PA shall evaluate whether such threat is at an acceptable level. Examples of conditions, policies

and procedures relevant in evaluating the levels of the threat are as follows: Corporate governance requirements. Educational, training and experience requirements for the profession. Effective complaint systems which enable the professional accountant and the general

public to draw attention to unethical behavior. An explicitly stated duty to report breaches of ethics requirements. Professional or regulatory monitoring and disciplinary procedures.

Addressing threats Threats identified that are not at an acceptable level must be addressed in one of three ways (ESE): a. Eliminating the circumstances, including interests or relationships, that are creating the

threats; b. Applying safeguards, where available and capable of being applied, to reduce the threats to

an acceptable level; or c. Declining or ending the specific professional activity.

Forming Overall Conclusion In forming an overall conclusion, through the three-step approach of the Conceptual Framework, the PA is required to “step back” through the following actions:

1. Review any significant judgments made or conclusions reached; and 2. Use the reasonable and informed third party test.

PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESS (PAIBs) PAIBs play an important role as to the reliability of information that investors, creditors, employing organizations and other sectors of the business community, as well as governments and the general public, may rely upon. As such, the second part of the Code details on how PAIBs should apply the Conceptual Framework approach presented in Part 1. It also includes the discussion of the following circumstances that may create threats to compliance with fundamental principles:

Circumstance Main Threat/s Created Main Fundamental Principle/s Affected Conflict of Interest Self-interest Objectivity Preparation and presentation of information Self-interest; intimidation All Acting with sufficient expertise Self-interest Professional competence and due care Financial Interests, Compensation and Incentives Self-interest Objectivity; Confidentiality Inducements, Including Gifts and Hospitality Self-interest; Familiarity;

Intimidation Integrity; Objectivity; Professional

Behavior Responding to Non-compliance with Laws and Regulations (NOCLAR) Self-interest; Intimidation Integrity; Professional behavior

Pressure to Breach the Fundamental principles Intimidation All As presented previously, PAIBs should comply with the fundamental principles and apply the three-step approach introduced in the conceptual framework. Three-step Approach for PAIBs

Step Discussion Identifying threats Examples of facts and circumstances that may create threats for PAIBs are as follows:

Self-interest threat o A PA holding a financial interest in, or receiving a loan or guarantee from, the

employing organization. o A PA participating in incentive compensation arrangements offered by the

employing organization. o A PA having access to corporate assets for personal use. o A PA being offered a gift or special treatment from a supplier of the employing

organization. Self-review threat

o A PA determining the appropriate accounting treatment for a business combination after performing the feasibility study supporting the purchase decision.

Advocacy threat o A PA having the opportunity to manipulate information in a prospectus in order to

obtain favorable financing. Familiarity threat




o A PA being responsible for the financial reporting of the employing organization when an immediate or close family member employed by the organization makes decisions that affect the financial reporting of the organization.

o A PA having a long association with individuals influencing business decisions. Intimidation threat

o A PA or immediate or close family member facing the threat of dismissal or replacement over a disagreement about:

The application of an accounting principle. The way in which financial information is to be reported.

o An individual attempting to influence the decision-making process of the PA Evaluating threats PAIB’s evaluation of the level of threat is greatly influenced by the work environment within the

employing organization and its operating environment. Examples of which are as follows: Leadership - that stresses the importance of ethical behavior and the expectation that

employees will act in an ethical manner. Policies and procedures - that empower and encourage employees to communicate ethics

issues that concern them to senior levels of management without fear of retribution; to implement and monitor the quality of employee performance.

Systems of corporate oversight Strong internal controls Recruitment procedures - that emphasize the importance of employing high caliber

competent personnel. Timely communication of policies and procedures - including any changes to them, to

all employees, and appropriate training and education on such policies and procedures. Ethics and code of conduct policies.

Addressing threats Refer to discussions of conflict of interest and pressure to breach fundamental principles for the examples of actions that might address threats. Note: In extreme situations, if the circumstances that created the threats cannot be eliminated and safeguards are not available or capable of being applied to reduce the threat to an acceptable level, it might be appropriate for a PA to resign from the employing organization.

Communicating with Those Charged with Governance (TCWG) The PA shall determine the appropriate individuals within the employing organization’s governance structure with whom to communicate. The PA may consider:

1. The nature and importance of the circumstances; and 2. The matter to be communicated.

PART 3 – PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE (PAPPs) PAPPs play an essential role in the efficiency and effectiveness of financial markets and reliability of information. This is manifested through the professional services that they undertake with various clients across different types of industries. The third part of the Code details on how PAPPs should apply the Conceptual Framework approach presented in Part 1. It also includes the discussion of the following circumstances that may create threats to compliance with fundamental principles:

Circumstance Main Threat/s Created Main Fundamental Principle/s Affected Conflict of Interest Self-interest Objectivity Professional Appointments All All Second Opinions Self-interest Professional Competence and Due Care Fees and other types of Remuneration Self-interest Professional Competence and Due Care; Objectivity Inducements, Including Gifts and Hospitality Self-interest; Familiarity;

Intimidation Integrity; Objectivity and Professional

Behavior Custody of Client Assets Self-interest Objectivity; Professional Behavior Responding to Non-compliance with Laws and Regulations (NOCLAR)

Self-interest; Intimidation Integrity; Professional behavior




Three-step Approach for PAPPs Step Discussion

Identifying threats

Examples of facts and circumstances that may create threats for PAPPs when undertaking professional services are as follows:

Self-interest threat o A PA having a direct financial interest in a client o A PA quoting a low fee to obtain a new engagement o A PA having a close business relationship with a client. o A PA having access to confidential information that might be used for personal gain. o A PA discovering a significant error when evaluating the results of a previous professional

service performed by a member of the accountant’s firm. Self-review threat

o A PA issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems.

o A PA having prepared the original data used to generate records that are the subject matter of the assurance engagement.

Advocacy threat o A PA promoting the interests of, or shares in, a client. o A PA acting as an advocate on behalf of a client in litigation or disputes with third parties. o A PA lobbying in favor of legislation on behalf of a client.

Familiarity threat o A PA having a close or immediate family member who is a director or officer of the client. o A director or officer of the client or an employee in a position to exert significant influence

over the subject matter of the engagement, having recently served as the engagement partner.

o An audit team member having a long association with the audit client. Intimidation threat

o A PA being threatened with dismissal from a client engagement or the firm because of a disagreement about a professional matter.

o A PA feeling pressured to agree with the judgment of a client because the client has more expertise on the matter in question.

o A PA being informed that a planned promotion will not occur unless the accountant agrees with an inappropriate accounting treatment.

o A PA having accepted a significant gift from a client and being threatened that acceptance of this gift will be made public.

Evaluating threats

PAPP’s evaluation of the level of threat is greatly influenced by the conditions, policies and procedures relating to the following:

Client and its Operating Environment – level of threat may be impacted by whether the client is: o An audit client and whether the audit client is a public interest entity (PIE); o An assurance client that is not an audit client; or o A non-assurance client

Firm and its Operating Environment – Examples of the conditions, policies and procedures are: o Leadership of the firm o Policies or procedures on ethics o Compensation, performance appraisal and disciplinary policies and procedures o Management of the reliance on revenue received from a single client. o Engagement partner’s authority o Educational, training and experience requirements. o Processes to facilitate and address internal and external concerns or complaints

Addressing threats

Sample safeguards that may address threats include: Assigning additional time and qualified personnel Having an appropriate reviewer Using different partners and engagement teams with separate reporting lines for the provision of

non-assurance services to an assurance client might address self-review, advocacy or familiarity threats.

Involving another firm to perform or re-perform part of the engagement might address self-interest, self-review, advocacy, familiarity or intimidation threats.

Disclosing to clients any referral fees or commission arrangements Separating teams when dealing with matters of a confidential nature




Communicating with TCWG The PA shall determine the appropriate individuals within the entity’s governance structure with whom to communicate. The PA may consider:

1. The nature and importance of the circumstances; and 2. The matter to be communicated.

PART 4 – INTERNATIONAL INDEPENDENCE STANDARDS (IISs) The Code has specifically set out IISs to apply the conceptual framework and address the threats to compliance with these overarching requirements. The IISs are composed of two parts as follows:

• Part 4A – Independence for Audit and Review Engagements, which applies when performing audit or review engagements.

• Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, which applies when performing assurance engagements that are not audit or review engagements.

Considerations for Audits, Reviews and Other Assurance Engagements The Conceptual Framework of the Code presents the following as additional considerations for audits, reviews and other assurance engagements:

1. Independence; and 2. professional skepticism

Independence Professional Skepticism Independence is comprised of: Independence of mind – the state of mind that

permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an audit or assurance team member’s integrity, objectivity or professional skepticism has been compromised.

Note that professional skepticism and the fundamental principles are inter-related concepts. As such, in an audit of financial statements, compliance by the PAPP with the fundamental principles, individually and collectively, supports the exercise of professional skepticism. This can be demonstrated as follows: 1. Integrity relates to PAs critical assessment of audit

evidence. 2. Objectivity relates to PAs manner of behavior such as

familiarity with client that might compromise PA’s judgment. 3. Professional competence and due care relates to the PA’s

application of knowledge of industry or business, design and performance of procedures and relevant knowledge to critically assess evidence.

PART 4A - INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS, WHICH APPLIES WHEN PERFORMING AUDIT OR REVIEW ENGAGEMENTS

Important note: This Part applies to both audit and review engagements. The term “professional accountant (PA)” refers to individual professional accountants in public practice and their firms. The first section of Part 4A discusses the application of the Conceptual Framework as presented in Part 1. Period during which Independence is required Independence, as required by this Part, shall be maintained during both:

• The engagement period; and • The period covered by the financial statements.

General Documentation of Independence for Audit and Review Engagements Firms are required to document that they are in compliance with the independence requirements of this Part. This is in particular:

1. When safeguards are applied to address a threat, the firm shall document the nature of the threat and the safeguards in place or applied; and

2. When a threat required significant analysis and the firm concluded that the threat was already at an acceptable level, the firm shall document the nature of the threat and the rationale for the conclusion.




Merger and Acquisitions An entity might become a related entity of an audit client because of a merger or acquisition. Such is a threat to independence and, therefore, to the ability of a firm to continue an audit engagement. In these circumstances, the following shall be done:

1. The firm shall identify and evaluate previous and current interests and relationships with the related entity after the effective date of the merger or acquisition; and

2. The firm shall take steps to end any interests or relationships that are not permitted by the Code by the effective date of the merger or acquisition.

Breach of an Independence Provision for Audit and Review Engagements Identification of a breach requires the exercise of professional judgment and “step back” approach found on the conceptual framework. If a breach has been identified, the firm shall:

1. End, suspend or eliminate the interest or relationship 2. Consider whether any legal or regulatory requirements apply to the breach and, if so:

a. Comply with those requirements; and b. Consider reporting the breach to a professional or regulatory body as applicable.

3. Promptly communicate the breach in accordance with its policies and procedures to: a. The engagement partner; b. Those with responsibility for the policies and procedures relating to independence; c. Other relevant personnel in the firm and, where appropriate, the network; and d. Those subject to the independence requirements in Part 4A who need to take appropriate action;

4. Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report; and

5. Depending on the significance of the breach, determine: a. Whether to end the audit engagement; or b. Whether it is possible to take action that satisfactorily addresses the consequences of the breach.

Other sections of Part 4A discuss circumstances that may create a threat to compliance of the overarching requirements of the Code. These other sections and their requirements are summarized on the table below:

Three-step Approach of the Conceptual Framework Circumstance Identify

(I-FASS) Evaluate

(Through relevant factors) Address (Sample

actions/safeguards) Fees • Relative Size

(e.g. large proportion of fee from a client to total fees of the firm)

Self-interest; Intimidation

The operating structure of the firm. Whether the firm is well established or

new. The significance of the client qualitatively

and/or quantitatively to the firm.

Increase the client base in the firm to reduce dependence on the audit client.

• Relative Size (e.g. large proportion of fee from a client to total revenue of 1 partner or 1 office of the firm)


The significance of the client qualitatively and/or quantitatively to the partner or office.

The extent to which the compensation of the partner, or the partners in the office, is dependent upon the fees generated from the client.

Increase partner’s or office’s client base

Have an appropriate reviewer

• Relative Size (e.g. Client is a Public Interest Entity [PIE] for 2 consecutive years and fees from the client > 15% of total fees received)


When the total fees significantly exceed 15%, the firm shall determine whether the level of the threat is such that a post-issuance review would not reduce the threat to an acceptable level. If so, the firm shall have a pre-issuance review performed.

Disclose such fact to TCWG; and

Discuss whether either are safeguards and apply them o Pre-issuance

review o Post-issuance

review • Overdue Fees

(e.g. Significant part of the fee is unpaid prior to issuance of report)

Self-interest Refer to Loans and Guarantees Obtain partial payment Have an appropriate

reviewer




• Contingent Fees A firm shall not charge directly or indirectly a contingent fee for an audit engagement.




Compensation and Evaluation Policies (e.g. Audit team member for a particular audit client is evaluated on or compensated for selling non-assurance services to that client)

Self-interest What proportion of the compensation or evaluation is based on the sale of such services;

The role of the individual on the audit team; and

Whether the sale of such non-assurance services influences promotion decisions.

Revise the policy Removing that

individual from the audit team

Gifts and Hospitality A firm, network firm or an audit team member shall not accept gifts and hospitality from an audit client, unless the value is trivial and inconsequential. Refer also to discussion of Inducements in Part 3.

Actual or threatened litigation Self-interest; intimidation

Materiality of the litigation Whether the litigation relates to a

prior audit engagement.

Have an appropriate reviewer

Removing that individual from the audit team

Financial Interests • Held by the Firm, a Network

Firm, Audit Team Members and Others

A direct financial interest (DFI) or a material indirect financial (MIFI) interest in the audit client shall not be held by:

a. The firm or a network firm; b. An audit team member, or any of that individual’s immediate family; c. Any other partner in the office in which an engagement partner practices in

connection with the audit engagement, or any of that other partner’s immediate family; or

d. Any other partner or managerial employee who provides non-audit services to the audit client, except for any whose involvement is minimal, or any of that individual’s immediate family.

• in an Entity Controlling an Audit Client

When an entity has a controlling interest in an audit client and the client is material to the entity, neither the firm, nor a network firm, nor an audit team member, nor any of that individual’s immediate family shall hold a DFI/MIFI in that entity.

• Held as trustee Discussions under the first point of financial interests also apply to financial interests in an audit client held in a trust for which the firm, network firm or individual acts as trustee, unless:

a. None of the following is a beneficiary of the trust: the trustee, the audit team member or any of that individual’s immediate family, the firm or a network firm;

b. The interest in the audit client held by the trust is not material to the trust; c. The trust is not able to exercise significant influence over the audit client; and d. None of the following can significantly influence any investment decision

involving a financial interest in the audit client: the trustee, the audit team member or any of that individual’s immediate family, the firm or a network firm.

• In Common with the Audit Client

A firm, or a network firm, or an audit team member, or any of that individual’s immediate family shall not hold a financial interest in an entity when an audit client also has a financial interest in that entity, unless:

a. The financial interests are immaterial to the firm, the network firm, the audit team member and that individual’s immediate family member and the audit client, as applicable; or

b. The audit client cannot exercise significant influence over the entity. • Received Unintentionally If a firm, a network firm or a partner or employee of the firm or a network firm, or any of

that individual’s immediate family, receives a DFI/MIFI in an audit client by way of an inheritance, gift, as a result of a merger or in similar circumstances and the interest would not otherwise be permitted to be held under this section, then:

a. If the interest is received by the firm or a network firm, or an audit team member or any of that individual’s immediate family, the financial interest shall be disposed of immediately, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; or

b. i. If the interest is received by an individual who is not an audit team member, or by any of that individual’s immediate family, the financial interest shall be disposed of as soon as possible, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; and ii. Pending the disposal of the financial interest, when necessary the firm shall




address the threat created.




Loans and guarantees • with an audit client Not permitted unless immaterial. • with an audit client

that is a bank or similar institution

Not permitted unless the loan or guarantee is made under normal lending procedures, terms and conditions.

• with an audit client that is not a bank or similar institution

Not permitted unless immaterial.

Business relationships • Between a firm, a

network firm or an audit team member and an audit client or its management

These parties shall not have a close business relationship with an audit client or its management unless any financial interest is immaterial and the business relationship is insignificant to the client or its management and the firm, the network firm or the audit team member, as applicable.

• Common Interests in Closely-held entities

A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not have a business relationship involving the holding of an interest in a closely-held entity when an audit client or a director or officer of the client, or any group thereof, also holds an interest in that entity, unless:

• The business relationship is insignificant to the firm, the network firm, or the individual as applicable, and the client;

• The financial interest is immaterial to the investor or group of investors; and • The financial interest does not give the investor, or group of investors, the ability to

control the closely-held entity. • Buying goods or

services Does not usually create a threat to independence if the transaction is in the normal course of business and at arm’s length.

Family and personal relationships

Self-interest; Familiarity; Intimidation

The individual’s responsibilities on the audit team.

The role of the family member or other individual within the client, and the closeness of the relationship.

Removing the individual from the audit team

Structuring the responsibilities of the audit team so that the audit team does not deal with matters that are within the responsibility of the individual with whom the audit team member has close relationship

Recent service with audit client

Self-interest; Self-review; Familiarity threat

Service during period covered by Audit Report The audit team shall not include an individual who, during the period covered by the audit report had served as a director or officer of the audit client or was an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements. Service Prior to Period covered by the Audit Report A self-interest, self-review or familiarity threat might be created if, before the period covered by the audit report, an audit team member had served as a director or officer of the audit client; or was an employee in a position to exert significant influence over the preparation of the client’s accounting records or financial statements on which the firm will express an opinion.

Serving as a director or officer of an audit client • As Director or Officer A partner or employee of the firm or a network firm shall not serve as a director or officer of

an audit client of the firm. • As Company

Secretary A partner or employee of the firm or a network firm shall not serve as Company Secretary for an audit client of the firm, unless:

a. Permitted under law, professional rules or practice; b. Management makes all relevant decisions; and c. The duties and activities performed are limited to those of a routine and administrative

nature Employment with an audit client

A familiarity or intimidation threat might be created if any of the following individuals have been an audit team member or partner of the firm or a network firm:

a. A director or officer of the audit client. b. 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.

Temporary Personnel Assignments

Self-review; Advocacy; Familiarity

Nature and scope of work performed by the personnel

Conduct of additional review of work performed

Not including the loaned personnel as audit team member

Not giving the audit responsibility to the loaned personnel for function or activity he performed

Long Association Provisions Long association may create familiarity and self-interest threats. An example of an action that might eliminate the familiarity and self-interest threats created by an individual being involved in an audit engagement over a long period of time would be rotating the individual off the audit team. Provision of Non-assurance Services to an Audit Client Part 4A also sets out the guidance as to provision of non-assurance services to audit client. This is due to the possible threats to independence created should non-assurance services are provided. In evaluating the threats by providing non-assurance services, relevant factors are considered including:

• The nature, scope and purpose of the service. • The degree of reliance that will be placed on the outcome of the service as part of the audit. • The legal and regulatory environment in which the service is provided. • Whether the outcome of the service will affect matters reflected in the financial statements on which the firm will

express an opinion. • The level of expertise of the client’s management and employees with respect to the type of service provided. • The extent of the client’s involvement in determining significant matters of judgment. • The nature and extent of the impact of the service, if any, on the systems that generate information that forms a

significant part of the client’s records and internal controls. • Whether the client is a public interest entity (PIE)*.

*If a firm audits a PIE, the following non-assurance services are prohibited: Prohibited Without Regard to Materiality Prohibited if Material to the Financial Statements

• Assuming a management responsibility • Serving as General Counsel • Accounting and bookkeeping services, including

preparing accounting records and financial statements

• Can only be provided to divisions/related entities if routine/mechanical, if specified conditions are met.

• Promoting, dealing in, or underwriting client shares. • Negotiating for the client as part of a recruiting

service. • Recruiting directors/officers, or senior management

who will have significant influence over accounting records or financial statements

• Evaluating or compensating a key audit partner based on that partner’s success in selling non-assurance services to the partner’s audit client

• Valuation services • Calculations of current/deferred taxes • Tax or corporate finance advice that depends on a

particular accounting treatment/financial statement presentation with respect to which there is reasonable doubt as to its appropriateness

• Acting as an advocate before a public tribunal or court to resolve a tax matter

• Internal audit services relating to internal controls over financial reporting, financial accounting systems, or financial statement amounts/disclosures

• Designing/implementing financial reporting IT systems

• Estimating damages or other amounts as part of litigation support services

• Acting as an advocate to resolve a dispute or litigation

PART 4B - INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS The scope of Part 4B of the Code is the residual of Part 4A. As such, this part applies to assurance engagements other than audit and review engagements (referred to as “assurance engagements”). For a detailed discussion of these types of engagements, kindly refer to Chapter 1.




Note: In this Part, the term “professional accountant (PA)” refers to individual professional accountants in public practice and their firms.




Period during which Independence is required Similar in Part 4A, independence is required to be maintained during both:

• The engagement period; and • The period covered by the subject matter information.

General Documentation of Independence for Assurance Engagements Other than Audit and Review Engagements (Concepts in Part 4A applies to this Part.) Breach of an Independence Provision for Assurance Engagements Other than Audit and Review Engagements If a firm concludes that a breach of a requirement in this Part has occurred, the firm shall:

1. End, suspend or eliminate the interest or relationship that created the breach; 2. Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an assurance

report; and 3. Determine whether action can be taken that satisfactorily addresses the consequences of the breach.

Other sections of Part 4B discuss other circumstances that may create a threat to compliance of the overarching requirements of the Code. Some discussions found on Part 4A of this Chapter (refer to application of three-step approach table) are also applicable to the below circumstances found on Part 4B but are applied in the context of an assurance engagement other than audit or review:

1. Fees a. Relative Size b. Overdue Fees c. Contingent Fees

2. Gifts and hospitality 3. Actual or threatened litigation 4. Loans and Guarantees 5. Business relationships

a. Between a firm, assurance team member or immediate family and an assurance client or its management b. Buying goods or services

6. Family and personal relationships 7. Recent service with assurance client 8. Serving as a director or officer of an assurance client

On the other hand, the requirements of Part 4B for financial interests are modified and are summarized below. Financial Interests Requirements • Held by the Firm,

Assurance Team Members and Immediate Family

A DFI/MFI in the assurance client shall not be held by: a. The firm; or b. An assurance team member or any of that individual’s immediate family.

• in an Entity Controlling an Audit Client

When an entity has a controlling interest in the assurance client and the client is material to the entity, neither the firm, nor an assurance team member, nor any of that individual’s immediate family shall hold a direct or material indirect financial interest in that entity.

• Held as trustee Discussions under the first point of financial interests also apply to financial interests in an audit client held in a trust for which the firm, network firm or individual acts as trustee, unless:

a. None of the following is a beneficiary of the trust: the trustee, the assurance team member or any of that individual’s immediate family, or the firm;

b. The interest in the assurance client held by the trust is not material to the trust; c. The trust is not able to exercise significant influence over the assurance client; and d. None of the following can significantly influence any investment decision involving a

financial interest in the assurance client: the trustee, the assurance team member or any of that individual’s immediate family, or the firm.

• Received Unintentionally

If a firm, an assurance team member, or any of that individual’s immediate family, receives a DFI/MIFI in an assurance client by way of an inheritance, gift, as a result of a merger, or in similar circumstances and the interest would not otherwise be permitted to be held under this section, then:

a. If the interest is received by the firm, the financial interest shall be disposed of immediately, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; or

b. If the interest is received by an assurance team member, or by any of that individual’s immediate family, the individual who received the financial interest shall immediately dispose of the financial interest, or dispose of enough of an indirect financial interest so




that the remaining interest is no longer material. Provision of Non-assurance Services to Assurance Clients other than Audit and Review Engagement Clients Before a firm accepts an engagement to provide a non-assurance service to an assurance client, the firm shall determine whether providing such a service might create a threat to independence. In evaluating the threats by providing non-assurance services, relevant factors are considered including:

• The nature, scope and purpose of the service. • The degree of reliance that will be placed on the outcome of the service as part of the assurance engagement. • The legal and regulatory environment in which the service is provided. • Whether the outcome of the service will affect matters reflected in the subject matter or subject matter information

of the assurance engagement, and, if so: o The extent to which the outcome of the service will have a material or significant effect on the subject

matter of the assurance engagement. o The extent of the assurance client’s involvement in determining significant matters of judgment.

• The level of expertise of the client’s management and employees with respect to the type of service provided.

In addressing the threats, see the requirement of Conceptual Framework in Part 1. Reports that include a restriction on use and distribution (RUD) Certain modifications to Parts 4A and 4B are permitted in the Code in certain circumstances involving assurance engagements where the report includes a RUD. An engagement is eligible to these modifications only if:

1. The firm communicates with the intended users of the report regarding the modified independence requirements that are to be applied in providing the service; and

2. The intended users of the report understand the purpose and limitations of the report and explicitly agree to the application of the modifications.

ILLUSTRATIVE QUIZZERS 1. Which of the following statements best describes why the profession of certified public accountants has deemed it

essential to promulgate a code of professional ethics and to establish a mechanism for enforcing observation of the Code? A. A pre-requisite to success is the establishment of an ethical code that primarily defines the professional’s

responsibility to clients and colleagues. B. A distinguishing mark of a profession is its acceptance of responsibility to the public. C. A requirement of most state laws calls for the profession to establish a code of ethics. D. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the

profession. 2. The following are the attributes of a profession. Which is not?

A. Systematic body of theory and professional authority B. Regulative code and culture C. Maintenance of high integrity and infallible performance D. Community sanction

3. Society has attached a special meaning to the term “professional”. A professional is

A. someone who has passed a qualifying exam to enter the job market B. a person who is expected to conduct himself or herself at a higher level that the requirements of society’s laws or

regulations C. any person who receives pay for the services performed D. someone who has both an education in the trade and on-the-job experience received under an experienced

supervisor 4. Which statement is incorrect regarding the Code of Ethics for Professional Accountants in the Philippines?

A. Professional accountants refer to persons who are Certified Public Accountants (CPA) and who hold a valid certificate issued by the Board of Accountancy.

B. Where a national statutory requirement is in conflict with a provision of the IFAC Code, the IFAC Code requirement prevails.

C. The IFAC Code of Ethics for Professional Accountants is composed of four parts. D. Professional accountants should consider the ethical requirements as the basic principles which they should

follow in performing their work.




5. When a professional accountant performs services in a country other than the home country and differences on specific matters exist between ethical requirements of the two countries, the following provisions should be applied A. When the ethical requirements of the country in which the services are being performed are less strict than the

Code of Ethics of the Philippines, then the Code of Ethics of the Philippines should be applied. B. When the ethical requirements of the country in which services are being performed are stricter than the Code of

Ethics of the Philippines, then the ethical requirements in the country where services are being performed should be applied.

C. When the ethical requirements of the home country are mandatory for services performed outside that country and are stricter, then the ethical requirements of the home country should be applied.

D. Any of the above. 6. The principle of professional behavior requires a professional accountant to

A. Be straightforward and honest in performing professional services. B. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. C. Perform professional services with due care, competence and diligence. D. Act in a manner consistent with the good reputation of the profession and refrain from any conduct which might

bring discredit to the profession. 7. A professional accountant may be associated with a tax return that

A. Contains a false or misleading statement. B. Contains statements or information furnished recklessly or without any real knowledge of whether they are true or

false. C. Omits or obscures information required to be submitted and such omission or obscurity would mislead the

revenue authorities. D. Uses of estimates if such use is generally acceptable or if it is impractical under the circumstances to obtain exact

data. 8. Which of the following is incorrect regarding professional competence?

A. Professional accountants may portray themselves as having expertise or experience they do not possess. B. Professional competence may be divided into two separate phases. C. The attainment of professional competence requires initially a high standard of general education. D. The maintenance of professional competence requires a continuing awareness of development in the

accountancy profession. 9. Which of the following is incorrect regarding confidentiality?

A. Professional accountants have an obligation to respect the confidentiality of information about a client’s or employer’s affairs acquired in the course of professional services.

B. The duty of confidentiality ceases after the end of the relationship between the professional accountant and the client or employer.

C. Confidentiality should always be observed by a professional accountant unless specific authority has been given to disclose information or there is a legal or professional duty to disclose.

D. Confidentiality requires that professional accountant acquiring information in the course of performing professional services neither uses nor appear to use that information for personal advantage or for the advantage of a third party.

10. If an audit firm discovers threats to independence with respect to an audit engagement, the code indicates that the

firm should A. Immediately resign from the engagement. B. Notify the appropriate regulatory body. C. Document the issue. D. Evaluate the significance of the threats and apply appropriate safeguards to reduce them to an acceptable level.

11. Circumstances that threaten the ability of a professional accountant in business to perform duties with the appropriate

degree of professional competence and due care include the following, except: A. Insufficient time for properly performing or completing the relevant duties B. Incomplete, restricted or otherwise inadequate information for performing the duties properly C. Sufficient experience, training and/or education D. Inadequate resources for the proper performance of the duties




12. Which statement is incorrect regarding employed professional accountants? A. Employed professional accountants owe a duty of loyalty to their employer as well as to the profession; therefore

there may be no time that the two will be in conflict. B. A professional accountant, particularly one having authority over others, should give due weight for the need for

them to develop and hold their own judgment in accounting matters and should deal with difference of opinion in a professional way.

C. When undertaking significant tasks for which a professional accountant has not had sufficient specific training or experience, he or she should not mislead the employer as to the degree of expertise or experience he or she possesses, and where appropriate, expert advice and assistance should be sought.

D. A professional accountant is expected to present financial information fully, honestly and professionally and so that it will be understood in its context.

13. The following statements pertain to provisions of Part 2 of the IFAC Code of Ethics for professional accountants.

Which is incorrect? A. A professional accountant shall not allow a conflict of interest to compromise professional or business judgment. B. When the professional accountant knows or has reason to believe that the information with which the accountant

is associated is misleading, the accountant shall take appropriate actions to seek to resolve the matter. C. Acting without sufficient expertise creates a self-review threat to compliance with the principle of professional

competence and due care. D. A professional accountant shall not offer, or encourage others to offer, any inducement that is made, or which the

accountant considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behavior of the recipient or of another individual.

14. With regard to marketing professional services, the code indicates that

A. Direct marketing is prohibited. B. Marketing is allowed if lawful. C. Marketing should be honest and truthful. D. Marketing of audit services is prohibited.

15. Which of the following is a “self-review” threat to member independence?

A. An engagement team member has a spouse that serves as CFO of the attest client. B. A second partner review is required on all attest engagements. C. An engagement team member prepares invoices for the attest client. D. An engagement team member has a direct financial interest in the attest client.

16. According to the standards of the profession, which of the following circumstances will prevent a CPA performing

audit engagements from being independent? A. Obtaining a collateralized automobile loan from a financial institution client. B. Litigation with a client relating to billing for consulting services for which the amount is immaterial. C. Employment of the CPA’s spouse as a client’s director of internal audit. D. Acting as an honorary trustee for a not-for-profit organization client.

17. A client company has not paid its 2020 audit fees. According to the Code of Professional Conduct, for the auditor to

be considered independent with respect to the 2021 audit, the 2020 audit fees must be paid before the A. 2020 report is issued B. 2021 report is issued C. 2021 field work is started D. 2022 field work is started

18. Which of the following is an example of a safeguard implemented by the client that might mitigate a threat to

independence? A. Required continuing education for all attest engagement team members. B. Required second partner review of an attest engagement. C. An effective corporate governance structure. D. Management selection of the CPA firm.

19. May a CPA hire for the CPA’s public accounting firm a non-CPA systems analyst who specializes in developing

computer systems? A. Yes, provided the CPA is qualified to perform each of the specialist’s tasks. B. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s end product. C. No, because non-CPA professionals are not permitted to be associated with CPA firms in public practice. D. No, because developing computer systems is not recognized as a service performed by public accountants.




20. According to the ethical standards of the profession, which of the following acts is generally prohibited? A. Issuing a modified report explaining a failure to follow a governmental regulatory agency’s standards when

conducting an attest service for a client. B. Revealing confidential client information during a quality review of a professional practice by a team from the

Board of Accountancy (BOA). C. Accepting a contingent fee for representing a client in an examination of the client’s tax return by the Bureau of

Internal Revenue (BIR). D. Retaining client records after an engagement is terminated prior to completion and the client has demanded their

return. 21. Which statement is incorrect regarding professional fees?

A. Professional fees should normally be computed on the basis of appropriate rates per hour or per day for the time of each person engaged in performing professional services.

B. The appropriate rates should be based on the fundamental premise that the organization and conduct of the professional accountant in public practice and the services provided to clients are well planned, controlled and managed.

C. It is for each professional accountant in public practice to determine the appropriate rates. D. It is not proper for a professional accountant in public practice to charge a client a lower fee than has previously

been charged for similar services 22. According to the ethical standards of the profession, which of the following acts is generally prohibited?

A. Purchasing a product from a third party and reselling it to a client. B. Writing a financial management newsletter promoted and sold by a publishing company. C. Accepting a commission for recommending a product to an audit client. D. Accepting engagements obtained through the efforts of third parties.

23. The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the

assurance engagement may least likely create A. Self-interest threat B. Intimidation threat C. Advocacy threat D. Familiarity threat

24. When a member of the assurance team knows that his or her close family member has a direct financial interest or a

material indirect financial interest in the assurance client, a self-interest threat may be created. Safeguards least likely include: A. The close family member disposing of all or a sufficient portion of the financial interest at the earliest practical

date. B. Discussing the matter with those charged with governance, such as the audit committee. C. Involving a professional accountant who took part in the assurance engagement to review the work done by the

member of the assurance team with the close family relationship or otherwise advise as necessary. D. Removing the individual from the assurance engagement.

25. When a professional accountant learns of a material error or omission in a tax return of a prior year, or of the failure to

file a required tax return, the professional accountant has a responsibility to do the following, except A. Promptly advise the client or employer of the error or omission and recommend that disclosure be made to the

revenue authorities. B. Immediately inform the revenue authorities. C. Take reasonable steps to ensure that the error is not repeated in subsequent tax returns if the professional

accountant concludes that a professional relationship with the client or employer can be continued. D. Inform the client or the employer that it is not possible to act for them in connection with that return or other

related information submitted to the authorities if the client or the employer does not correct the error. 26. Which of the following is incorrect regarding independence?

A. Independence consists of independence of mind and independence in appearance. B. Independence of mind is the state of mind that permits the provision of an opinion without being affected by

influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

C. Independence in appearance is the avoidance of facts and circumstances that are so significant a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm's or a member of the assurance team’s integrity, objectivity or professional skepticism had been compromised.




D. Independence is a combination of impartiality, intellectual honesty and a freedom from conflicts of interest. 27. Which of the following is incorrect regarding engagement period?

A. The period of the engagement starts when the assurance team begins to perform assurance services and ends when the assurance report is issued, except when the assurance engagement is of a recurring nature.

B. If the assurance engagement is expected to recur, the period of the assurance engagement ends with the notification by either party that the professional relationship has terminated or the issuance of the final assurance report, whichever is earlier.

C. In the case of an audit engagement, the engagement period includes the period covered by the financial statements reported on by the firm.

D. When an entity becomes an audit client during or after the period covered by the financial statements that the firm will report on, the firm should consider whether any threats to compliance with fundamental principles may be created by previous services provided to the audit client.

28. According to Code of Ethics, audit teams are required to be independent of the audit client during the engagement

period and during which other period? A. The fiscal year following the period covered by the financial statements. B. The period covered by the financial statements. C. The calendar years that includes any part of the period covered by the financial statements. D. The two years prior to the period covered by the financial statements.

29. On June 1, 2020, a CPA obtained a personal loan from a financial institution client for whom the CPA provided

compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full on December 31, 2021. On April 3, 2021, the client asked the CPA to audit the client’s financial statements for the year ended December 31, 2021. Is the CPA considered independent with respect to the audit of the client’s December 31, 2021 financial statements? A. Yes, because the loan was fully secured. B. Yes, because the CPA was not required to be independent at the time the loan was granted. C. No, because the CPA had a loan with the client during the period of a professional engagement. D. No, because the CPA had a loan with the client during the period covered by the financial statements.

30. Long association may create familiarity and self-interest threats. An example of an action that might eliminate the

familiarity and self-interest threats created by an individual being involved in an audit engagement over a long period of time would be rotating the individual off the audit team. Which of the following is incorrect regarding the rules on rotation according to IFAC Code of Ethics for Professional Accountant? A. For entities not publicly traded, the firm shall determine an appropriate period to address possible threats. B. For public interest entity, when the individual acted as the engagement partner for seven cumulative years, the

cooling-off period shall be five consecutive years. C. For public interest entity, when the individual acted in a combination of key audit partner roles and served as the

engagement partner for four or more cumulative years, the cooling-off period shall be five consecutive years. D. For public interest entity, where the individual has been appointed as responsible for the engagement quality

control review and has acted in that capacity for seven cumulative years, the cooling-off period shall be two consecutive years.

"Dream big and aim your goal toward the stars. You may not be able to reach them, but for sure they will guide

your way through a satisfying successful life. Everything being built is the fruit of a dream. Dream big but above all, act upon it." - Eduardo Dominguez

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Documents

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS · 2020. 8. 25. · CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS RAYMUND FRANCIS A. ESCALA, CPA MBA . REO CPA REVIEW PHILIPPINES . Effectiveness