Philippine Standard on Quality Management 1

PSQM 1
MANAGEMENT OF A PUBLIC
ACCOUNTING PRACTICE
Public accounting firms are usually organized as sole proprietorships or
partnerships. Whatever the legal form of organization, the hierarchy in
the public accounting firm usually includes partners, managers or
supervisors, in-charge auditors (sometimes called senior and staff
auditors). Although the titles of these positions vary from firm to firm;
the structure is substantially present in all firms.

A corporation is not allowed to engage in the practice of public

accounting in the Philippines and therefore the Securities and Exchange
Commission shall not register any corporation organized for the practice
of public accountancy. However, a growing number of practitioners now
seem to favor the adoption of "professional corporations" which are
allowed in the United States and other parts of the world. This
organizational structure of CPA firms is influenced by the following
factors:
(1) The need to be independent from clients to enable
the auditor to remain unbiased in drawing
conclusions about the financial statements;

(2) The need of a structure to encourage competence

to enable the auditor to conduct audits efficiently
and effectively; and

(3) The increased risk of litigation faced by auditors.

REGULATION WITHIN THE FIRM
SYSTEM OF QUALITY MANAGEMENT
PHILIPPINE STANDARD ON QUALITY MANAGEMENT (PSQM) 1, ADOPTED FROM
INTERNATIONAL STANDARD ON QUALITY MANAGEMENT (ISQM) 1 OF IAASB FOR
FIRMS THAT PERFORM AUDITS OR REVIEWS OF FINANCIAL STATEMENTS, OR OTHER
ASSURANCE OR RELATED
SERVICES ENGAGEMENTS
QUALITY MANAGEMENT

PSQM strengthens firms' systems of quality management through robust, proactive

and effective approach to quality management. The standard encourages firms to
design a system of quality management that is tailored to the nature and
circumstances of the firm and engagements it performs. PSQM 1 applies to all firms
that perform engagements under the IAASB's international standards. PSQM 1
replaces PSQC 1, Quality Control for Firms that Perform Audits and Reviews of
Financial Statements and Other Assurance and Related Services Engagements.

Firms are required to have systems of quality management designed and

implemented in accordance with PSQM 1 by December 15, 2022.
REGULATION WITHIN THE FIRM
THE FIRM'S SYSTEM OF QUALITY MANAGEMENT
A system of quality management operates in a continual and iterative
manner and is responsive to changes in the nature and circumstances of
the firm and its engagements. It also does not operate in a linear manner.
However, for the purposes of this PSQM, a system of quality management
addresses the following eight components:

(a) The firm's risk assessment process;

(b) Governance and leadership;

(c) Relevant ethical requirements;

(d) Acceptance and continuance of client relationships and specific engagements;

(e) Engagement performance;

(f) Resources;

(g) Information and communication; and

(h) The monitoring and remediation process.

EFFECTIVE DATE
Systems of quality management in compliance with this PSQM are
required to be designed and implemented by December 15, 2022, and the
evaluation of the system of quality management required by paragraphs
53-54 of this PSQM is required to be performed within one year following
December 15, 2022.
OBJECTIVE
The objective of the firm is to design, implement and operate a system
of
quality management for audits or reviews of financial statements, or
other
assurance or related services engagements performed by the firm, that
provides the firm with reasonable assurance that:

(a) The firm and its personnel fulfill their responsibilities in

accordance with professional standards and applicable legal and
regulatory requirements, and conduct engagements in accordance
with such standards and requirements; and

(b) Engagement reports issued by the firm or engagement partners are

appropriate in the circumstances.
DEFINITIONS
For purposes of this PSQM, the following terms have the meanings
attributed below:

(a) Deficiency in the firm's system of quality management (referred to

as "deficiency" in this PSQM)

This exists when:

i. A quality objective required to achieve the objective of the system of quality
management is not established;
ii. A quality risk, or combination of quality risks, is not identified or properly
assessed;
iii. A response, or combination of responses, does not reduce to an acceptably low
level the likelihood of a related quality risk occurring because the response(s) is
not properly designed, implemented or operating effectively; or
iv. Another aspect of the system of quality management is absent, or not properly
designed, implemented or operating effectively, such that a requirement of this
PSQM has not been addressed.
(b) Engagement documentation - The record of work performed,
results obtained, and conclusions the practitioner reached (terms
such as "working papers" or "work papers" are sometimes used).

(c) Engagement partner - The partner or other individual, appointed

by the firm, who is responsible for the engagement and its
performance, and for the report that is issued on behalf of the firm,
and who, where required, has the appropriate authority from a
professional, legal or regulatory body.

(d) Engagement quality review - An objective evaluation of the

significant judgments made by the engagement team and the
conclusions reached thereon, performed by the engagement quality
reviewer and completed on or before the date of the engagement
report.

(e) Engagement quality reviewer - A partner, other individual in the

firm, or an external individual, appointed by the firm to perform
the engagement quality review.
(f) Engagement team - All partners and staff performing the
engagement, and any other individuals who perform procedures on
the engagement, excluding an external expert and internal
auditors who provide direct assistance on an engagement.

(g) External inspections - Inspections or investigations, undertaken by

an external oversight authority, related to the firm's system of
quality management or engagements performed by the firm.

(h) Findings (in relation to a system of quality management) -

Information about the design, implementation and operation of the
system of quality management that has been accumulated from the
performance of monitoring activities, external inspections and
other relevant sources, which indicates that one or more
deficiencies may exist.

(i) Listed entity - An entity whose shares, stock or debt are quoted or
listed on a recognized stock exchange, or are marketed under the
regulations of a recognized stock exchange or other equivalent
body.
(i) Network firm - A firm or entity that belongs to the firm's network.

(k) Network - A larger structure:

i. That is aimed at cooperation; and
ii. That is clearly aimed at profit or cost-sharing or shares common ownership,
control or management, common quality management policies or procedures,
common business strategy, the use of a common brand name, or a significant
part of professional resources.

(I) Partner - Any individual with authority to bind the firm with respect to the
performance of a professional services engagement.

(m) Personnel - Partners and staff in the firm.

(n) Professional judgment - The application of relevant training, knowledge and

experience, within the context of professional standards, in making informed
decisions about the courses of action that are appropriate in the design,
implementation and operation of the firm's system of quality management.
(o) Professional standards - IAASB Engagement Standards, as defined in the IAASB's
Preface to the International Quality Management, Auditing, Review, Other Assurance,
and Related Services Pronouncements, and relevant ethical requirements.

(p) Quality objectives - The desired outcomes in relation to the components of the
system of quality management to be achieved by the firm.

(q) Quality risk - A risk that has a reasonable possibility of:

i. Occurring; and
ii. Individually, or in combination with other risks, adversely affecting the
achievement of one or more quality objectives.

(r) Reasonable assurance - In the context of the PSQMs, a high, but not absolute, level
of assurance.

(s) Relevant ethical requirements - Principles of professional ethics and ethical

requirements that are applicable to professional accountants when undertaking
engagements that are audits or reviews of financial statements or other assurance or
related services engagements. Relevant ethical requirements ordinarily comprise the
provisions of the IESBA Code related to audits or reviews of financial statements, or
other assurance or related services engagements, together with national
requirements that are more restrictive.
(t) Response (in relation to a system of quality management) - Policies or procedures
designed and implemented by the firm to address one or more quality risk(s):
i. Policies are statements of what should, or should not, be done to address a quality
risk(s). Such statements may be documented, explicitly stated in communications or
implied through actions and decisions.
ii. Procedures are actions to implement policies.

(u) Service provider (in the context of this PSQM) - An individual or organization
external to the firm that provides a resource that is used in the system of quality
management or in the performance of engagements. Service providers exclude the
firm's network, other network firms or other structures or organizations in the
network.

(v) Staff - Professionals, other than partners, including any experts the firm employs.

(w) System of quality management - A system designed, implemented and operated

by a firm to provide the firm with reasonable assurance that:
i. The firm and its personnel fulfill their responsibilities in accordance with
professional standards and applicable legal and regulatory requirements, and conduct
engagements in accordance with such standards and requirements; and
ii. Engagement reports issued by the firm or engagement partners are appropriate in
the circumstances.
Fundamental Principles
The Code of Ethics requires auditors to adhere to the
following fundamental principles.
(a) Integrity
(b) Objectivity
(c) Professional Competence and Due Care
(d) Confidentiality
(e) Professional Behavior
THREATS TO COMPLIANCE WITH RULES
THREATS TO COMPLIANCE WITH RULES
CODE OF ETHICS: APPLICABILITY TO CPAS IN PUBLIC
PRACTICE
In the following sections, we discuss the various Code of Ethics Rules as they apply
to accountants in public practice.

Conflicts of Interests (Section 220)

A conflict of interest creates a threat to objectivity and may create threats to the
other fundamental principles.

Examples of situations in which conflicts of interest may arise include:

Providing a transaction advisory service to a client seeking to acquire an audit
client of the firm, where the firm has obtained confidential information during
the course of the audit that may be relevant to the transaction.
Providing services to both a vendor and a purchaser in relation to the same
transaction.
Preparing valuations of assets for two parties who are in adversarial position with
respect to the assets.
Advising a client to invest in a business in which, for example, the spouse of the
professional accountant in public practice has a financial interest.
Advising a client on the acquisition of a business which the firm is also interested
in acquiring.
If a conflict of interest is identified, the professional
accountant in public practice shall evaluate

The significance of relevant interests or relationships;

The significance if the threats created by performing the
professional service(s),

and shall apply safeguards, when necessary, to eliminate or

reduce the threats to an acceptable level.
THANK
YOU