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Chapter
PROFESSIONAL PRACTICE OF

2 ACCOUNTANCY:
AN OVERVIEW

Expected Learning Outcomes

After studying the chapter, you should be able to:

1. Explain the attributes of a profession.

2. Describe who a professional accountant is.
3. Enumerate and explain the scope of the practice of professional
accountants in the Philippines.
4. Describe the nature of assurance, attest, and auditing services
of accounting professionals.
5. Describe the relationship among assurance, attest and auditing
services.
6. Distinguish between external auditors, internal auditors,
government auditors and forensic auditors.
7. Explain the nature of other audit services such as internal audit,
compliance audits, operational audits and forensic audits.
8. Describe the most sought-after non-assurance services such as
• Agreed upon procedures
• Tax preparation and planning services

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• Management advisory services

• Compilation, accounting and processing system services


CHAPTER 2

PROFESSIONAL PRACTICE OF ACCOUNTANCY:

AN OVERVIEW

ACCOUNTANCY AS A PROFESSION

In our society, professions are generally recognized as elite occupational

classifications. Ernest Greenwood in his article Attributes of a Profession (1957)
sets forth five major characteristics of an ideal profession. These are (1) systematic
body of theory, (2) professional authority, (3) community sanction, (4) regulative
code and (5) a culture. Professional accountants satisfy these said attributes of a
profession.

Systematic Theory

The underlying theory of the public accounting profession consists of

accounting theory — financial accounting and reporting standards and
practices and auditing standards - a science of validation. Knowledge in
systematic theory can be achieved best through formal college-level
education in an academic environment.

Professional Authority

Clients who use the service of a professional often do not really understand
their own needs. The professional thus determines what is good or bad for
the client and the client accedes to this professional judgment.

The basis for the professional accountant's (CPA's) authority is his expertise
in the systematic theory of accounting and auditing.

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Professional Practice of Accountancy: An Overview 13

Community Sanction

Admission to the public accounting profession is controlled. To become a

professional accountant (CPA), a candidate must satisfy government
educational and experience requirements and pass the CPA Licensure Board
Examinations.

This licensing system is controlled by the Professional Regulation

Commission through the Board of Accountancy. Also, although professional
accountants (CPAs) are responsible to the community for their actions, it is
generally accepted that a professional's performance should be judged by
standards established by a profession itself.
Regulations Code

The powers and privileges granted to the public accounting profession by

the community effectively constitute a monopoly. To prevent abuse of this
monopoly and to discipline its members, the Rules of Professional Conduct
or Code of Ethics have been promulgated and made legally binding through
the Accountancy Law.

A Culture

The CPA is a member of a time-honored profession and the status of the

profession and the responsibilities that accompany this status affect his/her
behavior in society. Accounting has developed a professional culture as
evidenced by such factors as the formal norms of the code of ethics, the
informal rules that guide relationships among practitioners and the traditions
and myths that have arisen concerning the CPA examinations.

The most recent revision in the Code of Ethics for Professional

Accountants in the Philippines made effective on April 6, 2016 states

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"A profession is distinguished by certain characteristics including:

Mastery of a particular intellectual skill, acquired by training and
education;

• Adherence by its members to a common code of values and conduct

established by its administering body, including maintaining an outlook
which is essentially objective; and

• Acceptance of a duty to society as a whole (usually in return for

restrictions in use of a title or in the granting of a qualification)."

WHO IS A PROFESSIONAL ACCOUNTANT?

A professional accountant is an individual who holds a valid certificate issued by

the Board of Accountancy (i.e., Certified Public Accountant), whether he/she be
in public practice, industry, commerce, the public sector or education. This
professional accountant may belong to any of the following sectors:

Professional Accountant in Public Practice. A professional accountant,

irrespective of functional accountant in classification (for example, audit, tax
or consulting) in a firm that provides professional services. This term is also
used to refer to a firm of professional accountants in public practice.

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Professional Practice of Accountancy: An Overview 15

Professional Accountant in Business. A professional accountant employed or

engaged in an executive or non-executive capacity in such areas as commerce,
industry, service, the public sector, education, the not-for-profit sector,
regulatory bodies or professional bodies, or a professional accountant
contracted by such entities. The professional accountant in this group may be
in any of the following sub-sectors:

(a) commerce and industry;

(b) education; and (c) government.

Scope of Practice

The Philippine Accountancy Act of 2004 (RA. 9298) Article 1, Section 4,

paragraphs (a) to (d) spell out the scope of the practice of accountancy as follows:

(a) Practice of Public Accountancy. This shall constitute in a person, be it in

his/her individual capacity, or as a partner or as a staff member in an
accounting or auditing firm, holding out himself/herself as one skilled in
the knowledge, science and practice of accounting, and as a qualified
person to render professional services as a certified public accountant; or
offering or rendering, or both, to more than one client on a fee basis or
otherwise, services such as the audit or verification of financial transaction
and accounting records; or the preparation, signing, or certification for
clients of reports of audit, statement of financial position, and other
financial, accounting and related schedules, exhibits, statements or reports
which are to be used for publication or for credit purposes, or to be filed
with a court or government agency, or to be used for any other purpose; or
the design, installation, and revision of accounting system; or the
preparation of income tax returns when related to accounting procedures;
or when he/she represents clients before government agencies on tax and
other matters related to accounting or renders professional assistance in
matters relating to accounting procedures and the recording and
presentation of financial facts or data.

(b) Practice in Commerce and Industry. This shall constitute in a person

involved in decision making requiring professional knowledge in the

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16 Chapter 2

science of accounting, or when such employment or position requires that

the holder thereof must be a certified public accountant.

(c) Practice in Education/Academe. This shall constitute in a person in an

educational institution which involves teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and other
technically related subjects.

(d) Practice in the Government. This shall constitute in a person who holds,
or is appointed to, a position in the accounting professional group in
government or in a government-owned and/or controlled corporation,
including those performing proprietary functions, where decision making
requires professional knowledge in the science of accounting, or where a
civil service eligibility as a certified public accountant is a prerequisite.

ASSURANCE, ATTEST, AND AUDITING SERVICES DEFINED

Accounting professionals can perform various services that provide assurance

about the reliability and relevance of information given by one party to another.
The broadest category of such services is simply called assurance services. Attest
services are a subset of assurance services, and auditing is a type of attest service.
Many times these terms are used interchangeably because they are related, and at
a general level, they encompass the same process: the evaluation of evidence to
determine whether information has been recorded and presented in accordance
with a predetermined set of criteria, together with the issuance of a report that
indicates the degree of correspondence.

Assurance Services

In the late 1990s, the accounting profession expanded the potential breadth of
auditors’ activities beyond auditing and attest services to include a broader set of
assurance services. Extending auditors’ activities to assurance services allows
reporting not only on the reliability and credibility of information but also on the
relevance and timeliness of that information. Assurance services are defined as
follows:

Assurance services are independent professional services that improve the quality
of information, or its context, for decision makers.

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Professional Practice of Accountancy: An Overview 17

The definition captures some important concepts. First, the definition focuses on
decision making. Making good decisions requires quality information, which, in
the context of the broad set of assurances services, can be financial or nonfinancial.
Second, it relates to improving the quality of information or its context. An
assurance service engagement can improve quality through increasing confidence
in the information’s reliability and relevance. Context can be improved by
clarifying the format and background with which the information is presented.
Third, the definition includes “independence”, which relates to the objectivity of
the application of professional judgment and due care by the provider. To
summarize, assurance services can include almost any service provided by
accounting professionals that involves capturing information, improving its
quality, or enhancing its usefulness for decision makers.

Attest Services

Auditors have a reputation for independence and objectivity. As a result, various

parties frequently request that auditors attest to information beyond historical
financial information. However, professional standards did not allow for such
services until the profession established a separate set of attestation standards in
1986. These standards provide the following definition for attest services:

Attest services occur when a practitioner is engaged to issue … a report on subject

matter, or an assertion about subject matter, that is the responsibility of another
party.

Notice that this definition is broader than the one previously discussed for auditing
because it is not limited to economic events or actions. The subject matter of attest
services can take many forms, including prospective information, analyses,
systems and processes, and even the specific actions of specified parties. Note that
financial statement auditing is a particular, specialized form of an attest service.

Audit Services

Auditing is a systematic process of objectivity obtaining and evaluating evidence

regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and
communicating the results to interest users.

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18 Chapter 2

The phrase “systematic process” implies that there should be a well-planned and
thorough approach for conducting an audit. This approach involves “objectivity in
obtaining and evaluating evidence”. In other words, the auditor must search for
audit evidence and objectively evaluate the relevance and validity of the evidence
he or she finds. The type, quantity, and reliability of evidence will vary between
audits, but the process of obtaining and evaluating evidence makes up most of the
auditor’s activities on any audit.

As our analogy of auditing illustrates, the evidence gathered by the auditor must
relate to relevant assertions, which in auditing pertain to economic actions and
events. The auditor compares the evidence gathered to management’s financial
statement assertions in order to asses “the degree of correspondence between those
assertions and established criteria.” While different types of “criteria” might be
available in various settings, financial accounting and reporting standards
principles usually serve as the basis for evaluating management’s assertions in the
context of a financial statement audit.

RELATIONSHIP AMONG ASSURANCE, ATTEST, AND AUDITING

SERVICES

It is important to understand the relationship among the range of services that are
offered by CPAs, because different professional standards apply to each type of
service. Figure 2-1 illustrates the universe of services that may be offered by CPAs
and the relationships among these services. As shown, CPAs provide both
assurance and non assurance services but a few, specially of the management
consulting type, overlap. Certain management consulting services have assurance
aspects. It also illustrates that attestation services are only a portion of the
assurance services that are offered by CPAs.

This textbook focuses primarily on financial statements auditing because it

represents the major type of assurance service offered by most public accounting
firms. In addition, in many instances, the approach, concepts, methods, and
techniques used for financial statement audit also apply to other attest and
assurance service engagements.

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Professional Practice of Accountancy: An Overview 19

Figure 2-1: The Relationship among Assurance, Auditing, Attest, and

Services

ASSURANCE SERVICES NONASSURANCE

SERVICES
Tax
Services
Attestation Services

Audits of Financial Statements

Examination of Internal Control Management Consulting
Trust Services, e.g.,
WebTrust Services
and SysTrust
Reviews of Financial Statements Fraud Investigations
or Other Information Information Technology
Agreed-Upon Procedures
Consulting
Engagements

Other Assurance Services Other Nonassurance

Services
CPA ElderCarePrime Plus Compilation, Accounting and
Services Data
CPA Performance View Services Processing System Services

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20 Chapter 2

• CPA Risk Advisory Services Others

• Others

TYPES OF AUDITORS

1. External Auditors

CPA firms have as their primary responsibility the performance of audits

of the published historical financial statements of all publicly traded
companies, most other reasonably large companies and many smaller
companies and noncommercial organizations. Because of the widespread
use of audited financial statements, it is common to use the terms CPA
firms, independent auditor, or auditor, synonymously.

CPA firms can perform operational auditing as well as compliance

auditing as part of their management consultancy services.

2. Internal Auditors

Internal auditors could be CPA firms hired by the entity as consultants or

employees of individual companies who perform independent appraisal
activity within the organization such as review of accounting, financial and
other operations as a basis for service to management. They provide
management with valuable information for making decisions concerning
effective operation of its business.

The internal auditor is therefore concerned with all kinds of financial and
other data generated for both internal and external users. Likewise, the
internal auditor is also engaged in evaluating the efficiency of resource
utilization (operational auditing), the effectiveness with which entity
objectives are attained (management or performance auditing and routine
compliance auditing).

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Professional Practice of Accountancy: An Overview 21

To be able to operate effectively, an internal auditor must be independent

of the line functions in an organization and may report directly to the audit
committee or board of directors.

3. Government Auditors

Several government agencies perform a significant number of audits.

These include the Commission on Audit (COA) and the Bureau of Internal
Revenue.

COA Auditors

Government auditors from COA determine whether the government

agencies and other entities that use public funds:

(1) present their financial statements fairly in accordance with Financial

Reporting Standards and applicable laws and regulations,
(2) conduct the programs with economy and efficiency,
(3) desired results are achieved.

Many of the COA's audit responsibilities are the same as those of a CPA
firm. But since the authority for expenditures and receipts of governmental
agencies is defined by law, there is considerable emphasis on compliance
in these audits. Also, an increasing effort of the COA's audit efforts has
been devoted to evaluating the operational efficiency and effectiveness of
various government programs. As a result of their great responsibility for
auditing government expenditures, their eligibility to be CPAs, their
opportunities for performing operational audit, their use of advanced
auditing concepts, COA auditors are highly regarded in the auditing
profession.

BIR Examiners

BIR audits affect individuals as well as businesses. A form of compliance

auditing, BIR audits or examinations are designed to determine whether

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22 Chapter 2

the taxpayers have complied with the tax laws. These audits can be
regarded solely as compliance audits.

An auditor involved in these areas must have considerable tax knowledge

and auditing skills to conduct an effective audit.

Regulatory Auditors

Other auditors include SEC, Bangko Sentral ng Pilipinas, Cooperative

Commission, Office of Insurance Commission and other government
agency examiners who check on the solvency and compliance of the
various institutions and business firms with appropriate laws and
regulations.

4. Forensic Auditors

Forensic auditors are employed by corporations, government agencies,

public accounting firms, and specialized consulting and investigative
services firms. They are specially trained in detecting, investigating, and
deterring fraud and white-collar crime (see the discussion of forensic
auditing later in this chapter). Some examples of situations where forensic
auditors are often involved include

• Reconstructing incomplete or damaged accounting records to settle an

insurance claim over inventory valuation.
• Probing money-laundering activities by tracking and reconstructing
cash transactions.
• Identify and investigating transactions and assets in business or marital
disputes. Investigating and documenting embezzlement allegations
and negotiating insurance settlements.

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Professional Practice of Accountancy: An Overview 23

TYPES OF OTHER AUDIT SERVICES

In addition to the financial statement audit, there are four (4) major types of audits:

a) Internal audits
b) Compliance audits
c) Operational audits
d) Forensic audits

a. Internal Audit

Nature

Internal auditing is an independent, objective assurance and consulting

activity designed to add value and improve an organization's operations It
helps an organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness f risk
management, control, and government processes.

Objective and Scope

The objective of internal auditing is to assist all members of management

in the effective discharge of their responsibilities, by furnishing them with
analyses, appraisals, recommendations, and pertinent comments
concerning the activities reviewed. The internal auditor is concerned with
any phase of business activity where he or she can be of service to
management. This involves going beyond the accounting and financial
records to obtain a full understanding of the operations under review. The
attainment of this overall objective involves such activities as:

• Reviewing and appraising the soundness, adequacy, and application

of accounting, financial, and other operational controls, and
promoting effective control at reasonable cost.
• Ascertaining the extent of compliance with established policies,
plans, and procedures.

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24 Chapter 2

• Ascertaining the extent to which company assets are accounted for

and safeguarded from losses of all kinds.
• Ascertaining the reliability of management data developed within
the organization.
• Appraising the quality of performance in carrying out assigned
responsibilities.
• Recommending operating improvements.

b) Compliance Auditing – which is the examination, audit and settlement in

accordance with law and regulation.

A compliance audit determines the extent to which rules, policies, laws,

covenants, or government regulations are followed by the entity being
audited. For example, a university may be required to obtain an audit to
ensure that applicable rules and policies are being followed with respect to
the granting of student loans. Another example of compliance auditing is
the examination of tax returns of individuals and companies by the Internal
Revenue Service for compliance with the tax laws.

c) Operational audit

This is a future-oriented, independent and systematic evaluation performed

by the internal auditor for management of the operational activities
controlled by top-, middle-, and lower-level management for the purpose
of improving organizational profitability and increasing the attainment of
the other organizational objectives.

An operational audit involves a systematic review of part or all of an

organization’s activities to evaluate whether resources are being used
effectively and efficiently. The purpose of an operational audit is to
provide assurance, assess performance, identify areas for improvement,
and develop recommendations with respect to operational effectiveness
and efficiency. Sometimes this type of audit is referred to as a performance
audit or management audit. Operational audits present different challenges
than financial statement audit or compliance audits because operational
audits often require the auditor to identify or create objective, measurable
criteria against which to assess effectiveness and efficiency. Some
operational audits, such as information technology (IT) or cybersecurity

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Professional Practice of Accountancy: An Overview 25

audits, require specialized skills and expertise. Operational auditing has

increased in importance in recent years, and this trend will likely continue.
An example of an operational audit is when an entity auditors to assess the
efficiency and effectiveness of its use of information technology resources.

d) Forensic Audits

The purpose of a forensic audit is to detect a deter fraudulent activities.

Forensic auditing has increased significantly in recent years. As we
mentioned above in discussing forensic auditors, some examples of where
a forensic audit might be conducted include business or employee fraud,
various other types of criminal investigations where money or other assets
are involved, and matrimonial disputes involving division of assets.

TYPES OF OTHER ATTEST SERVICES

Auditors can provide numerous types of attest services regarding almost any
subject matter. For example, an auditor might be asked to attest to the nature and
quantity of inventory stored in an entity’s warehouse so that the entity can obtain
a bank loan with the inventory as collateral. A promising new area of attestation
services relates to assertions companies make about sustainability-claimed
reductions in carbon emissions or appropriate handling of hazardous waste.

OTHER NON-ASSURANCE SERVICES

In addition to audit, attest, and assurance services, many public accounting firms
perform other broad categories of non-assurance services.

Agreed-Upon Procedures

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

professional accountant or the intended user determines the procedures
and the professional accountant provides a report of factual findings as a

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26 Chapter 2

result of undertaking those procedures. This is not an assurance

engagement.

Tax Preparation and Planning Services

Many public accounting firms have tax professionals that assist clients in
preparing and filing tax returns, providing advice on tax and estate
planning, and representing clients on tax issues before the Internal
Revenue Service or tax courts.

Management Advisory Services

Management advisory services (MAS) involve providing advice and

assistance concerning an entity’s organization, human resources, finances,
operations, IT systems, or other activities. Another significant MAS
service area is helping public companies implement effective internal
control over financial reporting in preparation for an integrated audit to be
performed by a different public accounting firm. Due to independence
requirements, CPA firms perform MAS primarily for private entities or for
public companies for whom they do not provide a financial statement
audit. The large public accounting firms all have very robust MAS
consulting practices for non-audit clients.

Compilation, Accounting and Data Processing System Services

Public accounting firms perform a number of accounting-related services

for their nonpublic or nonaudit clients. These services include
bookkeeping, payroll processing, and preparing financial statements.
When a public accounting firm prepares the financial statements of
companies, the services are known as compilations. These forms of
services provide less assurance than a financial statement audit.

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Professional Practice of Accountancy: An Overview 27

REVIEW QUESTIONS

Questions

1. Why is the practice of accountancy considered practice of a profession?

2. Describe briefly the scope of practice of a professional accountant in the

Philippines. NANDITO NAMAN EXPLANATION

The Philippine Accountancy Act of 2004 (R.A. 9298) Article I,

Section 4, paragraphs (a) to (d) spell out the scope of the practice
of accountancy as follows:
•Practice of Public Accountancy
•Practice in Commerce and Industry
•Practice in Education/Academe
•Practice in the Government

3. State the major types of services CPAs perform, and explain each.

4. Explain the relationships among audit services, attestation services, and

assurance services, and give examples of each.

5. Define assurance services.

6. Describe what attest services are. What is the most common type of attest
engagement?

7. What does an operational audit attempt to measure? Does an operational

audit involve more or fewer subjective judgments than a compliance audit

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28 Chapter 2

or an audit of financial statements? Explain. To whom is the report usually

directed after completion of an operational audit?

8. Distinguish between a compliance audit and an operational audit.

9. Is an independent status possible or desirable for internal auditors as

compared with the independence of a public accounting firm? Explain.

10. Apart from auditing, what other professional services are offered by public
accounting firms?

11. What are the differences and similarities in audits of financial statements,
compliance audits, and operational audits?

12. List five examples of specific operational audits that could be conducted
by an internal auditor in a manufacturing company.

13. In the conduct of audits of financial statements, it would be a serious

breach of responsibility if the auditor did not thoroughly understand
accounting. However, many competent accountants do not have an
understanding of the auditing process. What causes this difference?

14. Describe the nature of the evidence the Bureau of Internal Revenue (BIR)
examiner will use in the audit of Mabuhay Company’s tax return.

15. What are the major differences in the scope of the audit responsibilities for
CPAs, COA auditors, BIR agents, and Internal Auditors?

Multiple Choice Questions

1. The practice of accounting includes the following except

a. Practice in public accountancy.
b. Practice in education / academe.
c. Practice in the government.

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Professional Practice of Accountancy: An Overview 29

d. Practice in commerce and industry, when the CPA is appointed as

marketing manager of the enterprise.

2. CPAs are considered professional persons because they:

a. hold a license from a government agency.
b. pass the CPA examination and have qualifying practical experience.
c. serve the interests of the public in general and clients in particular.
d. are members of the PICPA.

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 than 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 of the following is not an assurance engagement?

a. Compilation
b. Financial statements audit
c. Information reliability services
d. Reviews of prospective financial statements
5. Non-assurance engagements include all of the following except
a. agreed-upon procedures.
b. management consulting
c. preparing of tax returns where no conclusion is expressed.
d. compliance audit.

6. Independent auditing can best be described as

a. A branch of accounting
b. A discipline that attests to the results of accounting and other
functional operations and data.
c. A professional activity that measures and communicates financial
and business data.

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30 Chapter 2

d. A regulatory function that prevents that issuance of improper financial

information.

7. Which of the following professional services would be considered an

attestation engagement?
a. A consulting service engagement to provide computer processing
advice to a client.
b. An engagement to report on statutory requirements.
c. An income tax engagement to prepare federal and state tax returns.
d. The compilation of financial statements from a client’s financial
records.

8. In performing an attestation engagement, a CPA typically

a. Supplies litigation support services
b. Assesses control risk at a low level
c. Expresses a conclusion about an assertion
d. Provides management consulting advice

9. Operational audits generally have been conducted by internal auditors and

government audit agencies but may be performed by certified public
accountants. A primary purpose of an operational audit is to provide
a. A means of assurance that internal accounting controls are functioning
as planned.
b. A measure of management performance in meeting organizational
goals.
c. The results of internal examinations of financial and accounting
matters to a company’s top-level management.
d. Aid to the independent auditor, who is conducting the audit of the
financial statements.
10. In comparison to the external auditor, an internal auditor is more likely to
be concerned with
a. Internal administrative control
b. Cost accounting procedures
c. Operational auditing
d. Internal control

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Professional Practice of Accountancy: An Overview 31

11. Which of the following best describes the operational audit?

a. It requires the constant review by internal auditors of the
administrative controls as they relate to the operations of the company.
b. It concentrates on implementing financial and accounting control in a
newly organized company.
c. It attempts and is designed to verify the fair presentation of a
company’s results of operations.
d. It concentrates on seeking aspects of operations in which waste
could be reduced by the introduction of controls.

12. Compliance auditing often extends beyond audits leading to the expression
of opinion on the fairness of financial presentation and includes audits of
efficiency, economy effectiveness, as well as
a. Accuracy
b. Evaluation
c. Adherence to specific rules of procedures
d. Internal control

13. A summary of findings rather than assurance is most likely to be included

in a(n):
a. Agreed-upon procedures report.
b. Compilation report.
c. Examination report.
d. Review report.

14. The attest function:

a. Is an essential part of every engagement by the CPA, whether
performing auditing, tax work, or other services.
b. Includes the preparation of a report of the CPA's findings.
c. Requires a consideration of internal control.
d. Requires a complete review of all transactions during the period under
examination.

15. Attestation risk is limited to a low level in which of the following

engagement(s)?

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32 Chapter 2

a. Both examinations and reviews.

b. Examinations, but not reviews.
c. Reviews, but not examinations.
d. Neither examinations nor reviews.

16. An operational audit differs in many ways from an audit of financial

statements. Which of the following is the best example of one of these
differences?
a. The usual audit of financial statements covers the four basic
statements, whereas the operational audit is usually limited to either
the balance sheet or the income statement.
b. Operational audits are more subjective and often involve
evaluating efficiency and effectiveness of operations.
c. Operational audits do not ordinarily result in the preparation of a
report.
d. The operational audit deals with pre-tax income.

17. Which of the following terms best describes the audit of a taxpayer's tax
return by an BIR auditor?
a. Operational audit.
b. Internal audit.
c. Compliance audit.
d. Government audit.

18. Inquiries and analytical procedures ordinarily form the basis for which
type of engagement?
a. Agreed-upon procedures.
b. Audit.
c. Examination.
d. Review.

19. Operational auditing is primarily oriented toward:

a. Future improvements to accomplish the goals of management.
b. The accuracy of data reflected in management's financial records.

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Professional Practice of Accountancy: An Overview 33

c. The verification that a company's financial statements are fairly

presented.
d. Past protection provided by existing internal control.

20. A typical objective of an operational audit is for the auditor to:

a. Determine whether the financial statements fairly present the entity's
operations.
b. Evaluate the feasibility of attaining the entity's operational objectives.
c. Make recommendations for improving performance.
d. Report on the entity's relative success in attaining profit maximization.

Exercises

Exercise 1

Match the following definitions (or partial definitions) of the various types of
services to the appropriate service. Each service may be used once or not at
all.

Definition (or Partial Service

Definition)
a. An attest engagement in which A 1. Agreed-upon procedures
the CPAs agree to perform engagement
procedures for a specified F 2. Assurance services
party and issue a report that is C 3. Attest engagement
restricted to use by that party D 4. Audit of financial statements
b. An engagement designed to 5. Compliance audit
express limited assurance G 6. Examination
relating to subject matter or an E 7. Integrated audit
c. assertion. 8. Operational audit
An engagement in which the B 9. Review
CPAs issue an examination, a
review, or an agreed-upon
procedures report on subject
matter or an assertion about

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34 Chapter 2

subject matter that is the

responsibility of another party
(e.g., management).

d. An examination designed to
provide an opinion that is the
CPA’s highest level of
assurance that the financial
statements follow Philippine
Financial Reporting
Standards, or another
acceptable basis of
accounting.

e. An audit that includes

providing assurance on
both the financial
statements and internal
control over financial
reporting.
f. Professional services that
enhance the quality of
information, or its context,
for decision makers.
g. An attest engagement
designed to provide the
highest level of assurance
that CPAs provide on an
assertion.

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Professional Practice of Accountancy: An Overview 35

Exercise 2

For the purposes of this problem, assume the existence of five types of
auditors: CPA, COA, BIR, bank examiner, and internal auditor. Also assume
that the work of these various auditors can be grouped into five classifications:
audits of financial statements, compliance audits, operational audits,
accounting services, and consulting services.

For each of the following topics, you are to state the type of auditor most
probably involved. Also identify the topic with one of the above classes of
work.

You should organize your answer in a three-column format as follows: Column

1, the number of the topic; Column 2, the type of auditor involved; and Column
3, the class of work.

1. Financial statements of a small business to be submitted to a bank in

support of a loan application.
2. Financial statements of a large bank listed on the Philippine Stock
Exchange to be distributed to stockholders.
3. Review of the management directive stating
the goals and responsibilities of corporation’s mail-
handling department.
4. Review of costs and accomplishments of a military research program
carried on within the air force to determine whether the program was cost-
effective.

5. Examination on a surprise basis of General Union Bank. Emphasis placed

on verification of cash, marketable securities, and loans receivable and on
consistent observation of the banking code.
6. Analysis of the accounting system of a small business with the objective
of making recommendations concerning installation of a computer-based
system.

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36 Chapter 2

7. Determination of fairness of financial statements for public distribution by

a corporation that has professional-level internal auditing staff.
8. Review of the activities of the receiving department of a large
manufacturing company, with special attention to efficiency of materials
inspection and promptness of reports issued.
9. Review of the tax return of the corporate president to determine whether
charitable contributions are adequately substantiated.
10. Review of daily attendance during the first semester at Blue Ridge Public
School to ascertain whether payments received from the government were
substantiated by pupil-day data and whether disbursements by the school
were within authorized limits.
11. Review of transactions of a government agency to determine whether
disbursements under the Cash Transfer program of the Department of
Social Welfare followed the intent of Congress.
12. Compilation of quarterly financial statements for a small business that
does not have any accounting personnel capable of preparing financial
statements.

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