Elements of Quality Control

Acceptance and Continuance of Clients

(PSA 220, PSQC 1)
PSQC 1 (26-28)
The firm shall establish policies and procedures for the acceptance and continuance
of client relationships and specific engagements, designed to provide the firm with
reasonable assurance that it will only undertake or continue relationships and
engagements where the firm:
(a) Is competent to perform the engagement and has the capabilities, including
time and resources, to do so;
Consideration of whether the firm has the competence, capabilities, and
resources:
Firm personnel have knowledge of relevant industries or subject matters;
Firm personnel have experience with relevant regulatory or reporting
requirements, or the ability to gain the necessary skills and knowledge
effectively;
The firm has sufficient personnel with the necessary competence and
capabilities;
Experts are available, if needed;
Individuals meeting the criteria and eligibility requirements to perform
engagement quality control review are available, where applicable; and
The firm is able to complete the engagement within the reporting deadline.
(b) Can comply with relevant ethical requirements; and
(c) Has considered the integrity of the client, and does not have information that
would lead it to conclude that the client lacks integrity
Matters to consider with regards to integrity
The identity and business reputation of the clients principal owners, key
management, and those charged with its governance.
The nature of the clients operations, including its business practices.
Information concerning the attitude of the clients principal owners, key
management and those charged with its governance towards such matters as

aggressive interpretation of accounting standards and the internal control

environment.
Whether the client is aggressively concerned with maintaining the firms fees
as low as possible.
Indications of an inappropriate limitation in the scope of work.
Indications that the client might be involved in money laundering or other
criminal activities.
The reasons for the proposed appointment of the firm and nonreappointment
of the previous firm.
The identity and business reputation of related parties.
Sources of these information
Communications

with

existing

or

previous

providers

of

professional

accountancy services to the client in accordance with relevant ethical

requirements, and discussions with other third parties.
Inquiry of other firm personnel or third parties such as bankers, legal counsel
and industry peers.
Background searches of relevant databases.
Such policies and procedures shall require:
(a) The firm to obtain such information as it considers necessary in the
circumstances before accepting an engagement
(b) If a potential conflict of interest is identified in accepting an engagement from a
new or an existing client, the firm to determine whether it is appropriate to accept
the engagement.
(c) If issues have been identified, and the firm decides to accept or continue the
client relationship or a specific engagement, the firm to document how the issues
were resolved.
The firm shall establish policies and procedures on continuing an engagement and
the client relationship, addressing the circumstances where the firm obtains
information that would have caused it to decline the engagement had that
information been available earlier. Such policies and procedures shall include
consideration of:
(a) The professional and legal responsibilities that apply to the circumstances,
including whether there is a requirement for the firm to report to the person or
persons who made the appointment or, in some cases, to regulatory authorities;
and

(b) The possibility of withdrawing from the engagement or from both the
engagement and the client relationship.

Consultation
PSQC 1 (34)
Consultation
-

includes discussion at the appropriate professional level, with individuals

within or outside the firm who have specialized expertise

uses appropriate research resources as well as the collective experience and
technical expertise of the firm.

The firm shall establish policies and procedures designed to provide it with
reasonable assurance that:
(a) Appropriate consultation takes place on difficult or contentious matters;
(b) Sufficient resources are available to enable appropriate consultation to take
place;
(c) The nature and scope of, and conclusions resulting from, such consultations are
documented and are agreed by both the individual seeking consultation and the
individual consulted; and
(d) Conclusions resulting from consultations are implemented.
Effective consultation on significant technical, ethical and other matters within the
firm or, where applicable, outside the firm can be achieved when those consulted:
Are given all the relevant facts that will enable them to provide informed
advice; and
Have appropriate knowledge, seniority and experience, and when conclusions
resulting from consultations are appropriately documented and implemented.
A firm needing to consult externally may take advantage of advisory services
provided by:
Other firms;
Professional and regulatory bodies; or
Commercial organizations that provide relevant quality control services.

Professional Development

Republic Act No. 9298

Philippine Accountancy Act of 2004
Rule I. Title, Declaration of Policy, Objective and Scope of Practice
SEC. 2. Declaration of Policy. The State recognizes the importance of
accountants in nation building and development. Hence, it shall develop and
nurture competent, virtuous, productive and well-rounded professional
accountants whose standards of practice and service shall be excellent,
qualitative, world class and globally competitive through inviolable, honest,
effective, and credible licensure examinations and through regulatory measures,
programs

and

activities

that

foster

their

professional

growth

and

development
Rule IV. Practice of Accountancy
SEC. 32. Continuing Professional Education (CPE) Program All certified
public accountants shall abide by the requirements, rules and regulations on
continuing professional education to be promulgated by the Board, subject to
the approval of the Commission, in coordination with the accredited national
professional organization of certified public accountants or any duly accredited
educational institutions For this purpose, a CPE Council is hereby created to
implement the CPE program.

1 CPE OBJECTIVES, DEFINITION, NATURE, AND RATIONALE

a Objectives The CPE program shall have these objectives:
i

To provide and ensure the continuous education of a

registered

professional

with

the

latest

trends

in

the

profession brought about by modernization and scientific and

technological advancements;
ii

To raise and maintain the professionals capability for

delivering professional services;

iii

To attain and maintain the highest standards and quality in

the practice of his profession;

iv

To make the professional globally competitive; and

To promote the general welfare of the public.

b Rationale Voluntary compliance with the CPE program is an effective
and credible means of ensuring competence, integrity and global
competitiveness of professionals in order to allow them to continue
the practice of their profession.
VITAL: For CPE programs, activities or sources
i

The scope shall be beyond the basic preparation for admission

to the practice of the profession. The contents shall be
relevant/related, but not limited, to the practice of the
profession.

ii

The

programs,

competence

activities
of

the

or

sources

professional

shall
by

enhance

upgrading

the
and

updating knowledge and skills for the practice of the

profession as brought about by modernization and scientific
and technical advancements in the profession.

b Programs,

Activities

and

Sources

for

Accreditation

and

Equivalent Credit Units - Any provider may submit to the PRC CPE
Council programs, activities or sources to be approved and accredited for
CPE units. The provider shall be notified of the disapproval of his CPE
programs, activities or sources without prior approval and accreditation
from the Council.
As used in these guidelines the following terms shall mean:

a Seminars shall refer to the gathering of professionals which shall

include, among others, workshops, technical lectures or subject
matter

meetings,

non-degree

training

courses

and

scientific

meetings.
b Conventions shall refer to a gathering of professionals which shall
include, among others, conferences, symposia or assemblies for
round table discussions.
c Masteral Degree shall refer to a graduate degree in accountancy,
business

or related field from a recognized school, college or

university.
d Doctoral

Degree

shall

refer

to

post

graduate

degree

in

accountancy, business or related field from a recognized school,

college or university.

Authorship shall refer to the ownership of intellectual property

which

includes technical or professional books, instructional

materials and the like. Credits earned must be claimed within one
(1) year from the date of publication.
f

Self-Directed Learning Package shall refer to learning which

uses course manuals or accredited learning modules. Accredited
Learning modules include self- instructional materials or programs
which may be in the form of printed manual, audio and video
cassette tapes, films, computer-assisted learning (CAL), study
kits, learning aids and modules or the use of the information
highway. These should include among others clearly defined
objectives, adequate content and an evaluation component for
each module.

Post Graduate/In-Service Training shall mean training or

specialization at the post graduate level for a minimum period of

one (1) week.
h

Resource Speaker shall refer to a professional who acts as

discussion leader or lecturer in a convention or seminar or similar
gathering.

Peer Reviewer shall refer to a professional who acts as an

evaluator of a research paper, conference paper or journal article
before it is presented or published.

CPE Provider shall refer to a natural person or a juridical

entity which includes among others, accredited or non-accredited
professional

organization,

firm,

partnership,

corporation

or

institution which offers, organizes or arranges CPE programs,

activities or sources for implementation and administration.
k

CPE Programs, Activities or Sources shall refer to the regime

of

CPE

which

enhance

the

competence

of

the

CPAs

by

upgrading and updating knowledge and skills for the profession as

brought

about

modernization

and

scientific

and

technical

advancements in the profession. The scope shall be beyond the

basic preparation for admission to the practice of the profession.
The content shall be related but not limited to the practice of the
profession.

2 CPE Credit Units

The total CPE credit units for registered accounting professionals shall
be sixty (60) credit units for three (3) years, provided that a minimum of
fifteen (15) credit units shall be earned in each year. Any excess credit
units in one year may be carried over to the succeeding years within the
three- year period. Excess credit units earned shall not be carried over to

the next three-year period except credit units earned for doctoral and
masters degrees.
One credit hour of CPE program, activity or source shall be
equivalent to one (1) credit unit.
3

Sanctions

a Registered CPAs
Unless

otherwise

exempted,

registered

CPAs

in

the

practice

of

accountancy who have not completed the CPE requirements provided

herein shall not be allowed to renew their professional licenses. Those
who failed to renew their professional licenses for a period of five (5)
continuous years from initial registration, or from last renewal date
shall be declared delinquent and shall, after due notice, through the
website and publication in the newsletters of PICPA or any newspaper
of general circulation, be dropped from the roster of CPAs.
ADDENDUM:
4

THE P R C C P E C O U N C I L : CREATION, C O M P O S I T I O N , T E R M S O F
OFFICE, FUNCTIONS, MEETINGS
a Creation The Board, upon approval by the PRC, shall create a Council
within thirty (30) days from the effectivity of this resolution. This shall
be known as the PRC CPE Council which shall assist the Board in
implementing its CPE program.
b Exercise of Powers and Functions The PRC CPE Council shall,
upon a majority vote, exercise powers and functions which shall include
but shall not be limited to the following.

Accept, evaluate and approve applications for accreditation of

CPE providers.

ii

Accept, evaluate and approve applications for accreditation of

CPE programs, activities or sources as to their relevance to the
profession and determine the number of CPE credit units to be
earned on the basis of the contents of the program, activity or
source submitted by the CPE providers.

iii

Accept, evaluate and approve applications for exemptions from

CPE requirements.

iv

Monitor the implementation by the CPE providers of their

programs, activities or sources.

Assess periodically and upgrade criteria for accreditation of CPE

providers and CPE programs, activities or sources.

vi

Perform such other related functions that may be incidental to

implementation of the CPE programs or policies.

CRITERIA
ACTIVITIES

FOR
OR

ACCREDITATION
SOURCES;

OF

PROVIDERS,

EQUIVALENT

CREDIT

PROGRAMS,

UNITS;

CREDIT

REQUIREMENTS; EXEMPTIONS AND OTHER MATTERS

a Criteria for Accreditation In order to merit accreditation, the

following criteria shall be complied with:
For CPE Provider
i

Must be a duly registered organization, firm, institution or agency,

or a professional of good standing and has never been convicted
of a crime;

ii

Shall

have

instructional

an

established

mechanism

and

updated

materials to carry out the CPE programs and

activities;
iii

Must

have

adequate,

modern

and

updated

instructional

materials to carry out the CPE programs and activities;

iv

Shall have instructors, lecturers, trainors and resource speakers

with good moral character, technical competence, facilitation
skills and are holders of current CPA licenses.

ADDENDUM:
6

Exemption from CPE Requirements; Procedures

a Permanent Exemption
A registered professional shall be permanently exempted from CPE
requirements upon reaching the age of 65 years old. To avail of this
exemption, the
i

professional must

Submit an application for exemption which should include the

following data:
-

Full name, residence address and phone number of applicant

PRC License Number

Employment history
Position

 Name of employer
Address of employer
ii

Submit an authentic or authenticated copy of birth certificate. If

birth certificates is not available, submit any of the following:
Voters ID or Drivers License.

Temporary Exemption
A registered professional who is working or practicing his/her
profession or furthering his/her studies abroad shall be
temporarily exempted from compliance with CPE requirement during
the period of his/her stay abroad, provided that he/she has been
out of the country for at least two years immediately prior to the
date of renewal.
Any professional availing of this temporary exemption must:

Submit an application for temporary exemption, to include the

following data:
-

Full name, residence, address and phone number of applicant;

PRC License number;

Degree obtained; college or university attended, year graduated;

Principal area of professional work;

If employed:

Position

Name of employer

Address of employer,

Certificate of employment

If furthering studies abroad, certificate of enrollment from

college or university where presently enrolled.

ii Submit original, or authenticated copy of passport, photocopy of

inside front cover, page 2, and the page/s containing visa of country,
indicating date of arrival/departure.
A permanent exempt registered professional shall be allowed to
renew his/her License without complying with the CPE requirements
upon his/her accomplishment and submission of the necessary
papers as previously mentioned and upon payment of the annual
registration fee for three (3) years for as long as he/she continues to
be out of the country.

Hiring
(Human Resource Policies and Practices)
The most important element of the control environment is personnel, which is why
human resource policies and practices are essential. With trustworthy and
competent employees, weaknesses in other controls can be compensated and
reliable financial statements might still result. Honest, efficient people are able to
perform at a high level even when there are few other controls to support them. A
company should take care in hiring, orientation, training, evaluation, counseling,
promoting, compensating, and remedial actions. Recruiting practices that include
formal, in-depth employment interviews and evidence of integrity and ethical

behavior result in hiring high-quality employees. Training improves employee

technical skills and communicates their prospective roles in the enterprise. Rotation
of personnel and promotions driven by periodic performance appraisals
demonstrate the entitys commitment to its people. Competitive compensation
programs that include bonus incentives serve to motivate and reinforce outstanding
performance. Disciplinary actions send a message that violations of expected
behavior will not be tolerated.
Quality Control Policies
The Sarbanes-Oxley Act (SOX) requires that every registered public accounting firm
auditing publicly traded companies include in their quality control policies standards
relating to:
monitoring of professional ethics and independence from issuers on behalf of
which the firm issues audit reports;
consultation within such firm on accounting and auditing questions;
supervision of audit work;
hiring, professional development, and advancement of personnel;
the acceptance and continuation of audit engagements;
internal inspection;
such other requirements as the Public Company Accounting Oversight
Board (PCAOB) may prescribe.
PCAOB Inspections
In order to insure quality control, the PCAOB conducts a continuing program of
inspections to assess the degree of compliance of the audit firms performance of
audits and issuance of audit reports with the rules of the PCAOB and professional
standards. The PCAOB evaluates the sufficiency of the quality control system of the
firm, and the manner of the documentation and communication of that system by
the firm; and performs such testing as appropriate of the audit, supervisory, and
quality control procedures of the firm.
Ex-Employee Conflicts of Interest
In determining the acceptance and continuation of audit engagements the audit
firm must consider ex-employee conflicts of interest and audit partner rotation. An

accounting firm cannot perform any audit service for a firm if a chief executive
officer, controller, chief financial officer, chief accounting officer, or equivalent
position, was employed by that accounting firm and participated in any capacity in
the audit of that issuer during the one-year period preceding the date of the
initiation of the audit. The audit partner must be rotated away from that client every
five years.
Partnership Review and Rotation
Audits should be reviewed by partners in the accounting firm not connected with
the audit and should rotate their audit partners every five years. Under SOX, section
103, auditors should provide a concurring or second partner review by a qualified
person associated with the public accounting firm, other than the person in charge
of the audit, or by an independent reviewer.
The Sarbanes-Oxley Act requires that every registered public accounting firm
auditing publicly traded companies include in their quality control policies standards
relating to all of the following except:
(A) Consultation within such firm on accounting and auditing questions.
(B) Hiring, professional development, and advancement of personnel.
(C) Internal control policies.
(D) Internal inspection.
SOX, section 303 makes it unlawful for a registered public accounting firm to
provide audit services to an issuer if the lead audit partner having primary
responsibility for the audit, or the audit partner responsible for reviewing the audit,
has performed audit services for that issuer in each of the five previous fiscal years
of that issuer. Section 103 also states the quality control standards that were
discussed in 11.3 Quality Control, above.
Audit Committee Review of Auditors
Under SOX, section 301, public company audit committees are directly responsible
for the appointment, compensation, and oversight of the work of any registered
public accounting firm employed by their company (including resolution of
disagreements between management and the auditor regarding financial reporting).

Each such registered public accounting firm reports directly to the audit committee.
Auditors may also have to discuss accounting complaints with the audit committee.
Each audit committee must have established procedures for the receipt, retention,
and treatment of complaints regarding accounting, internal accounting controls, or
auditing matters.
KPMG Hiring Policies
Nelnet Audit Committee Policy The Hiring of Former Employees of KPMG (last
approved by the Board of Directors on 3/22/07)
Objective
To comply with the Act and related SEC rules and otherwise to avoid actual or
perceived conflicts of interest that might arise from the hiring of an individual who
as an employee of KPMG participated, beyond a certain minimum level, in the audit
of Nelnet.
Application
Since KPMG is the outside accounting firm that audits Nelnets consolidated
financial statements, this section applies only to the hiring of current and former
professional employees of that firm. It does not apply to hiring administrative staff
of KPMG or to hiring professional or administrative employees of any other outside
accounting firm. Should Nelnet replace KPMG as its primary external auditor, this
policy will apply to the new auditing firm and continue to apply to KPMG for the time
periods described below.
Policy
Unless the exception described below applies and until the specified time period
passes, neither Nelnet nor any consolidated subsidiary whose assets or revenues
constitute more than 20 percent of Nelnet consolidated assets or revenues, may
hire or appoint in a financial reporting oversight role the following current or
former employees of KPMG: the lead partner, the concurring partner or any other
member of the audit engagement team with more than minimal involvement in a
Nelnet audit as described below. None of these persons may be hired or appointed
in such a role until the passage of a full engagement period from their last
involvement or more than 10 hours providing audit, review or attest services in any

Nelnet audit which is listed in the annual KPMG Client Service Plan. An engagement
period begins on the day following the filing of the annual Form 10-K and ends on
the day the next Form 10-K is filed.
In addition, a current or former employee of KPMG cannot be hired if that individual
serves in an accounting role (which includes a financial reporting oversight role)
and that person
(i) influences the accounting firms operations or financial policies;
(ii) has a capital balance in the accounting firm; or
(iii) has a financial arrangement with the accounting form other than one providing
for regular payment of a fixed dollar amount:
(A) pursuant to a fully funded retirement plan, rabbi trust, or in jurisdictions in which
a rabbi trust does not exist, a similar vehicle, or
(B) in the case of a former professional employee who was not a partner, principal
or shareholder of the accounting firm and who has not been disassociated from the
accounting firm for more than three years, that is immaterial to the former
professional employee.

Definitions
Financial reporting oversight role means a role in which a person is in a position to
or does exercise influence over the contents of the financial statements of Nelnet or
anyone who prepares or approves them, such as a member of the board of
directors, the co-chief executive officers, the chief financial officer, the audit
committee executive, the director of internal audit, the director of financial
reporting or any equivalent position. Questions about the scope of this definition
should be referred to the audit committee executive.
Audit engagement team means all partners, principals, shareholders and
professional employees participating in an audit, review, or attestation engagement
of an audit client,
including those conducting concurring or second partner reviews and all persons
who consult with others on the audit engagement team during the audit, review or

attestation engagement regarding technical or industry-specific issues, transactions

or events.
Accounting role refers to a role where a person can or does exercise more than
minimal influence over the contents of the accounting records or over any person
who prepares the accounting records. All persons in a financial reporting oversight
role also are in an accounting role. Persons in an accounting role include
individuals in clerical positions responsible for accounting records (e.g., payroll,
accounts payable, accounts receivable, purchasing, sales) as well as those who
report to individuals in financial reporting oversight roles.
Exceptions
This policy does not apply to persons employed by Nelnet as a result of a business
combination so long as the person was not hired by the other party in
contemplation of the business combination and the Audit Committee is informed in
writing within 30-days of completion of the business combination of the prior
employment relationship.
Procedures Notification Before Job Offers to KPMG Personnel
While this policy prohibits the employment of certain current or professional
employees of KPMG, the audit committee executive should be notified of an offer of
employment to any current or former professional employee of KPMG prior to the
extension of the offer.

Assignment of Personnel to Engagement Team

(PSA 300, par. 4 & A5) The engagement partner and other key

members of the engagement team shall be involved in planning the audit,

including planning and participating in the discussion among engagement
team members. Their involvement draws on their experience and insight,
thereby enhancing the effectiveness and efficiency of the planning process

(PSA 220, par. 14) The engagement team, and any auditors experts

who are not part of the engagement team, collectively should have the
appropriate competence and capabilities to:
o

(a) Perform the audit engagement in accordance with professional

standards and regulatory and legal requirements

o

(b) Enable an auditors report that is appropriate in the circumstances

to be issued.

(PSA 220, par. A11) When considering the appropriate competence and

capabilities expected of the engagement team as a whole, the engagement

partner may take into consideration such matters as the teams:
o
a

Understanding of, and practical experience with, audit engagements of

similar

nature

and

complexity

through

appropriate

training

and

participation.
o

Understanding of professional standards and regulatory and legal

requirements.
o

Technical expertise, including expertise with relevant information

technology and specialized areas of accounting or auditing.

o

Knowledge of relevant industries in which the client operates.

Ability to apply professional judgment.

Understanding of the firms quality control policies and procedures.

(PSQC 1, par. 30) The firm shall assign responsibility for each

engagement to an engagement partner and shall establish policies and

procedures requiring that:
o

(a) The identity and role of the engagement partner are communicated

to key members of client management and those charged with governance;

o

(b) The engagement partner has the appropriate competence,

capabilities, and authority to perform the role; and

o

(c) The responsibilities of the engagement partner are clearly defined

and communicated to that partner.

(PSQC 1, par. A25) Competence can be developed through a variety of

methods, including the following:

Professional education.

Continuing professional development, including training.

Work experience.

Coaching by more experienced staff, for example, other members of

the engagement team.

o

Independence education for personnel who are required to be

independent.

(PSQC 1, par. A26) The continuing competence of the firms personnel

depends to a significant extent on an appropriate level of continuing

professional development so that personnel maintain their knowledge and
capabilities. Effective policies and procedures emphasize the need for
continuing training for all levels of firm personnel, and provide the necessary
training resources and assistance to enable personnel to develop and
maintain the required competence and capabilities.

(PSQC par. A27) The firm may use a suitably qualified external person,

for example, when internal technical and training resources are unavailable.

(PSQC 1, par. A28) Performance evaluation, compensation and

promotion procedures give due recognition and reward to the development

and maintenance of competence and commitment to ethical principles.
Steps a firm may take in developing and maintaining competence and
commitment to ethical principles include:
o

Making

personnel

aware

of

the

firms

expectations

regarding

performance and ethical principles

o

Providing

personnel

with

evaluation

of,

and

counseling

on,

performance, progress and career development

o

Helping personnel understand that advancement to positions of

greater responsibility depends, among other things, upon performance

quality and adherence to ethical principles, and that failure to comply with
the firms policies and procedures may result in disciplinary action.

(PSQC 1, par. A30) Policies and procedures may include systems to

monitor the workload and availability of engagement partners so as to

enable these individuals to have sufficient time to adequately discharge their

responsibilities