Quality Control Policies and Procedures

Abernethy and Chapman

Quality Control Policies and Procedures: ACCEPTANCE AND CONTINUATION OF CLIENTS

The Client Acceptance and Continuance Policy sets out principles for member firms to
determine whether to accept a new client or a new engagement or to continue with
an existing client or engagement. These principles are fundamental to maintaining
quality, managing risk, protecting our people and meeting regulatory requirements.

The objectives of the policy are to:

 Establish a rigorous process for evaluating risk and making decisions to
accept/continue clients or engagements
 Meet applicable independence requirements
 Identify and deal appropriately with any conflicts of interest
 Identify and decline clients that pose excessive risk
 Require consultation with designated professionals to identify additional risk
management procedures for specific high-risk factors
 Comply with legal, regulatory and professional requirements
Policy 1: An evaluation of a prospective client and authorized approval shall precede
issuance of any client proposal.
 For each new engagement client, a review process must be undertaken and
documented before the firm can accept the engagement. This process will
include an assessment of the risks associated with the client.
 The firm will make inquiry of personnel or third parties in making its
determination of whether to consider a new client proposal. The firm may also
engage in background searches, such as making use of any online information
that may be readily available.
 Once a determination has been made to accept a new client, the firm shall
meet the relevant ethical requirements (such as communicating with the
former firm if required by the member body code of ethics) and will prepare
an engagement letter for signature by the new client.

Policy 2: When entering into negotiations regarding professional services, a

professional accountant in public practice may quote whatever fee deemed to be
appropriate. The fact that one professional accountant in public practice may quote a
fee lower than another is not in itself unethical. Nevertheless, there may be threats to
compliance with the fundamental principles arising from the level of fees quoted.
In view of these potential threats, safeguards should be considered and applied as
necessary to eliminate them or reduce them to an acceptable level. Safeguards which
may be adopted include:
 Making the client aware of the terms of the engagement and, in particular, the
basis on which fees are charged and which services are covered by the quoted
fee.
  Assigning appropriate time and qualified staff to the task.

Policy 3: Our firm includes provisions for managing potential conflicts of interest as
quickly and efficiently as possible through the use of appropriate safeguards.
 Such safeguards range from obtaining a client’s consent for member firms to
act for two or more clients to declining an engagement in order to avoid an
identified conflict.
 Takes users through the acceptance and continuance requirements and
identifies the policies and references to professional standards needed to
assess both business opportunities and associated risks.

Policy 4: As part of this process, we carefully consider the risk characteristics of a

prospective client and several due diligence procedures.
 Before we take on a new engagement or client, we determine if we can commit
sufficient resources to deliver quality service, especially in highly technical
areas, and if the services the client wants are appropriate for us to provide.
 The approval process is rigorous, and no new audit engagement may be
accepted without the approval.
 In our annual client continuance process, we review our service delivery and
ability to continue to provide quality service and confirm that clients share
commitment to quality and transparency in financial reporting.
 The partner in charge of each audit, together with our Assurance leadership,
annually reviews our relationship with the audit client to determine whether
continuance is appropriate.

Policy 5: As a result of this review, certain audit engagements are identified as

requiring, and are then subjected to, additional oversight procedures during the audit,
and some audit clients are discontinued.
 Both client acceptance and client continuance decisions consider the
engagement team’s assessment of whether the company’s management could
pressure us to accept inappropriate accounting, auditing and reporting
conclusions to undermine quality.
 Considerations and conclusions on the integrity of management are essential
to acceptance and continuance decisions

Policy 6: The firm has a defined process to be followed when it has been determined
that withdrawal from an engagement is necessary. This process includes consideration
of the professional, regulatory, and legal requirements and any mandatory reporting
which must be undertaken as a result.
 A partner will undertake to meet with the client’s management and those
charged with governance to discuss the facts and circumstances leading to the
withdrawal.
  The firm will document the significant matters which led to the withdrawal,
including the results of any consultation, the conclusions reached, and the
basis for these conclusions.
 If there is a professional, regulatory or legal requirement which compels the
firm to continue the engagement, the reasons for continuance should be
documented, including consideration of consultation with the legal counsel.

Quality Control Policies and Procedures: INDEPENDENCE

To ensure Abernethy & Chapman’s independence, the firm, and all professionals
assigned to each engagement, must be free from financial interests in and prohibited
relationships with the client, its management, its directors, and its significant owners.

Policy 1: Our firm has established processes that communicate independence policies
and procedures to personnel. We require our personnel to adhere to applicable
independence requirements and ethical standards at all times and we monitor
compliance through:

 Requiring all professionals to affirm their independence annually using an

independence questionnaire. This questionnaire is signed upon joining the
firm, every year thereafter and upon termination of employment. In addition,
the questionnaire is used to confirm the individual’s compliance with, and
understanding of, Abernethy & Chapman’s independence policies.
 The firm’s independence team review and resolve questions and any apparent
violations that are reported on the questionnaires. The firm’s policies also
address disciplinary actions in the event of individual non-compliance with its
independence policies. Such actions vary based on the event and severity of
the violation and could include dismissal.

Policy 2: The audit committee should consider whether a relationship with or service
provided by an auditor:
 Creates a mutual or conflicting interest with their audit client
 Places them in the position of auditing their own work;
 Results in their acting as management or an employee of the audit client; or
 Places them in a position of being an advocate for the audit client

Policy 3: We also address specific auditor independence issues, which are:

 Specific Prohibited Non-audit Services. The auditor is prohibited from providing
bookkeeping, financial information systems design and implementation,
appraisal or valuation services, fairness opinions, or contribution-in-kind
reports, actuarial services, internal audit outsourcing services, management
functions or human resources, broker-dealer, investment adviser, or
investment banking services, and legal services and expert services unrelated
to the audit to an audit client including its affiliates. In addition to the specific
 prohibited services, audit committees should consider whether any service
provided by the audit firm may impair the firm's independence in fact or
appearance.
 Pre-approval of Permitted Services. Subject to certain limited exceptions, the
audit committee must pre-approve all permitted services provided by the
independent auditor (i.e., tax services, comfort letters, statutory audits or
other). The Commission rules include certain pre-approval requirements that
the audit committee must follow. In addition, the audit committee should be
informed about the services expected to be provided by the audit firm to
understand whether the audit firm's independence will be impaired. The audit
committee should consider whether company policies and procedures require
that all audit and non-audit services are brought before the committee for pre-
approval. Also, listing company standards require audit committees to
preapprove all audit, review and attest services regardless of whether the firm
performing the services is the company's principal auditor.
 Prohibited Relationships. Certain relationships between our firm and the
companies we audit are not permitted. These include:
o Employment relationships. A one-year cooling off period is required
before a company can hire certain individuals formerly employed by its
auditor in a financial reporting oversight role. The audit committee
should also consider whether the hiring of personnel that are or were
formerly employed by the audit firm might affect the audit firm's
independence.
o Contingent Fees. Audit committees should not approve engagements
that remunerate an independent auditor on a contingent fee or a
commission basis. Such remuneration is considered to impair the
auditor's independence.
o Direct or material indirect business relationships. Audit firms may not
have any direct or material indirect business relationships with the
company, its officers, directors or significant shareholders. Thus, audit
committees should consider whether the company has implemented
processes that identify such prohibited relationships.
o Certain Financial Relationships. Audit committees should be aware that
certain financial relationships between the company and the
independent auditor are prohibited. These include creditor/ debtor
relationships, banking, broker-dealer, futures commission merchant
accounts, insurance products and interests in investment companies.
 Communications between the Audit Committee and the Independent Auditor.
Independence Standards Board Standard No. 1 requires that the auditor
disclose to the audit committee in writing all relationships between the audit
firm and the company that may reasonably be thought to bear on the audit
firm's independence. Standard No. 1 also requires the auditor to confirm and
discuss its independence with the audit committee. The audit committee
should consider discussing the following issues with the auditor in regards to
the firm's independence disclosure:
o Processes the audit firm uses to ensure complete disclosure of all
relationships with the company and its affiliates
 o Relationships the audit firm may have with officers, board members
and significant shareholders
o Relationships not included in the communication because they were
deemed immaterial
 Change of Independent Auditors. The auditor generally must be independent
for the entire engagement period and the period covered by the financial
statements being audited. Once this relationship is terminated, there is no
continuing requirement for the auditor to remain independent. The auditor
may generally re-issue its former opinions on the company's financial
statements. However, if a restatement of the financial statements becomes
necessary, the auditor must be independent to audit the restatement
adjustments and re-issue its opinion. Further, if the Board is contemplating
or plans a change in auditors, the audit committee must consider whether
the prospective firm will be independent during the audit engagement
period. That is, the prospective firm must cease all prohibited services and/or
sever all prohibited relationships with the issuer prior to the beginning of the
audit engagement period. Therefore, the audit committee should consider
these issues before hiring a predecessor auditor or a prospective auditor to
provide non-audit services to the company or its affiliates. Prospective firms
cannot audit financial statements of years that they were not independent.

Quality Control Policies and Procedures: ASSIGNING PERSONNEL TO ENGAGEMENTS

Our firm’s policies require an annual review of partner assignments to make sure that
the professionals leading listed-company audits possess the appropriate
competencies (i.e., the knowledge, skills and abilities) to fulfil their engagement
responsibilities and are in compliance with applicable auditor rotation regulations.

Policy 1: Factors considered when assigning people to audit teams include:

 Competence
 Engagement size and complexity
 Specialized industry knowledge and experience
 Timing of work
 Continuity and opportunities for on-the-job training

Policy 2: The appropriate capabilities and competence expected of the engagement

team as a whole include the following:
 An understanding of, and practical experience with, audit engagements of a
similar nature and complexity through appropriate training and participation
 An understanding of professional standards and regulatory and legal
requirements
 Appropriate technical knowledge, including knowledge of relevant information
technology
 Knowledge of relevant industries in which the client operates
 Ability to apply professional judgment
 An understanding of the firm’s quality control policies and procedures
 Policy 3: For more complex engagements, consideration is given to whether
specialized or additional expertise is needed to supplement or enhance the audit
engagement team. In many situations, internal specialists are assigned as part of the
audit engagement team to assist in performing audit procedures and obtaining
appropriate audit evidence. These professionals are used in situations requiring
special skills or knowledge, such as information systems, asset valuation and actuarial
analysis.

Policy 4: Audit partner rotation helps strengthen auditor independence. Our firm
complies with the audit partner rotation requirements of the Code of Ethics for
Professional Accountants in the Philippines and the Philippine Securities and Exchange
Commission.
 It provides a fresh perspective and promotes independence from company
management while retaining expertise and knowledge of the business. Audit
partner rotation, combined with independence requirements, enhanced
systems of internal quality controls and independent audit oversight, help
strengthen independence and objectivity and are important safeguards of
audit quality.
 For public interest entities where the rotation of the audit partner is not
mandated by local independence regulation, the Independence Policy requires
the lead engagement partner and the engagement quality reviewer to be
rotated after seven years.
 For a new public interest entity (including a newly listed company) client, the
lead engagement partner and the engagement quality reviewer may remain in
place for an additional two years before rotating off the team, regardless of
the time they served prior to the listing. Following the rotation, the partner
may not resume the lead or engagement quality review role until at least two
years have elapsed.
 To track the partner rotation, we employ tools that enable an effective
monitoring of compliance with requirements.

Quality Control Policies and Procedures: CONSULTATION

Our consultation policies are built upon a culture of collaboration, whereby audit
professionals are encouraged to share perspectives on complex accounting, auditing
and reporting issues. Consultation requirements and related policies are designed to
involve the right resources, so that audit teams reach appropriate conclusions.

Policy 1: The following procedures must be undertaken regarding consultation

requirements:
 For complex and sensitive matters, we have a formal process requiring
consultation outside of the audit engagement team with other personnel who
have more experience or specialized knowledge, primarily Professional
Practice and Independence personnel.
  In the interests of objectivity and professional scepticism, our policies require
withdrawal from a consultation if our firm currently serve, or have served,
within a specified period of time, the client to which the consultation relates.
 Our policies also require that we document all consultations, including written
concurrence from the person or persons consulted, in order to demonstrate
their understanding of the matter and its resolution.

Policy 2: Our policies describe the requirements for timely and direct senior
professional participation as well as the level of review required for the work
performed.
 Supervisory members of the audit engagement team perform a detailed
review of the audit documentation for accuracy and completeness.
 Engagement partners perform a second-level review to determine adequacy
of the audit work as a whole and the related accounting and financial
statement presentation.
 A tax representative reviews the significant tax and other relevant working
papers. For listed and certain other companies, an engagement quality
reviewer (described below) reviews important areas of accounting, financial
reporting and audit execution, as well as the financial statements of the
company we audit and our audit report.
 The nature, timing and extent of the reviews of audit work depend on many
factors, including the risk, materiality, subjectivity and complexity of the
subject matter, the ability and experience of the audit team members
preparing the audit documentation, the level of the reviewer’s direct
participation in the audit work, and the extent of consultation employed.

Policy 3: Engagement quality reviews are performed by audit partners in compliance

with professional standards for audits of all listed companies and those considered
higher risk.
 Engagement quality reviewers are experienced professionals with significant
subject matter knowledge. They are independent of the engagement team and
able to provide objective evaluation of significant accounting, auditing and
reporting matters.
 In no circumstances may the responsibility of the engagement quality reviewer
be delegated to another individual.
 The engagement quality review spans the entire engagement cycle, including
planning, risk assessment, audit strategy and execution. Policies and
procedures for the performance and documentation of engagement quality
reviews provide specific guidelines on the nature, timing and extent of the
procedures to be performed and the required documentation evidencing their
completion.

Policy 4: If differences of opinion arise within the engagement team, with those
consulted, or where applicable, between the engagement partner and the
 engagement quality control reviewer, the engagement team shall be guided by the
following procedures:
 Differences of professional opinion that arise during an audit generally are
resolved at the audit engagement team level. However, if any person involved
in the discussion of an issue is not satisfied with the decision, he or she has
both the right and the obligation to see that the issue is referred to the next
level of authority until agreement is reached or a final decision is made.
 Until such time, the parties to the discussion do not withdraw, step aside or
otherwise extract themselves from the process. Furthermore, if the
engagement quality reviewer makes recommendations that the engagement
partner does not accept or the matter is not resolved to the reviewer’s
satisfaction, the audit report is not issued until the matter is resolved by
following consultation processes for resolving differences of professional
opinion.
 Our documentation requirements for disagreements and their resolution are
the same as for other consultations. Anyone involved in the process may
separately document his or her personal position in an attachment to the
documentation of the final decision.

Policy 5: Documentation of consultations with other professionals that involve difficult

or contentious matter that is sufficiently complete and detailed contributes to an
understanding of:
 The issue on which consultation was sought; and
 The results of the consultation, including any decisions taken, the basis for
those decisions and how they were implemented.

Quality Control Policies and Procedures: SUPERVISION

Supervision entails directing the efforts of professionals who are involved in
accomplishing the objectives of the audit and determining whether those objectives
have been met. Elements of supervision include instructing and guiding professionals,
keeping informed of significant issues, reviewing the work performed, resolving
issues, and agreeing on appropriate conclusions.

Policy 1: Abernethy and Chapman supervision guidelines for audit work include:

 Considering the capabilities and competencies of individual members of an

engagement team;
 Tracking the progress of an engagement;
 Identifying matters for consultation or consideration by more experienced
engagement team members during an engagement;
 Reviewing and approving engagement planning and risk assessment prior to
the start of significant fieldwork;
 Reviewing all working papers by a professional other than the preparer. The
engagement partner’s responsibilities include review of audit documentation
related to critical areas of judgment, significant findings and issues, and
 significant risks at the financial statement level and the relevant assertion level
with respect to significant accounts and disclosures, including work performed
by Abernethy and Chapman’s specialists relative to these significant risks;
 Preparing Planning and Completion Documents that summarize significant
issues, which are approved by various parties, including the engagement
partner and engagement quality control reviewer; and
 Performing in-depth technical reviews in certain situations.

Policy 2: Safeguards that act as monitoring mechanisms for our firm include:
 Internal and external education and training programs
 Requirements that partners and staff know, understand, and enforce the firm’s
policies and procedures for engagement reviews, quality control reviews, and
engagement partner approvals
 A policy statement instructing partners and staff not to release any
engagement financial statement information of any kind unless all necessary
approvals are signed off
 The firm’s standard engagement completion and release control system, which
outlines the required approvals and sign-offs by engagement type, function,
and individual responsible
 Instructions to the engagement partner and quality control reviewer to
monitor the appropriate approvals on an ongoing basis
 Instructions to all partners and staff to advise appropriate senior personnel
within the firm when they observe significant or repeated smaller breaches of
firm policies or protocols

Quality Control Policies and Procedures: HIRING

New employees should possess the characteristics to handle their job. They can be
those who have experience in the field before or fresh graduates who have passed the
licensure examination for accountants.

Policy 1: All candidates for professional positions submit résumés, are interviewed,
and are subject to background checks during which information provided is verified
through independent sources.

 An understanding of, and practical experience with, audit engagements of a

similar nature and complexity through appropriate training and participation;
 An understanding of professional standards, regulatory standards and legal
requirements;
 Appropriate technical knowledge, including knowledge of relevant
information technology;
 Knowledge of relevant industries in which the client operates;
 Ability to apply professional judgment; and
 An understanding of Abernethy and Chapman quality control policies and
procedures.
Quality Control Policies and Procedures: PROFESSIONAL DEVELOPMENT
Our firm’s career development framework provides our people with opportunities for
the right experiences, learning and coaching to help them grow and achieve their
potential. The learning component is based on an extensive and globally consistent
learning curriculum that helps all our people develop the right technical and personal
leadership skills, wherever they are located around the world.

Policy 1: Core audit training courses are supplemented by learning programs that are
developed in response to changes in accounting and reporting standards,
independence and professional standards, and emerging practice issues.

 Requires our audit professionals to obtain at least 20 hours of continuing

professional education each year and at least 120 hours over a three-year
period. Of these hours, 40% (8 hours each year and 48 hours over a three-year
period) must cover technical subjects related to accounting and auditing.
 In addition to formal learning, professional development occurs through
coaching and experiences our professionals receive on the job. Coaching helps
to transform knowledge and experience into practice. Experienced
professionals are expected to coach and develop less experienced personnel
to create a continual learning environment.
 We also manage the assignment of our people to particular engagements in a
systematic way that helps to ensure they have exposure to a range of
experiences as part of their own development.

Quality Control Policies and Procedures: ADVANCEMENT

This plays a vital role in motivating and retaining our personnel. Persons promoted
should be qualified on their changed roles and different responsibilities. They should
also have the opportunity to expand their skill sets, learning and trying new things and
supporting their efforts that can help with retention.

Policy 1: A comprehensive performance management process requires our people to

set goals, have clear work expectations, receive feedback and talk about their
performance. The Performance Management and Development Process (PMDP) is
designed to help our people grow and succeed in their careers. Under the PMDP:

 Periodic job performance reviews are combined with annual self-appraisal and
annual reviews.
 As part of the annual review process, each professional, in conjunction with his
or her counselor (an assigned, more experienced professional), identifies
opportunities for further development.
 Professionals and their counselors are guided by a set of expectations that
articulate the knowledge, skills and behaviors that should be maintained and
developed for their respective rank.
Quality Control Policies and Procedures: INSPECTION
Abernethy and Chapman meets the profession’s quality control standards and
monitoring requirements through the implementation of its internal inspection
process.

Policy 1: Our firm will instruct the monitor to prepare appropriate documentation of
inspections that will include:

 An evaluation of adherence to professional standards and applicable

regulatory and legal requirements;
 The results from evaluating elements of the quality control system;
 An evaluation of whether the firm has appropriately applied quality control
policies and procedures;
 An evaluation of adherence to professional standards and applicable
regulatory and legal requirements;
 An evaluation of whether the engagement report is appropriate in the
circumstances;
 Identification of any deficiencies, their effect, and a decision on whether
further action is necessary, describing this action in detail; and
 A summary of results and conclusions reached (provided to the firm), with
recommendations for corrective actions or changes needed.

Policy 2: We identify areas for continuous improvement and disseminate the findings
to our professionals through written communications, internal training seminars and
periodic departmental and staff meetings. These areas are also followed up in
subsequent years to gauge the extent of continuous improvements.

Policy 3: Monitoring procedures involve ongoing consideration and evaluation by the

firm of the following matters:
 Relevance and adequacy of the firm’s policies and procedures;
 Appropriateness of the firm’s guidance materials and practice aids;
 Effectiveness of professional development activities;
 Compliance with professional and firm standards, policies, and procedures;
and
 Effectiveness of action plans to address recurring findings related to all
engagement reviews