INTRODUCTION

Around the world, the journey to success is governed by increasingly complex and broadening
regulatory requirements and stakeholder demands. We have the courage and integrity to help
you meet these demands by providing a timely and constructive challenge to management, a
robust and clear perspective to audit committees, and transparent information for your
stakeholders and investors.

To grow and create value, your company must have the trust of its customers, lenders, and
investors. The integrity of your companys financial information and the reliability and security of
your technology are critical components in garnering this trust and gaining access to global capital
markets. Whether you are managing issues associated with globalization, addressing technology
vulnerabilities in the connected economy, or looking to assure the fairness of your financial
information Harer & Jones, CPAs, can help.

We have invested substantially in innovating our global, risk-based audit methodology and
technology and knowledge enablers. All our auditors are equipped with our global audit process
management and documentation tool. The methodology is supplemented by comprehensive
standards and quality controls that are applicable to every client engagement.

We provide independent assurance on financial and nonfinancial information to meet regulatory

and other stakeholder requirements utilizing world-class business-process-based methodologies
and supporting tools. Our Global Audit Methodology and Documentation Approach is a risk-based
approach that focuses on the drivers of the business, the associated risks, and the potential
effects on financial statements accounts, and delivers a consistent, high-quality audit anywhere
in the world.

We assist companies in completing certain reporting requirements under existing rules and
regulations of regulatory bodies such as the Board of Investments (BOI), the Securities and
Exchange Commission (SEC), the Philippine Export Zone Authority (PEZA), and Bangko Sentral
ng Pilipinas (BSP).
The global business landscape is being reshaped by transformational events and trends. And that
means the financial and reporting environment is also being reshaped, resulting in significant
challenges for management, boards, audit committees and auditors.

Many recent auditor liability cases have resulted from a failure to exercise due professional care
and sound professional judgment; failure to complete required audit procedures was not a fault.
The firm, Harer and Jones, CPAs, is well-respected in the region, noted for a quality practice and
exceptional professional staff. It has been operating in the region for 30 years and presently has
offices located in three cities approximately 100 miles apart. Present plan do not call for immediate
expansion, although future mergers may be considered as long as the firms quality can be
maintained.

The professional staff consists of 20 partners, 30 managers, and 100 staff accountants. The firm
has grown to the extent that in-house continuing professional education courses are offered at
central locations for most staff-training needs.

Harer & Jones is structured so that an administrative partner is responsible for the overall
management of the practice, although management is decentralized in the sense that each office
has a managing partner responsible for general operations. The firm generates 75 percent of its
revenues form audit services and the remaining 25 percent form tax and management advisory
services functions. On all audit engagements, the partner in charge or manager is expected to
consult with the tax and MAS professionals when planning the engagement and in coordinating
their involvement during the examination.

The firm has several SEC clients and therefore has joined both the SEC Practice Section and the
Private Companies Practice Section of the AICPA Division for CPA Firms. Quality control
documentation has been developed, and the firm has requested a peer review for the following
year. The administrative partner has indicated that a favorable peer review report is expected by
the firm.
UNIT 1 | Requirement 1
Harer & Jones Quality Control Policies and Procedures1

Harer & Jones has adopted policies and procedures for quality control including the acceptance and
retention of clients in accordance with the Philippine Standards on Auditing (PSA), International
Standard on Quality Control (ISQC), generally accepted auditing standards (GAAS) and related
auditing guidelines for quality control in an accounting practice. These policies are adopted from
American Institute of Certified Public Accountants (AICPA).

LEADERSHIP RESPONSIBILITIES
The purpose of the leadership responsibilities element of a system of quality control is to
promote an internal culture based on the recognition that quality is essential in per forming
engagements.

Policy 1: The partners document the firms QC policies and procedures and communicate
them to the firms personnel, if any.
The partners document the firms QC policies and procedures and keeps that
documentation up-to-date (reviewing at least annually). Staff accountants are required to
acknowledge receipt of the firms QC document in writing, and that they have been informed that
failure to adhere to the firms policies and procedures or failure to demonstrate commitment to
ethical principles may result in termination of the contract or assignment. When engaged, staff
accountants receive training on the firms QC policies and procedures relevant to their work
assignments through an informal discussion.

Policy 2: The partners assume ultimate responsibility for the firms system of quality
control and actively pursue quality in performing engagements.
The partners accept ultimate responsibility for the firms system of quality control and for
setting a tone that emphasizes the importance of quality and of following the firms system of
quality control. The partners are knowledgeable about the requirements for a system of quality
control, and design and implement policies and procedures required for the firms system of
quality control.

1
See Appendix A for the guiding principles in establishing quality control policies and procedures
Policy 3: The partners do not allow commercial considerations to override the quality of
the work performed.
The partners evaluate client relationships and specific engagements so that commercial
considerations do not override the objectives of the system of quality control. The partners
consider the costs associated with a strong system of quality control, such as the costs of
maintaining necessary competency, practice aids, and professional subscriptions, hiring
consultants and engagement quality control reviewers, as an investment. They consider these
costs when determining rates and fees so that commercial considerations will not override the
quality of work performed.

Policy 4: The partners devote sufficient and appropriate resources for the development,
communication, and support of the firms quality control policies and procedures.
The partners review and update the firms QC policies, procedures and documentation on
an annual basis.

RELEVANT ETHICAL REQUIREMENT2

The purpose of the relevant ethical requirements element of a system of quality control is
to provide the firm with reasonable assurance that the firm and its personnel comply with relevant
ethical requirements when discharging professional responsibilities. Relevant ethical
requirements include independence, integrity, and objectivity, professional behavior, and
professional competence and due care.

Policy 1: The partners comply with relevant ethical requirements.

The partners stay informed on relevant ethical requirements through subscription service
to PICPA (Philippine Institute of Certified Public Accountants) Professional Standards and consulting
the PICPA website and professional publications for information about changes in professional
ethics and independence standards. They document the resolution of ethical matters when
consultation, including of professional literature, has occurred. The partners have a system for
identifying all services performed for each client, and evaluating, at the attest engagement level,
whether nonattest services are provided that might impair independence.

2
See Appendix B for the Summary of Code of Ethics
 They maintain a current list of: (1) all entities with which firm personnel are prohibited from
having a financial or business relationship; and (2) all activities which the firm is prohibited from
performing, as defined in the firms independence policies.
They consider the significance of each client to the firm. In broad terms, the significance
of a client to a firm refers to relationships that could diminish a practitioners objectivity and
independence in performing attest services. In determining the significance of a client, the firm
considers (a) the amount of time the partner devotes to the engagement and (b) the effect that
losing the client would have on the firm. They take periodic independence and ethics training.
Such training covers the independence and ethics requirements of all applicable regulators.

Policy 2: The partners communicate independence requirements to staff accountants.

The partners make staff accountants aware of financial, family, business, and other
relationships that are prohibited by applicable requirements. They remind personnel of
independence considerations for regulated industries. The partners remind staff accountants to
avoid behavior that might be perceived as impairing their independence or objectivity, as
necessary and at least annually. They inform staff accountants of the types of financial or other
relationships that may impair independence and that may be prohibited.

Policy 3: The partners evaluate threats to independence and objectivity, including the
familiarity threat that may be created on an audit or attest engagement over a long period
of time. They take appropriate action to eliminate them or reduce them to an acceptable
level by applying safeguards.
New personnel assigned to the engagement are encouraged to bring a fresh perspective.
When a relationship or circumstance that may create threats to compliance with the rules is
identified, they perform procedures to evaluate threats and apply safeguards. They consult with
individuals outside the firm on independence, integrity, or objectivity concerns that research has
not clearly addressed.

Policy 4: Staff accountants are required to notify the firm of breaches of independence
requirements and the partners take appropriate actions to resolve such situations.
All staff accountants are required to notify the partners of any potential activities involving
themselves, their spouses, or their dependents that might impair independence or violate ethics
rules, including services provided to entities with which firm personnel are prohibited from having
a business relationship.
 The partners determine the need for safeguards for engagements when the familiarity
threat exists on an audit, review or at testation examination engagement. The partners periodically
review unpaid fees from clients to ascertain whether any outstanding amounts may impair the
firms independence.

Policy 5: The partners do not accept or withdraw from the engagement if effective
safeguards to reduce threats to independence to an acceptable level cannot be applied.
The partners consult with legal counsel and other parties if necessary, when they believe
that effective safeguards to reduce threats to independence to an acceptable level cannot be
applied.

Policy 6: The partners obtain written confirmation3, upon hire and at least annually, of
compliance with relevant policies and procedures regarding independence from all staff
accountants required to be independent by relevant requirements.
The partners obtain from staff accountants written representations, upon hire and on an
annual basis thereafter, stating that they have read the firms independence, integrity, and
objectivity policies, understand the applicability of those policies to their activities, and have
complied with the requirements of those policies since their last representation. Personnel are
required to review the most current list of all entities with which firm personnel are prohibited from
having a business relationship prior to providing the writ ten representation. In each engagement,
they sign a step in the engagement program attesting to compliance with independence
requirements that apply to the engagement.

Policy 7: When another firm performs part of the engagement, the partners confirm the
independence of the other firm and adherence to other relevant ethical requirements.
Written confirmations are obtained regarding the other firms independence with respect
to audit engagements, and either written or oral confirmations are obtained for review or at
testation engagements. Oral confirmations are documented.

ACCEPTANCE AND CONTINUANCE

The purpose of the quality control element that addresses acceptance and continuance of
client relationships and specific engagements is to establish criteria for deciding whether to accept

3
See Appendix C
or continue a client relationship and whether to perform a specific engagement for a client. A firms
client acceptance and continuance policies represent a key element in mitigating litigation and
business risk. Accordingly, it is important that a firm be aware that the integrity and reputation of
a clients management could reflect the reliability of the clients accounting records and financial
representations and, therefore, affect the firms reputation or involvement in litigation.

Policy 1: The partners consider the risk associated with providing professional services
in particular circumstances, including evaluating factors that have a bearing on
managements integrity. The firm only accepts or continues engagements and client
relationships when it concludes that the risk is at an acceptable level.
The partners obtain and evaluate relevant information before accepting or continuing any
client, such as:
The nature and purpose of the services to be provided and managements understanding
thereof
The identity of the clients principal owners, key management, related parties, and those
charged with its governance
The nature of the clients operations, including its business practices, from sources such
as annual reports, interim financial statements, reports to and from regulators, income tax
returns, and credit reports
Information obtained from inquiries of third parties about the client, its principal owners,
key management, and those charged with governance that may have a bearing on
evaluating the client. Examples of such third parties are bankers, factors, legal counsel,
credit services, and others such as, when relevant, investment bankers, underwriters, and
other members of the financial or business community who may have applicable
knowledge.
Information, from discussion with the client and inquiries of others, concerning the attitude
of the clients principal owners, key management, and those charged with its governance
toward such matters as aggressive interpretation of accounting standards, compliance
with regulatory or legislative requirements, and internal control over financial reporting.
The partners communicate with the predecessor auditor 4 as required, and consider
communicating with the predecessor accountant when recommended, by professional standards.

4
See Requirement 5
This communication includes inquiries regarding the nature of any disagreements and whether
there is evidence of opinion-shopping.
They conduct a background check of the business, its officers, and the person(s) in
question by using resources available on the Internet and evaluate the information obtained
regarding managements integrity.
The partners evaluate the risk of providing services to significant clients or to other clients
for which the firms objectivity or the appearance of independence may be impaired. They take
appropriate safeguards, if necessary. If safeguards cannot reduce the threat to objectivity and
independence to an acceptably low level, the firm does not accept the engagement.
The partners consider the timing of the acceptance of the engagement and how that
affects the firms ability to perform all procedures necessary for the engagement.

Policy 2: The partners evaluate whether the engagement can be completed with
professional competence; undertake only those engagements for which the firm has the
capabilities, resources, and professional competence to complete; and evaluate, at the
end of specific periods or upon occurrence of certain events, whether the relationship
should be continued.
If the engagement is for a level of service that the firm is not currently providing (for
example, reviews or audits), the partners consider the implications for Peer Review. They define
high-risk engagements based on the characteristics of my practice. They consider the following
criteria in determining whether the engagement is high-risk.
The partners accept only engagements that meet the firms criteria for high-risk when they
have, or are willing to make the investment to acquire, the necessary competency. They
acknowledge that accepting a high-risk engagement may necessitate the use of external
resources, and requires that an engagement quality control review (EQCR) be performed by a
suitably qualified external person. They evaluate whether they have, or can reasonably expect to
obtain, the knowledge and expertise necessary to perform the engagement, including relevant
regulatory or reporting requirements.
The partners determine the following before accepting an engagement:
They have sufficient technical resources available, including Audit and Accounting
Guides, and that they have taken appropriate CPE and training.
Whether specialists will be needed and, if so, will be available.
 Individuals meeting the criteria and eligibility requirements to perform an EQCR
are available, when needed; for example, for engagements that meet the firms
definition of high-risk.
The partners am able to complete the engagement within the reporting deadline.
The partners obtain relevant information to determine whether the relationship should be
continued and they evaluate the client continuance decision at least annually, before work on the
current engagement begins.
When the partners become aware of information that would have caused the firm to
decline the engagement if the information had been available earlier, they consider the
professional and legal responsibilities that apply to the circumstances, including whether there is
a requirement for the firm to report to regulatory authorities, and whether to withdraw from the
engagement or from the client relationship.

Policy 3: The partners obtain an understanding with the client regarding the services to be
performed.
The partners prepare a written engagement letter5 for each engagement, documenting the
understanding with the client regarding the nature, scope, and limitations of the services to be
performed. The partners obtain the clients signature on that letter before significant resources
are committed to the engagement. If the nature or scope of the engagement changes, the
partners document the change in an addendum to the engagement letter that is sent to the client.

Policy 4: The partners follow established procedures on withdrawal from an engagement

or from both the engagement and the client relationship.
The partners consider whether there is a professional, regulatory, or legal requirement for
the firm to remain in place or for the firm to report to regulatory authorities the withdrawal from the
engagement, or from both the engagement and the client relationship, together with the reasons
for the withdrawal. They consult with legal counsel or my insurance carrier if necessary.

HUMAN RESOURCES
The purpose of the human resources element of a system of quality control is to provide
the firm with reasonable assurance that it has sufficient personnel with the capabilities,
competence, and commitment to ethical principles necessary to perform its engagements in

5
See Requirement 4
accordance with professional standards and regulator y and legal requirements, and to enable
the firm to issue reports that are appropriate in the circumstances.

Policy 1: The firm has sufficient personnel with the competence, capabilities, and
commitment to ethical principles necessary to perform engagements in accordance with
professional standards and applicable legal and regulatory requirements; and enable the
firm to issue reports that are appropriate in the circumstances.

Policy 2: The firm hires only staff accountants who have the characteristics to enable them
to perform competently.
The partners set criteria regarding such factors as education, licensure or certification,
and experience, and only hire staff accountants who meet the criteria.

Policy 3: The partners maintain capabilities and competencies required for an

engagement.
Such competencies include the following:
An understanding of the role of the firms system of quality control and the Code of
Professional Conduct.
An understanding of the performance, supervision, and reporting aspects of the
engagement.
An understanding of the applicable accounting, auditing, or attestation professional
standards, including those standards directly related to the industry in which a client
operates.
An understanding of the industry in which a client operates, including the industrys
organization and operating characteristics, to identify the areas of high or unusual risk
associated with an engagement, and to evaluate the reasonableness of industry-specific
estimates.
Skills that indicate sound professional judgment, including the ability to exercise
professional skepticism.
An understanding of how organizations are dependent on or enabled by information
technologies, and the manner in which information systems are used to record and
maintain financial information.
 The partners maintain the appropriate licenses, including firm license(s) or permit(s) to
perform the engagements they accept, including for states other than where they primarily
practice public accounting, as applicable.

Policy 4: The partners, and staff accountants, participate in general and industry-specific
continuing professional education (CPE) and professional development activities that
enable us to accomplish assigned responsibilities and satisfy applicable CPE
requirements state CPA societies, state boards of accountancy, and other regulators.
The partners comply with, and require staff accountants, if any, to comply with the
professional education requirements of the board(s) of accountancy in state(s) where they are
licensed, and as applicable the state CPA society, and Government Auditing Standards. They
document their compliance, and obtain and retain documentation for staff accountants of their
compliance, with such CPE requirements. Regardless of whether otherwise required, they take
and require staff accountants, if any, to takeethics CPE periodically.
The partners stay informed of changes in accounting and auditing standards,
independence, integrity, and objectivity requirements. They participate in professional
development activities, such as taking graduate-level courses, being active in professional
organizations, serving on professional committees, speaking to professional groups, and writing
for professional publications.

ENGAGEMENT PERFORMANCE
The purpose of the engagement performance element of quality control is to provide the
firm with reasonable assurance that engagements are consistently performed in accordance with
applicable professional standards and regulatory and legal requirements, and that the firm or the
engagement partner issues reports that are appropriate in the circumstances. Policies and
procedures for engagement performance should address all phases of the design and execution
of the engagement, including engagement performance, supervision responsibilities, and review
responsibilities. Policies and procedures also should require that consultation takes place when
appropriate. In addition, a policy should establish criteria against which all engagements are to
be evaluated to determine whether an engagement quality control review should be per formed.
Policy 1: The partners use quality control materials (QCM) (for example, an audit and
accounting manual, standardized forms, checklists, templates, practice aids, tools,
questionnaires, and the like) to assist with engagement performance.
The partners ensure that, whether they develop their own QCM or obtain it from a third-party
provider,
the material is reliable and suitable for the practice;
the QCM is up-to-date;
modifications to the package and to individual forms are appropriate; and
the forms being used are appropriate for the engagement.

Policy 2: The partners plan engagements to meet professional, regulatory and the firms
requirements.
The partners use practice aids that prescribe the factors they should consider in the
planning process and the extent of documentation of those considerations. Planning
considerations may vary depending on the size and complexity of the engagement. They follow
these procedures for planning engagements:
If they accept an audit in an industry in which they do not have recent experience, they
take industry-specific CPE before planning procedures are performed.
They develop or update background information on the client and the engagement.
Planning includes determination of whether the engagement meets the firms criteria for
performing an EQCR. If so, the person performing the EQCR reviews the planning timely.
If a specialist or consultant is utilized to provide the engagement team with the necessary
competence, that person reviews the planning timely.
The partners prepare planning documentation that includes the following:
Proposed work programs tailored to the specific engagement.
Whether there is a need for specialized knowledge and how that will be obtained.
Consideration of the economic conditions affecting the client and its industry and their
potential effect on the conduct of the engagement.
Consideration of risks, including fraud considerations, affecting the client and the
engagement and how they may affect the procedures to be performed.
A budget that allocates sufficient time for the engagement to be performed in accordance
with professional standards and the firms quality control policies and procedures.
Policy 3: The partners perform, supervise, document, and report (or communicate) in
accordance with the requirements of professional standards, applicable regulators, and
the firm.
A written work program is used in each engagement. The partners supervise the work of
staff accountants by doing the following:
Briefing the engagement team on the objectives of their work.
Tracking the progress of the engagement.
Considering the competence and capabilities of individual members of the engagement
team, whether they have sufficient time to carry out their work, whether they understand
their instructions, and whether the work is being carried out in accordance with the planned
approach to the engagement.
Addressing significant findings and issues arising during the engagement, considering
their significance, and modifying the planned approach appropriately.
Reviewing and signing off on all engagement documentation prepared by staff
accountants.
The partners prepare working papers that adhere to the firms guidelines, applicable
regulatory requirements and professional standards for the form and content of documentation of
the work performed and conclusions reached.

Policy 4: Qualified engagement team members review work performed by other team
members on a timely basis.
The partners review engagement documentation to determine whether the following have
occurred:
The work has been performed in accordance with professional standards and applicable
legal and regulatory requirements.
Significant findings and issues have been raised for further consideration.
Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented.
The nature, timing, and extent of the work performed is appropriate and without need for
revision.
The work performed supports the conclusions reached and is appropriately documented.
The evidence obtained is sufficient and appropriate to support the report.
The objectives of the engagement procedures have been achieved.
Policy 5: The partners establish, document and follow procedures when using external
personnel, such as from other firms, for audit or accounting engagements.
Those procedures address:
The form in which instructions are given to external personnel; and
The extent to which their work is reviewed.

Policy 6: The partners complete the assembly of final engagement files on a timely basis.
Final engagement files are assembled by the earlier of time limits required by professional
standards and applicable regulatory requirements, if any, or 60 days from the report release date.

Policy 7: The partners maintain the confidentiality, safe custody, integrity, accessibility,
and retrievability of engagement documentation.
The partners implement adequate and appropriate controls over the confidentiality,
custody, integrity, accessibility, and retrievability of the firms engagement documentation.
Adequate and appropriate controls over confidentiality, custody, integrity, accessibility,
and retrievability of engagement documentation include the following:
Requiring that engagement documentation clearly indicates when and by whom it was
prepared and reviewed.
Procedures to protect the integrity of the information at all stages of the engagement,
including preventing unauthorized changes to the engagement documentation. For
electronic engagement documentation this includes:
o Using passwords or data encryption, or both, to restrict access to authorized users.
o Using appropriate back-up routines at appropriate stages during the engagement.
Procedures for tracking the distribution of engagement documentation materials to the
staff accountants at the start of the engagement, preparing engagement documentation
during the engagement, and assembling final documentation at the end of the
engagement.
Procedures to allow access to hardcopy engagement documentation for authorized users,
including staff accountants and inspectors, and restrict access by others.
Maintaining engagement documentation in one location to enhance retrievability (this
applies to both hardcopy and electronic documentation, although back-up files would be
maintained elsewhere).
Implementing procedures regarding original paper documents that have been
electronically scanned or otherwise copied to another media that accomplish the following:
 o Generate copies that contain the entire content of the original paper
documentation, including manual signatures, cross-references, and annotations.
o Integrate the copies into the engagement files, including indexing and signing off
on the copies as necessary.

Policy 8: The partners retain engagement documentation for a period of time sufficient to
meet the needs of the firm, professional standards, laws, and regulations.
The partners maintain a list specifying the period of time sufficient to meet the needs of
the firm, the requirements of the state board of accountancy, and applicable professional
standards for each level of engagement service. Engagement documentation is retained for the
specified period of time.

Policy 9: The partners require that consultation take place when appropriate; they make
sufficient and appropriate resources available to enable appropriate consultation to take
place; they provide all the relevant facts to those consulted; they document the nature,
scope, and conclusions of such consultations; and they implement conclusions resulting
from such consultations.
The partners inform staff accountants of their consultation policies and procedures. They
identify circumstances, including specialized situations, when firm personnel, including
themselves, may need to consult. Those circumstances include the following:
Application of newly issued technical pronouncements.
Industries with special accounting, auditing, or reporting requirements
Emerging practice problems.
Choices among alternative generally accepted accounting principles upon initial adoption
or when an accounting change is made.
Reissuance of a report, consideration of omitted procedures after a report has been
issued, or subsequent discovery of facts that existed at the time a report was issued.
Filing requirements of regulatory agencies.
The partners determine the need to consult based on the following:
The materiality of the matter.
My experience in a particular industry or functional area.
Whether the applicable financial reporting framework or the relevant professional
standards are as follows:
o Based on authoritative pronouncements that are subject to varying interpretations.
 o Based on varied interpretations of prevailing practice.
o Under active consideration by an authoritative body.

Policy 10: The partners deal with and resolve differences of opinion; they document and
implement the conclusions reached; and they do not release the report until the matter is
resolved.
The partners evaluate issues of professional judgment when differences of opinion arise
with staff accountants, with those consulted, or with an external reviewer and resolve the matter
before releasing the report. The conclusion reached to resolve the matter of disagreement and
how that conclusion was implemented are documented. They will not release the report until they
have resolved any differences of opinion. If persons involved in the engagement continue to
disagree with my resolution, they may disassociate themselves from the resolution of the matter
and document that a disagreement continues to exist.

Policy 11: The partners have criteria for determining whether an engagement quality
control review should be performed; they evaluate all engagements against the criteria;
they contract with a qualified external person to perform the EQCR for all engagements
that meet the criteria; and they do not release the report until the review is completed.
The firms criteria include:
The identification of unusual circumstances or risks in an engagement or class of
engagements as pre-determined by the firm.
An engagement quality control review is required by law or regulation.
An engagement for which the undue influence threat may exist.
A high-risk engagement, as pre-defined, using the same criteria used for acceptance and
continuance.
An engagement for an entity operating in a highly specialized or regulated industry,
including financial institutions and employee benefit plans, and audits in accordance with
government auditing standards.
An engagement in an industry in which the firms practice is limited and the firms
personnel have little or no experience.
An engagement for which the familiarity threat may exist.
The partners evaluate all engagements against the criteria, both before accepting the
engagement and during the engagement, and contract with a qualified external person to perform
an EQCR for all engagements that meet the criteria.
Policy 12: Engagement quality control reviewers meet the firms criteria for eligibility.
The engagement quality control reviewer meets the following criteria:
Has sufficient technical expertise and experience.
Carries out his or her responsibilities with objectivity and due professional care without
regard to the relative positions of the audit engagement partner and the engagement
quality control reviewer. If the reviewers objectivity becomes impaired, the reviewer must
be replaced.
Does not make decisions for the engagement team or participate in the performance of
the engagement except to serve as a consultant to the engagement partner at any stage
during the engagement, with the understanding that the engagement quality control
reviewers objectivity may be impaired if the nature and extent of consultations becomes
significant.
Does not assume any of the responsibilities of the engagement partner or have
responsibility for the audit of any significant subsidiaries, divisions, benefit plans, or
affiliated or related entities.
Meets the independence requirements relating to the engagements reviewed, even
though the engagement quality control reviewer is not a member of the engagement team.

Policy 13: The partners establish procedures addressing the nature, timing, extent, and
documentation of the engagement quality control review.
Regarding the EQCR, the partners understand that:
They remain responsible for the engagement and its performance, and the engagement
quality control reviewer does not make decisions for them.
They may consult the engagement quality control reviewer at any stage during the
engagement, with the understanding that the engagement quality control reviewers
objectivity may be impaired if the nature and extent of consultations becomes significant
and accordingly will no longer be able to function as the engagement control reviewer.
The engagement quality control reviewer is not a member of the engagement team and
does not provide the competency needed by the engagement team (that is, me and staff
accountants, if any).
For engagements that meet the firms criteria for having an EQCR performed, the partners
hire an engagement quality control reviewer; discuss with the engagement quality control
reviewer the significant findings or issues that arose during the engagement, if any; and
do not release the report until the completion of the EQCR.
Timing of the EQCR
Performing an engagement quality control review is not necessary to obtain sufficient
appropriate audit evidence for audit engagements; therefore, the engagement quality control
review does not need to be completed before the date of the auditors report. When the
engagement quality control review results in additional audit procedures being performed, the
date of the auditors report is changed to the date by which sufficient appropriate audit evidence
has been obtained.
The firms procedures require that for audit and examination engagements, the
engagement quality control reviewer do the following:
Discuss significant accounting, auditing, and financial reporting issues with the partners,
including matters for which there has been consultation.
Discuss with them how they identified and audited high-risk assertions, transactions and
account balances.
Confirm with them that there are no significant unresolved issues.
Review selected working papers relating to the significant judgments the engagement
team made and the conclusions they reached.
Review documentation of the resolution of significant accounting, auditing, or financial
reporting issues, including documentation of consultation with firm personnel or external
sources.
Review the summary of uncorrected misstatements related to known and likely
misstatements.
Review additional engagement documentation to the extent considered necessary.
Read the financial statements and the report and consider whether the report is
appropriate.
Complete the EQC review before the release of the report.
Conduct the EQC review at appropriate stages during the engagement to the extent
possible.
Determine whether the issues raised in the EQC review require additional procedures that
necessitate changing the auditors report date.
Before reports are released, matters that would cause the reviewer to question the
partners judgments and conclusions are resolved and the resolution is documented.
 The engagement quality control review is documented. Documentation includes the
following:
That the procedures required by the firms policies on engagement quality control review
have been performed
That the engagement quality control review has been completed before the report is
released
An assertion that the reviewer is not aware of any unresolved matters that would cause
the reviewer to believe that the significant judgments the engagement team made and the
conclusions it reached were not appropriate

MONITORING
The purpose of the monitoring element of a system of quality control is to provide the firm
and its engagement partners with reasonable assurance that the policies and procedures related
to the system of quality control are relevant, adequate, operating effectively, and complied with in
practice. Monitoring involves an ongoing consideration and evaluation of the appropriateness of
the design, the effectiveness of the operation of a firms quality control system, and a firms
compliance with its quality control policies and procedures.

Policy 1: The partners have a monitoring process designed to provide reasonable

assurance that the policies and procedures relating to the system of quality control are
relevant, adequate, and operating effectively.
The partners maintain appropriate records that enable them to provide their peer reviewer
with a complete list of engagements performed.

Policy 2: The partners perform monitoring procedures that are sufficiently comprehensive
to enable them to assess compliance with all applicable professional standards and all
elements of the firms quality control policies and procedures.

Policy 3: The partners deal appropriately with complaints and allegations.

The partners investigate complaints and allegations promptly. They consult with legal
counsel or my professional liability insurance carrier as necessary. They document the complaints
and allegations and the responses to them.
Policy 4: The partners prepare appropriate documentation to provide evidence of the
operation of each element of its system of quality control.
The partners document appropriate evidence of the operation of each element of the firms
system of quality control addressing the following:
Monitoring procedures performed, including the procedure for selecting completed
engagements to be subject to post-issuance review.
A record of the evaluation of the following:
Adherence to professional standards and regulatory and legal requirements.
Whether the quality control system has been appropriately designed and effectively
implemented.
Whether the firms quality control policies and procedures have been appropriately
applied so that reports that are issued by the firm are appropriate in the circumstances.
Identification of the deficiencies noted, an evaluation of their effects, and the basis for
determining whether further action is necessary and what that action should be.

Policy 5: The partners retain documentation providing evidence of the operation of the
system of quality control for an appropriate period of time.
The partners retain monitoring documentation for a period time sufficient to meet the firms
peer review or other regulatory requirements.

(Following is KPMGs quality control policies and procedures. These are based on auditing principles and
standards, thus can be used by Harer & Jones in rendering engagement services.)
UNIT 1 | Requirement 2
Prospective Client Questionnaire

HARER & JONES, CPAs

PROSPECTIVE CLIENT QUESTIONNAIRE6

Prospective Client: LONE STAR WESTERN APPAREL CO. Date: APRIL 25, 19X2
Address: 3810 LONGHORN DRIVE, BIG CITY
Nature of Business: MANUFACTURING (Manufacturer of Western-style Hats)
Date Business Commenced: JANUARY 19W8
Type of Engagement:
AUDIT
TAX PLANNING
TAX RETURN PREPARATION
Is the engagement expected to be continuing? YES Annually
Nature of Referral:
Referred by: ATTY. JANE KINDMAN Business: LOCAL ATTORNEY
Relationship to Harer & Jones: FRIEND OF A PARTNER.
Prospective Clients Attorney: ATTY. WARREN RAMSEY
Have prospective clients tax returns been audited by the IRS?
NO. Corporate tax returns have never been audited by the IRS.

Audit Client Information:

Are copies of previous years financial statements available? YES NO
If yes, type of opinion issued if audited: UNQUALIFIED OPINION
Is there litigation pending against company? YES NO
Comments

6
See Appendix C for the supporting document and see Policy 1 of Acceptance and Continuance of Client
Engagements which is the basis of the composition of this questionnaire
Officers:
Name Title Stock Ownership
James R. Wiggins President 65%
Catherine Mayer VP & Secretary-Treasurer 15%
Ross Crothers VP Manufacturing 10%
Claire McCartin VP Marketing 10%
Donna Wiles Controller 0%

Any known independence problems?

YES. The daughter of Lone Star Western Apparel Co.s controller, Donna Wiles, is a
staff accountant of Harer & Jones, CPAs.
Accounting firm being replaced: CARL MOORE LOCAL CPA
Reasons: LONE STAR WESTERN APPAREL CO.S RAPID GROWTH AND PLANS
FOR THE FUTURE NECESSITATE AN AUDITOR CHANGE.

Will client give permission to contact predecessor auditor?

YES. Mr. Wiggins and Mrs. Wiles have discussed the matter with Mr. Carl Moore, Lone
Star Western Apparel Co.s predecessor auditor. They would give permission for Harer &
Jones, CPAs, to contact Mr. Moore and review his working papers.
Condition of books and records (based on inquiry):
Excellent ____ Good __ Fair ____ Poor ____
Do any special accounting or auditing problems appear likely?
NO. Wiles indicated that she and her staff would cooperate with the auditors of Harer &
Jones, and would assist in the preparation of schedules and in other areas in order to
maintain a reasonable fee for the engagement.

References: (banks and others)

Name: FIRST NATIONAL BANK OF BIG CITY, USA
Name: JANE KINDMAN, LOCAL ATTORNEY
Name: WARREN RAMSEY, LONE STAR WESTER APPAREL CO.S ATTORNEY
Publicly Held Audit Clients:
Has Form 8-K been filed reporting change of accountants?
Yes ___ No ___ Comments ____________________________
Obtain copy of accountants letter to company Form 8-K?
Yes ___ No ___ Comments ____________________________
Name of underwriters:
Summary of types of outstanding securities and long-term financing:

Special comments regarding engagement:

As the contact partner of this engagement, I am impressed with Mr. Wiggins, and on the
surface I am inclined to believe that the engagement would be beneficial for Harer &
Jones.

Prepared by:

MARC JUL F. ARELLANO

Contact Partner
HARER & JONES, CPAs
Date: APRIL 25, 19X2

Approved by:

RYAN JOSEPH D. ALAMAG

Managing Partner
HARER & JONES, CPAs
Date: MAY 5, 19X2
UNIT 1 | Requirement 3
Resolution to Independence Problem

HARER & JONES, CPAs

PROSPECTIVE CLIENT QUESTIONNAIRE7

Any known independence problems?

YES. The daughter of Lone Star Western Apparel Co.s controller, Donna Wiles, is a
staff accountant of Harer & Jones, CPAs.

Donna Wiles, Lone Star Western Apparel Co.s Controller mentioned during the interview that her
daughter is a staff accountant for Harer & Jones, CPAs. This poses threats to the independence
of Harer & Jones, CPAs, which may affect the credibility and integrity of the audit. The threats are
that independence will be compromised by self-interest, self-review, being in an advocacy
position, over-familiarity, or intimidation. Where such threats exist, the auditor must put in place
safeguards that eliminate them or reduce them to clearly insignificant levels.

According to the Code of Ethics for Professional Accountants, independence requires

independence of mind and independence of appearance. However, independence is not absolute
meaning theres no such thing as freedom from all economic, financial and other relationships
since every member of society has relationships with others. Therefore, the significance of
economic, financial and other relationships should also be evaluated in the light of what a
reasonable and informed third party having knowledge of all relevant information would
reasonably conclude to be unacceptable.

In order to reduce the independence threat to an acceptable level, the particular staff accountant,
who is related with the controller of the company to be audited will be removed, if she is in the
assurance team, otherwise she will not be allowed to join the team.

7
See Appendix D for Independence Questionnaire and Appendix E for the basis of the resolution to the
independence problem
Based on Code of Ethics for Professional Accountants, Section 290.136 137, the safeguards
would be:
Removing the individual from the assurance team;
Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the
immediate family member; or
Policies and procedures to empower staff to communicate to senior levels within the
firm any issue of independence and objectivity that concerns them.
UNIT 1 | Requirement 4
Engagement Letter8

HARER & JONES

Certified Public Accountants
Big City, USA
November 28, 2016

Mr. James R. Wiggins

President and Chairman of the Board
Lone Star Western Apparel Co.
3810 Longhorn Drive, Big City, USA

Dear Mr. Wiggins:

You have requested that we render professional services for your company, Lone Star Western
Apparel Co. specifically the audit of the companys balance sheet as of December 31, 19X2 and
the related statements of income and cash flows for the year then ended. We are pleased to
confirm our acceptance and our understanding of this engagement through this letter. Our audit
will be made with the objective expression of an opinion on the financial statements; in addition,
tax planning, tax return preparation, and consultation will also be conducted with competence.

Financial statements audit will be conducted in accordance with Philippine Standards on Auditing
(PSA). The said standards require the auditor to plan and perform the audit to obtain reasonable
assurance that the financial statements are free from material misstatements and are fairly
presented. An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures selected depend on the auditors
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.

8
See Appendix F for the basis of this engagement letter
Because of the inherent limitations of an audit, together with the inherent limitations of internal
control, there is an unavoidable risk that some material misstatements may remain undetected,
even though the audit is properly planned and performed in accordance with PSAs.

As part of our risk assessments, internal control relevant to the entitys preparation of the financial
statements in order to design audit procedures that are appropriate in the circumstances is
considered, but not for the purpose of expressing an opinion on the effectiveness of the entitys
internal control. However, we will send you a letter concerning any material insufficiencies and
weaknesses in internal control relevant to the audit of the financial statements.

The management of your company will be held responsible for the preparation and fair
presentation of the financial statements including adequate disclosure in accordance with
generally accepted accounting principles (GAAP) and Philippine Financial Reporting Standards
(PFRS). This includes the design, implementation, and maintenance of adequate accounting
records and internal controls, the selection and application of accounting policies, and the
safeguarding of the assets of the company. As part of our audit process, we will request from the
management a written confirmation concerning the representation made to us in connection with
the audit.

As promised, I have set out below a description of the services that our firm will provide to your
company together with a suggested fee proposal.

Our firm will provide the following services:

Audit of the Financial Statements (Balance Sheet, Income Statement, and Cash Flow
Statement)
Tax Planning
Tax Return Preparation
Electronic Data Processing (EDP) Consultation

Our fees for the services are as follows:

Audit-related Fees of $16,0009

9
See Appendix G for the supporting documents for the audit fee
 Other Service Fees (Tax Planning, Return Preparation, and EDP Consulting) on an actual
time charges basis (to be followed).

The computed audit fee for the engagement is $16,000. The audit-related fees will be billed as
the work progresses. With regards to other service fees for tax planning, return preparation, and
EDP consulting, we will also send a note to you every month which details the actual time spent
providing the services to you and the total service fees charged against your company. Individual
hourly rates vary according to the degree of responsibility involved and the experience and skill
required.

This letter will be effective for future years unless it is terminated, amended or superseded.

If you agree that the foregoing fairly sets out your understanding of our mutual responsibilities,
please sign a copy of this letter in the space indicated below, and return it to me on the date
indicated at the main office of Harer & Jones, CPA.

Yours truly,

MARC JUL F. ARELLANO

Contact Partner
HARER & JONES, CPAs

Acknowledged on behalf of Lone Star Western Apparel Co. by

MR. JAMES R. WIGGINS

President and Chairman of the Board
December 7, 2016
UNIT 1 | Requirement 5
Communication to the Predecessor Auditor10

HARER & JONES

Certified Public Accountants
Big City, USA
November 28, 2016

Mr. Carl Moore, CPA

Big City, USA

Dear Mr. Moore:

We, Harer & Jones, CPAs, have been appointed as the successor auditor and taxation-related
professional service provider of Lone Star Western Apparel Co.

In accordance with this appointment, Lone Star Western Apparel Co. have given their consent to
allow Harer & Jones, as successor independent auditor, access to the audit documentation of
your audit services done for the December 31, 19X1 financial statements of Lone Star Western
Apparel Co; and any documents e.g. statutory books, concerning audit engagements done by
you for Lone Star Western Apparel Co. for the past fiscal years as their auditor.

In line with this, Lone Star Western Apparel Co. also have given you consent, as their predecessor
auditor, to respond fully to Harer & Jones' auditor's inquiries. With that, Harer & Jones courteously
request the following relevant auxiliary information in respect of your former office as the
predecessor auditor of Lone Star Western Apparel Co.
The veracity and relevance of reason of Lone Star Western Apparel Co. for the change in
auditor.
Information related to the integrity of management.
Any disagreements between you, the predecessor auditor and the client, Lone Star
Western Apparel Co, concerning accounting principles, audit procedures, or other
"similarly significant matters."

10
See Appendix H for the basis of the communication to predecessor auditor
 Predecessor auditor's communications with the Lone Star Western Apparel Co. audit
committee concerning fraud, illegal acts by the client, and the matters related to the client's
internal control.

If you are unable to provide any of the information requested above, please advise us accordingly
and, if possible, indicate where the information may be held. Should we consider it appropriate,
we may also request you to give explanations in relation to the above information.

You understand and agree that the review of your audit documentation is undertaken solely for
the purpose of obtaining an understanding of Lone Star Western Apparel Co. and certain
information about the company.

Please confirm your agreement with the foregoing by signing and dating a copy of this letter and
returning it to us.

We look forward to receiving your positive response!

Very truly yours,

MARC JUL F. ARELLANO

Contact Partner
HARER & JONES, CPAs

Accepted:

CARL MOORE, CPA

December 5, 2016
UNIT 1 | Requirement 6
Supplemental Letter11

HARER & JONES

Certified Public Accountants
Big City, USA
November 28, 2016

Mr. James R. Wiggins

President and Chairman of the Board
Lone Star Western Apparel Co.

Dear Mr. Wiggins:

You have requested that we render professional services for your company, Lone Star Western
Apparel Co. We are pleased to confirm our acceptance and our understanding of this engagement
by means of this letter. Our audit will be made with objective of our expressing an opinion on the
financial statements; and in addition to auditing services, tax planning, tax return preparation, and
consultation will also be done with competence.

We remind you that the responsibility for the preparation of financial statements including
adequate disclosure is that of the management of the company. This includes the maintenance
of adequate accounting records and internal controls, the selection and application of accounting
policies, and the safeguarding of the assets of the company.

The audit service that we give can only be as good as the information on which it is based. In so
far as that information is provided by you, or by third parties with your permission, your
responsibility arises as soon as possible if any circumstances or facts alter, as any alteration may
have a significant impact on the assurance given. If the circumstances change therefore or your
needs alter, advise us of the alteration as soon as possible in writing.

11
See Appendix I for the basis of this supplemental letter
Harer & Jones expects the controller and responsible staff of Lone Star Western Apparel Co. to
provide the following for the year ended December 31, 19X2: financial statements or a trial
balance of the ledger; a reconciliation of the bank account; an aged listing of accounts receivable
as of December 31, 19X2; a list of bad debts written off during the year; a completed copy of the
physical inventory sheets; a schedule of insurance coverage; a schedule of property and
equipment additions and retirements; a depreciation schedule; and a list of accounts payable as
of December 31, 19X2. In addition, Harer & Jones also expects to receive from your good office:
copies of the minutes of the board of directors meetings for the past five years; copies of lease
agreements, employment contracts; and the corporate charter and bylaws.

We look forward to full cooperation with your staff and we trust they will make available to us
whatever records, documentation and other information are requested in connection with our
audit.

Yours truly,

MARC JUL F. ARELLANO

Contact Partner
HARER & JONES, CPAs

Acknowledged on behalf of Lone Star Western Apparel Co. by

MR. JAMES R. WIGGINS

President and Chairman of the Board
December 7, 2016