What To Know Before Engaging an Independent Auditor in the Philippines | GPP CPAs
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What To Know Before Engaging an Independent Auditor in the Philippines

An independent auditor plays a very significant role in the compliance requirements of businesses in the Philippines. As mandated by the Bureau of Internal Revenue (BIR) corporations, companies, partnerships or persons whose gross quarterly sales, earnings, receipts or output exceed One hundred fifty thousand pesos (P150,000) shall have their books of accounts audited and examined yearly by an independent Certified Public Accountants. Furthermore, SRC 68 as amended requires all covered corporation to submit financial statements accompanied by an auditor’s report issued by an independent auditor. Failure to comply with this requirement shall be subjected to penalties set by the Philippine Securities and Exchange Commission.

With these two regulating bodies in the Philippines requiring an Independent Auditors’ Report as an accompanying report on the financial statements submitted by the entities doing business in the Philippines, it would be helpful to know what constitutes and Independent Auditor prior to engagement.

SEC  issued an SEC Memorandum Circular No. 16 Series of 2009  which provides guidelines in preparing for an audit of the annual financial statements including the engagement guidelines for external auditor. The following important points should be remembered:

  1. The company through its Board of Directors or Audit Committee, if applicable should conduct due diligence in confirming the personal identification and professional qualifications of the practitioner whose services will be engaged as an external auditor. The company should not enter into an engagement contract with a person who merely acts as agent of a practitioner.
  2. Prior to engagement, the company should require the practitioner to present a copy of his/her professional license from the Professional Regulatory Commission (PRC) and the Certificate of Accreditation issued to him/her by the Board of Accountancy (BOA) as sole practitioner or to the auditing firm if he/she is a partner thereof.
  3. The company should confirm the authenticity of the BOA Certificate of Accreditation by checking the latest list of accredited practitioners issued by the BOA.
  4. If the BOA Certificate of Accreditation does not indicate any expiration date, its validity shall be counted three (3) years from the year of its issuance. Example: an accreditation issued on December 1, 2013 will expire on December 1, 2015.
  5. For companies covered by the Commission’s Guidelines on Accreditation of External Auditors, the following shall be observed prior to the engagement of an external auditor:
  6. In addition to the above , the company shall require presentation of the Commission’s Certificate of Accreditation issued to the practitioner and its auditing firm, applicable. The level of accreditation (Group A to C) indicated in the said certificate should be higher (Group A being the highest) or equivalent to the company’s classification under the Guidelines;
  7. The company through its BOD or Audit Committee should closely monitor whether its external auditor is personally conducting audit or directly supervising his/her audit staff. For this purpose, preliminary meetings with the management and the exit conference should be attended personally by the external auditor or the handling partner, in case of firm.
  8. The engagement contract with the external auditor should be in writing.
  9. A complete set of documentation of the foregoing requirements should be retained by the company. The external auditor’s file with the company should include a copy of his/her PRC license, BOA Accreditation Certificate, Commission’s Certificate of Accreditation (if applicable), duly signed engagement contract and minutes of conference with the auditors, among others.

Selecting an appropriate independent auditor or external auditor to conduct evaluation and issue an independent auditors’ report that would accompany the financial statements is not merely a matter of compliance but it is also one way that the management and its governing body can take to add credibility on the financial reports of the company.

By: Cecile S. Maglunob, CPA

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