2 the cpa profession ood auditing includes good client service
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2222THE CPA PROFESSION THE CPA PROFESSION
OOD AUDITING INCLUDES OOD AUDITING INCLUDES GOOD CLIENT SERVICEGOOD CLIENT SERVICE
Objective 2 - 1Objective 2 - 1Describe the nature of CPA firms,what they do, and their structure.
Describe the nature of CPA firms,what they do, and their structure.
CERTIFIED PUBLIC ACCOUNTING FIRMSCERTIFIED PUBLIC ACCOUNTING FIRMS
The legal right to perform audits is grantedThe legal right to perform audits is grantedto CPA firms by regulation of each state. CPAto CPA firms by regulation of each state. CPAfirms also provide many other services to their firms also provide many other services to their clients, such as tax and consulting services.clients, such as tax and consulting services.
The legal right to perform audits is grantedThe legal right to perform audits is grantedto CPA firms by regulation of each state. CPAto CPA firms by regulation of each state. CPAfirms also provide many other services to their firms also provide many other services to their clients, such as tax and consulting services.clients, such as tax and consulting services.
1.1. Big 4 International Firms -Big 4 International Firms - The four largest CPA firms in the UnitedStates are called the “Big Four” international CPA firms.
2.2. National Firms -National Firms - Three CPA firms in the United States are called nationalfirms because they have offices in most major cities.
3.3. Regional and Large Local Firms -Regional and Large Local Firms - There are less than
200 CPA firms with professional staffs of more than 50 people.
4.4. Small Local Firms -Small Local Firms - More than 95 percent of all CPA firms havefewer than 25 professionals in a single-office firm.
STRUCTURE OF CPA FIRMSSTRUCTURE OF CPA FIRMSSTRUCTURE OF CPA FIRMS
Three main factors influence theThree main factors influence theorganizational structure of all firms:organizational structure of all firms:
1. The need for independence from clients.
2. The importance of a structure to encourage competence.
3. The increased litigation risk faced by auditors.
1. The need for independence from clients.
2. The importance of a structure to encourage competence.
3. The increased litigation risk faced by auditors.
Professional CorporationProfessional Corporation
Organizational StructuresOrganizational Structures
General CorporationGeneral Corporation
Limited Liability CompanyLimited Liability Company
ProprietorshipProprietorship
General PartnershipGeneral Partnership
Limited Liability PartnershipLimited Liability Partnership
1997 Sizeby Revenue Firm*
Net Revenue-U.S. Only(in $ millions) Partners Professional
U.S.Offices
Percentage ofTotal Revenuefrom Accountingand Auditing/Taxes/ManagementConsulting Services
BIG FIVE
12345
Andersen WorldwidePricewaterhouseCooperErnst & YoungDeloitte & ToucheKPMG
$5,445.0$4,844.5$4,416.0$3,600.0$3,000.0
1,6732,4392,1721,7191,600
32,31926,40417,84516,42613,400
9521189
106130
20/14/6637/21/4236/23/4135/20/4541/25/34
NATIONAL
678
Grant ThorntonMcGladrey & PullenBDO Seidman
$289.0$270.1$240.0
278381299
1,9791,8831,171
486442
42/30/2845/32/2351/26/23
REGIONAL
910111213
Crowe, Chizek & Co.Baird Kurtz & DobsonPlante & MoranClifton Gunderson & CoMoss Adams
$97.4$90.0$86.9$74.8$72.0
9312411711594
830567704508451
1020144216
32/18/5047/30/2357/23/2056/32/1247/37/16
LARGE LOCAL
5075
Follmer, Rudzeqicz & CoKaufman Rossin & Co.
$18.3$13.8
1214
14864
22
39/28/3354/32/14
** Rankings reflect merger of Price Waterhouse and Cooper & Lybrand to form PricewaterhouseCooper. Information for PricewaterhouseCooper is based on separately reported information for Price Waterhouse and Cooper & Lybrand. Source: Accounting Today (March 16-April 5, 1998), pp. 18-20
LATE 90’s LATE 90’s Revenue and Other Data for the largest CPARevenue and Other Data for the largest CPA Firms in the United StatesFirms in the United States
LATE 90’s LATE 90’s Revenue and Other Data for the largest CPARevenue and Other Data for the largest CPA Firms in the United StatesFirms in the United States
Fiscal Year 2002 (this is the year SOX became law)
Revenue (2) Prof. (2) Revenue %Rank Firm $ million Staff A&A Tax MAS Other 1 Deloitte & Touche 5,933 19,835 36 21 34 9 2 PwC 5,174 29,787 (a) 58 30 9 3 3 Ernst & Young 4,515 15,078 59 38 0 3 4 KPMG 3,400 11,000 44 36 20 0 (a) Does not reflect sale of consulting practice
Current approximation:
Firm A&A Tax MAS or OtherDeloitte & Touche 44 22 34 Ernst & Young 72 27 1 PwC 63 26 11 KPMG 77 23 0
FOR the 00’sFOR the 00’sFOR the 00’sFOR the 00’s
Hierarchy of Typical CPA FirmHierarchy of Typical CPA Firm
SStaff taff LLevels and evels and RResponsibilitiesesponsibilitiesStaff Level Average ExperienceStaff Level Average Experience Typical Responsibilities Typical Responsibilities
Staff Assistant 0 - 2 years Performs most of the detailed audit work.
Senior or in-charge 2 - 5 years Coordinates and is responsible for the audit field work, auditor including supervising and reviewing staff work.
Manager 5 - 10 years Helps the in-charge plan and manage the audit, reviewsthe in-charge’s work, and manages relations with the client. A manager may be responsible for more than one engagement at the same time.
Partner 10 + years Reviews the overall audit work and is involved in significant audit decisions. A partner is an owner ofthe firm, and therefore has the ultimate responsibility for conducting the audit and serving the client.
This Act is considered by many observers tobe the most important legislation affectingthe auditing profession since the 1930s.
Sarbanes-Oxley Act
The provisions of the Act apply to publiclyheld companies and their audit firms.
Sarbanes-Oxley Act
SEC
PCAOB(Public Company
Accounting
Oversight Board)
SEC
NOWNOW
Vs.Vs.
ThenThen
NOWNOW
Vs.Vs.
ThenThen
Sarbanes-Oxley Act
The PCAOB conducts inspections of registeredaccounting firms and assess their compliancewith the rules of the PCAOB and the SEC.
The overall purpose of the Securities andExchange Commission (SEC) is to assist inproviding investors with reliable informationupon which to make investment decisions.
Securities and Exchange Commission
Securities and Exchange Commission
Form S-1 – new issues
Form 8-K – significant events (like press release)
Form 10-K – annual FS’s
Form 10-Q – quarterly FS’s
The The AICPAAICPA is empowered to set is empowered to set standards (guidelines) and rules that all standards (guidelines) and rules that all
members and other practicing members and other practicing CPAsCPAs must follow. must follow.
The requirements are set byThe requirements are set bycommittees made up of committees made up of AICPAAICPA members. members.
There are four major areas in which There are four major areas in which the the AICPA AICPA has authority to set has authority to set
standards and make rules.standards and make rules.
1. Auditing Standards1. Auditing Standards
2. Compilation and Review Standards2. Compilation and Review Standards
3. Other Attestation Standards3. Other Attestation Standards
4. Consulting Standards4. Consulting Standards
5. Code of Professional Conduct5. Code of Professional Conduct
SUMMARY OF GENERALLYSUMMARY OF GENERALLYACCEPTED ADUITING STANDARDSACCEPTED ADUITING STANDARDS
Generally AcceptedGenerally AcceptedAuditing StandardsAuditing Standards
GeneralGeneralqualificationsqualificationsand conductand conduct
Field WorkField Workperformance of performance of
the auditthe audit
ReportingReportingresultsresults
Adequate trainingAdequate trainingand proficiencyand proficiency
Independence inIndependence inmental attitudemental attitude
Due professional careDue professional care
Proper planning andProper planning andsupervisionsupervision
Sufficient understandingSufficient understandingof internal controlof internal control
Sufficient competentSufficient competentevidenceevidence
Whether statements Whether statements were prepared inwere prepared inaccordance with GAAPaccordance with GAAP
Circumstances whenCircumstances whenGAAP not consistentlyGAAP not consistentlyfollowedfollowed
Adequacy of informative Adequacy of informative disclosuresdisclosures
Expression of opinion on Expression of opinion on financial statementsfinancial statements
Relationship Between GAAS and PCAOB Auditing Standards
The term GAAS is no longer used for public company audits. Public company audits refer to PCAOB auditing standards.
The term GAAS continues to be used for auditsof private companies.
The 10 generally accepted auditing standardsare too general to provide precise guidance inall cases.
SASs interpret the 10 generally acceptedauditing standards and are the mostauthoritative references available to auditors.
Statements on Auditing Standards
INTERNATIONAL STANDARDSINTERNATIONAL STANDARDSDEVELOPING HARMONYDEVELOPING HARMONY
International Standards on Auditing (ISAs) are generally similar to U.S. GAAS, although there are some differences. There is an interest and trend toward harmonization, which means developing uniform accounting and auditing standards throughout the world.
International Standards on Auditing (ISAs)are issued by the International AuditingPractice Committee of the InternationalFederation of Accountants (IFAC).
1. Independence, integrity, and objectivity1. Independence, integrity, and objectivity
2. Personnel Management2. Personnel Management
3. Acceptance and Continuation of Clients3. Acceptance and Continuation of Clients
and Engagementsand Engagements
4. Engagement Performance4. Engagement Performance
5. Monitoring5. Monitoring
1. Independence, integrity, and objectivity1. Independence, integrity, and objectivity
2. Personnel Management2. Personnel Management
3. Acceptance and Continuation of Clients3. Acceptance and Continuation of Clients
and Engagementsand Engagements
4. Engagement Performance4. Engagement Performance
5. Monitoring5. Monitoring
Arens, Loebbecke; Auditing, 8/EArens, Loebbecke; Auditing, 8/E
© © 2000 by2000 by Prentice Hall, Inc.Prentice Hall, Inc.
Audit Quality
• The audit is often unobservable and difficult to quantify
• Audit Quality = P (finding and reporting a FS breach)
• “Finding” = function of skill
• “Reporting” = function of independence level
Relationships among GAAS, Quality Control,Relationships among GAAS, Quality Control,Division of CPA Firms, and Peer ReviewDivision of CPA Firms, and Peer Review
Quality ControlQuality ControlStandardsStandards
Standards applicable to a CPAfirm to aid in satisfyinggenerally accepted auditingstandards
AICPA Practice sectionsAICPA Practice sections
Center forPublic CompanyAudit Firms
PrivateCompaniesPracticeSection
Organizations intended to helpfirms meet quality controlstandards and GAAS
Generally AcceptedGenerally AcceptedAuditing StandardsAuditing Standards
Standards applicable to eachaudit
Peer ReviewPeer Review
Method to determine whethera CPA firm meets qualitycontrol standards
Ways the Profession and Society Encourage CPAs to Conduct Ways the Profession and Society Encourage CPAs to Conduct Themselves at a High LevelThemselves at a High LevelWays the Profession and Society Encourage CPAs to Conduct Ways the Profession and Society Encourage CPAs to Conduct Themselves at a High LevelThemselves at a High Level
GAAS andGAAS andinterpretationsinterpretations
GAAS andGAAS andinterpretationsinterpretationsCPACPA
examinationexaminationCPACPA
examinationexamination
QualityQualitycontrolcontrolQualityQualitycontrolcontrol
Peer reviewPeer reviewPeer reviewPeer review
ContinuingContinuingeducationeducation
requirementsrequirements
ContinuingContinuingeducationeducation
requirementsrequirements
LegalLegalliabilityliabilityLegalLegal
liabilityliability
AICPA practice AICPA practice sectionssections
AICPA practice AICPA practice sectionssections
Code of Code of ProfessionalProfessional
ConductConduct
Code of Code of ProfessionalProfessional
ConductConduct
SECSECSECSEC
ConductConductofof
CPA firmCPA firmpersonnelpersonnel
ConductConductofof
CPA firmCPA firmpersonnelpersonnel