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Page 1: Acco 304  Chapter02

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 2 - 1

The CPA ProfessionThe CPA Profession

Chapter 2Chapter 2

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Learning Objective 1Learning Objective 1

Describe the nature of CPA firms,Describe the nature of CPA firms,

what they do, and their structure.what they do, and their structure.

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Certified Public Accounting Certified Public Accounting FirmsFirms

The legal right to perform audits is grantedto CPA firms by regulation of each state.

CPA firms also provide many other services totheir clients, such as tax and consulting services.

CPAs continue to develop new products and services- such as financial planning, business valuation and information technology.

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Certified Public Accounting Certified Public Accounting FirmsFirms

Big Four international firms

National firms

Regional and large local firms

Small local firms

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Certified Public Accounting Certified Public Accounting FirmsFirms

The four largest CPA firms in the United Statesare called the “Big Four” international CPA firms.

These four firms have offices in most majorcities in the United States and in manycities throughout the world.

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Management consulting services

Tax services

Accounting and bookkeeping services

Activities of CPA FirmsActivities of CPA Firms

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Structure of CPA FirmsStructure of CPA Firms

Three main factors influence the organizationalstructure 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.

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Organizational StructureOrganizational Structure

Proprietorship

Professional corporation

General partnership

Limited liability company

General corporation

Limited liability partnership

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Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm

Staff Level Experience Typical Responsibilities

Staffassistant

0-2 yearsPerforms most of thedetailed audit work

Senior orin-chargeauditor

2-5 yearsResponsible for the auditfield work, includingsupervising staff work

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Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm

Staff Level Experience Typical Responsibilities

Manager 5-10 years

Helps plan the audit, manages the audit, reviews work, and works with the client

Partner 10+ yearsReviews audit work andmakes significant auditdecisions

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Learning Objective 2Learning Objective 2

Understand the role of theUnderstand the role of the

Public Company AccountingPublic Company Accounting

Oversight Board and the effectsOversight Board and the effects

of the Sarbanes-Oxley Actof the Sarbanes-Oxley Act

on the CPA profession.on the CPA profession.

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This Act is considered by many observers tobe the most important legislation affectingthe auditing profession since the 1930s.

Sarbanes-Oxley ActSarbanes-Oxley Act

The provisions of the Act apply to publiclyheld companies and their audit firms.

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Sarbanes-Oxley ActSarbanes-Oxley Act

SEC

PCAOB(Public Company

AccountingOversight Board)

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Sarbanes-Oxley ActSarbanes-Oxley Act

The PCAOB conducts inspections of registeredaccounting firms and assess their compliancewith the rules of the PCAOB and the SEC.

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Learning Objective 3Learning Objective 3

Summarize the role of theSummarize the role of the

Securities and ExchangeSecurities and Exchange

Commission in accountingCommission in accounting

and auditing.and auditing.

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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 Securities and Exchange CommissionCommission

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Securities and Exchange Securities and Exchange CommissionCommission

Form S-1

Form 8-K

Form 10-K

Form 10-Q

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Learning Objective 4Learning Objective 4

Describe the key functionsDescribe the key functions

performed by the AICPA.performed by the AICPA.

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The AICPA sets professional requirementsfor CPAs, conducts research, and publishesmaterials on many different subjects relatedto accounting, auditing, attestation andassurance services, managementconsulting services, and taxes.

AICPAAICPA

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The AICPA is empowered to set standards(guidelines) and rules that all membersand other practicing CPAs must follow.

Establishing StandardsEstablishing Standardsand Rulesand Rules

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Establishing StandardsEstablishing Standardsand Rulesand Rules

1. Auditing standards

2. Compilation and review standards

3. Other attestation standards

4. Consulting standards

5. Code of Professional Conduct

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Other AICPA FunctionsOther AICPA Functions

Supports research by its own staff andprovides grants to others.

Writes and grades the CPA examination.

Provides seminars and education in avariety of subject matters.

Publishes a variety of materials.

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Learning Objective 5Learning Objective 5Discuss the nature of United States and international auditing standardsDiscuss the nature of United States and international auditing standards

Generally Accepted Auditing Standards

General qualifications and conduct

Field Work performance of

the audit

Reporting results

Adequate training and proficiency

Independence in mental attitude

Due professional care

Proper planning and supervision

Sufficient understanding of the entity, its environment, and its internal control

Sufficient appropriate evidence

Whether statements were prepared in accordance with GAAP

Circumstances when GAAP not consistently followed

Adequacy of informative disclosures

Expression of opinion on financial statements

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GAAS and Standards of Performance

Statements on Auditing Statements on Auditing StandardsStandards

Classification of Statements on Auditing Standards

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International StandardsInternational Standardson Auditingon Auditing

IFAC is the worldwide organizationfor the accountancy profession.

The IFAC works to improve theuniformity of auditing practices andrelated services throughout the world.

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International StandardsInternational Standardson Auditingon Auditing

International Standards on Auditing (ISAs)are issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC).

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Learning Objective 6Learning Objective 6

Use generally accepted auditing standards Use generally accepted auditing standards as a basis for further studyas a basis for further study

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Generally Accepted AuditingGenerally Accepted AuditingStandards- United StatesStandards- United States

General Standards

1. Adequate training and proficiency

2. Independence in mental attitude

3. Due professional care

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1. The auditor must have adequate technical training and proficiency to perform the audit.

2. The auditor must maintain independencein mental attitude in all matters relatingto the audit.

U.S. Generally Accepted Auditing U.S. Generally Accepted Auditing StandardsStandards

General StandardsGeneral Standards

3. The auditor must exercise due professionalcare in the performance of the audit and thepreparation of the report.

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Generally Accepted AuditingGenerally Accepted AuditingStandards – United StatesStandards – United States

Standards of Field Work

1. Proper planning and supervision

2. Understanding of the entity

3. Sufficient appropriate evidence

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1. The auditor must adequately plan the workand must properly supervise any assistants.

2. The auditor must obtain a sufficient understandingof the entity and its environment, including itsinternal control, to assess the risk of materialmisstatement and to design further auditprocedures.

Standards of Field WorkStandards of Field Work

3. The auditor must obtain sufficient appropriateaudit evidence by performing audit proceduresto afford a reasonable basis for an opinion regarding the financial statements under audit.

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Generally Accepted AuditingGenerally Accepted AuditingStandards-United StatesStandards-United States

Standards of Reporting

1. Statements prepared in accordance with GAAP

2. Circumstances when GAAP not followed

3. Adequacy of disclosures

4. Expression of opinion on financial statements

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1. The report shall state whether the financialstatements are presented in accordance withgenerally accepted accounting principles.

2. The report shall identify those circumstancesin which such principles have not beenconsistently observed in the current periodin relation to the preceding period.

Standards of ReportingStandards of Reporting

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Standards of Reporting Standards of Reporting (Cont’d)(Cont’d)

3. Informative disclosures in the financialstatements are to be regarded as reasonablyadequate unless otherwise stated in the report.

4. The report shall contain an expression ofopinion regarding the financial statements,taken as a whole.

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Relationship Between GAAS and Relationship Between GAAS and PCAOB Auditing StandardsPCAOB Auditing Standards

The term generally accepted auditing standardsis no longer used for public company audits.

The term GAAS continues to be used for auditsof private companies.

Public company audits refer to PCAOB auditingstandards.

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The 10 generally accepted auditing standardsare too general to provide meaningful guidance.

SASs interpret the 10 generally acceptedauditing standards and are the mostauthoritative references available to auditors.

Statements on Auditing Statements on Auditing StandardsStandards

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AICPA Clarity and Convergence AICPA Clarity and Convergence ProjectProject

The AICPA Auditing Standards Board has The AICPA Auditing Standards Board has undertaken a significant effort to make GAAS undertaken a significant effort to make GAAS easier to read, understand and apply.easier to read, understand and apply.

This project is similar to an effort by the International This project is similar to an effort by the International Auditing and Assurance Standards Board to clarify Auditing and Assurance Standards Board to clarify International Standards on Auditing. (IAASB). International Standards on Auditing. (IAASB).

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Learning Objective 7Learning Objective 7

Identify quality control standardsIdentify quality control standards

and practices within theand practices within the

accounting profession.accounting profession.

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Elements of Quality ControlElements of Quality Control

Independence, integrity, and objectivity

Personnel management

Acceptance and continuation of clientsand engagements

Engagement performance

Monitoring

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RelationshipsRelationships

Quality controlstandards

Generally acceptedauditing standards

AICPA practicesections

Peerreview

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CPAs Encouraged to ConductCPAs Encouraged to ConductThemselves at a High LevelThemselves at a High Level

Legalliability

AICPA practicesections

Continuingeducation

requirements

GAAS andinterpretations

Code ofProfessional

Conduct

CPAexamination

Qualitycontrol

Peerreview

PCAOBand SEC

Conduct of

CPA firm

personnel

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End of Chapter 2End of Chapter 2