2 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder The CPA Profession Chapter 2

2 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

The CPA ProfessionThe CPA Profession

Chapter 2Chapter 2


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.


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.to CPA firms by regulation of each state.

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



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

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



Big Four international firmsBig Four international firms

National firmsNational firms

Regional and large local firmsRegional and large local firms

Small local firmsSmall local firms


Management consulting servicesManagement consulting services

Tax servicesTax services

Accounting and bookkeeping servicesAccounting and bookkeeping services

Activities of CPA FirmsActivities of CPA Firms


Structure of CPA FirmsStructure of CPA Firms

Three main factors influence the organizationalThree main factors influence the organizationalstructure of all firms:structure of all firms:

1. The need for independence from clients1. The need for independence from clients

2. The importance of a structure to encourage2. The importance of a structure to encouragecompetencecompetence

3. The increased litigation risk faced by auditors3. The increased litigation risk faced by auditors


Organizational StructureOrganizational Structure

ProprietorshipProprietorship

General partnershipGeneral partnership

General corporationGeneral corporation

Professional corporationProfessional corporation

Limited liability companyLimited liability company

Limited liability partnershipLimited liability partnership


Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm

Staff LevelStaff Level ExperienceExperience Typical ResponsibilitiesTypical Responsibilities

StaffStaffassistantassistant 0-2 years0-2 years Performs most of thePerforms most of the

detailed audit workdetailed audit work

Senior orSenior orin-chargein-chargeauditorauditor

2-5 years2-5 yearsResponsible for the auditResponsible for the auditfield work, includingfield work, includingsupervising staff worksupervising staff work


Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm

Staff LevelStaff Level ExperienceExperience Typical ResponsibilitiesTypical Responsibilities

ManagerManager 5-10 years5-10 yearsHelps the plan, managesHelps the plan, managesthe audit, reviews work,the audit, reviews work,and works with the clientand works with the client

PartnerPartner 10+ years10+ yearsReviews audit work andReviews audit work andmakes significant auditmakes significant auditdecisionsdecisions


E-Commerce andE-Commerce andCPA Firm OperationsCPA Firm Operations

CPA firms are using the Internet to marketCPA firms are using the Internet to markettheir services.their services.

They also use the Internet to connect theirThey also use the Internet to connect theirglobal professional staff.global professional staff.

Firms take advantage of online resources andFirms take advantage of online resources anddatabases to help their staffs stay current on databases to help their staffs stay current on emerging business and standards-setting issues.emerging business and standards-setting issues.



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 Act onof the Sarbanes-Oxley Act on

the CPA profession.the CPA profession.


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

Sarbanes-Oxley ActSarbanes-Oxley Act

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


Sarbanes-Oxley ActSarbanes-Oxley Act

SECSEC

PCAOBPCAOB(Public Company Accounting(Public Company Accounting

Oversight Board)Oversight Board)



Summarize the role of theSummarize the role of the

Securities and ExchangeSecurities and Exchange

Commission in accountingCommission in accounting

and auditing.and auditing.


The overall purpose of the The overall purpose of the Securities andSecurities andExchange Commission (SEC)Exchange Commission (SEC) is to assist inis to assist inproviding investors with reliable informationproviding investors with reliable informationUpon which to make investment decisions.Upon which to make investment decisions.

Securities and Exchange Securities and Exchange CommissionCommission


Forms S-1 to S-16Forms S-1 to S-16

Securities and Exchange Securities and Exchange CommissionCommission

Form 8-KForm 8-K

Form 10-KForm 10-K

Form 10-QForm 10-Q



Describe the key functionsDescribe the key functions

performed by the AICPA.performed by the AICPA.


The AICPA sets professional requirementsThe AICPA sets professional requirementsfor CPAs, conducts research, and publishesfor CPAs, conducts research, and publishesmaterials on many different subjects relatedmaterials on many different subjects relatedto accounting, auditing, attestation andto accounting, auditing, attestation andAssurance services, managementAssurance services, managementConsulting services, and taxes.Consulting services, and taxes.

AICPAAICPA


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

Establishing StandardsEstablishing Standardsand Rulesand Rules


Establishing StandardsEstablishing Standardsand Rulesand Rules

1.1. Auditing standardsAuditing standards

2.2. Compilation and review standardsCompilation and review standards

3.3. Other attestation standardsOther attestation standards

4.4. Consulting standardsConsulting standards

5.5. Code of Professional ConductCode of Professional Conduct


Other AICPA FunctionsOther AICPA Functions

Supports research by its own staff andSupports research by its own staff andprovides grants to othersprovides grants to others

Writes and grades the CPA examinationWrites and grades the CPA examination

Provides seminars and education in aProvides seminars and education in avariety of subject mattersvariety of subject matters

Publishes a variety of materials.Publishes a variety of materials.


Vision for the FutureVision for the Future

The AICPA has established the CPA Vision ProjectThe AICPA has established the CPA Vision Projectto provide a core purpose and a vision for the CPAto provide a core purpose and a vision for the CPAprofession in the year 2011 and beyond.profession in the year 2011 and beyond.

The core purpose of the CPA Vision Project is:The core purpose of the CPA Vision Project is:““CPAs…making sense of a changingCPAs…making sense of a changingand complex world.”and complex world.”


Vision for the FutureVision for the Future

1. Continuing education and life-long learning1. Continuing education and life-long learning

2. Competence2. Competence

3. Integrity3. Integrity

4. Attuned to broad business issues4. Attuned to broad business issues

5. Objectivity5. Objectivity



Use generally acceptedUse generally accepted

auditing standards as aauditing standards as a

basis for further study.basis for further study.


1. The audit is to be performed by a person or1. The audit is to be performed by a person orpersons having adequate technical trainingpersons having adequate technical trainingand proficiency as an auditor.and proficiency as an auditor.

2. In all matters relating to the assignment,2. In all matters relating to the assignment,an independence in mental attitude is toan independence in mental attitude is tobebe maintained by the auditor or auditors.maintained by the auditor or auditors.

General StandardsGeneral Standards


General StandardsGeneral Standards

3. Due professional care is to be exercised3. Due professional care is to be exercisedinin the planning and performance ofthe planning and performance of thetheaudit and the preparation of the report.audit and the preparation of the report.


1. The work is to be adequately planned1. The work is to be adequately plannedand assistants, if any, are to beand assistants, if any, are to beproperly supervised.properly supervised.

2. A sufficient understanding of internal2. A sufficient understanding of internalcontrol is to be obtained to plan the auditcontrol is to be obtained to plan the auditand to determine the nature, timing, andand to determine the nature, timing, andextent of tests to be performed.extent of tests to be performed.

Standards of Field WorkStandards of Field Work


Standards of Field WorkStandards of Field Work

3. Sufficient competent evidential matter is to3. Sufficient competent evidential matter is tobe obtained through inspection, observation,be obtained through inspection, observation,inquiries, and confirmations to afford ainquiries, and confirmations to afford areasonable basis for an opinion regardingreasonable basis for an opinion regardingthe financial statements under audit.the financial statements under audit.


1. The report shall state whether the financial1. The report shall state whether the financialstatements are presented in accordance withstatements are presented in accordance withgenerally accepted accounting principles.generally accepted accounting principles.

2. The report shall identify those circumstances2. The report shall identify those circumstancesin which such principles have not beenin which such principles have not beenconsistently observed in the current periodconsistently observed in the current periodin relation to the preceding period.in relation to the preceding period.

Standards of ReportingStandards of Reporting


3. Informative disclosures in the financial3. Informative disclosures in the financialstatements are to be regarded as reasonablystatements are to be regarded as reasonablyadequate unless otherwise stated in the report.adequate unless otherwise stated in the report.

4. The report shall contain an expression of4. The report shall contain an expression ofopinion regarding the financial statements,opinion regarding the financial statements,taken as a whole.taken as a whole.

Standards of ReportingStandards of Reporting


Summary ofSummary ofGeneral StandardsGeneral Standards

Generally Accepted Auditing StandardsGenerally Accepted Auditing Standards

GeneralGeneral

1. Adequate training1. Adequate training and proficiencyand proficiency2. Independence in2. Independence in mental attitudemental attitude3. Due professional3. Due professional carecare

Field WorkField Work

1. Proper planning1. Proper planning and supervisionand supervision2. Internal control2. Internal control understandingunderstanding3. Sufficient3. Sufficient competentcompetent evidenceevidence

ReportingReporting

1. Statements prepared in1. Statements prepared in accordance with GAAPaccordance with GAAP2. Circumstances when2. Circumstances when GAAP not followedGAAP not followed3. Adequacy of disclosures3. Adequacy of disclosures4. Expression of opinion4. Expression of opinion on financial statementson financial statements


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

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

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

Public company audits refer to PCAOBPublic company audits refer to PCAOBauditing standards.auditing standards.


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

SASs interpret the 10 generally acceptedSASs interpret the 10 generally acceptedauditing standards and are the mostauditing standards and are the mostAuthoritative references available to auditors.Authoritative references available to auditors.

Statements on Auditing StandardsStatements on Auditing Standards



Discuss the role of internationalDiscuss the role of international

auditing standards.auditing standards.


International StandardsInternational Standardson Auditingon Auditing

International Standards on Auditing (ISAs)International Standards on Auditing (ISAs)are issued by the International Auditingare issued by the International AuditingPractice Committee of the InternationalPractice Committee of the InternationalFederation of Accountants (IFAC).Federation of Accountants (IFAC).


International StandardsInternational Standardson Auditingon Auditing

IFAC is the worldwide organizationIFAC is the worldwide organizationfor the accountancy profession.for the accountancy profession.

The IAPC works to improve theThe IAPC works to improve theuniformity of auditing practices anduniformity of auditing practices andrelated services throughout the world.related services throughout the world.



Identify quality controlIdentify quality control

standards and practicesstandards and practices

within the accountingwithin the accounting

profession.profession.


Elements of Quality ControlElements of Quality Control

Independence, integrity, and objectivityIndependence, integrity, and objectivity

Personnel managementPersonnel management

Acceptance and continuation of clientsAcceptance and continuation of clientsand engagementsand engagements

Engagement performanceEngagement performance

MonitoringMonitoring


RelationshipsRelationships

Quality controlQuality controlstandardsstandards

Generally acceptedGenerally acceptedauditing standardsauditing standards

Division ofDivision ofCPA firmsCPA firms

PeerPeerreviewreview


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

LegalLegalliabilityliability

Division ofDivision ofCPA firmsCPA firms

ContinuingContinuingeducationeducation

requirementsrequirements

GAAS andGAAS andinterpretationsinterpretations

Code ofCode ofProfessionalProfessional

ConductConduct

CPACPAexaminationexamination

QualityQualitycontrolcontrol

PeerPeerreviewreview

PCAOBPCAOBand SECand SEC

Conduct ofConduct ofCPA firmCPA firmpersonnelpersonnel


End of Chapter 2End of Chapter 2

Documents

2 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder The CPA Profession Chapter 2