The CPA Profession Chapter 2

Learning Objective 1 Describe the nature of CPA firms, what they do, and their structure.

Certified Public Accounting Firms The legal right to perform audits is granted to CPA firms by regulation of each state. CPA firms also provide many other services to their clients, such as tax and consulting services.

Certified Public Accounting Firms Big Four international firms National firms Regional and large local firms Small local firms

Certified Public Accounting Firms The four largest CPA firms in the United States are called the “Big Four” international CPA firms. These four firms have offices in most major cities in the United States and in many cities throughout the world.

Activities of CPA Firms Accounting and bookkeeping services Tax services Management consulting services

Structure of CPA Firms Three main factors influence the 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.

Organizational Structure Proprietorship Professional corporation General partnership Limited liability company General corporation Limited liability partnership

Hierarchy of a Typical CPA Firm Staff Level Experience Typical Responsibilities Staff assistant 0-2 years Performs most of the detailed audit work Senior or in-charge auditor 2-5 years Responsible for the audit field work, including supervising staff work

Hierarchy of a Typical CPA Firm Staff Level Experience Typical Responsibilities Manager 5-10 years Helps the plan, manages the audit, reviews work, and works with the client Partner 10+ years Reviews audit work and makes significant audit decisions

Learning Objective 2 Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.

Sarbanes-Oxley Act This Act is considered by many observers to be the most important legislation affecting the auditing profession since the 1930s. The provisions of the Act apply to publicly held companies and their audit firms.

Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting Oversight Board)

Sarbanes-Oxley Act The PCAOB conducts inspections of registered accounting firms and assess their compliance with the rules of the PCAOB and the SEC.

Learning Objective 3 Summarize the role of the Securities and Exchange Commission in accounting and auditing.

Securities and Exchange Commission The overall purpose of the Securities and Exchange Commission (SEC) is to assist in providing investors with reliable information upon which to make investment decisions.

Securities and Exchange Commission Form S-1 Form 8-K Form 10-K Form 10-Q

Learning Objective 4 Describe the key functions performed by the AICPA.

AICPA The AICPA sets professional requirements for CPAs, conducts research, and publishes materials on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services, and taxes.

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

Establishing Standards and Rules 1. Auditing standards 2. Compilation and review standards 3. Other attestation standards 4. Code of Professional Conduct

Other AICPA Functions Writes and grades the CPA examination. Supports research by its own staff and provides grants to others. Publishes a variety of materials. Provides seminars and education in a variety of subject matters.

Learning Objective 5 Understand the role of international Auditing standards and their relation to U.S. auditing standards.

International Standards on Auditing U.S. GAAS PCAOB Auditing Standards

Learning Objective 6 Use U.S. auditing standards as a Basis for further study

General Standards 1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. 2. The auditor must maintain independence in mental attitude in all matters relating to the audit.

General Standards 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.

Standards of Field Work 1. The auditor must adequately plan the work and must properly supervise any assistants. 2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement and to design further audit procedures.

Standards of Field Work 3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

Standards of Reporting 1. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles. 2. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

Standards of Reporting 3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. 4. The report shall contain an expression of opinion regarding the financial statements, taken as a whole.

Generally Accepted Auditing Standards General Standards 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care

Generally Accepted Auditing Standards Standards of Field Work 1. Proper planning and supervision 2. Understanding of the entity 3. Sufficient appropriate evidence

Generally Accepted Auditing Standards 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

Statements on Auditing Standards The 10 generally accepted auditing standards are too general to provide meaningful guidance. SASs interpret the 10 generally accepted auditing standards and are the most authoritative references available to auditors.

Statements on Auditing Standards Classification of Statements on Auditing Standards GAAS and Standards of Performance

Learning Objective 7 Identify quality control standards and practices within the accounting profession.

Relationships Quality control standards Generally accepted auditing standards Audit practice and quality centers Peer review

CPAs Encouraged to Conduct Themselves at a High Level examination GAAS and interpretations Continuing education requirements Quality control Conduct of CPA firm personnel Legal liability Peer review AICPA practice sections PCAOB and SEC Code of Professional Conduct

End of Chapter 2