THE CPA PROFESSION 2 OOD AUDITING INCLUDES GOOD CLIENT SERVICE

3. Regional and Large Local Firms - There are less than Objective 2 - 1 CERTIFIED PUBLIC ACCOUNTING FIRMS Describe the nature of CPA firms, what they do, and their structure. 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. 1. Big 4 International Firms - The four largest CPA firms in the United States are called the “Big Four” international CPA firms. 2. National Firms - Three CPA firms in the United States are called national firms because they have offices in most major cities. 3. Regional and Large Local Firms - There are less than 200 CPA firms with professional staffs of more than 50 people. 4. Small Local Firms - More than 95 percent of all CPA firms have fewer than 25 professionals in a single-office firm.

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 Structures Proprietorship General Partnership General Corporation Professional Corporation Limited Liability Company Limited Liability Partnership

LATE 90’s Revenue and Other Data for the largest CPA Firms in the United States * 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

FOR the 00’s Current approximation: 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 Other Deloitte & Touche 44 22 34 Ernst & Young 72 27 1 PwC 63 26 11 KPMG 77 23 0

Staff Levels and Responsibilities Hierarchy of Typical CPA Firm Staff Levels and Responsibilities Staff Level Average Experience 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, reviews the 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 of the firm, and therefore has the ultimate responsibility for conducting the audit and serving the client.

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 AICPA AICPA SEC SEC PCAOB (Public Company NOW Vs. Then PCAOB (Public Company Accounting Oversight Board) AICPA AICPA

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

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 – new issues Form 8-K – significant events (like press release) Form 10-K – annual FS’s Form 10-Q – quarterly FS’s

The requirements are set by committees made up of AICPA members. The AICPA is empowered to set standards (guidelines) and rules that all members and other practicing CPAs must follow. The requirements are set by committees made up of AICPA members.

There are four major areas in which the AICPA has authority to set standards and make rules. 1. Auditing Standards 2. Compilation and Review Standards 3. Other Attestation Standards 4. Consulting Standards 5. Code of Professional Conduct

ACCEPTED ADUITING STANDARDS SUMMARY OF GENERALLY ACCEPTED ADUITING STANDARDS Generally Accepted Auditing Standards Reporting results General qualifications and conduct Field Work performance of the audit Whether statements were prepared in accordance with GAAP Circumstances when GAAP not consistently followed Adequacy of informative disclosures Expression of opinion on financial statements Adequate training and proficiency Independence in mental attitude Due professional care Proper planning and supervision Sufficient understanding of internal control Sufficient competent evidence

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 audits of private companies.

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

INTERNATIONAL STANDARDS DEVELOPING 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 Auditing Practice Committee of the International Federation of Accountants (IFAC).

1. Independence, integrity, and objectivity 2. Personnel Management 3. Acceptance and Continuation of Clients and Engagements 4. Engagement Performance 5. Monitoring

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, Division of CPA Firms, and Peer Review Quality Control Standards Generally Accepted Auditing Standards Standards applicable to a CPA firm to aid in satisfying generally accepted auditing standards Standards applicable to each audit AICPA Practice sections Center for Public Company Audit Firms Private Companies Practice Section Organizations intended to help firms meet quality control standards and GAAS Peer Review Method to determine whether a CPA firm meets quality control standards

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