1. THE CPA PROFESSION 2
OOD AUDITING INCLUDES
GOOD CLIENT SERVICE

2. 3. Regional and Large Local Firms - There are less than
Objective
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.

3. 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.

4. Organizational Structures
Proprietorship
General Partnership
General Corporation
Professional Corporation
Limited Liability Company
Limited Liability Partnership

5. 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

6. 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
Deloitte & Touche , ,
PwC , ,787 (a)
Ernst & Young , ,
KPMG , ,
(a) Does not reflect sale of consulting practice
Current approximation:
Firm A&A Tax MAS or Other
Deloitte & Touche
Ernst & Young
PwC
KPMG

7. Staff Levels and Responsibilities
Hierarchy of Typical CPA Firm
Staff Levels and Responsibilities
Staff Level Average Experience Typical Responsibilities
Staff Assistant years Performs most of the detailed audit work.
Senior or in-charge years Coordinates and is responsible for the audit field work,
auditor including supervising and reviewing staff work.
Manager 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 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.

8. 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.

9. Sarbanes-Oxley Act AICPA AICPA SEC SEC PCAOB (Public Company NOW Vs.
Then
PCAOB
(Public Company
Accounting
Oversight Board)
AICPA
AICPA

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

11. 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.

12. 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

13. 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.

14. 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

15. 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

16. 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.

17. 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.

18. 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).

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

20. 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

21. 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

22. 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