1. The Audit Standards’ Setting Process
Chapter 2
The Audit Standards’ Setting Process 1

2. Learning Objectives
Describe the nature of CPA firms, what they do, and their structure.
Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.
Summarize the role of the Securities and Exchange Commission in accounting and auditing.

3. Learning Objectives Describe the functions performed by the AICPA.
Understand the role of international auditing standards and their relation to U.S. auditing standards.
Use U.S. auditing standards as a basis for further study.
Identify quality control standards and practices within the accounting profession.

4. 1 Describe the nature of CPA firms, what they do, and their structure.

5. Certified Public Accounting Firms
The legal right to perform audits is granted
to CPA firms by regulation in each state.
CPA firms also provide many other services to
their clients, such as tax and advisory services.
CPA firms continue to develop new products and services—such as financial planning, business valuation, forensic accounting, and information technology advisory services.

6. Certified Public Accounting Firms
Big Four international firms
National firms
Regional and large local firms
Small local firms
2-6

7. 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 throughout the
United States and in many cities throughout
the world.
Over 30 years ago the largest CPA firms were known as the “Big Eight”. These eight firms dominated the market and audited the vast majority of public and large private companies. Several “Big Eight” firms merged to increase their geographic presence in 1988 and Another merger occurred in 1997 to create the “Big Five”. When Arthur Andersen liquidated in 2002, only four large international firms remained.

8. Certified Public Accounting Firms

9. Activities of CPA Firms
Accounting and bookkeeping services
Tax services
Management consulting services
Many small companies with limited accounting staff rely on CPA firms to prepare their financial statements.
CPA firms prepare corporate and individual tax returns for both audit and non-audit clients. Almost every CPA firm performs tax services.
Most CPA firms provide certain services that enable their clients to operate their businesses more effectively. The ability to provide this value added service often distinguishes one firm from another.

10. 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.
Independence permits auditors to remain unbiased in drawing conclusions about financial statements.
Competence permits auditors to conduct audits and perform other services efficiently and effectively.
Litigation costs are increasing for all audit firms. Some organizational structures afford a degree of protection to individual firm members.

11. Organizational Structure
Proprietorship
General Partnership
General Corporation
Professional Corporation
LLC combines the most favorable attributes of a general corporation and a partnership. Owners have limited personal liability.
An LLP is owned by one or more partners and taxed like a general partnership, but the personal liability protection of an LLP is less than that of a general corporation or an LLC.
Limited Liability Company
Limited Liability Partnership

12. Hierarchy of a Typical CPA Firm
Average Experience
10+ years
5-10 years
2-5
0-2
Partners
Managers
Seniors and In-Charge Auditors
Staff Assistants
Staff perform most of the audit field work.
Seniors are responsible for the field work and supervise the staff.
Managers help plan the audit, manage the audit, review the audit work and work with the client to resolve any issues identified.
Partners review all audit areas and makes significant decisions. The partner signs the audit report.

13. 2
Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.

14. 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.

15. Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting
Oversight Board)
The Sarbanes-Oxley Act established the PCAOB which is overseen by the SEC. The PCAOB provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits and performs inspections of the quality controls at audit firms performing those audits.

16. 3
Summarize the role of the Securities and Exchange Commission in accounting and auditing.

17. Securities and Exchange Commission
The purpose is to assist in providing investors
with reliable information upon which to make
investment decisions
The Securities Act of 1933
The Securities Exchange Act of 1934
The 1933 Act requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval.
The 1934 Act provides additional protection by requiring public companies and others to file detailed annual reports with the Commission. The Commission examines these statements for completeness and adequacy before permitting the company to sell its securities through the exchanges.

18. Securities and Exchange Commission
Form S-1
Form 8-K
Form 10-K
Form 10-Q
Form S-1 applies to new securities.
Form 8-K is field to report significant events that are of interest to public investors.
Form 10-K must be filed annually within days after the close of each fiscal year, depending on the size of the company.
Form 10-Q must be filed quarterly for all publicly held companies.

19. Describe the key functions performed by the AICPA.4
Describe the key functions performed by the AICPA.

20. AICPA Performs the following services for CPAs:
Sets professional requirements
Conducts research
Publishes materials related to services
performed
Such services include the following:
Accounting, auditing, attestation and assurance services,
management consulting services, and taxes.
All AICPA members and other practicing CPAs must follow the
standards and guidelines set by the AICPA.
Empowered to set standards (guidelines)
and rules

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

22. Other AICPA Functions The CPA examination Research and Grants
Publishes a variety of materials
Provides seminars and
continuing education

23. 5
Understand the role of international auditing standards and their relation to U.S. auditing standards
The AICPA auditing standards board has undertaken a significant effort to make U.S. Generally Accepted Auditing Standards (GAAS) easier to read, understand and apply. The project originated with the ASB plan to converge U.S. GAAS with the ISAs and align its agenda with the IAASB. The foundation of the clarity project is the establishment of an objective for each auditing standard to reflect a principles–based approach to the standard setting.

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

25. International Standards on Auditing
IFAC is the worldwide organization
for the accountancy profession.
The IAASB works to improve the
uniformity of auditing practices and
related services throughout the world.

26. International Standards on Auditing
ISAs do not override a country's regulations governing the audit of financial or other information as each country’s own regulations generally govern audit practices.

27. Use U.S. auditing standards as a basis for further study6
Use U.S. auditing standards as a basis for further study

28. GAAS
These standards represent the minimum standards of performance.

29. PCAOB Auditing Standards – United States
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care
The auditor must have adequate technical training and proficiency to perform the audit.
The auditor must maintain independence in mental attitude in all matters relating
to the audit.
The auditor must exercise due professional care in the performance of the audit and the
preparation of the report.

30. PCAOB Auditing Standards – United States
Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence
The auditor must adequately plan the work and must properly supervise any assistants.
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.
The auditor must obtain sufficient and appropriate audit evidence by performing audit procedures
to afford a reasonable basis for an opinion regarding the financial statements under audit.

31. PCAOB Auditing Standards – 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
The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.
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.
Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
The report shall contain an expression of opinion regarding the financial statements,
taken as a whole.

32. Relationship Between ASB and PCAOB Auditing Standards
The PCAOB initially adopted GAAS as interim standards.
The term generally accepted auditing standards is no longer used for public company audits.
The term ASB will be used for audits of private companies.
Public company audits refer to PCAOB auditing standards.
Public
company
audits
Private
company
audits

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

34. 7
Identify quality control standards and practices within the accounting profession.

35. Elements of Quality Control
Leadership responsibilities for quality
Relevant ethical requirements
Acceptance and continuation of clients
and engagements
Human resources
Engagement performance
Each firm should document its quality control policies and procedures. Procedures should depend on such things as the size of the firm, number of practice offices and the nature of the practice.
Monitoring

36. Relationships

37. CPAs Encouraged to Conduct Themselves at a High Level
Auditing
standards
Continuing
education
requirements
CPA
examination
Quality
control
Conduct of
CPA firm
personnel
Legal
liability
Peer
review
AICPA practice
and quality
centers
Code of
Professional
Conduct
PCAOB
and SEC

38. Do you have any questions?

39. Copyright
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