Assurance services
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Assurance services. The broad range of information enhancement services that are provided by certified public accountants (CPAs). Two types: Increase reliability of information Putting information into a form or context that facilitates decision making. Types of Services. Assurance Services

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Assurance services

Assurance services

The broad range of information enhancement services that are provided by certified public accountants (CPAs).

Two types:

Increase reliability of information

Putting information into a form or context that facilitates decision making.


Types of services

Types of Services

Assurance Services

Attestation Services

Example: Audits of Financial Statements, Examinations of Internal Control

Other Assurance Services

Example: CPA ElderCare Prime Plus Services

NonAssurance Services

Tax Services

Management Consulting Services

Other


Attestation services

Attestation Services

To attest to information means to provide assurance as to its reliability

Attest engagement:

A practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g. management)


The attest function

The Attest Function

Management

The CPA

Suitable

Criteria

Subject

Matter

Gathers

Evidence

Issues

Report

Subject

Matter*

The Attest

Report

*May be management’s assertion about the subject matter.


Suitable criteria

Suitable criteria

Standards established or developed by groups of experts.

Example: Internal control audit – standards established by a committee of experts on internal control

Example: Financial statement audit – standards are GAAP. For a financial statement audit suitable criteria are referred to as the “applicable financial reporting framework.”


Forms of attestation

Forms of Attestation


Audit of financial statements

Audit of Financial Statements

Management

The

Auditors

Prepares

Financial

Statements

Criteria

(e.g., GAAP)

Gathers

Evidence

Issues

Report

Financial

Statements

The Auditors’

Report

*Applicable financial reporting framework


Financial statement audit

Financial Statement Audit

Auditors gather evidence and provide a high level of assurance that the financial statements follow GAAP, or some other appropriate basis of accounting

Audit involves searching and verifying accounting records and examining other documents

Evidence necessary to issue an audit report that states auditors’ opinion


Audit evidence

Audit Evidence

Evidence focuses on whether financial statements are presented in accordance with GAAP; examples:

Balance sheet contains all liabilities

Income statement

Sales really occurred

Sales have been recorded at appropriate amounts

Recorded costs and expenses are applicable to period

All expenses have been recognized

Financial statement amounts

Accurate, properly classified and summarized

Notes are informative and complete


What creates the demand for audits

What Creates the Demand for Audits?

Audits lend credibility to information by reducing information risk, the risk that information is materially misstated

Financial statement misstatements arise due to--

Accidental errors

Lack of knowledge of accounting principles

Unintentional bias

Deliberate falsification

Audits do not directly address business risk, the risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions


History of the attest function

History of the Attest Function


The accounting profession s credibility crisis

The Accounting Profession’s Credibility Crisis

2000—The Panel on Audit Effectiveness made a variety of suggestions to improve audits.

2001—Enron Bankruptcy

2002—WorldCom Fraud

2002—Sarbanes-Oxley Act

2003—Public Company Accounting Oversight Board began operations


Financial audits

Financial Audits

Audit of the financial statements of an entity

Covers the balance sheet and related statements of income, retained earnings and cash flows

Goal is to determine if prepared in conformity with GAAP

Performed by CPAs

Users include management, investors, bankers, creditors, financial analysts, government agencies


Other types of audits

Other Types of Audits

Compliance Audits

Example: IRS audit of income tax return

Operational Audits

Example: Effectiveness of operations of receiving department of a manufacturing company

Integrated Audits

Example: Assurance on both the financial statements and effectiveness of internal control over financial reporting


Other types of auditors

Other Types of Auditors

  • Internal Auditors

  • Government Accountability Office Auditors

  • Tax Auditors


Internal auditors

Internal Auditors

  • Employed by a company as an employee

  • They often

    • perform operational and compliance audits

    • address internal control

    • report to the audit committee of the board of directors and to the president

  • The Institute of Internal Auditors is the international organization of internal auditors.


Government accountability office auditors gao auditors

Government Accountability Office Auditors (GAO Auditors)

  • Headed by the comptroller general

  • Responsibility of supporting Congress

  • Perform

    • Compliance, operational and financial audits of government agencies

    • Examinations of corporations holding government contracts to verify contract payments have been proper


Tax auditors

Tax Auditors

  • Responsible for enforcement of tax laws of various sorts (e.g., state and federal income taxes, property taxes, sales taxes)

  • Internal revenue agents generally perform compliance audits of income tax returns


Aicpa s traditional role

AICPA’s Traditional Role

Establish Standards

Research and Publication

Continuing Professional Education

Self-Regulation

Note: Much of the standards setting and regulation roles relating to public companies (referred to as “issuers”) has been taken over by the SEC and the PCAOB.


Establishes standards examples

Establishes Standards--Examples

AICPA Auditing Standards Board

Issues official pronouncements on auditing matters for nonpublic companies (“nonissuers”)

Statements on Auditing Standards (SASs)

Statements on Standards for Attestation Engagements (SSAEs)

Guidance for attesting to information other than financial statements such as financial forecasts

Accounting and Review Services Committee

Statements on Standards for Accounting and Review Services (SSARS)

Standards for compilations or reviews not audits of financial statements


Research and publication

Research and Publication

Publications

Journal of Accountancy (monthly)

The Tax Advisor

Audit publications

Industry Audit and Accounting Guides

Audit Risk Alerts

Auditing Practice Releases

Other publications

Accounting Research Studies

Statements of Position

Accounting Trends & Techniques


Continuing professional education

Continuing Professional Education

Development of continuing professional education programs

Necessary for continuing education requirement for CPA certificate

Offered by

AICPA

State societies

Other professional organizations


Professional regulation

Professional Regulation

Regulations of Individual CPAs

Code of Professional Conduct – ethical rules for CPAs

Requirements for regular membership in AICPA

Regulation of Public Accounting Firms

Division for Public Accounting Firms

Center for Public Company Audit Firms

Private Companies Practice Section (PCPS)


The cpa examination

The CPA Examination

Uniform national examination prepared and graded by the AICPA

Computerized exam includes multiple choice and simulations in four parts

Auditing and Attestation

Financial Accounting & Reporting

Regulation

Business Environment & Concepts


State boards of accountancy

State Boards of Accountancy

Issue CPA certificates

All boards require successful completion of CPA examination

Education and experience requirements vary

National Association of State Boards of Accounting (NASBA)


Other parties

Other Parties

FASB

Sets GAAP for entities other than federal, state and local governments

GASB

Standards of financial accounting for state and local government entities

FASAB

Accounting standards for the US government


Pcaob role

PCAOB Role

Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports for SEC registrants

Oversee and discipline CPAs and CPA firms that audit public companies, including

Register firms

Perform inspections of firms

Conduct investigations and disciplinary proceedings of firms

Sanction registered firms


Securities and exchange commission sec

Securities and Exchange Commission (SEC)

Agency of the US government

Oversight responsibility for the PCAOB

Objectives

Protect investors and public by requiring full disclosure of financial information by companies offering securities for sale to the public

Prevent misrepresentation, deceit, or other fraud in the sale of securities


Securities and exchange commission sec1

Securities and Exchange Commission (SEC )

Registration statements

Qualify securities for sales

Contains audited financial statements

Makes SEC major user of financial statements

Protects investors

Regulation S-X

Basic accounting regulation


Types of professional services

Types of Professional Services

Attestation and Assurance

Tax

Consulting

Accounting

Personal Financial Planning

Litigation support

Fraud Investigation

Personal Financial Planning


Organization of the public accounting profession

Organization of the Public Accounting Profession

Sole proprietorship

Partnerships

Professional Corporation

Limited Liability Partnership (LLP)

Limited Liability Company (LLC)


Categories of public accounting firms

Categories of Public Accounting Firms

  • Local

  • Regional

  • National

  • Big 4

  • Alternative Practice Structures


Industry specialization

Industry Specialization

Firms with detailed knowledge and understanding of a client’s industry

Helps firms

Be more effective at collecting and evaluating audit evidence

Make valuable suggestions to improve client’s operations

Provide the client consulting services


Typical structure of a national cpa firm

Typical Structure of a National CPA Firm

Partners

Managers

Seniors

Staff Assistant


Responsibilities on an engagement

Responsibilities on an Engagement

  • Partner—Overall responsibility is to assure that that audit is performed in accordance with professional standards.

  • Manager—Supervise overall engagement.

  • Seniors—”In charge” auditor on a daily basis.

  • Staff assistants—Work under the immediate supervision of the senior.


Elements of public accounting work

Elements of Public Accounting Work

Professional Developments

Stay current on developments within the profession

Seasonal fluctuations

Busy season from December through April

Relationships with clients

Need to maintain independence


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