The CPA Profession Chapter 2
Describe the nature of CPA firms, what they do, and their structure. Learning Objective 1
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 TypicalCPA 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 TypicalCPA 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
E-Commerce andCPA Firm Operations CPA firms are using the Internet to market their services. Firm Web sites also feature online software tools and databases to subscribers. Firms take advantage of online resources and databases to help their staffs stay current on emerging business and standards-setting issues.
Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession. Learning Objective 2
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.
Summarize the role of the Securities and Exchange Commission in accounting and auditing. Learning Objective 3
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
Describe the key functions performed by the AICPA. Learning Objective 4
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 Standardsand Rules The AICPA is empowered to set standards (guidelines) and rules that all members and other practicing CPAs must follow.
Establishing Standardsand Rules 1. Auditing standards 2. Compilation and review standards 3. Other attestation standards 4. Consulting standards 5. 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.
Vision for the Future The AICPA has established the CPA Vision Project to provide a core purpose and a vision for the CPA profession in the year 2011 and beyond. The core purpose of the CPA Vision Project is: “CPAs…making sense of a changing and complex world.”
Vision for the Future Five Core Values: 1. Continuing education and life-long learning 2. Competence 3. Integrity 4. Attuned to broad business issues 5. Objectivity
Use generally accepted auditing standards as a basis for further study. Learning Objective 5
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 AuditingStandards General Standards 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care
Generally Accepted AuditingStandards Standards of Field Work 1. Proper planning and supervision 2. Understanding of the entity 3. Sufficient appropriate evidence
Generally Accepted AuditingStandards 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
Relationship Between GAAS and PCAOB Auditing Standards The term generally accepted auditing standards is no longer used for public company audits. The term GAAS continues to be used for audits of private companies. Public company audits refer to PCAOB auditing standards.
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
Discuss the role of international auditing standards. Learning Objective 6
International Standardson Auditing International Standards on Auditing (ISAs) are issued by the International Auditing Practice Committee of the International Federation of Accountants (IFAC).
International Standardson Auditing IFAC is the worldwide organization for the accountancy profession. The IFAC works to improve the uniformity of auditing practices and related services throughout the world.
Identify quality control standards and practices within the accounting profession. Learning Objective 7
Elements of Quality Control • Independence, integrity, and objectivity • Personnel management • Acceptance and continuation of clients • and engagements • Engagement performance • Monitoring
Relationships Quality control standards Generally accepted auditing standards AICPA practice sections Peer review
CPAs Encouraged to ConductThemselves at a High Level CPA 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