The CPA Profession Chapter 2

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

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 The five largest CPA firms in the United States are called the “Big Five” international CPA firms. Three CPA firms in the United States are called national firms because they have offices in most major cities.

Certified Public Accounting Firms There are only approximately 100 regional and large local CPA firms with professional staffs of more than 50 people. More than 95% of all CPA firms have fewer than 25 professionals in a single-office firm.

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 Typical CPA Firm Staff Level Experience Typical Responsibilities Staff Assistant 0-2 years Performs most of the detailed audit work Senior Auditor 2-5 years Responsible for the audit field work, including supervising staff work

Hierarchy of a Typical CPA 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 decision

Discuss how e-commerce and the Internet affect Learning Objective 2 Discuss how e-commerce and the Internet affect CPA firm operations.

E-Commerce and CPA Firm Operations CPA firms are using the Internet to market their services. They also use the Internet to connect their global professional staff. Sender’s mail server Receiver’s mail server

Describe the key functions Learning Objective 3 Describe the key functions performed by the AICPA.

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.

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 The future success of the CPA profession relies a great deal on public perceptions of CPAs’ abilities and roles. CPAs must become market driven and not dependent on regulations to keep them in business. The market demands less audit and accounting and more value-adding consulting services.

Vision for the Future Specialization is critical for the future of the CPA profession. The market demands that CPAs be conversant in global business practices and strategies.

Establishing Standards and Rules 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.

Establishing Standards and Rules 1. Auditing Standards 2. Compilation and Review Standards 3. Other Attestation Standards 4. Code of Professional Conduct

Other AICPA Functions Supports research by its own staff and provides grants to others Writes and grades the CPA examination Provides seminars and education in a variety of subject matters

Use generally accepted auditing standards as a Learning Objective 4 Use generally accepted auditing standards as a basis for further study.

General Standards 1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. 2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. 3. Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report.

Standards of Field Work 1. The work is to be adequately planned and assistants, if any, are to be properly supervised. 2. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.

Standards of Field Work 3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations 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.

Summary of General Standards Generally Accepted Auditing Standards General Field Work Reporting 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care 1. Proper planning and supervision 2. Internal control understanding 3. Sufficient competent evidence 1. Statements prepared in accordance with GAAP 2. Circumstances when GAAP not followed 3. Adequacy of disclosures 4. Expression of opinion on financial statements

Learning Objective 5 Discuss the role of international auditing standards.

International Standards on Auditing International Standards on Auditing (ISAs) are issued by the International Auditing Practice Committee of the International Federation of Accountants (IFAC).

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

Identify quality control standards and practices Learning Objective 6 Identify quality control standards and practices within the accounting profession.

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 Division of CPA firms Peer review

Summarize the role of the Securities and Exchange Learning Objective 7 Summarize the role of the Securities and Exchange Commission in accounting and auditing.

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 Forms S-1 to S-16 Form 10-K Form 8-K Form 10-Q

CPAs Encouraged to Conduct Themselves at a High Level examination GAAS and interpretations Conduct of CPA firm personnel Continuing education requirements

CPAs Encouraged to Conduct Themselves at a High Level SEC Peer review Conduct of CPA firm personnel Quality control

CPAs Encouraged to Conduct Themselves at a High Level Legal liability Division of CPA firms Conduct of CPA firm personnel Code of Professional Conduct

End of Chapter 2