©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley The CPA Profession Chapter 2

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 1 Describe the nature of CPA firms, what they do, and their structure.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Certified Public Accounting Firms There are less than 200 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Managementconsultingservices Taxservices Accountingandbookkeepingservices Activities of CPA Firms

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Organizational Structure Proprietorship General partnership General corporation Professional corporation Limited liability company Limited liability partnership

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Hierarchy of a Typical CPA Firm Staff Level Experience Typical Responsibilities StaffAssistant 0-2 years Performs most of the detailed audit work SeniorAuditor 2-5 years Responsible for the audit field work, including supervising staff work

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Hierarchy of a Typical CPA Firm Staff Level Manager Experience Typical Responsibilities 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 2 Discuss how e-commerce and the Internet affect CPA firm operations. Discuss how e-commerce and the Internet affect CPA firm operations.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 3 Describe the key functions performed by the AICPA. Describe the key functions performed by the AICPA.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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. AICPA

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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.”

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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. The market demands less audit and accounting and more value-adding consulting services.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Establishing Standards and Rules 1.Auditing standards 2.Compilation and review standards 3.Other attestation standards 4.Consulting standards 5.Code of Professional Conduct

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 4 Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession. Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley This Act is considered by many observers to be the most important legislation affecting the auditing profession since the 1930s. Sarbanes-Oxley Act The provisions of the Act apply to publicly held companies and their audit firms.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Sarbanes-Oxley Act SEC PCAOB (5 members)

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 5 Summarize the role of the Securities and Exchange Commission in accounting and auditing. Summarize the role of the Securities and Exchange Commission in accounting and auditing.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Forms S-1 to S-16 Securities and Exchange Commission Form 8-K Form 10-K Form 10-Q

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 6 Use generally accepted auditing standards as a basis for further study. Use generally accepted auditing standards as a basis for further study.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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 bemaintained by the auditor or auditors. General Standards

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley General Standards 3. Due professional care is to be exercised inthe planning and performance ofthe audit and the preparation of the report.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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. Standards of Reporting

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Summary of General Standards Generally Accepted Auditing Standards General 1. Adequate training and proficiency and proficiency 2. Independence in mental attitude mental attitude 3. Due professional care care Field Work 1. Proper planning and supervision and supervision 2. Internal control understanding understanding 3. Sufficient competent competent evidence evidence Reporting 1. Statements prepared in accordance with GAAP accordance with GAAP 2. Circumstances when GAAP not followed GAAP not followed 3. Adequacy of disclosures 4. Expression of opinion on financial statements on financial statements

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 7 Discuss the role of international auditing standards. Discuss the role of international auditing standards.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley International Standards on Auditing International Standards on Auditing (ISAs) are issued by the International Auditing Practice Committee of the International Federation of Accountants (IFAC).

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 8 Identify quality control standards and practices within the accounting profession. Identify quality control standards and practices within the accounting profession.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Elements of Quality Control Independence, integrity, and objectivity Personnel management Acceptance and continuation of clients and engagements Engagement performance Monitoring

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Relationships Quality control standards Generally accepted auditing standards Division of CPA firms Peerreview

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Chapter Summary The nature of the CPA profession and the activities of CPA firms. The nature of the CPA profession and the activities of CPA firms.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley CPAs Encouraged to Conduct Themselves at a High Level Conduct of CPA firm personnel Legalliability Division of CPA firms Continuingeducationrequirements GAAS and interpretations Code of ProfessionalConduct CPAexamination Qualitycontrol Peerreview PCAOB and SEC

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley End of Chapter 2