The Role of the Public Accountant in the American Economy

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Presentation transcript:

The Role of the Public Accountant in the American Economy Chapter 1 The Role of the Public Accountant in the American Economy 1

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. 2 2

Forms of Attestation

Audit of Financial Statements Management The Auditors Prepares Financial Statements Criteria (e.g., GAAP) Gathers Evidence Issues Report Financial Statements The Auditors’ Report 4 6

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 5 7

History of the Attest Function Period Developments Audit Objective Nature of Audit Ancient - 1850 Audits of city states, individuals & ventures Detection of fraud Detailed; No reliance on controls 1850-1905 Industrial revolution resulted in the need for corporate audits Detection of fraud & clerical errors Some testing; No reliance on controls 1905-1940 Development of stock markets - increased emphasis on earnings Determination of fairness; detection of fraud & errors Increased emphasis on testing; Slight reliance on controls 1940-1975 Development of auditing standards Determination of fairness Substantial reliance on controls 1975-1985 Criticism by Congress; Increased self-regulation Internal control determines scope of audit 1985-1995 Increased demands for reporting on compliance & internal control Risk assessment determines audit scope; must assess risk of fraud 1995-Present Panel on Audit Effectiveness; Sarbanes-Oxley Act of 2002 Business risk approach to audits 6 8

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

Types of Audits Audits of Financial Statements Compliance Audits Operational Audits 7 9

Types of Auditors External Auditors Internal Auditors GAO Auditors Tax Auditors 8 10

AICPA’s Traditional Role Establishes Standards Research and Publication Continuing Professional Education Self-Regulation CPA Examination Note: The standards setting and regulation roles have been taken over by the SEC and the PCAOB with respect to auditors of public companies. 9 11

PCAOB Role Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports 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

Types of Professional Services Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation 10 12

Typical Structure of a National CPA Firm Partners Managers Seniors Staff 11 13