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 NonAssurance 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 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 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

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

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 4 6

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 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? 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

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 Compliance Audits Operational 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 7 9

Other Types of Auditors Internal Auditors Government Accountability Office Auditors Tax 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) 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 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 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. 9 11

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 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 Development of continuing professional education programs Necessary for continuing education requirement for CPA certificate Offered by AICPA State societies Other professional organizations

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 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 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 FASB GASB FASAB 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 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) 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 (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 Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation 10 12

Organization of the Public Accounting Profession Sole proprietorship Partnerships Professional Corporation Limited Liability Partnership (LLP) Limited Liability Company (LLC)

Categories of Public Accounting Firms Local Regional National Big 4 Alternative Practice Structures

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 Partners Managers Seniors Staff Assistant 11 13

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 Professional Developments Stay current on developments within the profession Seasonal fluctuations Busy season from December through April Relationships with clients Need to maintain independence