2 - 1 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley The CPA Profession Chapter 2

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 1 Describe the nature of CPA firms, what they do, and their structure. what they do, and their structure.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Certified Public Accounting Firms The legal right to perform audits is granted to CPA firms by each state. CPA firms also provide many other services to their clients, such as tax and consulting services. CPAs continue to develop new products and services—such as financial planning, business valuation and information technology.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Certified Public Accounting Firms  Big Four international firms  National firms  Regional and large local firms  Small local firms

©2012 Prentice Hall Business Publishing, Auditing 14/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.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Certified Public Accounting Firms

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley  Management consulting services  Tax services  Accounting and bookkeeping services Activities of CPA Firms

©2012 Prentice Hall Business Publishing, Auditing 14/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.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Organizational Structure  Proprietorship  Professional corporation  General partnership  Limited liability company  General corporation  Limited liability partnership

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Staff Assistants Hierarchy of a Typical CPA Firm Seniors and In-charge Auditors Managers Partners Breadth of Experience 10+ years

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 2 Understand the impact of the PCAOB and Sarbanes-Oxley on the CPA profession.

©2012 Prentice Hall Business Publishing, Auditing 14/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.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting Oversight Board)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 3 Summarize the role of the Securities and Exchange Commission in accounting and auditing.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley The purpose is to assist in providing investors with reliable information upon which to make investment decisions  The Securities Act of 1933  The Securities Exchange Act of 1934 Securities and Exchange Commission

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Securities and Exchange Commission  Form S-1  Form 8-K  Form 10-K  Form 10-Q

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 4 Describe the key functions performed by the AICPA.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Performs the following services for CPAs:  Sets professional requirements  Conducts research  Publishes materials related to services performed AICPA Empowered to set standards (guidelines) and rules

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Establishing Standards and Rules 1.Auditing standards 2.Compilation and review standards 3.Other attestation standards 4.Code of Professional Conduct

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Other AICPA Functions Research and Grants The CPA examination Provides seminars and continuing education Publishes a variety of materials

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 5 Understand the role of international auditing standards and their relation to U.S. auditing standards

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley  GAAS and Standards of Performance Statements on Auditing Standards  Classification of Statements on Auditing Standards

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley International Standards on 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.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley International Standards on Auditing

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 6 Use U.S. auditing standards as a basis for further study

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley GAAS

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Generally Accepted Auditing Standards – United States General Standards 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Generally Accepted Auditing Standards – United States Standards of Field Work 1. Proper planning and supervision 2. Understanding of the entity 3. Sufficient appropriate evidence

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Generally Accepted Auditing Standards – United States 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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Relationship Between GAAS and PCAOB Auditing Standards PCAOB Public company audits Private company audits GAAS

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley The 10 generally accepted auditing standards are too general to provide meaningful guidance. SAS interpret the 10 generally accepted auditing standards and are the most authoritative references available to auditors. Statements on Auditing Standards

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Learning Objective 7 Identify quality control standards and practices within the accounting profession.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Elements of Quality Control  Independence, integrity, and objectivity  Personnel management  Acceptance and continuation of clients and engagements  Engagement performance  Monitoring

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Relationships

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley CPAs Encouraged to Conduct Themselves at a High Level Legal liability AICPA practice sections Continuing education requirements GAAS and interpretations Code of Professional Conduct CPA examination Quality control Peer review PCAOB and SEC Conduct of CPA firm personnel

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley End of Chapter 2