1. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 1 The CPA Profession Chapter 2

2. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 2 Learning Objective 1 Describe the nature of CPA firms, what they do, and their structure.

3. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 3 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.

4. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 4 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.

5. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 5 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.

6. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 6 Management Consulting Services Tax Services Accounting and Bookkeeping Services Activities of CPA Firms

7. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 7 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

8. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 8 Organizational Structure Proprietorship General Partnership General Corporation Professional Corporation Limited Liability Company Limited Liability Partnership

9. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 9 Hierarchy of a Typical CPA Firm Staff Level Staff Assistant Senior Auditor ExperienceTypical Responsibilities 0-2 years Performs most of the detailed audit work 2-5 years Responsible for the audit field work, including supervising staff work

10. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 10 Hierarchy of a Typical CPA Firm Staff Level Manager Partner ExperienceTypical Responsibilities 5-10 years Helps the plan, manages the audit, reviews work, and works with the client 10 + years Reviews audit work and makes significant audit decision

11. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 11 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.

12. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 12 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 Sender’s mail server Receiver’s mail server Receiver’s mail server

13. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 13 Learning Objective 3 Describe the key functions performed by the AICPA. Describe the key functions performed by the AICPA.

14. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 14 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

15. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 15 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.”

16. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 16 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.

17. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 17 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.

18. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 18 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

19. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 19 Establishing Standards and Rules 1.Auditing Standards 2.Compilation and Review Standards 3.Other Attestation Standards 4.Code of Professional Conduct

20. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 20 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

21. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 21 Learning Objective 4 Use generally accepted auditing standards as a basis for further study. Use generally accepted auditing standards as a basis for further study.

22. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 22 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 bemaintained by the auditor or auditors. General Standards 3. Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report.

23. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 23 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

24. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 24 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.

25. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 25 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

26. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 26 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. Standards of Reporting

27. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 27 Summary of General Standards Generally Accepted Auditing Standards General 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care Field Work 1. Proper planning and supervision 2. Internal control understanding 3. Sufficient competent evidence 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

28. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 28 Learning Objective 5 Discuss the role of international auditing standards. Discuss the role of international auditing standards.

29. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 29 International Standards on Auditing International Standards on Auditing (ISAs) are issued by the International Auditing Practice Committee of the International Federation of Accountants (IFAC).

30. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 30 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.

31. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 31 Learning Objective 6 Identify quality control standards and practices within the accounting profession. Identify quality control standards and practices within the accounting profession.

32. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 32 Elements of Quality Control Independence, integrity, and objectivity Personnel management Acceptance and continuation of clients and engagements Engagement performance Monitoring

33. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 33 Relationships Quality control standards Generally accepted auditing standards Division of CPA firms Peer review

34. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 34 Learning Objective 7 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.

35. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 35 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

36. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 36 Forms S-1 to S-16 Securities and Exchange Commission Form 8-K Form 10-K Form 10-Q

37. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 37 CPAs Encouraged to Conduct Themselves at a High Level Conduct of CPA firm personnel CPA examination GAAS and interpretations Continuing education requirements

38. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 38 CPAs Encouraged to Conduct Themselves at a High Level Conduct of CPA firm personnel SEC Peer review Quality control

39. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 39 CPAs Encouraged to Conduct Themselves at a High Level Conduct of CPA firm personnel Legal liability Division of CPA firms Code of Professional Conduct

40. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 40 End of Chapter 2