2. 2 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder The CPA Profession Chapter 2

3. 2 - 2 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 1 Describe the nature of CPA firms, what they do, and their structure.

4. 2 - 3 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.

5. 2 - 4 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.

6. 2 - 5 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Certified Public Accounting Firms Big Four international firms National firms Regional and large local firms Small local firms

7. 2 - 6 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Management consulting services Tax services Accounting and bookkeeping services Activities of CPA Firms

8. 2 - 7 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

9. 2 - 8 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Organizational Structure Proprietorship General partnership General corporation Professional corporation Limited liability company Limited liability partnership

10. 2 - 9 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Hierarchy of a Typical CPA Firm Staff Level Experience Typical Responsibilities Staffassistant 0-2 years Performs most of the detailed audit work Senior or in-chargeauditor 2-5 years Responsible for the audit field work, including supervising staff work

11. 2 - 10 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Hierarchy of a Typical CPA Firm Staff Level Experience Typical Responsibilities Manager 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

12. 2 - 11 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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. Firms take advantage of online resources and databases to help their staffs stay current on emerging business and standards-setting issues.

13. 2 - 12 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 2 Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.

14. 2 - 13 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.

15. 2 - 14 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting Oversight Board)

16. 2 - 15 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 3 Summarize the role of the Securities and Exchange Commission in accounting and auditing.

17. 2 - 16 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

18. 2 - 17 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Forms S-1 to S-16 Securities and Exchange Commission Form 8-K Form 10-K Form 10-Q

19. 2 - 18 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 4 Describe the key functions performed by the AICPA.

20. 2 - 19 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

21. 2 - 20 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder The AICPA is empowered to set standards (guidelines) and rules that all members And other practicing CPAs must follow. Establishing Standards and Rules

22. 2 - 21 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Establishing Standards and Rules 1.Auditing standards 2.Compilation and review standards 3.Other attestation standards 4.Consulting standards 5.Code of Professional Conduct

23. 2 - 22 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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 Publishes a variety of materials.

24. 2 - 23 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.”

25. 2 - 24 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Vision for the Future 1. Continuing education and life-long learning 2. Competence 3. Integrity 4. Attuned to broad business issues 5. Objectivity

26. 2 - 25 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 5 Use generally accepted auditing standards as a basis for further study.

27. 2 - 26 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

28. 2 - 27 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder General Standards 3. Due professional care is to be exercised inthe planning and performance ofthe audit and the preparation of the report.

29. 2 - 28 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

30. 2 - 29 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.

31. 2 - 30 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

32. 2 - 31 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

33. 2 - 32 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

34. 2 - 33 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder The term generally accepted auditing standards is no longer used for public company audits. The term GAAS continues to be used for audits of private companies. Relationship Between GAAS and PCAOB Auditing Standards Public company audits refer to PCAOB auditing standards.

35. 2 - 34 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder The 10 generally accepted auditing standards are too general to provide meaningful guidance. SASs interpret the 10 generally accepted auditing standards and are the most Authoritative references available to auditors. Statements on Auditing Standards

36. 2 - 35 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 6 Discuss the role of international auditing standards.

37. 2 - 36 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder International Standards on Auditing International Standards on Auditing (ISAs) are issued by the International Auditing Practice Committee of the International Federation of Accountants (IFAC).

38. 2 - 37 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.

39. 2 - 38 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 7 Identify quality control standards and practices within the accounting profession.

40. 2 - 39 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Elements of Quality Control Independence, integrity, and objectivity Personnel management Acceptance and continuation of clients and engagements Engagement performance Monitoring

41. 2 - 40 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationships Quality control standards Generally accepted auditing standards Division of CPA firms Peerreview

42. 2 - 41 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder CPAs Encouraged to Conduct Themselves at a High Level Legalliability Division of CPA firms Continuingeducationrequirements GAAS and interpretations Code of ProfessionalConduct CPAexamination Qualitycontrol Peerreview PCAOB and SEC Conduct of CPA firm personnel

43. 2 - 42 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder End of Chapter 2