Presentation on theme: "The Audit Standards’ Setting Process"— Presentation transcript:
1 The Audit Standards’ Setting Process Chapter 2The Audit Standards’ Setting Process1
2 Learning ObjectivesDescribe the nature of CPA firms, what they do, and their structure.Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.Summarize the role of the Securities and Exchange Commission in accounting and auditing.
3 Learning Objectives Describe the functions performed by the AICPA. Understand the role of international auditing standards and their relation to U.S. auditing standards.Use U.S. auditing standards as a basis for further study.Identify quality control standards and practices within the accounting profession.
4 1 Describe the nature of CPA firms, what they do, and their structure.
5 Certified Public Accounting Firms The legal right to perform audits is grantedto CPA firms by regulation in each state.CPA firms also provide many other services totheir clients, such as tax and advisory services.CPA firms continue to develop new products and services—such as financial planning, business valuation, forensic accounting, and information technology advisory services.
6 Certified Public Accounting Firms Big Four international firmsNational firmsRegional and large local firmsSmall local firms2-6
7 Certified Public Accounting Firms The four largest CPA firms in the United Statesare called the “Big Four” international CPA firms.These four firms have offices throughout theUnited States and in many cities throughoutthe world.Over 30 years ago the largest CPA firms were known as the “Big Eight”. These eight firms dominated the market and audited the vast majority of public and large private companies. Several “Big Eight” firms merged to increase their geographic presence in 1988 and Another merger occurred in 1997 to create the “Big Five”. When Arthur Andersen liquidated in 2002, only four large international firms remained.
9 Activities of CPA Firms Accounting and bookkeeping servicesTax servicesManagement consulting servicesMany small companies with limited accounting staff rely on CPA firms to prepare their financial statements.CPA firms prepare corporate and individual tax returns for both audit and non-audit clients. Almost every CPA firm performs tax services.Most CPA firms provide certain services that enable their clients to operate their businesses more effectively. The ability to provide this value added service often distinguishes one firm from another.
10 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 encouragecompetence.3. The increased litigation risk faced by auditors.Independence permits auditors to remain unbiased in drawing conclusions about financial statements.Competence permits auditors to conduct audits and perform other services efficiently and effectively.Litigation costs are increasing for all audit firms. Some organizational structures afford a degree of protection to individual firm members.
11 Organizational Structure ProprietorshipGeneral PartnershipGeneral CorporationProfessional CorporationLLC combines the most favorable attributes of a general corporation and a partnership. Owners have limited personal liability.An LLP is owned by one or more partners and taxed like a general partnership, but the personal liability protection of an LLP is less than that of a general corporation or an LLC.Limited Liability CompanyLimited Liability Partnership
12 Hierarchy of a Typical CPA Firm Average Experience10+ years5-10 years2-50-2PartnersManagersSeniors and In-Charge AuditorsStaff AssistantsStaff perform most of the audit field work.Seniors are responsible for the field work and supervise the staff.Managers help plan the audit, manage the audit, review the audit work and work with the client to resolve any issues identified.Partners review all audit areas and makes significant decisions. The partner signs the audit report.
13 2Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.
14 Sarbanes-Oxley Act This Act is considered by many observers to be the most important legislation affectingthe auditing profession since the 1930s.The provisions of the Act apply to publiclyheld companies and their audit firms.
15 Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting Oversight Board)The Sarbanes-Oxley Act established the PCAOB which is overseen by the SEC. The PCAOB provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits and performs inspections of the quality controls at audit firms performing those audits.
16 3Summarize the role of the Securities and Exchange Commission in accounting and auditing.
17 Securities and Exchange Commission The purpose is to assist in providing investorswith reliable information upon which to makeinvestment decisionsThe Securities Act of 1933The Securities Exchange Act of 1934The 1933 Act requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval.The 1934 Act provides additional protection by requiring public companies and others to file detailed annual reports with the Commission. The Commission examines these statements for completeness and adequacy before permitting the company to sell its securities through the exchanges.
18 Securities and Exchange Commission Form S-1Form 8-KForm 10-KForm 10-QForm S-1 applies to new securities.Form 8-K is field to report significant events that are of interest to public investors.Form 10-K must be filed annually within days after the close of each fiscal year, depending on the size of the company.Form 10-Q must be filed quarterly for all publicly held companies.
19 Describe the key functions performed by the AICPA. 4Describe the key functions performed by the AICPA.
20 AICPA Performs the following services for CPAs: Sets professional requirementsConducts researchPublishes materials related to servicesperformedSuch services include the following:Accounting, auditing, attestation and assurance services,management consulting services, and taxes.All AICPA members and other practicing CPAs must follow thestandards and guidelines set by the AICPA.Empowered to set standards (guidelines)and rules
21 Establishing Standards and Rules 1. Auditing standards2. Compilation and review standards3. Other attestation standards4. Code of Professional Conduct
22 Other AICPA Functions The CPA examination Research and Grants Publishes a variety of materialsProvides seminars andcontinuing education
23 5Understand the role of international auditing standards and their relation to U.S. auditing standardsThe AICPA auditing standards board has undertaken a significant effort to make U.S. Generally Accepted Auditing Standards (GAAS) easier to read, understand and apply. The project originated with the ASB plan to converge U.S. GAAS with the ISAs and align its agenda with the IAASB. The foundation of the clarity project is the establishment of an objective for each auditing standard to reflect a principles–based approach to the standard setting.
24 Statements on Auditing Standards Classification of Statements on Auditing StandardsGAAS and Standards of Performance
25 International Standards on Auditing IFAC is the worldwide organizationfor the accountancy profession.The IAASB works to improve theuniformity of auditing practices andrelated services throughout the world.
26 International Standards on Auditing ISAs do not override a country's regulations governing the audit of financial or other information as each country’s own regulations generally govern audit practices.
27 Use U.S. auditing standards as a basis for further study 6Use U.S. auditing standards as a basis for further study
28 GAASThese standards represent the minimum standards of performance.
29 PCAOB Auditing Standards – United States General Standards1. Adequate training and proficiency2. Independence in mental attitude3. Due professional careThe auditor must have adequate technical training and proficiency to perform the audit.The auditor must maintain independence in mental attitude in all matters relatingto the audit.The auditor must exercise due professional care in the performance of the audit and thepreparation of the report.
30 PCAOB Auditing Standards – United States Standards of Field Work1. Proper planning and supervision2. Understanding of the entity3. Sufficient appropriate evidenceThe auditor must adequately plan the work and must properly supervise any assistants.The auditor must obtain a sufficient understanding of the entity and its environment, including itsinternal control, to assess the risk of material misstatement and to design further auditprocedures.The auditor must obtain sufficient and appropriate audit evidence by performing audit proceduresto afford a reasonable basis for an opinion regarding the financial statements under audit.
31 PCAOB Auditing Standards – United States Standards of Reporting1. Statements prepared in accordance with GAAP2. Circumstances when GAAP not followed3. Adequacy of disclosures4. Expression of opinion on financial statementsThe report shall state whether the financial statements are presented in accordance withgenerally accepted accounting principles.The report shall identify those circumstances in which such principles have not beenconsistently observed in the current period in relation to the preceding period.Informative disclosures in the financial statements are to be regarded as reasonablyadequate unless otherwise stated in the report.The report shall contain an expression of opinion regarding the financial statements,taken as a whole.
32 Relationship Between ASB and PCAOB Auditing Standards The PCAOB initially adopted GAAS as interim standards.The term generally accepted auditing standards is no longer used for public company audits.The term ASB will be used for audits of private companies.Public company audits refer to PCAOB auditing standards.PubliccompanyauditsPrivatecompanyaudits
33 Statements on Auditing Standards The 10 generally accepted auditing standardsare too general to provide meaningful guidance.SAS interpret the 10 generally acceptedauditing standards and are the mostauthoritative references available to auditors.
34 7Identify quality control standards and practices within the accounting profession.
35 Elements of Quality Control Leadership responsibilities for qualityRelevant ethical requirementsAcceptance and continuation of clientsand engagementsHuman resourcesEngagement performanceEach firm should document its quality control policies and procedures. Procedures should depend on such things as the size of the firm, number of practice offices and the nature of the practice.Monitoring
37 CPAs Encouraged to Conduct Themselves at a High Level AuditingstandardsContinuingeducationrequirementsCPAexaminationQualitycontrolConduct ofCPA firmpersonnelLegalliabilityPeerreviewAICPA practiceand qualitycentersCode ofProfessionalConductPCAOBand SEC
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