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The Role of the Public Accountant in the American Economy

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Presentation on theme: "The Role of the Public Accountant in the American Economy"— Presentation transcript:

1 The Role of the Public Accountant in the American Economy
Chapter 1 The Role of the Public Accountant in the American Economy 1

2 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

3 Forms of Attestation

4 Audit of Financial Statements
Management The Auditors Prepares Financial Statements Criteria (e.g., GAAP) Gathers Evidence Issues Report Financial Statements The Auditors’ Report 4 6

5 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

6 History of the Attest Function
Period Developments Audit Objective Nature of Audit Ancient Audits of city states, individuals & ventures Detection of fraud Detailed; No reliance on controls Industrial revolution resulted in the need for corporate audits Detection of fraud & clerical errors Some testing; No reliance on controls Development of stock markets - increased emphasis on earnings Determination of fairness; detection of fraud & errors Increased emphasis on testing; Slight reliance on controls Development of auditing standards Determination of fairness Substantial reliance on controls Criticism by Congress; Increased self-regulation Internal control determines scope of audit 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

7 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

8 Types of Audits Audits of Financial Statements Compliance Audits
Operational Audits 7 9

9 Types of Auditors External Auditors Internal Auditors GAO Auditors
Tax Auditors 8 10

10 AICPA’s Traditional Role
Establishes Standards Research and Publication Continuing Professional Education Self-Regulation CPA Examination Note: The standards setting and regulation roles have been taken over by the SEC and the PCAOB with respect to auditors of public companies. 9 11

11 PCAOB Role Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports 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

12 Types of Professional Services
Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation 10 12

13 Typical Structure of a National CPA Firm
Partners Managers Seniors Staff 11 13

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