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