Learning Objective 1 Describe the nature of CPA firms, what they do, and their structure.
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. CPAs continue to develop new products and services- such as financial planning, business valuation and information technology.
Certified Public Accounting Firms Big Four international firms National firms Regional and large local firms Small local firms
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.
Management consulting services Tax services Accounting and bookkeeping services Activities of CPA Firms
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.
Organizational Structure Proprietorship Professional corporation General partnership Limited liability company General corporation Limited liability partnership
Hierarchy of a Typical CPA Firm Staff LevelExperienceTypical Responsibilities Staff assistant 0-2 years Performs most of the detailed audit work Senior or in-charge auditor 2-5 years Responsible for the audit field work, including supervising staff work
Hierarchy of a Typical CPA Firm Staff LevelExperienceTypical Responsibilities Manager5-10 years Helps plan the audit, manages the audit, reviews work, and works with the client Partner10+ years Reviews audit work and makes significant audit decisions
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.
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.
Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting Oversight Board)
Sarbanes-Oxley Act The PCAOB conducts inspections of registered accounting firms and assess their compliance with the rules of the PCAOB and the SEC.
Learning Objective 3 Summarize the role of the Securities and Exchange Commission in accounting and auditing.
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
Learning Objective 4 Describe the key functions performed by the AICPA.
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
The AICPA is empowered to set standards (guidelines) and rules that all members and other practicing CPAs must follow. Establishing Standards and Rules
1.Auditing standards 2.Compilation and review standards 3.Other attestation standards 4.Consulting standards 5.Code of Professional Conduct
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.
Learning Objective 5 Discuss the nature of United States and international auditing standards Generally Accepted Auditing Standards General qualifications and conduct Field Work performance of the audit Reporting results Adequate training and proficiency Independence in mental attitude Due professional care Proper planning and supervision Sufficient understanding of the entity, its environment, and its internal control Sufficient appropriate evidence Whether statements were prepared in accordance with GAAP Circumstances when GAAP not consistently followed Adequacy of informative disclosures Expression of opinion on financial statements
GAAS and Standards of Performance Statements on Auditing Standards Classification of Statements on Auditing Standards
International Standards on Auditing IFAC is the worldwide organization for the accountancy profession. The IFAC works to improve the uniformity of auditing practices and related services throughout the world.
International Standards on Auditing International Standards on Auditing (ISAs) are issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC).
Learning Objective 6 Use generally accepted auditing standards as a basis for further study
Generally Accepted Auditing Standards- United States General Standards 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care
1. The auditor must have adequate technical training and proficiency to perform the audit. 2.The auditor must maintain independence in mental attitude in all matters relating to the audit. U.S. Generally Accepted Auditing Standards General Standards 3.The auditor must exercise due professional care in the performance of the audit and the preparation of the report.
Generally Accepted Auditing Standards – United States Standards of Field Work 1. Proper planning and supervision 2. Understanding of the entity 3. Sufficient appropriate evidence
1. The auditor must adequately plan the work and must properly supervise any assistants. 2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement and to design further audit procedures. Standards of Field Work 3.The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
Generally Accepted Auditing Standards-United States Standards of 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
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
Standards of Reporting (Cont’d) 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.
Relationship Between GAAS and PCAOB Auditing Standards 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. Public company audits refer to PCAOB auditing standards.
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
AICPA Clarity and Convergence Project The AICPA Auditing Standards Board has undertaken a significant effort to make GAAS easier to read, understand and apply. This project is similar to an effort by the International Auditing and Assurance Standards Board to clarify International Standards on Auditing. (IAASB).
Learning Objective 7 Identify quality control standards and practices within the accounting profession.
Elements of Quality Control Independence, integrity, and objectivity Personnel management Acceptance and continuation of clients and engagements Engagement performance Monitoring
Relationships Quality control standards Generally accepted auditing standards AICPA practice sections Peer review
CPAs Encouraged to Conduct Themselves at a High Level Legal liability AICPA practice sections Continuing education requirements GAAS and interpretations Code of Professional Conduct CPA examination Quality control Peer review PCAOB and SEC Conduct of CPA firm personnel