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Assurance services The broad range of information enhancement services that are provided by certified public accountants (CPAs). Two types: Increase reliability.

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Presentation on theme: "Assurance services The broad range of information enhancement services that are provided by certified public accountants (CPAs). Two types: Increase reliability."— Presentation transcript:


2 Assurance services The broad range of information enhancement services that are provided by certified public accountants (CPAs). Two types: Increase reliability of information Putting information into a form or context that facilitates decision making.

3 Types of Services Assurance Services NonAssurance Services
Attestation Services Example: Audits of Financial Statements, Examinations of Internal Control Other Assurance Services Example: CPA ElderCare Prime Plus Services NonAssurance Services Tax Services Management Consulting Services Other

4 Attestation Services To attest to information means to provide assurance as to its reliability Attest engagement: A practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g. management)

5 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

6 Suitable criteria Standards established or developed by groups of experts. Example: Internal control audit – standards established by a committee of experts on internal control Example: Financial statement audit – standards are GAAP. For a financial statement audit suitable criteria are referred to as the “applicable financial reporting framework.”

7 Forms of Attestation

8 Audit of Financial Statements
Management The Auditors Prepares Financial Statements Criteria (e.g., GAAP) Gathers Evidence Issues Report Financial Statements The Auditors’ Report *Applicable financial reporting framework 4 6

9 Financial Statement Audit
Auditors gather evidence and provide a high level of assurance that the financial statements follow GAAP, or some other appropriate basis of accounting Audit involves searching and verifying accounting records and examining other documents Evidence necessary to issue an audit report that states auditors’ opinion

10 Audit Evidence Evidence focuses on whether financial statements are presented in accordance with GAAP; examples: Balance sheet contains all liabilities Income statement Sales really occurred Sales have been recorded at appropriate amounts Recorded costs and expenses are applicable to period All expenses have been recognized Financial statement amounts Accurate, properly classified and summarized Notes are informative and complete

11 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

12 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

13 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

14 Financial Audits Audit of the financial statements of an entity
Covers the balance sheet and related statements of income, retained earnings and cash flows Goal is to determine if prepared in conformity with GAAP Performed by CPAs Users include management, investors, bankers, creditors, financial analysts, government agencies

15 Other Types of Audits Compliance Audits Operational Audits
Example: IRS audit of income tax return Operational Audits Example: Effectiveness of operations of receiving department of a manufacturing company Integrated Audits Example: Assurance on both the financial statements and effectiveness of internal control over financial reporting 7 9

16 Other Types of Auditors
Internal Auditors Government Accountability Office Auditors Tax Auditors

17 Internal Auditors Employed by a company as an employee They often
perform operational and compliance audits address internal control report to the audit committee of the board of directors and to the president The Institute of Internal Auditors is the international organization of internal auditors.

18 Government Accountability Office Auditors (GAO Auditors)
Headed by the comptroller general Responsibility of supporting Congress Perform Compliance, operational and financial audits of government agencies Examinations of corporations holding government contracts to verify contract payments have been proper

19 Tax Auditors Responsible for enforcement of tax laws of various sorts (e.g., state and federal income taxes, property taxes, sales taxes) Internal revenue agents generally perform compliance audits of income tax returns

20 AICPA’s Traditional Role
Establish Standards Research and Publication Continuing Professional Education Self-Regulation Note: Much of the standards setting and regulation roles relating to public companies (referred to as “issuers”) has been taken over by the SEC and the PCAOB. 9 11

21 Establishes Standards--Examples
AICPA Auditing Standards Board Issues official pronouncements on auditing matters for nonpublic companies (“nonissuers”) Statements on Auditing Standards (SASs) Statements on Standards for Attestation Engagements (SSAEs) Guidance for attesting to information other than financial statements such as financial forecasts Accounting and Review Services Committee Statements on Standards for Accounting and Review Services (SSARS) Standards for compilations or reviews not audits of financial statements

22 Research and Publication
Publications Journal of Accountancy (monthly) The Tax Advisor Audit publications Industry Audit and Accounting Guides Audit Risk Alerts Auditing Practice Releases Other publications Accounting Research Studies Statements of Position Accounting Trends & Techniques

23 Continuing Professional Education
Development of continuing professional education programs Necessary for continuing education requirement for CPA certificate Offered by AICPA State societies Other professional organizations

24 Professional Regulation
Regulations of Individual CPAs Code of Professional Conduct – ethical rules for CPAs Requirements for regular membership in AICPA Regulation of Public Accounting Firms Division for Public Accounting Firms Center for Public Company Audit Firms Private Companies Practice Section (PCPS)

25 The CPA Examination Uniform national examination prepared and graded by the AICPA Computerized exam includes multiple choice and simulations in four parts Auditing and Attestation Financial Accounting & Reporting Regulation Business Environment & Concepts

26 State Boards of Accountancy
Issue CPA certificates All boards require successful completion of CPA examination Education and experience requirements vary National Association of State Boards of Accounting (NASBA)

27 Other Parties FASB GASB FASAB
Sets GAAP for entities other than federal, state and local governments GASB Standards of financial accounting for state and local government entities FASAB Accounting standards for the US government

28 PCAOB Role Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports for SEC registrants 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

29 Securities and Exchange Commission (SEC)
Agency of the US government Oversight responsibility for the PCAOB Objectives Protect investors and public by requiring full disclosure of financial information by companies offering securities for sale to the public Prevent misrepresentation, deceit, or other fraud in the sale of securities

30 Securities and Exchange Commission (SEC )
Registration statements Qualify securities for sales Contains audited financial statements Makes SEC major user of financial statements Protects investors Regulation S-X Basic accounting regulation

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

32 Organization of the Public Accounting Profession
Sole proprietorship Partnerships Professional Corporation Limited Liability Partnership (LLP) Limited Liability Company (LLC)

33 Categories of Public Accounting Firms
Local Regional National Big 4 Alternative Practice Structures

34 Industry Specialization
Firms with detailed knowledge and understanding of a client’s industry Helps firms Be more effective at collecting and evaluating audit evidence Make valuable suggestions to improve client’s operations Provide the client consulting services

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

36 Responsibilities on an Engagement
Partner—Overall responsibility is to assure that that audit is performed in accordance with professional standards. Manager—Supervise overall engagement. Seniors—”In charge” auditor on a daily basis. Staff assistants—Work under the immediate supervision of the senior.

37 Elements of Public Accounting Work
Professional Developments Stay current on developments within the profession Seasonal fluctuations Busy season from December through April Relationships with clients Need to maintain independence

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