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