The CPA Profession

Chapter 2

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Learning Objective 1
Describe the nature of CPA firms, what they do, and their structure.

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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.
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Certified Public Accounting Firms

Big Four international firms

National firms
Regional and large local firms Small local firms

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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.

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Activities of CPA Firms

Accounting and bookkeeping services Tax services Management consulting services

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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.

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Organizational Structure
Proprietorship Professional corporation

General partnership
Limited liability company General corporation Limited liability partnership

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Hierarchy of a Typical CPA Firm

Staff Level Experience Typical Responsibilities Staff assistant Senior or in-charge auditor 0-2 years Performs most of the detailed audit work Responsible for the audit field work, including supervising staff work
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2-5 years

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Hierarchy of a Typical CPA Firm

Staff Level Experience Typical Responsibilities Manager Helps plan the audit, manages the audit, 5-10 years reviews work, and works with the client 10+ years Reviews audit work and makes significant audit decisions
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Partner

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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.

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Sarbanes-Oxley Act
This Act is considered by many observers to be the most important legislation affecting the auditing profession since the 1930s. The provisions of the Act apply to publicly held companies and their audit firms.

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Sarbanes-Oxley Act
SEC

PCAOB (Public Company Accounting Oversight Board)

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Sarbanes-Oxley Act
The PCAOB conducts inspections of registered accounting firms and assess their compliance with the rules of the PCAOB and the SEC.

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Learning Objective 3
Summarize the role of the Securities and Exchange Commission in accounting and auditing.

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Securities and Exchange Commission

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.

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Securities and Exchange Commission

Form S-1 Form 8-K

Form 10-K
Form 10-Q

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Learning Objective 4
Describe the key functions performed by the AICPA.

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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.

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Establishing Standards and Rules

The AICPA is empowered to set standards (guidelines) and rules that all members and other practicing CPAs must follow.

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Establishing Standards and Rules

1. Auditing standards 2. Compilation and review standards 3. Other attestation standards 4. Consulting standards 5. Code of Professional Conduct
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Other AICPA Functions

Writes and grades the CPA examination. Supports research by its own staff and provides grants to others. Publishes a variety of materials. Provides seminars and education in a variety of subject matters.
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Learning Objective 5
Discuss the nature of United States and international auditing standards

Generally Accepted Auditing Standards

General qualifications and conduct

Adequate training and proficiency

Field Work performance of the audit

Proper planning and supervision

Reporting results
Whether statements were prepared in accordance with GAAP Circumstances when GAAP not consistently followed Adequacy of informative disclosures Expression of opinion on financial statements
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Independence in mental attitude

Due professional care

Sufficient understanding of the entity, its environment, and its internal control
Sufficient appropriate evidence

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Statements on Auditing Standards

Classification of Statements on Auditing Standards GAAS and Standards of Performance

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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.

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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).

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Learning Objective 6
Use generally accepted auditing standards as a basis for further study

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Generally Accepted Auditing Standards- United States

General Standards 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care

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U.S. Generally Accepted Auditing Standards General Standards

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. 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.
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Generally Accepted Auditing Standards United States

Standards of Field Work 1. Proper planning and supervision 2. Understanding of the entity 3. Sufficient appropriate evidence

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Standards of Field Work

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. 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.
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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

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Standards of Reporting
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.

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Standards of Reporting

(Contd)

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.

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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.
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Statements on 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.

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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).

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Learning Objective 7
Identify quality control standards and practices within the accounting profession.

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Elements of Quality Control

Independence, integrity, and objectivity Personnel management Acceptance and continuation of clients and engagements

Engagement performance
Monitoring
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Relationships
Quality control standards Generally accepted auditing standards

AICPA practice sections

Peer review

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CPAs Encouraged to Conduct Themselves at a High Level

CPA examination GAAS and interpretations Continuing education requirements

Quality control

Conduct of CPA firm personnel

Legal liability

Peer review PCAOB and SEC Code of Professional Conduct

AICPA practice sections

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End of Chapter 2

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