The CPA Profession Chapter 2 2005 Prentice Hall

The CPA Profession Chapter 2 © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -1

Learning Objective 1 Describe the nature of CPA firms, what they do, and their structure. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -2

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. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -3

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. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -4

Certified Public Accounting Firms There are less than 200 regional and large local CPA firms with professional staffs of more than 50 people. More than 95% of all CPA firms have fewer than 25 professionals in a single-office firm. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -5

Activities of CPA Firms Accounting and bookkeeping services Tax services Management consulting services © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -6

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 © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -7

Organizational Structure Proprietorship Professional corporation General partnership Limited liability company General corporation Limited liability partnership © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -8

Hierarchy of a Typical CPA Firm Staff Level Experience Typical Responsibilities Staff Assistant Performs most of the detailed audit work 0 -2 years Senior Auditor Responsible for the audit 2 -5 years field work, including supervising staff work © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 -9

Hierarchy of a Typical CPA Firm Staff Level Experience Typical Responsibilities Manager Helps the plan, manages 5 -10 years the audit, reviews work, and works with the client Partner Reviews audit work and 10+ years makes significant audit decisions © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 10

Learning Objective 2 Discuss how e-commerce and the Internet affect CPA firm operations. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 11

E-Commerce and CPA Firm Operations CPA firms are using the Internet to market their services. They also use the Internet to connect their global professional staff. Sender’s mail server Receiver’s mail server © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 12

Learning Objective 3 Describe the key functions performed by the AICPA. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 13

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. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 14

Vision for the Future The AICPA has established the CPA Vision Project to provide a core purpose and a vision for the CPA profession in the year 2011 and beyond. The core purpose of the CPA Vision Project is “CPAs…making sense of a changing and complex world. ” © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 15

Vision for the Future The future success of the CPA profession relies a great deal on public perceptions of CPAs’ abilities and roles. CPAs must become market driven and not dependent on regulations to keep them in business. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 16

Vision for the Future The market demands less audit and accounting and more value-adding consulting services. Specialization is critical for the future of the CPA profession. The market demands that CPAs be conversant in global business practices and strategies. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 17

Establishing Standards and Rules The AICPA is empowered to set standards (guidelines) and rules that all members and other practicing CPAs must follow. The requirements are set by committees made up of AICPA members. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 18

Establishing Standards and Rules 1. Auditing standards 2. Compilation and review standards 3. Other attestation standards 4. Consulting standards 5. Code of Professional Conduct © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 19

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 © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 20

Learning Objective 4 Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 21

Sarbanes-Oxley Act This Act is considered by many observers to be the most important legislation affecting the auditing profession since the 1930 s. The provisions of the Act apply to publicly held companies and their audit firms. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 22

Sarbanes-Oxley Act SEC PCAOB (5 members) © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 23

Learning Objective 5 Summarize the role of the Securities and Exchange Commission in accounting and auditing. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 24

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. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 25

Securities and Exchange Commission Forms S-1 to S-16 Form 10 -K Form 8 -K Form 10 -Q © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 26

Learning Objective 6 Use generally accepted auditing standards as a basis for further study. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 27

General Standards 1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. 2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 28

General Standards 3. Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 29

Standards of Field Work 1. The work is to be adequately planned and assistants, if any, are to be properly supervised. 2. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 30

Standards of Field Work 3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 31

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. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 32

Standards of Reporting 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. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 33

Summary of General Standards Generally Accepted Auditing Standards General Field Work 1. Adequate training 1. Proper planning and proficiency and supervision 2. Independence in 2. Internal control mental attitude understanding 3. Due professional 3. Sufficient care competent evidence 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 © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 34

Learning Objective 7 Discuss the role of international auditing standards. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 35

International Standards on Auditing (ISAs) are issued by the International Auditing Practice Committee of the International Federation of Accountants (IFAC). © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 36

International Standards on Auditing IFAC is the worldwide organization for the accountancy profession. The IAPC works to improve the uniformity of auditing practices and related services throughout the world. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 37

Learning Objective 8 Identify quality control standards and practices within the accounting profession. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 38

Elements of Quality Control Independence, integrity, and objectivity Personnel management Acceptance and continuation of clients and engagements Engagement performance Monitoring © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 39

Relationships Quality control standards Generally accepted auditing standards Division of CPA firms Peer review © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 40

Chapter Summary The nature of the CPA profession and the activities of CPA firms. © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 41

CPAs Encouraged to Conduct Themselves at a High Level CPA examination Quality control GAAS and interpretations Continuing education requirements Conduct of CPA firm personnel Peer review PCAOB and SEC Code of Professional Conduct Legal liability Division of CPA firms © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 42

End of Chapter 2 © 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 43