Arens Chapter02

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 2 - 1
The CPA Profession

Chapter 2
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 2
Learning Objective 1
Describe the nature of CPA firms,
what they do, and their structure.

2 - 3
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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Firms
Big Four international firms
National firms
Regional and large local firms
Small local firms

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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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Management consulting services
Tax services
Accounting and bookkeeping services
Activities of CPA Firms

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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
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

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

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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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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.

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Sarbanes-Oxley Act
SEC
PCAOB
(Public Company
Accounting
Oversight Board)

2 - 14
Sarbanes-Oxley Act
The PCAOB conducts inspections of registered
accounting firms and assess their compliance
with the rules of the PCAOB and the SEC.

2 - 15
Summarize the role of the
Securities and Exchange
Commission in accounting
and auditing.

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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.
Commission

2 - 17
Commission
Form S-1
Form 8-K
Form 10-K
Form 10-Q

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Describe the key functions
performed by the AICPA.

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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

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

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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
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.

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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

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GAAS and Standards of Performance
Statements on Auditing
Standards
Classification of Statements on Auditing Standards

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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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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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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.

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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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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.

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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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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

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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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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

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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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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

2 - 41
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
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 2 - 42
End of Chapter 2

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2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 2 - 1

The CPA Profession

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