The CPA Profession
Chapter 2
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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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.
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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
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
Partner
Helps the plan, manages
5-10 years the audit, reviews work,
and works with the client
10+ years
Reviews audit work and
makes significant audit
decisions
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E-Commerce and
CPA Firm Operations
CPA firms are using the Internet to market
their services.
Firm Web sites also feature online software tools
and databases to subscribers.
Firms take advantage of online resources and
databases to help their staffs stay current on
emerging business and standards-setting issues.
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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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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.”
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Vision for the Future
1. Continuing education and life-long learning
2. Competence
3. Integrity
4. Attuned to broad business issues
5. Objectivity
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Learning Objective 5
Use generally accepted auditing
standards as a basis for
further study.
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General Standards
1. The audit is to be performed by a person or
persons having adequate technical training
and proficiency as an auditor.
2. The auditor must maintain independence
in mental attitude in all matters relating
to the audit.
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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 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.
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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 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
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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Generally Accepted Auditing
Standards
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care
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Generally Accepted Auditing
Standards
Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence
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Generally Accepted Auditing
Standards
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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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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Statements on Auditing
Standards
 Classification of Statements on Auditing Standards
 GAAS and Standards of Performance
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Learning Objective 6
Discuss the role of international
auditing standards.
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International Standards
on Auditing
International Standards on Auditing (ISAs)
are issued by the International Auditing
Practice Committee of the International
Federation of Accountants (IFAC).
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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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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
Quality
control
GAAS and
interpretations
Conduct of
CPA firm
personnel
Peer
review
PCAOB
and SEC
Code of
Professional
Conduct
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Continuing
education
requirements
Legal
liability
AICPA practice
sections
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End of Chapter 2
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