The CPA Profession
Chapter 2
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2-1
Learning Objective 1
Describe the nature of CPA firms,
what they do, and their structure.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2-3
Certified Public
Accounting Firms
The five largest CPA firms in the United States
are called the “Big Five” international CPA firms.
Three CPA firms in the United States are called
national firms because they have offices in most
major cities.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2-4
Certified Public
Accounting Firms
There are only approximately 100 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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2-5
Activities of CPA Firms
Accounting
and
Bookkeeping
Services
Tax
Services
Management
Consulting
Services
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2-7
Organizational Structure
Proprietorship
Professional Corporation
General Partnership
Limited Liability Company
General Corporation
Limited Liability Partnership
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2-8
Hierarchy of a Typical
CPA Firm
Staff Level Experience Typical Responsibilities
Staff
Assistant
Senior
Auditor
Performs most of the
0-2 years
detailed audit work
Responsible for the audit
2-5 years
field work, including
supervising staff work
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2-9
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
Reviews audit work and
10+ years makes significant audit
decision
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 10
Learning Objective 2
Discuss how e-commerce
and the Internet affect
CPA firm operations.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 12
Learning Objective 3
Describe the key functions
performed by the AICPA.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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.”
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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.
The market demands less audit and
accounting and more value-adding
consulting services.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 16
Vision for the Future
Specialization is critical for the
future of the CPA profession.
The market demands that CPAs be
conversant in global business
practices and strategies.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 18
Establishing Standards
and Rules
1. Auditing Standards
2. Compilation and Review Standards
3. Other Attestation Standards
4. Code of Professional Conduct
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/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
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 20
Learning Objective 4
Use generally accepted
auditing standards as a
basis for further study.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 21
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.
3. Due professional care is to be exercised in
the planning and performance of the audit
and the preparation of the report.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 22
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 23
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 24
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 25
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 26
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
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 27
Learning Objective 5
Discuss the role
of international
auditing standards.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 28
International Standards
on Auditing
International Standards on Auditing (ISAs)
are issued by the International Auditing
Practice Committee of the International
Federation of Accountants (IFAC).
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 29
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 30
Learning Objective 6
Identify quality control
standards and practices
within the accounting
profession.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 31
Elements of Quality Control
Independence, integrity, and objectivity
Personnel management
Acceptance and continuation of clients
and engagements
Engagement performance
Monitoring
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 32
Relationships
Quality control
standards
Generally accepted
auditing standards
Division of
CPA firms
Peer
review
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 33
Learning Objective 7
Summarize the role of the
Securities and Exchange
Commission in accounting
and auditing.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 34
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 35
Securities and Exchange
Commission
Forms S-1 to S-16
Form 10-K
Form 8-K
Form 10-Q
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 36
CPAs Encouraged to Conduct
Themselves at a High Level
CPA
examination
GAAS and
interpretations
Conduct of CPA firm personnel
Continuing education
requirements
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 37
CPAs Encouraged to Conduct
Themselves at a High Level
Peer
review
SEC
Conduct of CPA firm personnel
Quality control
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 38
CPAs Encouraged to Conduct
Themselves at a High Level
Legal
liability
Division of
CPA firms
Conduct of CPA firm personnel
Code of Professional
Conduct
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 39
End of Chapter 2
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
2 - 40