Chapter Two
1- The Big (4) international firms
in the USA and throughout the world:
A.Deloitte & Touche.
B.Ernst & Young.
C.Waterhouse Coopers.
D.KPMG.
2- Activities of CPA firms:
A. Accounting and bookkeeping services.
B. Tax services.
C. Management consulting services.
3- Organizational structure of CPA firms:
A. Proprietorship: only firms with one owner can operate in this
form.
B. General partnership: this form of organization is the same as
proprietorship, except that it applies to multiple owners.
C. General Corporation: the advantage of a corporation is that
shareholders are liable only to extent of their investments in the
firm.
D. Professional corporation (PC): a professional corporation
provides professional services and is owned by one or more
shareholders.
E. Limited Liability Company (LLC): it combines the most
favorable attributes of a general corporation and a general
partnership.
F. Limited Liability Partnership (LLP): a limited partnership is
owned by one or more partners.
4- PCAOB (Public Company
Accounting Oversight):
 The SOX established the PCAOB, appointed
and overseen by the SEC (Securities and
Exchange
Commission)
the
PCAOB
provides oversight for auditors of public
companies, established auditing and quality
control standards for public companies
audits, and performs inspections of the
quality controls audit at audit forms
performing those audits.
5- (SEC):
 An agency of the federal government
assists in providing investors with
reliable information upon which to
make investment decision.
6- AICPA ( American institute of
certified public accountants):
 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, the AICPA sets standards and rules that
all members and other practicing CPAs must follow.
 Four major areas in which the AICPA has authority to set
standards and make rules are as follows:
A. Auditing standards.
B. Compilation and review standards.
C. Other attestation standards.
D. Code of professional conducts.
7- ISAs (International
Standards on auditing):
 Are issued by the international auditing and
assurance standards board (IAASB) of the
international
(IFAC).
federation
of
accountants
8- IFAC:
 Is the worldwide organization for the
accountancy profession with 157
member organizations in 123 countries
representing more than 2.5 million
accountants throughout the world.
9- GAAS (Generally Accepted
Auditing Principles) 10 standards:
A- 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 audit must exercise due professional care in
the performance of the
preparation of the report.
audit
and
the
9- GAAS (Generally Accepted
Auditing Principles) 10 standards:
B-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 of the financial
statements whether due to error or fraud and to design the
nature, timing and extent of 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.
9- GAAS (Generally Accepted
Auditing Principles) 10 standards:
C- Standards of reporting:
1. The auditor must state in the auditor’s report whether the
financial statements are presented in accordance with GAAP.
auditor must identify in the auditor’s report those
circumstances in which such principles have not been consistently
observed in the current period in the relation to the preceding
period.
2. The
3. When the auditor determines that informative disclosures are not
reasonably adequate the auditor must so state in the auditor’s
report.
4. The auditor must either express an opinion regarding the financial
statements, taken as a whole or state that an opinion cannot be
expressed, in the auditor’s report, when the auditor cannot express
an overall opinion, the auditor should state the reasons therefore.
10- Quality control standards and practices:
 Methods used by a CPA firm to ensure that the
firm meets its professional responsibilities to
clients and others, each firm should documents
its quality control policies and procedures.
 Procedures should depend on such things as the
size of the firm, the number of practice offices,
and the nature of the practice.
10- Quality control standards and practices:
Elements of quality control:
 Leadership responsibilities for quality within
the firm (tone at the top).
 Relevant ethical requirements.
 Acceptance and continuation of clients and
engagements.
 Human resources.
 Engagement performance.
 Monitoring.
10- Quality control standards and practices:
Peer review:
 It is the review by CPAs, of a CPA firm’s
compliance with its quality, control system,
the purpose of a peer review is to determine
and report whether the CPA firm being
reviewed has developed adequate quality
control policies and procedures and follows
them in practice.
SUMMARY
1- The difference between GAAS & GAAP:
 The generally accepted auditing standards are general
guide lines to help auditors meet their professional
responsibilities in the audit of historical financial
statements. They are considered to be the minimum
standards of performance for auditors to follow and are
established by the auditing standards board of the
American institutes of certified public accountants for
private companies and by the public company accounting
oversight board for public companies.
 Generally accepted accounting principles are the guidelines
an entity’s management normally follows when preparing
historical financial statements. GAAP are established by the
financial accounting standard board.
2-The ten (10) generally accepted
auditing standards:
A- General standards:
 Adequate training and proficiency.
 Independence of mental attitude.
 Due professional care.
B- Standard of fieldwork:
 Proper planning and supervision.
 Sufficient understanding of internal control.
 Sufficient competent evidence.
2-The ten (10) generally accepted
auditing standards:
C- Standards of reporting:
 Whether statements were prepared in
accordance with GAAP.
 Circumstances
when
consistently followed.
GAAP
not
 Adequacy of informative disclosures.
 Expression of opinion
statements as a whole.
on
financial
3- Internal auditors can have
independent mental attitude through:
 Independent mental attitude refers to a state of
mind in which the CPA is totally unbiased with
respect to the client and the financial information
under audit.
 Although internal auditors are employees of the
organization for which their audits are performed,
internal auditors should be independent of the
function being examined and should report their
findings to a level high enough in the organization
to allow the auditor to be free from influence by the
party or parties being examined.
4- The four major functions of the AICPA:
 Establishing standards and rules that all practicing CPAs
must follow. These standards consist of auditing
standards, compilation and review standards, other
attestation standards, and the code of professional
conduct.
 Research and publication. AICPA publications include
the journal of accountancy, industry audit guides, and
periodic updates of the codification of statements on
auditing standards, and the code of professional conduct.
 Guiding and grading the uniform CPA examination.
 Providing
members.
continuing
education
seminars
for
its