Chapter 01
The Role of the
Public Accountant in
the American
Economy
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Assurance services
 The
broad range of information
enhancement services that are provided
by certified public accountants (CPAs).
 Two types:


Increase reliability of information
Putting information into a form or context that
facilitates decision making.
1-2
Types of Services
 Assurance

Services
Attestation Services
• Example: Audits of Financial Statements,
Examinations of Internal Control

Other Assurance Services
• Example: CPA ElderCare Prime Plus Services
 NonAssurance



Services
Tax Services
Management Consulting Services
Other
1-3
Attestation Services
 To
attest to information means to provide
assurance as to its reliability
 Attest engagement:
A practitioner is engaged to issue or does
issue an examination, a review, or an agreedupon procedures report on subject matter or
an assertion about subject matter that is the
responsibility of another party (e.g.
management)
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The Attest Function
Management
The CPA
Suitable
Criteria
Subject
Matter
Gathers
Evidence
Issues
Report
Subject
Matter*
The Attest
Report
*May be management’s assertion about the subject matter.
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Suitable criteria

Standards established or developed by
groups of experts.
 Example: Internal control audit – standards
established by a committee of experts on
internal control
 Example: Financial statement audit –
standards are GAAP. For a financial
statement audit suitable criteria are referred
to as the “applicable financial reporting
framework.”
1-6
Forms of Attestation
1-7
Audit of Financial Statements
The
Auditors
Management
Prepares
Financial
Statements
Criteria
(e.g., GAAP)
Gathers
Evidence
Issues
Report
Financial
Statements
*Applicable financial reporting framework
The Auditors’
Report
1-8
Financial Statement Audit

Auditors gather evidence and provide a high
level of assurance that the financial statements
follow GAAP, or some other appropriate basis of
accounting
 Audit involves searching and verifying
accounting records and examining other
documents
 Evidence necessary to issue an audit report that
states auditors’ opinion
1-9
Audit Evidence
Evidence focuses on whether financial statements are
presented in accordance with GAAP; examples:
• Balance sheet contains all liabilities
• Income statement




Sales really occurred
Sales have been recorded at appropriate amounts
Recorded costs and expenses are applicable to period
All expenses have been recognized
• Financial statement amounts


Accurate, properly classified and summarized
Notes are informative and complete
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What Creates the Demand for Audits?

Audits lend credibility to information by reducing
information risk, the risk that information is materially
misstated

Financial statement misstatements arise due to-




Accidental errors
Lack of knowledge of accounting principles
Unintentional bias
Deliberate falsification
Audits do not directly address business risk, the risk
that a company will not be able to meet its financial
obligations due to economic conditions or poor
management decisions
1-11
History of the Attest Function
Period
Developments
Audit Objective
Nature of Audit
Ancient - 1850
Audits of city states,
individuals & ventures
Detection of fraud
Detailed; No reliance on
controls
1850-1905
Industrial revolution
resulted in the need for
corporate audits
Detection of fraud &
clerical errors
Some testing; No reliance
on controls
1905-1940
Development of stock
markets - increased
emphasis on earnings
Determination of
fairness; detection of
fraud & errors
Increased emphasis on
testing; Slight reliance on
controls
1940-1975
Development of auditing
standards
Determination of
fairness
Substantial reliance on
controls
1975-1985
Criticism by Congress;
Increased self-regulation
Determination of
fairness
Internal control
determines scope of
audit
1985-1995
Increased demands for
reporting on compliance &
internal control
Determination of
fairness
Risk assessment
determines audit scope;
must assess risk of fraud
1995-Present
Panel on Audit
Effectiveness; SarbanesOxley Act of 2002
Determination of
fairness
Business risk approach
to audits
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The Accounting Profession’s
Credibility Crisis
 2000—The
Panel on Audit
Effectiveness made a variety of
suggestions to improve audits.
 2001—Enron Bankruptcy
 2002—WorldCom Fraud
 2002—Sarbanes-Oxley Act
 2003—Public Company Accounting
Oversight Board began operations
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Financial Audits
 Audit
of the financial statements of an
entity




Covers the balance sheet and related statements of
income, retained earnings and cash flows
Goal is to determine if prepared in conformity with
GAAP
Performed by CPAs
Users include management, investors, bankers,
creditors, financial analysts, government agencies
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Other Types of Audits
 Compliance

Example: IRS audit of income tax return
 Operational

Audits
Example: Effectiveness of operations of
receiving department of a manufacturing
company
 Integrated

Audits
Audits
Example: Assurance on both the financial
statements and effectiveness of internal
control over financial reporting
1-15
Other Types of Auditors
 Internal
Auditors
 Government Accountability Office Auditors
 Tax Auditors
1-16
Internal Auditors
 Employed
 They



by a company as an employee
often
perform operational and compliance audits
address internal control
report to the audit committee of the board of
directors and to the president
 The
Institute of Internal Auditors is the
international organization of internal
auditors.
1-17
Government Accountability Office
Auditors (GAO Auditors)
 Headed
by the comptroller general
 Responsibility of supporting Congress
 Perform


Compliance, operational and financial audits
of government agencies
Examinations of corporations holding
government contracts to verify contract
payments have been proper
1-18
Tax Auditors
 Responsible
for enforcement of tax laws of
various sorts (e.g., state and federal
income taxes, property taxes, sales taxes)
 Internal revenue agents generally perform
compliance audits of income tax returns
1-19
AICPA’s Traditional Role

Establish Standards
 Research and Publication
 Continuing Professional Education
 Self-Regulation
Note: Much of the standards setting and regulation roles
relating to public companies (referred to as “issuers”)
has been taken over by the SEC and the PCAOB.
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Establishes Standards--Examples
 AICPA




Auditing Standards Board
Issues official pronouncements on auditing matters
for nonpublic companies (“nonissuers”)
Statements on Auditing Standards (SASs)
Statements on Standards for Attestation
Engagements (SSAEs)
• Guidance for attesting to information other than
financial statements such as financial forecasts
Accounting and Review Services Committee


Statements on Standards for Accounting and Review
Services (SSARS)
Standards for compilations or reviews not audits of
financial statements
1-21
Research and Publication



Publications
 Journal of Accountancy (monthly)
 The Tax Advisor
Audit publications
 Industry Audit and Accounting Guides
 Audit Risk Alerts
 Auditing Practice Releases
Other publications
 Accounting Research Studies
 Statements of Position
 Accounting Trends & Techniques
1-22
Continuing Professional
Education
 Development
of continuing professional
education programs
 Necessary for continuing education
requirement for CPA certificate
 Offered by



AICPA
State societies
Other professional organizations
1-23
Professional Regulation
 Regulations


Code of Professional Conduct – ethical rules
for CPAs
Requirements for regular membership in
AICPA
 Regulation

of Individual CPAs
of Public Accounting Firms
Division for Public Accounting Firms
• Center for Public Company Audit Firms
• Private Companies Practice Section (PCPS)
1-24
The CPA Examination
 Uniform
national examination prepared
and graded by the AICPA
 Computerized exam includes multiple
choice and simulations in four parts
•
•
•
•
Auditing and Attestation
Financial Accounting & Reporting
Regulation
Business Environment & Concepts
1-25
State Boards of Accountancy
 Issue
CPA certificates
 All boards require successful completion
of CPA examination
 Education and experience requirements
vary
 National Association of State Boards of
Accounting (NASBA)
1-26
Other Parties
 FASB

Sets GAAP for entities other than federal,
state and local governments
 GASB

Standards of financial accounting for state
and local government entities
 FASAB

Accounting standards for the US government
1-27
PCAOB Role

Adopt auditing, attestation, quality control, ethics
and independence standards relating to the
preparation of audit reports for SEC registrants
 Oversee and discipline CPAs and CPA firms that
audit public companies, including




Register firms
Perform inspections of firms
Conduct investigations and disciplinary proceedings of firms
Sanction registered firms
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Securities and Exchange
Commission (SEC)
 Agency
of the US government
 Oversight responsibility for the PCAOB
 Objectives


Protect investors and public by requiring full
disclosure of financial information by
companies offering securities for sale to the
public
Prevent misrepresentation, deceit, or other
fraud in the sale of securities
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Securities and Exchange
Commission (SEC )
 Registration



statements
Qualify securities for sales
Contains audited financial statements
Makes SEC major user of financial statements
 Protects
investors
 Regulation S-X

Basic accounting regulation
1-30
Types of Professional Services
 Attestation
and Assurance
 Tax
 Consulting
 Accounting
 Personal
Financial Planning
 Litigation support
 Fraud Investigation
 Personal Financial Planning
1-31
Organization of the Public
Accounting Profession
 Sole
proprietorship
 Partnerships
 Professional Corporation
 Limited Liability Partnership (LLP)
 Limited Liability Company (LLC)
1-32
Categories of
Public Accounting Firms
 Local
 Regional
 National
 Big
4
 Alternative Practice Structures
1-33
Industry Specialization
 Firms
with detailed knowledge and
understanding of a client’s industry
 Helps firms



Be more effective at collecting and evaluating
audit evidence
Make valuable suggestions to improve client’s
operations
Provide the client consulting services
1-34
Typical Structure of a National
CPA Firm
Partners
Managers
Seniors
Staff Assistant
1-35
Responsibilities on an Engagement
 Partner—Overall
responsibility is to
assure that that audit is performed in
accordance with professional standards.
 Manager—Supervise overall engagement.
 Seniors—”In charge” auditor on a daily
basis.
 Staff assistants—Work under the
immediate supervision of the senior.
1-36
Elements of Public Accounting
Work
 Professional

Stay current on developments within the
profession
 Seasonal

Developments
fluctuations
Busy season from December through April
 Relationships

with clients
Need to maintain independence
1-37