Chapter 1
The Role of the
Public Accountant
in the American
Economy
1-2
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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1-3
Attestation Engagements
Type of
Engagement
Examination
Review
Level of
Assurance
Highest
Moderate or
Limited
Agreed-upon Varies with
procedures procedures
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Nature of
Report
Procedures
Expresses
opinion
Sufficient to limit
attestation risk to
low level
Expresses
negative
assurance
Generally limited to
inquiry & analytical
procedures
States
findings
Procedures
agreedupon with the
specified users
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1-4
Audit of Financial Statements
The
Auditors
Management
Prepares
Financial
Statements
Criteria
(e.g., GAAP)
Gathers
Evidence
Issues
Report
Financial
Statements
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The Auditors’
Report
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1-5
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
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1-6
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
1-7
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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1-8
Types of Audits
Audits of Financial Statements
Compliance Audits
Operational Audits
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1-9
Types of Auditors
External Auditors
Internal Auditors
GAO Auditors
Tax Auditors
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1-10
AICPA’s Traditional Role
Establishes Standards
Research and Publication
Continuing Professional Education
Self-Regulation
CPA Examination
Note: The standards setting and regulation
roles have been taken over by the SEC
and the PCAOB with respect to auditors
of public companies.
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1-11
Types of Professional Services
Attestation and Assurance
Tax
Consulting
Accounting
Personal Financial Planning
Litigation support
Fraud Investigation
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1-12
Typical Structure of a National
CPA Firm
Partners
Managers
Seniors
Staff
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