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©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 1

The CPA Profession

Chapter 2

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 - 3

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.

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

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 5

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.

Management Consulting

Services Tax

Services Accounting

and

Bookkeeping 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

Organizational Structure

Proprietorship

General Partnership General Corporation

Professional Corporation Limited Liability Company Limited Liability Partnership

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 9

Hierarchy of a Typical

CPA Firm

Staff Level Staff Assistant Senior Auditor

Experience Typical Responsibilities 0-2 years Performs most of the_{detailed audit work} 2-5 years

Responsible for the audit field work, including supervising staff work

Hierarchy of a Typical

CPA Firm

Staff Level Manager

Partner

Experience Typical Responsibilities 5-10 years

Helps the plan, manages the audit, reviews work, and works with the client 10+ years

Reviews audit work and makes significant audit

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Learning Objective 2

Discuss how e-commerce

and the Internet affect

CPA firm operations.

Discuss how e-commerce

and the Internet affect

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 Sender’s mail server Receiver’s mail server Receiver’s mail server

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 13

Learning Objective 3

Describe the key functions

performed by the AICPA.

Describe the key functions

performed by the 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.

AICPA

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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

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

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Vision for the Future

Specialization is critical for the

future of the CPA profession.

The market demands that CPAs be conversant in global business

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.

Establishing Standards

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Establishing Standards

and Rules

1. Auditing Standards

2. Compilation and Review Standards 3. Other Attestation Standards

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

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 21

Learning Objective 4

Use generally accepted

auditing standards as a

basis for further study.

Use generally accepted

auditing standards as a

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.

General Standards

3. Due professional care is to be exercised in the planning and performance of the audit

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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.

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.

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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.

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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Summary of

General Standards

Generally Accepted Auditing Standards

General

1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care

Field Work 1. Proper planning and supervision 2. Internal control understanding 3. Sufficient

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

Learning Objective 5

Discuss the role

of international

auditing standards.

Discuss the role

of international

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International Standards

on Auditing

International Standards on Auditing (ISAs) are issued by the International Auditing Practice Committee of the International

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 - 31

Learning Objective 6

Identify quality control

standards and practices

within the accounting

profession.

Identify quality control

standards and practices

within the accounting

profession.

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 - 33

Relationships

Quality control

standards

Generally accepted auditing standards

Division of CPA firms

Peer review

Learning Objective 7

Summarize the role of the

Securities and Exchange

Commission in accounting

and auditing.

Summarize the role of the

Securities and Exchange

Commission in accounting

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 35

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.

Securities and Exchange

Forms S-1 to S-16

Securities and Exchange

Commission

Form 8-K

Form 10-K

©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

Conduct of CPA firm personnel CPA

examination

GAAS and interpretations

Continuing education requirements

CPAs Encouraged to Conduct

Themselves at a High Level

Conduct of CPA firm personnel

SEC Peer

review

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 2 - 39

CPAs Encouraged to Conduct

Themselves at a High Level

Conduct of CPA firm personnel Legal

liability

Division of CPA firms

Code of Professional Conduct

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.

Securities and Exchange

Commission

Forms S-1 to S-16

Securities and Exchange

Commission

Form 8-K

Form 10-K

CPAs Encouraged to Conduct

Themselves at a High Level

Conduct of CPA firm personnel CPA

examination

GAAS and interpretations

CPAs Encouraged to Conduct

Themselves at a High Level

Conduct of CPA firm personnel

SEC Peer

review

CPAs Encouraged to Conduct

Themselves at a High Level

Conduct of CPA firm personnel Legal

liability

Division of CPA firms