Addthis Arens Chapter02

The CPA Profession
Chapter 2

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-1

Learning Objective 1
Describe the nature of CPA firms,
what they do, and their structure.

©2010 Prentice Hall Business Publishing, Auditing 13/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.

CPAs continue to develop new products and
services- such as financial planning, business
valuation and information technology.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-3

Certified Public Accounting
Firms
 Big Four international firms
 National firms
 Regional and large local firms
 Small local firms

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-4

Certified Public Accounting
Firms

The four largest CPA firms in the United States
are called the “Big Four” international CPA firms.
These four firms have offices in most major
cities in the United States and in many
cities throughout the world.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-5

Activities of CPA Firms
 Accounting and bookkeeping services
 Tax services
 Management consulting services

©2010 Prentice Hall Business Publishing, Auditing 13/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.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-7

Organizational Structure
 Proprietorship
 Professional corporation
 General partnership
 Limited liability company
 General corporation
 Limited liability partnership
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-8

Hierarchy of a Typical
CPA Firm
Staff Level Experience Typical Responsibilities
Staff
assistant
Senior or
in-charge
auditor

0-2 years

Performs most of the
detailed audit work

2-5 years

Responsible for the audit
field work, including

supervising staff work

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-9

Hierarchy of a Typical
CPA Firm
Staff Level Experience Typical Responsibilities
Manager

Partner

Helps plan the audit,
manages the audit,
5-10 years
reviews work, and works
with the client
10+ years

Reviews audit work and
makes significant audit
decisions

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 10

Learning Objective 2
Understand the role of the
Public Company Accounting
Oversight Board and the effects
of the Sarbanes-Oxley Act
on the CPA profession.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 11

Sarbanes-Oxley Act

This Act is considered by many observers to
be the most important legislation affecting
the auditing profession since the 1930s.
The provisions of the Act apply to publicly
held companies and their audit firms.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 12

Sarbanes-Oxley Act
SEC

PCAOB
(Public Company
Accounting
Oversight Board)

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 13

Sarbanes-Oxley Act
The PCAOB conducts inspections of registered
accounting firms and assess their compliance
with the rules of the PCAOB and the SEC.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 14

Learning Objective 3
Summarize the role of the
Securities and Exchange
Commission in accounting
and auditing.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 15

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.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 16

Securities and Exchange
Commission
 Form S-1
 Form 8-K
 Form 10-K
 Form 10-Q

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 17

Learning Objective 4
Describe the key functions
performed by the AICPA.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 18

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.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 19

Establishing Standards
and Rules
The AICPA is empowered to set standards
(guidelines) and rules that all members
and other practicing CPAs must follow.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 20

Establishing Standards
and Rules
1. Auditing standards
2. Compilation and review standards
3. Other attestation standards
4. Consulting standards
5. Code of Professional Conduct
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 21

Other AICPA Functions
Writes and grades the CPA examination.
Supports research by its own staff and
provides grants to others.
Publishes a variety of materials.
Provides seminars and education in a
variety of subject matters.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 22

Learning Objective 5
Discuss the nature of United States and international auditing standards

Generally Accepted
Auditing Standards

General
qualifications
and conduct

Field Work
performance of
the audit

Adequate training and
proficiency

Proper planning and
supervision

Independence in mental
attitude

Sufficient understanding of
the entity, its environment,
and its internal control

Due professional care

Sufficient appropriate
evidence

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Reporting
results
Whether statements were
prepared in accordance with
GAAP
Circumstances when GAAP
not consistently followed
Adequacy of informative
disclosures
Expression of opinion on
financial statements
2 - 23

Statements on Auditing
Standards
 Classification of Statements on Auditing Standards
 GAAS and Standards of Performance

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 24

International Standards
on Auditing
IFAC is the worldwide organization
for the accountancy profession.

The IFAC works to improve the
uniformity of auditing practices and
related services throughout the world.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 25

International Standards
on Auditing
International Standards on Auditing (ISAs)
are issued by the International Auditing
and Assurance Standards Board (IAASB)
of the International Federation of
Accountants (IFAC).

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 26

Learning Objective 6
Use generally accepted auditing standards
as a basis for further study

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 27

Generally Accepted Auditing
Standards- United States
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 28

U.S. Generally Accepted Auditing
Standards
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 auditor must exercise due professional
care in the performance of the audit and the
preparation of the report.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 29

Generally Accepted Auditing
Standards – United States
Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 30

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 and to design 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.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 31

Generally Accepted Auditing
Standards-United States
Standards of 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

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 32

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.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 33

Standards of Reporting

(Cont’d)

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.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 34

Relationship Between GAAS and
PCAOB Auditing Standards
The term generally accepted auditing standards
is no longer used for public company audits.
The term GAAS continues to be used for audits
of private companies.
Public company audits refer to PCAOB auditing
standards.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 35

Statements on Auditing
Standards
The 10 generally accepted auditing standards
are too general to provide meaningful guidance.
SASs interpret the 10 generally accepted
auditing standards and are the most
authoritative references available to auditors.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 36

AICPA Clarity and Convergence
Project
The AICPA Auditing Standards Board has undertaken a
significant effort to make GAAS easier to read,
understand and apply.

This project is similar to an effort by the International
Auditing and Assurance Standards Board to clarify
International Standards on Auditing. (IAASB).

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 37

Learning Objective 7
Identify quality control standards
and practices within the
accounting profession.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 38

Elements of Quality Control
 Independence, integrity, and objectivity
 Personnel management
 Acceptance and continuation of clients
and engagements
 Engagement performance
 Monitoring
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 39

Relationships
Quality control
standards

Generally accepted
auditing standards

AICPA practice
sections

Peer
review

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 40

CPAs Encouraged to Conduct
Themselves at a High Level
CPA
examination

GAAS and
interpretations

Quality
control

Continuing
education
requirements

Conduct of
CPA firm
personnel

Peer
review

Legal
liability

AICPA practice
sections
PCAOB
and SEC

Code of
Professional
Conduct

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 41

End of Chapter 2

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2 - 42