Vous êtes sur la page 1sur 51

Chapter 01

The Role of the Public Accountant in the American Economy

Note: Certain slides in this presentation were created by McGraw Hill,

the publisher of the textbook.



From Merriam Websters Dictionary


Definition of AUDIT



: a formal examination of an organization's or

individual's accounts or financial situation


: the final report of an audit


: a methodical examination and review

Would you accept a financial statement from management?

Note: Certain slides in this presentation were created by McGraw Hill, the publisher

of the textbook.


Financial Statements pdf page 44

Auditor’s Report pdf page76

Audit of financial statementsAn examination designed to provide an opinion; the highest level of assurance that the financial statements follow generally accepted accounting principles or another acceptable basis of accounting.

Attest engagement (1)

<b>Def</b>: An engagement in which the CPAs issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g., management).

Assurance Assurance services (1)

<b>Def</b>: Professional services that enhance the quality of information, or its context, for decision makers. Many assurance services involve some form of attestation.

at·test verb \ə-ˈtest\

Definition of ATTEST transitive verb



: to affirm to be true or

genuine; specifically : to authenticate by signing as a witness

b : to authenticate officially


Independence includes two categoriesindependence of mind and independence of appearance

Term: Independence in appearance (73)

Def: The avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, to

reasonably conclude that the integrity, objectivity, or

professional skepticism of a firm or a member of the attest engagement team has been compromised.

Term: Independence of mind (73)

Def: The state of mind that permits the performance of an attest service without being affected by influences that compromise

professional judgment, thereby allowing an individual to act with

integrity and exercise objectivity and professional skepticism .

Internal Control

The Committee of Sponsoring Organizations (COSO) commissioned a study to:

Establish a common definition of internal control to serve the needs of different

parties. Provide a standard against which businesses and other entities can assess their control systems and determine how to improve them. The study, titled Internal ControlIntegrated Framework,2 defines internal control as [emphasis added]:

A process, effected by the entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

Reliability of financial reporting.

Effectiveness and efficiency of operations.

Compliance with applicable laws and regulations.


Per page 44 of text --

“Sufficiently important to influence decisions Made by reasonable users of financial statements.”

Types of Professional Services

Attestation and Assurance (Includes auditing)

Tax (compliance and tax planning)


Accounting (and Review Services)

Personal Financial Planning

Litigation support

Fraud Investigation

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.

Which of the following has primary responsibility for the fairness of the representations made in financial statements?


Client's management.


Independent auditor.


Audit committee.



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


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 agreed-upon procedures report on subject matter or an

assertion about subject matter that is the

responsibility of another party (e.g. management)

The Attest Function

Management The CPA Suitable Subject Gathers Criteria Matter Evidence Issues Report Subject Matter* The Attest
The Attest

*May be management’s assertion about the subject matter.

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.”

Forms of Attestation

Forms of Attestation 1-17
What are the required statements ? Who might be the users ?

What are the required statements ?

Who might be the users ?

Audit of Financial Statements

The Management Auditors Prepares Criteria (e.g., GAAP) Gathers Financial Evidence Statements Issues Report
(e.g., GAAP)
The Auditors’

*Applicable financial reporting framework

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

Audit Evidence

Evidence focuses on whether financial statements are presented in accordance with GAAP; examples:

Balance sheet

Do assets really exist

Are the assets valued correctly

Are the liabilities complete?

Are assets and liabilities properly classified

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

What Creates the Demand for Audits?

Audits lend credibility to information by reducing information risk, the risk that information is materially misstated

assists userse.g. lenders, investors

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

The most important benefit of having an annual audit by a public accounting firm is to:

Provide assurance to investors and other outsiders that the financial statements are reliable.

Enable officers and directors to avoid personal responsibility for any misstatements in the financial statements.

Meet the requirements of government agencies.

Provide assurance that illegal acts, if any exist, will be brought to light

From Chapter 6

From Chapter 6

Corporate governance

Board of directors oversee corporations activities

Public companies must establish audit committees of their boards of directors

Audit committees are charges with areas such as oversight

of financial reporting, regulatory compliance, and risk management.


instructor serves on audit committee of a not for profit entity.

Do not have to know

History of the Attest Function



Audit Objective

Nature of Audit

Ancient - 1850

Audits of city states, individuals & ventures

Detection of fraud

Detailed; No reliance on controls


Industrial revolution resulted in the need for corporate audits

Detection of fraud & clerical errors

Some testing; No reliance on controls


Development of stock markets - increased emphasis on earnings

Determination of fairness; detection of fraud & errors

Increased emphasis on testing; Slight reliance on controls


Development of auditing standards

Determination of fairness

Substantial reliance on controls


Criticism by Congress; Increased self-regulation

Determination of fairness

Internal control determines scope of audit


Increased demands for reporting on compliance & internal control

Determination of fairness

Risk assessment determines audit scope; must assess risk of fraud


Panel on Audit Effectiveness; Sarbanes- Oxley Act of 2002

Determination of fairness

Business risk approach to audits

2002---audit procedures must address risk of fraud

Do not have to know

The Accounting Profession’s Credibility Crisis

2000The Panel on Audit Effectiveness made a variety

of suggestions to improve audits (including documentation of audit evidence and judgments, risk assessments, and the linkage of audit procedures to audit risks)

2001Enron Bankruptcy

2002WorldCom Fraud

2002Sarbanes-Oxley Act (top management must individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity became more severe. Also, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors.)

2003Public Company Accounting Oversight Board

began operations

2008Dodd Frank actmore regulations for broker dealers

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

Other Types of Audits

Compliance Audits

Examples: IRS audit of income tax return

Not for Profit entities which receive federal

fundsOMB Circular A-133

Operational Audits

Example: Effectiveness of operations of receiving department of a manufacturing company

Integrated Audits

Example: Assurance on both the financial statements and effectiveness of internal control over financial reporting

Other Types of Auditors

Internal Auditorslarge part of work consists

of operational audits

Government Accountability Office Auditorsincludes audits of government agencies

Tax Auditors

Internal Auditors

Employed by a company as an employee

They 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.


Government Accountability Office Auditors (GAO Auditors)

Headed by the comptroller general

Responsibility of supporting Congress


Compliance, operational and financial audits of government agencies

Examinations of corporations holding government contracts to verify contract payments have been proper

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

AICPA’s Traditional Role

Establish Standards

Research and Publication

Continuing Professional Education


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.

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

Research and Publication


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

Continuing Professional Education

Development of continuing professional

education programs

Necessary for continuing education requirement for CPA certificate

Offered by


State societies

Other professional organizations

Professional Regulation

Regulations of Individual CPAs

Code of Professional Conduct ethical rules for


Requirements for regular membership in AICPA

Regulation of Public Accounting Firms

Division for Public Accounting Firms

Center for Public Company Audit Firms

Private Companies Practice Section (PCPS)

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


Business Environment & Concepts

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)


Other Parties

Sets GAAP for entities other than federal, state

and local governments


Standards of financial accounting for state and local government entities


Accounting standards for the US government


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

Securities and Exchange Commission


Agency of the US government

Oversight responsibility for the PCAOB


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

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

» Comment letters

Do not have to know

Organization of the Public Accounting


Sole proprietorship


Professional Corporation

Limited Liability Partnership (LLP)

Limited Liability Company (LLC)

Categories of Public Accounting Firms




Big 4

Alternative Practice Structures

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

Typical Structure of a National

CPA Firm

Typical Structure of a National CPA Firm Partners Managers Seniors Staff Assistant 1-49
Typical Structure of a National CPA Firm Partners Managers Seniors Staff Assistant 1-49
Partners Managers Seniors Staff Assistant
Staff Assistant

Responsibilities on an Engagement

PartnerOverall responsibility is to assure

that that audit is performed in accordance

with professional standards.

ManagerSupervise overall engagement.

Seniors—”In charge” auditor on a daily basis.

Staff assistantsWork under the immediate

supervision of the senior.

Elements of Public Accounting Work

Professional Developments

Stay current on developments within the


Seasonal fluctuations

Busy season from December through April

Relationships with clients

Need to maintain independence