The CPA Profession

Chapter 2

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 Learning Objective 1

Describe the nature of CPA firms,

what they do, and their structure.

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 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.
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 Certified Public Accounting
Firms
 Big Four international firms

 National firms

 Regional and large local firms

 Small local firms

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 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.

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 Activities of CPA Firms

 Accounting and bookkeeping services

 Tax services

 Management consulting 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.
3. The increased litigation risk faced by auditors.

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 Organizational Structure

 Proprietorship
 Professional corporation
 General partnership
 Limited liability company
 General corporation
 Limited liability partnership

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 Hierarchy of a Typical
CPA Firm
Staff Level Experience Typical Responsibilities

Staff Performs most of the

0-2 years
assistant detailed audit work

Senior or Responsible for the audit

in-charge 2-5 years field work, including
auditor supervising staff work

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 Hierarchy of a Typical
CPA Firm
Staff Level Experience Typical Responsibilities
Helps plan the audit,
manages the audit,
Manager 5-10 years
reviews work, and works
with the client
Reviews audit work and
Partner 10+ years makes significant audit
decisions

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 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.

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 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.

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 Sarbanes-Oxley Act

SEC

PCAOB
(Public Company
Accounting
Oversight Board)

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 Sarbanes-Oxley Act

The PCAOB conducts inspections of registered

accounting firms and assess their compliance
with the rules of the PCAOB and the SEC.

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

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 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.

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

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

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 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.

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

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 Establishing Standards
and Rules
1. Auditing standards

2. Compilation and review standards

3. Other attestation standards

4. Consulting standards

5. Code of Professional Conduct

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 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.
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 Learning Objective 5
Discuss the nature of United States and international auditing standards
Generally Accepted
Auditing Standards
General Field Work
qualifications performance of
and conduct the audit
Adequate training and Proper planning and
proficiency supervision
Independence in mental Sufficient understanding of the
attitude entity, its environment, and its
internal control
Due professional care
Sufficient appropriate
evidence
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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
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 Statements on Auditing
Standards
 Classification of Statements on Auditing Standards

 GAAS and Standards of Performance

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 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.

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 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).

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

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 Generally Accepted Auditing
Standards- United States
General Standards
1. Adequate training and proficiency

2. Independence in mental attitude

3. Due professional care

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 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.

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 Generally Accepted Auditing
Standards – United States

Standards of Field Work

1. Proper planning and supervision

2. Understanding of the entity

3. Sufficient appropriate evidence

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 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.

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 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

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 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.

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 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.

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 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.

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 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.

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 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).

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

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 Elements of Quality Control

 Independence, integrity, and objectivity

 Personnel management

 Acceptance and continuation of clients

and engagements

 Engagement performance

 Monitoring

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 Relationships

Quality control Generally accepted

standards auditing standards

AICPA practice Peer

sections review

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 CPAs Encouraged to Conduct
Themselves at a High Level
GAAS and
interpretations Continuing
CPA
education
examination
requirements

Quality Conduct of Legal

control CPA firm liability
personnel

Peer AICPA practice

review sections

PCAOB Code of
and SEC Professional
Conduct
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 End of Chapter 2

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