Chapter 1: The Role of the Public Accountant in the American Economy

Assurance services

Describes the broad range of information enhancement services performed by a certified public accountant (CPA) that are designed to enhance the degree of confidence in the information.

Types of Assurance Services:

1) Those that increase the reliability of information

2) Those that involve putting information in a form or context that facilitates decision making

Attestation services

To attest to information means to provide assurance as to its reliability.

Attestation engagement (Attest engagement)

CPA’s provide a report on subject matter or an assertion about that subject matter.

Suitable Criteria

The Standards or benchmarks used to measure and present the subject matter and against which the CPA evaluates the subject matter.

Suitable Criteria Attributes:

1) Objectivity

2) Measurability

3) Completeness

4) Relevance

Three forms of attest engagements:

1) Examination

2) Review

3) Agreed-Upon Procedures Engagement

Examination

An attest engagement designed to provide the highest level of assurance that CPA’s provide on subject matter. An examination of financial statements is referred to as an audit.

Review

An engagement designed to express limited assurance relating to subject matter or an assertion. Generally limited to inquiries and analytical procedures.

Agreed-Upon Procedures Engagement

An attestation engagement in which a practitioner performs specific procedures on subject matter or an assertion and reports the findings without providing an opinion or conclusion.

What creates the demand for audits?

The contribution of the independent auditor is to provide credibility to information. That it can be relied upon by outsiders.

Why financial statements my depart from GAAP?

1) Accidental errors

2) Lack of knowledge

3) Unintentional bias

4) Deliberate Falsification

United States v. Arthur Young

The Supreme Court case that establishes the overall, legal responsibility of accountants who perform audits of a client. The key provision of this case is the concept that the audit profession serves as a watchdog, requiring complete independence from the client and fidelity to the public trust.

Business Risk

The risk associated with a company’s survival and profitability

Information Risk

The risk that information used to asses business risk is not accurate

Audit Committee

A committee of a corporation’s board of directors that engages, compensates, and oversees the work of the independent auditors, monitors activities of the internal auditing staff, and intervenes in any disputes between management and the independent auditors. Members must not serve as corporate officers or have other relationships that might impair independence, independent directors.

PCAOB

Established by the Sarbanes-Oxley Act of 2002 to provide oversight of accounting firms that audit public companies. It is composed of five individuals appointed by the SEC.

Firms not subject to PCAOB

Firms that are not subject to PCAOB inspections, are subject to peer reviews that are administered by the State CPA Societies under the overall direction of the AICPA Peer Review Board.

Function of PCAOB

1) Establishing or adopting professional and ethical standards

2) conducting inspections of CPA firms

3) Enforcing compliance with professional and ethical standards.

Information Technology

Is beginning to provide auditors with opportunities to test entire populations electronically.

Financial Audit

An audit of the financial accounting information of an organization or segment of the organization. This may involve a complete set of financial statements or a portion of a statement. Goal is to determine if F/S have been prepared in conformity with GAAP

Compliance Audit

An audit to measure the compliance of the organization with some established criteria (Laws, internal control policies, procedures, etc.) Dependent upon verifiable data and recognized criteria. (The IRS)

Operational Audit

An analysis of a department or other unit of a business or governmental organization to measure the effectiveness and efficiency of operations. Tend to be more subjective than financial or compliance audits.

Integrated Audit

Required by SOA 02 and PCAOB, an audit that includes providing assurance on both the financial statements and internal control over financial reporting. Report on managements assessment and internal control effectiveness. Required of publicly traded companies in the US.

Internal Auditors

Have principal goal to investigate and appraise the effectiveness with which various organizational units of the company are carrying out their functions. Largely operational audits and they report to the audit committee and the president. They are not independent of the corporation.

Institute of Internal Auditors (IIA)

The international organization of internal auditors.

Government Accountability Office (GAO)

complete audits of government agencies to determine that spending programs follow the intent of congress and operational audits to evaluate the effectiveness and efficiency of selected government programs.

Internal Revenue Service (IRS)

responsible for enforcement of the federal tax laws.

American Institute of Certified Public Accountants (AICPA)

The national professional organization of CPA’s engaged in promoting high professional standards to ensure that CPA’s serve the public interest. After SOA 02, the AICPA’s influence and responsibility have been significantly diminished.

Functions of AICPA

1) Establishing standards and rules to guide CPA’s in their conduct of professional services

2) Carrying on a program of research and publication

3) Promoting continuing professional education

4) Contributing to the professional self-regulation

Auditing Standards Board

The AICPA’s senior committee for auditing, attestation, and quality control applicable to the performance and issuance of audit and attestation reports for nonpublic companies. Assigned responsibility by AICPA.

Statements on Auditing Standards (SASs)

Series of statements issued by the ASB of AICPA. Generally accepted auditing standards are developed and issued in the form of SASs in the context of an audit of financial statements performed by an auditor

Center for Audit Quality (CAQ)

The CAQ is dedicated to enhancing investor confidence and public trust in the global capital markets by fostering high-quality performance by the discussion of critical issues requiring actions and intervention; and advocating policies and standards that promote public company auditor's’ objectivity, effectiveness, and responsiveness.

Peer Review

Involves a critical review of one public accounting firm’s practices by another public accounting firm.

CPA License

Permits to practice as CPA are granted by the state boards of accountancy. May suspend or revoke accountant’s certificate.

Financial Accounting Standards Board (FASB)

Designated. bySEC and AICPA as the body with power to set forth these principles for entities other than federal, state, and local governments. Thus, FASB Statements exposure drafts, public hearings, and research projects are all of major concern to the public accounting profession.

Governmental Accounting Standards Board (GASB)

Was formed in 1984 to establish and improve standards of financial accounting for state and local government entities.

Federal Accounting Standards Advisory Board (FASAB)

Established by the Government Management Reform Act of 1994 to dvelop accounting standards for the U.S. government. This body issues standards that are used to audit a number of major federal agencies and the U.S. Government as a whole.

Dodd-Frank Act

Expanded the PCAOB’s authority to oversee audits of brokers and dealers.

International Federation of Accountants (IFAC)

The global organization of accounting professional bodies, not individuals. 175 professional accountancy bodies from approx. 130 countries and jurisdictions. Was established to help foster a coordinated worldwide accounting profession with harmonized standards

Boards established by IFAC

1) International Auditing and Assurance Standards Board (IAASB)

2) International Ethics Standards Board for Accountants (IESBA)

3) International Accounting Education Standards Board (IAESB)

Responsibilities of IAASB

Establishing International Standards on Auditing, International Standards on Quality Control, and standards for other assurance and related services

Responsibilities of IESBA

Establishes ethical standards and guidance for professional accountants

Responsibilities of IAESB

Develops guidance to improve accounting education around the world

Tax Services

1) Compliance Work - involves preparing federal, state, and local tax returns

2) Tax Planning - Involves consulting with clients on how to structure their business affairs to legally minimize the amount and postpone the payment of their taxes

Consulting Services

Developing strategic planning models, management information systems, and performing executive search services

Fraud Investigation Services

Engaging professionals to investigate suspected or known fraud

Forensic Accounting Services

Is somewhat broader than just fraud investigation and includes litigation support services

Personal Financial Planning

CPA’s who satisfy certain experience requirements and pass a one-day examination on personal financial planning topics, such as income tax planning, risk management, investment planning, retirement planning, and estate planning

Professional Corporations

Differ from traditional corporations in a number of respects. All shareholders and directors must be engaged in the practice of public accounting. Shareholders and directors of professional corporations may be held personally liable for the corporations actions

LLP or LLC

Are similar to professional corporations but they provide for the protection of the personal assets of any shareholders or partners not directly involved in providing services on engagements resulting in litigation

Local Firms

1-2 offices, 1-a few CPS’s, and serve clients in a single city or area. Often emphasize income tax, consulting, and accounting services. Auditing is usually only a small part of the practice and tends to involve small business concerns that find a need for audited statements to support applications for bank loans.

Regional Firms

Local firms that expand to neighboring cities or states and increasing the professional staff. Merging with local firms is often a route to this status. This growth is often accompanied by an increase in the amount of auditing as compared to other services

National Firms

Firms with offices in most major cities in U.S. are national firms. May operate internationally as well.

Big 4 firms

Deloitte, EY, KPMG, and PwC. These firms audit nearly all the largest American and multinational corporations

Associations of CPA firms

CPA firms may join a group of firms. These Associations are seperate legal entities that are designed to help their member firms to increase availibility of services and resources that they provide.

Network of CPA firms

Association when relationship among firms includes at least:

1) Common Brand Name

2) Common Control

3) Profits

4) Common Business Strategy

5) Significant Professional Resources

6) common Quality Control Policies and Procedures

Partners

The owners of the firm and are compensated in part directly from the firm’s profits (Equity Partners). Also may, attracting new clients, recruiting new staff members, supervising the professional staff, reviewing audit working papers, and signing the audit reports

Lead Partner (Engagement Partner)

On an engagement is responsible for assuring that the audit is performed in accordance with applicable professional standards. This individual is ultimately responsible for adequate planning, supervision, and execution of the audit and maintaining primary contacts with clients

Managers

Responsible for supervising two or more concurrent audit engagements, reviewing the audit working papers, and discussing with the audit staff and with the client any accounting or auditing problems that may arise during the engagement, determining the audit procedures applicable to specific audits for maintaining uniform standards of fieldwork.

Senior Auditors “Senior In-Charge”

Responsibilities vary depending on the size of the organization.

Smaller engagement - may include planning and conducting the audti and drafting the audit report, subject to review and approval by manager.

Larger engagement - may assume responsibility for supervising some aspect of the audit, such as the audit of accounts receivable. They will delegate most tasks

Staff Acountants

Usually encounter a variety of assigments that fully utilize their capacity for analysis and growth.

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