CH.1 - Role Of Public Accountant in American Economy

Assurance Services

broad term for information enhancement services (making better or more trustworthy) done by CPAs

2 branches of Assurance Services

Attestation Services

Other Assurance Services

Attestation Services

aimed at increasing the reliability of information

overall goal is to “bear witness”

ex. checking someone else’s work; if comp claims they made $10M in profit, you double check to see if true

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

attest - “bear witness”

Other Assurance Services

ehnacements that put data into clean,useful format to facilitate a decision for bosses/investors

Types of NonAssurance Services

Tax Services

Manangement Consulting Services

Attest engagement

a specific, individual project or work contract performed regarding a subject matter or assertion that is the responsibility of another party

procedure used to carryout work (in 3 forms)

3 forms of attestation engagements

Examination

Review

Agree Upon Procedures

Attestation Engagements: Examination

most comprehensive (detailed) form of attestation

High assurance = Low Risk

Search/verify acct. records + examine internal and external evidence

Report Language: “In our opinion”

“checked car top to bottom and runs great no hidden crashes”

Attestation Engagements: Review

mid-level engagement designed to provide limited assurance without performing deep audit testing

Moederate Assurance = Moderate Risk

limited to inquiries of management and analytical procedures

Report Language: “Not aware of any material mods that should be made”

“didnt take engine apart, but took it for a spin and nothing seemed broken”

Attestation Engagements: Agreed-Upon Procedures

customized engagement where the scope is restricted to specific tests requested by particular reliance parties

No opinion, just summary of findings = Risk depends

Strictly limited to the specific procedures agreed upon with the specified user or users

summary of procedures followed by findings

“asked to check if ac was broken. heres the temp reading. cant give ovreall grade just facts”

Subject Matter

what management’s assertion can be about

Suitable Criteria

Standards established or developed by groups of experts used as a benchmark for the subject matter

think: answerkey/rulebook (set by FASB)

Committee of Sponsoring Organizations (COSO) framework

specific framework that serves as suitable criteria for an internal control audit

In a financial statement audit, what is the term for the suitable criteria used?

Applicable financial reporting framework

What is the most common applicable financial reporting framework used in the United States?

Generally Accepted Accounting Principles (GAAP)

Auditors provide _____ assurance that financial statements follow GAAP

reasonable

what audit evidence is looked at regarding financial statements?

Balance and Income Sheets and Financial statement amounts

When auditing the balance sheet, auditors gather evidence to ensure that

ALL assets and obligations are included + properly valued

When auditing the income sheet, auditors gather evidence to ensure that

ALL sales and expenses actually happened + report appropriate amount

costs and expenses recorded to applicable period

When auditing the financial statement amounts, auditors gather evidence to ensure that

quanitites are properly classified and summerized

notes are informative and complete

Information Risk

risk that information is materially misstated (lying, wrong, or misleading)

auditors job is to fix this

Audits lend _____ to information by reducing information risk

credibility

List the four primary causes of financial statement misstatements

Accidental errors

lack of knowledge of accounting principles

unintentional bias

deliberate falsification (fraud)

Business Risk

risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions

ex. blockbuster going out of business

United States v. Arthur Young, the Supreme Court described the auditor's role as a public

watchdogs

Compliance Audit

determines if a party is following specific rules, such as an IRS audit of a tax return

Operational Audit

audit that measures the effectiveness of a specific department's operations

Integrated Audit

provides assurance on both the financial statements and the effectiveness of internal control over financial reporting

Management is

responsible for prepping financial statements

Public Company Committees

performs audits of public companies registered with the government

2 types of Public Company “Overseers”

Securities and Exchange Commission (SEC)

Public Company Accounting Oversight Board (PCAOB)

Securities and Exchange Commission (SEC)

fed gov agency sitting at the top of public market oversight

What is the primary objective of the SEC's requirement for audited financial statements in registration statements?

To protect investors and the public by requiring full disclosure of financial information

Which government agency has oversight responsibility for the PCAOB?

The Securities and Exchange Commission (SEC)

What SEC regulation sets forth basic accounting regulations for companies offering securities for sale?

Regulation S-X

Public Company Accounting Oversight Board (PCAOB)

adopts auditing, attestation, quality control, ethics, and independence standards specifically for public company audit reports

also registers, inspects firms, and disciplines CPA firms that audit public companies

American Institute of Certified Public Accountants (AICPA)

(Private Company Committees)

The National Professional Association for CPAs

Sets standards for nonpublic entities through technical committees

3 types of Private Company Committees

Auditing Standards Board (ASB)

Accounting and Review Services Committee (ARSC)

Peer Review Board / National Peer Review Committee

Auditing Standards Board (ASB)

AICPA committee designated to issue official pronouncements on auditing and attestation for nonpublic companies

• Issues: Statements on Auditing Standards (SASs) for audits and Statements on Standards for Attestation Engagements (SSAEs) for non-financial attestations

Accounting and Review Services Committee (ARSC)

AICPA committee responsible for non-audit accounting engagements

• Issues: Statements on Standards for Accounting and Review Services (SSARS) for compilations and reviews

Peer Review Board / National Peer Review Committee

AICPA bodies that administer peer reviews to evaluate CPA firm quality control practices

PCAOB and ASB set rules for

auditors

Criteria Setters

independent boards set GAAP and financial reporting rules that management uses to prepare financial statements

3 types of Criteria Setters

Financial Accounting Standards Board (FASB)

Governmental Accounting Standards Board (GASB)

Federal Accounting Standards Advisory Board (FASAB)

Financial Accounting Standards Board (FASB)

Sets GAAP for public and private non-governmental entities

Governmental Accounting Standards Board (GASB)

Sets accounting standards for state and local governments

Federal Accounting Standards Advisory Board (FASAB)

Sets accounting standards for the U.S. federal government

2 types of Licensing & Legal Enforcement

State Boards of Accountancy

National Association of State Boards of Accountancy (NASBA)

State Boards of Accountancy

State government bodies that issue CPA certificates and grant licenses to practice

National Association of State Boards of Accountancy (NASBA)

An organization representing individual state boards

Industry Specialization

Firms with detailed knowledge of a client's specific business sector

GAO Audit (Government Accountability Office)

audit performed to support Congress by auditing government agencies

Internal auditors typically report to the

CEO and the audit committee of the board of directors.