The Role of Public Accountants in the American Economy

Assurance Services

Enhance reliability of information for decision-making.

Non-Assurance Services

Includes tax and management consulting by CPAs.

Attestation Services

CPAs assure reliability of third-party assertions.

Financial Statement Audits

High assurance that statements follow GAAP standards.

Evidence Gathering

Process of collecting data to support audit opinions.

Information Risk

Risk of materially misstated information in reports.

Business Risk

Risk of failing to meet financial obligations.

Credibility Crisis

Loss of trust in accounting profession post-scandals.

Sarbanes-Oxley Act

2002 law enhancing accountability in financial reporting.

Public Company Accounting Oversight Board (PCAOB)

Regulatory body overseeing public company audits.

American Institute of Certified Public Accountants (AICPA)

Sets standards and conducts research for CPAs.

CPA Examination

Uniform national exam required for CPA certification.

Continuing Professional Education

Ongoing education required to maintain CPA certification.

Compliance Audits

Assess adherence to laws and regulations.

Operational Audits

Evaluate efficiency and effectiveness of operations.

Integrated Audits

Combine financial and operational audit processes.

Internal Auditors

Evaluate internal controls and risk management.

Government Accountability Office Auditors

Conduct audits for government entities.

Tax Auditors

Specialize in reviewing tax compliance and filings.

Historical Evolution of Audits

Shift from fraud detection to fairness and risk assessment.

Demand for Audits

Audits increase credibility and reduce information risk.

Audit Report

Document stating auditor's opinion on financial statements.

AICPA

American Institute of Certified Public Accountants.

CPA Certificate

Credential issued by state boards of accountancy.

FASB

Financial Accounting Standards Board; sets accounting standards.

GASB

Governmental Accounting Standards Board; focuses on governmental entities.

FASAB

Federal Accounting Standards Advisory Board; federal accounting standards.

PCAOB

Public Company Accounting Oversight Board; oversees auditors.

Public Accounting Services

Includes auditing, tax, consulting, and fraud investigation.

Sole Proprietorship

Business owned by a single individual.

Limited Liability Partnership (LLP)

Partnership with limited liability for partners.

Big 4 Firms

Largest global public accounting firms.

Professional Skepticism

Questioning mindset during audit evidence evaluation.

GAAS

Generally Accepted Auditing Standards for audits.

General Standards

Training, independence, and due professional care requirements.

Field Work Standards

Planning, supervision, and evidence gathering guidelines.

Reporting Standards

GAAP consistency and adequate disclosure requirements.

Auditor Responsibility

Assessing risks and ensuring material misstatements are detected.

Material Misstatement

Significant errors affecting financial statement accuracy.

Professional Judgment

Auditor's ability to make informed decisions.

Independence

Auditor's impartiality in client relationships.

Engagement Responsibilities

Roles of partners, managers, and staff in audits.

Busy Season

Peak periods of workload for public accountants.

Client Noncompliance

Failure to adhere to laws affecting financial statements.

Auditor's Inquiry Responsibilities

Auditors inquire but do not assure detection.

Standard Auditors' Report

Includes title, opinion, and auditor responsibilities.

Opinion Paragraph

States if financial statements present fairly.

Reasonable Assurance

Auditors aim for reasonable, not absolute assurance.

Fraud Detection Risk

Higher risk due to potential collusion.

Types of Auditors' Reports

Includes unmodified, qualified, adverse, and disclaimers.

Public Company Reports

Follow PCAOB standards and have different titles.

GAAP Definition

Generally Accepted Accounting Principles by FASB.

GASB Scope

Covers accounting for state and local governments.

FASAB Purpose

Focuses on federal government accounting standards.

Quality Control Elements

Includes leadership, ethics, performance, and monitoring.

PCAOB Regulation

Oversees audits of public companies.

PCAOB Inspections

Evaluate audit performance and quality control.

Peer Reviews

Conducted by CPAs to assess quality control.

IFRS Overview

International standards accepted by SEC for foreign firms.

International Audit Report

May expand on auditor responsibilities.

Need for Professional Ethics

Essential for public confidence in CPA work.

Auditors vs. Other Professionals

Auditors serve public interest, not just clients.

Code of Professional Conduct

Framework with principles and mandatory rules.

AICPA Professional Ethics Principles

Include integrity, objectivity, and public interest.

Independence Rule (Rule 101)

Mandatory for auditors to maintain independence.

Confidential Client Information (Rule 301)

Protect client information with specific exceptions.

Independence

Requires actual and appearance independence.

Threats to Independence

Financial self-interest and undue influence risks.

Independence Safeguards

Created by profession, legislation, or CPA firm.

Covered Members

Key individuals influencing independence rules.

Impairment of Independence

Situations affecting independence under Rule 101.

Direct Financial Interest

Ownership stake affecting independence.

Sarbanes-Oxley Act

Prohibits certain consulting services for audit clients.

Rule 102 Violations

Includes materially incorrect entries and false statements.

Rule 201 Standards

Requires competence, care, planning, and relevant data.

Rule 202 Compliance

Mandates adherence to designated technical standards.

Rule 203 GAAP Compliance

Financial statements must follow GAAP for audits.

Rule 301 Confidentiality

Prohibits disclosure without client consent.

Rule 302 Contingent Fees

Generally prohibited for attest clients.

Rule 501 Discreditable Acts

Includes improper retention of client records.

Client Records

Client-prepared records must be returned.

Rule 502 Advertising

Advertising allowed if not misleading or deceptive.

Rule 503 Commissions

Requires disclosure of received commissions.

Rule 505 Business Forms

Permits practice in any legal business form.

CPA Liability Scope

Extensive due to multiple potential claimants.

Common Law Liability

Arises from breach of contract or negligence.

Statutory Liability

Developed through laws like Securities Acts.

Primary Beneficiaries

Known by name in a contract.

Foreseen Parties

Reasonably expected to rely on services.

Foreseeable Parties

Decisions rely on audited financials.

CPA Liability to Clients

Includes failure to discover fraud.

Common Law Liability

Liability for misstated financials to third parties.

Civil Liability

Under federal securities laws for auditors.

Criminal Liability

Auditors face charges for serious misconduct.

Elements of Proof

Duty, breach, losses, causation must be proven.

Third Parties' Legal Recourse

Must prove losses from CPA's breach.

Gross Negligence

Generally establishes liability for auditors.

Ordinary Negligence

Liability depends on jurisdiction's rules.

Auditor's Defenses

Lack of duty or non-negligent performance.

Contributory Negligence

Client's negligence can reduce auditor liability.