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©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 1
The CPA ProfessionThe CPA Profession
Chapter 2Chapter 2
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 2
Learning Objective 1Learning Objective 1
Describe the nature of CPA firms,Describe the nature of CPA firms,
what they do, and their structure.what they do, and their structure.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 3
Certified PublicCertified PublicAccounting FirmsAccounting Firms
The legal right to perform audits is grantedThe legal right to perform audits is grantedto CPA firms by regulation of each state.to CPA firms by regulation of each state.
CPA firms also provide many other services toCPA firms also provide many other services totheir clients, such as tax and consulting services.their clients, such as tax and consulting services.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 4
Certified PublicCertified PublicAccounting FirmsAccounting Firms
The four largest CPA firms in the United StatesThe four largest CPA firms in the United Statesare called the “Big Four” international CPA firms.are called the “Big Four” international CPA firms.
These four firms have offices in most majorThese four firms have offices in most majorcities in the United States and in manycities in the United States and in many
cities throughout the world.cities throughout the world.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 5
Certified PublicCertified PublicAccounting FirmsAccounting Firms
There are less than 200 regional andThere are less than 200 regional andlarge local CPA firms with professionallarge local CPA firms with professional
staffs of more than 50 people.staffs of more than 50 people.
More than 95% of all CPA firms have fewerMore than 95% of all CPA firms have fewerthan 25 professionals in a single-office firm.than 25 professionals in a single-office firm.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 6
ManagementManagementconsultingconsultingservicesservices
TaxTaxservicesservices
AccountingAccountingandand
bookkeepingbookkeepingservicesservices
Activities of CPA FirmsActivities of CPA Firms
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 7
Structure of CPA FirmsStructure of CPA Firms
Three main factors influence theThree main factors influence theorganizational structure of all firms:organizational structure of all firms:
1. The need for independence from clients1. The need for independence from clients
2. The importance of a structure to encourage2. The importance of a structure to encouragecompetencecompetence
3. The increased litigation risk faced by auditors3. The increased litigation risk faced by auditors
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 8
Organizational StructureOrganizational Structure
ProprietorshipProprietorship
General partnershipGeneral partnership
General corporationGeneral corporation
Professional corporationProfessional corporation
Limited liability companyLimited liability company
Limited liability partnershipLimited liability partnership
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 9
Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm
Staff LevelStaff Level ExperienceExperience Typical ResponsibilitiesTypical Responsibilities
StaffStaffAssistantAssistant
0-2 years0-2 yearsPerforms most of thePerforms most of thedetailed audit workdetailed audit work
SeniorSeniorAuditorAuditor
2-5 years2-5 yearsResponsible for the auditResponsible for the audit
field work, includingfield work, includingsupervising staff worksupervising staff work
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 10
Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm
Staff LevelStaff Level
ManagerManager
ExperienceExperience Typical ResponsibilitiesTypical Responsibilities
5-10 years5-10 yearsHelps the plan, managesHelps the plan, managesthe audit, reviews work,the audit, reviews work,and works with the clientand works with the client
PartnerPartner 10+ years10+ yearsReviews audit work andReviews audit work andmakes significant auditmakes significant audit
decisionsdecisions
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 11
Learning Objective 2Learning Objective 2
Discuss how e-commerceDiscuss how e-commerce
and the Internet affectand the Internet affect
CPA firm operations.CPA firm operations.
Discuss how e-commerceDiscuss how e-commerce
and the Internet affectand the Internet affect
CPA firm operations.CPA firm operations.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 12
E-Commerce and E-Commerce and CPA Firm OperationsCPA Firm Operations
CPA firms are using the InternetCPA firms are using the Internetto market their services.to market their services.
They also use the Internet to connectThey also use the Internet to connecttheir global professional staff.their global professional staff.
Sender’sSender’smail servermail server
Receiver’sReceiver’smail servermail server
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 13
Learning Objective 3Learning Objective 3
Describe the key functionsDescribe the key functions
performed by the AICPA.performed by the AICPA.
Describe the key functionsDescribe the key functions
performed by the AICPA.performed by the AICPA.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 14
The AICPA sets professional requirements forThe AICPA sets professional requirements forCPAs, conducts research, and publishesCPAs, conducts research, and publishes
materials on many different subjectsmaterials on many different subjectsrelated to accounting, auditing,related to accounting, auditing,
attestation and assurance services,attestation and assurance services,management consultingmanagement consulting
services, and taxes.services, and taxes.
AICPAAICPA
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 15
Vision for the FutureVision for the Future
The AICPA has established the CPA Vision ProjectThe AICPA has established the CPA Vision Projectto provide a core purpose and a vision for the CPAto provide a core purpose and a vision for the CPA
profession in the year 2011 and beyond.profession in the year 2011 and beyond.
The core purpose of the CPA Vision Project isThe core purpose of the CPA Vision Project is““CPAs…making sense of a changingCPAs…making sense of a changing
and complex world.”and complex world.”
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 16
Vision for the FutureVision for the Future
The future success of the CPA professionThe future success of the CPA professionrelies a great deal on public perceptionsrelies a great deal on public perceptions
of CPAs’ abilities and roles.of CPAs’ abilities and roles.
CPAs must become market driven and notCPAs must become market driven and notdependent on regulations to keep them in business.dependent on regulations to keep them in business.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 17
Vision for the FutureVision for the Future
Specialization is critical for the Specialization is critical for the future of the CPA profession.future of the CPA profession.
The market demands that CPAs be conversantThe market demands that CPAs be conversantin global business practices and strategies. in global business practices and strategies.
The market demands less audit and accountingThe market demands less audit and accountingand more value-adding consulting services.and more value-adding consulting services.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 18
The AICPA is empowered to set standardsThe AICPA is empowered to set standards(guidelines) and rules that all members and(guidelines) and rules that all members and
other practicing CPAs must follow.other practicing CPAs must follow.
The requirements are set byThe requirements are set bycommittees made up of AICPA members.committees made up of AICPA members.
Establishing StandardsEstablishing Standardsand Rulesand Rules
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 19
Establishing StandardsEstablishing Standardsand Rulesand Rules
1.1. Auditing standardsAuditing standards
2.2. Compilation and review standardsCompilation and review standards
3.3. Other attestation standardsOther attestation standards
4.4. Consulting standardsConsulting standards
5.5. Code of Professional ConductCode of Professional Conduct
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 20
Other AICPA FunctionsOther AICPA Functions
Supports research by its ownSupports research by its ownstaff and provides grants to othersstaff and provides grants to others
Writes and grades the CPA examinationWrites and grades the CPA examination
Provides seminars and education inProvides seminars and education ina variety of subject mattersa variety of subject matters
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 21
Learning Objective 4Learning Objective 4
Understand the role of theUnderstand the role of the
Public Company AccountingPublic Company Accounting
Oversight Board and the effectsOversight Board and the effects
of the Sarbanes-Oxley Actof the Sarbanes-Oxley Act
on the CPA profession.on the CPA profession.
Understand the role of theUnderstand the role of the
Public Company AccountingPublic Company Accounting
Oversight Board and the effectsOversight Board and the effects
of the Sarbanes-Oxley Actof the Sarbanes-Oxley Act
on the CPA profession.on the CPA profession.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 22
This Act is considered by many observers toThis Act is considered by many observers tobe the most important legislation affectingbe the most important legislation affecting
the auditing profession since the 1930s.the auditing profession since the 1930s.
Sarbanes-Oxley ActSarbanes-Oxley Act
The provisions of the Act apply to publiclyThe provisions of the Act apply to publiclyheld companies and their audit firms.held companies and their audit firms.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 23
Sarbanes-Oxley ActSarbanes-Oxley Act
SECSEC
PCAOB PCAOB (5 members)(5 members)
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 24
Learning Objective 5Learning Objective 5
Summarize the role of theSummarize the role of the
Securities and ExchangeSecurities and Exchange
Commission in accountingCommission in accounting
and auditing.and auditing.
Summarize the role of theSummarize the role of the
Securities and ExchangeSecurities and Exchange
Commission in accountingCommission in accounting
and auditing.and auditing.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 25
The overall purpose of theThe overall purpose of theSecurities and Exchange Commission (SEC)Securities and Exchange Commission (SEC)
is to assist in providing investorsis to assist in providing investorswith reliable information uponwith reliable information upon
which to make investment decisions.which to make investment decisions.
Securities and Exchange Securities and Exchange CommissionCommission
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 26
Forms S-1 to S-16Forms S-1 to S-16
Securities and Exchange Securities and Exchange CommissionCommission
Form 8-KForm 8-K
Form 10-KForm 10-K
Form 10-QForm 10-Q
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 27
Learning Objective 6Learning Objective 6
Use generally acceptedUse generally accepted
auditing standards as aauditing standards as a
basis for further study.basis for further study.
Use generally acceptedUse generally accepted
auditing standards as aauditing standards as a
basis for further study.basis for further study.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 28
1. The audit is to be performed by a person or1. The audit is to be performed by a person orpersons having adequate technical trainingpersons having adequate technical trainingand proficiency as an auditor.and proficiency as an auditor.
2. In all matters relating to the assignment,2. In all matters relating to the assignment,an independence in mental attitude is toan independence in mental attitude is tobebe maintained by the auditor or auditors.maintained by the auditor or auditors.
General StandardsGeneral Standards
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 29
General StandardsGeneral Standards
3. Due professional care is to be exercised3. Due professional care is to be exercisedinin the planning and performance ofthe planning and performance of thetheaudit and the preparation of the report.audit and the preparation of the report.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 30
1. The work is to be adequately planned1. The work is to be adequately plannedand assistants, if any, are to beand assistants, if any, are to beproperly supervised.properly supervised.
2. A sufficient understanding of internal2. A sufficient understanding of internalcontrol is to be obtained to plan the auditcontrol is to be obtained to plan the auditand to determine the nature, timing, andand to determine the nature, timing, andextent of tests to be performed.extent of tests to be performed.
Standards of Field WorkStandards of Field Work
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 31
Standards of Field WorkStandards of Field Work
3. Sufficient competent evidential matter is to3. Sufficient competent evidential matter is tobe obtained through inspection, observation,be obtained through inspection, observation,inquiries, and confirmations to afford ainquiries, and confirmations to afford areasonable basis for an opinion regardingreasonable basis for an opinion regardingthe financial statements under audit.the financial statements under audit.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 32
1. The report shall state whether the financial1. The report shall state whether the financialstatements are presented in accordance withstatements are presented in accordance withgenerally accepted accounting principles.generally accepted accounting principles.
2. The report shall identify those circumstances2. The report shall identify those circumstancesin which such principles have not beenin which such principles have not beenconsistently observed in the current periodconsistently observed in the current periodin relation to the preceding period.in relation to the preceding period.
Standards of ReportingStandards of Reporting
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 33
3. Informative disclosures in the financial3. Informative disclosures in the financialstatements are to be regarded as reasonablystatements are to be regarded as reasonablyadequate unless otherwise stated in the report.adequate unless otherwise stated in the report.
4. The report shall contain an expression of4. The report shall contain an expression ofopinion regarding the financial statements,opinion regarding the financial statements,taken as a whole.taken as a whole.
Standards of ReportingStandards of Reporting
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 34
Summary ofSummary ofGeneral StandardsGeneral Standards
Generally Accepted Auditing StandardsGenerally Accepted Auditing Standards
GeneralGeneral
1. Adequate training1. Adequate training and proficiencyand proficiency2. Independence in2. Independence in mental attitudemental attitude3. Due professional3. Due professional carecare
Field WorkField Work
1. Proper planning1. Proper planning and supervisionand supervision2. Internal control2. Internal control understandingunderstanding3. Sufficient3. Sufficient competentcompetent evidenceevidence
ReportingReporting
1. Statements prepared in1. Statements prepared in accordance with GAAPaccordance with GAAP2. Circumstances when2. Circumstances when GAAP not followedGAAP not followed3. Adequacy of disclosures3. Adequacy of disclosures4. Expression of opinion4. Expression of opinion on financial statementson financial statements
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 35
Learning Objective 7Learning Objective 7
Discuss the roleDiscuss the role
of internationalof international
auditing standards.auditing standards.
Discuss the roleDiscuss the role
of internationalof international
auditing standards.auditing standards.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 36
International StandardsInternational Standardson Auditingon Auditing
International Standards on Auditing (ISAs)International Standards on Auditing (ISAs)are issued by the International Auditingare issued by the International AuditingPractice Committee of the InternationalPractice Committee of the International
Federation of Accountants (IFAC).Federation of Accountants (IFAC).
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 37
International StandardsInternational Standardson Auditingon Auditing
IFAC is the worldwide organizationIFAC is the worldwide organizationfor the accountancy profession.for the accountancy profession.
The IAPC works to improve theThe IAPC works to improve theuniformity of auditing practices anduniformity of auditing practices and
related services throughout the world.related services throughout the world.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 38
Learning Objective 8Learning Objective 8
Identify quality controlIdentify quality control
standards and practicesstandards and practices
within the accountingwithin the accounting
profession.profession.
Identify quality controlIdentify quality control
standards and practicesstandards and practices
within the accountingwithin the accounting
profession.profession.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 39
Elements of Quality ControlElements of Quality Control
Independence, integrity, and objectivityIndependence, integrity, and objectivity
Personnel managementPersonnel management
Acceptance and continuation of clientsAcceptance and continuation of clientsand engagementsand engagements
Engagement performanceEngagement performance
MonitoringMonitoring
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 40
RelationshipsRelationships
Quality controlQuality controlstandardsstandards
Generally acceptedGenerally acceptedauditing standardsauditing standards
Division ofDivision ofCPA firmsCPA firms
PeerPeerreviewreview
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 41
Chapter SummaryChapter Summary
The nature of the CPAThe nature of the CPA
profession and theprofession and the
activities of CPA firms.activities of CPA firms.
The nature of the CPAThe nature of the CPA
profession and theprofession and the
activities of CPA firms.activities of CPA firms.
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 42
CPAs Encouraged to ConductCPAs Encouraged to ConductThemselves at a High LevelThemselves at a High Level
Conduct ofConduct ofCPA firmCPA firmpersonnelpersonnel
LegalLegalliabilityliability
Division ofDivision ofCPA firmsCPA firms
ContinuingContinuingeducationeducation
requirementsrequirements
GAAS andGAAS andinterpretationsinterpretations
Code ofCode ofProfessionalProfessional
ConductConduct
CPACPAexaminationexamination
QualityQualitycontrolcontrol
PeerPeerreviewreview
PCAOBPCAOBand SECand SEC
©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 2 - 43
End of Chapter 2End of Chapter 2