Chapter 2The CPA Profession

P. SmithCPA

I need a C P A

!

Presentation Outline

I. The Structure of CPA FirmsII. The Regulation of Public CorporationsIII. American Institute of Certified Public

Accountants (AICPA)IV. Generally Accepted Auditing

StandardsV. Quality Control Policies

I. The Structure of CPA Firms

A. Organization Forms With High Personal Liability

B. Organization Forms with Limited LiabilityC. Staff Levels and Responsibilities

The legal right to perform

audits is granted to CPA firms by

regulation of each state.

A. Organizational Forms with High Personal Liability

The following forms of firm organization are unpopular because they provide no owner

protection against litigation:Proprietorship – Only firms with one owner can

operate in this form. General Partnership – Same form as a

proprietorship except that there are 2 or more owners.

B. Organizational Forms with Limited Liability

General corporation – An owner’s loss in a corporation is limited to the amount invested. However, most states prohibit CPA firms from

organizing in this manner.Professional corporation (PC) – Although this form

provides some legal liability, the amount of protection can vary significantly from state to

state.Limited Liability Company (LLC) – Firm is taxed like

a partnership, but the partners have limited liability like a corporation.

Limited Liability Partnership – Partner’s are personally liable for partnership obligations, their

own acts, and the acts of those under their supervision. Not responsible for the acts of other

partners or staff not under their supervision.

C. Staff Levels and Responsibilities

Staff LevelAverage

Experience

Typical Responsibilities

Staff Assistant 0-2 yearsPerforms most of the detailed

audit work.

Senior or in-charge auditor

2-5 yearsResponsible for the audit field

work, including supervising staff work.

Manager 5-10 yearsHelps the plan, manages the

audit, reviews work, and works with the client.

Partner 10+ yearsReviews overall audit work

and is involved in significant audit decisions. Has ultimate responsibility for the audit.

II. The Regulation of Public Corporations

A. The Public Company Accounting Oversight Board

B. The Securities ActsC. The Role of the SECD. Specific SEC Reports

A. The Public Company Accounting Oversight Board (PCAOB)

1. A Primary Responsibility of the PCAOB

2. Meet the Board Members of the PCAOB

3. SEC Oversight Over PCAOB

4. Standard Setting Input from Outside the PCAOB

Establishment of standards for auditing, quality control, ethics, and independence, as well as attestation,

for registered accounting firms.

1. A Primary Responsibility of the PCAOB

2. Meet the Board Members of the PCAOBBill Gradison is a former nine-term Congressman from Ohio.William J. McDonough is a former president and CEO of the

Federal Reserve Bank of New York.Kayla J. Gillan worked in the pension field for more than

16 years.

Charles D. Niemeier was the Chief Accountant in the Divisionof Enforcement of the U.S. Securities and Exchange

Commission.

Daniel L. Goelzer served as General Counsel of the Securities and Exchange Commission.

3. SEC Oversight Over PCAOB

In addition to appointing or removing members, the SEC, among other things, must approve the Board’s budget and

rules, including auditing standards, and may review appeals of adverse Board

inspection reports and disciplinary actions against registered accounting firms.

4. Standard Setting Input from Outside the PCAOB

Although the Sarbanes-Oxley Act would allow the PCAOB to designate a professional group of

accountants to propose standards to the Board, the Board decided early in 2003 that it could best protect investors by developing standards itself.The Board will rely on advice from a standing

advisory group, and be involved in soliciting public comment to obtain the views of issuers, accountants, investors, and other interested

parties.

The PCAOB

B. The Securities Acts

Securities Act of 1933

Requires most companies

planning to issue new securities to

the public to submit a

registration statement to the SEC for approval.

Securities Exchange Act of 1934

Requires companies to file detailed annual reports

with the commission in

order to have their securities publicly

traded on the stock exchanges.

C. The Role of the SEC

The SEC has legal power to establish rules for any CPA associated with audited financial

statements submitted to the commission. The SEC has taken the position that

accounting principles and auditing standards should be set by the profession. However, they can override the profession and their

opinion is strongly considered.

D. Specific SEC Forms

Forms S1 to S16 – Completed when new securities are to be issued to the public.

Form 8K – Filed at the end of any month in which a significant investor event has

occurred (i.e., sale of subsidiary, change of auditor, etc.)

Form 10-K – Filed annually within 90 days of the close of each fiscal year. Includes

audited financial statements. Form 10-Q – Filed quarterly with financial

statements reviewed by the auditor.

III. American Institute of Certified Public Accountants

The AICPA sets standards and rules that all members and other practicing CPAs must

follow. This authority extends to the following areas:

1. Auditing Standards2. Compilation and Review Standards

3. Other Attestation Standards4. Consulting Standards

5. Code of Professional Conduct

1. Auditing Standards The Auditing Standards Board

(ASB) is responsible for issuing

pronouncements on auditing matters for

all entities other than publicly traded

companies. The

pronouncements are known as

Statements on Auditing Standards

(SASs)Note: For public company engagements, the

Sarbanes-Oxley Act of 2002 transferred this power to the Public Company Accounting Oversight Board (PCAOB).

2. Compilation and Review Standards

The Accounting and Review Services Committee is responsible for issuing pronouncements of the CPAs responsibilities when the CPA is associated

with financial statements of non-public companies that are not audited.

The Statements on Standards for Accounting and Review Services (SSARS), provide guidance

for providing compilation (no assurance on financials) and review services (limited

assurance on financials).

3. Other Attestation Services

Forms of attestation are often performed

for other than historical financial

statements. Examples of other

attestation services involve prospective

financial information in forecasts and

projections.

4. Consulting Standards

The Management Consulting Services

Executive Committee is responsible for issuing

pronouncements on consulting services.

Consulting differs from attestation in that the CPA does not report on

another party’s assertion. Rather, the CPA develops findings,

conclusions, and recommendations.

5. Code of Professional Conduct

The AICPA Committee on Professional

Ethics sets rules of conduct that

CPAs are required to meet.

IV. Generally Accepted Auditing StandardsA Measure of the Quality of Audit Work

Generally Accepted Auditing Standards(GAAS)

SAS No. 1

A. 3 GeneralStandards

Apply to everyphase of auditengagement

B. 3 StandardsOf Field Work

Apply to performance of

audit work

C. 4 StandardsOf Reporting

Apply to development of

audit report

Note: Although the term generally accepted auditing standardscontinues to be used for audits of private companies, public company audits should refer to PCAOB auditing standards.

General Standard No. 1

The audit is to be performed by a person or persons having adequate technical training and proficiency as an

auditor.

a. Specific education in auditingb. Professional experience

c. Continuing education

What does auditor training and proficiency involve?

General Standard No. 2

In all matters relating to the assignment, an independence in mental attitude is to be maintained by

the auditor or auditors.Independenc

e

in fact

An auditor must also be

independent in appearance

CPA

General Standard No. 3

Due professional care is to be exercised in the performance of the audit and the preparation of the

report.The Standard of the Prudent Practitioner

ProfessionalSkepticism

ProfessionalJudgment

An auditor must exercise

both …

Standard of Fieldwork No. 1

The work is to be adequately planned and assistants, if any, are to be properly supervised.

Yes, that is the part of

the audit you will be

performing.

Standard of Fieldwork No. 2

A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature,

timing, and extent of tests to be performed.

First, we need to size up your organization’s

system of internal control!

CPA

Audit Customer

Sufficient competent evidence does not require a fine tooth

comb.

Standard of Fieldwork No. 3

Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and

confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

Financial Statement

s

Standard of Reporting No. 1

The report shall state whether the financial statements are presented in accordance with generally accepted

accounting principles

Standard of Reporting No. 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.

CurrentYear

AccountingPrinciples

PriorYear

AccountingPrinciples

Consistent Application of Accounting Principles

Standard of Reporting No. 3

Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise

stated in the report.

FinancialStatementWording

Notes toFinancial

StatementsDisclosures

Include

Standard of Reporting No. 4

The report shall contain either an expression of opinion regarding the financial statements, taken as a whole, or

an assertion to the effect that an opinion cannot be expressed.

Financial Statements

Balance Sheet

Profit & Loss

Cash Flows

V. Quality Control Policies

To Control the Quality of Audit Work

AICPA QualityControl Structure

A. Elements ofQualityControl

B. PeerReview

Program

C. Division of

CPA Firms

A. Elements of Quality Control

The AICPA has not set specific quality control standards because such procedures

should depend upon features of the practice. However, five elements have been identified that firms should consider in setting up their

own policies and procedures..

B. Peer Review Program

A peer review is an examination of one CPA firm’s compliance with its quality control system and

whether it has developed and followed adequate policies and procedures for the five elements of

quality control.

All CPA firms that are members of the AICPA must be reviewed at least once every 3 years.

Note: The peer review program for SECPS members has beenreplaced by the quality inspections conducted by the PCAOB for

registered firms responsible for auditing public companies.

C. Division for CPA Firms

There are two sections in the Division of CPA Firms:

> SEC Practice Section (SECPS)

> Private Companies Practice Section (PCPS)Designed to establish a self-regulation

process for the profession.

Note: Many of the self-regulatory activities of the SECPS havebeen taken over by the PCAOB. As a result, the SECPS has

reorganized as the Center for Public Company Audit Firms toshare information and promote member firms’ positions

before the SEC and PCAOB.

Summary

1. Organization and staffing of CPA firms2. Public company regulation

3. The role of the AICPA4. General Standards – all audit phases

5. Fieldwork Standards – performance of audit work

6. Reporting Standards – development of audit report

7. Quality control in the form of standards, peer review, and AICPA divisions.