The Role of the
Public Accountant in
the American
Economy
Chapter 01
McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Assurance services
The broad range of information
enhancement services that are provided
by certified public accountants (CPAs).
Two types:
Increase reliability of information
Putting information into a form or context that
facilitates decision making.
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Types of Services
Assurance Services
Attestation Services
Example: Audits of Financial Statements,
Examinations of Internal Control
Other Assurance Services
Example: CPA ElderCare Prime Plus Services
NonAssurance Services
Tax Services
Management Consulting Services
Other
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Attestation Services
To attest to information means to provide
assurance as to its reliability
Attest engagement:
A practitioner is engaged to issue or does
issue an examination, a review, or an agreed-
upon procedures report on subject matter or
an assertion about subject matter that is the
responsibility of another party (e.g.
management)
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The Attest Function
Management
Subject
Matter
Suitable
Criteria
The CPA
Gathers
Evidence
Subject
Matter* The Attest
Report
Issues
Report
*May be managements assertion about the subject matter.
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Suitable criteria
Standards established or developed by groups of experts.
Example: Internal control audit standards established by a committee of experts on internal control
Example: Financial statement audit standards are GAAP. For a financial statement audit suitable criteria are referred to as the applicable financial reporting framework.
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Forms of Attestation
1-8 *Applicable financial reporting framework
Audit of Financial Statements
Management
Prepares
Financial
Statements
Criteria
(e.g., GAAP)
The
Auditors
Gathers
Evidence
Financial
Statements The Auditors
Report
Issues
Report
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Financial Statement Audit
Auditors gather evidence and provide a high
level of assurance that the financial statements
follow GAAP, or some other appropriate basis of
accounting
Audit involves searching and verifying
accounting records and examining other
documents
Evidence necessary to issue an audit report that
states auditors opinion
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Audit Evidence
Evidence focuses on whether financial statements are
presented in accordance with GAAP; examples:
Balance sheet contains all liabilities
Income statement
Sales really occurred
Sales have been recorded at appropriate amounts
Recorded costs and expenses are applicable to period
All expenses have been recognized
Financial statement amounts
Accurate, properly classified and summarized
Notes are informative and complete
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What Creates the Demand for Audits?
Audits lend credibility to information by reducing information risk, the risk that information is materially misstated
Financial statement misstatements arise due to-- Accidental errors
Lack of knowledge of accounting principles
Unintentional bias
Deliberate falsification
Audits do not directly address business risk, the risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions
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History of the Attest Function
Period Developments Audit Objective Nature of Audit
Ancient - 1850 Audits of city states,
individuals & ventures
Detection of fraud Detailed; No reliance on
controls
1850-1905 Industrial revolution
resulted in the need for
corporate audits
Detection of fraud &
clerical errors
Some testing; No reliance
on controls
1905-1940 Development of stock
markets - increased
emphasis on earnings
Determination of
fairness; detection of
fraud & errors
Increased emphasis on
testing; Slight reliance on
controls
1940-1975 Development of auditing
standards
Determination of
fairness
Substantial reliance on
controls
1975-1985 Criticism by Congress;
Increased self-regulation
Determination of
fairness
Internal control
determines scope of
audit
1985-1995 Increased demands for
reporting on compliance &
internal control
Determination of
fairness
Risk assessment
determines audit scope;
must assess risk of fraud
1995-Present Panel on Audit
Effectiveness; Sarbanes-
Oxley Act of 2002
Determination of
fairness
Business risk approach
to audits
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The Accounting Professions Credibility Crisis
2000The Panel on Audit Effectiveness made a variety of suggestions to improve audits.
2001Enron Bankruptcy
2002WorldCom Fraud
2002Sarbanes-Oxley Act
2003Public Company Accounting Oversight Board began operations
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Financial Audits
Audit of the financial statements of an
entity Covers the balance sheet and related statements of
income, retained earnings and cash flows
Goal is to determine if prepared in conformity with
GAAP
Performed by CPAs
Users include management, investors, bankers,
creditors, financial analysts, government agencies
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Other Types of Audits
Compliance Audits Example: IRS audit of income tax return
Operational Audits Example: Effectiveness of operations of
receiving department of a manufacturing
company
Integrated Audits Example: Assurance on both the financial
statements and effectiveness of internal
control over financial reporting
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Other Types of Auditors
Internal Auditors
Government Accountability Office Auditors
Tax Auditors
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Internal Auditors
Employed by a company as an employee
They often
perform operational and compliance audits
address internal control
report to the audit committee of the board of directors and to the president
The Institute of Internal Auditors is the international organization of internal auditors.
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Government Accountability Office
Auditors (GAO Auditors)
Headed by the comptroller general
Responsibility of supporting Congress
Perform
Compliance, operational and financial audits
of government agencies
Examinations of corporations holding
government contracts to verify contract
payments have been proper
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Tax Auditors
Responsible for enforcement of tax laws of
various sorts (e.g., state and federal
income taxes, property taxes, sales taxes)
Internal revenue agents generally perform
compliance audits of income tax returns
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AICPAs Traditional Role
Establish Standards
Research and Publication
Continuing Professional Education
Self-Regulation
Note: Much of the standards setting and regulation roles relating to public companies (referred to as issuers) has been taken over by the SEC and the PCAOB.
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Establishes Standards--Examples
AICPA Auditing Standards Board Issues official pronouncements on auditing matters
for nonpublic companies (nonissuers)
Statements on Auditing Standards (SASs)
Statements on Standards for Attestation
Engagements (SSAEs)
Guidance for attesting to information other than
financial statements such as financial forecasts
Accounting and Review Services Committee
Statements on Standards for Accounting and Review
Services (SSARS)
Standards for compilations or reviews not audits of
financial statements
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Research and Publication
Publications
Journal of Accountancy (monthly)
The Tax Advisor
Audit publications
Industry Audit and Accounting Guides
Audit Risk Alerts
Auditing Practice Releases
Other publications
Accounting Research Studies
Statements of Position
Accounting Trends & Techniques
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Continuing Professional
Education Development of continuing professional
education programs
Necessary for continuing education
requirement for CPA certificate
Offered by
AICPA
State societies
Other professional organizations
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Professional Regulation
Regulations of Individual CPAs
Code of Professional Conduct ethical rules
for CPAs
Requirements for regular membership in
AICPA
Regulation of Public Accounting Firms
Division for Public Accounting Firms
Center for Public Company Audit Firms
Private Companies Practice Section (PCPS)
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The CPA Examin