Chapter 01

The Role of the

Public Accountant
in the
American Economy

McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

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 agreedupon 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

The CPA
Suitable
Criteria

Subject
Matter

Gathers
Evidence
Issues
Report

Subject
Matter*

The Attest
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

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Audit of Financial Statements

The
Auditors

Management
Prepares
Financial
Statements

Criteria
(e.g., GAAP)

Gathers
Evidence
Issues
Report

Financial
Statements

The Auditors
Report

*Applicable financial reporting framework

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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; SarbanesOxley 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

Example: IRS audit of income tax return

Operational

Audits

Example: Effectiveness of operations of

receiving department of a manufacturing
company

Integrated

Audits

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
They

by a company as an employee

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

Code of Professional Conduct ethical rules

for CPAs
Requirements for regular membership in
AICPA

Regulation

of Individual CPAs

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 Examination

Uniform

national examination prepared

and graded by the AICPA
Computerized exam includes multiple
choice and simulations in four parts

Auditing and Attestation

Financial Accounting & Reporting
Regulation
Business Environment & Concepts

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State Boards of Accountancy

Issue

CPA certificates
All boards require successful completion
of CPA examination
Education and experience requirements
vary
National Association of State Boards of
Accounting (NASBA)

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Other Parties
FASB

Sets GAAP for entities other than federal,

state and local governments

GASB

Standards of financial accounting for state

and local government entities

FASAB

Accounting standards for the US government

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PCAOB Role

Adopt auditing, attestation, quality control, ethics

and independence standards relating to the
preparation of audit reports for SEC registrants
Oversee and discipline CPAs and CPA firms that
audit public companies, including

Register firms
Perform inspections of firms
Conduct investigations and disciplinary proceedings of firms
Sanction registered firms

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Securities and Exchange

Commission (SEC)
Agency

of the US government
Oversight responsibility for the PCAOB
Objectives

Protect investors and public by requiring full

disclosure of financial information by
companies offering securities for sale to the
public
Prevent misrepresentation, deceit, or other
fraud in the sale of securities
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Securities and Exchange

Commission (SEC )
Registration

statements

Qualify securities for sales

Contains audited financial statements
Makes SEC major user of financial
statements

Protects

investors
Regulation S-X

Basic accounting regulation

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Types of Professional Services

Attestation

and Assurance

Tax
Consulting
Accounting
Personal

Financial Planning
Litigation support
Fraud Investigation
Personal Financial Planning
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Organization of the Public

Accounting Profession
Sole

proprietorship
Partnerships
Professional Corporation
Limited Liability Partnership (LLP)
Limited Liability Company (LLC)

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Categories of Public Accounting Firms

Local
Regional
National
Big

4
Alternative Practice Structures

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Industry Specialization
Firms

with detailed knowledge and

understanding of a clients industry
Helps firms

Be more effective at collecting and evaluating

audit evidence
Make valuable suggestions to improve clients
operations
Provide the client consulting services

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Typical Structure of a National

CPA Firm

Partners
Managers
Seniors
Staff Assistant

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Responsibilities on an Engagement
PartnerOverall

responsibility is to
assure that that audit is performed in
accordance with professional standards.
ManagerSupervise overall engagement.
SeniorsIn charge auditor on a daily
basis.
Staff assistantsWork under the
immediate supervision of the senior.
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Elements of Public Accounting

Work
Professional

Stay current on developments within the

profession

Seasonal

Developments

fluctuations

Busy season from December through April

Relationships

with clients

Need to maintain independence

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