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 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 The CPA

Subject Suitable Gathers

Matter Criteria Evidence

Issues
Report

Subject The Attest

Matter* Report

*May be management’s 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

Management The
Auditors
Prepares Criteria Gathers
Financial (e.g., GAAP) Evidence
Statements

Issues
Report

Financial The Auditors’

Statements 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 - Audits of city states, Detection of fraud Detailed; No reliance on
1850 individuals & ventures controls
1850-1905 Industrial revolution Detection of fraud & Some testing; No
resulted in the need for clerical errors reliance on controls
corporate audits
1905-1940 Development of stock Determination of Increased emphasis on
markets - increased fairness; detection of testing; Slight reliance
emphasis on earnings fraud & errors on controls
1940-1975 Development of auditing Determination of Substantial reliance on
standards fairness controls
1975-1985 Criticism by Congress; Determination of Internal control
Increased self-regulation fairness determines scope of
audit
1985-1995 Increased demands for Determination of Risk assessment
reporting on compliance & fairness determines audit scope;
internal control must assess risk of fraud
1995-Present Panel on Audit Determination of Business risk approach
Effectiveness; Sarbanes- fairness to audits
Oxley Act of 2002

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The Accounting Profession’s Credibility
Crisis

 2000—The Panel on Audit

Effectiveness made a variety of
suggestions to improve audits.
 2001—Enron Bankruptcy
 2002—WorldCom Fraud
 2002—Sarbanes-Oxley Act
 2003—Public 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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 AICPA’s 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 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 client’s industry
 Helps firms
 Be more effective at collecting and evaluating
audit evidence
 Make valuable suggestions to improve client’s
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
 Partner—Overall responsibility is to
assure that that audit is performed in
accordance with professional standards.
 Manager—Supervise overall engagement.
 Seniors—”In charge” auditor on a daily
basis.
 Staff assistants—Work under the
immediate supervision of the senior.

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 Elements of Public Accounting
Work
 Professional Developments
 Stay current on developments within the
profession
 Seasonal fluctuations
 Busy season from December through April
 Relationships with clients
 Need to maintain independence

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