Chapter 2 The CPA Profession

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Chapter 2The CPA Profession
I need a C P A !
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Presentation Outline

1. The Structure of CPA Firms
2. The Regulation of Public Corporations
3. American Institute of Certified Public
   Accountants (AICPA)
4. Generally Accepted Auditing Standards
5. Quality Control Policies

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I. The Structure of CPA Firms
The legal right to perform audits is granted to
CPA firms by regulation of each state.

1. Organization Forms With High Personal Liability
2. Organization Forms with Limited Liability
3. Staff Levels and Responsibilities

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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.

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B. Organizational Forms with Limited Liability

• General corporation An owners 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 Partners 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.

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C. Staff Levels and Responsibilities
Staff Level Average Experience Typical Responsibilities
Staff Assistant 0-2 years Performs most of the detailed audit work.
Senior or in-charge auditor 2-5 years Responsible for the audit field work, including supervising staff work.
Manager 5-10 years Helps the plan, manages the audit, reviews work, and works with the client.
Partner 10 years Reviews overall audit work and is involved in significant audit decisions. Has ultimate responsibility for the audit.
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II. The Regulation of Public Corporations

1. The Public Company Accounting Oversight Board
2. The Securities Acts
3. The Role of the SEC
4. Specific SEC Reports

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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

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1. A Primary Responsibility of the PCAOB

• Establishment of standards for auditing, quality
  control, ethics, and independence, as well as
  attestation, for registered accounting firms.

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2. Meet the Board Members of the PCAOB
Bill 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 Division of Enforcement of the U.S.
Securities and Exchange Commission.
Daniel L. Goelzer served as General Counsel of
the Securities and Exchange Commission.
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3. SEC Oversight Over PCAOB

• In addition to appointing or removing members,
  the SEC, among other things, must approve the
  Boards budget and rules, including auditing
  standards, and may review appeals of adverse
  Board inspection reports and disciplinary actions
  against registered accounting firms.

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4. Standard Setting Input from Outside the PCAOB
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.

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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.

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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.

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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.

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III. American Institute of Certified Public
Accountants
AICPA

• The AICPA sets standards and rules that all
  members and other practicing CPAs must follow.
  This authority extends to the following areas
• Auditing Standards
• Compilation and Review Standards
• Other Attestation Standards
• Consulting Standards
• Code of Professional Conduct

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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).
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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).

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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.

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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 partys assertion.
  Rather, the CPA develops findings, conclusions,
  and recommendations.

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5. Code of Professional Conduct

• The AICPA Committee on Professional Ethics sets
  rules of conduct that CPAs are required to meet.

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IV. Generally Accepted Auditing Standards
A Measure of the Quality of Audit Work
Generally Accepted Auditing Standards (GAAS) SAS
No. 1
A. 3 General Standards Apply to every phase of
audit engagement
B. 3 Standards Of Field Work Apply to
performance of audit work
C. 4 Standards Of Reporting Apply to
development of audit report
Note Although the term generally accepted
auditing standards continues to be used for
audits of private companies, public company
audits should refer to PCAOB auditing standards.
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General Standard No. 1
The audit is to be performed by a person or
persons having adequate technical training and
proficiency as an auditor.
What does auditor training and proficiency
involve?

1. Specific education in auditing

b. Professional experience
c. Continuing education
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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.
An auditor must also be independent in appearance
Independence in fact
CPA
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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
An auditor must exercise both
Professional Skepticism
Professional Judgment
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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.
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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 organizations
system of internal control!
Audit Customer
CPA
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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.
Sufficient competent evidence does not require a
fine tooth comb.
Financial Statements
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Standard of Reporting No. 1
The report shall state whether the financial
statements are presented in accordance with
generally accepted accounting principles
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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.
Consistent Application of Accounting Principles
Current Year Accounting Principles
Prior Year Accounting Principles
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Standard of Reporting No. 3
Informative disclosures in the financial
statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
Financial Statement Wording
Notes to Financial Statements
Disclosures Include
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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
Cash Flows
Profit Loss
Balance Sheet
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V. Quality Control Policies
To Control the Quality of Audit Work
AICPA Quality Control Structure

• Elements of
• Quality
• Control

B. Peer Review Program
C. Division of CPA Firms
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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..
Quality - See Table 2-4 on page 38
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B. Peer Review Program

• A peer review is an examination of one CPA firms
  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 been replaced by the quality inspections
conducted by the PCAOB for registered firms
responsible for auditing public companies.
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C. Division for CPA Firms
There are two sections in the Division of CPA
Firms
gt SEC Practice Section (SECPS)
gt 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 have been taken over by the PCAOB. As
a result, the SECPS has reorganized as the Center
for Public Company Audit Firms to share
information and promote member firms
positions before the SEC and PCAOB.
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Summary

• Organization and staffing of CPA firms
• Public company regulation
• The role of the AICPA
• General Standards all audit phases
• Fieldwork Standards performance of audit work
• Reporting Standards development of audit report
• Quality control in the form of standards, peer
  review, and AICPA divisions.