The CPA Profession

Chapter 2

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-1

Learning Objective 1
Describe the nature of CPA firms,
what they do, and their structure.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-2

Certified Public Accounting

Firms
The legal right to perform audits is granted
to CPA firms by each state.
CPA firms also provide many other services to
their clients, such as tax and consulting services.

CPAs continue to develop new products and

servicessuch as financial planning, business
valuation and information technology.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-3

Certified Public Accounting

Firms
Big Four international firms
National firms

Regional and large local firms

Small local firms

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-4

Certified Public Accounting

Firms
The four largest CPA firms in the United States
are called the Big Four international CPA firms.
These four firms have offices in most major
cities in the United States and in many
cities throughout the world.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-5

Certified Public Accounting

Firms

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-6

Activities of CPA Firms

Accounting and bookkeeping services
Tax services
Management consulting services

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-7

Structure of CPA Firms

Three main factors influence the organizational
structure of all firms:
1. The need for independence from clients.
2. The importance of a structure to encourage
competence.
3. The increased litigation risk faced by auditors.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-8

Organizational Structure
Proprietorship
Professional corporation
General partnership
Limited liability company
General corporation
Limited liability partnership

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2-9

Hierarchy of a Typical
CPA Firm
Breadth of Experience
Partners
Managers

10+ years

5-10

Seniors and
In-charge Auditors

2-5

Staff Assistants

0-2

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 10

Learning Objective 2
Understand the impact of the PCAOB and
Sarbanes-Oxley on the CPA profession.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 11

Sarbanes-Oxley Act
This Act is considered by many observers to
be the most important legislation affecting
the auditing profession since the 1930s.
The provisions of the Act apply to publicly
held companies and their audit firms.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 12

Sarbanes-Oxley Act
SEC

PCAOB
(Public Company
Accounting
Oversight Board)

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 13

Learning Objective 3
Summarize the role of the Securities and
Exchange Commission in accounting and
auditing.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 14

Securities and Exchange

Commission
The purpose is to assist in providing investors
with reliable information upon which to make
investment decisions
The Securities Act of 1933
The Securities Exchange Act of 1934

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 15

Securities and Exchange

Commission
Form S-1
Form 8-K
Form 10-K
Form 10-Q

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 16

Learning Objective 4
Describe the key functions performed by the
AICPA.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 17

AICPA
Performs the following services for CPAs:
Sets professional requirements
Conducts research
Publishes materials related to services
performed
Empowered to set standards (guidelines)
and rules
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 18

Establishing Standards
and Rules
1. Auditing standards

2. Compilation and review standards

3. Other attestation standards

4. Code of Professional Conduct

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 19

Other AICPA Functions

The CPA examination

Research and Grants

Publishes a variety of materials
Provides seminars and
continuing education
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 20

Learning Objective 5
Understand the role of international auditing
standards and their relation to U.S. auditing
standards

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 21

Statements on Auditing
Standards
Classification of Statements on Auditing Standards

GAAS and Standards of Performance

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 22

International Standards
on Auditing
IFAC is the worldwide organization
for the accountancy profession.

The IFAC works to improve the

uniformity of auditing practices and
related services throughout the world.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 23

International Standards
on Auditing

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 24

Learning Objective 6
Use U.S. auditing standards as a basis for
further study

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 25

GAAS

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 26

Generally Accepted Auditing

Standards United States
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude

3. Due professional care

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 27

Generally Accepted Auditing

Standards United States
Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity

3. Sufficient appropriate evidence

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 28

Generally Accepted Auditing

Standards United States
Standards of Reporting
1. Statements prepared in accordance with GAAP
2. Circumstances when GAAP not followed

3. Adequacy of disclosures
4. Expression of opinion on financial statements
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 29

Relationship Between GAAS and

PCAOB Auditing Standards
PCAOB

GAAS

Public
company
audits

Private
company
audits

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 30

Statements on Auditing
Standards
The 10 generally accepted auditing standards
are too general to provide meaningful guidance.
SAS interpret the 10 generally accepted
auditing standards and are the most
authoritative references available to auditors.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 31

Learning Objective 7
Identify quality control standards and
practices within the accounting profession.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 32

Elements of Quality Control

Independence, integrity, and objectivity

Personnel management
Acceptance and continuation of clients
and engagements
Engagement performance

Monitoring
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 33

Relationships

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 34

CPAs Encouraged to Conduct

Themselves at a High Level
CPA
examination

Quality
control

GAAS and
interpretations

Continuing
education
requirements

Conduct of
CPA firm
personnel

Peer
review

Legal
liability

AICPA practice
sections
PCAOB
and SEC

Code of
Professional
Conduct

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 35

End of Chapter 2

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

2 - 36