Chapter 2

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 2 - 1
The CPA Profession

Chapter 2
Learning Objective 1
Describe the nature of CPA firms,
what they do, and their structure.
Certified Public Accounting
Firms
The legal right to perform audits is granted
to CPA firms by regulation of each state.
CPA firms also provide many other services to
their clients, such as tax and consulting services.
Firms
Big Four international firms
National firms
Regional and large local firms
Small local firms
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.
Management consulting services
Tax services
Accounting and bookkeeping services
Activities of CPA Firms
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.
Organizational Structure
Proprietorship
Professional corporation
General partnership
Limited liability company
General corporation
Limited liability partnership
Hierarchy of a Typical
CPA Firm
Staff Level 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
Hierarchy of a Typical
CPA Firm
Staff Level Experience Typical Responsibilities
Manager 5-10 years
Helps the plan, manages
the audit, reviews work,
and works with the client
Partner 10+ years
Reviews audit work and
makes significant audit
decisions
E-Commerce and
CPA Firm Operations
CPA firms are using the Internet to market
their services.
Firm Web sites also feature online software tools
and databases to subscribers.
Firms take advantage of online resources and
databases to help their staffs stay current on
emerging business and standards-setting issues.
Understand the role of the
Public Company Accounting
Oversight Board and the effects
of the Sarbanes-Oxley Act
on the CPA profession.
This Act is considered by many observers to
be the most important legislation affecting
the auditing profession since the 1930s.
Sarbanes-Oxley Act
The provisions of the Act apply to publicly
held companies and their audit firms.
Sarbanes-Oxley Act
SEC
PCAOB
(Public Company
Accounting
Oversight Board)
Sarbanes-Oxley Act
The PCAOB conducts inspections of registered
accounting firms and assess their compliance
with the rules of the PCAOB and the SEC.
Summarize the role of the
Securities and Exchange
Commission in accounting
and auditing.
The overall purpose of the Securities and
Exchange Commission (SEC) is to assist in
providing investors with reliable information
upon which to make investment decisions.
Commission
Commission
Form S-1
Form 8-K
Form 10-K
Form 10-Q
Describe the key functions
performed by the AICPA.
The AICPA sets professional requirements
for CPAs, conducts research, and publishes
materials on many different subjects related
to accounting, auditing, attestation and
assurance services, management
consulting services, and taxes.
AICPA
The AICPA is empowered to set standards
(guidelines) and rules that all members
and other practicing CPAs must follow.
Establishing Standards
and Rules
Establishing Standards
and Rules
1. Auditing standards
2. Compilation and review standards
3. Other attestation standards
4. Consulting standards
5. Code of Professional Conduct
Other AICPA Functions
Supports research by its own staff and
provides grants to others.
Writes and grades the CPA examination.
Provides seminars and education in a
variety of subject matters.
Publishes a variety of materials.
Vision for the Future
The AICPA has established the CPA Vision Project
to provide a core purpose and a vision for the CPA
profession in the year 2011 and beyond.
The core purpose of the CPA Vision Project is:
CPAsmaking sense of a changing and
complex world.
Vision for the Future
1. Continuing education and life-long learning
2. Competence
3. Integrity
4. Attuned to broad business issues
5. Objectivity
Use generally accepted auditing
standards as a basis for
further study.
1. The audit is to be performed by a person or
persons having adequate technical training
and proficiency as an auditor.
2. The auditor must maintain independence
in mental attitude in all matters relating
to the audit.
General Standards
General Standards
3. The auditor must exercise due professional
care in the performance of the audit and the
preparation of the report.
1. The auditor must adequately plan the work
and must properly supervise any assistants.
2. The auditor must obtain a sufficient understanding
of the entity and its environment, including its
internal control, to assess the risk of material
misstatement and to design further audit
procedures.
Standards of Field Work
3. The auditor must obtain sufficient appropriate
audit evidence by performing audit procedures
to afford a reasonable basis for an opinion
regarding the financial statements under audit.
1. The report shall state whether the financial
statements are presented in accordance with
generally accepted accounting principles.
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.
Standards of Reporting
3. Informative disclosures in the financial
statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
4. The report shall contain an expression of
opinion regarding the financial statements,
taken as a whole.
Generally Accepted Auditing
Standards
General Standards
1. Adequate training and proficiency

2. Independence in mental attitude

3. Due professional care
Standards
1. Proper planning and supervision

2. Understanding of the entity

3. Sufficient appropriate evidence
Standards
1. Statements prepared in accordance with GAAP

2. Circumstances when GAAP not followed

3. Adequacy of disclosures

4. Expression of opinion on financial statements
Relationship Between GAAS
and PCAOB Auditing Standards
The term generally accepted auditing standards
is no longer used for public company audits.
The term GAAS continues to be used for audits
of private companies.
Public company audits refer to PCAOB auditing
standards.
The 10 generally accepted auditing standards
are too general to provide meaningful guidance.
SASs interpret the 10 generally accepted
auditing standards and are the most
authoritative references available to auditors.
Statements on Auditing
Standards
GAAS and Standards of Performance
Statements on Auditing
Standards
Classification of Statements on Auditing Standards
Discuss the role of international
auditing standards.
International Standards
on Auditing
International Standards on Auditing (ISAs)
are issued by the International Auditing
Practice Committee of the International
Federation of Accountants (IFAC).
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.
Identify quality control standards
and practices within the
accounting profession.
Elements of Quality Control
Independence, integrity, and objectivity
Personnel management
Acceptance and continuation of clients
and engagements
Engagement performance
Monitoring
Relationships
Quality control
standards
Generally accepted
auditing standards
AICPA practice
sections
Peer
review
CPAs Encouraged to Conduct
Themselves at a High Level
Legal
liability
AICPA practice
sections
Continuing
education
requirements
GAAS and
interpretations
Code of
Professional
Conduct
CPA
examination
Quality
control
Peer
review
PCAOB
and SEC
Conduct of
CPA firm
personnel
End of Chapter 2

Chapter 2

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Chapter 2

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2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 2 - 1

The CPA Profession

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