Chapter 2

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The Audit Standards Setting

Process

Describe the nature of CPA firms, what they do, and their structure.Understand the role of the Public Company Accounting Oversight Board

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p y g gand the effects of the Sarbanes-Oxley Act on the CPA profession.Summarize the role of the Securities and Exchange Commission in accounting and auditing.

Describe the functions performed by the AICPA.Understand the role of international auditing standards and their relation to U.S.

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gauditing standards.Use U.S. auditing standards as a basis for further study.Identify quality control standards and practices within the accounting profession.

1

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

2-4

The legal right to perform audits is grantedto CPA firms by regulation in each state.

CPA fi l id th i t

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CPA firms also provide many other services totheir clients, such as tax and advisory services.

CPA firms continue to develop new products and servicessuch as financial planning, business valuation, forensic accounting, and information technology advisory services.

Big Four international firms

National firms

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Regional and large local firms

Small local firms

The four largest CPA firms in the United Statesare called the Big Four international CPA firms.

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These four firms have offices throughout the United States and in many cities throughoutthe world.

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Accounting and bookkeeping services

Tax services

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Tax services

Management consulting services

Three main factors influence the organizationalstructure of all firms:

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1. The need for independence from clients.2. The importance of a structure to encourage

competence.3. The increased litigation risk faced by auditors.

Proprietorship General Partnership General Corporation

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General Corporation Professional Corporation Limited Liability Company Limited Liability Partnership

Partners 10+ years

Average Experience

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Managers

Seniors and In-Charge Auditors

Staff Assistants

5-10 years

2-5

0-2

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Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.

2-13

This Act is considered by many observers tobe the most important legislation affectingthe auditing profession since the 1930s.

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The provisions of the Act apply to publiclyheld companies and their audit firms.

SEC

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PCAOB(Public Company

AccountingOversight Board)

3

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

2-16

The purpose is to assist in providing investorswith reliable information upon which to make investment decisionsThe Securities Act of 1933

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The Securities Act of 1933The Securities Exchange Act of 1934

Form S-1 Form 8-K F 10 K

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Form 10-K Form 10-Q

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Describe the key functions performed by the AICPA.

2-19

Performs the following services for CPAs: Sets professional requirements Conducts research Publishes materials related to services

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Publishes materials related to services performed

Empowered to set standards (guidelines)and rules

1. Auditing standards

2. Compilation and review standards

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3. Other attestation standards

4. Code of Professional Conduct

The CPA examination

Research and Grants

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Publishes a variety of materials

Provides seminars and continuing education

5

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Understand the role of international auditing standards

and their relation to U.S. auditing standards

2-23

Classification of Statements on Auditing Standards

GAAS and Standards of Performance

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IFAC is the worldwide organizationfor the accountancy profession.

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The IAASB works to improve theuniformity of auditing practices andrelated services throughout the world.

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6

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

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2-28

General Standards

1. Adequate training and proficiency

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2. Independence in mental attitude

3. Due professional care

Standards of Field Work

1. Proper planning and supervision

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2. Understanding of the entity

3. Sufficient appropriate evidence

Standards of Reporting

1. Statements prepared in accordance with GAAP

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2. Circumstances when GAAP not followed

3. Adequacy of disclosures

4. Expression of opinion on financial statements

PCAOB ASB

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Public company

audits

Private company

audits

The 10 generally accepted auditing standardsare too general to provide meaningful guidance.

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SAS interpret the 10 generally acceptedauditing standards and are the mostauthoritative references available to auditors.

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Identify quality control standards and practices within the accounting profession.

2-34

Leadership responsibilities for quality Relevant ethical requirements Acceptance and continuation of clients

and engagements

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and engagements Human resources Engagement performance Monitoring

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Auditing standards

Continuingeducation

requirementsCPAexamination

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Legalliability

Conduct ofCPA firm

personnelAICPA practice

and qualitycenters

Code ofProfessional

ConductPCAOBand SEC

Peerreview

Qualitycontrol

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Copyright

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