Transcript The Role of the Auditor in the American Economy

The Class you are in is:
Auditing and
Attestation
Instructor: Harry Lorsbach
Slide 1-1
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The Role of the Auditor in the
American Economy
Slide 1-4

An independent audit is necessary
because of inherent conflict of
interest between management and
F.S. users .

Confirms or corrects data previously
provided to stock markets.

Influences behavior in anticipation
of an audit.
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What Creates 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
 Intentional 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.
Slide 1-5
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What is a Misstatement?
 Inaccuracy
in gathering or processing data from which F.S. are
prepared. (in maintaining accounting records or preparing F.S.)
 Difference
between the amount, classification, or presentation
of a reported F.S. element, account, or item and that would
have been reported under GAAP. (Violation of GAAP)
 Omission
 F.S.
of a F.S. element, account, or item or F.S. disclosure.
Disclosure that is not presented in conformity with GAAP.
 Incorrect
accounting estimate. (errors in computing)
 Management’s
Judgments concerning an accounting estimate
or the selection or application of accounting policies that the
auditor considers unreasonable or inappropriate.
Slide 1-6
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1-6
The Accounting Profession’s
Credibility Crisis –Major Events

2000—The Panel on Audit Effectiveness made a
variety of suggestions to improve audits.

2001—Enron Bankruptcy, Arthur Andersen Out
of Business

2002—WorldCom Fraud

2002—Sarbanes-Oxley Act

2003—Public Company Accounting Oversight
Board began operations.
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Major Types of Audits
 Audits
of Financial Statements
 Compliance
Audits (ch 20 & 21)
 Operational
Audits (ch 21)
 Integrated
Audits of F.S. & Effectiveness
of Internal Controls (ch 18)
Slide 1-8
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Major Types of Auditors
 External
 Internal
 GAO
 Tax
Slide 1-9
Auditors (e.g., CPAs)
Auditors (Corporate, Gov’t)
Auditors (Evaluators)
Auditors (IRS, FTB, SBE)
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AICPA’s Role

Establishes Standards (Public Practice)
(Note: The standards setting and regulation roles have
been taken over by the SEC and the PCAOB with
respect to auditors of public companies.)

Research and Publication

Support Profession (FASB, GASB)

Continuing Professional Education

Self-Regulation

CPA Examination (Now along with NASBA)
Slide 1-10
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PCAOB’s Role

Adopts auditing, attestation, quality control, ethics
and independence standards relating to audits of
public companies.

Oversees and disciplines CPAs and CPA firms that
audit public companies, including:
 Registering CPA firms
 Performing inspections of registered CPA firms
 Conducting investigations & disciplinary proceedings of
CPA firms
 Sanctioning registered CPA firms.
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Primary Types of Professional Services

Attestation and Assurance (Incl Audits)

Tax Preparation & Planning

Management Consulting

Accounting Services (Smaller Clients)

Personal Financial Planning

Fraud Investigation or Litigation Support
(Also known as Forensic Accounting)
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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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Typical Structure
International CPA Firm
Partners
Managers
Seniors
Staff
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