Transcript General Standard No. 1

Chapter 2
The CPA Profession
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aCPA
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Presentation Outline
I.
The Structure of CPA Firms
II. The Regulation of Public Corporations
III. American Institute of Certified Public
Accountants (AICPA)
IV. Generally Accepted Auditing Standards
V. Quality Control Policies
I. The Structure of CPA Firms
The legal right to
perform audits is
granted to CPA
firms by regulation
of each state.
A. Organization Forms With High Personal
Liability
B. Organization Forms with Limited Liability
C. Staff Levels and Responsibilities
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.
B. Organizational Forms with Limited Liability
General corporation – An owner’s 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 – Partner’s 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.
C. Staff Levels and
Responsibilities
Staff Level
Staff Assistant
Senior or incharge auditor
Manager
Partner
Average
Experience
Typical Responsibilities
0-2 years
Performs most of the detailed
audit work.
2-5 years
Responsible for the audit field
work, including supervising staff
work.
5-10 years
Helps the plan, manages the audit,
reviews work, and works with the
client.
10+ years
Reviews overall audit work and is
involved in significant audit
decisions. Has ultimate
II. The Regulation of Public Corporations
A. The Public Company Accounting Oversight
Board
B. The Securities Acts
C. The Role of the SEC
D. Specific SEC Reports
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
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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New York.
Commission.
3. SEC Oversight Over PCAOB
In addition to appointing or removing members, the
SEC, among other things, must approve the Board’s
budget and rules, including auditing standards, and
may review appeals of adverse Board inspection
reports and disciplinary actions against registered
accounting firms.
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.
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.
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.
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.
III. American Institute of Certified Public
Accountants
The AICPA sets standards and rules that all members
and other practicing CPAs must follow. This
authority extends to the following areas:
1. Auditing Standards
2. Compilation and Review Standards
3. Other Attestation Standards
4. Consulting Standards
5. Code of Professional Conduct
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).
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).
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.
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
party’s assertion. Rather,
the CPA develops findings,
conclusions, and
recommendations.
5. Code of Professional Conduct
The AICPA Committee
on Professional
Ethics sets rules of
conduct that CPAs
are required to
meet.
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
B. 3 Standards
Of Field Work
C. 4 Standards
Of Reporting
Apply to every
phase of audit
engagement
Apply to
performance of
audit work
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.
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?
a. Specific education in auditing
b. Professional experience
c. Continuing education
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.
Independence
in fact
An auditor must also
be independent in
appearance
CPA
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
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.
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
organization’s
system of internal
control!
Audit
Customer
CPA
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
Standard of Reporting No. 1
The report shall state whether the financial statements are
presented in accordance with generally accepted accounting
principles
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
Prior
Year
Accounting
Principles
Current
Year
Accounting
Principles
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
Disclosures
Include
Notes to
Financial
Statements
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
Balance
Sheet
Profit & Loss
V. Quality Control Policies
To Control the Quality of Audit Work
AICPA Quality
Control Structure
A. Elements of
Quality
Control
B. Peer
Review
Program
C. Division
of
CPA Firms
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..
B. Peer Review Program
A peer review is an examination of one CPA firm’s
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.
C. Division for CPA Firms
There are two sections in the Division of CPA
Firms:
> SEC Practice Section (SECPS)
> 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.
Summary
1.
Organization and staffing of CPA firms
2. Public company regulation
3. The role of the AICPA
4. General Standards – all audit phases
5. Fieldwork Standards – performance of audit work
6. Reporting Standards – development of audit report
7. Quality control in the form of standards, peer
review, and AICPA divisions.