Date post: | 27-Mar-2015 |
Category: |
Documents |
Upload: | anthony-donahue |
View: | 215 times |
Download: | 0 times |
The Role of the Public Accountant in the American Economy
Chapter 01
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
Assurance servicesAssurance services
The broad range of information enhancement services that are provided by certified public accountants (CPAs).
Two types: Increase reliability of information Putting information into a form or context that
facilitates decision making.
1-3
Types of ServicesTypes of Services
Assurance Services Attestation Services
• Example: Audits of Financial Statements, Examinations of Internal Control
Other Assurance Services• Example: CPA ElderCare Prime Plus Services
NonAssurance Services Tax Services Management Consulting Services Other
1-4
Attestation ServicesAttestation Services
To attest to information means to provide assurance as to its reliability
Attest engagement: A practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g. management)
1-5
The Attest FunctionThe Attest Function
Management
SubjectMatter
SuitableCriteria
The CPA
Gathers Evidence
SubjectMatter*
The AttestReport
IssuesReport
*May be management’s assertion about the subject matter.
1-6
Suitable criteriaSuitable criteria
Standards established or developed by groups of experts.
Example: Internal control audit – standards established by a committee of experts on internal control
Example: Financial statement audit – standards are GAAP. For a financial statement audit suitable criteria are referred to as the “applicable financial reporting framework.”
1-7
Forms of AttestationForms of Attestation
1-8*Applicable financial reporting framework
Audit of Financial StatementsAudit of Financial Statements
Management
PreparesFinancial
Statements
Criteria (e.g., GAAP)
The Auditors
Gathers Evidence
FinancialStatements
The Auditors’Report
IssuesReport
1-9
Financial Statement AuditFinancial Statement Audit
Auditors gather evidence and provide a high level of assurance that the financial statements follow GAAP, or some other appropriate basis of accounting
Audit involves searching and verifying accounting records and examining other documents
Evidence necessary to issue an audit report that states auditors’ opinion
1-10
Audit EvidenceAudit Evidence
Evidence focuses on whether financial statements are presented in accordance with GAAP; examples:
• Balance sheet contains all liabilities• Income statement
Sales really occurred Sales have been recorded at appropriate amounts Recorded costs and expenses are applicable to period All expenses have been recognized
• Financial statement amounts Accurate, properly classified and summarized Notes are informative and complete
1-11
What Creates the Demand for Audits?What Creates the 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 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
1-12
History of the Attest FunctionPeriod Developments Audit Objective Nature of Audit
Ancient - 1850
Audits of city states, individuals & ventures
Detection of fraud Detailed; No reliance on controls
1850-1905 Industrial revolution resulted in the need for corporate audits
Detection of fraud & clerical errors
Some testing; No reliance on controls
1905-1940 Development of stock markets - increased emphasis on earnings
Determination of fairness; detection of fraud & errors
Increased emphasis on testing; Slight reliance on controls
1940-1975 Development of auditing standards
Determination of fairness
Substantial reliance on controls
1975-1985 Criticism by Congress; Increased self-regulation
Determination of fairness
Internal control determines scope of audit
1985-1995 Increased demands for reporting on compliance & internal control
Determination of fairness
Risk assessment determines audit scope; must assess risk of fraud
1995-Present Panel on Audit Effectiveness; Sarbanes-Oxley Act of 2002
Determination of fairness
Business risk approach to audits
1-13
The Accounting Profession’s The Accounting Profession’s Credibility CrisisCredibility Crisis
2000—The Panel on Audit Effectiveness made a variety of suggestions to improve audits.
2001—Enron Bankruptcy 2002—WorldCom Fraud 2002—Sarbanes-Oxley Act 2003—Public Company Accounting
Oversight Board began operations
1-14
Financial AuditsFinancial Audits
Audit of the financial statements of an entity
Covers the balance sheet and related statements of income, retained earnings and cash flows
Goal is to determine if prepared in conformity with GAAP
Performed by CPAs Users include management, investors, bankers,
creditors, financial analysts, government agencies
1-15
Other Types of AuditsOther Types of Audits
Compliance Audits Example: IRS audit of income tax return
Operational Audits Example: Effectiveness of operations of
receiving department of a manufacturing company
Integrated Audits Example: Assurance on both the financial
statements and effectiveness of internal control over financial reporting
1-16
Other Types of AuditorsOther Types of Auditors
Internal Auditors Government Accountability Office Auditors Tax Auditors
1-17
Internal Auditors Internal Auditors Employed by a company as an employee They often
perform operational and compliance audits address internal control report to the audit committee of the board of
directors and to the president The Institute of Internal Auditors is the
international organization of internal auditors.
1-18
Government Accountability Office Government Accountability Office Auditors (GAO Auditors)Auditors (GAO Auditors)
Headed by the comptroller general Responsibility of supporting Congress Perform
Compliance, operational and financial audits of government agencies
Examinations of corporations holding government contracts to verify contract payments have been proper
1-19
Tax AuditorsTax Auditors
Responsible for enforcement of tax laws of various sorts (e.g., state and federal income taxes, property taxes, sales taxes)
Internal revenue agents generally perform compliance audits of income tax returns
1-20
AICPA’s Traditional RoleAICPA’s Traditional Role
Establish Standards Research and Publication Continuing Professional Education Self-Regulation
Note: Much of the standards setting and regulation roles relating to public companies (referred to as “issuers”) has been taken over by the SEC and the PCAOB.
1-21
Establishes Standards--ExamplesEstablishes Standards--Examples AICPA Auditing Standards Board
Issues official pronouncements on auditing matters for nonpublic companies (“nonissuers”)
Statements on Auditing Standards (SASs) Statements on Standards for Attestation Engagements
(SSAEs)
• Guidance for attesting to information other than financial statements such as financial forecasts
Accounting and Review Services Committee Statements on Standards for Accounting and Review
Services (SSARS) Standards for compilations or reviews not audits of
financial statements
1-22
Research and PublicationResearch and Publication
Publications Journal of Accountancy (monthly) The Tax Advisor
Audit publications Industry Audit and Accounting Guides Audit Risk Alerts Auditing Practice Releases
Other publications Accounting Research Studies Statements of Position Accounting Trends & Techniques
1-23
Continuing Professional Continuing Professional EducationEducation
Development of continuing professional education programs
Necessary for continuing education requirement for CPA certificate
Offered by AICPA State societies Other professional organizations
1-24
Professional RegulationProfessional Regulation
Regulations of Individual CPAs Code of Professional Conduct – ethical rules
for CPAs Requirements for regular membership in
AICPA Regulation of Public Accounting Firms
Division for Public Accounting Firms• Center for Public Company Audit Firms• Private Companies Practice Section (PCPS)
1-25
The CPA ExaminationThe CPA Examination
Uniform national examination prepared and graded by the AICPA
Computerized exam includes multiple choice and simulations in four parts
• Auditing and Attestation• Financial Accounting & Reporting• Regulation• Business Environment & Concepts
1-26
State Boards of AccountancyState Boards of Accountancy
Issue CPA certificates All boards require successful completion
of CPA examination Education and experience requirements
vary National Association of State Boards of
Accounting (NASBA)
1-27
Other PartiesOther Parties
FASB Sets GAAP for entities other than federal,
state and local governments GASB
Standards of financial accounting for state and local government entities
FASAB Accounting standards for the US government
1-28
PCAOB Role PCAOB Role
Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports for SEC registrants
Oversee and discipline CPAs and CPA firms that audit public companies, including
Register firms Perform inspections of firms Conduct investigations and disciplinary proceedings of firms Sanction registered firms
1-29
Securities and Exchange Securities and Exchange Commission (SEC)Commission (SEC)
Agency of the US government Oversight responsibility for the PCAOB Objectives
Protect investors and public by requiring full disclosure of financial information by companies offering securities for sale to the public
Prevent misrepresentation, deceit, or other fraud in the sale of securities
1-30
Securities and Exchange Securities and Exchange Commission (SEC )Commission (SEC )
Registration statements Qualify securities for sales Contains audited financial statements Makes SEC major user of financial statements
Protects investors Regulation S-X
Basic accounting regulation
1-31
Types of Professional ServicesTypes of Professional Services Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation Personal Financial Planning
1-32
Organization of the Public Organization of the Public Accounting ProfessionAccounting Profession
Sole proprietorship Partnerships Professional Corporation Limited Liability Partnership (LLP) Limited Liability Company (LLC)
1-33
Categories of Categories of Public Accounting FirmsPublic Accounting Firms
Local Regional National Big 4 Alternative Practice Structures
1-34
Industry SpecializationIndustry Specialization
Firms with detailed knowledge and understanding of a client’s industry
Helps firms Be more effective at collecting and evaluating
audit evidence Make valuable suggestions to improve client’s
operations Provide the client consulting services
1-35
Typical Structure of a National Typical Structure of a National CPA FirmCPA Firm
Partners
Managers
Seniors
Staff Assistant
1-36
Responsibilities on an EngagementResponsibilities on an Engagement
Partner—Overall responsibility is to assure that that audit is performed in accordance with professional standards.
Manager—Supervise overall engagement. Seniors—”In charge” auditor on a daily
basis. Staff assistants—Work under the
immediate supervision of the senior.
1-37
Elements of Public Accounting Elements of Public Accounting WorkWork
Professional Developments Stay current on developments within the
profession Seasonal fluctuations
Busy season from December through April Relationships with clients
Need to maintain independence