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The Role of the Public Accountant in the American Economy
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Attest Function
Management
SubjectMatter
SuitableCriteria
The CPA
Gathers Evidence
SubjectMatter*
The AttestReport
IssuesReport
*May be management’s assertion about the subject matter.
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Attestation Engagements
Type ofEngagement
Level ofAssurance
Nature of Report Procedures
Examination Highest Expresses
opinionSufficient to limitattestation risk tolow level
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Attestation Engagements
Type ofEngagement
Level ofAssurance
Nature of Report
Procedures
Examination
Review
Highest
Moderate orLimited
Expresses opinion
Expressesnegativeassurance
Sufficient to limitattestation risk tolow level
Generally limited toinquiry & analyticalprocedures
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Attestation Engagements
Type ofEngagement
Level ofAssurance
Nature of Report Procedures
Examination
Review
Agreed-upon procedures
Highest
Moderate orLimited
Varies with procedures
Expresses opinion
Expressesnegativeassurance
States findings
Sufficient to limitattestation risk tolow level
Generally limited toinquiry & analyticalprocedures
Procedures agreed-upon with the specified users
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Audit of Financial Statements
Management
PreparesFinancial
Statements
Criteria (e.g., GAAP)
The Auditors
Gathers Evidence
FinancialStatements
The Auditors’Report
IssuesReport
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
History of the Attest FunctionPeriodPeriod DevelopmentsDevelopments Audit ObjectiveAudit Objective Nature of AuditNature of Audit
Ancient - Ancient - 18501850
Audits of city states, Audits of city states, individuals & venturesindividuals & ventures
Detection of fraudDetection of fraud Detailed; No reliance on Detailed; No reliance on controlscontrols
1850-1850-19051905
Industrial revolution Industrial revolution resulted in the need for resulted in the need for corporate audits corporate audits
Detection of fraud & Detection of fraud & clerical errorsclerical errors
Some testing; No reliance Some testing; No reliance on controlson controls
1905-19401905-1940Development of stock Development of stock markets - increased markets - increased emphasis on earningsemphasis on earnings
Determination of Determination of fairness; detection of fairness; detection of fraud & errorsfraud & errors
Increased emphasis on Increased emphasis on testing; Slight reliance on testing; Slight reliance on controlscontrols
1940-19751940-1975 Development of auditing Development of auditing standardsstandards
Determination of Determination of fairnessfairness
Substantial reliance on Substantial reliance on controlscontrols
1975-19851975-1985 Criticism by Congress; Criticism by Congress; Increased self-regulationIncreased self-regulation
Determination of Determination of fairnessfairness
Internal control determines Internal control determines scope of auditscope of audit
1985-19951985-1995 Increased demands for Increased demands for reporting on compliance & reporting on compliance & internal controlinternal control
Determination of Determination of fairnessfairness
Risk assessment determines Risk assessment determines audit scope; must assess audit scope; must assess risk of fraudrisk of fraud
1995-Present1995-PresentPanel on Audit Panel on Audit Effectiveness; Sarbanes-Effectiveness; Sarbanes-Oxley Act of 2002 Oxley Act of 2002
Determination of Determination of fairnessfairness
Business risk approach toBusiness risk approach toauditsaudits
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Accounting Profession’s Credibility 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
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Types of Audits
Audits of Financial Statements
Compliance Audits
Operational Audits
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Types of Auditors
External Auditors Internal Auditors GAO Auditors Tax Auditors
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
AICPA’s Traditional Role
Establishes Standards Research and Publication Continuing Professional Education Self-Regulation CPA Examination
Note: The standards setting and regulation roles have been taken over by the SEC and the PCAOB with respect to auditors of public companies.
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Types of Professional Services
Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Fraud Investigation
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Typical Structure of a National CPA Firm
Partners
Managers
Seniors
Staff