The Role of the Public
Accountant in the American
Economy
Chapter 1
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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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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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Audit of Financial Statements
Management
PreparesFinancial
Statements
Criteria (e.g., GAAP)
The Auditors
Gathers Evidence
FinancialStatements
The Auditors’Report
IssuesReport
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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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History of the Attest Function
Period Developments Audit Objective Nature of AuditAncient - 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
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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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Types of Audits
Audits of Financial Statements
Compliance Audits
Operational Audits
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Types of Auditors
External Auditors Internal Auditors GAO Auditors Tax Auditors
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AICPA’s Traditional Role Establishes Standards Research and Publication Continuing Professional Education Self-Regulation CPA ExaminationNote: 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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Types of Professional Services
Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation
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Typical Structure of a National CPA Firm
Partners
Managers
Seniors
Staff