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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Forms of Attestation
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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 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
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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 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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PCAOB Role
Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports
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
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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