Arens14e_ch02_ppt - The CPA Firms (Structure, Function)

Auditing Arens 14ed, chapter 2

Describe the nature of CPA firms, what they do, and their structure.

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The CPA ProfessionThe CPA Profession
Chapter 2Chapter 2
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Learning Objective 1Learning Objective 1
Describe the nature of CPA firms,Describe the nature of CPA firms,
what they do, and their structure.what they do, and their structure.

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Certified Public Accounting Certified Public Accounting
FirmsFirms
The legal right to perform audits is granted
to CPA firms by each state.
CPA firms also provide many other services to
their clients, such as tax and consulting services.
CPAs continue to develop new products and
services—such as financial planning, business
valuation and information technology.

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Certified Public Accounting Certified Public Accounting
FirmsFirms
 Big Four international firms
 National firms
 Regional and large local firms
 Small local firms

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Certified Public Accounting Certified Public Accounting
FirmsFirms
The four largest CPA firms in the United States
are called the “Big Four” international CPA firms.
These four firms have offices in most major
cities in the United States and in many
cities throughout the world.

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Certified Public Accounting Certified Public Accounting
FirmsFirms

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 Management consulting services
 Tax services
 Accounting and bookkeeping services
Activities of CPA FirmsActivities of CPA Firms

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Structure of CPA FirmsStructure of CPA Firms
Three main factors influence the organizational
structure of all firms:
1.The need for independence from clients.
2.The importance of a structure to encourage
competence.
3.The increased litigation risk faced by auditors.

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Organizational StructureOrganizational Structure
 Proprietorship
 Professional corporation
 General partnership
 Limited liability company
 General corporation
 Limited liability partnership

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Staff Assistants
Hierarchy of a TypicalHierarchy of a Typical
CPA FirmCPA Firm
Seniors and
In-charge Auditors
Managers
Partners
Breadth of Experience
10+ years
5-10
2-5
0-2

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Learning Objective 2Learning Objective 2
Understand the impact of the PCAOB andUnderstand the impact of the PCAOB and
Sarbanes-Oxley on the CPA profession.Sarbanes-Oxley on the CPA profession.

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This Act is considered by many observers to
be the most important legislation affecting
the auditing profession since the 1930s.
Sarbanes-Oxley ActSarbanes-Oxley Act
The provisions of the Act apply to publicly
held companies and their audit firms.

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Sarbanes-Oxley ActSarbanes-Oxley Act
SEC
PCAOB
(Public Company
Accounting
Oversight Board)

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Learning Objective 3Learning Objective 3
Summarize the role of the Securities andSummarize the role of the Securities and
Exchange Commission in accounting andExchange Commission in accounting and
auditing.auditing.

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The purpose is to assist in providing investors
with reliable information upon which to make
investment decisions
The Securities Act of 1933
The Securities Exchange Act of 1934
Securities and Exchange Securities and Exchange
CommissionCommission

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Securities and Exchange Securities and Exchange
CommissionCommission
 Form S-1
 Form 8-K
 Form 10-K
 Form 10-Q

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Learning Objective 4Learning Objective 4
Describe the key functions performed by Describe the key functions performed by
the AICPA.the AICPA.

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Performs the following services for CPAs:
Sets professional requirements
Conducts research
Publishes materials related to services
performed
AICPAAICPA
Empowered to set standards (guidelines)
and rules

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Establishing StandardsEstablishing Standards
and Rulesand Rules
1.Auditing standards
2.Compilation and review standards
3.Other attestation standards
4.Code of Professional Conduct

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Other AICPA FunctionsOther AICPA Functions
Research and Grants
The CPA examination
Provides seminars and
continuing education
Publishes a variety of materials

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Learning Objective 5Learning Objective 5
Understand the role of international Understand the role of international
auditing standards and their relation to auditing standards and their relation to
U.S. auditing standards U.S. auditing standards

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 GAAS and Standards of Performance
Statements on Auditing Statements on Auditing
StandardsStandards
 Classification of Statements on Auditing Standards

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International StandardsInternational Standards
on Auditingon Auditing
IFAC is the worldwide organization
for the accountancy profession.
The IFAC works to improve the
uniformity of auditing practices and
related services throughout the world.

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International StandardsInternational Standards
on Auditingon Auditing

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Learning Objective 6Learning Objective 6
Use U.S. auditing standards as a basis for Use U.S. auditing standards as a basis for
further studyfurther study

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GAASGAAS

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Generally Accepted AuditingGenerally Accepted Auditing
Standards – United StatesStandards – United States
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care

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Generally Accepted AuditingGenerally Accepted Auditing
Standards – United StatesStandards – United States
Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence

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Generally Accepted AuditingGenerally Accepted Auditing
Standards – United StatesStandards – United States
Standards of Reporting
1. Statements prepared in accordance with GAAP
2. Circumstances when GAAP not followed
3. Adequacy of disclosures
4. Expression of opinion on financial statements

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Relationship Between GAAS and Relationship Between GAAS and
PCAOB Auditing StandardsPCAOB Auditing Standards
PCAOB
Public
company
audits
Private
company
audits
GAAS

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The 10 generally accepted auditing standards
are too general to provide meaningful guidance.
SAS interpret the 10 generally accepted
auditing standards and are the most
authoritative references available to auditors.
Statements on Auditing Statements on Auditing
StandardsStandards

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Learning Objective 7Learning Objective 7
Identify quality control standards and Identify quality control standards and
practices within the accounting practices within the accounting
profession.profession.

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Elements of Quality ControlElements of Quality Control
 Independence, integrity, and objectivity
 Personnel management
 Acceptance and continuation of clients
and engagements
 Engagement performance
 Monitoring

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RelationshipsRelationships

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CPAs Encouraged to ConductCPAs Encouraged to Conduct
Themselves at a High LevelThemselves at a High Level
Legal
liability
AICPA practice
sections
Continuing
education
requirements
GAAS and
interpretations
Code of
Professional
Conduct
CPA
examination
Quality
control
Peer
review
PCAOB
and SEC
Conduct of
CPA firm
personnel

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End of Chapter 2End of Chapter 2