Chapter 01

The Role of the Public Accountant in the American Economy

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

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

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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)

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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

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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

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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

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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

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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.

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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

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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

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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.

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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

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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

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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

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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

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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

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Types of Professional ServicesTypes of Professional Services Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation Personal Financial Planning

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Organization of the Public Organization of the Public Accounting ProfessionAccounting Profession

Sole proprietorship Partnerships Professional Corporation Limited Liability Partnership (LLP) Limited Liability Company (LLC)

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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.

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