Ch. 2: The CPA Profession Flashcards
3 main factors of CPA firm structure
- Independence from clients
- The importance of a structure to encourage competence
- Increased litigation risk faced by auditors
6 types of organizational structure
- Proprietorship
- Partnership
- General corporation
- Professional corporation
- Limited Liability Company (LLC)
- Limited Liability Partnership (LLP)
CPA Firm Staff Levels
Staff Assistant
Senior (in-charge) Auditor
Manager
Partner
Staff Assistant
0-2 years of experience
Performs most of the detailed audit work
Senior Auditor
2-5 years of experience
Coordinates and is responsible for the audit field work, including supervising and reviewing staff work
Manager
5-10 years of experience
Helps senior auditor plan and manage the audit, reviews the senior’s work and manages relations with the client
May be responsible for more than one engagement at the same time
Partner
> 10 years of experience
Reviews the overall audit work and is involved in significant audit decisions
A partner is an owner of the firm and therefore has the ultimate responsibility for conducting the audit and servicing the client
3 Main Auditing Standards
- International Standards on Auditing
- U.S. Generally Accepted Auditing Standards (GAAS)
- Public Company Accounting Oversight Board (PCAOB)
International Standards on Auditing
Applicable to entities outside the United States
U.S. Generally Accepted Auditing Standards (GAAS)
Applicable to private entities in the U.S.
Minimum standard that must be achieved on each audit
PCAOB
July 30, 2002
Adopted the standards issued by the AICPA as transitional standards for public companies, but now have their own
Applicable to U.S. Public Companies and other SEC registrants
Provides oversight for auditors of public companies and establishes quality control standards
Requires audit of internal controls to be integrated with the audit of financial statements
Minimum standard that must be achieved on each audit
Also considers international standards when setting their standards
Standards for audits of public and private companies are mostly similar
American Institute of Certified Public Accountants (AICPA) and Purposes
Sets professional requirements for CPAs
Interpretations of GAAS
- Purpose
- Responsibilities
- Performance
- Reporting
Any member CPA firm is required to belong to the SEC practice section if it audits publicly held companies
Any CPA can join, and it is not limited to auditors
Responsibilities
Stress important personal qualities auditors should possess
Should maintain professional skepticism and exercise professional judgement (questioning mind, alert to misstatements, critical assessment of audit evidence, consideration of documents, sufficiency of audit evidence, appropriateness of audit report)
2 Items of Responsibilities
- Competence and capabilities (formal education, experience, and continuing education)
- Comply with ethical requirements (independence, cannot be biased in motives)
Performance
Relates to evidence accumulation and other audit activities
5 items of Performance
- Obtain reasonable assurance about whether financial statements are free of material misstatement
- Planning work and supervise assistants
- Determine and apply materiality level or levels
- Identify and assess risks of material misstatement based on understanding of the entity and its environment, including internal controls
- Obtain sufficient appropriate evidence (requires judgement)
Reporting
How the auditor prepares the financial report and disclosures
2 Items of Reporting
- Express opinion on Financial Statements written report Auditor states whether statements are in accordance with GAAP
- Whether Financial statements are presented fairly in accordance with financial reporting framework
Quality Control
Methods to ensure the CPA firm meets professional responsibilities to the clients and others
- Organizational structure
- Procedures and Methods for audits
- Education staff
Unique to firms and must be met for every engagement
Closely related, but distinct from auditing standards
Good Auditing includes Good Client Services
Must go beyond traditional audit
Show genuine interest in improving the company
Clients want to know how you can help them through an auditors evaluation and knowledge of auditing standards
Statements on Auditing Standards (SAS)
Issued by AICPA Auditing Standards Board
Give limited guidance for auditors of privately held companies and other non-public companies/brokers in the US
CPAs must justify departures
Minimum standard that must be achieved on each audit
How much evidence should an auditor acquire?
Dependent on their professional judgement
Statement on Standards for Attestation
Used by auditors when there is no specific guidance or standards existing
Fairness of financial presentation
Dependent on GAAP
Continuing Professional Education
CPA firms encourage this to provide staff knowledge to perform assignments and progress within the firm
Covered under the firm’s “Quality Control” program
Other AICPA functions
Conduct research and publishes material on many different subjects related to accounting, auditing, management consulting, and taxes
Administers CPA exam
Provide continuing education
Specialized practice for different designations
International Standards on Auditing (IAS)
Issued by International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC)
Designed to improve the uniformity of auditing practices throughout the world
Similar to Auditing Standards Board
SEC form requirements
Annual 10-K (Comprehensive analysis with more detailed version of financial statements)
Quarterly 10-Q (earnings, latest developments, and company direction)
Both provide valuable information to investors
8-K Report
Unscheduled document addresses specific events and provides further detail and exhibits, such as data tables and press releases.
