Ch. 2: The CPA Profession

Question 1

3 main factors of CPA firm structure

Answer 1

1. Independence from clients
2. The importance of a structure to encourage competence
3. Increased litigation risk faced by auditors

Question 2

6 types of organizational structure

Answer 2

1. Proprietorship
2. Partnership
3. General corporation
4. Professional corporation
5. Limited Liability Company (LLC)
6. Limited Liability Partnership (LLP)

Question 3

CPA Firm Staff Levels

Answer 3

Staff Assistant
Senior (in-charge) Auditor
Manager
Partner

Question 4

Staff Assistant

Answer 4

0-2 years of experience

Performs most of the detailed audit work

Question 5

Senior Auditor

Answer 5

2-5 years of experience

Coordinates and is responsible for the audit field work, including supervising and reviewing staff work

Question 6

Manager

Answer 6

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

Question 7

Partner

Answer 7

> 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

Question 8

3 Main Auditing Standards

Answer 8

1. International Standards on Auditing
2. U.S. Generally Accepted Auditing Standards (GAAS)
3. Public Company Accounting Oversight Board (PCAOB)

Question 9

International Standards on Auditing

Answer 9

Applicable to entities outside the United States

Question 10

U.S. Generally Accepted Auditing Standards (GAAS)

Answer 10

Applicable to private entities in the U.S.

Minimum standard that must be achieved on each audit

Question 11

PCAOB

Answer 11

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

Question 12

American Institute of Certified Public Accountants (AICPA) and Purposes

Answer 12

Sets professional requirements for CPAs
Interpretations of GAAS

1. Purpose
2. Responsibilities
3. Performance
4. 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

Question 13

Responsibilities

Answer 13

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)

Question 14

2 Items of Responsibilities

Answer 14

1. Competence and capabilities (formal education, experience, and continuing education)
2. Comply with ethical requirements (independence, cannot be biased in motives)

Question 15

Performance

Answer 15

Relates to evidence accumulation and other audit activities

Question 16

5 items of Performance

Answer 16

1. Obtain reasonable assurance about whether financial statements are free of material misstatement
2. Planning work and supervise assistants
3. Determine and apply materiality level or levels
4. Identify and assess risks of material misstatement based on understanding of the entity and its environment, including internal controls
5. Obtain sufficient appropriate evidence (requires judgement)

Question 17

Reporting

Answer 17

How the auditor prepares the financial report and disclosures

Question 18

2 Items of Reporting

Answer 18

1. Express opinion on Financial Statements written report Auditor states whether statements are in accordance with GAAP
2. Whether Financial statements are presented fairly in accordance with financial reporting framework

Question 19

Quality Control

Answer 19

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

Question 20

Good Auditing includes Good Client Services

Answer 20

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

Question 21

Statements on Auditing Standards (SAS)

Answer 21

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

Question 22

How much evidence should an auditor acquire?

Answer 22

Dependent on their professional judgement

Question 23

Statement on Standards for Attestation

Answer 23

Used by auditors when there is no specific guidance or standards existing

Question 24

Fairness of financial presentation

Answer 24

Dependent on GAAP

Question 25

Continuing Professional Education

Answer 25

CPA firms encourage this to provide staff knowledge to perform assignments and progress within the firm

Covered under the firm’s “Quality Control” program

Question 26

Other AICPA functions

Answer 26

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

Question 27

International Standards on Auditing (IAS)

Answer 27

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

Question 28

SEC form requirements

Answer 28

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

Question 29

8-K Report

Answer 29

Unscheduled document addresses specific events and provides further detail and exhibits, such as data tables and press releases.