Chapter 2
The Audit
Standards’ Setting
Process
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Describe the nature of CPA firms, what
they do, and their structure.
Understand the role of the Public
Company Accounting Oversight Board
and the effects of the Sarbanes-Oxley Act
on the CPA profession.
Summarize the role of the Securities and
Exchange Commission in accounting and
auditing.
2-2
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Describe the functions performed by the
AICPA.
Understand the role of international
auditing standards and their relation to U.S.
auditing standards.
Use U.S. auditing standards as a basis for
further study.
Identify quality control standards and
practices within the accounting profession.
2-3
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1
Describe the nature of CPA firms,
what they do, and their structure.
2-4
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The legal right to perform audits is granted
to CPA firms by regulation in each state.
CPA firms also provide many other services to
their clients, such as tax and advisory services.
CPA firms continue to develop new products and
services—such as financial planning, business
valuation, forensic accounting, and information
technology advisory services.
2-5
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Big Four international firms
National firms
Regional and large local firms
Small local firms
2-6 Copyright © 2014 Pearson Education
The four largest CPA firms in the United States
are called the “Big Four” international CPA firms.
These four firms have offices throughout the
United States and in many cities throughout
the world.
2-7
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2-8
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Accounting and bookkeeping services
Tax services
Management consulting services
Audit services
2-9
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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.
2-10
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Proprietorship
General Partnership
General Corporation
Professional Corporation
Limited Liability Company
Limited Liability Partnership
2-11
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Average Experience
Partners 10+ years
Managers 5-10 years
Seniors and In- 2-5
Charge Auditors
Staff Assistants 0-2
2-12
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2
Understand the role of the Public Company
Accounting Oversight Board and the effects of
the Sarbanes-Oxley Act on the CPA profession.
2-13
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This Act is considered by many observers to
be the most important legislation affecting
the auditing profession since the 1930s.
The provisions of the Act apply to publicly
held companies and their audit firms.
2-14
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SEC
PCAOB
(Public Company
Accounting
Oversight Board)
2-15
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3
Summarize the role of the Securities and Exchange
Commission in accounting and auditing.
2-16
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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
2-17
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Form S-1
Form 8-K
Form 10-K
Form 10-Q
2-18
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4
Describe the key functions
performed by the AICPA.
2-19
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Performs the following services for CPAs:
Sets professional requirements
Conducts research
Publishes materials related to services
performed
Empowered to set standards (guidelines)
and rules
2-20
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1. Auditing standards
2. Compilation and review standards
3. Other attestation standards
4. Code of Professional Conduct
2-21
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The CPA examination
Research and Grants
Publishes a variety of materials
Provides seminars and
continuing education
2-22
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5
Understand the role of
international auditing standards
and their relation to U.S.
auditing standards
2-23
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Classification of Statements on Auditing Standards
GAAS and Standards of Performance
2-24
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IFAC is the worldwide organization
for the accountancy profession.
The IAASB works to improve the
uniformity of auditing practices and
related services throughout the world.
2-25
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2-26
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6
Use U.S. auditing standards as a basis for
further study
2-27
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2-28
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General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care
2-29
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Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence
2-30
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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
2-31
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PCAOB ASB
Public Private
company company
audits audits
2-32
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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.
2-33
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7
Identify quality control standards and practices
within the accounting profession.
2-34
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Leadership responsibilities for quality
Relevant ethical requirements
Acceptance and continuation of clients
and engagements
Human resources
Engagement performance
Monitoring
2-35
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2-36
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Auditing Continuing
standards education
CPA
requirements
examination
Quality Conduct of Legal
control CPA firm liability
personnel
Peer AICPA practice
review and quality
centers
Code of
PCAOB Professional
and SEC Conduct
2-37
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38
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