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The Role of the Public Accountant in the American Economy

The Role of the Public Accountant in the American Economy. Auditing, Attest, and Assurance Services Defined. Assurance Services – broad range of information enhancing services provided by CPAs. Two types: 1. Those that increase information reliability (e.g., attestation services)

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The Role of the Public Accountant in the American Economy

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  1. The Role of the Public Accountant in the American Economy

  2. Auditing, Attest, and Assurance Services Defined • Assurance Services – broad range of information enhancing services provided by CPAs. • Two types: 1. Those that increase information reliability (e.g., attestation services) 2. Those that involve putting information into a certain form or context

  3. Auditing, Attest, and Assurance Services Defined Attest engagement as defined by AICPA: a practitioner is engaged to issue or does issue a report on subject matter or an assertion about subject matter that is the responsibility of another party. (e.g., financial statement audits)

  4. Auditing, Attest, and Assurance Services Defined • AUDITING as defined by AAA Committee on Basic Auditing Concepts: a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties.

  5. The Relationship Among Auditing, Attest, and Assurance Services Auditing Attestation Assurance

  6. Attestation Engagements Type of Engagement Level of Assurance Nature of Report Procedures Examination Review Agreed-upon procedures Highest Moderate or Limited Varies with procedures Expresses opinion Expresses negative assurance States findings Sufficient to limit attestation risk to low level Generally limited to inquiry & analytical procedures Procedures agreed- upon with the specified users

  7. The Attest Function Management The CPA Criteria Subject Matter Gathers Evidence Issues Report Subject Matter* The Attest Report *May be management’s assertion about the subject matter.

  8. Audit of Financial Statements Management The Auditors Prepares Financial Statements Criteria (e.g..., GAAP) Gathers Evidence Issues Report Financial Statements The Auditors’ Report

  9. FASB/ AICPA SEC Auditor Audit Com. $ Mgmt. Stockholders Customers Workers Suppliers Lenders Analysts/ intermediaries Model of Corporate Governance Competitors General public Source: William R. Kinney, Univ. of Texas at Austin

  10. The Demand for Auditing • Two types of risk faced by capital markets with respect to an investment • Business risk – the risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions • Information risk - the risk that information is materially misstated • Audits lend credibility to information by reducing information risk, thus reducing contracting costs. • 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

  11. Types of Audits • Audits of Financial Statements • Compliance Audits • Operational Audits

  12. Types of Auditors • External Auditors (CPAs) • Internal Auditors • GAO Auditors • Tax Auditors

  13. Organizations Affecting the CPA Profession • AICPA • Establishes Standards / Self-Regulation (historically) • Research and Publication • Continuing Professional Education • CPA Examination • State Boards of Accounting • Grant permits to practice as a CPA and regulate the profession

  14. Organizations Affecting the CPA Profession • FASB (financial accounting standards board) • Establishes generally accepted accounting principles for entities other than state and local governments • GASB (governmental accounting standards board) • Establishes financial accounting standards for state and local government entities • FASAB (federal accounting standards advisory board) • Establishes standards for the U.S. Government and major federal agencies

  15. Organizations Affecting the CPA Profession • SEC (Securities and Exchange Commission) • Administers the Securities Acts of 1933 and 1934 and other securities legislation. Also, oversees the PCAOB • PCAOB (Public Company Accounting Oversight Board) • Created as a result of the 2002 Sarbanes-Oxley Act (SARBOX) to establish auditing standards and oversee accounting firms that audit public companies.

  16. The Accounting Profession’s Credibility Crisis • 2000—The Panel on Audit Effectiveness made a variety of suggestions to improve audits. • 2001—Enron Bankruptcy • 2002—WorldCom Fraud • 2002—Sarbanes-Oxley Act • 2003—Public Company Accounting Oversight Board began operations

  17. Organization of Public Accounting Profession • Local Firms • Regional Firms • National Firms • International (Big 4) Firms

  18. Typical Structure of a CPA Firm Partners Managers Seniors Staff

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