Chapter 1

The Role of the Public Accountant

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Learning Objectives:
After studying this chapter, you will be able to

Describe what is auditing Distinguish between auditing and accounting Describe assurance services and nonassurance services provided by CPAs. Describe how CPA firms are typically organized. Differentiate the three main types of audits
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Auditing definition

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria.

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Distinguish between auditing and accounting

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Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making. Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period.
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The Attest Function

Management Subject Matter Suitable Criteria The CPA Gathers Evidence Issues Report Subject Matter* The Attest Report

*May be managements assertion about the subject matter.

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Forms of Attestation

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Audit of Financial Statements

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

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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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The Accounting Professions Credibility Crisis

2000The Panel on Audit Effectiveness made a variety of suggestions to improve audits. 2001Enron Bankruptcy 2002WorldCom Fraud 2002Sarbanes-Oxley Act 2003Public Company Accounting Oversight Board began operations
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Types of Audits

Audits of Financial Statements Compliance Audits Operational Audits

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Types of Auditors

External Auditors Internal Auditors GAO Auditors Tax Auditors

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AICPAs Traditional Role

Establishes Standards Research and Publication Continuing Professional Education Self-Regulation CPA Examination

Note: The standards setting and regulation roles have been taken over by the SEC and the PCAOB with respect to auditors of public companies.
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PCAOB Role

Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports 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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Types of Professional Services

Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation
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Typical Structure of a National CPA Firm

Partners Managers Seniors Staff

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