The Role of the

Public Accountant
in the American
Economy
Chapter 1
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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-2
The Attest Function
Management
Subject
Matter
Suitable
Criteria
The CPA
Gathers
Evidence
Subject
Matter*
The Attest
Report
Issues
Report
*May be managements assertion about the subject matter.
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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-3

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



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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Audit of Financial Statements
Management
Prepares
Financial
Statements
Criteria
(e.g., GAAP)
The
Auditors
Gathers
Evidence
Financial
Statements
The Auditors
Report
Issues
Report
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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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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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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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History of the Attest Function

Period Developments Audit Objective Nature of Audit
Ancient -
1850
Audits of city states,
individuals & ventures
Detection of fraud Detailed; No reliance on
controls
1850-1905 Industrial revolution
resulted in the need for
corporate audits
Detection of fraud &
clerical errors
Some testing; No reliance
on controls
1905-1940 Development of stock
markets - increased
emphasis on earnings
Determination of
fairness; detection of
fraud & errors
Increased emphasis on
testing; Slight reliance on
controls
1940-1975 Development of auditing
standards
Determination of
fairness
Substantial reliance on
controls
1975-1985 Criticism by Congress;
Increased self-regulation
Determination of
fairness
Internal control
determines scope of
audit
1985-1995 Increased demands for
reporting on compliance &
internal control
Determination of
fairness
Risk assessment
determines audit scope;
must assess risk of fraud
1995-Present Panel on Audit
Effectiveness; Sarbanes-
Oxley Act of 2002
Determination of
fairness
Business risk approach
to audits
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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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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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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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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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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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2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Typical Structure of a National
CPA Firm
Partners
Managers
Seniors
Staff