2222THE CPA PROFESSION THE CPA PROFESSION

OOD AUDITING INCLUDES OOD AUDITING INCLUDES GOOD CLIENT SERVICEGOOD CLIENT SERVICE

Objective 2 - 1Objective 2 - 1Describe the nature of CPA firms,what they do, and their structure.

Describe the nature of CPA firms,what they do, and their structure.

CERTIFIED PUBLIC ACCOUNTING FIRMSCERTIFIED PUBLIC ACCOUNTING FIRMS

The legal right to perform audits is grantedThe legal right to perform audits is grantedto CPA firms by regulation of each state. CPAto CPA firms by regulation of each state. CPAfirms also provide many other services to their firms also provide many other services to their clients, such as tax and consulting services.clients, such as tax and consulting services.

The legal right to perform audits is grantedThe legal right to perform audits is grantedto CPA firms by regulation of each state. CPAto CPA firms by regulation of each state. CPAfirms also provide many other services to their firms also provide many other services to their clients, such as tax and consulting services.clients, such as tax and consulting services.

1.1. Big 4 International Firms -Big 4 International Firms - The four largest CPA firms in the UnitedStates are called the “Big Four” international CPA firms.

2.2. National Firms -National Firms - Three CPA firms in the United States are called nationalfirms because they have offices in most major cities.

3.3. Regional and Large Local Firms -Regional and Large Local Firms - There are less than

200 CPA firms with professional staffs of more than 50 people.

4.4. Small Local Firms -Small Local Firms - More than 95 percent of all CPA firms havefewer than 25 professionals in a single-office firm.

STRUCTURE OF CPA FIRMSSTRUCTURE OF CPA FIRMSSTRUCTURE OF CPA FIRMS

Three main factors influence theThree main factors influence theorganizational structure of all firms: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.

1. The need for independence from clients.

2. The importance of a structure to encourage competence.

3. The increased litigation risk faced by auditors.

Professional CorporationProfessional Corporation

Organizational StructuresOrganizational Structures

General CorporationGeneral Corporation

Limited Liability CompanyLimited Liability Company

ProprietorshipProprietorship

General PartnershipGeneral Partnership

Limited Liability PartnershipLimited Liability Partnership

1997 Sizeby Revenue Firm*

Net Revenue-U.S. Only(in $ millions) Partners Professional

U.S.Offices

Percentage ofTotal Revenuefrom Accountingand Auditing/Taxes/ManagementConsulting Services

BIG FIVE

12345

Andersen WorldwidePricewaterhouseCooperErnst & YoungDeloitte & ToucheKPMG

$5,445.0$4,844.5$4,416.0$3,600.0$3,000.0

1,6732,4392,1721,7191,600

32,31926,40417,84516,42613,400

9521189

106130

20/14/6637/21/4236/23/4135/20/4541/25/34

NATIONAL

678

Grant ThorntonMcGladrey & PullenBDO Seidman

$289.0$270.1$240.0

278381299

1,9791,8831,171

486442

42/30/2845/32/2351/26/23

REGIONAL

910111213

Crowe, Chizek & Co.Baird Kurtz & DobsonPlante & MoranClifton Gunderson & CoMoss Adams

$97.4$90.0$86.9$74.8$72.0

9312411711594

830567704508451

1020144216

32/18/5047/30/2357/23/2056/32/1247/37/16

LARGE LOCAL

5075

Follmer, Rudzeqicz & CoKaufman Rossin & Co.

$18.3$13.8

1214

14864

22

39/28/3354/32/14

** Rankings reflect merger of Price Waterhouse and Cooper & Lybrand to form PricewaterhouseCooper. Information for PricewaterhouseCooper is based on separately reported information for Price Waterhouse and Cooper & Lybrand. Source: Accounting Today (March 16-April 5, 1998), pp. 18-20

LATE 90’s LATE 90’s Revenue and Other Data for the largest CPARevenue and Other Data for the largest CPA Firms in the United StatesFirms in the United States

LATE 90’s LATE 90’s Revenue and Other Data for the largest CPARevenue and Other Data for the largest CPA Firms in the United StatesFirms in the United States

Fiscal Year 2002 (this is the year SOX became law)

Revenue (2) Prof. (2) Revenue %Rank Firm $ million Staff A&A Tax MAS Other 1 Deloitte & Touche 5,933 19,835 36 21 34 9 2 PwC 5,174 29,787 (a) 58 30 9 3 3 Ernst & Young 4,515 15,078 59 38 0 3 4 KPMG 3,400 11,000 44 36 20 0 (a) Does not reflect sale of consulting practice

Current approximation:

Firm A&A Tax MAS or OtherDeloitte & Touche 44 22 34 Ernst & Young 72 27 1 PwC 63 26 11 KPMG 77 23 0

FOR the 00’sFOR the 00’sFOR the 00’sFOR the 00’s

Hierarchy of Typical CPA FirmHierarchy of Typical CPA Firm

SStaff taff LLevels and evels and RResponsibilitiesesponsibilitiesStaff Level Average ExperienceStaff Level Average Experience Typical Responsibilities Typical Responsibilities

Staff Assistant 0 - 2 years Performs most of the detailed audit work.

Senior or in-charge 2 - 5 years Coordinates and is responsible for the audit field work, auditor including supervising and reviewing staff work.

Manager 5 - 10 years Helps the in-charge plan and manage the audit, reviewsthe in-charge’s work, and manages relations with the client. A manager may be responsible for more than one engagement at the same time.

Partner 10 + years Reviews the overall audit work and is involved in significant audit decisions. A partner is an owner ofthe firm, and therefore has the ultimate responsibility for conducting the audit and serving the client.

This Act is considered by many observers tobe the most important legislation affectingthe auditing profession since the 1930s.

Sarbanes-Oxley Act

The provisions of the Act apply to publiclyheld companies and their audit firms.

Sarbanes-Oxley Act

SEC

PCAOB(Public Company

Accounting

Oversight Board)

SEC

NOWNOW

Vs.Vs.

ThenThen

NOWNOW

Vs.Vs.

ThenThen

Sarbanes-Oxley Act

The PCAOB conducts inspections of registeredaccounting firms and assess their compliancewith the rules of the PCAOB and the SEC.

The overall purpose of the Securities andExchange Commission (SEC) is to assist inproviding investors with reliable informationupon which to make investment decisions.

Securities and Exchange Commission

Securities and Exchange Commission

Form S-1 – new issues

Form 8-K – significant events (like press release)

Form 10-K – annual FS’s

Form 10-Q – quarterly FS’s

The The AICPAAICPA is empowered to set is empowered to set standards (guidelines) and rules that all standards (guidelines) and rules that all

members and other practicing members and other practicing CPAsCPAs must follow. must follow.

The requirements are set byThe requirements are set bycommittees made up of committees made up of AICPAAICPA members. members.

There are four major areas in which There are four major areas in which the the AICPA AICPA has authority to set has authority to set

standards and make rules.standards and make rules.

1. Auditing Standards1. Auditing Standards

2. Compilation and Review Standards2. Compilation and Review Standards

3. Other Attestation Standards3. Other Attestation Standards

4. Consulting Standards4. Consulting Standards

5. Code of Professional Conduct5. Code of Professional Conduct

SUMMARY OF GENERALLYSUMMARY OF GENERALLYACCEPTED ADUITING STANDARDSACCEPTED ADUITING STANDARDS

Generally AcceptedGenerally AcceptedAuditing StandardsAuditing Standards

GeneralGeneralqualificationsqualificationsand conductand conduct

Field WorkField Workperformance of performance of

the auditthe audit

ReportingReportingresultsresults

Adequate trainingAdequate trainingand proficiencyand proficiency

Independence inIndependence inmental attitudemental attitude

Due professional careDue professional care

Proper planning andProper planning andsupervisionsupervision

Sufficient understandingSufficient understandingof internal controlof internal control

Sufficient competentSufficient competentevidenceevidence

Whether statements Whether statements were prepared inwere prepared inaccordance with GAAPaccordance with GAAP

Circumstances whenCircumstances whenGAAP not consistentlyGAAP not consistentlyfollowedfollowed

Adequacy of informative Adequacy of informative disclosuresdisclosures

Expression of opinion on Expression of opinion on financial statementsfinancial statements

Relationship Between GAAS and PCAOB Auditing Standards

The term GAAS is no longer used for public company audits. Public company audits refer to PCAOB auditing standards.

The term GAAS continues to be used for auditsof private companies.

The 10 generally accepted auditing standardsare too general to provide precise guidance inall cases.

SASs interpret the 10 generally acceptedauditing standards and are the mostauthoritative references available to auditors.

Statements on Auditing Standards

INTERNATIONAL STANDARDSINTERNATIONAL STANDARDSDEVELOPING HARMONYDEVELOPING HARMONY

International Standards on Auditing (ISAs) are generally similar to U.S. GAAS, although there are some differences. There is an interest and trend toward harmonization, which means developing uniform accounting and auditing standards throughout the world.

International Standards on Auditing (ISAs)are issued by the International AuditingPractice Committee of the InternationalFederation of Accountants (IFAC).

1. Independence, integrity, and objectivity1. Independence, integrity, and objectivity

2. Personnel Management2. Personnel Management

3. Acceptance and Continuation of Clients3. Acceptance and Continuation of Clients

and Engagementsand Engagements

4. Engagement Performance4. Engagement Performance

5. Monitoring5. Monitoring

1. Independence, integrity, and objectivity1. Independence, integrity, and objectivity

2. Personnel Management2. Personnel Management

3. Acceptance and Continuation of Clients3. Acceptance and Continuation of Clients

and Engagementsand Engagements

4. Engagement Performance4. Engagement Performance

5. Monitoring5. Monitoring

Arens, Loebbecke; Auditing, 8/EArens, Loebbecke; Auditing, 8/E

© © 2000 by2000 by Prentice Hall, Inc.Prentice Hall, Inc.

Audit Quality

• The audit is often unobservable and difficult to quantify

• Audit Quality = P (finding and reporting a FS breach)

• “Finding” = function of skill

• “Reporting” = function of independence level

Relationships among GAAS, Quality Control,Relationships among GAAS, Quality Control,Division of CPA Firms, and Peer ReviewDivision of CPA Firms, and Peer Review

Quality ControlQuality ControlStandardsStandards

Standards applicable to a CPAfirm to aid in satisfyinggenerally accepted auditingstandards

AICPA Practice sectionsAICPA Practice sections

Center forPublic CompanyAudit Firms

PrivateCompaniesPracticeSection

Organizations intended to helpfirms meet quality controlstandards and GAAS

Generally AcceptedGenerally AcceptedAuditing StandardsAuditing Standards

Standards applicable to eachaudit

Peer ReviewPeer Review

Method to determine whethera CPA firm meets qualitycontrol standards

Ways the Profession and Society Encourage CPAs to Conduct Ways the Profession and Society Encourage CPAs to Conduct Themselves at a High LevelThemselves at a High LevelWays the Profession and Society Encourage CPAs to Conduct Ways the Profession and Society Encourage CPAs to Conduct Themselves at a High LevelThemselves at a High Level

GAAS andGAAS andinterpretationsinterpretations

GAAS andGAAS andinterpretationsinterpretationsCPACPA

examinationexaminationCPACPA

examinationexamination

QualityQualitycontrolcontrolQualityQualitycontrolcontrol

Peer reviewPeer reviewPeer reviewPeer review

ContinuingContinuingeducationeducation

requirementsrequirements

ContinuingContinuingeducationeducation

requirementsrequirements

LegalLegalliabilityliabilityLegalLegal

liabilityliability

AICPA practice AICPA practice sectionssections

AICPA practice AICPA practice sectionssections

Code of Code of ProfessionalProfessional

ConductConduct

Code of Code of ProfessionalProfessional

ConductConduct

SECSECSECSEC

ConductConductofof

CPA firmCPA firmpersonnelpersonnel

ConductConductofof

CPA firmCPA firmpersonnelpersonnel