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

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

1-2 The Attest Function Management The CPA Suitable Criteria Subject Matter Gathers Evidence Issues Report Subject Matter* The Attest Report *May be management’s assertion about the subject matter. McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights

1-3 Attestation Engagements Type of Engagement Examination Review Level of Assurance Highest Moderate or Limited Agreed-upon Varies with procedures procedures McGraw-Hill/Irwin Nature of Report Procedures Expresses opinion Sufficient to limit attestation risk to low level Expresses negative assurance Generally limited to inquiry & analytical procedures States findings Procedures agreedupon with the specified users 2006 The McGraw-Hill Companies, Inc., All Rights

Audit of Financial Statements The Auditors Management Prepares Financial Statements 1-4 Criteria (e.g., GAAP) Gathers Evidence Issues Report Financial Statements McGraw-Hill/Irwin The Auditors’ Report 2006 The McGraw-Hill Companies, Inc., All Rights

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- 1-5 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 McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights

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; SarbanesOxley Act of 2002 Determination of fairness Business risk approach to audits McGraw-Hill/Irwin 1-6 2006 The McGraw-Hill Companies, Inc., All Rights

The Accounting Profession’s Credibility Crisis 1-7 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 McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights

1-8 Types of Audits Audits of Financial Statements Compliance Audits Operational Audits McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights

1-9 Types of Auditors External Auditors Internal Auditors GAO Auditors Tax Auditors McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights

1-10 AICPA’s 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. McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights

Types of Professional Services 1-11 Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights

1-12 Typical Structure of a National CPA Firm Partners Managers Seniors Staff McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights