Tishk International University Faculty of Administrative Sciences and

Tishk International University Faculty of Administrative Sciences and Economics Auditing {BUS 437} Chapter 2: The CPA Profession By Dr. Samer H. Alssabagh E-mail: [email protected]

From Previous Lecture: The Demand for Audit and Other Assurance Services: Nature of Auditing Distinction Between Auditing and Accounting Economic Demand for Auditing Assurance Services Types of Audits Type of Auditors How to become a CPA?! 2 Dr. Samer H.

The Contents of This Lecture: The CPA Profession: Certified Public Accounting Firms Structure of CPA Firms Sarbanes-Oxley Act American Institute of Certified Public Accountants International and U.S. Auditing Standards Generally Accepted Auditing Standards 3 Dr. Samer H.

Certified Public Accounting Firms The legal right to perform audits is granted to CPA firms by regulation in each state in the USA. CPA firms also provide many other services to their clients, such as: accounting and bookkeeping, tax and management consulting services. There are four kinds of CPA firms: Big Four international firms. Regional and large local firms. National firms. Small local firms. 4 Dr. Samer H.

Certified Public Accounting Firms “Big Four” Audit Firms 5 Dr. Samer H.

Structure of CPA Firms 1. Organizational Structures Six organizational structures are available to CPA firms: 1. Proprietorship: It’s owned by one owner. 2. General Partnership: It’s owned by multiple owners. 3. General Corporation: It’s owned by Shareholders. 4. Professional Corporation (PC): It’s owned by one or more shareholders, whereby they provide professional services to the clients. 5. Limited Liability Company (LLC): It’s structured and taxed like a general partnership, but its owners have limited personal liability similar to that of a general corporation. 6 Dr. Samer H.

Structure of CPA Firms 1. Organizational Structures - Continued 6. Limited Liability Partnership (LLP): It’s structured and taxed like a general partnership, but the personal liability protection of an LLP is less than that of a general corporation or an LLC. Partners of an LLP are personally liable for the partnership’s debts and obligations, their own acts, and acts of others under their supervision. Partners are not personally liable for liabilities arising from negligent acts of other partners and employees not under their supervision. All of the Big Four firms and many smaller firms now operate as LLPs. 7 Dr. Samer H.

Structure of CPA Firms 2. Hierarchy of a Typical CPA Firm Breadth of Experience Partners Managers 5-10 Seniors and In-charge Auditors 2-5 Staff Assistants 8 10 years 0-2 Dr. Samer H.

Sarbanes-Oxley Act (SOX) Sox has been issued in 2002 by the U.S. Congress as a result of bankruptcies and alleged audit failures involving such companies as Enron and WorldCom. SOX act is considered the most important legislation affecting the auditing profession since the 1930s. The provisions of the Act apply to publicly held companies and their audit firms. The Act requires auditors to report on the “effectiveness of internal control over financial reporting”. The Act established the “Public Company Accounting Oversight Board (PCAOB)”, appointed and overseen by the “Securities and Exchange Commission (SEC)”. 9 Dr. Samer H.

Sarbanes-Oxley Act (SOX) - Continued What are the main tasks of PCAOB?! The PCAOB provides oversight for auditors of public companies. It establishes auditing and quality control standards for public company audits. It performs inspections of the quality controls at audit firms performing those audits. 10 Dr. Samer H.

American Institute of Certified Public Accountants (AICPA) The AICPA is the largest professional association for CPAs in the United States. The AICPA sets Standards and Rules that all members and other practicing CPAs MUST follow. Four major areas in which the AICPA has authority to set standards and make rules are as follows: 1. Auditing standards: It’s called “Statements on Auditing Standards (SASs)” 2. Compilation and review standards 3. Other attestation standards 4. Code of Professional Conduct 11 Dr. Samer H.

Other AICPA Functions The CPA examination Research and Grants Publishes a variety of materials Provides seminars and continuing education 12 Dr. Samer H.

International and U.S. Auditing Standards International Standards on Auditing (ISAs) are issued by the International Auditing and Assurance Standards Board (IAASB) of the “International Federation of Accountants (IFAC)”. IFAC is the worldwide organization for the accountancy profession, with 167 member organizations in 127 countries, representing more than 2.5 million accountants throughout the world. The Auditing Standards Board in the U.S. has revised most of its standards to converge with the international standards. As a result, U.S. standards are mostly consistent with international standards, except for certain requirements that reflect unique characteristics of the U.S. 13 Dr. Samer H.

International and U.S. Auditing Standards Relation of U.S. and International Auditing Standards ISAs SASs & GAAS ASs 14 Dr. Samer H.

Generally Accepted Auditing Standards (GAAS) Historically, auditing standards have been organized, by the (AICPA), along 10 generally accepted auditing standards (GAAS) that fall into three categories: General standards Standards of field work Reporting standards The 10 GAAS are too general to provide meaningful guidance. Thereby, they represent “Principles” to provide a framework to help auditors fulfill the objectives of conducting an audit of financial statements. SASs interpret the 10 generally accepted auditing standards and are the most authoritative references available to auditors in the USA. 15 Dr. Samer H.

Generally Accepted Auditing Standards (GAAS) 16 Dr. Samer H.

Summary 1. Describe the nature of CPA firms, what they do, and their structure. 2. Understand the role of “PCAOB” and the effects of “SOX” on the CPA profession. 3. Describe the key functions performed by the AICPA. 4. Understand the role of international auditing standards and their relation to U.S. auditing standards. 5. Understand the U.S. GAAS in order to use them as a basis for further study. 17 Dr. Samer H.

Next Week Audit Reports. 18 Dr. Samer H.

Any Questions? 19 Dr. Samer H.