Chapter 2 The CPA Profession
Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?
(2) Human resources: Y Monitoring: Y Engagement performance: Y
Limited Liability Partnership (LLP)
-Owned by one or more partners. I -It is 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
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this objective is provided through:
1. A system of quality control
State the four major types of services CPAs perform, and explain each.
1. Auditing and assurance services 2. Accounting and bookkeeping services 3. Tax services 4. Management consulting services
Professional Corporation
A professional corporation (PC) provides professional services and is owned by one or more shareholders. Offer personal liability protection.
Relevant ethical requirements
All personnel on engagements should maintain independence in mind and in appearance, perform all professional responsibilities with integrity, and maintain objectivity in performing their professional responsibilities.
Limited Liability Company (LLC)
An LLC is typically structured and taxed like a general partnership, but its owners have limited personal liability similar to that of a general corporation
General Partnership
Applies to multiple owners. This organizational structure has also become less popular as other forms of ownership that offer some legal liability protection became authorized under state laws.
Audit and assurance services
Assurance services are independent professional services that improve the quality of information for decision makers. Assurance services include attestation services, which are any service in which the CPA firm issues a report that expresses a conclusion about the reliability of an assertion that is the responsibility of another party. The four categories of attestation services are audits of historical financial statements, attestation on the effectiveness of internal control over financial reporting, reviews of historical financial statements, and other attestation services.
Why are most CPA firms not organized as general partnerships?
CPA firms are typically not organized as a general partnership because a general partnership offers less protection from legal liability relative to other structures such as a limited liability partnership.
Other AICPA Functions
In addition to writing and grading the CPA examination, the AICPA performs many educational and other functions for CPAs. The association supports research by its own research staff and provides grants to others. It also publishes a variety of materials, including journals such as the Journal of Accountancy, industry audit guides for several industries, periodic updates of the Codification of Statements on Auditing Standards, and the Code of Professional Conduct.
Tax Services
Include preparation of corporate, individual, and estate returns as well as tax-planning assistance.
Bookkeeping
Include the preparation of the client's journals and ledgers as well as financial statements.
Describe the relations among international auditing standards, AICPA auditing standards, and PCAOB 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) and are designed to improve the uniformity of auditing practices and related services throughout the world. AICPA Statements on Auditing Standards (SASs) are established by the Auditing Standards Board of the AICPA, and are applicable to private entities within the United States. As a result of efforts by the Auditing Standards Board of the AICPA to converge U.S. standards with international standards, AICPA auditing standards and International Standards on Auditing are similar in most respects. PCAOB Auditing Standards apply only to U.S. publicly traded companies and other SEC registrants, including brokerdealers. However, given that the PCAOB initially adopted existing standards established by the Auditing Standards Board as interim auditing standards, standards for audits of U.S. public and private companies are mostly similar.
The three main sets of auditing standards
International Standards on Auditing, AICPA auditing standards for entities other than public companies, and PCAOB Auditing Standards
Accounting services
Involve preparing the clients financial statements from the clients records.
Identify quality control standards and practices within the accounting profession.
Leadership responsibilities for quality within the firm ("tone at the top") Relevant ethical requirements Acceptance and continuation of client relationships and specific engagements Human resources Engagement performance Monitoring
Which of the following best describes what is meant by U.S. auditing standards?
Measures of the quality of the auditor's performance
Proprietorship
Only firms with one owner can operate in this form. Traditionally, all one-owner firms were organized as proprietorships, but most have changed to organizational forms with more limited liability because of litigation risks.
An auditor of an entity subject to the rules of the SEC must conduct the financial statement audit in accordance with
PCAOB standards
Acceptance and continuation of client relationships and specific engagements
Policies and procedures should be established for deciding whether to accept or continue a client relationship or specific engagement. These policies and procedures should minimize the risk of associating with a client whose management lacks integrity. The firm should also only undertake engagements that can be completed with professional competence
Human resources
Policies and procedures should be established to provide the firm with reasonable assurance that • All new personnel should be qualified to perform their work c ompetently. • Work is assigned to personnel who have adequate technical training and proficiency. • All personnel should participate in continuing professional education and professional development activities that enable them to fulfill their assigned responsibilities. • Personnel selected for advancement have the qualifications necessary for the fulfillment of their assigned responsibilities.
Monitoring
Policies and procedures should exist to ensure that the other quality control elements are being effectively applied.
Engagement performance
Policies and procedures should exist to ensure that the work performed by engagement personnel meets applicable professional standards, legal and regulatory requirements, and the firm's standards of quality.
Structure of CPA Firms
Proprietorship General Partnership Limited Liability Company Limited Liability Partnership Professional Corporations General Corproations
Management consulting services
Range from suggestions to improve the client's accounting system to computer installations.
Describe the key functions performed by the AICPA.
Sets professional requirements for CPAs, conducts research, publishes materials on many different subjects related to accounting, auditing, attesta- tion and assurance services, management consulting services, and taxes. The AICPA also promotes the accounting profession through organizing national advertising campaigns, promoting new assurance services, and developing specialist certifications to help mar- ket and ensure the quality of services in specialized practice areas
Which of the following provides authoritative guidance for the auditor of a nonpublic company?
Statements on Auditing Standards
What roles are played by the American Institute of Certified Public Accountants for its members?
The AICPA is the organization that sets professional requirements for CPAs. The AICPA also conducts research and publishes materials on many different subjects related to accounting, auditing, management consulting and advisory services, and taxes. The organization also prepares and grades the CPA examinations, provides continuing education to its members, and develops specialty designations to help market and assure the quality of services in specialized practice areas
The following questions concern quality control standards. Choose the best response. The nature and extent of a CPA firm's quality control policies and procedures depend on:
The CPA firm's size: Y The nature of the CPA firm's practice: Y Cost-benefit considerations: Y
Understand the role of international auditing standards and their relation to U.S. auditing standards.
The IAASB works to improve the uniformity of auditing practices and related services throughout the world by issuing pronouncements on a variety of audit and attest functions and by promoting their acceptance worldwide. The Auditing Standards Board in the U.S. has revised its audit standards to converge with the international standards. In addition, the PCAOB considers existing international standards in developing its 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. environment, such as legal and regulatory requirements. International auditing standards as adopted by standard-setting bodies in individual countries apply to audits of entities outside the United States. AICPA auditing standards are similar to international auditing standards and apply to the audits of private companies and other entities in the United States. PCAOB auditing standards apply to audits of U.S. public companies and other SEC registrants.
What is the role of the Public Company Accounting Oversight Board?
The Public Company Accounting Oversight Board provides oversight for auditors of public companies, including establishing auditing and quality control standards for public company audits, and performing inspections of the quality controls at audit firms performing those audits.
Understand the role of the Public Company Accounting Oversight Board and the effects of the Sarbanes-Oxley Act on the CPA profession.
The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB), appointed and overseen by the SEC. The PCAOB provides oversight for auditors of public companies; establishes auditing, attestation, and quality control standards for public company audits; and performs inspections of audit engagements as well as the quality controls at audit firms performing those audits. The PCAOB conducts inspections of registered accounting firms to assess their compliance with the rules of the PCAOB and SEC, professional standards, and each firm's own quality control policies.
General Corporation
The advantage of a corporation is that shareholders are liable only to the extent of their investment in the corporation.
What is the general character of the responsibilities characterized by the Performance principles?
The criteria of audit planning and evidence gathering
Leadership responsibilities for quality within the firm ("tone at the top")
The firm should promote a culture that quality is essential in performing engagements and should establish policies and procedures that support that culture.
Describe the nature of CPA firms and what they do
The legal right to perform audits is granted to CPA firms by regulation in each state. CPA firms also provide many other services to their clients, such as tax and advisory services. CPA firms continue to develop new products and services, such as financial planning, business valuation, forensic accounting, and information technology advisory services. Additional services commonly provided by CPA firms include accounting and bookkeeping services, tax services, and management con- sulting and risk advisory services.
Hierarchy of CPA firms
The organizational hierarchy in a typical CPA firm includes partners or shareholders, managers, supervisors, seniors or in-charge auditors, and assistants
Identify the six organizational structures available to CPA firms
The six organizational structures available to CPA firms are: proprietorship, general partnership, general corporation, professional corporation, limited liability company, and limited liability partnership
Describe the structure of CPA firms
Three main factors influence the organizational structure of all firms: 1. The need for independence from clients. Independence permits auditors to remain unbiased in drawing conclusions about the financial statements. 2. The importance of a structure to encourage competence. Competence permits auditors to conduct audits and perform other services efficiently and effectively. 3. The increased litigation risk faced by auditors. Audit firms continue to experience increases in litigation-related costs. Some organizational structures afford a degree of protection to individual firm member
Summarize the role of the Securities and Exchange Commission in accounting and auditing
To assist in providing investors with reliable information upon which to make investment decisions
Center for Audit Quality (CAQ)
a public policy organization with a mission to foster confidence in the audit process and to make public company audits even more reliable and relevant for investors
Public Company Accounting Oversight Board (PCAOB
board created by the Sarbanes-Oxley Act; oversees auditors of public companies and broker-dealers, including establishing auditing, attestation, and quality control standards and performing inspections of registered accounting firms
The Public Company Accounting Oversight Board (PCAOB) has the duty to
conduct investigations concerning registered public accounting firms
Principles underlying an audit
framework helpful in understanding and explaining an audit; provide a structure for the Codification of Statements on Auditing Standards
The Responsibilities principle underlying AICPA auditing standards includes a requirement that:
professional judgment be exercised by the auditor
Statements on Auditing Standards (SASs)
pronouncements issued by the Auditing Standards Board of the AICPA applicable to audits of entities other than public issuers
Generally accepted auditing standards (GAAS)
refers to AICPA auditing standards developed and issued in the form of Statements on Auditing Standards (SASs) and codified in AU-C sections in the Codification of Auditing Standards
International Standards on Auditing (ISAs)
statements issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants to promote international acceptance of auditing standards
Securities and Exchange Commission (SEC)
—a federal agency that oversees the orderly conduct of the securities markets; the SEC assists in providing investors in public corporations with reliable information upon which to make investment decisions
American Institute of Certified Public Accountants (AICPA)
—a voluntary organization of CPAs that sets professional requirements, conducts research, and publishes materials relevant to accounting, auditing, advisory services, and taxes
Quality control
—methods used by a CPA firm to ensure that the firm meets its professional responsibilities to clients and others
Peer review
—the review by CPAs of a CPA firm's compliance with its quality control system
