Arens Chapter02-20130220

The Audit Standards’ Setting
Process
Chapter 2
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 2-1

Learning Objective 1
Describe the nature of CPA firms,

what they do, and their structure.
Auditing plays an important role in society by

reducing information risk and facilitating
access to capital and that audit firms
provide additional, value-added service to
their clients.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2-2
Certified Public Accounting
Firms
The legal right to perform audits is granted
to CPA firms by regulation of each state.
CPA firms also provide many other services to

their clients, such as tax and consulting services.
CPAs continue to develop new products and

services- such as financial planning, business
valuation and information technology.
2-3
Firms
 Big Four international firms
 National firms
 Regional and large local firms
 Small local firms

2-4
Firms

2-5
Firms
The four largest CPA firms in the United States
are called the “Big Four” international CPA firms.
These four firms have offices in most major

cities in the United States and in many
cities throughout the world.

2-6
Activities of CPA Firms
 Accounting and bookkeeping services
 Tax services
 Management consulting services

2-7
Structure of CPA Firms
Three main factors influence the 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.

2-8
Organizational Structure
 Proprietorship
 Professional corporation
 General partnership
 Limited liability company
 General corporation
 Limited liability partnership

2-9
Hierarchy of a Typical CPA Firm (1/2)
Staff Level Experience Typical Responsibilities
Staff Performs most of the

0-2 years
assistant detailed audit work
Senior or Responsible for the audit

in-charge 2-5 years field work, including
auditor supervising staff work

2 - 10
Hierarchy of a Typical CPA Firm(2/2)
Staff Level Experience Typical Responsibilities

Helps plan the audit,
manages the audit,
Manager 5-10 years
reviews work, and works
with the client
Reviews audit work and
Partner 10+ years makes significant audit
decisions

2 - 11
Hierarchy of a Typical
CPA Firm
Breadth of Experience
Partners 10+ years
Managers 5-10
Seniors and
In-charge Auditors 2-5
Staff Assistants 0-2

2 - 12
Understand the role of the
Public Company Accounting
Oversight Board and the effects
of the Sarbanes-Oxley Act
on the CPA profession.

2 - 13
Sarbanes-Oxley Act
This Act is considered by many observers to

be 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.

2 - 14
Sarbanes-Oxley Act
SEC
PCAOB
(Public Company
Accounting
Oversight Board)

2 - 15
Sarbanes-Oxley Act
The PCAOB conducts inspections of registered

accounting firms and assess their compliance
with the rules of the PCAOB and the SEC.

2 - 16
Summarize the role of the
Securities and Exchange
Commission in accounting
and auditing.

2 - 17
Securities and Exchange
Commission
The overall purpose of the Securities and
Exchange Commission (SEC) is to assist in
providing investors with reliable information
upon which to make investment decisions.

2 - 18
Describe the key functions
performed by the AICPA.

2 - 19
AICPA
The AICPA sets professional requirements

for CPAs, conducts research, and publishes
materials on many different subjects related
to accounting, auditing, attestation and
assurance services, management
consulting services, and taxes.

2 - 20
Establishing Standards
and Rules
The AICPA is empowered to set standards
(guidelines) and rules that all members
and other practicing CPAs must follow.

2 - 21
Establishing Standards
and Rules
1. Auditing standards
2. Compilation and review standards
3. Other attestation standards
4. Code of Professional Conduct

2 - 22
Other AICPA Functions
Writes and grades the CPA examination.
Supports research by its own staff and

provides grants to others.
Publishes a variety of materials.
Provides seminars and education in a

variety of subject matters.
2 - 23
Statements on Auditing
Standards
 Classification of Statements on Auditing Standards
 GAAS and Standards of Performance

2 - 24
International Standards
on Auditing
International Federation of Accountants
(IFAC) is the worldwide organization
for the accountancy profession.
The IFAC works to improve the

uniformity of auditing practices and
related services throughout the world.

2 - 25
on Auditing
International Standards on Auditing (ISAs)
are issued by the International Auditing
and Assurance Standards Board (IAASB)
of the International Federation of
Accountants (IFAC).

2 - 26
on Auditing

2 - 27
Use generally accepted auditing standards
as a basis for further study

2 - 28
GAAS

2 - 29
Generally Accepted Auditing
Standards- United States
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care

2 - 30
U.S. Generally Accepted Auditing
Standards
General Standards
1. The auditor must have adequate technical training
and proficiency to perform the audit.
2. The auditor must maintain independence

in mental attitude in all matters relating
to the audit.
3. The auditor must exercise due professional

care in the performance of the audit and the
preparation of the report.

2 - 31
Standards – United States
Standards of Field Work

1. Proper plann and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence

2 - 32
Standards of Field Work
1. The auditor must adequately plan the work
and must properly supervise any assistants.
2. The auditor must obtain a sufficient understanding

of the entity and its environment, including its
internal control, to assess the risk of material
misstatement of the financial statements whether due to
error or fraud, and to design further audit procedures.
3. The auditor must obtain sufficient appropriate

audit evidence by performing audit procedures
to afford a reasonable basis for an opinion
regarding the financial statements under audit.

2 - 33
Standards-United States
Standards of Reporting
1. Statements prepared in accordance with GAAP
2. Circumstances in which such principles have not

been consistently observed
3. Adequacy of disclosures
4. Expression of opinion on financial statements

2 - 34
Relationship Between GAAS and
PCAOB Auditing Standards
PCAOB GAAS
Public Private
company company
audits audits

2 - 35
Standards of Reporting
1. The report shall state in the auditor’s report whether the

Financial statements are presented in accordance with
generally accepted accounting principles (GAAP).
2. The report shall identify those circumstances

in which such principles have not been
consistently observed in the current period
in relation to the preceding period.

2 - 36
Standards of Reporting (Cont’d)
3. When the auditor determines that Informative disclosures

in the financial statements are to be regarded as reasonably
adequate, the auditor must so state in the auditor’s report.
4. The auditor either express an opinion regarding the

financial statements, taken as whole, or state the an opinion
Cannot be expressed, in the auditor’s report. When the auditor
Cannot express an overall opinion, the auditor shall state the
Reasons therefor in auditor’s report. In all cases where an
Auditor’s name is associated with financial statement, the
Auditor should clearly indicate the character of the auditor’s
Work, if any, and the degree of responsibility the auditor is
taking,
©2010 Prentice Hallin thePublishing,
Business auditor’sAuditing report.
13/e, Arens/Elder/Beasley
2 - 37
Relationship Between GAAS and
PCAOB Auditing Standards
The term generally accepted auditing standards
is no longer used for public company audits.
The term GAAS continues to be used for audits

of private companies.
Public company audits refer to PCAOB auditing

standards.

2 - 38
Statements on Auditing
Standards
The 10 generally accepted auditing standards
are too general to provide meaningful guidance.
SASs interpret the 10 generally accepted

auditing standards and are the most
authoritative references available to auditors.

2 - 39
Identify quality control standards
and practices within the
accounting profession.

2 - 40
Elements of Quality Control
 Independence, integrity, and objectivity
 Personnel management
 Acceptance and continuation of clients

and engagements
 Engagement performance
 Monitoring

2 - 41
Relationships
Quality control Generally accepted

standards auditing standards
AICPA practice Peer

sections review

2 - 42
CPAs Encouraged to Conduct
Themselves at a High Level
GAAS and
interpretations Continuing
CPA
education
examination
requirements
Quality Conduct of Legal

control CPA firm liability
personnel
Peer AICPA practice

review sections
PCAOB Code of
and SEC Professional
Conduct
2 - 43
我國審計公報第46號
會計師事務所之品質管制
我國審計公報第44號
查核歷史性財務資訊之品質管制

2 - 44
End of Chapter 2
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 2 - 45

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The Audit Standards’ Setting

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 2-1

Describe the nature of CPA firms,

Auditing plays an important role in society by

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

CPA firms also provide many other services to

CPAs continue to develop new products and

 Regional and large local firms

 Small local firms

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

These four firms have offices in most major

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

 Accounting and bookkeeping services

 Management consulting services

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Three main factors influence the organizational

1. The need for independence from clients.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Staff Level Experience Typical Responsibilities

Staff Performs most of the

Senior or Responsible for the audit

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Staff Level Experience Typical Responsibilities

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Partners 10+ years

Staff Assistants 0-2

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

This Act is considered by many observers to

The provisions of the Act apply to publicly

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

The PCAOB conducts inspections of registered

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

The AICPA sets professional requirements

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2. Compilation and review standards

3. Other attestation standards

4. Code of Professional Conduct

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

Writes and grades the CPA examination.

Supports research by its own staff and

Publishes a variety of materials.

Provides seminars and education in a

 GAAS and Standards of Performance

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

The IFAC works to improve the

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2. Independence in mental attitude

3. Due professional care

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

2. The auditor must maintain independence

3. The auditor must exercise due professional