Presentation Outline The Structure of CPA FirmsAmerican Institute of Certified Public Accountants (AICPA)Generally Accepted Auditing StandardsQuality Control Policies
I. The Structure of CPA Firms Organization Forms With High Personal LiabilityOrganization Forms with Limited Liability
A. Organizational Forms with High Personal Liability The following forms of firm organization are unpopular because they provide no owner protection against litigation:Proprietorship – Only firms with one owner can operate in this form. General Partnership – Same form as a proprietorship except that there are 2 or more owners.
B. Organizational Forms with Limited Liability General corporation – An owner’s loss in a corporation is limited to the amount invested. However, most states prohibit CPA firms from organizing in this manner.Professional corporation (PC) – Although this form provides some legal liability, the amount of protection can vary significantly from state to state.Limited Liability Company (LLC) – Firm is taxed like a partnership, but the partners have limited liability like a corporation. Limited Liability Partnership – Partner’s are personally liable for partnership obligations, their own acts, and the acts of those under their supervision. Not responsible for the acts of other partners or staff not under their supervision.
C. Staff Levels and Responsibilities
II. The Regulation of Public Corporations The Public Company Accounting Oversight BoardThe Role of the SECSpecific SEC Reports
A. The Public Company Accounting Oversight Board (PCAOB)
Establishment of standards for auditing, quality control, ethics, and independence, as well as attestation, for registered accounting firms. Establishment of standards for auditing, quality control, ethics, and independence, as well as attestation, for registered accounting firms.
3. SEC Oversight Over PCAOB In addition to appointing or removing members, the SEC, among other things, must approve the Board’s budget and rules, including auditing standards, and may review appeals of adverse Board inspection reports and disciplinary actions against registered accounting firms.
4. Standard Setting Input from Outside the PCAOB Although the Sarbanes-Oxley Act would allow the PCAOB to designate a professional group of accountants to propose standards to the Board, the Board decided early in 2003 that it could best protect investors by developing standards itself.The Board will rely on advice from a standing advisory group, and be involved in soliciting public comment to obtain the views of issuers, accountants, investors, and other interested parties.
B. The Securities Acts Securities Act of 1933Requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval.
C. The Role of the SEC The SEC has legal power to establish rules for any CPA associated with audited financial statements submitted to the commission.The SEC has taken the position that accounting principles and auditing standards should be set by the profession. However, they can override the profession and their opinion is strongly considered.
D. Specific SEC Forms Forms S1 to S16 – Completed when new securities are to be issued to the public.Form 8K – Filed at the end of any month in which a significant investor event has occurred (i.e., sale of subsidiary, change of auditor, etc.)Form 10-K – Filed annually within 90 days of the close of each fiscal year. Includes audited financial statements.Form 10-Q – Filed quarterly with financial statements reviewed by the auditor.
III. American Institute of Certified Public Accountants The AICPA sets standards and rules that all members and other practicing CPAs must follow. This authority extends to the following areas:Auditing StandardsCompilation and Review StandardsConsulting StandardsCode of Professional Conduct
1. Auditing Standards The Auditing Standards Board (ASB) is responsible for issuing pronouncements on auditing matters for all entities other than publicly traded companies.The pronouncements are known as Statements on Auditing Standards (SASs)
2. Compilation and Review Standards The Accounting and Review Services Committee is responsible for issuing pronouncements of the CPAs responsibilities when the CPA is associated with financial statements of non-public companies that are not audited.The Statements on Standards for Accounting and Review Services (SSARS), provide guidance for providing compilation (no assurance on financials) and review services (limited assurance on financials).
3. Other Attestation Services Forms of attestation are often performed for other than historical financial statements.Examples of other attestation services involve prospective financial information in forecasts and projections.
4. Consulting Standards The Management Consulting Services Executive Committee is responsible for issuing pronouncements on consulting services.Consulting differs from attestation in that the CPA does not report on another party’s assertion. Rather, the CPA develops findings, conclusions, and recommendations.
5. Code of Professional Conduct The AICPA Committee on Professional Ethics sets rules of conduct that CPAs are required to meet.
IV. Generally Accepted Auditing Standards
General Standard No. 1
General Standard No. 2
General Standard No. 3
Standard of Fieldwork No. 1
Standard of Fieldwork No. 2
Standard of Fieldwork No. 3
Standard of Reporting No. 1
Standard of Reporting No. 2
Standard of Reporting No. 3
Standard of Reporting No. 4
V. Quality Control Policies
A. Elements of Quality Control
B. Peer Review Program
C. Division for CPA Firms
Summary Organization and staffing of CPA firmsThe role of the AICPAGeneral Standards – all audit phasesFieldwork Standards – performance of audit workReporting Standards – development of audit reportQuality control in the form of standards, peer review, and AICPA divisions.
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