CHAPTER 1 f
The Role of the f f f
f Public Accountant in the f f f
American Economy f
Review Questions
f
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously
f f f f f f f f f f f f f f
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
f f f f f f f f f f f f f f
the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted
f f f f f f f f f f f f f f f
the largest companies in American history to do so. The extent of the accounting irregularities and fraud
f f f f f f f f f f f f f f f f f
being investigated and disclosed brought into question the effectiveness of financial statement audits. In
f f f f f f f f f f f f f f
addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on
f f f f f f f f f f f f f f f f f
charges of destroying documents related to the Enron case brought into question the ethics standards of the
f f f f f f f f f f f f f f f f f
profession.
f
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
f f f f f f f f f f f f f f
decision-making. The two types are: (a) those that increase the reliability of information and (b) those
f f f f f f f f f f f f f f f f
that involve putting information in a form or context that facilitates decision-making.
f f f f f f f f f f f f
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,
f f f f f f f f f f f f f f f f
made by management, most frequently is that the financial statements follow generally accepted
f f f f f f f f f f f f f
accounting principles.
f f
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange
f f f f f f f f f f f f f f f f f f
and by the rules of the Securities and Exchange Commission to provide an audit report with the annual
f f f f f f f f f f f f f f f f f f
financial statements furnished to its stockholders. It also is required to engage the auditors to provide an
f f f f f f f f f f f f f f f f f
opinion on its internal control. Apart from legal requirements, however, a large listed corporation
f f f f f f f f f f f f f f
recognizes that it must maintain investor confidence in the reliability of its financial statements and
f f f f f f f f f f f f f f f
internal control over financial reporting if it is to continue to be able to secure capital from the public.
f f f f f f f f f f f f f f f f f f f
fThe report by a firm of certified public accountants adds credibility to the financial statements prepared by
f f f f f f f f f f f f f f f f
the corporation. When a small family-owned enterprise elects to have an audit, the purpose usually is to
f f f f f f f f f f f f f f f f f
use the auditors' report to support an application for a bank loan.
f f f f f f f f f f f f
Solutions Manual, Chapter 6, Page 1 of 359 f f f f f f f
,1-5 A report by an independent public accountant concerning the fairness of a company's financial statements
f f f f f f f f f f f f f f
is commonly required in the following situations:
f f f f f f f
(1) Application for a bank loan. f f f f
(2) Establishing credit for purchase of merchandise, equipment, or other assets. f f f f f f f f f
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders
f f f f f f f f f f f
or partners).
f f
(4) Issuance of securities by a corporation. f f f f f
(5) Annual financial statements by a corporation with securities listed on a stock exchange or traded
f f f f f f f f f f f f f f
over the counter.
f f f
(6) Sale of an ongoing business. f f f f
(7) Termination of a partnership. f f f
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
f f f f f f f f f f f f f f f
following the appropriate criteria, usually generally accepted accounting principles. As such, an increase
f f f f f f f f f f f f f
in credibility results in financial statements that can be believed and relied upon by third parties.
f f f f f f f f f f f f f f f f
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable to
f f f f f f f f f f f f f f f f f f
meet its financial obligations due to economic conditions or poor management decisions. Information
f f f f f f f f f f f f f
risk is the risk that the information used to assess business risk is not accurate. Auditors can directly
f f f f f f f f f f f f f f f f f f
reduce information risk, but have only limited effect on business risk.
f f f f f f f f f f f
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of
f f f f f f f f f f f f f f f f
fraud. Audit work centered on the balance sheet, because the income statement was regarded as highly
f f f f f f f f f f f f f f f f
confidential and not for public disclosure. Today, the principal objective of auditing is to form an
f f f f f f f f f f f f f f f f
opinion on the fairness of financial statements and their conformity with generally accepted accounting
f f f f f f f f f f f f f f
principles. But the professional standards also require that an audit be designed to provide reasonable
f f f f f f f f f f f f f f f
assurance of detecting material misstatements, due to errors or fraud. Particular emphasis is placed on
f f f f f f f f f f f f f f f
the income statement which is of great importance to investors. Auditing today also has the objectives of
f f f f f f f f f f f f f f f f f
meeting the requirements of the Securities and Exchange Commission (SEC) and the Public Company
f f f f f f f f f f f f f f
Accounting Oversight Board for public companies.
f f f f f f
1-9 The statement is incorrect. The increasing integrated databases of today, along with available audit
f f f f f f f f f f f f f
procedures make audited entire populations a possibility in many situations.
f f f f f f f f f f
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
f f f f f f f f f f f f f f f
organization. It involves more subjective judgments than a compliance audit or an audit of financial
f f f f f f f f f f f f f f f
statements because the criteria of effectiveness and efficiency of departmental performance are not as
f f f f f f f f f f f f f f
clearly established as are many laws and regulations or generally accepted accounting principles.
f f f f f f f f f f f f f
The report prepared after completion of an operational audit is usually directed to management of
f f f f f f f f f f f f f f
the organization in which the audit work was done.
f f f f f f f f f
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in
f f f f f f f f f f f f f f f
compliance with established criteria. The necessary ingredients are verifiable data and the existence of
f f f f f f f f f f f f f f
standards established by an authoritative body. An operational audit, on the other hand, is a review of a
f f f f f f f f f f f f f f f f f f
department or other unit of a business or governmental organization to measure the effectiveness and
f f f f f f f f f f f f f f f
efficiency of operations. Internal auditors often perform operational audits as do auditors employed by
f f f f f f f f f f f f f f
the Government Accountability Office (GAO) of the federal government.
f f f f f f f f f
1-12 Internal auditors must be independent of the department heads and other line executives whose work they
f f f f f f f f f f f f f f f
review. However, internal auditors are not independent in the same sense as a public accounting firm.
f f f f f f f f f f f f f f f f
Solutions Manual, Chapter 6, Page 2 of 359 f f f f f f f
, The public accounting firm serves many clients and the revenue obtained from any one client is only a
f f f f f f f f f f f f f f f f f
small part of the revenue of the firm. Internal auditors, on the other hand, are employees of one company,
f f f f f f f f f f f f f f f f f f f
and are subject to the restraints inherent in the employer-employee relationship. Internal auditors can
f f f f f f f f f f f f f f
achieve a great deal of independence by reporting to the audit committee of the board of directors, but
f f f f f f f f f f f f f f f f f f
fthey cannot achieve the same degree of independence as is possessed by the external public accounting
f f f f f f f f f f f f f f f
firm.
f
1-13 The internal auditors are employees of Spacecraft, Inc., and may be influenced by corporate management.
f f f f f f f f f f f f f f
The public accounting firm is independent of the company and is in a better position to take positions
f f f f f f f f f f f f f f f f f
opposed to those of company management. The work of the internal audit staff emphasizes measurement
f f f f f f f f f f f f f f f
of the efficiency and effectiveness of various operating units of the company and compliance with all
f f f f f f f f f f f f f f f f
ftypes of controls, whereas the public accounting firm is primarily concerned with determining the fairness
f f f f f f f f f f f f f f
of Spacecraft's financial statements.
f f f f
1-14 The Government Accountability Office (GAO) is a staff of professional auditors which reports to
f f f f f f f f f f f f f
Congress. Its function is to determine that programs carried out by federal agencies conform to the
f f f f f f f f f f f f f f f f
financial authorization of the Congress. It is also concerned with the cost-effectiveness of government
f f f f f f f f f f f f f f
programs. The audit activities include investigation of the costs and performance of corporations holding
f f f f f f f f f f f f f f
government contracts.
f f
1-15 Among the many important contributions to auditing literature by the AICPA are the series of Statements
f f f f f f f f f f f f f f f
on Auditing Standards (SASs), Statements on Standards for Attestation Engagements (SSAEs), Industry
f f f f f f f f f f f f
Audit and Accounting Guides, Audit Guides, Audit Risk Alerts, Statements on Standards for Accounting
f f f f f f f f f f f f f f
and Review Services (SSARSs), , and the Code of Professional Conduct (only two required).
f f f f f f f f f f f f f f
1-16 A peer review is a critical review of a public accounting firm's practices by another public accounting
f f f f f f f f f f f f f f f f
firm (or other CPAs functioning as a peer review team). The purpose of a peer review is to encourage
f f f f f f f f f f f f f f f f f f f
adherence to quality control standards established by the accounting firm and the profession.
f f f f f f f f f f f f f
1-17 The Securities and Exchange Commission (SEC) is an agency of the federal government and is
f f f f f f f f f f f f f f
fresponsible for administering a number of acts, including the Securities Act of 1933 and the Securities
f f f f f f f f f f f f f f f
Exchange Act of 1934. In meeting this responsibility, the SEC reviews financial statements of
f f f f f f f f f f f f f f
companies offering securities for sale to the public. It is particularly concerned with requiring full
f f f f f f f f f f f f f f f
disclosure of financial information and with preventing misrepresentation. Through the Public Company
f f f f f f f f f f f f
Accounting Oversight Board, the SEC now oversees public accounting firms that audit public companies.
f f f f f f f f f f f f f f
Included in this oversight process includes development of auditing, independence, and quality control
f f f f f f f f f f f f f
standards; inspection of performance; and enforcement of the standards.
f f f f f f f f f
The AICPA is the national organization of certified public accountants. It has long been a leader
f f f f f f f f f f f f f f f
in accounting and auditing research, in publication of authoritative accounting and auditing
f f f f f f f f f f f f
pronouncements and studies, and in promoting high professional standards of practice.
f f f f f f f f f f f
1-18 Services offered by public accounting firms in addition to auditing include other forms of attestation, tax
f f f f f f f f f f f f f f f
work, consulting services, litigation support services, fraud investigation services, personal financial
f f f f f f f f f f f
planning and accounting services. This last category includes preparation of financial statements for
f f f f f f f f f f f f f
smaller companies that have limited accounting personnel and various types of write-up work. Public
f f f f f f f f f f f f f f
accounting firms also perform a variety of other services. Consulting services include aiding clients in
f f f f f f f f f f f f f f f
the design of accounting systems, conversion to Information Technology (IT) systems, preparation of
f f f f f f f f f f f f f
budgets, planning business combinations with other companies, executive search, and numerous other
f f f f f f f f f f f f
projects. Public accounting firms are restricted as to the consulting services that they may provide to
f f f f f f f f f f f f f f f f
audit clients that are public companies.
f f f f f f
Solutions Manual, Chapter 6, Page 3 of 359 f f f f f f f
, 1-19 The partnership form of organization for a public accounting firm offers several advantages over a sole
f f f f f f f f f f f f f f f
proprietorship. A partnership offers the opportunity for specialization by the partners in areas such as
f f f f f f f f f f f f f f f
taxation, auditing, and consulting services. Partners can discuss difficult technical problems among
f f f f f f f f f f f f
themselves, and benefit from different perspectives. Also, the partnership may be better able to attract
f f f f f f f f f f f f f f f
and retain high quality professional staff, because they may be rewarded by acceptance into the
f f f f f f f f f f f f f f f
partnership.
f
1-20 The following characteristics of a professional corporation distinguish it from the traditional corporation:
f f f f f f f f f f f f
(1) All shareholders must be engaged in the practice of public accounting.
f f f f f f f f f f
(2) To the extent possible, directors and officers should be certified public accountants.
f f f f f f f f f f f
(3) Shares of a professional corporation may be transferred only to those engaged in public
f f f f f f f f f f f f f
accounting or to the corporation itself.
f f f f f f
(4) The corporation's shareholders and employees have liability equivalent to other forms of
f f f f f f f f f f f
organizations (i.e., the corporate form of organization does not reduce liability). Note, however,
f f f f f f f f f f f f f
that CPAs may choose to purchase liability insurance to limit potential liability.
f f f f f f f f f f f f
1-21 Local firms usually have only one or two offices, are headed by a single CPA or have a few CPAs as
f f f f f f f f f f f f f f f f f f f f
partners, and serve clients in a single city or area. The services provided are mostly income tax work,
f f f f f f f f f f f f f f f f f f
consulting services, and accounting services. Auditing is often only a small part of the practice.
f f f f f f f f f f f f f f f
Regional firms often arise from the merger and expansion of local firms. They typically maintain f f f f f f f f f f f f f f
several offices in neighboring cities and states. Auditing is a more important function for regional firms
f f f f f f f f f f f f f f f f
than for the local firms, because larger businesses are included among the clients.
f f f f f f f f f f f f f
National firms have offices in most major cities in the United States and some operate in other
f f f f f f f f f f f f f f f f
countries as well. These firms offer a full range of services, with auditing often representing the largest
f f f f f f f f f f f f f f f f f
single portion of the practice.
f f f f f
International firms have offices in most of the world’s major cities. These firms offer a full range f f f f f f f f f f f f f f f f
of services, with auditing often representing the largest single portion of the practice.
f f f f f f f f f f f f f
1-22 The various levels of accounting personnel in a large public accounting firm are staff auditors, senior
f f f f f f f f f f f f f f f
auditors, managers or supervisors, and partners (and principals).
f f f f f f f f
The staff auditor performs audit procedures such as the observation of physical inventories and
f f f f f f f f f f f f f
confirmation of receivables under the supervision of a senior. The senior auditor plans and coordinates
f f f f f f f f f f f f f f f
the audit and drafts the audit report. The senior also reviews working papers, controls the allocation of
f f f f f f f f f f f f f f f f f
audit time, and trains assistants on the job. The manager or supervisor usually is responsible for
f f f f f f f f f f f f f f f f
supervising and reviewing several audit engagements concurrently, and resolving significant problems
f f f f f f f f f f f
with the client. The partners maintain contacts with clients, develop new business, establish policies of
f f f f f f f f f f f f f f f
the firm, review the adequacy of audit work, and sign audit reports. The engagement partner is
f f f f f f f f f f f f f f f f
responsible for performance of the audit in accordance with professional standards. A partner also
f f f f f f f f f f f f f f
devotes time to the recruitment and development of staff, to AICPA and other professional group
f f f f f f f f f f f f f f f
activities, to educational and other civic activities, and generally to promoting an environment in which
f f f f f f f f f f f f f f f
the firm can prosper. The position of principal, which is often held by top-ranking consulting personnel
f f f f f f f f f f f f f f f f
who do not hold the CPA certificate, has responsibilities similar to those of a partner.
f f f f f f f f f f f f f f f
1-23 The most significant responsibilities of a partner in a public accounting firm include (only three required:
f f f f f f f f f f f f f f f
Assume ultimate responsibility for the audits assigned to him or her
f f f f f f f f f f
Sign audit reports f f
Review the audit work for compliance with firm and professional standards
f f f f f f f f f f
Maintain relations with audit clients f f f f
Solutions Manual, Chapter 6, Page 4 of 359 f f f f f f f
The Role of the f f f
f Public Accountant in the f f f
American Economy f
Review Questions
f
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously
f f f f f f f f f f f f f f
issued financial statements as a result of accounting irregularities and fraud. Especially responsible were
f f f f f f f f f f f f f f
the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted
f f f f f f f f f f f f f f f
the largest companies in American history to do so. The extent of the accounting irregularities and fraud
f f f f f f f f f f f f f f f f f
being investigated and disclosed brought into question the effectiveness of financial statement audits. In
f f f f f f f f f f f f f f
addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on
f f f f f f f f f f f f f f f f f
charges of destroying documents related to the Enron case brought into question the ethics standards of the
f f f f f f f f f f f f f f f f f
profession.
f
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
f f f f f f f f f f f f f f
decision-making. The two types are: (a) those that increase the reliability of information and (b) those
f f f f f f f f f f f f f f f f
that involve putting information in a form or context that facilitates decision-making.
f f f f f f f f f f f f
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion,
f f f f f f f f f f f f f f f f
made by management, most frequently is that the financial statements follow generally accepted
f f f f f f f f f f f f f
accounting principles.
f f
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange
f f f f f f f f f f f f f f f f f f
and by the rules of the Securities and Exchange Commission to provide an audit report with the annual
f f f f f f f f f f f f f f f f f f
financial statements furnished to its stockholders. It also is required to engage the auditors to provide an
f f f f f f f f f f f f f f f f f
opinion on its internal control. Apart from legal requirements, however, a large listed corporation
f f f f f f f f f f f f f f
recognizes that it must maintain investor confidence in the reliability of its financial statements and
f f f f f f f f f f f f f f f
internal control over financial reporting if it is to continue to be able to secure capital from the public.
f f f f f f f f f f f f f f f f f f f
fThe report by a firm of certified public accountants adds credibility to the financial statements prepared by
f f f f f f f f f f f f f f f f
the corporation. When a small family-owned enterprise elects to have an audit, the purpose usually is to
f f f f f f f f f f f f f f f f f
use the auditors' report to support an application for a bank loan.
f f f f f f f f f f f f
Solutions Manual, Chapter 6, Page 1 of 359 f f f f f f f
,1-5 A report by an independent public accountant concerning the fairness of a company's financial statements
f f f f f f f f f f f f f f
is commonly required in the following situations:
f f f f f f f
(1) Application for a bank loan. f f f f
(2) Establishing credit for purchase of merchandise, equipment, or other assets. f f f f f f f f f
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders
f f f f f f f f f f f
or partners).
f f
(4) Issuance of securities by a corporation. f f f f f
(5) Annual financial statements by a corporation with securities listed on a stock exchange or traded
f f f f f f f f f f f f f f
over the counter.
f f f
(6) Sale of an ongoing business. f f f f
(7) Termination of a partnership. f f f
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared
f f f f f f f f f f f f f f f
following the appropriate criteria, usually generally accepted accounting principles. As such, an increase
f f f f f f f f f f f f f
in credibility results in financial statements that can be believed and relied upon by third parties.
f f f f f f f f f f f f f f f f
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable to
f f f f f f f f f f f f f f f f f f
meet its financial obligations due to economic conditions or poor management decisions. Information
f f f f f f f f f f f f f
risk is the risk that the information used to assess business risk is not accurate. Auditors can directly
f f f f f f f f f f f f f f f f f f
reduce information risk, but have only limited effect on business risk.
f f f f f f f f f f f
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of
f f f f f f f f f f f f f f f f
fraud. Audit work centered on the balance sheet, because the income statement was regarded as highly
f f f f f f f f f f f f f f f f
confidential and not for public disclosure. Today, the principal objective of auditing is to form an
f f f f f f f f f f f f f f f f
opinion on the fairness of financial statements and their conformity with generally accepted accounting
f f f f f f f f f f f f f f
principles. But the professional standards also require that an audit be designed to provide reasonable
f f f f f f f f f f f f f f f
assurance of detecting material misstatements, due to errors or fraud. Particular emphasis is placed on
f f f f f f f f f f f f f f f
the income statement which is of great importance to investors. Auditing today also has the objectives of
f f f f f f f f f f f f f f f f f
meeting the requirements of the Securities and Exchange Commission (SEC) and the Public Company
f f f f f f f f f f f f f f
Accounting Oversight Board for public companies.
f f f f f f
1-9 The statement is incorrect. The increasing integrated databases of today, along with available audit
f f f f f f f f f f f f f
procedures make audited entire populations a possibility in many situations.
f f f f f f f f f f
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
f f f f f f f f f f f f f f f
organization. It involves more subjective judgments than a compliance audit or an audit of financial
f f f f f f f f f f f f f f f
statements because the criteria of effectiveness and efficiency of departmental performance are not as
f f f f f f f f f f f f f f
clearly established as are many laws and regulations or generally accepted accounting principles.
f f f f f f f f f f f f f
The report prepared after completion of an operational audit is usually directed to management of
f f f f f f f f f f f f f f
the organization in which the audit work was done.
f f f f f f f f f
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in
f f f f f f f f f f f f f f f
compliance with established criteria. The necessary ingredients are verifiable data and the existence of
f f f f f f f f f f f f f f
standards established by an authoritative body. An operational audit, on the other hand, is a review of a
f f f f f f f f f f f f f f f f f f
department or other unit of a business or governmental organization to measure the effectiveness and
f f f f f f f f f f f f f f f
efficiency of operations. Internal auditors often perform operational audits as do auditors employed by
f f f f f f f f f f f f f f
the Government Accountability Office (GAO) of the federal government.
f f f f f f f f f
1-12 Internal auditors must be independent of the department heads and other line executives whose work they
f f f f f f f f f f f f f f f
review. However, internal auditors are not independent in the same sense as a public accounting firm.
f f f f f f f f f f f f f f f f
Solutions Manual, Chapter 6, Page 2 of 359 f f f f f f f
, The public accounting firm serves many clients and the revenue obtained from any one client is only a
f f f f f f f f f f f f f f f f f
small part of the revenue of the firm. Internal auditors, on the other hand, are employees of one company,
f f f f f f f f f f f f f f f f f f f
and are subject to the restraints inherent in the employer-employee relationship. Internal auditors can
f f f f f f f f f f f f f f
achieve a great deal of independence by reporting to the audit committee of the board of directors, but
f f f f f f f f f f f f f f f f f f
fthey cannot achieve the same degree of independence as is possessed by the external public accounting
f f f f f f f f f f f f f f f
firm.
f
1-13 The internal auditors are employees of Spacecraft, Inc., and may be influenced by corporate management.
f f f f f f f f f f f f f f
The public accounting firm is independent of the company and is in a better position to take positions
f f f f f f f f f f f f f f f f f
opposed to those of company management. The work of the internal audit staff emphasizes measurement
f f f f f f f f f f f f f f f
of the efficiency and effectiveness of various operating units of the company and compliance with all
f f f f f f f f f f f f f f f f
ftypes of controls, whereas the public accounting firm is primarily concerned with determining the fairness
f f f f f f f f f f f f f f
of Spacecraft's financial statements.
f f f f
1-14 The Government Accountability Office (GAO) is a staff of professional auditors which reports to
f f f f f f f f f f f f f
Congress. Its function is to determine that programs carried out by federal agencies conform to the
f f f f f f f f f f f f f f f f
financial authorization of the Congress. It is also concerned with the cost-effectiveness of government
f f f f f f f f f f f f f f
programs. The audit activities include investigation of the costs and performance of corporations holding
f f f f f f f f f f f f f f
government contracts.
f f
1-15 Among the many important contributions to auditing literature by the AICPA are the series of Statements
f f f f f f f f f f f f f f f
on Auditing Standards (SASs), Statements on Standards for Attestation Engagements (SSAEs), Industry
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Audit and Accounting Guides, Audit Guides, Audit Risk Alerts, Statements on Standards for Accounting
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and Review Services (SSARSs), , and the Code of Professional Conduct (only two required).
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1-16 A peer review is a critical review of a public accounting firm's practices by another public accounting
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firm (or other CPAs functioning as a peer review team). The purpose of a peer review is to encourage
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adherence to quality control standards established by the accounting firm and the profession.
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1-17 The Securities and Exchange Commission (SEC) is an agency of the federal government and is
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fresponsible for administering a number of acts, including the Securities Act of 1933 and the Securities
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Exchange Act of 1934. In meeting this responsibility, the SEC reviews financial statements of
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companies offering securities for sale to the public. It is particularly concerned with requiring full
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disclosure of financial information and with preventing misrepresentation. Through the Public Company
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Accounting Oversight Board, the SEC now oversees public accounting firms that audit public companies.
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Included in this oversight process includes development of auditing, independence, and quality control
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standards; inspection of performance; and enforcement of the standards.
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The AICPA is the national organization of certified public accountants. It has long been a leader
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in accounting and auditing research, in publication of authoritative accounting and auditing
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pronouncements and studies, and in promoting high professional standards of practice.
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1-18 Services offered by public accounting firms in addition to auditing include other forms of attestation, tax
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work, consulting services, litigation support services, fraud investigation services, personal financial
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planning and accounting services. This last category includes preparation of financial statements for
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smaller companies that have limited accounting personnel and various types of write-up work. Public
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accounting firms also perform a variety of other services. Consulting services include aiding clients in
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the design of accounting systems, conversion to Information Technology (IT) systems, preparation of
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budgets, planning business combinations with other companies, executive search, and numerous other
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projects. Public accounting firms are restricted as to the consulting services that they may provide to
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audit clients that are public companies.
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, 1-19 The partnership form of organization for a public accounting firm offers several advantages over a sole
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proprietorship. A partnership offers the opportunity for specialization by the partners in areas such as
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taxation, auditing, and consulting services. Partners can discuss difficult technical problems among
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themselves, and benefit from different perspectives. Also, the partnership may be better able to attract
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and retain high quality professional staff, because they may be rewarded by acceptance into the
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partnership.
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1-20 The following characteristics of a professional corporation distinguish it from the traditional corporation:
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(1) All shareholders must be engaged in the practice of public accounting.
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(2) To the extent possible, directors and officers should be certified public accountants.
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(3) Shares of a professional corporation may be transferred only to those engaged in public
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accounting or to the corporation itself.
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(4) The corporation's shareholders and employees have liability equivalent to other forms of
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organizations (i.e., the corporate form of organization does not reduce liability). Note, however,
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that CPAs may choose to purchase liability insurance to limit potential liability.
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1-21 Local firms usually have only one or two offices, are headed by a single CPA or have a few CPAs as
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partners, and serve clients in a single city or area. The services provided are mostly income tax work,
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consulting services, and accounting services. Auditing is often only a small part of the practice.
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Regional firms often arise from the merger and expansion of local firms. They typically maintain f f f f f f f f f f f f f f
several offices in neighboring cities and states. Auditing is a more important function for regional firms
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than for the local firms, because larger businesses are included among the clients.
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National firms have offices in most major cities in the United States and some operate in other
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countries as well. These firms offer a full range of services, with auditing often representing the largest
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single portion of the practice.
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International firms have offices in most of the world’s major cities. These firms offer a full range f f f f f f f f f f f f f f f f
of services, with auditing often representing the largest single portion of the practice.
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1-22 The various levels of accounting personnel in a large public accounting firm are staff auditors, senior
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auditors, managers or supervisors, and partners (and principals).
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The staff auditor performs audit procedures such as the observation of physical inventories and
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confirmation of receivables under the supervision of a senior. The senior auditor plans and coordinates
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the audit and drafts the audit report. The senior also reviews working papers, controls the allocation of
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audit time, and trains assistants on the job. The manager or supervisor usually is responsible for
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supervising and reviewing several audit engagements concurrently, and resolving significant problems
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with the client. The partners maintain contacts with clients, develop new business, establish policies of
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the firm, review the adequacy of audit work, and sign audit reports. The engagement partner is
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responsible for performance of the audit in accordance with professional standards. A partner also
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devotes time to the recruitment and development of staff, to AICPA and other professional group
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activities, to educational and other civic activities, and generally to promoting an environment in which
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the firm can prosper. The position of principal, which is often held by top-ranking consulting personnel
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who do not hold the CPA certificate, has responsibilities similar to those of a partner.
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1-23 The most significant responsibilities of a partner in a public accounting firm include (only three required:
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Assume ultimate responsibility for the audits assigned to him or her
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Sign audit reports f f
Review the audit work for compliance with firm and professional standards
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Maintain relations with audit clients f f f f
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