Auditing Chapter 1: The Role of the Public Accountant

1. Types of Services
a. Assurance Services--The broad range of information enhancement
services that are provided by certified public accountants (CPAs).
These services include:
i. Attestation Services—Increase the reliability of information
ii. Other Assurance Services—Putting information into a form or
context that facilitates decision making
b. Non-Assurance Services
i. Tax Services
ii. Management Consulting Services
iii. Other
2. Attest Engagements
a. To attest to information means to provide assurance as to its reliability
b. Attest engagement: An examination, review, or agreed-upon
procedures engagement performed under the attestation standards
related to subject matter or an assertion that is the responsibility of
another party
3. Suitable criteria
a. Standards established or developed by groups of experts.
b. Example: Internal control audit – standards established by the
Committee of Sponsoring Organizations (COSO) framework.
c. Example: Financial statement audit – for a financial statement audit,
suitable criteria are referred to as the “applicable financial reporting
framework.” In the U.S. this is typically Generally Accepted
Accounting Standards.
1
4. Financial Statement Audit
a. Auditors gather evidence and provide a high level of assurance
(referred to as reasonable assurance) that the financial statements
follow GAAP, or some other appropriate accounting framework
b. Audit involves searching and verifying accounting records and
examining internal and external evidence
c. Sufficient evidence is gathered to issue an audit report that states the
auditors’ opinion
5. Audit Evidence - Evidence focuses on whether financial statements are
presented in accordance with GAAP; examples:
a. Balance sheet
i. All included assets and obligations exist
ii. Includes all assets and obligations
iii. Assets and obligations are properly valued
b. Income statement
i. Sales actually occurred
ii. Sales have been recorded at appropriate amounts
iii. Recorded costs and expenses are applicable to period
iv. All expenses have been recognized
c. Financial statement amounts
i. Accurate, properly classified and summarized
ii. Notes are informative and complete

2
6. What Creates the Demand for Audits?
a. Audits lend credibility to information by reducing information risk,
the risk that information is materially misstated.
b. Financial statement misstatements arise due to--
i. Accidental errors
ii. Lack of knowledge of accounting principles
iii. Unintentional bias
iv. Deliberate falsification (fraud)
c. Audits do not directly address business risk, the risk that a company
will not be able to meet its financial obligations due to economic
conditions or poor management decisions.
d. United States v. Arthur Young—Supreme Court described the
auditors’ role as being that of a public watchdog, requiring both total
independence and complete fidelity to public trust.
7. Other Types of Audits
a. Compliance Audits
i. Example: IRS audit of taxpayer’s return
b. Operational Audits
i. Example: Effectiveness of operations of receiving department
of a manufacturing company
c. Integrated Audits
i. Example: Assurance on both the financial statements and
effectiveness of internal control over financial reporting
8. Other Types of Auditors
a. Internal Auditors
b. Government Accountability Office Auditors
c. Tax Auditors
3
9. Internal Auditors
a. Employed by a company as employees
b. They often
i. Perform operational, compliance and internal control audits
ii. Report to the audit committee of the board of directors and to
another high-level management individual (usually the CEO)
c. The Institute of Internal Auditors is the international organization of
internal auditors.
10. Government Accountability Office Auditors (GAO Auditors)
a. Headed by the Comptroller General
b. Responsibility for supporting Congress
c. Perform
i. Compliance, operational and financial audits of government
agencies
ii. Examinations of corporations holding government contracts to
verify contract payments have been appropriate
11. Tax Auditors
a. Responsible for enforcement of tax laws of various sorts (e.g., state
and federal income taxes, property taxes, sales taxes)
b. Internal revenue agents generally perform compliance audits of
income tax returns
12. AICPA’s Traditional Role
a. Establish Standards
b. Research and Publication
c. Continuing Professional Education
d. Self-Regulation

4
 i. Note: Much of the standards setting and regulation roles
relating to public companies (referred to as “issuers”) has been
taken over by the SEC and the PCAOB.
13. Establishes Standards—Examples
a. AICPA Auditing Standards Board
i. Issues official pronouncements on auditing and attestation
matters for nonpublic companies (“nonissuers”)
ii. Statements on Auditing Standards (SASs)
iii. Statements on Standards for Attestation Engagements (SSAEs),
which provides guidance for attesting to information other than
financial statements such as financial forecasts
b. Accounting and Review Services Committee
i. Issues Statements on Standards for Accounting and Review
Services (SSARS) which are standards for compilations or
reviews, not audits of financial statements
14. Research and Publication
a. Publications
i. Journal of Accountancy (monthly)
ii. The Tax Advisor
b. Audit publications
i. Industry Audit and Accounting Guides
ii. Audit Guides
iii. Audit Risk Alerts
c. Other publications
i. Statements of Position
ii. Accounting Trends & Techniques Products

5
15. Continuing Professional Education
a. Necessary to fulfill the requirement for maintaining license to practice
as a CPA
b. Offered by
i. AICPA
ii. State societies
iii. Other professional organizations
16. Professional Regulation
a. Regulations of Individual CPAs
i. Code of Professional Conduct – ethical rules for CPAs
ii. Requirements for regular membership in AICPA
b. Regulation of Public Accounting Firms
i. Peer reviews of a firm’s accounting and auditing practice must
follow A ICPA Peer Review Program
1. CPA firms not registered and inspected by the PCAOB
are subject to peer reviews administered by the State
CPA Societies under the direction of the AICPA Peer
Review Board
2. The AICPA National Peer Review Committee
administers peer reviews of CPA firms registered and
inspected by PCAOB
3. Center for Audit Quality works to foster high-quality
performance

6
17. The CPA Examination
a. Uniform national examination prepared and graded by the AICPA
b. Computerized exam includes multiple choice and simulations in four
parts
i. Auditing and Attestation
ii. Financial Accounting & Reporting
iii. Regulation
iv. Business Environment & Concepts
18. State Boards of Accountancy
a. Issue CPA certificates
b. All boards require successful completion of CPA examination
c. Education and experience requirements vary
d. National Association of State Boards of Accounting (NASBA)
19. Other Parties
a. FASB
i. Sets GAAP for entities other than federal, state and local
governments
b. GASB
i. Sets accounting standards of financial accounting for state and
local government entities
c. FASAB
i. Sets accounting standards for the US government
d. IFAC
i. Sets international accounting standards

7
20. PCAOB Role
a. Adopt auditing, attestation, quality control, ethics, and independence
standards relating to the preparation of audit reports for SEC
registrants
b. Oversee and discipline CPAs and CPA firms that audit public
companies (issuers), including:
i. Register firms
ii. Perform inspections of firms
iii. Conduct investigations and disciplinary proceedings of firms
iv. Sanction registered firms
21. Securities and Exchange Commission (SEC)
a. Agency of the US government
b. Oversight responsibility for the PCAOB
c. Objectives
i. Protect investors and public by requiring full disclosure of
financial information by companies offering securities for sale
to the public
ii. Prevent misrepresentation, deceit, or other fraud in the sale of
securities
22. Registration and Regulation of the Sale of Securities by the SEC
a. Registration statements
i. Qualify securities for sales
ii. Contains audited financial statements
iii. Makes SEC major user of financial statements
b. Periodic reporting requirements, e.g., Form 10-Ks, Form 10-Qs, etc.
c. Regulation S-X
i. Sets forth basic accounting regulation
8
23. Types of Professional Services
a. Attestation and Assurance
b. Tax
c. Consulting
d. Accounting
e. Personal Financial Planning
f. Litigation support
g. Fraud Investigation
h. Personal Financial Planning
24. Organization of the Public Accounting Profession
a. Sole proprietorship
b. Partnerships
c. Professional Corporation
d. Limited Liability Partnership (LLP)
e. Limited Liability Company (LLC)
25. Categories of Public Accounting Firms
a. Local
b. Regional
c. National
d. Big 4
e. Alternative Practice Structures

9
26. Industry Specialization
a. Firms with detailed knowledge and understanding of a client’s
industry
b. Helps firms
i. Be more effective at collecting and evaluating audit evidence
ii. Make valuable suggestions to improve client’s operations
iii. Provide client consulting services
27. Responsibilities on an Engagement
a. Partner—Overall responsibility is to assure that the audit is
performed in accordance with professional standards.
b. Manager—Supervise overall engagement.
c. Seniors— “In charge” auditor on a daily basis.
d. Staff—Work under the immediate supervision of the senior.

10