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Assurance services

Assurance services. The broad range of information enhancement services that are provided by certified public accountants (CPAs). Two types: Increase reliability of information Putting information into a form or context that facilitates decision making. Types of Services. Assurance Services

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Assurance services

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  1. Assurance services The broad range of information enhancement services that are provided by certified public accountants (CPAs). Two types: Increase reliability of information Putting information into a form or context that facilitates decision making.

  2. Types of Services Assurance Services Attestation Services Example: Audits of Financial Statements, Examinations of Internal Control Other Assurance Services Example: CPA ElderCare Prime Plus Services NonAssurance Services Tax Services Management Consulting Services Other

  3. Attestation Services To attest to information means to provide assurance as to its reliability Attest engagement: A practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g. management)

  4. The Attest Function Management The CPA Suitable Criteria Subject Matter Gathers Evidence Issues Report Subject Matter* The Attest Report *May be management’s assertion about the subject matter.

  5. Suitable criteria Standards established or developed by groups of experts Example: Internal control audit – standards established by a committee of experts on internal control Example: Financial statement audit – standards are GAAP

  6. Forms of Attestation

  7. Audit of Financial Statements Management The Auditors Prepares Financial Statements Criteria (e.g., GAAP) Gathers Evidence Issues Report Financial Statements The Auditors’ Report

  8. Financial Statement Audit Auditors gather evidence and provide a high level of assurance that the financial statements follow GAAP, or some other appropriate basis of accounting Audit involves searching and verifying accounting records and examining other documents Evidence necessary to issue an audit report that states auditors’ opinion

  9. Audit Evidence Evidence focuses on whether financial statements are presented in accordance with GAAP; examples: Balance sheet contains all liabilities Income statement Sales really occurred Sales have been recorded at appropriate amounts Recorded costs and expenses are applicable to period All expenses have been recognized Financial statement amounts Accurate, properly classified and summarized Notes are informative and complete

  10. What Creates the Demand for Audits? Audits lend credibility to information by reducing information risk, the risk that information is materially misstated Financial statement misstatements arise due to-- Accidental errors Lack of knowledge of accounting principles Unintentional bias Deliberate falsification 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

  11. History of the Attest Function

  12. The Accounting Profession’s Credibility Crisis 2000—The Panel on Audit Effectiveness made a variety of suggestions to improve audits. 2001—Enron Bankruptcy 2002—WorldCom Fraud 2002—Sarbanes-Oxley Act 2003—Public Company Accounting Oversight Board began operations

  13. Financial Audits Audit of the financial statements of an entity Covers the balance sheet and related statements of income, retained earnings and cash flows Goal is to determine if prepared in conformity with GAAP Performed by CPAs Users include management, investors, bankers, creditors, financial analysts, government agencies

  14. Other Types of Audits Compliance Audits Example: IRS audit of income tax return Operational Audits Example: Effectiveness of operations of receiving department of a manufacturing company Integrated Audits Example: Assurance on both the financial statements and effectiveness of internal control over financial reporting

  15. Other Types of Auditors • Internal Auditors • Government Accountability Office Auditors • Tax Auditors

  16. Internal Auditors • Employed by a company as an employee • They often • perform operational and compliance audits • address internal control • report to the audit committee of the board of directors and to the president • The Institute of Internal Auditors is the international organization of internal auditors.

  17. Government Accountability Office Auditors (GAO Auditors) • Headed by the comptroller general • Responsibility of supporting Congress • Perform • Compliance, operational and financial audits of government agencies • Examinations of corporations holding government contracts to verify contract payments have been proper

  18. Tax Auditors • Responsible for enforcement of tax laws of various sorts (e.g., state and federal income taxes, property taxes, sales taxes) • Internal revenue agents generally perform compliance audits of income tax returns

  19. AICPA’s Traditional Role Establish Standards Research and Publication Continuing Professional Education Self-Regulation 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.

  20. Establishes Standards--Examples AICPA Auditing Standards Board Issues official pronouncements on auditing matters for nonpublic companies (“nonissuers”) Statements on Auditing Standards (SASs) Statements on Standards for Attestation Engagements (SSAEs) Guidance for attesting to information other than financial statements such as financial forecasts Accounting and Review Services Committee Statements on Standards for Accounting and Review Services (SSARS) Standards for compilations or reviews not audits of financial statements

  21. Research and Publication Publications Journal of Accountancy (monthly) The Tax Advisor Audit publications Industry Audit and Accounting Guides Audit Risk Alerts Auditing Practice Releases Other publications Accounting Research Studies Statements of Position Accounting Trends & Techniques

  22. Continuing Professional Education Development of continuing professional education programs Necessary for continuing education requirement for CPA certificate Offered by AICPA State societies Other professional organizations

  23. Professional Regulation Regulations of Individual CPAs Code of Professional Conduct – ethical rules for CPAs Requirements for regular membership in AICPA Regulation of Public Accounting Firms Division for Public Accounting Firms Center for Public Company Audit Firms Private Companies Practice Section (PCPS)

  24. The CPA Examination Uniform national examination prepared and graded by the AICPA Computerized exam includes multiple choice and simulations in four parts Auditing and Attestation Financial Accounting & Reporting Regulation Business Environment & Concepts

  25. State Boards of Accountancy Issue CPA certificates All boards require successful completion of CPA examination Education and experience requirements vary National Association of State Boards of Accounting (NASBA)

  26. Other Parties FASB Sets GAAP for entities other than federal, state and local governments GASB Standards of financial accounting for state and local government entities FASAB Accounting standards for the US government

  27. PCAOB Role Adopt auditing, attestation, quality control, ethics and independence standards relating to the preparation of audit reports for SEC registrants Oversee and discipline CPAs and CPA firms that audit public companies, including Register firms Perform inspections of firms Conduct investigations and disciplinary proceedings of firms Sanction registered firms

  28. Securities and Exchange Commission (SEC) Agency of the US government Oversight responsibility for the PCAOB Objectives Protect investors and public by requiring full disclosure of financial information by companies offering securities for sale to the public Prevent misrepresentation, deceit, or other fraud in the sale of securities

  29. Securities and Exchange Commission (SEC ) Registration statements Qualify securities for sales Contains audited financial statements Makes SEC major user of financial statements Protects investors Regulation S-X Basic accounting regulation

  30. Types of Professional Services Attestation and Assurance Tax Consulting Accounting Personal Financial Planning Litigation support Fraud Investigation Personal Financial Planning

  31. Organization of the Public Accounting Profession Sole proprietorship Partnerships Professional Corporation Limited Liability Partnership (LLP) Limited Liability Company (LLC)

  32. Categories of Public Accounting Firms • Local • Regional • National • Big 4 • Alternative Practice Structures

  33. Industry Specialization Firms with detailed knowledge and understanding of a client’s industry Helps firms Be more effective at collecting and evaluating audit evidence Make valuable suggestions to improve client’s operations Provide the client consulting services

  34. Typical Structure of a National CPA Firm Partners Managers Seniors Staff Assistant

  35. Responsibilities on an Engagement • Partner—Overall responsibility is to assure that that audit is performed in accordance with professional standards. • Manager—Supervise overall engagement. • Seniors—”In charge” auditor on a daily basis • Staff assistants—Work under the immediate supervision of the senior

  36. Elements of Public Accounting Work Professional Developments Stay current on developments within the profession Seasonal fluctuations Busy season from December through April Relationships with clients Need to maintain independence

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