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2-1
Chapter 2
The CPA Profession
Concept Checks
P. 28
1. The four major services that CPAs provide are:
a. Audit and assurance services Assurance services are independent
responsibility of another party. The four categories of attestation
services are audits of historical financial statements, attestation on the
Bookkeeping services include the preparation of the client’s journals and
ledgers as well as financial statements.
system to advice on risk management or on computer installations.
2. The six organizational structures available to CPA firms are proprietorship,
general partnership, general corporation, professional corporation, limited
liability company, and limited liability partnership. CPA firms are typically not
P. 38
1. The Public Company Accounting Oversight Board provides oversight for
2-2
Concept Checks (continued)
2. The AICPA is the organization that sets professional requirements for
and grades the CPA examinations, provides continuing education to its
3. International Standards on Auditing (ISAs) are issued by the International
Auditing and Assurance Standards Board (IAASB) of the International
entities within the United States. As a result of efforts by the Auditing
Standards Board of the AICPA to converge U.S. standards with international
established by the Auditing Standards Board as interim auditing standards,
standards for audits of U.S. public and private companies are mostly similar.
Review Questions
function competently and independently are:
1. Organizational form A CPA firm exists as a separate entity to avoid
endangering the firm’s independence.
2. Conduct A CPA firm employs a professional staff of sufficient size
3. Peer review This practice evaluates the performance of CPA firms
2-2 The Public Company Accounting Oversight Board (PCAOB) was
established by the Sarbanes-Oxley Act of 2002 in the wake of multiple
accounting scandals and alleged audit failures, including those of Enron and
2-3
2-3 The purpose of the Securities and Exchange Commission is to assist in
providing investors with reliable information upon which to make investment
decisions. Since most reasonably large CPA firms have clients that must file
The SEC has considerable influence in setting generally accepted
accounting principles and disclosure requirements for financial statements
2-4 Statements on Standards for Attestation Engagements provide a framework
2-5 The PCAOB has responsibility for establishing auditing standards for U.S.
public companies, while the Auditing Standards Board (ASB) of the AICPA
establishes auditing standards for U.S. private companies. Prior to the creation of
2-6 International Standards on Auditing (ISAs) are issued by the International
Auditing and Assurance Standards Board (IAASB) of the International Federation
of Accountants (IFAC) and are designed to improve the uniformity of auditing
2-7 Auditing standards represent the combination of the four principles and all
the Statements on Auditing Standards (SASs) that are codified in the AU-C sections.
Generally accepted accounting principles are specific rules for accounting
for transactions occurring in a business enterprise. Examples may be any of the
2-4
2-8 Auditors develop their competency and capabilities for performing an audit
through formal education in auditing and accounting, adequate practical
2-9 For the most part, auditing standards, including SASs, are general rather
than specific. Many practitioners along with critics of the profession believe the
standards should provide more clearly defined guidelines as an aid in
determining the extent of evidence to be accumulated. This would eliminate
2-10 Quality controls are the procedures used by a CPA firm that help it meet its
2-11 The element of quality control is personnel management. The purpose of
2-12 A peer review is a review, by CPAs, of a CPA firm’s compliance with its
quality control system. A mandatory peer review means that such a review is
required periodically. AICPA member firms are required to have a peer review
every three years. Registered firms with the PCAOB are subject to quality
effectiveness, and reduces the likelihood of lawsuits. Of course, peer reviews are
costly. There is always a trade-off between cost and benefits.
Multiple Choice Questions From CPA Examinations
2-13 a. (2) b. (3) c. (3)
2-14 a. (1) b. (2) c. (1)
2-15 a. (1) b. (4) c. (3)
2-5
Discussion Questions And Problems
reporting framework.
b. No. In an audit of the financial statements, the auditor performs
audit procedures to obtain reasonable assurance about whether the
financial statements contain material misstatements. While a high
are accurate with certainty.
c. No. Fraud is a broad legal concept that describes any intentional
deceit meant to deprive another person or party of their property or
rights. The auditor does not take responsibility for detecting all
types of fraud, given many types of fraud do not impact the financial
d. Each entity faces a number of risks unique to the nature of its
business and industry. The types of operations, the extent of
regulation, how the organization obtains capital to fund its business
model, and the nature of accounts in the financial statements,
financial statements when planning the audit.The auditor is
responsible for obtaining sufficient appropriate audit evidence
about whether the financial statements are free of material
misstatements. In addition to understanding whether the amounts
2-6
2-16 (continued)
accounting standards.
2-17 a. Engagement performance
b. Leadership responsibilities
c. Monitoring
d. Engagement performance
2-18 a. The AICPA Auditing Standards Board (ASB) is responsible for
issuing standards in the U.S. to be used by auditors when auditing
the financial statements of all entities other than U.S. publicly
with the SEC (e.g., broker-dealers).
b. The International Auditing and Assurance Standards Board (IAASB)
of the International Federation of Accountants (IFAC) is responsible
appropriate for the U.S. environment.
e. The PCAOB develops and issues its standards. While the PCAOB
considers existing international standards, it does not start with
the ISA standard as the base.
but may also require the auditor to perform additional procedures
required by one, but not the other, set of standards.
2-19 a. AICPA auditing standards.
b. International auditing standards.
c. PCAOB auditing standards.
international auditing standards).
e. AICPA auditing standards.
2-20
BRIEF DESCRIPTION
OF PRINCIPLE
HOLMES’ ACTIONS RESULTING IN
FAILURE TO COMPLY WITH PRINCIPLE
RESPONSIBILITIES
PRINCIPLES
The auditor must possess the
competency and capabilities
to perform the audit.
It was inappropriate for Holmes to hire the two
students to conduct the audit. The audit must
be conducted by persons with proper
education and experience in the field of
auditing. Although a junior assistant has not
completed his formal education, he may help in
the conduct of the audit as long as there is
proper supervision and review.
The auditor must comply
with ethical requirements, which
include maintaining
independence in mental attitude
in all matters relating to the
audit.
To satisfy this principle, Holmes must be without
bias with respect to the client under audit.
Holmes has an obligation for fairness to the
owners, management, and creditors who may
rely on the report. Because of the financial
interest in whether the bank loan is granted to
Ray, Holmes is independent in neither fact nor
appearance with respect to the assignment
undertaken.
The auditor must maintain
professional skepticism and
exercise professional judgment
in the performance of the audit
and the preparation of the
report.
This principle requires Holmes to perform the
audit with due care, which imposes on Holmes
and everyone in Holmes’ organization a
responsibility to observe the principles of
performance and reporting. Maintaining
professional skepticism and exercising
professional judgment require critical review at
every level of supervision of the work done and
the judgments exercised by those assisting in
the audit. Holmes did not review the work or
the judgments of the assistants and clearly
2-20 (continued)
BRIEF DESCRIPTION
OF PRINCIPLE
HOLMES’ ACTIONS RESULTING IN
FAILURE TO COMPLY WITH PRINCIPLE
PERFORMANCE
PRINCIPLES
The auditor must adequately plan
the work and must properly
supervise any assistants.
This principle recognizes that early appointment
of the auditor has advantages for the auditor
and the client. Holmes accepted the
engagement without considering the
availability of competent staff. In addition,
Holmes failed to supervise the assistants. The
work performed was not adequately planned.
The auditor must identify and
assess the risks of material
misstatement based on a
sufficient understanding of the
entity and its environment,
including its internal control, to
design the nature, timing, and
extent of further audit
procedures.
Holmes did not obtain an understanding of the
entity or its internal control, nor did the
assistants obtain such an understanding.
There appears to have been no audit at all.
The work performed was more an accounting
service than it was an auditing service.
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.
Holmes acquired no evidence that would
support the financial statements. Holmes
merely checked the mathematical accuracy of
the records and summarized the accounts.
Standard audit procedures and techniques
were not performed.
2-20 (continued)
BRIEF DESCRIPTION
OF PRINCIPLE
HOLMES’ ACTIONS RESULTING IN
FAILURE TO COMPLY WITH PRINCIPLE
REPORTING
PRINCIPLES
The auditor must express an
opinion in a written report about
whether the financial statements
are presented in accordance
with the applicable financial
reporting framework.
The auditor must either express
an opinion regarding the
financial statements, taken as a
whole, or state that an opinion
cannot be expressed in the
auditor’s report. When the
auditor cannot express an
overall opinion, the auditor
should state the reasons
therefor in the auditor’s report.
In all cases where an auditor’s
name is associated with
financial statements, the auditor
should clearly indicate the
character of the auditor’s work,
if any, and the degree of
responsibility the auditor is
taking, in the auditor’s report.
Holmes’ report made no reference to generally
accepted accounting principles. Because
Holmes did not conduct a proper audit, the
report should state that no opinion can be
expressed as to the fair presentation of the
financial statements in accordance with
generally accepted accounting principles.
Although Holmes’ report contains an expression
of opinion, such opinion is not based on the
results of a proper audit. Holmes should
disclaim an opinion because he failed to
conduct an audit in accordance with auditing
standards.
The auditor must assess whether
the financial statements are
Holmes’ improper audit would not enable him to
determine whether generally accepted
accounting principles.
Management is primarily responsible for
adequate disclosures in the financial
statements, but when the statements do
not contain adequate disclosures the auditor
should make such disclosures in
2-10
2-21 a. The objective of the IAASB is to serve the public interest by setting
high-quality auditing and assurance standards and by facilitating
their auditing standards
b. The IAASB follows a due process in setting standards.
The standards-setting Public Interest Activity Committees (PIAC)
identify new projects based on review of international developments
in English.
The PIAC is responsible for consulting with the PIAC Consultative
Advisory Group (CAG) on the identification and prioritization
of projects to be undertaken by the PIAC.
The project may be assigned to a task force, which considers
of the exposure draft.
Draft pronouncements are exposed for a minimum of 90 days.
When the Project Task Force is satisfied that it has a proposed
pronouncement.
c. The IAASB is committed to transparency. Where practicable, meetings
are broadcast over the Internet or recorded. Meeting agendas and
minutes are published on the International Federation of Accountants
public.
