Auditing & Assurance Services Chapter 1
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Questions and Answers

Who is responsible for verifying that eligible voters for the Baseball Hall of Fame are properly registered?

  • The Baseball Writers’ Association of America
  • An independent committee of former players
  • The Major League Baseball (MLB)
  • EY, one of the largest audit firms (correct)

What is a requirement for baseball writers to be eligible to vote in the Hall of Fame election?

  • Must have been a player for at least 5 years
  • Must write articles about baseball daily
  • Must maintain 10 consecutive years following a team (correct)
  • Must be a member of the Hall of Fame

What type of engagement does EY perform in relation to the Hall of Fame voting process?

  • Financial statement auditing services
  • Non-audit attestations
  • Tax advisory services
  • Verification of the voting process (correct)

In what way can the final outcomes of the Hall of Fame vote be interpreted?

<p>They can sometimes lead to disagreement among fans. (D)</p> Signup and view all the answers

What does the code of conduct signed by eligible voters ensure?

<p>That voters act ethically and follow voting guidelines (A)</p> Signup and view all the answers

What is the main purpose of the financial statement auditing process?

<p>To reduce information risk and thus the cost of capital. (D)</p> Signup and view all the answers

What does the term 'information risk' refer to?

<p>The probability that circulated information will be false or misleading. (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of professional skepticism?

<p>Trusting all information provided by management. (C)</p> Signup and view all the answers

Which of the following services is not typically offered by public accounting firms?

<p>Medical examinations. (A)</p> Signup and view all the answers

Why are management assertions important in the auditing process?

<p>They serve as the focal point for auditors during the audit. (A)</p> Signup and view all the answers

What is meant by 'assurance services' in public accounting?

<p>Independent evaluations of financial information. (A)</p> Signup and view all the answers

Which of the following represents a business risk?

<p>Not meeting organizational objectives. (D)</p> Signup and view all the answers

What is a primary function of an auditor in relation to company information?

<p>To provide an independent assessment of the information. (C)</p> Signup and view all the answers

Which company has the highest revenue from auditing and assurance services?

<p>Deloitte (C)</p> Signup and view all the answers

What percentage of EY's total revenues comes from advisory services?

<p>40% (B)</p> Signup and view all the answers

Which of the following services is prohibited for audit clients according to Sarbanes-Oxley?

<p>Internal audit outsourcing (A)</p> Signup and view all the answers

What is the total revenue reported by KPMG?

<p>$32.1 billion (B)</p> Signup and view all the answers

What is the main source of revenue for Deloitte?

<p>Advisory services (C)</p> Signup and view all the answers

Which prohibition is NOT specified by Sarbanes-Oxley for audit clients?

<p>Tax preparation (D)</p> Signup and view all the answers

Which company has the lowest revenue from tax services?

<p>KPMG (A)</p> Signup and view all the answers

Which of the following represents the largest portion of PwC's total revenue?

<p>Auditing and assurance services (D)</p> Signup and view all the answers

What is the primary focus of assurance services?

<p>To improve the quality of information or its context (B)</p> Signup and view all the answers

Which element is NOT considered essential in assurance services?

<p>Cost efficiency (B)</p> Signup and view all the answers

Which of the following is an example of an attestation engagement?

<p>Examination of Management's Discussion &amp; Analysis (B)</p> Signup and view all the answers

Which statement correctly describes the difference between assurance and advisory services?

<p>Assurance services provide independent evaluations, while advisory services offer recommendations. (D)</p> Signup and view all the answers

What is a key distinguishable feature of attestation engagements?

<p>They require a report on management's assertions. (D)</p> Signup and view all the answers

In which scenario would assurance services NOT be applicable?

<p>Providing specific recommendations for management improvement (A)</p> Signup and view all the answers

Independence in assurance services is crucial to ensure:

<p>No conflicts of interest that could compromise evaluations (A)</p> Signup and view all the answers

What is NOT a characteristic of assurance services?

<p>They always involve a legal obligation to report. (B)</p> Signup and view all the answers

What does the assertion of existence address regarding account balances?

<p>Balances include only assets and liabilities that actually exist. (B)</p> Signup and view all the answers

Which assertion is closely related to ensuring that all necessary items are included in financial statements?

<p>Completeness (B)</p> Signup and view all the answers

What does the rights and obligations assertion confirm?

<p>The entity possesses legal claims on its reported assets. (B)</p> Signup and view all the answers

Which assertion would evaluate whether sales transactions occurred during the correct financial period?

<p>Cutoff (C)</p> Signup and view all the answers

In the context of financial statements, what does valuation and allocation primarily refer to?

<p>Evaluating if balance sheet accounts are correctly valued and reported. (A)</p> Signup and view all the answers

Which assertion asserts the necessity of proper presentation of disclosures?

<p>Presentation (C)</p> Signup and view all the answers

What is assessed under the completeness assertion for the balance sheet?

<p>Determining if all accounts are accurately reported on the balance sheet. (D)</p> Signup and view all the answers

Which of the following is NOT one of the assertions about account balances?

<p>Expression of goodwill (B)</p> Signup and view all the answers

What is the total test length for the Certified Public Accountant (CPA) exam?

<p>16 hours (D)</p> Signup and view all the answers

Which certification requires a passing score of 450 on an 800-point scale?

<p>Certified Information Systems Auditor (CISA) (D)</p> Signup and view all the answers

How many parts does the Certified Fraud Examiner (CFE) exam consist of?

<p>1 part (B)</p> Signup and view all the answers

When is the Certified Management Accountant (CMA) exam administered?

<p>During specified months only (C)</p> Signup and view all the answers

Which of the following certifications has the shortest total test length?

<p>Certified Fraud Examiner (CFE) (C)</p> Signup and view all the answers

Which organization administers the Certified Internal Auditor (CIA) exam?

<p>Institute of Internal Auditors (D)</p> Signup and view all the answers

What is the passing score for the Certified Management Accountant (CMA) exam?

<p>360 per part on a 500-point scale (A)</p> Signup and view all the answers

Which of the following subject areas is NOT part of the CPA exam's four parts?

<p>Internal Control and Risk Management (D)</p> Signup and view all the answers

What is a primary objective of internal auditing?

<p>To evaluate the cost-effectiveness of operations (B)</p> Signup and view all the answers

What is one of the key aspects of the Sarbanes-Oxley Act?

<p>It promotes stricter regulations on financial disclosures (A)</p> Signup and view all the answers

Which of the following is a limitation imposed by Sarbanes-Oxley on audit firms?

<p>Audit firms must rotate audit partners every five years (D)</p> Signup and view all the answers

Which aspect of professional service is restricted by the Sarbanes-Oxley Act?

<p>Providing tax services to audit clients (D)</p> Signup and view all the answers

What is the primary reason for internal control system reviews during audits?

<p>To ensure compliance with established policies (B)</p> Signup and view all the answers

Which category constitutes the largest share of total revenues for Deloitte?

<p>Advisory services (A)</p> Signup and view all the answers

What is one of the main purposes of the Sarbanes-Oxley Act regarding audit firms?

<p>To prohibit auditors from performing certain client services (A)</p> Signup and view all the answers

Which of the following services is explicitly prohibited for audit clients under the Sarbanes-Oxley Act?

<p>Internal audit outsourcing (D)</p> Signup and view all the answers

Which Big Four CPA firm's auditing and assurance services revenue is the highest as a percentage of its total revenues?

<p>PwC (D)</p> Signup and view all the answers

What percentage of EY's total revenues comes from auditing and assurance services?

<p>34% (B)</p> Signup and view all the answers

Which of the following services can auditors provide to non-audit clients?

<p>Tax services (D)</p> Signup and view all the answers

In terms of total revenue, which Big Four firm has the lowest overall revenue reported?

<p>KPMG (B)</p> Signup and view all the answers

Which of the following is NOT a service prohibited by the Sarbanes-Oxley Act for audit clients?

<p>Investment services (A)</p> Signup and view all the answers

What services can audit firms provide to audit clients with prior approval from the audit committee?

<p>Non-prohibited services (B)</p> Signup and view all the answers

Which scenario would typically not allow an audit firm to provide services to an audit client?

<p>Offering personal tax consulting to executives (A)</p> Signup and view all the answers

What challenge do audit firms face when considering entering the legal services market?

<p>Potential conflict of interest with auditing (B)</p> Signup and view all the answers

Why is client approval significant for professional service firms providing non-audit services?

<p>It mitigates independence concerns (D)</p> Signup and view all the answers

What was the significance of the American Bar Association's resolution in February 2020?

<p>It encouraged states to explore new access methods for legal services. (D)</p> Signup and view all the answers

What aspect of audit services is regulated to avoid conflicts of interest?

<p>Independence while offering non-audit services (B)</p> Signup and view all the answers

Which of the following is NOT a restriction on audits according to the outlined content?

<p>Providing corporate tax return services (A)</p> Signup and view all the answers

What does the expansion of the Big 4 accounting firms into legal services suggest about the future of public accounting?

<p>Increased revenue from legal sectors (B)</p> Signup and view all the answers

Flashcards

Information Risk

The probability that information circulated by a company is false or misleading.

Business Risk

The risk that an entity fails to meet its objectives.

Financial Statement Auditing

A process that reduces information risk and lowers a company's capital cost.

User Demand for Info

People need more complex and timely info, demanding remote access.

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Cost of Capital

The cost companies pay to raise funds.

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Independent Third-Party

A neutral party assessing circulated information.

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Financial Statement

A record of a company's financial health, its assets, liabilities and equity.

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Auditing Services

The act of an external party evaluating the truthfulness and accuracy of the financial statements.

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Assurance Services

Independent professional services that enhance information quality for decision-makers.

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Assurance Elements

Independence, professional services, and improving info quality for decision-makers.

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Attestation Engagement

A service evaluating the reliability of assertions about subject matter.

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Financial Attestation

Attestation services on financial information (not audits).

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Non-Financial Attestation

Attestation services on non-financial subject matter.

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AICPA Definition of Attestation

Practitioner assesses if assertions about subject matter can be relied upon.

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Third Party Assurance

Assurance provided by a separate entity (like a professional organization).

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Compilations

An accounting service where a CPA presents financial information in a specific format, without any assurance on its accuracy.

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Reviews

A less extensive assurance engagement than an audit, where a CPA examines information to form a conclusion about whether it is fairly presented.

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Tax Services

A CPA provides advice and assistance related to tax compliance, planning, and representation.

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Advisory Services

A broad range of services where a CPA provides expert advice related to business, accounting, and finance.

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Assertions about Account Balances

Statements made by management about the accuracy of accounts listed on the balance sheet.

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Existence (Account Balances)

Management asserts that all assets and liabilities listed on the balance sheet actually exist.

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Completeness (Account Balances)

Management asserts that all assets and liabilities required by GAAP are included on the balance sheet.

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Accuracy, Valuation, and Allocation (Account Balances)

Management asserts that all accounts are valued correctly according to GAAP and are allocated properly between balance sheet categories.

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Rights and Obligations (Account Balances)

Management asserts that the company has a legal claim to all assets and revenues reported and is legally responsible for all liabilities and expenses.

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Presentation (Account Balances)

Management asserts that all disclosures related to account balances are presented in the correct format according to GAAP.

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Assertions about Transactions

Statements made by management about the accuracy of transactions recorded in the financial statements.

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Occurrence (Transactions)

Management asserts that all transactions recorded actually occurred.

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Big Four Firms

The four largest accounting firms in the world: Deloitte, EY, KPMG, and PwC. They dominate the audit and assurance services market.

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Audit and Assurance Services

These services involve examining and evaluating financial statements to ensure their accuracy and reliability. They provide assurance to stakeholders about a company's financial position.

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Sarbanes-Oxley Act

This legislation passed in 2002, aims to improve corporate governance and financial reporting practices in the United States. It includes restrictions on the services that auditors can offer to their audit clients to maintain independence.

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Prohibited Services

Specific services that audit firms cannot provide to their audit clients to avoid conflicts of interest and maintain professional independence. These services are defined in the Sarbanes-Oxley Act.

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Bookkeeping and Related Services

Auditors cannot provide these services to their audit clients, as it involves creating the very financial information they are supposed to be independently evaluating

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Financial Information System Design or Implementation

Auditors cannot design or implement systems that create the financial information they are auditing, as it could compromise their objectivity.

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CPA Exam

A challenging, four-part exam required to become a Certified Public Accountant (CPA) in the United States. It covers Auditing, Financial Accounting, Regulation, and Business concepts.

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CPA Exam Parts

The CPA exam is comprised of four separate parts: Auditing and Attestation (AUD), Financial Accounting and Reporting (FAR), Regulation (REG), and Business Environment and Concepts (BEC).

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CPA Exam Length

The CPA exam consists of four parts, each taking sixteen hours to complete. This equates to a total of sixty-four hours of testing.

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Passing the CPA Exam

To pass the CPA exam, candidates must achieve a score of 75% or higher on each of the four parts.

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CISA Exam

The Certified Information Systems Auditor (CISA) exam is a one-day exam focusing on information systems auditing.

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CISA Exam Length

The CISA exam consists of four hours and 150 multiple-choice questions.

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CISA Passing Score

To pass the CISA exam, candidates need a scaled score of 450 out of 800.

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CMA Exam

The Certified Management Accountant (CMA) exam is a rigorous test for those seeking a professional designation in management accounting.

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Appraisal or Valuation Services

Auditors cannot provide these services to their audit clients, as it could create conflicts of interest regarding the value of assets.

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Internal Audit Outsourcing

Auditors cannot provide this service to their audit clients, as it could compromise their objectivity. It involves potentially auditing their own work.

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Audit Restrictions

Rules that limit the services an auditor can provide to their audit client to maintain independence.

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Tax Consulting Restrictions

Auditors cannot provide tax consulting services on aggressive interpretations of tax laws or transactions deemed 'listed' by the U.S. Treasury Department to maintain independence.

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Contingent Fees

Auditors cannot charge fees based on a specific outcome of their work, as this creates a conflict of interest.

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Tax Services for Executives

Auditors cannot provide tax services to key company executives, as this could compromise their independence.

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Public Accounting Firms in Legal Services

Large accounting firms are increasingly providing legal services, becoming a potential force in the legal market.

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Regulatory Challenges for Accounting Firms

There are strict regulatory issues when accounting firms offer legal services, especially in maintaining their independence as auditors.

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Potential for Growth in Legal Services

Offering legal services provides a promising avenue for growth for accounting firms.

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American Bar Association Resolution (2020)

The American Bar Association passed a resolution encouraging states to explore ways to make legal services more accessible, potentially opening doors for non-lawyers, like accounting firms, to own legal service firms.

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Internal Auditing

An independent review of a company's internal control systems, including policies, procedures, and compliance with laws and regulations. Internal auditors evaluate the effectiveness and efficiency of operations, ensuring alignment with company objectives and goals.

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GAO (Government Accountability Office)

A U.S. government agency responsible for auditing government agencies and programs, providing objective oversight of federal spending and operations.

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Regulatory Auditors

Auditors who focus on specific industries or regulations, ensuring compliance with specific rules and standards.

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CPA (Certified Public Accountant)

A professional accounting designation requiring education, examination, and experience. CPAs are licensed by the state to provide financial and accounting services like auditing, tax preparation, and consulting.

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Why become a CPA?

Earning a CPA designation can open doors to a rewarding career in accounting, finance, and related fields. It demonstrates a high level of competence and professionalism, increasing earning potential and career opportunities.

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Study Notes

Chapter 1: Auditing & Assurance Services

  • The purpose of learning is to change everything.
  • The chapter is about Auditing & Assurance Services 9e.
  • The auditor's opinion is vital to investors' trust.
  • Current demand for information is increasing in complexity, timeliness, and has far-reaching consequences.
  • Information risk is the probability that information circulated by a company will be false or misleading.
  • Financial statement auditing reduces information risk, thereby reducing the cost of capital.
  • Assurance, attestation, and financial statement auditing services are distinct.
  • Management assertions about financial statements are crucial for audits.
  • Professional skepticism is fundamental for an auditor.

Learning Objectives

  • Understand information risk.
  • Differentiate assurance, attestation, and financial statement auditing services.
  • Recognize management's assertions about financial statements and the audit's focus on them.
  • Define and recognize professional skepticism and its characteristics.
  • Understand public accounting firm organization and services.
  • Describe governmental, internal, and operational audits.
  • List and explain CPA requirements and other professional certifications.

User Demand for Reliable Information

  • Business risk is the risk that an entity will fail to meet its objectives.
  • Users demand reliable information.
  • Information needs are becoming more complex and timelier.

More Consequences

  • Bernard Madoff's Ponzi scheme highlights the need for reliable information, even with knowledgeable investors.
  • Red flags such as consistent high returns, unrealistic hedging strategies, and insufficient firm resources were present in the Madoff scam.
  • The scandal serves as an example to emphasize information risk and the importance of auditor diligence.

Assurance Services

  • Assurance services are independent professional services that improve the quality of information for decision-makers.
  • Examples include cybersecurity risk assessment, XBRL reporting, investment policy evaluation, internal audit outsourcing, and preventing fraud.
  • Assurance is about enhancing info, not offering an advisory.

Assurance Elements

  • Independence (no conflict of interest).
  • Professional service based on education and experience.
  • Improves information quality and context.
  • Relevance of information.
  • Reliability and credibility, is it trustworthy?
  • Assurance is for decision-makers who are the beneficiaries.

Attestation Engagements

  • Attestation engagements, which are not audits, are used to evaluate management's assertions related to subject matters.
  • Financial forecasts, projections, management discussions, and pro forma financial information are examples of financial attestation engagements.
  • Non-financial attestation engagements cover internal controls, environmental compliance, and sustainability reporting.

AAA Definition of Financial Statement Auditing

  • Auditing is a systematic and objective process collecting and assessing evidence about economic events to ensure consistency with established criteria.
  • The goal is to ascertain the correspondence between assertions and criteria.
  • The results are communicated to stakeholders.

Audits

  • Audits are planned and logical efforts to scrutinize financial statements.
  • The auditors form an opinion regarding the fairness of presented financial information.
  • The process aims to increase confidence in the financial statements for intended users with the help of GAAS and relevant ethical requirements.

A Rich History

  • Auditing has deep roots, dating back to the Pilgrims and George Washington's financial records.
  • The need for audit committees is not a new concept, evidenced by the bylaws of the Potomac Company.

Sarbanes-Oxley Act of 2002

  • The act emphasizes management's responsibility for the financial reporting process and the financial statements.
  • Key company officials certify that the financial statements are accurate and presented truthfully.

Sarbanes-Oxley and Management's Responsibility for Financial Reporting

  • The SOX act highlights management's responsibility to make assertions about the effectiveness of internal financial controls.
  • Auditors must also issue an attestation report on the internal control system's effectiveness.

Used Car for Sale!

  • An exercise to practice identifying management assertions.

Management Financial Statement Assertions (PCAOB)

  • Existence/occurrence: assets and liabilities exist and transactions occurred.
  • Completeness: all balances and transactions are recorded.
  • Valuation/allocation: fair value in accordance with GAAP.
  • Rights and obligations: the entity has legal claim.
  • Presentation and disclosure: information is presented and disclosed appropriately.

Management Financial Statement Assertions (ASB)

  • Occurrence: transactions are valid and have occurred.
  • Cut-off: transactions are recorded in the correct period.
  • Completeness: all transactions are recorded.
  • Accuracy: transactions are recorded at correct amounts.
  • Rights and obligations: entity has legal claims and obligations.
  • Classification: transactions are correctly classified.
  • Presentation: disclosures meet GAAP standards.

Management Assertions

  • These assertions are categorized and are used to assess account balances and transactions.

Public Accounting Firm Organization

  • Public accounting firms are organized with a hierarchy.
  • The organization is structured with a firm's leadership at the top, followed by local offices.
  • Various services, including auditing, assurance, tax, and advisory, are provided by distinct specialized teams led by partners, managers, and staff.

Revenues for the Big Four CPA Firms

  • Deloitte, EY, KPMG, and PwC are major public accounting firms.
  • The data emphasizes their revenue figures, highlighting different service-specific revenue streams.

Prohibited Professional Services

  • Sarbanes-Oxley Act of 2002 prohibits public accounting firms from performing various non-audit services for audit clients.

No Audit?

  • Restrictions on providing non-audit services are tied to tax consulting, contingent fees, and tax services for key executives.

Is There Room for Public Accounting Firms?

  • Public accounting firms are expanding into legal services.
  • State bar associations are examining new approaches to access legal services, which could create opportunities for accounting firms.

Governmental, Internal, and Operational Auditing

  • These include, but are not limited to, reviews of internal control systems, appraisals of operational efficiency, reviews of compliance with laws, regulations, plans, and procedures, and reviews of effectiveness and program goals.
  • The GAO plays a role in governmental audits.
  • Other regulatory audits are conducted, such as IRS audits.

List and Explain CPA Requirements and Certifications

  • Education is a prerequisite (150 hours +)
  • Examinations are required.
  • Experience (1 year public/2 years of private)
  • State certificate & license is required.
  • Skill sets and education are also critical elements.

CPA Examination

  • Candidates will complete a comprehensive and uniform exam.
  • CPA examinations cover auditing and attestation.
  • Important content included here are financial accounting and reporting, regulation, business environment & concepts.
  • Multiple choice questions and task-based simulations will be used.

Auditing and Attestation

  • Candidates will have four hours to complete a section of the examination.
  • Includes multiple-choice questions and task-based simulations.
  • The content areas included are ethics, professional responsibilities, risk assessment, planned responses, performing procedures, forming conclusions, and reporting.

The New Uniform CPA Examination

  • The CPA exam is undergoing substantial changes in 2024.
  • The changes under the broader "CPA Evolution" model are aimed at reimagining CPA licensure.
  • The proposed new sections include Business Analysis and Reporting(BAR), Information and Systems Control(ISC), and Tax Compliance and Planning(TCP).

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Related Documents

Chapter 1 Auditing & Assurance Services 9e PDF
User Demand for Reliable Information PDF

Description

This quiz covers Chapter 1 of Auditing & Assurance Services 9e, focusing on the importance of auditing, information risk, and the distinctions between assurance, attestation, and financial statement auditing services. Learn how management assertions and professional skepticism play critical roles in the auditing process.

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