SESSION 2

FINANCIAL STATEMENT
AUDIT ENVIRONMENT
 Red Flags
 During the late 1990s and early 2000s,
accounting firms sold a variety of high-margin,
nonaudit services to audit clients (i.e. IT
Consulting and Investment Advisory)

 Fees from these nonaudit services were

significantly higher than audit fees

 Accounting Scandals: Enron, WorldCom, Tyco

SESSION 2 2
 Sarbanes-Oxley
 In July 2002, Congress passed the Sarbanes-Oxley Act,
which established the Public Company Accounting
Oversight Board (PCAOB), and ended self-regulation

 Key Provisions:
 Stricter independence rules
 Prohibits most nonaudit services to audit clients
 Requires rotation of audit partners every 5 years
 Requires internal control audits for public companies
 Enhances the role of corporate governance

SESSION 2 3
 Auditing Standards
Minimum standards of
performance for auditors

PCAOB ASB

Public Companies Nonpublic Companies

SAS, GAAS, & AS SAS & GAAS

SESSION 2 4
 Generally Accepted Auditing
Standards

GENERAL
STANDARDS

Adequate Technical Due Professional

Independence
Training Care

SESSION 2 5
 Generally Accepted Auditing
Standards
STANDARDS
OF
FIELDWORK

Sufficient Sufficient
Adequate Planning
Understanding of Competent
& Supervision
Internal Controls Evidence

SESSION 2 6
 Generally Accepted Auditing
Standards
STANDARDS
OF
REPORTING

GAAP Consistency Disclosures Opinion

SESSION 2 7
 Public Accounting Firms
 Organized as sole proprietorships, limited liability
partnerships, or corporations

 “Big 4” Firms: Deloitte, Ernst & Young, KPMG,

and PricewaterhouseCoopers

 National Firms: Grant Thornton & BDO Seidman

 Regional and Local CPA Firms

SESSION 2 8
 Audit Engagement Team
 Partner: Signs the audit report

 Manager: Reviews work papers and f/s

 Senior: Supervises the staff’s work

 Staff: Performs various audit procedures

SESSION 2 9
Organizations Affecting the Profession

AICPA

Public
PCAOB Accounting SEC
Profession

FASB

SESSION 2 10