2. Read the standards, attend training, review each others work, consult with peers, and likely

Chapter 2: The Public Accounting Profession

Copyright  2013 Pearson Canada Inc. 1 Chapter 2 The Public Accounting Profession

Chapter opener: Leveraging the Power of Professional Judgment

• Virtually any industry could be listed as a specialization, even banking, as there are some

small credit unions that would fall under banking. Key is that the student explains how the specialization is acquired (e.g. by reading the standards, having worked in the industry, or practice with a group of clients).

• Read the standards, attend training, review each other’s work, consult with peers, and likely

others.

• Attend seminars offered by the industry, read the legislation, work with these organizations on

an ongoing basis to find out and stay current with what is happening for them.

Audit Challenge 2-1 National and Regional CGA Firms

• They would be looking for members that are current in their field, have good quality

control practices, have a good reputation in their community, and are competent. The prospective members would likely also need to be qualified PAs and professional accountants.

• They could ask about the nature of the quality control practices in place, as well as the

results of peer review from the local professional accounting association. They could also engage in their own peer review, have members from one firm location assess the work of another location.

Concept Check Answers

C2-1 Large international or national firms have more specialist functions and a greater variety of support resources. They also have the resources and skills to audit publicly listed organizations from many different industries. Smaller, local firms may have only one or two partners who serve local business.

C2-2 Websites can be used to provide information to clients, including results of research that could attract potential new clients. The Internet can also be used to transfer information back and forth among staff, including the use of Internet video conferencing to discuss working papers. This is particularly useful for international clients.

C2-3 Factors that contribute to a PA's competence are training, quality control standards, professional rules of conduct, regulatory agencies, and continuing research.

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Instructor’s Solutions Manual for Arens et al., Auditing, Canadian 12 th Edition

Copyright  2013 Pearson Canada Inc. 2 C2-4 They provide professional guidance and continuing professional education. They also conduct practice inspection.

C2-5 The CICA, CGAAC, SMAC and IFAC are involved in setting standards. (In the U.S., the PCAOB is also involved in setting standards.)

C2-6 Professional rules of conduct and GAAS provide the framework for conducting an effective audit. The PA firm could have quality control monitored or enforced by members of its own firm, by the provincial CA, CGA or CMA institute, or by the CPAB for publicly listed clients.

C2-7 Poorly completed audits could result in incorrect audit opinions, resulting in increased audit costs or loss of confidence in the PA profession. The PA and PA firms could also be sued (increased legal liability).

Review Questions

2-1 A small practitioner may work with a broad diversity of small clients, getting to know her customers well, perhaps doing detailed work such as tax planning. She would also be responsible for administrative, continuing education, quality control and marketing for the practice. A larger firm enables having different people doing the different tasks, such as marketing, administration, human resources, and support for quality assurance. There would also be an opportunity for working at diverse clients of different sizes.

2-2 The major characteristics of PA firms that permit them to fulfill their social function

competently and independently are:

• Organizational form A PA firm exists as a separate entity to avoid an employer-

employee relationship with its clients. The PA firm employs a professional staff of sufficient size to prevent one client from constituting a significant portion of total income and thereby endangering the firm's independence.

• Conduct A PA firm employs a professional staff of sufficient size to provide a

broad range of expertise, continuing education, and promotion of a professional independent attitude and competence.

• Peer review This practice evaluates the performance of PA firms in an attempt to

keep competence high.

2-3 The answer to the first question will vary by province. For example, in Ontario, LLPs are permitted.

Differences between a partnership and an LLP: In a normal partnership, each partner normally could be liable to the full extent of his or her personal assets in the event of partnership lawsuits, and would share in profits based upon the partnership agreement. In a Limited Liability

Chapter 2: The Public Accounting Profession

Copyright  2013 Pearson Canada Inc. 3 Partnership (LLP), one or more partners have limited liability (normally limited to the extent of their capital contribution), while one or more partners is designated as having unlimited liability.The LLP could also be structured so that all partners have limited liability, based upon the legislation where the LLP was established.

A firm would choose to organize as an LLP to protect the assets of its partners.

2-4 The PA firm could have a web site to illustrate the services provided by the firm, to gain potential clients, and also to gain potential employees or partners. The internet could also be used as a vehicle for internal communications, as employees can use the internet for email, to send files back and forth, to hold teleconferences, or to facilitate the firm’s intranet. The firm could also use application service providers (ASP) for its own accounting. It could also outsource client work, for example some firms sent their client tax returns to other countries for processing.

2-5 The CICA Handbook provides guidance in general circumstances to service the largest numbers of situations and users. Where there is no guidance in the Handbook, accountants rely on their professional judgment to fairly present the economic reality of the situation. Leaving the application open to judgment may result in general acceptance of a minimum level of auditing or accounting practice. The existence of standards is a means of transmitting wisdom and avoiding unintentional error due to ignorance. Standards may be a more efficient and desirable way of creating a body of knowledge about acceptable financial reporting frameworks or GAAS than expensive lawsuits and the development of case law. Compliance with a documented set of standards can provide a better defense against legal liability. If the Standards Boards did not develop standards, then other groups or agencies would. Standards instill confidence in the fairness and reliability of financial statements to users. On the other hand, market research suggests that too many standards are ineffective in assisting the operation of the market. Standard setting is expensive for the profession; the costs may exceed the benefits. Given the complexity of the economic reality that financial statements attempt to portray, no set of standards can be theoretically correct or deal appropriately with all situations.

2-6 By organizing standard-setting, the independent Boards associated with the CICA provide a framework that can be used for engaging in public accounting.

The CICA/CGAAC/SMAC conduct research and publish materials on many different subjects related to accounting, auditing, management advisory services, and taxes. These research materials enable professional accountants to stay current in their profession, or to take continuing education on the topics of their choice.

The organizations also prepare and grade the CA, CGA, and CMA accounting examinations, respectively. This is a high cost service that helps to ensure standardization of knowledge at the entry level of theses professions.

Instructor’s Solutions Manual for Arens et al., Auditing, Canadian 12 th Edition

Copyright  2013 Pearson Canada Inc. 4

2-7 The CICA Handbook codifies as recommendations, the standards associated with several acceptable financial reporting frameworks (such as ASPE and IFRS), and generally accepted auditing standards (GAAS). In addition, the Handbook includes Accounting Guidelines and Assurance and Related Services Guidelines. The Guidelines are either interpretations of the recommendations, or a statement on a matter of concern. The Handbook is prepared by the CICA, which serves two main functions: 1) it is the umbrella organization to which all CAs belong, and 2) it has been given the authority by the Canada Business Corporations Act and the various provincial incorporating acts to set the accounting and auditing standards that must be followed by public accountants doing audits of companies chartered under one of the acts.

2-8 Generally accepted auditing standards are general guidelines to aid auditors in fulfilling their professional responsibilities. These guidelines include standards concerned with adequate technical training and proficiency in auditing, due care, and an objective state of mind; examination standards including planning and supervision, understanding and evaluation of internal control, and the gathering of sufficient appropriate evidential matter; and standards of reporting including identification of the responsibilities of management and the responsibilities of the auditor with respect to the financial statements, the scope of the examination, and an opinion on the financial statements as to whether the financial statements present fairly the financial position, results of operations and changes in financial position in accordance with an appropriate financial reporting framework.

Generally accepted accounting principles are specific rules for accounting for transactions occurring in a business enterprise that relate to a particular financial reporting framework, such as ASPE or IFRS.

Examples may be any of the Accounting Recommendations (GAAP from an appropriate financial reporting framework) and Assurance Recommendations in Sections or in CASs (GAAS) of the CICA Handbook.

2-9 An objective state of mind helps the PA evaluate evidence without bias. Due care embodies the concept that a PA does his or her best during the engagement, helping to provide high quality field work and results.

2-10 The large-scale business failures of Enron and WorldCom affected public confidence in auditors worldwide. In the U.S., this resulted in the Sarbanes-Oxley legislation in 2002, and in Canada, in CSA rules that provided for an additional layer of quality control. In Canada, the Canadian Public Accountability Board is now responsible for conducting peer review of audit firms that audit public companies.

2-11 SOX (Sarbanes-Oxley) was passed in the U.S. in 2002. At that time, the PCOAB was created, mandated to develop additional auditing standards for public companies in the U.S. The requirements of SOX resulted in more stringent rules for boards of directors and audit committees, and added certification by the CEO (chief executive officer) and other senior management with respect to the financial statements. Section 404 of that act also implemented