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Introduction to Introduction to Auditing and Auditing and
Assurance ServicesAssurance Services
"If you want to be successful, it's just this "If you want to be successful, it's just this simple:simple:
Know what you're doing. Love what you're Know what you're doing. Love what you're doing. And believe in what you're doing." doing. And believe in what you're doing." Will RogersWill Rogers
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Entry-level CPAs are expected to Entry-level CPAs are expected to practically walk on water. In addition practically walk on water. In addition to technical ability to do the job, they to technical ability to do the job, they
need communication and people need communication and people skills, computer savvy, a strong sense skills, computer savvy, a strong sense
of ethics---and even a nose that can of ethics---and even a nose that can detect fraud.detect fraud.
Journal of AccountancyJournal of Accountancy
June, 2005 p77 June, 2005 p77
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Study of AuditingStudy of Auditing
Technical, analytical and logical skills
Gather and assess the
evidence against assertions
More conceptual in nature
Improving the reliability of
information for decision makers
The study of auditing is different from other accounting courses that you have taken in college because …
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INFORMATION RISKINFORMATION RISK
RRisk (probability) that the information isk (probability) that the information (mainly financial) disseminated by a (mainly financial) disseminated by a company will be materially false or company will be materially false or misleadingmisleading
Users demand independent third Users demand independent third party assessment of the information party assessment of the information
..
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Reducing Information RiskReducing Information Risk
User verifies information.User verifies information.
User shares information risk with management.User shares information risk with management.
Audited financial statements are provided.Audited financial statements are provided.
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Assurance and Attestation Assurance and Attestation ServicesServices
Other Assurance ServicesOther Assurance Services
CertainCertainManagementManagementConsultingConsulting
Other Attestation ServicesOther Attestation Services(e.g., (e.g., WebTrust, SysTrustWebTrust, SysTrust))
ATTESTATION SERVICESATTESTATION SERVICES
AuditsAudits ReviewsReviews
Internal ControlInternal Controlover Financial Reportingover Financial Reporting
ASSURANCE SERVICESASSURANCE SERVICES
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The Attest FunctionThe Attest Function
Management
SubjectMatter
SuitableCriteria
The CPA
Gathers Evidence
SubjectMatter*
The AttestReport
IssuesReport
*May be management’s assertion about the subject matter.
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Attestation ServicesAttestation Services
1. Audit of historical financial statements
2. Attestation of internal control over financial reporting
3. Review of historical financial statements
4. Attestation services on information technology
5. Other attestation services
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Auditing vs AccountingAuditing vs Accounting
AccountingAccounting is the recording, classifying, is the recording, classifying,and summarizing of economic eventsand summarizing of economic eventsfor the purpose of providing financialfor the purpose of providing financialinformation used in decision making.information used in decision making.
AuditingAuditing is determining whetheris determining whetherrecorded information properlyrecorded information properlyreflects the economic events thatreflects the economic events thatoccurred during the accounting period.occurred during the accounting period.
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Definition of AuditingDefinition of Auditing
Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users.
Financial Statements(including footnotes)
GAAP
Auditor's Report/Other ReportsPersons who rely on
the financial reports•Creditors•Investors
Source: American Accounting Association Committee on Basic Auditing Concepts. 1973. A Statement of Basic Auditing Concepts, American Accounting Association (Sarasota, FL).
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Audit of a Tax Return Audit of a Tax Return
InternalInternalrevenuerevenue
agentagent
Competent,Competent,independentindependent
personperson
Examines cancelledExamines cancelledchecks and otherchecks and other
supporting recordssupporting records
Accumulates andAccumulates andevaluates evidenceevaluates evidence
DeterminesDeterminescorrespondencecorrespondence
Federal taxFederal taxreturns filedreturns filedby taxpayerby taxpayer
InformationInformation
Internal RevenueInternal RevenueCode and allCode and all
interpretationsinterpretations
Established criteriaEstablished criteria
Report on taxReport on taxdeficienciesdeficiencies
Report on resultsReport on results
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Relationships Among Auditors, Relationships Among Auditors, Client, and External UsersClient, and External Users
ClientClient
AuditorAuditorClient or auditClient or auditcommittee hirescommittee hiresauditorauditor
ExternalExternalUsersUsers
Auditor issuesAuditor issuesreport reliedreport reliedupon by usersupon by users
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Overview of the Financial Statement Overview of the Financial Statement Audit ProcessAudit Process
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Problems and Warning Problems and Warning SignsSigns
1990 2000
During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities
to market a variety of high-margin nonaudit services to their audit clients.
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Accounting Profession’s Decade of Accounting Profession’s Decade of Unprecedented Turmoil & ChangeUnprecedented Turmoil & Change
1. Failure of one of the largest public 1. Failure of one of the largest public accounting firms (Andersen)accounting firms (Andersen)
2. Four of the largest bankruptcies ever - each 2. Four of the largest bankruptcies ever - each in a company where financial statement in a company where financial statement misrepresentation had taken placemisrepresentation had taken place
3. Billions of investment and retirement dollars 3. Billions of investment and retirement dollars lostlost
4. Perception that auditors were not4. Perception that auditors were not
independent from their clientsindependent from their clients
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SEC Concerns About the Auditing SEC Concerns About the Auditing ProfessionProfession
Auditors unwilling to confront clients over Auditors unwilling to confront clients over questionable accounting practicesquestionable accounting practices
Consulting fees impairing auditor Consulting fees impairing auditor independenceindependence
Accountants using technical Accountants using technical interpretations of GAAP to push the interpretations of GAAP to push the limits of accountinglimits of accounting
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Government RegulationGovernment Regulation
In July 2002, Congress passed the Sarbanes-Oxley Public Company Accounting Reform and Investor
Protection Act.
The Sarbanes-Oxley Act effectively ended the profession’s era of “self-
regulation,” creating and transferring authority to set and enforce standards to the Public Company Accounting
Oversight Board (PCAOB).
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Sarbanes/Oxley ActSarbanes/Oxley Act
Established the Public Companies Accounting Established the Public Companies Accounting Oversight Board (PCAOB)Oversight Board (PCAOB)
Requires CEO and CFO to “certify” financial Requires CEO and CFO to “certify” financial statementsstatements
Requires Requires bothboth companies and auditors to provide a companies and auditors to provide a comprehensive report on internal controlscomprehensive report on internal controls
Gives Audit Committees expanded powers as the Gives Audit Committees expanded powers as the 'audit client' and for pre-approving any non-audit 'audit client' and for pre-approving any non-audit services by its external auditorsservices by its external auditors
Requires Audit Committees to report their activities to Requires Audit Committees to report their activities to the publicthe public
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Sarbanes/Oxley Act (Cont)Sarbanes/Oxley Act (Cont)
Audit Committees --- at least one person who is a Audit Committees --- at least one person who is a financial expert.financial expert.
Audit engagement partners rotation --- every five Audit engagement partners rotation --- every five yearsyears
A "cooling off" period of an audit partner or A "cooling off" period of an audit partner or manager before taking a high-level position with manager before taking a high-level position with an audit clientan audit client
Increased disclosure of material "off-balance Increased disclosure of material "off-balance sheet" transactions or agreementssheet" transactions or agreements
Requires the GAO to make a study a of Requires the GAO to make a study a of accounting issues of the effect of consolidation accounting issues of the effect of consolidation on competition within the accounting profession, on competition within the accounting profession, and an analysis of mandatory audit firm rotationand an analysis of mandatory audit firm rotation
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Prohibited Services to Audit ClientsProhibited Services to Audit Clients
Bookkeeping and related servicesBookkeeping and related servicesDesign or implementation of financial information Design or implementation of financial information
systemssystemsAppraisal or valuation servicesAppraisal or valuation servicesActuarial servicesActuarial servicesInternal audit outsourcing Internal audit outsourcing Management or human resources services Management or human resources services Investment or broker/dealer services Investment or broker/dealer services Legal and expert services (unrelated to the audit) Legal and expert services (unrelated to the audit)
Professional service firms may provide client tax Professional service firms may provide client tax services (with some restrictions) and other non-services (with some restrictions) and other non-prohibited services to audit clients if the prohibited services to audit clients if the company’s audit committee has approved them company’s audit committee has approved them in advance.in advance.
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Powers Granted to the Powers Granted to the PCAOBPCAOB
Set Auditing StandardsSet Auditing StandardsSet Financial Accounting StandardsSet Financial Accounting StandardsSet Internal Control and Risk Management Set Internal Control and Risk Management
Reporting StandardsReporting StandardsPerform Quality Reviews and Recommend Perform Quality Reviews and Recommend
PenaltiesPenaltiesEstablish Quality Control Standards for the Establish Quality Control Standards for the
Audits of Public CompaniesAudits of Public CompaniesRequire Registration of Public Accounting Require Registration of Public Accounting
Firms doing audits of public companies for Firms doing audits of public companies for license to perform such auditslicense to perform such audits
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Types of AuditorsTypes of Auditors
Financial (External Auditors/CPAs)Financial (External Auditors/CPAs)Ensure that financial statements are accurate.Ensure that financial statements are accurate.
Operational (Internal and Governmental Operational (Internal and Governmental Auditors/CIAs)Auditors/CIAs)Improve operational Improve operational economyeconomyImprove operational Improve operational efficiencyefficiency
Compliance (Internal and Governmental Compliance (Internal and Governmental Auditors)Auditors)Ensure compliance with company and/or governmental rules and Ensure compliance with company and/or governmental rules and
regulationsregulations
Forensic (Fraud Auditors/CFEs)Forensic (Fraud Auditors/CFEs) Most audits are a combination of financial, Most audits are a combination of financial,
operational, and compliance audits.operational, and compliance audits.
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PCAOB Management AssertionsPCAOB Management Assertions
Existence or OccurrenceExistence or Occurrence – Assets included in – Assets included in accounts exists and events that give rise to accounts exists and events that give rise to transactions have taken placetransactions have taken place
Rights and Obligations- Rights and Obligations- Entity has a legal claim Entity has a legal claim on all assets and revenues reported and has a on all assets and revenues reported and has a legal responsibility for all liabilities and expenseslegal responsibility for all liabilities and expenses
CompletenessCompleteness - All transactions have been - All transactions have been recordedrecorded
Valuation or AllocationValuation or Allocation – Transactions are – Transactions are recorded at the correct amount in the proper recorded at the correct amount in the proper periodperiod
Presentation and DisclosurePresentation and Disclosure – All accounts are – All accounts are presented in the appropriate place and all presented in the appropriate place and all information required has been disclosed in the information required has been disclosed in the statements and footnotesstatements and footnotes..
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Management AssertionsManagement Assertions ( (ABSABS))
Events and Transaction AssertionsEvents and Transaction Assertions OccurrenceOccurrence – Events giving rise to transactions – Events giving rise to transactions
have taken placehave taken place
Completeness and cutoffCompleteness and cutoff - - All transactions All transactions have been recorded and are recorded in the have been recorded and are recorded in the appropriate periodappropriate period
Accuracy Accuracy – – Transactions are recorded at the correct amount
ClassificationsClassifications – – Transactions have posted to Transactions have posted to the proper accountthe proper account
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Management AssertionsManagement Assertions ( (ABSABS))
Account Balance AssertionsAccount Balance Assertions Existence – Existence – Balances include only assets and Balances include only assets and
liabilities that existliabilities that exist
Rights and obligationsRights and obligations - - Entity has legal claim on all assets and revenues reportedEntity has a legal responsibility for all liabilities Entity has a legal responsibility for all liabilities
and expensesand expenses
CompletenessCompleteness – – Balances include all items Balances include all items which should be included according to GAAPwhich should be included according to GAAP
Accuracy and valuationAccuracy and valuation – –Balances included Balances included items recorded in the proper period at the proper items recorded in the proper period at the proper amount in accordance with GAAPamount in accordance with GAAP
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Management’s Financial Statement Management’s Financial Statement Assertions (ASB)Assertions (ASB)
Assertions about Presentation and DisclosuresAssertions about Presentation and DisclosuresOccurrence and rights and obligationsOccurrence and rights and obligations – items – items
presented have occurred and are either owned by or presented have occurred and are either owned by or represent the responsibility of the entityrepresent the responsibility of the entity
Completeness Completeness – the proper disclosures have all been – the proper disclosures have all been made by the entitymade by the entity
Classification and understandability Classification and understandability – accounts in – accounts in the disclosures have been appropriately grouped and the disclosures have been appropriately grouped and users can comprehend the disclosuresusers can comprehend the disclosures
Accuracy and valuationAccuracy and valuation – the amounts in the – the amounts in the disclosures have been properly measured and are disclosures have been properly measured and are valued in accordance with GAAPvalued in accordance with GAAP
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Exhibit 1.5Exhibit 1.5Example Assertions and their Relationships to Example Assertions and their Relationships to
the Financial Statementsthe Financial Statements
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Management AssertionsManagement Assertions
Financial statements issued by management contain explicit and implicit assertions.
Transactions
Management asserts that transactions
related to inventory actually occurred.
Account Balances
Management asserts that the entity owns
the inventory represented in the inventory account.
Presentation & Disclosure
Management asserts that the financial
statements properly classify and present
the inventory.
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Questions to AskQuestions to Ask
What do I need to know?What do I need to know?
How well do I know it?How well do I know it?
Does it make sense?Does it make sense?
What can go wrong?What can go wrong?
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Professional SkepticismProfessional Skepticism
Professional skepticism - auditor’s Professional skepticism - auditor’s questioning, evaluative, attitude toward questioning, evaluative, attitude toward evidenceevidenceManagement’s assertions without sufficient corroboration.Management’s assertions without sufficient corroboration.Financial trends need investigationFinancial trends need investigationDocuments are checked for authenticity or alterationDocuments are checked for authenticity or alterationAsk questions, get answers, then verify the answers.Ask questions, get answers, then verify the answers.
A potential conflict of interest always exists A potential conflict of interest always exists between the auditor and the client.between the auditor and the client.Management wants to portray the company and its operations in the Management wants to portray the company and its operations in the
best possible light.best possible light.Auditors want to portray the company and its operations fairly.Auditors want to portray the company and its operations fairly.
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CPAs Encouraged to ConductCPAs Encouraged to ConductThemselves at a High LevelThemselves at a High Level
LegalLegalLiabilityLiability
Division ofDivision ofCPA firmsCPA firms
ContinuingContinuingEducationEducation
RequirementsRequirements
GAAS andGAAS andInterpretationsInterpretations
Code ofCode ofProfessionalProfessional
ConductConduct
CPACPAExaminationExamination
QualityQualityControlControl
PeerPeerReviewReview
PCAOBPCAOBand SECand SEC
Conduct ofConduct ofCPA FirmCPA FirmPersonnelPersonnel
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Professional/Regulatory Professional/Regulatory OrganizationsOrganizations
SECSEC --- oversees the PCAOB and all companies --- oversees the PCAOB and all companies
publicly traded on the U.S. capital marketspublicly traded on the U.S. capital markets
AICPAAICPA --- primary governing organization of the --- primary governing organization of the
public accounting profession public accounting profession
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Professional/Regulatory Professional/Regulatory OrganizationsOrganizations
State Boards of AccountancyState Boards of Accountancy --- responsible --- responsible for certifying and licensing CPAs in their for certifying and licensing CPAs in their state. state.
Institute of Internal AuditorsInstitute of Internal Auditors --- issues internal --- issues internal auditing standards and administers the auditing standards and administers the Certified Internal Auditor programCertified Internal Auditor program
U. S. General Accounting OfficeU. S. General Accounting Office --- --- nonpartisan audit agency for Congress. The nonpartisan audit agency for Congress. The GAO develops auditing standards for GAO develops auditing standards for governmental audits.governmental audits.
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Other PartiesOther Parties
FASBFASBSets GAAP for entities other than federal, state and Sets GAAP for entities other than federal, state and
local governmentslocal governments
GASBGASBStandards of financial accounting for state and local Standards of financial accounting for state and local
government entitiesgovernment entities
FASABFASABAccounting standards for the US governmentAccounting standards for the US government
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Purpose: to assist in providing investors Purpose: to assist in providing investors with reliable information upon which to with reliable information upon which to make investment decisions.make investment decisions.
Securities and Exchange Securities and Exchange CommissionCommission
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Forms S-1 to S-16Forms S-1 to S-16
Securities and Exchange Securities and Exchange CommissionCommission
Form 8-KForm 8-K
Form 10-KForm 10-K
Form 10-QForm 10-Q
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AICPA’s Traditional RoleAICPA’s Traditional Role
Establish Standards --- Now only Establish Standards --- Now only private companiesprivate companies
Research and PublicationResearch and Publication
Continuing Professional EducationContinuing Professional Education
Self-RegulationSelf-Regulation
CPA ExaminationCPA Examination
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Establishes Standards--ExamplesEstablishes Standards--Examples
AICPA Auditing Standards BoardAICPA Auditing Standards BoardIssues official pronouncements on auditing matters for Issues official pronouncements on auditing matters for
nonpublic companies (“nonissuers”)nonpublic companies (“nonissuers”)
Statements on Auditing Standards (SASs)Statements on Auditing Standards (SASs)
Statements on Standards for Attestation Engagements Statements on Standards for Attestation Engagements (SSAEs)(SSAEs)
Accounting and Review Services Accounting and Review Services CommitteeCommitteeStatements on Standards for Accounting and Review Statements on Standards for Accounting and Review
Services (SSARS)Services (SSARS)
Standards for compilations or reviews not audits of Standards for compilations or reviews not audits of financial statementsfinancial statements
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Research and PublicationResearch and Publication
MagazinesMagazinesJournal of Accountancy (Monthly)Journal of Accountancy (Monthly)
The Tax AdvisorThe Tax Advisor
Audit PublicationsAudit PublicationsIndustry Audit and Accounting GuidesIndustry Audit and Accounting Guides
Audit Risk AlertsAudit Risk Alerts
Auditing Practice ReleasesAuditing Practice Releases
Other PublicationsOther PublicationsAccounting Research StudiesAccounting Research Studies
Statements of Position Statements of Position
Accounting Trends & TechniquesAccounting Trends & Techniques
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Professional RegulationProfessional Regulation
Development of CPE ProgramsDevelopment of CPE Programs
AICPAAICPA
State SocietiesState Societies
Other Professional OrganizationsOther Professional Organizations
Code of Professional ConductCode of Professional Conduct – Ethical Rules – Ethical Rules for CPAsfor CPAs
Membership requirements of the AICPAMembership requirements of the AICPA
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CPA ExamCPA Exam
National exam prepared and graded by the National exam prepared and graded by the AICPAAICPA
ComputerizedComputerizedFour Parts Four Parts
Auditing and Attestation—4. hrsAuditing and Attestation—4. hrsFinancial Accounting and Reporting—4 hrsFinancial Accounting and Reporting—4 hrsRegulation—3 hrs.Regulation—3 hrs.Business Environment—3 hrsBusiness Environment—3 hrs
Skill Sets—Research, Communication, Skill Sets—Research, Communication, Analysis, Analysis, Judgment,Judgment, Understanding Understanding
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Organization of the Organization of the ProfessionProfession
“Big Four” Accounting FirmsD&T, E&Y, KPMG, PWC
National Grant Thornton, BDO Seidman, Tilly Baker
Local/Regional Clifton Gunderson, C.P.A.
Wipfile, C.P.A.
Sole Proprietor
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Public Accounting Public Accounting Professional ServicesProfessional Services
Assurance ServicesAudit Engagements
Assurance Engagements
Attestation Engagements
Compilations
Reviews
Tax Consulting Services
Consulting Services
Litigation Support
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Professional Service Firm Professional Service Firm OrganizationOrganization
Executive CommitteeManaging Partner
Practice OfficesPartners-in-Charge
Consulting Services
Audit, Assurance and Business Advisory
Services
Tax ConsultingServices
Partner
ManagerManager Manager
Senior (In-charge) AccountantsStaff Accountants (or Associates)
Partner
ManagerManager Manager
Senior (In-charge) AccountantsStaff Accountants (or Associates)
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Firm Organizational StructureFirm Organizational Structure
ProprietorshipProprietorship
General PartnershipGeneral Partnership
General CorporationGeneral Corporation
Professional CorporationProfessional Corporation
Limited Liability CompanyLimited Liability Company
Limited Liability PartnershipLimited Liability Partnership
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Typical Structure of a National Typical Structure of a National CPA FirmCPA Firm
Partners
Managers
Seniors
Staff
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Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm
LevelLevel ExperienceExperience ResponsibilitiesResponsibilities
StaffStaffAssistantAssistant 0-2 years0-2 years Performs most of thePerforms most of the
detailed audit workdetailed audit work
Senior orSenior orIn-ChargeIn-ChargeAuditorAuditor
2-5 years2-5 yearsResponsible for the auditResponsible for the auditfield work, includingfield work, includingsupervising staff worksupervising staff work
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Hierarchy of a TypicalHierarchy of a TypicalCPA FirmCPA Firm
LevelLevel ExperienceExperience ResponsibilitiesResponsibilities
ManagerManager 5-10 years5-10 yearsHelps the plan, managesHelps the plan, managesthe audit, reviews work,the audit, reviews work,and works with the clientand works with the client
PartnerPartner 10+ years10+ yearsReviews audit work andReviews audit work andmakes significant auditmakes significant auditdecisionsdecisions
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Requirements to Become Requirements to Become Certified!Certified!
EducationEducation
ExaminationExamination
ExperienceExperience
State Certificate and License for CPA
Skills sets and your educationSkills sets and your education