F. Impact on Privately Held Companies and Their Auditors 3

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1 THE CPA S PROFESSIONAL STANDARDS: WHAT ARE THEY? WHO SETS THEM? WHAT ARE THE KEY ISSUES TODAY? SALLY L. HOFFMAN, CPA, CFE BERDON LLP DECEMBER 2005 TABLE OF CONTENTS I. SARBANES-OXLEY AND THE PCAOB A. Sarbanes-Oxley Act of 2002 B. Public Company Accounting Oversight Board C. Auditor Independence 2 D. Accounting Standards 2 E. Auditing Standards F. Impact on Privately Held Companies and Their Auditors II. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES A. Introduction B. Sources of GAAP 4 C. GAAP Hierarchy 6 D. Key GAAP Principles 7 E. Financial Statements 8

2 F. Hot Issues: GAAP 8 III. LEVELS OF SERVICES BY ACCOUNTANTS 9 A. Audit 9 B. Review 0 C. Compilation 0 D. Comparative Analysis Audit, Review and Compilation E. Reports IV. GENERALLY ACCEPTED AUDITING STANDARDS 2 A. Who Sets GAAS? 2 B. Generally Accepted Auditing Standards 5 C. The Audit Process 7 D. Report of the Panel on Audit Effectiveness 2 E. Detecting Fraud 2 F. Hot Issues: GAAS 24 V. AICPA CODE OF PROFESSIONAL CONDUCT 25 EXHIBITS. GAAP Hierarchy Schedule

3 2. Report of Independent Registered Public Accounting Firm Audit. Report of Independent Registered Public Accounting Firm Interim Review 4. Standard Report Independent Auditor s Report 5. Explanatory Language Added Internal Control Consideration Independent Auditor s Report 6. Explanatory Language Added In Accordance with GAAS and PCAOB Standards Independent Auditor s Report 7. Scope Limitation Independent Auditor s Report 8. Departure from GAAP Independent Auditor s Report 9. Adverse Opinion Independent Auditor s Report 0. Disclaimer of Opinion Independent Auditor s Report. Standard Report Accountant s Review Report 2. Departures from Generally Accepted Accounting Principles Accountant s Review Report. Standard Report Accountant s Compilation Report 4. Departures from Generally Accepted Accounting Principles Accountant s Compilation Report

4 THE CPA S PROFESSIONAL STANDARDS: WHAT ARE THEY? WHO SETS THEM? WHAT ARE THE KEY ISSUES TODAY? SALLY L. HOFFMAN, CPA, CFE BERDON LLP DECEMBER 2005 I. SARBANES-OXLEY AND THE PCAOB A. Sarbanes-Oxley Act of 2002 On July 0, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley or the Act ). As the most far-reaching securities legislation since the 90 s, Sarbanes-Oxley dramatically impacted the financial reporting responsibilities for publicly held companies, their officers and directors, and their advisors. Among many other things, it changed the landscape of standard setting and oversight of the accounting profession, for services relating to publicly held companies. The following is a brief overview of the provisions impacting the accounting profession and related standard setting. B. Public Company Accounting Oversight Board The Act established a non-governmental board, the Public Company Accounting Oversight Board ( PCAOB or the Board ) ( comprised of five full-time members appointed by the Securities and Exchange Commission ( SEC ). Two members (and only two) must be CPAs. The Board has oversight responsibility for accounting firms and CPAs performing audits of publicly held companies. It is responsible for, among other things: Registering public accounting firms Establishing or adopting auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers Conducting inspections (the successor to peer review for public companies) of registered accounting firms Imposing appropriate sanctions to enforce compliance with the rules and laws Significantly, the PCAOB has the responsibility for functions previously performed by the accounting profession itself, thus eliminating self regulation for those professionals serving issuers. The PCAOB has the responsibility for establishing auditing, attestation and quality control standards for auditors of public companies, a function previously performed by the Auditing Standards Board ( ASB ) of the American Institute of Public Accountants ( AICPA ). The ASB continues to have the responsibility and authority to establish standards for audits of privately held companies. While the Board is required to co-operate on an ongoing basis with designated professional groups of accountants and advisory groups engaged in standard setting, it has the authority to

5 amend, modify, repeal or reject any standards suggested by these groups. All standards approved by the PCAOB require approval by the SEC before becoming effective.