CPA REPORT Essay

CPA Report The manager of a large organization has asked the CPA to provide information to outside CPAs examining a subsidiary that has been set up as a corporation. As a part of their review, the outside CPAs want to be provided with the several explanations. The CPAs want to know the methodology used to determine deferred taxes and the procedures for reporting accounting changes and error corrections. The CPAs also want to know the rationale behind establishing the subsidiary as a corporation. Methodology Used to Determine Deferred Taxes The methodology used to determine deferred taxes deals with the basic principles of accounting for income taxes. According to FASB (2013), â€Å"The following basic principles are applied in accounting for income taxes: A current of deferred tax liability or asset is recognized for the current or deferred tax consequences of all events that have been recognized in the financial statements The current of deferred tax consequences of an event are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years The tax consequences of earning income or incurring losses or expenses in future years or the future enactment of a change in tax laws or rates are not anticipated for purposes of recognition and measurement of a deferred tax liability or asset† (Summary of Statement No. 96). Procedures for Reporting Accounting Changes and Error Corrections SFAS 154 addresses procedures for reporting accounting changes and error corrections. This statement 154 calls for retrospective application for voluntary changes in accounting principles. Through retrospective application, a change in accounting principle is treated by restating comparative financial statements to reflect the new method as though it had  been applied all along. Thus, the company should show any cumulative effect as a retrospective application and an adjustment to the opening retained earnings balance. SFAS also requires retrospective application to be presented with respect to direct effects and related income tax effects of a change in principle. Indirect effects should be reflected in the period of the accounting change (FASB, 2013). Corrections of errors from prior periods are recorded as adjustments to the beginning balance of retained earnings in the current period. The nature of the error should be disclosed as well as the effect on the current and prior periods presented. If an error affects the current or prior periods presented or is expected to affect subsequent periods, the entity must disclose that comparative information has been restated, the effect of the correction by line-item and per-share amounts for all periods presented, and the amount of the adjustment to opening retained earnings (FASB, 2013). Rationale behind Establishing the Subsidiary as a Corporation There several reasons behind establishing a subsidiary as a corporation. One reason is that a corporation maintains a capital stock account, additional paid-in capital accounts, and a retained earnings account. â€Å"Net income or loss becomes part of retained earnings, and dividends are always paid equally to all shareholders of a particular class of stock† (Bline, Fischer, & Skekel, 2004, Chapter 7). Corporations are also able to reacquire some of its own equity interest in the form of treasury stock. Other advantages of establishing a subsidiary as a corporation are Limited Liability. When it comes to taking responsibility for business debts and actions of a corporation, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company. Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business – the ability to raise funds through the sale of stock. Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, but any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.  Attractive to Potential Employees. Corporations are generally able to attract and hire high-quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options (U.S. Small Business Administration, 2013). MEMORANDUM TO: Manager FROM: CPA DATE: September 30, 2013 SUBJECT: Professional responsibilities as a CPA In response to the request for more information, the following is a summary of the professional responsibilities of a CPA. This memo will also cover the differences between a review and an audit. CPAs perform an essential role in society, and they are responsible to all those who use their professional services. CPAs have a continuing responsibility to improve the art of accounting, maintain the public’s confidence, and carry out the profession’s special responsibilities for self-governance (The CPA Journal, 2004). CPAs must adhere to the AICPA Code of Professional Conduct, which sets forth certain standards of professional conduct. AICPA members are bound by the AICPA Code of Professional Conduct. Rule 201 requires that members provide professional services with competency (AICPA, 2013). According to AICPA (2013), â€Å"In the delivery of personal financial planning services, a member shall adhere to the following Principles of Professional Conduct. ET Section 52 – Article I – Responsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. Section ET 53 – Article II – The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust and demonstrate commitment to professionalism. Section ET 54 – Article III – Integrity To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. Section ET 55 – Article IV – Objectivity and Independence A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. Section ET 56 – Article V – Due Care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability† (Professional Responsibilities). Review The purpose of a review is to provide limited assurance that financial statements do not have any known errors or departures from the accounting rules found in GAAP. There is usually no testing of information in the financial statements beyond inquiry and analytical review. The CPA will not obtain an understanding of the internal control system or address how the organization is addressing the risk of fraud in the financial statements (Ulvog, 2006). A review involves the CPA performing procedures that will provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework. A review does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records; or other  procedures ordinarily performed in an audit (Barfield, Murphy, Shank & Smith LLC, 2013). Audit The purpose of an audit is to provide reasonable assurance that financial statements are fairly presented in accordance with GAAP. In an audit, the CPA will gain an understanding of internal controls, evaluate the risk of major fraud, test the places where there is a significant risk of major fraud, and perform testing where necessary for the significant components of the financial statements (Ulvog, 2006). The auditor is required to corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures, and other procedures (Barfield, Murphy, Shank & Smith LLC, 2013). An audit provides more assurance to a reader of the financial statements than a review. References AICPA. (2013). Retrieved from http://www.aicpa.org/INTERESTAREAS/PERSONALFINANCIALPLANNING/RESOURCES/PRACTICECENTER/PROFESSIONALRESPONSIBILITIES/Pages/ProfessionalResponsibilities.aspx Barfield, Murphy, Shank & Smith LLC. (2013). Retrieved from http://www.bmss.com/news-story.php?cn=172 Bline, D., Fischer, M., & Skekel, T. (2004). Advanced Accounting. Retrieved from The University of Phoenix eBook Collection database FASB. (2013). Retrieved from http://www.fasb.org/summary/stsum96.shtml The CPA Journal. (2004). Retrieved from http://www.nysscpa.org/cpajournal/2004/104/text/p80.htm Ulvog, J.L. (2006). Ulvog CPA. Retrieved from http://ulvogcpa.com/Audit_or_Review.html U.S. Small Business Administration. (2013). Retrieved from http://www.sba.gov/content/corporation