Sidi Moh Sidi Mohamed Ben Abdellah University

School of Commerce & Management (ENCG) -Fès

 Accounting and financial audit

PRÉPARÉ PAR:
FETAL Fatiha
TABOUT Meryem
EL MESKINI Assia
DHAIMAN Soukaina
OUBELLA Sana
ELBARROUDI Kenza
AMASMIR Salma
ENCADRE PAR:
Mr.HOUSSAINI

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2020/2021
Sommary
Introduction..........................................................................................................................................2
Chapter 1 : The story of accounting.............................................................................................3
Section 1: The history of accounting........................................................................................3
Section 2: the evolution of accounting......................................................................................5
Section3: accounting cycle........................................................................................................7
Section 4:the role of accounting in business..............................................................................10
Chapter 2 : Financial auditing...........................................................................................................11
Section 1: The evolution of financial audit...................................................................................11
Section 2 : The different types of audit..................................................................................14
Section 3 : The main objective of financial statement audit..................................................17
Section 4 : The steps of financial audit mission.....................................................................19
Chapter 3: audit and the external environment...........................................................................20
Section 1: Audit and technology.............................................................................................20
Section 2: Audit scandals........................................................................................................21
Section 3: The Big Four..........................................................................................................22
Chapter 4: Similarities between Accounting and Auditing:............................................................23
Conclusion...........................................................................................................................................27

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Introduction

Accounting and auditing are two financial terms that refers to two different actions, we can define
accounting as the process of recording financial transactions pertaining to a business. The accounting
process includes summarizing, analyzing and reporting these transactions to oversight agencies,
regulators and tax collection entities. The financial statements used in accounting are a concise
summary of financial transactions over an accounting period, summarizing a company's operations,
financial position and cash flows.

So how about auditing ?

Auditing is the examination or inspection of various books of accounts by an auditor followed by

physical checking of inventory to make sure that all departments are following documented system
of recording transactions. It is done to ascertain the accuracy of financial statements provided by the
organization.

As we can see in those definitions, there is a relationship between accounting and auditing ;

So in this report, we’re going to talk about history and evolution of accounting, also about its types
and roles in the businesses.

And we cannot forget to talk about the auditing and its evolution and types, as well as his objectives
and main steps.

Again, we have to talk about audit and external environment, technology and its scandals, also about
the big four ; what are they? And what are their missions?

Therefore, we’re going to show the type of relationship between auditing and accounting or the
similarities between those two fields.

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Chapter 1 : The story of accounting
Section 1: The history of accounting

 From the 16th to the 18th century

Accounting techniques gradually evolved. Accounting obligations appeared, such as the
obligation imposed on French factories in the 17th century to keep a bi-annual inventory of
stocks.

 19th century
Until the 20th century, accounting writings remained essentially technical or pedagogical
works. Theoretical reflections were relatively limited and dealt essentially with the accounting
mechanisms of recording or with concepts and definitions. An example is Charles Penglaou's
Introduction à la technique comptable, published in 1929.The advent of the industrial
company and the development of joint-stock companies at the end of the 19th century led
accounting tools to evolve. Accounting thinking then focused as much on improvements in
bookkeeping techniques as on the problems of cost calculation. Management accounting owes
a great deal to the pioneering works of Frederick W. Taylor (1902) or of the author of the first
book on the subject. Taylor (1902) and Henri Fayol (1916).
 20th century
What characterizes the development of accounting in the 20th century is the phenomenon of
harmonization of practices (known as "standardization"). National harmonization at first, then
international harmonization, which accelerated in the second half of the century. In France,
the publication of the first general chart of accounts in 1942 was inspired by the numerous
works and experiments carried out during the previous decades, in particular those of Emile
Rimailho (1928). It marked the first step in French accounting standardization. This
standardization phenomenon is also evident in other industrialized countries, even if it does
not always focus as much as in France on cost accounting. In the United States, a twofold
movement is noteworthy. First, at the end of the nineteenth century, American universities
created departments of management education in which accounting professors worked. They
produced the first theoretical accounting works. In addition, the crisis of 1929 led the
American legislator to reinforce accounting regulations. The FASB, the American Accounting
and Financial Standards Board, then adopted a "conceptual framework", a general theoretical
framework for defining the objectives and major accounting principles that guide the work of
standard setters.
Accounting systems
The invention of conversational lettering in 1962, allowed mechanography and large
computer systems to do general accounting in large companies and to erase the caricatured
image of the accounting profession. The computerization of general accounting in large

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companies, which allows for the presentation of monthly results five days after the end of the
month, has erased the image of the "round-headed" accountant.
As far as the ancestors of liberal accountants are concerned, we can find clear traces of them
in the framework of the public service, i.e. in the Administration where they played an
average role according to page 15 of "Histoire de la profession comptable" (libérale)
published following the 47th congress of the Order of Chartered Accountants in October
1993. They first appeared in the military administration. They were in charge of reporting on
military events, but also of keeping an inventory of goods subject to fluctuations in
consumption by the troops and the accumulation of booty as victories were achieved. The
military leaders knew how long the current campaign could last. As good managers, they had
to take into account the goods that had to be found on the spot. They also had to know the
yield of the war undertaken, and consequently to evaluate the pay that the troops could
receive after the state and the warlords had shared the most remarkable wealth. As money was
unknown for a long time, taxes were paid in kind, and scribes also carried out surveying work
in order to determine the amount of tax to be paid. This range of functions performed by the
scribes gives rise to several remarks. First of all, it is logical to see the professions of
accountant and surveyor merging. For both activities, it was a matter of using the figures of
elementary arithmetic, the calculation of surface areas as a basis for the tax which was based
on the exploited space. The studies that led to these professions were long and costly, partly
aligned with those that led to the priesthood. Often in ancient societies numbers had a sacred
character. They were often linked to astronomical calculations to know when certain natural
phenomena would occur and to calculate the return of the seasons and also to measure time.
Advanced and even the most primitive cultures used and still use numerical systems that have
been maintained until today. The study cycle of an accountant is comparable in length to that
of a surgeon.
Before the invention of conversational accounting by computerized lettering, the organization
of accounting had known five accounting systems apart from the latter:
The Italian-style accounting,
The American journal,
The transfer system
Mechanized accounting on front-entry accounting machines
Computerized accounting according to the standard CoP of the manufacturers of computer
equipment, Conversational accounting with computerized accounting records, which
revolutionized both the management of large companies and the world of computers. What
the big sets suddenly knew how to do, the mini-computers, which have been out of use since
1952, would know how to do it instead of the accounting machine workshops, which were all
obsolete overnight.
Accounting the Italian way
Presentation

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Until the 1950s, this was the system used in large companies, as well as the universally
adopted academic system for teaching accounting. The teaching of the method was limited to
the entry of entries in a single journal. In practice, journals were created and used by nature,
purchases, banks, customers, etc. The scientific organization of the work also required that
they be subdivided into "even days" and "odd days" journals. The journals were kept by the
bookkeepers. At the end of the working day, they were handed over to the "Bookkeeper".
Five auxiliary journals were kept per accounting department. It was their responsibility to
supply the five ledgers, namely - The "General Accounts" ledger - The "Suppliers" individual
accounts ledger - The individual accounts ledger "Customers" - The ledger "Banks" - The
ledger "General expenses".

Section 2: the evolution of accounting

From record keeping to artificial intelligence
 Accounting in ancient history 
Accounting is a system of recording and summarizing financial and business transactions. Record
keeping, accounting, and accounting tools have been used for as long as civilizations have engaged in
trade. Many historians hypothesize that one reason writing systems were developed was to record
trade transactions. Some of the earliest writings discovered by archaeologists are accounts of tax
records on clay tablets. These first examples of accounting from Mesopotamia and Egypt date back to
between 3300 and 2000 BCE. In the 13th century, medieval Europe moved toward a money economy.
Merchants relied on bookkeeping to oversee the multiple simultaneous transactions financed by bank
loans. As industry moved forward, it was clear that accounting procedures needed to be refined for
higher accuracy and efficiency. 

 The father of accounting 

In 1458, Benedetto Contrugli invented the double-entry accounting system - broadly defined
as any bookkeeping system that involves a debit and/or credit entry for transactions. The
double-entry system revolutionized accounting. Luca Bartolomes Pacioli, an Italian
mathematician and Franciscan monk, invented a system of record keeping that used
a memorandum, ledger, and journal. He also wrote many books on
accounting. Paciolo became known as the father of accounting and bookkeeping. In 1494, he
wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita ("The Collected
Knowledge of Arithmetic, Geometry, Proportion, and Proportionality"), which included a 27-
page treatise on bookkeeping. 
Centuries later, in 1854, the first professional organizations for accountants - the Edinburgh
Society of Accountants and the Glasgow Institute of Accountants and Actuaries - were
established in Scotland. Members of these early organizations could refer to themselves as
“chartered accountants.” In 1887, the American Institute of Certified Public Accountants was
established. 
 The early systems and electronic data interchange 
Always finding ways to improve accounting and AP processes, inventors started to create
machines for mathematical calculations. In the 1880s, American William Burroughs invented
the adding machine. Early adding machines did not have the critical features of a computer,

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such as internal memory. However, they enabled accountants to carry out arithmetic with
higher accuracy and efficiency.  By the end of the century, technology continued to progress.
Herman Hollerith developed a punch-card machine to speed up data handling for the U.S.
Census. These innovative tabulating machines recorded data by punching a pattern of holes
into cards. The machine could also read these patterns to call up pertinent information.
Hollerith took the punch-card concept into private industry when he founded IBM. Businesses
were using punch-card machines for accounting by 1907; an IBM tabulator could process 100
cards a minute by 1928. 
Accounting took a large step toward the future  as we know it in 1955, when a company
bought a computer for the first time purely for accounting. After World War II, General
Electric purchased the UNIVAC (the UNIVersal Automatic Computer) to run payroll in its
factories. Developed by John Mauchly and J. Presper Eckert, the UNIVAC stored data on
magnetic tape instead of punch cards. The UNIVAC took 40 hours to complete the payroll
process. 

 The ongoing evolution of accounting technology 

AP processes were streamlined in the 1960s when the U.S. transportation industry developed
EDI to standardize transactions between vendors and customers. By 1982, automotive
industry customers including Ford and General Motors started to mandate EDI for their
suppliers. Today, all major industries employ EDI, making it a significant milestone in the
history of accounting. Sets of EDI standards, such as EDIFACT (the primary standard in
Europe) and X12 (the primary standard in the United States), govern the structure and content
of documents.  
In 1978, the accounting world saw the birth of Visicalc. It was the first spreadsheet software
that enabled financial modeling on the computer. During the same year, Peachtree Software
introduced an accounting software package for the early personal computer. As a result,
companies could computerize their accounting at a fraction of the cost of purchasing a
mainframe. In 1998, Quickbooks was launched. It soon dominated the market for day-to-day
bookkeeping. Today, over 4.5 million companies use Quickbooks, making it the most popular
accounting program in the U.S. 
Optical character recognition (OCR) and intelligent data capture (IDC) 
Another shift in the history of accounting occurred in early 2000. The financial world
experienced the entry of Advanced Data Capture: Optical Character Recognition (OCR) and
Intelligent Data Capture (IDC) technology, which enables the automation of the accounts
payable process. Instead of manually entering the information, key bits of data – such as the
PO number, amount or date – are digitally captured and populated in a variety of index fields.
Pre-set templates for commonly structured documents enable information to be automatically
entered into the system. Customized business rules can be applied to add automation to the
process from start to finish. Today companies are increasing their AP efficiency with
benchmarks based on robust technology that identifies and tracks complex factors that impact
the accounts payable workflow. Powerful performance dashboards and benchmarking
capabilities improve the AP processes continuously. Analytics tools can monitor key
performance indicators (KPIs) touchlessly,compare automation levels against real-world

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 benchmarks, leverage best practice workflows, and consult experts for ongoing
improvements. 
Artificial intelligence and the future of accounting 
A 2018 study by Atherton Research predicted that accounting tasks, as well as payroll, tax,
banking, and audits, would be completely automated using AI-based technologies by 2020.
And indeed, in the two years since the release of the study, AI has played an increasingly
important role in the accounting industry, bringing with it both opportunities and challenges. 
Rest assured that artificial intelligence will not eliminate accountants, however. Stephanie
Weil, CEO of Accounteam, a Silicon Valley-based accounting firm, explained, “Having
machines to do all these tedious and repetitive tasks could sound scary for many accountants
because they are also very time-consuming and thus very lucrative… [but] if the AI system is
well-configured, it can eliminate accounting errors that are generally hard to find and thereby
reduce our liability and allows us to move to a more advisory role.” 
The history of accounting is in a continuous state of evolution, improving accuracy, achieving
optimum efficiency, and accommodating the growth of business and commerce around the
world. AP processes are simplified and automated, giving the AP team more time to devote to
the analytical and administrative functions that benefit the C-suite and the company at large.
By studying the past, accounting professionals can recognize and address the ongoing changes
that occur within this essential industry, thereby boosting its value. 

Section3: accounting cycle

The accounting cycle is the process of accepting, recording, sorting, and crediting payments
made and received within a business during a particular accounting period. Companies
generally balance their books each quarter and then again at year-end, though others may
prefer to settle the books every day or every week – that’s a lot of work, but it can be done if
you choose to. Based on the transactions recorded as part of the accounting cycle, financial
statements such as cash flow reports, profit and loss statements, and balance sheets can be
prepared. Once all the business accounts have been balanced, they are closed out for that
period and new ones created for the next accounting period.

10 Steps of Accounting Cycle are:

1. Analyzing and Classify Data about an Economic Event.

2. Journalizing the transaction.
3. Posting from the Journals to General Ledger.
4. Preparing the Unadjusted Trial Balance.
5. Recording Adjusting Entries.
6. Preparing the Adjusted Trial Balance.
7. Preparing Financial Statements.
8. Recording Closing Entries.
9. Preparing a Closing Trial Balance.
10. Recording Reversing Entries.

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 1/Analy
zing and Classify Data about an Economic Event

Identifying the transactions from the events is the first step in the accounting process. Events
are analyzed to find the impact on the financial position or to be more specific the impacts on
the accounting equation. Documents such as; a receipt, an invoice, a depreciation schedule,
and a bank statement, etc. provide evidence that an economic event has actually occurred.

2/Journalizing the transaction

Transactions having an impact on the financial position of a business are recorded in the
general journal. In the general journal, the transactions are recorded as a debit and a credit in
monetary terms with the date and short description of the cause of the particular economic
event.

3/Posting from the Journals to the General Ledger

Transactions recorded in the general journal are then posted to the general ledger accounts.
The accounts classify accounting data into certain categories and they are recorded in general
journal entries according to that classification.Depending on the frequency of the transactions
posting to ledger accounts may be less frequent.

4/Preparing the Unadjusted Trial Balance

To determine the equality of debits and credits as recorded in the general ledger, an
unadjusted is prepared. It is a way to investigate and find the fault or prove the correctness of
the previous steps before proceeding to the next step.Unadjusted trial balance makes the next

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steps of the accounting process easy and provides the balances of all the accounts that may
require an adjustment in the next step.The unadjusted balance sheet is for internal use only.

5/Recording Adjusting Entries

Adjusting entries ensure that the revenue recognition and matching principles are followed.
To find the revenues and expenses of an accounting period adjustments are required.Adjusting
entries are required to be is because a transaction may have influence revenues or expenses
beyond the current accounting period and to journalize to the events that not yet recorded.

6/Preparing the Adjusted Trial Balance

An adjusted trial balance contains all the account titles and balances of the general ledger
which is created after the adjusting entries for an accounting period have been posted to the
accounts.It is an internal document and is not a financial statement.It helps to create the
income statement and balance sheet and provide enough information for preparing the cash
flow statement.

7/Preparing Financial Statements

Financial statements are prepared from the balances from the adjusted trial balance. The
financial statements are made at the very last of the accounting period.Cash flow
statement, income statement, balance sheet and statement of retained earnings; are the
financial statements that are prepared at the end of the accounting period.This is the output of
the accounting process, which is used by the interested parties both within and out of the
organization.

8/Recording Closing Entries

At the end of an accounting period, Closing entries are made to transfer data in the temporary
accounts to the permanent balance sheet or income statement accounts.

Transferring the balances of the temporary accounts or nominal accounts (e.g. revenue,
expense, and drawing accounts) to the owner’s equity or retained earnings account is used
because these types of accounts only affect one accounting period.

9/Preparing a Closing Trial Balance

To make sure that debits equal credits, the final trial balance is prepared. As the temporary
ones have been closed only the permanent accounts appear on the closing trial balance to
make sure that debits equal credits.

10/Recording Reversing Entries

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Posit closing entries is an optional step of the accounting cycle. A reversing journal entry is
recorded on the first day of the new period for avoiding double counting the amount when the
transaction occurs in the next period. The primary objective of the accounting cycle in an
organization is to process financial information and to prepare financial statements at the end
of the accounting period. An accounting cycle is a continuous and fixed process that needs to
be followed accordingly. Maintenance of the continuity accounting cycle is important.

Section 4:the role of accounting in business

Management Accounting

Management accounting plays a major role in helping managers carry out their
responsibilities. Because the information that it provides is intended for company-wide use,
the format for reporting it is flexible. Reports are tailored to the needs of individual managers,
and their function is to supply relevant, accurate, timely information in a format that will aid
managers in making decisions. In preparing, analyzing, and communicating such information,
accountants work with individuals from all functional areas of an organization.

Financial Accounting

Accountants prepare the financial statements—including the income statement, the balance

sheet, and the statement of cash flows—that summarize a company’s past performance and
evaluate its financial condition. In preparing financial statements, they adhere to a uniform set
of rules called generally accepted accounting principles (GAAP): principles for financial
reporting that are established by an independent agency called the Financial Accounting
Standards Board (FASB). Knowing that financial statements have been prepared according to
GAAP assures users that reported information is accurate. They’re also confident that they
can compare statements from one company to those of another in the same industry. (We’ll
examine financial statements much more closely later in the chapter.)

Who Uses Financial Accounting Information?

Let’s identify some of the users of financial statements and find out what they do with the
information that they gather from these statements.

Owners and Managers

In summarizing a company’s transactions over a specified period, financial statements are

report cards for owners and managers. They show whether the company made a profit and
furnish other information on the firm’s financial condition. They also supply information that
managers and owners can use to take corrective action where needed.

Investors and Creditors

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Investors and creditors furnish a company with the money it needs to operate. If you lent
money to a friend to start a business, you’d want to know how it was doing. Investors and
creditors feel the same way. They study financial statements to assess a company’s
performance and to help them make decisions about continued investment. They know that
it’s impossible to make smart investment and loan decisions without an accurate report on an
organization’s financial health.

Government Agencies

Businesses are required to provide financial information to a number of government agencies.

Publicly owned companies whose shares trade on one of the stock exchanges must provide
annual financial reports to the Securities and Exchange Commission (SEC), a federal agency
that regulates the trade of stock. Companies must also provide financial information to local,
state, and federal taxing agencies, including the Internal Revenue Service.

Other Users

There are a host of other external users with an interest in a company’s financial statements.
Suppliers, for example, need to know whether the company to which they sell their goods is
having trouble paying its bills or even at risk of going under. Employees and labor unions are
interested because salaries and other forms of compensation are dependent on an employer’s
performance.

Chapter 2 : Financial auditing

Section 1: The evolution of financial audit

 Historical of auditing:
The word “audit” comes from the Latin word audire, meaning “to hear” “to listen”. According
to Flint (1988), audit is asocial phenomenon which serves no purpose or value except of its
practical usefulness and its existence is wholly utilitarian. Wang (2004) explained financial
audit to mean the process of reconfirming of self-identity, self-measurement and self-edit on
financial accountability of management. Cañibano (1993) defines audit as being, in general
terms, to examine and check information, check information, register, processes, circuits,
having as an object to express an opinion over the beneficiations and its viability.
According to Power (1999), auditing refers to a systematic and independent examination of
books, accounts, documents and vouchers of an organization to ascertain how far the financial
statements present a true and fair view of the concern. 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 those assertions and established
criteria and communicating the results to interested users (Raffa, 2003).

 The evolution of auditing:

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A prominent work in the examination of history of auditing is the work of Lee and Azham
(2008), they divided the history into five chronological periods of; before 1840’s, 1840s-
1920’s, 1920’s – 1960’s and 1960’s - date. Their observations are summarized as follows:
 Before 1840’s
The activities of the auditors can be summarized in this period as follows:
● There was no structured business and as such no formal internal control was
established
● Lee and Azham (2008) observed that the auditing at the time was restricted to
performing detailed verification of every transaction. Thus, the concept of testing or
sampling was not part of the auditing procedure.
● Fitzpatrick (1939) opined that the audit objective in the early period was primarily
designed to verify the honesty of persons charged with fiscal responsibilities.
● The sole duty of auditors was to detect fraud. He was seen as a bloodhound and not a
watchdog (Police man theory)

 1840’s – 1920’s
The Industrial Revolution of the United Kingdom was between this period and it contributed
immensely to the expansion of businesses and subsequently evolution of the role of auditors.
The contributions of this period to the field of auditing are summarized as follows:
● The Joint Stock Companies Act was passed in UK in the year 1844 providing for the
appointment of auditors to check the account of companies.
● Porter, Simon, &Hatherly (2005) observed that the duties of auditors during this
period were influenced by the decisions of the courts
● Leung, Coram, Cooper, Cosserat, & Gill (2004) explained the objectives of auditing in
accordance with the book of Dicksee (1892) as:
✔ the detection of fraud;
✔ the detection of technical errors,
✔ the detection of errors of principles
 1920’s – 1960’s
During this period, Porter (2005) explained that as companies grew in size, the separation of
the ownership and management functions became more evident. Thus, agency theory was
evident. The following are the main activities of this period:
● Internal control functions of the organization started as a result of inflow of funds
from investors to companies, and the existence of functioning financial markets.
● The audit function was mainly to provide credibility to the financial statements
prepared by company managers for their shareholders. Hence, lending credibility
theory was developed and the primary objective of an audit function changed to
adding credibility to the financial statement from the detection of fraud and errors.

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 ● Queenan (1946) explained that the concept of materiality was used in this period.
Also, Brown (1962) observed that sampling techniques were used in auditing during
this period was due to the voluminous transactions involved in the conduct of business
by large corporations operating in widespread locations. It was no longer practical for
auditors to verify all the transactions.
● Porter, et al (2005) highlighted the major characteristics of the audit approach during
this period, among others, to include:
-reliance on internal control of the company and sampling techniques were used;
-audit evidence was gathered through both internal and external source;
-emphasis on the truth and fairness of financial statements;
-gradually shifted to the audit of Profit and Loss Statement but Balance Sheet remained
important;
-and physical observation of external and other evidence outside the “book of account”
 1960’s – 1990’s
According to Davies (1996), auditing had undergone some critical developments in this
period. He explained that in the earlier part of this period, a change in audit approach can be
observed from “verifying transaction in the books” to “relying on system”. Such a change was
due to the increase in the number of transactions which resulted from the continued growth in
size and complexity companies where it is unlike for auditors to play the role of verifying
transactions. As a result, Lee and Azham (2008) explained that auditors in this period had
placed much higher reliance on companies’ internal control in their audit procedures.
Furthermore, auditors were required to ascertain and document the accounting system with
particular consideration to information flows and identification of internal controls. When
internal control of the company was effective, auditors reduced the level of detailed substance
testing.
Salehi (2007) observed that in the early 1980, there was a readjustment in auditors’
approaches where the assessment of internal control systems was found to be an expensive
process and so auditors began to cut back their systems work and make greater use of
analytical procedures. An extension of this was the development during the mid-1980s of
risk-based auditing (Turley and Cooper, 1991). Risk-based auditing is an audit approach
where an auditor will focus on those areas which are more likely to contain errors. To adopt
the use of risk-based auditing, auditors are required to gain a thorough understanding of their
audit clients in term of the organization, key personnel, policies, and their industries (Porter,
et al., 2005) Hence, the use of risk-based auditing had placed strong emphasis on examining
audit evidence derived from a wide variety of sources, that is both internal and external
information for the audit client.
 1990’s – present
This period is characterized by the following:

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 ● Adoption of the business risk approach in turn enhances auditor’s ability to fulfill these
responsibilities (Porter, et al., 2005).
● The ultimate objective of auditing is to lend credibility to financial and non-financial
information provided by management in annual reports;
● Audit firms also provide consultancy services to businesses whereby, investigative
arm of audit was separately done. The birth of forensic accounting.
● Introduction of Computer Assisted Audit Techniques (CAATs) that facilitated data
extraction, sorting, and analysis procedures (Lanza, 1998)

Section 2 : The different types of audit

3 primary types of audits performed by CPAs (Certified Public Accountant) are:
● Financial audit,
● Operational audit,
● Compliance audit.
The latter two services are often called audit activities, even though they are most similar to
assurance and attestation services.

 Financial Audit
Financial audit, also known as external audit and the statutory audit, involves the examination
of the truth and fairness of the financial statements of an entity by an external auditor who is
independent of the organization by a reporting framework such as the IFRS.
Company law in most jurisdictions requires an external audit on an annual basis for
companies above a certain size.

 Operational Audit
The operational audit also referred to as internal audit, is a voluntary appraisal activity
undertaken by an organization to assure the effectiveness of internal controls, risk
management, and governance to facilitate the achievement of organizational objectives.
Unlike an external audit, whose scope is primarily restricted to matters that concern the
financial statements, the scope of work of an internal audit is very broad. It can encompass
any matters which can affect the achievement of organizational objectives.

 Compliance Audit
In many countries, companies are required to conduct specific audit engagements other than
the statutory audit to comply with the requirements of particular laws and regulations.

Other Types of Audit:

In addition to the primary types of audits discussed above, there are some other types of
audits, which are discussed below:

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Internal audit
Internal audits take place within your business. As the business owner, you initiate the audit
while someone else in your business conducts it.
Businesses that have shareholders or board members may use internal audits as a way to
update them on their business’s finances. And, internal audits are a good way to check in on
financial goals.
Although there are many reasons you may conduct an internal audit, some common reasons
include to:
o Propose improvements
o Monitor effectiveness
o Make sure your business is compliant with laws and regulations
o Review and verify financial information
o Evaluate risk management policies and procedures
o Examine operation processes

External audit
An external audit is conducted by a third party, such as an accountant, the IRS, or a tax
agency. The external auditor has no connection to your business (e.g., not an employee). And,
external auditors must follow generally accepted auditing standards (GAAS).
Like internal audits, the main objective of an external audit is to determine the accuracy of
accounting records.
Investors and lenders typically require external audits to ensure the business’s financial
information and data is accurate and fair.
Environmental and Social Audit
Environmental and Social Audits involve the assessment of environmental and social
footprints that an organization leaves as a consequence of its economic activities.
The need for environmental auditing is increasing due to a higher number of companies
providing environment and sustainability reports in their annual report describing the impact
of their business activities on the environment and society and the initiatives taken by them to
reduce any adverse consequences.
Information system audit
Information systems audits mostly impact software and IT companies. Business owners use
information system audits to detect issues relating to software development, data processing,
and computer systems.
This type of audit ensures the system provides accurate information to users and makes sure
unauthorized parties do not have access to private data.

16
Also, IT and non-software businesses should regularly conduct mini cybersecurity audits to
ensure their systems are secure from fraud and hackers.
Tax Audit
A tax audit is an analysis of the tax returns submitted by an individual or business entity, to
see if the tax information and any resulting income tax payment is valid. These audits are
usually targeted at returns that result in excessively low tax payments, to see if an additional
assessment can be made. If the taxpayer disagrees with the outcome of a tax audit, there is an
appeal process that may overturn the initial finding.
Payroll audit
A payroll audit examines your business’s payroll processes to ensure they are accurate. When
conducting payroll audits, look at different payroll factors, such as pay rates, wages, tax
withholdings, and employee information.
Payroll audits are typically internal. Conducting internal payroll audits helps prevent possible
external audits in the future. Businesses should conduct internal payroll audits annually to
check for errors in their payroll processes and remain compliant.
In micro-enterprises as well as in the largest multinationals, the financial decision has never been
so decisive.
The financial decision has never been so decisive. Finance has become a favourite area for those
For those who see numbers as a quasi-divine power, capable of working miracles for those who
know how to venerate them.
Power, capable of working miracles for those who know how to worship them.
Financial planning, development and control are all areas that haunt top decision-makers
Haunts the greatest decision-makers and is constantly being perfected with the sole aim of to
master the numbers and avoid unpleasant surprises.
This might seem at first sight to be an ironic description of the finance business, but it is more but
it is more a tribute to what is now considered the pillar of success of any business.
Pillar of success for any company. It is in this sense that we have taken the liberty of devoting
this to devote this preliminary section to it.
However, the sphere of money is also, and often moreover, associated with Fraud and
embezzlement, so control is a more important step in the monitoring and proper functioning of
for the monitoring and proper functioning of any organisation.
The notion of control, which is set to grow in the second decade of this century, has become
The concept of control, which is set to gain momentum in the second decade of this century, has
been anchored in management methods under the term audit.

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This term comes from the English verb "to audit", which means to control and verify.
Originally, auditing was a critical examination to check that the company's activity was correctly
reproduced on the
activity is correctly reflected in the accounting records in accordance with a to a certain
accounting standard.
Indeed, the need to verify accounting and financial information was felt very early on, from first
internally and then externally, as a way for the State to ensure that the Way for the State to ensure
that companies apply the legislative standards imposed on them.
Imposed on them. This mission will generally be entrusted to Auditors, state officials or duly
authorised contractual auditors. Duly authorised.
However, this field no longer stops at the simple auditing of accounts, often is often a prerequisite
for an operational audit designed to provide advice and recommendations.
Recommendations based on an analysis of the risks and deficiencies of the system or a
management audit which aims to judge a management operation.

Section 3 : The main objective of financial statement audit

 What is a financial audit
The term financial audit is often used to refer to the accounting and financial audit. Any entity
that keeps accounts may be obliged to do this in the event of an audit, or may choose to carry
out an accounting and financial audit itself, for example to assess its financial risks. It
involves examining each accounting transaction and assessing the financial state of the
company
An audit implies examination, measurement and assessment: the use of a professional expert,
an auditor, often external to the company for reasons of impartiality, is necessary in order to
make a judgement. This professional judgement is an expert's opinion based on verifications,
as well as on reference systems. Are the company's accounts consistent with those reported?
What is the state of health of the company's finances? How can the sincerity and accuracy of
the accounts be assessed in order to certify them? What is the purpose of this financial audit:
to reassure shareholders or to convince investors? Or both?
Why conduct a financial audit? What is the purpose? Although auditing is synonymous with
checking and/or monitoring accounts at all stages of verification and inspection, it can make a
company look critical. Therefore, auditing can meet certain challenges. There are several
contributions. The accounting and financial audit allows you to: Violation found Evaluate the
observed elements and pay attention to the adequacy of the repository, Identify financial risks,
anomalies and their respective nature, Benefit from the feedback of each participant in the
company, Understand how you work together and take a step back, Improve your current
system, There are arguments to convince new investors, Reporting activities sometimes
reassure shareholders and so on.

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Components of a legal audit Definition and objectives of a legal audit For external financial
audits, legal audit procedures are the most common. And there are good reasons for this: for
SA, some SAS and other entities (associations, Sarl, etc.), it is a legal obligation. In this case,
an auditor is appointed for 6 years. The purpose of the statutory audit is to express an opinion
confirming that the company's accounts accurately reflect its economic conditions. Sworn
experts, auditors, including the results of the previous year.
-basic points to remember:
The auditor is responsible for verifying the financial information provided to the shareholders,
He is responsible for certifying the annual accounts, He has published his report to the
shareholders (will be published in the registration form), His audit and observation work can
prevent possible risks.
Overall Objectives of the Auditor. In conducting an audit of financial statements, the overall
objectives of the auditor are: (a) To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial reporting
framework; and (b) To report on the financial statements, and communicate as required by the
ISAs, in accordance with the auditor’s findings. 12. In all cases when reasonable assurance
cannot be obtained and a qualified opinion in the auditor’s report is insufficient in the
circumstances for purposes of reporting to the intended users of the financial statements, the
ISAs require that the auditor disclaim an opinion or withdraw (or resign)3 from the
engagement, where withdrawal is possible under applicable law or regulation.

 Sufficient Appropriate Audit Evidence and Audit Risk

Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in
nature and is primarily obtained from audit procedures performed during the course of the
audit. It may, however, also include information obtained from other sources such as previous
audits (provided the auditor has determined whether changes have occurred since the previous
audit
That may affect its relevance to the current or a firm’s quality control procedures for client
acceptance and continuance. In addition to other sources inside and outside the entity, the
entity’s accounting records are an important source of audit evidence. Also, information that
may be used as audit evidence may have been prepared by an expert employed or engaged by
the entity. Audit evidence comprises both information that supports and corroborates
management’s assertions, and any information that contradicts such assertions. In addition, in
some cases, the absence of information (for example, management’s refusal to provide a
requested representation) is used by the auditor, and therefore, also constitutes audit evidence.
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and
evaluating audit evidence.

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Section 4 : The steps of financial audit mission
 Which financial auditor to choose? Internal or external audit?
Internal auditor By definition, internal auditors are usually engaged in the business of the
company in a large group, and the company allows for the establishment of an audit
department organisation. The mission of the internal auditor is to ensure compliance with the
legal and statutory framework and to strictly implement the procedures prescribed by the
management. Thus, he/she communicates with the employees, observes the benefits of the
programme, and sometimes even the limitations of the programme, and reports his/her
observations to the management, especially in terms of organisational control. Therefore, he
must have a complete understanding of the company in order to go the necessary distance, as
he can also make his own suggestions, such as new methods or work organisation to improve
productivity, and even point out malfunctions and recommend alternatives.
 The external auditor
Unlike the internal auditor, the external auditor does not work within the company. They are
commissioned by the company to carry out a financial audit of the company: the aim is to
evaluate the finances and detect anomalies or weaknesses.
The fact that the external auditor is not part of the company gives him several advantages:
The auditor is perceived as an external player by the employees and not as a "spy" of the
hierarchy,
The company has a real outside perspective, impartial and without potential conflicts of
interest.

 What alternative to financial auditing for startups?

An audit firm or a financial rating agency?
How do you get out of the costly pattern of audit firms or rating agencies such as Moody's,
Fitch, Standard and Poor's, when you are a digital start-up? How do you emerge when these
agencies base their assessment mainly on debt? How do you stay agile, mobile and fast when
you are a SaaS startup, or digital company?
Aware of the new world in which these companies are evolving, the financial rating agency
Exaegis reverses the model at all levels:
Its analysis tool, the online service RateAndGo, now evaluates the marketing, the business
model and the financing stage,
The rating system considers how the team reacts and manages the growth of the company,

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It goes beyond the monitoring tool and allows for readjustment of the development strategy in
the short and medium term; its rating service is free!
In order to generate financing and investment for digital companies and SaaS startups,
Exaegis evaluates and restores trust capital. This involves providing precise and reliable
indicators of entrepreneurial investment, financial solvency and the ability to honour the
service commitment over time.
Credibility objective: any start-up can be evaluated in a totally objective way, and on non-
financial criteria!
A neutral view is indeed essential to legitimise the strengths and weaknesses of an
entrepreneurial project.

Chapter 3: audit and the external environment

Section 1: Audit and technology
Technology offers the ability to both improve the quality of audit and to add value to it: audit
is moving from being a reactive, backward-looking exercise to a proactive, predictive,
forward-looking one, working in real time. And as such, it provides an opportunity to help
businesses by providing timely insights.
Developments in artificial intelligence (AI), data analytics and blockchain technologies are
having a significant impact on audit and finance. Globally, companies, the audit profession,
professional bodies and regulators are increasing their focus on the impact of technology.
There are clear benefits that technology can bring from operational efficiency to financial
inclusion and greater insights. However, alongside these benefits comes a range of risks,
many of which are still not fully understood. Technology is changing the way business is
conducted and data is analysed. There is an increasing focus on data management; ‘Know
Your Data’ (KYD) is the new buzzword replacing ‘Know Your Client’ (KYC). Artificial
intelligence, blockchain and data analytics are game changers for both the finance and
accounting sector and the audit profession, transforming the roles of both finance
professionals and auditors. The advent of cloud computing and cloud storage has opened up
the possibilities of collecting and analysing data on a previously unimaginable scale.
Advances in technology are changing the day-to-day business operations and transforming
firms’ business models.
The CFO role is no longer limited to oversight of finance and preparation of historic accounts;
technology now allows access to vast amounts of data which, if analysed appropriately, can
offer an extraordinary view of the organisation, allowing the CFO to play a central role in the
advancement and execution of strategy. Going beyond the confines of company data allows
auditors to collect and analyse broader industry data sets that were previously inaccessible.
This enables auditors to better identify informational outliers, and increases their ability to
generate business insights and focus on business and financial reporting risk. Disruptive
technologies are also having a profound impact on the skills required of auditors, finance and
accounting professionals and regulators which has implications for educators, recruitment

21
policies and staff development needs. This briefing paper explores the diverse range of
opportunities, risks and challenges that technology brings to audit and finance functions.
The evolution of technology challenges the current value proposition of the audit. Moving to
offshoring allowed audit firms to cut costs, and now automation will enable firms to cut the
time.
For the professional services firms, the cost of developing the technology and ensuring that
the technology remains at the cutting edge is significant. Firms need to maintain this
investment by being able to pass on the cost to their clients. Although clients may push for
audit fees to be squeezed as they see the audit taking less time, Steve felt confident about the
future of audit firms, responding that, ‘A business’s profitability and sustainability is driven
through margins. As long as audit firms maintain their margins there is still a strong financial
future for them.
Given the speed of technological and digital advances, it is imperative that those in the audit
and finance profession invest in understanding and developing these technologies to benefit
their respective sectors. This is a huge challenge, particularly in audit, where the pace of
technological change, specifically the move from sample testing to 100% populations testing,
and from historic testing to real-time testing, is spearheading the need to revisit the audit
approach in an unprecedented manner.
Technology will drive down the time taken to conduct an audit, as testing becomes more
automated and conducted on a real-time basis. Views were expressed around the need to
develop new methods for calculating audit fees based on the technological resources used in
the process and the value added by audit teams who derive insight from the data. There will
be opportunities for the firms to develop more forward-looking assurance services, helping
clients to manage risk and drive growth. Technological advances which could lead to the
commoditisation of the audit, and even the disintermediation of audit firms by other
technology players, were considered potential threats of which audit firms need to remain
vigilant.

Section 2: Audit scandals

 Waste Management, Inc. Fraud Scandal, 1998
A waste management scandal sounds like a plotline from The Sopranos. Established in 1894,
Waste Management, Inc. went on to provide environmental services to almost 20 million
customers across North America, generating about $82 million in revenue by the 1970s.
However, in 1998, the many murky accounting practices of those at the very top of the Waste
Management were eventually exposed. The list of financial frauds they committed between
1992 and 1997 is almost endless and in doing so appeared to eliminate $490 million from the
company’s operating expenses, in an attempt to meet predetermined targets for earnings.
Examples of these ploys include not counting depreciation expenses on company assets such
as garbage trucks, and not recording the expenses of unsuccessful landfill development
projects. As a publicly traded company, Waste Management were required to have their
accounting books audited. For this they enlisted a large independent auditing firm, Arthur
Andersen, who had a rather cosy relationship with their board of directors. Sure enough, by
effectively bribing Arthur Andersen, any fraudulent activities were overlooked. Once the
revelations did surface, Waste Management's shareholders lost more than $6 billion in the

22
market value of their investments as the stock value tumbled by more than 33%. In the end,
the company paid $457 million to settle a shareholder class-action suit in 2003, and Arthur
Andersen was fined $7 million for its role.
 Enron Scandal, 2001
Arguably the most infamous accounting scandal of them all, the 2001 bankruptcy of Enron
had global repercussions. Once regularly considered America’s most innovative company,
Enron was a U.S. energy trading firm that grew to dominate the U.S. electricity industry,
eventually building power stations and electricity grids, providing broadband, and trading in
many other areas. However, by exploiting loopholes in the accounting rules of the time -
specifically the ‘mark-to-market’ system of valuing assets by the most recent market price -
Enron’s CFO and other executives booked assets as profit without any actual value. One
example that explains this method is when Enron and Blockbuster Video signed a 20-year
deal to introduce an on-demand entertainment service by the end of the year. Following
several pilot projects, Enron recognised in their books estimated profits of more than $110
million from the deal, despite the explicit misgivings of analysts about the viability of the
service. The service didn’t work and Blockbuster pulled out of the deal, but Enron continued
to recognise the future profits from the deal, even though it had actually resulted in a loss. To
maintain the deception, a big auditing firm – you guessed it – Arthur Andersen were brought
in and encouraged to turn a blind eye, perhaps due to their significant audit and consultancy
fees, and even shred documents related to its audit of Enron. Once these debts were revealed,
the company collapsed, removing $74 billion of shareholder funds, costing the pensions and
jobs of thousands of employees. Also, this was the final straw for the auditing firm Arthur
Andersen, which folded following this and many other high-profile illegalities.

Section 3: The Big Four

 History of the Big Four
In 1910, the “Big Four” were still made up of eight smaller accounting firms: Arthur
Andersen, Coopers and Lybrand, Ernst & Whinney, Deloitte Haskins & Sells, Peat Marwick
Mitchell, Price Waterhouse Touche Ross, and Arthur Young. Now, however, the original
firms have merged and consolidated into four professional service conglomerates:
PricewaterhouseCoopers (PwC), Deloitte, Ernst & Young (EY), and KPMG. [1] Though a
third of their business consists of audits on Fortune 500 companies, 65 percent of their
revenue is derived from financial consulting services concerning regulations, financial
transactions, mergers, acquisitions, business strategy, and operations—among other services.
Historically, there has been a “university to Big Four pipeline,” according to Bloomberg
BNA. Since the infamous Enron scandal of 2002, wages have stagnated and labor shortages at
more traditional accounting firms have been forced higher wages than is financially lucrative
for them to be able to compete with major conglomerates for new employees. [2] If the Big
Four accounting firms aren’t merely accounting firms, why is that so? And in what other ways
is the industry changing?
 From accounting to consulting
The Big Four conglomerates focus primarily on consulting, now, because the nature of
business is changing. In addition to tax reporting becoming more automated via artificial
intelligence (AI), cloud computing, and tax reporting software, there are also the social

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implications and sometimes legal ramifications that result from auditors and clients working
together. The Economist writes, “The perception that auditors and clients are hand-in-glove,
fair or not, is a reason why shareholders of Bear Stearns sued Deloitte along with the defunct
bank.” moreover, the European Commission in Brussels recently proposed creating audit-
only firms in the European Union, but European Parliament opposed the idea. Since the Big
Four conduct so much business related to wealth management and tax consultation, rather
than auditing, this conflation will likely remain an issue. Meanwhile, multinational
corporations and high-income individuals have global stock portfolios and file international
tax returns. They are in need of highly-specialized tax consultants to help minimize tax
payments to the IRS, as well as for individuals to maximize their return on investments. But
what are the ongoing concerns and mitigating factors? And how is technology changing the
role of accountants and taxation law professionals?

Chapter 4: Similarities between Accounting and Auditing:

Many of the basic processes of both accounting and auditing are similar.
-They are both related to finance
-Both need a thorough knowledge of accounting basics and principles.
-Both are generally done by the persons with an accounting degree.
-Both use essential procedures and techniques of book-keeping, computation and analysis.
-Both accounting and auditing strive to ensure that the financial statements and records
provide a fair reflection of the actual financial position of an organization. 
-Both are imposed by Moroccan law
 Accounting is imposed by: Act No. 9-88 on the accounting obligations of traders
Any natural or legal person having the status of merchant within the meaning of the
trade shall be required to keep accounts in the forms prescribed by this Law
 auditing
o SARL 1 auditor when the turnover exceeds 50000DH
o SA( Law 17-95): - Companies making public offerings are required to appoint
at least two statutory auditors.
- Companies not making public offerings are required to j
appoint at least one auditor
Accounting and auditing are both related to finance, but they are not the same thing, and the
distinction between them is important to understand

 Difference between Accounting and Auditing:

Definition:

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Accounting is keeping records of the financial transactions and preparing financial statements;
but auditing is critical examination of the financial statements to give an opinion on their
fairness.

Timing:
Accounting is carried out on continuous basis with daily recording of financial transactions;
while auditing is basically a periodic process and carried out after the preparation of final
accounts and financial statements, usually on yearly basis.
Beginning:
Accounting starts usually where book-keeping ends; while auditing always starts where
accounting ends.
Period:
Accounting mainly concentrates on the current financial transactions and activities; while
auditing concentrates on the past financial statements.

Coverage:
Accounting covers all transactions, records and statements having financial implications;
while auditing mainly covers final financial statements and records.
Level of Detail:
Accounting is very detailed and captures all details related to financial transactions, records
and statements; while auditing generally uses financial statements and records on sample
basis
Type of Checking:
Accounting involves checking and verifying details related with all financial statements and
records; while auditing may be carried out through test checking or sample checking.

Focus:
The primary focus of accounting is to accurately record and present all financial transactions
and statements; while the primary focus of auditing is to verify the accuracy and reliability of
the financial statements, and to judge whether the financial statements provide a true picture
of the actual financial position of the entity.

Objective:

25
Objective of accounting is to determine the financial position, profitability and performance;
while objective of auditing is to add credibility to the financial statements and reports of the
company.

Legal Status:
Accounting is governed by Accounting Standards with some degree of discretion; but
auditing is governed by Standards on Auditing and does not provide much flexibility.

Performed by:
accounting is performed by accountants; while auditing is performed generally by qualified
auditors.

Status:
Accounting is usually carried out by an internal employee of the company; but auditing is
carried out by an external person or independent agency.

Appointment:
Accountant is appointed by the management of the company; while the auditor is appointed
by the shareholders of the company, or a regulator.

Qualification:
Any specific qualification is not compulsory for an accountant; but some specific
qualification is compulsory for an auditor.

Remuneration Type:
Accounting is carried out by a company employee who gets a salary; while a specific auditing
fee is paid to the auditor.

Remuneration Fixation:
Accountant’s remuneration, i.e., salary is fixed by the management; while auditor’s fee is
fixed by the shareholders.

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Scope Determination:
The scope of accounting is determined by the management of the company; while the scope
of auditing is determined by the relevant laws or regulations.

Necessity:
Accounting is necessary for all organizations in the day-to-day or routine operations; while
auditing is not necessary in the day-to-day operations.

Deliverables:
Accounting prepares financial statements e.g. Income Statement or P/L, Balance Sheet, Cash
Flow Statement, etc.; while auditing provides Audit Report.

Report Submission:
Accounts are submitted to the management of the organization; while audit report is
submitted to the shareholders.

Guidance:
Accountants may make suggestions for the improvement of accounting and related activities
to the management; whereas auditor usually does not make suggestions, except in some cases
with specific requirements, e.g. improvement in internal controls.
Liability:
Accountant’s liability generally ends with the preparation of the accounts; while auditor has
liability after preparation and submission of the audit report.

Shareholders’ Meetings:
Accountant does not attend the shareholders’ meeting; while an auditor may attend the
shareholders’ meeting.

Professional Misconduct:
An Accountant is not usually prosecuted for professional misconduct; whereas an auditor can
be prosecuted for professional misconduct as per the applicable legal procedure.

27
Removal:
Accountant can be removed by the management; while an auditor can be removed by the
shareholders.

Conclusion

As we can see in what mentioned above, that there are few similarities between the
accounting and the auditing, however there are a lot of differences, because accounting is
more detailed than auditing.
Thus, we can have as a conclusion that despite those differences between auditing and
accounting, those two fields are inseparable, because one of them accomplishes the other.
And we should know that those differences are necessary for the company to achieve its goals
and to ensure more effective production and more profit and earning.
Also, we noticed that even that auditing faced some trouble ns and scandals during history,
the companies and organizations cannot eliminate it from its systems, because it represents a
good and important tool for management, leadership and control of the company.

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