“Life can only be understood backwards; but it must be

lived forwards”

This quote metaphorically reflects the idea of accounting

and auditing. The company can’t presume it’s year without
making each step forwardly in accounting. However, it
can’t go on without reviewing what did it do, and here
comes auditing.

Let’s begin now with knowing a little bit more the origin
and evolution of auditing.

The Origin

The term audit is derived from the Latin term ‘audire’,

which means to hear.

In early days an auditor used to listen to the accounts read

over by an accountant in order to check them. Auditing is
as old as accounting. It was in use in all ancient countries
such as Mesopotamia, Greece, Egypt, Rome, U.K. and
India. The Vedas contain reference to accounts and
auditing. Arthasashthra by Kautilya detailed rules for
accounting and auditing of public finances.

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The original objective of auditing was to detect and
prevent errors and frauds Auditing evolved and grew
rapidly after the industrial revolution in the 18TH century
with the growth of the joint stock companies the
ownership and management became separate.
The shareholders who were the owners needed a report
from an independent expert on the accounts of the
company managed by the board of directors who were the
employees.
The objective of audit shifted and audit was expected to
ascertain whether the accounts were true and fair rather
than detection of errors and frauds.

The Big Four

The Big four refers to the four largest accounting firms in

the world. These firms provide an extensive range of
accounting and auditing services including external audit,
taxation services, management and business consultancy,
and risk assessment and control. The big four are PwC,
Deloitte, E&Y and KPMG.

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PwC PricewaterhouseCoopers, PwC is the second
largest accounting firm in terms of revenue. It
employs more than 276,000 professionals in 158 countries
around the world. The company was formed by the merger
of two large accounting firms – Price Waterhouse, and
Coopers & Lybrand. The two decided to merge in 1998 and
dedicated themselves to provide services of value while
establishing and maintaining good customer relations.

Deloitte was founded by William Delloitte in 1845.

It went through a series of merges and
reorganizations but kept its brand name along with its
quality standards and company values. Now, it emerges as
one of the most successful brands in the world.

E&Y Ernst & Whinney merged witth Arthur Young

to create Ernst & Young in 1989. Ernst &
Young is a global organization of member firms in 150
countries. It employs people equipped with professional
skills and values of integrity, respect, teamwork, enthusiasm
and motivation. These form the core values of Ernst &
Young.

KPMG KPMG is a global network of accounting

firms providing audit, tax, advisory, special
interest and industry-specific services. It employs
approximately 219,000 professionals working together to
provide quality service in 154 countries around the world.

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 The Comparison
I. Meaning .
Accounting
It is the process of systematically recording, measuring and
communicating information to prepare financial statements
that represent a company’s financial position and performance
to users who require such information.
The financial statements help the external users to take
decisions regarding the company like: Creditors & investors.
It also helps the internal users who works in the company in
making their decisions like: CFO, CEO.
Auditing
Auditing is an objective examination and evaluation of the
financial statements of an organization to make sure that the
financial records are a fair and accurate representation of the
transactions they claim to represent.

The audit can be conducted internally by employees of the

organization or externally by an outside Certified Public
Accountant (CPA) firm.

Ex. CPAs are in charge of examining the business and

making sure the financial statements accurately represent its
financial activities for the period.

Ex. when your parents review the shopping list you wrote
with the price tag, that’s auditing!

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 II. Standards .

Accounting
 Generally accepted accounting principles (GAAP) refer
to a common set of accounting principles, standards and
procedures.
GAAP aims to improve the clarity, consistency and
comparability of the communication of financial
information.
 International Financial Reporting Standards (IFRS
are issued by the International Accounting Standards
Board (FASB),
 IFRS were established to create a common
accounting language so that businesses and their
financial statements can be consistent and reliable
from company to company and country to country).

Auditing
 Generally accepted auditing standards (GAAS) are a set
of systematic guidelines used by auditors when
conducting audits on companies' financial records.
GAAS helps to ensure the accuracy, consistency, and
verifiability of auditors' actions and reports.

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 International Standards on Auditing (ISA) is
international professional standards for the performance
of financial audit of financial information.

III. Staff titles & Description .

Accountant VS Auditor
Works for Management VS works for CPA firm
Serve Customers VS Serve Clients
 An Accountant is a member of an organization’s staff that
draws their salary from the business.
 An auditor is an independent person who is appointed for a
specific period and gets a salary from the CPA firm (The
audit fees go to the CPA firm).

IV. Responsibility .
Management’s Responsibility
o Preparation of Financial Statements.
o Establishing appropriate Internal Control.

Auditors Responsibility
o The auditor gathers appropriate and sufficient evidence.

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 o The auditor’s responsibility is to express his opinion on
the financial statements.

Ex. When your mom takes the things you got from the market
then begin to examine them, use them and finds which one is
the best one.

I. Cycle .
Accounting cycle

Auditing cycle it is actually the same steps as accounting

cycle but it’s versed, it starts backwards.

II. Output .

o Accountants are responsible for making Financial

Statements.
o Auditors should issue an Auditing Report.

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 . Quick recap .

ACCOUNTING AUDITING
System of
recording,
measuring and
Examination and
communicating
evaluation of the
information to
financial
prepare financial
statements of an
statements that
organization to
MEANING represent a
make sure that the
company’s
financial records
financial position
are a fair and
and performance
accurate to the
to users who
standards.
require such
information.

STANDARDS GAAP / IFRS GAAS / ISA

STAFF Accountant Auditor
SERVE Customer Client
Gather evidence
RESPONSIBILITY Prepare F.S.
& issue the report
Starts where the
Starts where the
CYCLE Accounting cycle
book-keeping ends
ends
Financial
OUTPUT Audit Report
Statements

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 . Types of Accounting .

Financial Accounting:
- Financial accounting involves recording transactions for
business.

- All financial statements must be prepared according to the

“generally accepting accounting principles” (GAAP).

- Financial accounting is performed to conform to external

users to analyze and make financial decisions.

- It usually presented quarterly or annually.

Managerial Accounting:
- Produces information primarily for internal use by the
company’s management.
- The information produced is generally more detailed
than that produced for external use to enable effective
organization control, planning and decision making.
- Management accounting focuses on communicating
financial and non-financial
- information to internal users such as: Managers, CEO,
CFO.
- It usually presented monthly.

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 . Types of Auditing .

Financial Audits:
Determine whether the financial statements are stated in
accordance with specified criteria (IFRS & GAAP).

Ex. fair presentation of the company’s rights and

obligations (ASSETS = LIABILITIES + O.E).

Operational Audits:
Examines an operating process to determine if
resources are being used in the most efficient and
effective way to meet the unit’s mission and
objectives and internal control reviews are a major
portion of it.
Operational audits reviews may not be limited to
accounting. They may include the evaluation of
organizational structure, production methods or
computer operations to evaluate effectiveness and
efficiency of each unit.
Efficiency:
Shows how well an organization uses its resources to
achieve its goals. (Doing things right).

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 Ex: reaching a goal with (low wasted resources),
Reaching the place quickly (low time wasted), Reaching the
specific point with a straight line (low curves)
{The WAY}
Effectiveness:
Is a measure of whether an organization achieves its
goals.(Doing the right things)

Ex: reaching a goal, reaching a specific place, reaching a

specific point.

{The GOAL}

Compliance Audits:

A compliance audit is the types of audit service that their

procedure is mainly focusing on whether the entity complying
with local law, regulation, and related rule.
A compliance audit also reviews whether an entity
complying with internal rules, regulations, policies, decisions,
and procedures.
Ex: minimum wage rate in the country, issued by
government, determine whether bank requirements
for loan continuation have been met.

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 . Types of Auditors .
External Auditors (CPA)

- External auditor is appointed by the shareholders of the

company.
- Audits performed by outside parties can be extremely
helpful in removing any bias in reviewing the state of a
company's financials.
- External auditors follow a set of standards different from
that of the company or organization hiring them to do the
work.
- He is done annually at the end of the fiscal year.
- They apply (the financial statement audit).

Internal Auditors
- Internal auditors are employed by the company.
- His work is continuous throughout the year.
- He doesn’t submit any report to the shareholders.
- His primary duty is to find the frauds and errors.
- His purpose is to analyze and improve controls and
performance.

Governmental Auditors
▪ Government auditors are employed by local, state, and
federal governmental agencies
▪ These auditors work for the U.S. Government
Accountability Office (GAO), Auditors in this office report
their findings to Congress.

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 ▪ In Egypt, the GAO work for the (Central Account
Institute), and Auditors in this office report their findings to
Parliament.
▪ They apply all the types of audit.

Internal Revenue Agent (IRA):

▪ Examines and audit the tax payers' return of individuals,
businesses and corporations to make sure that tax liabilities
have been met.
▪ This kind of audit is considered a kind of compliance
audit.
▪ They apply (The compliance audit).

. CPA Firm/services .

A ll CPAs are accountants, but not all accountants are CPAs.

It's a specialized career earned through additional training,
professional practice and further education.
CPAs can prepare and file your business’s federal, state
and/or local tax returns.
The benefits of hiring a CPA firm are that you will have a
team of highly qualified, educated and experienced
accounting professionals at your service. They can help you
scale your business and create projections and detailed
budgets to take your business to the next level.

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There’s two types of CPA services:

. Non-Assurance services .
 Tax
- CPA firms prepare tax returns for clients , almost
every CPA firm performs tax services for many
small firms.

 Book-Keeping
- Small clients with limited accounting staff rely on
CPA firms to prepare their financial statements.

 Management consulting
- CPA firms provide certain services that enable
their clients to operate their businesses more
effectively.

. Assurance services .
Assurance Services are defined as independent professional
services that improve the quality or context of information for
decision-makers.

o Attestation services of CPA

“it is a type of assurance service in which the CPA firm issues
a report about a subject matter or assertion that is made by
another party”

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  Financial statement Audit
- Management asserts that the F.S are fairly in
accordance with GAAP/IFRS and the auditor
issues a written report expressing an opinion
about the F.S are fairly stated.
- It provides high level of assurance.
- It needs high costs.
- Provides & needs large amount of evidence.

 Financial statement Review

- Management asserts the F.S are fairly stated in
accordance with GAAP/IFRS the same as the
audit but the CPA provides a lower level of
assurance for reviews.
- It provides moderate level of assurance.
- It needs lower costs than the Audit.
- It provides & needs less amount of evidence
than the Audit.
 Audit vs Review
“AUDIT’’: Positive assurance → In all material respect
the financial statements are presented fairly.

“REVIEW”: Negative assurance → Doesn’t come to our

attention that the financial statement is misstated.

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  Internal control audit
- The auditor audits the internal control of the
management which asserts that the internal
control have been implemented with
established criteria.

 Information Technology audit

- Management makes assertions about the
reliability and security of electronic info.

 Other Attestation services

CPAs provide numerous other attestation services.
Other Assurance services: CPAs also provide other
assurance services that do not meet the definition of
attestation services, But the CPA must still be
independent and must provide assurance about
information used by decision makers.

EX: ISO

Relationship between “Client, External users & Auditor”

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