What is accounting?
Accounting can be defined as the task of tracking, reporting, and subsequently analyzing financial transactions. It covers areas ranging from financial reporting to the preparation of tax returns to be filed annually. Accounting is basically a tool that helps to analyze the company’s profitability after drawing a comparison of the sales revenue and the company’s expenses over time.
The scope of accounting mainly lies in ensuring that financial statements are prepared with proper accuracy. The scope of work is perpetual and concurrent. It is very detailed work since all transactions must be included to ensure that all transactions are properly recorded.
What is auditing?
Auditing can be best defined as a function that makes sure that the information presented by the accountants is accurate. It is important to ensure that the information present in the financial statements is a real depiction of its financial position. It is considered an essential element in the overall financial reporting framework because it gives a sense of surety to the users of the financial statements that there are no material misstatements in the financial statements.
There are numerous different types of audits that companies might conduct periodically. However, the most common and perhaps the most important type of audit is a financial audit. Financial Audit is something all listed companies have to go through at least once a year to protect the shareholders’ investment in the company.
The audit scope depends on past work since the work mainly revolves around validating the past financial statements. The main objective of auditing is to ensure that financial statements have been prepared with proper accuracy. However, the work itself carried out in auditing is not as detailed as the work involved in accounting since audit work is based.
Similarities between accounting and auditing
Accounting and auditing are two different departments that exist within a company. However, it is also important to understand that certain similarities between accounting and auditing need to be understood. The similarities between auditing and accounting are summarized below:
- Both accounting and auditing require a thorough understanding of accounting and finance principles. Both accountants and auditors need to ensure that they have a strong grip over accounting principles. Whilst accountants implement these accounting standards, the auditor’s job is to ensure that these accounting principles have been correctly applied. Auditors cannot verify the efficacy of implementation unless they themselves have a sound understanding of the accounting principles.
- For accounting and auditing professionals, having an accounting background is necessary. Given that it encircles accounting concepts to check if they have been correctly applied, accountants and auditors need to have a background in accounting education.
- The endgame for both accounting and auditing is the same: preparation and presentation of the financial statements. All companies account for different transactions because they need to accurately report all the balances on the financial statements at the end of the respective years. Similarly, the auditors are also supposed to check for the accuracy of the financial statements (if they are free from material misstatements or not). Therefore, the eventual aim for both accounting and auditing is to ensure that financial statements are prepared with accuracy and reflect the company’s actual financial position.
- Accounting and auditing both follow standards. It is a strictly compliance-related procedure. For accountants, they are supposed to follow accounting standards. On the other hand, auditors are supposed to follow the International Standards of Auditing. However, accounting and auditing involve stringent processes that need to be implemented to comply with the stated rules and regulations.
Differences between accounting and auditing
Even though accounting and auditing might appear to be relatively similar functions within a company, yet it can be seen that there are a couple of differences between both these divisions. These differences are summarized below:
- Accounting is internal. Auditing is mostly external: Companies have their own internal accounting teams. In some cases, accounting might be outsourced to a third-party vendor. However, most companies have their own internal hiring for accountants that manage day-to-day accounting operations. On the other hand, audits are mostly external. Even though companies also have an internal audit department, yet year-end financial audits are supposed to be conducted by other third-party specialist auditors. These auditors have no connection (no related parties) with the accountants of the stated companies.
- The accounting process can be tailored, but the auditing process cannot be tailored: Even though companies need to follow accounting body rules (such as IFRS and GAAP), yet there is no stringent way of actually executing the accounting process. They can choose to use any accounting software they want, and they can conduct financial reporting in any manner that seems right to them. However, the format of the year-end financial statements should exactly be by the accepted layouts provided by accounting bodies.
- Accounting is necessary for all companies. Auditing might not be necessary for all companies: Accounting tends to be rudimentary for all organizations, regardless of their size and stature. However, auditing is only mandatory for organizations that are publicly listed. Companies with medium-sized operations can still choose to conduct an internal audit, although it is not liable for law. As far as accounting is concerned, it tends to be important for all organizations, regardless of their size and stature.
- Accounting targets internal efficiency and decision making, whereas auditing impacts decision making for external stakeholders: As mentioned earlier, it can be seen that accounting mainly concerns getting an idea regarding the profitability of a given company. Especially in managerial accounting, it can be seen that it is mainly used as a decision-making tool that helps companies ensure that they can target higher efficiency relating to their costing and production schedules. On the other hand, it can be seen that auditing mainly constitutes of giving audit opinions that can help external stakeholders (like shareholders) to decide whether the company is a viable investment option for them.
- Accounting is a concurrent process, whereas auditing is a periodic process: During normal business operations, accounting is carried out daily. This involves recording all the respective transactions and ensuring that all incomings and outgoings of cash from the company are recorded. On the other hand, financial year-end audits are periodic events, which only take place after a fiscal year for a company has ended. Even though auditors might undertake processes at intervals of 6 months, it is finally executed at the end of the 3 years.
- The main objective of accounting is to determine whether the company has the generated profits. On the other hand, the main objective of auditing is to ensure that the financial statements have been prepared with proper accuracy.