Difference between accounting and auditing


Learning objective:
What is the Difference between accounting and auditing?

Contents:

Definitions and meanings

Accounting:

Accounting is a profession that involves measuring and recording of financial transactions of an enterprise. Accounting involves the following:

  • Recording entries of income and expense transactions in the books of accounts of an enterprise
  • Recording entries of transactions effecting assets and liabilities of the enterprise in its books of accounts
  • Drawing up detailed financial statements of the enterprise from books of accounts

Accounting function can be performed in house by an employed accountant or can be outsourced to an accounting firm.

Accounting requires compliance with mandated accounting standards and rules. These are prescribed by accounting and regulatory boards and mandated by jurisdictional law.

Basic accounting is also followed by advanced accounting functions such as analysis of financial statements, preparation of analysis reports, preparation of budget reports etc.

Accounting can take various forms such as GAAP accounting, cost accounting and management accounting.

Auditing:

Auditing is a function which involves verifying the financial records and statements of an enterprise to determine whether they represent a true and fair view of the financial position of the enterprise.

Auditing involves the following:

  • Vouching of transactional entries in books of accounts with documentary evidence
  • Verifying the correctness of accounting treatment given to the transactions
  • Verifying whether mandated accounting standards and rules have been adhered to
  • Verifying whether financial statements drawn up from the books of accounts represent a true and fair view of the financial state of the enterprise

Auditing can be of two types – external audit and internal audit.

External audit is carried out by professionally certified auditors who are externally appointed by the enterprise. They verify the reliability of the financial statements of the enterprise. Internal audit is carried out by in house employees or outsourced professionals who verify the internal controls surrounding accounting processes of the enterprise.

Auditing is completed with preparation of an audit report which highlights the main observations of the auditor along with the auditor’s opinion on the reliability of financial statements of the enterprise.

Difference between accounting and auditing:

The main points of difference between accounting and auditing have been detailed below:

1. Meaning

Accounting primarily involves measuring and recording financial transactions of an enterprise in its books of accounts.

Auditing involves verifying the accuracy and correctness of these accounting entries and financial statements prepared on their basis.

2. Purpose

The purpose of accounting is to show the profitability and financial position of an enterprise.

The purpose of auditing is to determine whether the financial statements of the enterprise reflect a true and fair view of the financial position of the enterprise.

3. Frequency

Accounting is a continuous process which is performed everyday to record transactions.

Auditing is generally carried out specific intervals. This may be quarterly or annually depending on the jurisdictional law governing the enterprise.

4. Hierarchy

Accounting is the first step whereby books of accounts and financial statements are generated.

Auditing is the subsequent step whereby the accuracy and correctness of these books of accounts and financial statements are assessed.

5. Compliance requirements

Accounting is required to comply with accounting standards and rules.

Auditing checks compliance with accounting standards but is governed by a separate set of auditing standards and rules.

6. Performed by

Accounting function can be performed in house by an employed accountant or can be outsourced to an accounting firm. There is generally no mandatory qualification requirement.

Auditing is carried out by professionally certified auditors who are externally appointed by the enterprise. Auditors mandatory require to be certified to be able to perform an audit.

7. End result

The end result of accounting function is preparation of financial statements of the enterprise.

The end result of auditing is the preparation of audit report wherein the audit gives his opinion on the accuracy and reliability of the financial statements of the enterprise.

8. Types

Accounting can be of many forms – GAAP accounting, cost accounting and management accounting.

Auditing is primarily of two types – external audit and internal audit.

Accounting versus auditing – tabular comparison

A tabular comparison of accounting and auditing is given below:

ACCOUNTING vs AUDITING
Meaning
Recording financial transactions and preparation of financial statements there from Inspecting financial statements to verify whether they show true and fair view
Purpose
To show profitability and financial position of the enterprise To verify reliability of financial statements
Frequency
Continuous process Done at specific intervals – quarterly or annually
Hierarchy
First step prior to commencement of auditing function Subsequent step after performance of accounting function
Compliance requirements
Accounting standards and rules Auditing standards and rules
Performed by
Accountants – in-house or outsourced Auditors – professionally certified in case of external audit
End result
Financial statements Audit report
Types
GAAP accounting, cost accounting, management accounting External audit and internal audit

Conclusion:

Both accounting and auditing are integral functions of the finance aspect of an enterprise. Accounting and auditing complement each other – with accounting being meaningless without auditing to verify its reliability and auditing being impossible without completion of accounting function.

Accounting in adherence to standards is generally regulated by accounting and regulatory boards such as the Securities and Exchange Commission and Financial Accounting Standards Board in the USA. Auditing similarly is also regulated by auditing boards such as the Public Company Accounting Oversight Board in the USA.

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