Auditing is an accounting function and can fall under the work scope of accountants. However, they are distinct concepts, and companies might prefer to hire different personnel for accounting and auditing.
Looking for the best Accounting Software? Check out SoftwareSuggest’s list of user-friendly accounting software.
Confused? This guide on the difference between accounting and auditing will clear your doubts. Not understanding the distinction can cause human errors, leading to 41% inaccurate numbers in reports and imprecise financial positions.
So, without any further ado, let’s dive into the difference between audit and accounting (accounting vs auditing) and the similarities between accounting and auditing.
Being unaware of how to distinguish between accounting and auditing can lead to regulatory violations, financial mismanagement, and compromised credibility or health of the business. Avoid this by mastering both concepts individually and noticing the differences between the two. Don’t forget to gauge the similarities as well to avoid any confusion while conducting accounting and auditing.
What Is Accounting?
Accounting is a systematic procedure of recording, categorizing, summarizing, and interpreting financial transactions of a company. It also involves preparing financial statements in adherence with all the tax laws.
- For instance, in the UK, financial statements for all kinds of businesses are prepared as per the Generally Accepted Accounting Practices (GAAP).
- However, public businesses follow the International Financial Reporting Standards (IFRS). Non-compliance can lead to strict financial implications.
Given the high volumes of financial transactions and multiple accounting standards, most businesses have a dedicated accountant or accounting department to perform this function. They may also delegate this task to accounting firms.
Accounting departments offer in-depth analysis and reports of financial records to assess the business’s overall financial health and review financial records for accurate tax filing.
Now, let’s move on to the major types of accounting that give you a true and fair view of your business’s financial health.
- Financial accounting involves recording, analyzing, and reporting of business’s financial transactions.
- Tax accounting incorporates the tax-related aspects of a business or individual, such as tax payments, tax preparation, and tax return filing.
- Management accounting refers to the process of presenting financial data in an organized and understandable manner for better decision-making.
- Cost accounting involves analyzing the business’s cost structure–cost of service, business expenses, and service cost.
- Social responsibility accounting tracks all the costs related to a company’s social welfare and environmental efforts.
Suggested Read: Accounting Practice: Types and Principles
What Is Auditing?
Auditing is a process of examining a company’s financial records to ensure they are accurate and free of discrepancies. This financial record covers final financial statements, the company’s balance sheet, financial transactions, and previous financial statements.
Auditing also includes verifying that the financial statements of companies and public organizations adhere to UK laws, accounting and auditing standards (GAAP and IFRS), and internal rules (if applicable). By following the golden accounting rules, auditors can ensure that financial records reflect true and fair views of a company’s operations.
This is done because the accuracy of financial information is critical to knowing the right financial status of the company. Conducting extensive auditing also makes sure that a company’s financial claims align with its financial reality.
Note:
Auditing is of two types–internal auditing (done by in-house auditors) and external auditing (done by externally hired auditors).
Types of auditors
- Internal auditor conducts an internal audit of the financial statements of a particular organization and checks if they adhere to the applicable laws and internal controls.
- External auditor works independently of any particular organization. They are assigned the task of auditing financial statements of different organizations.
- Forensic auditor conducts external audits to find financial evidence that can be presented and accepted by the court.
- Compliance auditor conducts internal or external audit(s) to closely examine if an organization’s financial records adhere to regulatory standards.
- Payroll auditor conducts audits of an organization’s payroll system to gauge its accuracy and compliance with fair wages and tax remittance laws.
All of these auditors follow a step-by-step auditing process.
5 Step auditing process
Step 1. Company prepares and maintains the financial records.
Step 2. Organization informs the auditor about the factors affecting its records.
Step 3. Auditor starts examining the organization’s financial statements and accounting system to ensure accurate auditing.
Step 4. Next, the auditor matches financial transactions with final reports to ensure accuracy.
Step 5. Lastly, the auditor prepares an audit report based on the examination and findings.
Difference Between Accounting and Auditing
Accounting and auditing are two distinct processes. Accounting involves preparing and managing financial records, whereas auditing just assesses its accuracy. Now, let’s quickly understand the other differences between accountancy and auditing –
| Basis | Accounting | Auditing |
|---|---|---|
Purpose | To present an organization’s true financial position, performance, and profitability. | To evaluate and verify the accuracy of accounting records. |
Sequence | The first step of accounting is bookkeeping. | The first step of auditing is accounting. |
Frequency | Accountants account for financial transactions on a daily basis. | Auditors conduct assessments of financial records on a periodic basis–quarterly, monthly, or yearly. |
Documentation | Accounting incorporates the preparation of statements and current or latest financial transactions. | Auditing incorporates the final financial records and statements. |
Consultation | Accountants suggest ways to improve the organization’s financial position considering the available data. | Auditors provide organizations with a report highlighting the extent of correctness and compliance of their financial records. |
Suggestions | Accountants suggest companies regarding ways of improving the accounting and related activities of an organization. | Auditors do not suggest anything. |
Deliverables | Accountants deliver financial statements like income statements and balance sheets. | Auditors deliver audit reports. |
Accountability | Accountants are accountable to their clients or employees. | Auditors are accountable to shareholders or legal agencies. |
Compensation | Accountants are paid a monthly salary. | Auditors are compensated with a fee. |
Scope | Determined by the client | Determined by the law |
Employment | A specific company employs accountants. | Auditors work with many organizations at once. |
Appointment and removal | The company’s management appoints and removes accountants. | The company’s shareholders appoint and remove auditors. |
Liability | Liability of accountants is valid until the preparation of accounts and financial statements. | Liability of auditors is valid until submission of the final audit report. |
Meetings | Accountants do not have to attend shareholders’ meetings. | Auditors may need to attend shareholder’s meetings. |
Result of misconduct | Accountants face no prosecution for professional misconduct. | Auditors may face professional misconduct. |
Software | Accountants rely on robust and best accounting automation software. | Auditors may use accounting or audit software as per the budget and requirements. |
Interesting Read: Difference Between Bookkeeping and AccountingSimilarities Between Accounting and Auditing
Now that you know the auditing and accounting differences, it’s time to understand the similarities between accounting and auditing.
Although accounting and auditing are distinct concepts, they have similar details, concepts, and accounting skill requirements. That’s why we have curated this section about the core similarities between accounting and auditing –
- Accountants and auditors train under or take up similar modules in certifications or courses.
- Both use the same accounting software to complete the processes quickly and accurately, reducing accounting time and cost. In fact, 58% of accounting professionals (accountants and auditors) will automate processes with AI solutions.
- Both professions require an in-depth understanding of related principles–mathematics, statistics, and data collection.
- Accounting and auditing involve creating accounts and compiling reports accurately as per basic standards like GAAP and IFRS.
- Both must have cognitive skills to understand the complex accounting and auditing terminology.
- Auditors and accountants must know how to communicate a result in the easiest language with reports.
- Both require a good command of numbers to calculate finance and organize information. Analyzing profits and balancing accounts are some tasks that require these numerical skills.
- Auditing and accounting professions often involve creating accounts or compiling reports digitally. Hence, both require basic knowledge to use accounting software.
- Both professions require core problem-solving skills to balance books accurately, even when during unforeseen situations.
- They use the same accounting principles and techniques to create accounts and create reports, while also adhering to accounting ethics. For instance, tax compliance rules and bookkeeping methods are the same for both.
Don’t Miss to Read: Accountant vs Controller: Key Differences
Wrapping Up
So, that was your answer to the question what are the differences between accounting and auditing? As we approach the end of this comprehensive guide on accounting and auditing differences, we hope you’ll never use them interchangeably and will always conduct both separately.
In short, accounting involves recording a business’s financial data, whereas auditing is the process of checking the accuracy of the recorded data and accounts. The primary similarity is that they are both exhausting and time-consuming if done manually.
You don’t have to drain your time manually making each entry, maintaining tons of books, or creating reports anymore. Just explore and invest in a powerful best accounting software today!
Yes, accountants can conduct an audit, as audit accounting is one of the accounting functions.
Auditors cannot offer non-audit services anymore as of December 2020.
Yes, small businesses can function without a dedicated accountant or auditor as owners perform accounting functions themselves. However, for medium-to-large businesses, it is impossible to manage accounts without an accountant. Also, only specific industries and business types need auditors.
Here are some major companies that need regular audits and, hence, a dedicated auditor–public companies, banks, insurance companies, e-money issuers, pension or labor relations firms, Markets in Financial Instruments Directive (MiFID) firms, and Undertakings for Collective Investment in Transferable Securities management.
Auditing makes businesses aware of the accuracy of their accounts.
Pratiiek Mavani is a seasoned professional in accountancy, taxation, audit, and finance, boasting over 16 years of industry expertise. He specializes in conducting audits for diverse entities including banks, optimizing their core processes through cost management and budgeting. With a focus on income tax and GST, he has represented various clients in cases and appeals concerning direct and indirect taxes across different levels.
