Accounting and audit have a pivotal role to play in the financial record keeping process of any business though their roles are different in their focus. While accounting translates to a much wider field, encompassing everything from the organization to the management of the flow of money through the company, auditing is more of a specialized service.
Auditing is a part of the accounting world. It is an examination of accounting and financial records that is undertaken independently. This is done to determine if the company or the business undertaking has confirmed its operations to the laws and the generally accepted accounting principles.
Whether you are a small business or a complex organization, keeping track of all your financial activities can be a daunting task. And accounting does just that for you by keeping track of your business. It reliably records every aspect of financial activities taking place, which is a crucial piece of information for the management of your company. One key function of accounting is keeping you updated about the company’s performance. This helps in identifying the areas of underperformance and those that require corrective measures. The information derived from accounting assist in the long term project planning of the business as well.
You know that if your books are kept up-to-date in accordance with the generally accepted accounting principles, it makes it possible for you to gauge your own performance and also make peer to peer comparisons. This is an important aspect of creating and maintaining credibility with your competitors and vendors. Your financial position determines how much credit you may be allowed and at what rates, etc. Investors will get a clear picture of the risk and opportunity your company could offer them. Keeping your accounts in place will serve you well when it is time to pay your taxes, file your returns and claim deductions.
Difference between Accounting and Auditing
In terms of
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.
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.
Accounting starts usually where book-keeping ends; while auditing always starts where accounting ends.
Accounting mainly concentrates on the current financial transactions and activities; while auditing concentrates on the past financial statements.
Accounting covers all transactions, records and statements having financial implications; while auditing mainly covers final financial statements and records.
(vi) 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.
(vii) 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.
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 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.
(x) 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.
(xi) Performed by
accounting is performed by accountants; while auditing is performed generally by qualified auditors.
Accounting is usually carried out by an internal employee of the company; but auditing is carried out by an external person or independent agency.
Accountant is appointed by the management of the company; while the auditor is appointed by the shareholders of the company, or a regulator.
Any specific qualification is not compulsory for an accountant; but some specific qualification is compulsory for an auditor.
(xv) Remuneration Type
Accounting is carried out by a company employee who gets a salary; while a specific auditing fee is paid to the auditor.
(xvi) Remuneration Fixation
Accountant’s remuneration, i.e., salary is fixed by the management; while auditor’s fee is fixed by the shareholders.
(xvii) 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.
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.
Accounting prepares financial statements e.g. Income Statement or P/L, Balance Sheet, Cash Flow Statement, etc.; while auditing provides Audit Report.
(xx) Report Submission
Accounts are submitted to the management of the organization; while audit report is submitted to the shareholders.
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.
Accountant’s liability generally ends with the preparation of the accounts; while auditor has liability after preparation and submission of the audit report.
(xxiii) Shareholders’ Meetings
Accountant does not attend the shareholders’ meeting; while an auditor may attend the shareholders’ meeting.
(xxiv) 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.
Accountant can be removed by the management; while an auditor can be removed by the shareholders.