Both auditing and accounting are interlinked to a large extent.
Accounting concerns itself with the maintenance of records and other source data in the books of accounts. And when those underlying records and source data are compared to financial statements to see if such statements properly reflect the transactions recorded therein, it is called auditing.
In simple words, the primary goal of auditing is to verify the accuracy of books of accounts prepared by an accountant. That is why, it is often said that where the function of an accountant comes to an end, the audit work actually starts to determine the true and fair picture of such accounts.
Let’s take a look deeper into their meaning.
Meaning of the two terms
In today’s competitive world, accounting is known as the “universal language of business” since it is the vehicle for communicating financial details about a company to users such as shareholders and management.
It is a system used by businesses to maintain track of their monetary or financial transactions. A businessman who has put money in his company would want to know if his company is making a profit or not, the position of his assets and liabilities, and whether his capital in the company has increased or decreased during a given period. All such information is easily processed through accounting.
Accounting involves the recording of all day-to-day transactions of a company in terms of money so that its financial position and results of operations can be determined. The ultimate result of accounting is the generation of financial statements. It serves to meet the following objectives:
- Systematically record the transactions of business
- Ascertain the results of business operations by comparing revenue with expenditure
- Know and interpret the financial position of the business as on a certain date
- Provide information to users to aid in rational decision-making
- Ascertain the company’s ability to meet its liabilities in the short-term (liquidity position) and long-term (solvency position)
- Forecast future performance of the business based on past data and trends
- Assess the performance achieved in relation to targets and implement controls to overcome weaknesses
In an audit, the financial statements/reports prepared through the mechanism of accounting undergo scrutiny to judge their degree of correctness. The purpose of an audit is to determine the legitimacy and reliability of business information.
An auditor should be satisfied with the accuracy of financial statements and report that they present a true & fair picture of the company’s financial situation. The efficacy of the internal control system must also be assessed by an auditor in order to determine the scope and extent of checking to be done in the audit.
Audit protects the financial interests of those who aren’t part of the management team, such as partners and shareholders. It also works as a moral check on employees and prevents the company from committing fraud.
When it comes to financial auditing, a set of financial statements is said to be true and fair if it is free of material misstatements. However, in light of recent frauds by high-profile organizations in collusion with reputable audit firms, the argument that auditing should go beyond just being true and fair is gaining traction.
Audits have traditionally been associated with gathering information regarding a company’s or business’s financial systems and financial records. But non-financial subject areas, such as safety, security, information systems performance, and environmental issues, have also recently been included in auditing. There has been an increased need for performance audits among non-profit organizations and government agencies, which examine how well they are meeting their mission objectives.
How is auditing related to accounting?
It is well known that auditing is the review of various assertions, both financial and non-financial, with the goal of proving the validity of such assertions and expressing an auditor’s opinion on the same. Therefore, it is quite reasonable and natural that the function of auditing can be performed if and only if the person also has a good knowledge of the fields in which he is conducting such a review. An auditor cannot check the books of accounts of his client unless he has a thorough knowledge of generally accepted accounting principles that go into the preparation of those books.
Accounting and auditing are very much connected to each other because auditing involves nothing but the review of financial statements that are an outcome of the overall accounting process. It would not be wrong to say that the result of accounting becomes a starting point for auditing.
In fact, not just accounting, auditing as a discipline is also directly related to a variety of other disciplines, as there are numerous linkages in the work that an auditor performs on a daily basis. To begin with, it may be noted that auditing is a logical construct in and of itself and that everything done in auditing must adhere to the rules of logic. Similarly, language skills are also important in the field of auditing, since an auditor will be required to communicate in writing as well as orally on a daily basis. Likewise, it is also essential that the auditor should have a good understanding of business & taxation laws affecting the auditee entity so that compliance with applicable laws can be checked.
The main points of distinction between auditing and accounting
Auditing is distinct from accounting in the sense that it is not concerned with the preparation of financial statements or the writing up of books of accounts. In the following table, you may find all of the differences between auditing and accounting.
|Definition||Auditing is the process of systematically examining financial statements to see how closely they correspond to management policies and generally accepted accounting principles. |
Whereas, accountancy is the preparation of periodic financial statements for presentation to owners and other stakeholders.
|Purpose||The basic function of auditing is to examine books of accounts with supporting vouchers and documentary evidence in order to detect any fraud or error. It certifies the correctness of financial statements. |
On the other hand, the purpose of accounting is to compile the accounts of a concern in such a manner that one is in a position to know the state of affairs of the business. It shows the business results.
|Nature||While accounting is concerned with the finalization of accounts, auditing deals with the examination of authenticity & reliability of the financial statements of a business concern.|
|Scope||The scope of accounting revolves around the maintenance of books of accounts. It doesn’t go beyond the books of accounts. It comprises making entries in primary books, posting them to ledgers, preparing T/B, Profit and Loss Account and B/S, passing adjustment entries, rectification of errors, etc. |
The scope of an audit is usually guided by its engagement terms or provisions of the relevant law. It includes expressing an opinion on the reliability & sufficiency of financial statements, checking the adequacy of disclosures made, ascertaining the accuracy of transactions against supporting evidence, performing tests, enquiries, and other verification procedures of accounting transactions and account balances, etc.
|Mandatory||The Companies Act, 2013 has made the audit of company accounts compulsory in India. |
And as far as accounting is concerned, it is something without which a business can’t operate. Moreover, different statutory laws like Income Tax Act, GST Act, and Companies Act also necessitate the maintenance of yearly books of accounts for a minimum of 8 or 6 years, as may be applicable.
|Which one is performed first?||Where an accountant’s job ends, an auditor’s job begins. The accountant does the bulk of the work, while the auditors put the finishing touches on it.|
|Transactions||An accountant is responsible for recording the transactions in the books of accounts, whereas an auditor is responsible for checking and verifying such transactions & accounts and submitting a report to the persons who appointed him.|
|Employee||Accountants are the employees of the company whereas an auditor works as an independent identity.|
|Appointing authority||An auditor is appointed by the shareholders or board of directors of a company. Whereas, an accountant may be appointed by the management or a superior to whom reporting is to be done.|
|Advice to management||According to the records kept by an accountant, he or she can provide information to management. Normally, he doesn’t make any recommendations or give advice to management, whereas the auditors can make recommendations or give advice based on their findings from the scrutiny of accounting records.|
|Assistance||Accountants must give all the necessary support and furnish all the required data to auditors.|
|Qualification||The auditor should be a qualified accountant, i.e., a chartered accountant, but this is not required in the case of an accountant. He or she might or might not be a chartered accountant.|
|Report||While an accountant is responsible for the work of book-keeping, an auditor needs to submit a report to the appointing authority/shareholders stating his opinion on the financials. This opinion could be unqualified, qualified, adverse, or a disclaimer.|
|Regulation||The work of auditors has to be in accordance with control measures and standards on auditing (SAs) issued by the Auditing & Assurance Standards Board (AASB) of ICAI. Similarly, the discipline of accounting is governed by Indian Accounting Standards issued by the Accounting Standards Board (ASB) of ICAI in harmony with generally accepted accounting principles/IFRS.|
|Types||Accounting has several branches such as financial accounting, cost accounting, management accounting, tax accounting, forensic accounting, etc. |
Similarly, an audit may be categorized as an internal audit, external audit, tax audit, GST audit, cost audit, management audit, performance audit, secretarial audit, and more.
|Period||Accounting is an ongoing practice whereas an audit is normally performed at the end of a financial year or as per the terms of its engagement letter.|
|Code of conduct||The bookkeeping and accounting work is not governed by any code of conduct prescribed by any professional body.|
Auditing work is governed by the professional code of conduct prescribed by the Institute of Chartered Accountants of India.
|Objective||Record all transactions to ascertain the financial results and state of affairs of a business||Examine whether the financial statements give a true and fair view of the state of affairs or not|
|Nature of work||Current recording of business transactions||Examination of past transactions|
|Frauds||Not expected to detect frauds||Required to detect frauds|
|Employees||Employees of the company||Outsiders|
|Salary||Paid regular salaries||They are given an audit fee for the audit work performed.|
|Qualification||Need not be Chartered Accountants||Must be Chartered Accountants|
|Knowledge||May or may not have the knowledge of audit techniques and procedures||Must have the knowledge of audit techniques and procedures|
|Code of conduct||Not governed by any prescribed code of conduct||Governed by the professional code of conduct prescribed by ICAI|
|Time period||Continuous||Generally undertaken at the end of the year|
|Order of work||Accounting work is done first||Auditing begins where accounting ends|
Hope the information given above helps. Thanks for reading!
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