Accounting and Auditing are two very important processes when it comes to the financial activities and records of an organization and business. They both walk hand in hand and can't do without each other
What Is Accounting?
Accounting can be defined the systematic process of capturing, classifying, summarizing, analyzing and presenting the financial transactions, records, statements, profitability and financial position of an organization or entity to enable decision making. Accounting therefore means the specialized language of business. The accounting work for an organization is done usually by the accountant who is an employee. Accounting process in a business is carried out on daily basis. There are various branches of Accounting which includes cost accounting, management accounting, financial accounting, etc.
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What Is Auditing?
Auditing can be defined as the critical examination of the financial records, financial activities or statements of a business or an organization. Auditing is required for all separate legal entities. Auditing in a business or organization is carried out after the final preparation of the financial statements and accounts by the accountant. Auditing involves carrying out the inspection and statutory audit of the financial statements, and giving a fair and unbiased view on whether the financial statements and records provide a true and fair reflection of the actual financial position of the business organization.
There are two main categories of Auditing which are: internal audit and external audit. Internal audit is mainly conducted by an internal auditor, usually someone that is employed by the organization while External audit is conducted by an external auditor usually appointed by the shareholders on contract basis.
Similarities Between Accounting And Auditing
Some of the basic processes of both accounting and auditing are similar to each other.
- Accounting and Auditing need a thorough knowledge of accounting basics and principles.
- Both are also generally done by the persons with an accounting degree.
- Both use essential procedures and techniques of book-keeping, computation and analysis.
- Both accounting and auditing strive to ensure that the financial statements and records provide a fair reflection of the actual financial position of an organization.
- All auditors are accountants but not all accountants are auditors
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Differences Between Accounting And Auditing
Accounting is keeping records of the financial transactions and preparing financial statements of business organization while auditing is critical examination and inspection of the financial statements to give an opinion on their fairness.
Accounting is done on continuous basis with daily recording of financial transactions; while auditing is usually a periodic process and it is carried out after the preparation of final accounts and financial statements of a business, usually on quarterly or yearly basis.
The accounting process starts usually where book-keeping ends; while auditing process always starts where accounting ends.
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Accounting mainly concentrates on the current financial transactions and activities of an organization; while auditing concentrates mainly on the past financial statements.
Accounting covers all transactions, records and statements having financial implications; while auditing mainly covers final financial statements and records.
6. 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.
7. 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.
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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.
10. 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.
11. Performed By
Accounting is done 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.
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Accountant is employed by the management of the company; while the auditor is appointed by the shareholders of the company, or a regulator.
There is no specific qualification that is compulsory for an accountant; but some specific qualification is compulsory for an auditor.
15. Remuneration Type
Accounting is carried out by an accountant who is usually employed by the company who also gets a salary; while a specific auditing fee is paid to the auditor.
16. Remuneration Fixation
The remuneration of an accountant, i.e., salaries and wages is fixed by the management; while auditor’s fee is fixed by the shareholders.
17. Scope Determination
The scope and method of accounting is determined by the management of the company; while the scope of auditing is determined by the relevant laws or regulations of the profession.
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Accounting is necessary for all business organizations in the day-to-day or routine recording of all financial transactions; 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 of the financial statement prepared by the accountant.
20. 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.
23. Shareholders’ Meetings
Accountant does not attend the shareholders’ meeting; while an auditor may attend the shareholders’ meeting.
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24. 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 or sacked by the management; while an auditor can be removed by the shareholders of the business. Some auditors are employed on contract
Summary of Difference Between Accounting and Auditing
Accounting and auditing are very important for an organization. They are separately carried out by internal employees and independent third party respectively. There are so many differences between the two: Accounting is a continuous process and it focuses on accurately recording and preparing all financial transactions and statements. Auditing on the other hand is independent; and focuses on critical evaluation and inspection of financial statements and providing an unbiased opinion on their accuracy.
However, accounting and auditing also complement each other in some respects. Accountants can learn from professional knowledge of an auditor; and implement the best practices in their accounting work. Auditor may get help from the accountants for a thorough knowledge of the accounting system that is been adopted by organization and technical aspects of the business. If any fraud or error remains undetected in the financial statement; the auditor will be held responsible solely.