University Lectures
Lecture ( 8)
8- Accounting and Auditing
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Accounting and Auditing
Accounting and Auditing:
Importance and Difference
Accounting and auditing are two important processes
for an organization related to the financial activities
and records of an organization.
Accounting and audit have a pivotal role to play in the
financial activities and record keeping process of any
business. However, their roles and focus are different.
While accounting translates to a much wider field,
encompassing everything, including the flow of
money from the organisation to the management
of the company, auditing is more of a specialised
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 conformed its operations to the laws and the
generally accepted accounting principles.
What are Accounting and Auditing?
Accounting:
Accounting is one of the key functions of a business.
Accounting refers to the process of capturing,
classifying, summarising, analysing and presenting
the financial records, transactions, profitability,
statements and financial position of an organisation.
It is the process of recording financial transactions
of a business.
Accounting of an organisation is usually done by its
own employees. The financial statements used in
accounting are a brief summary of financial
transactions over an accounting period. Accounting
is categorised into various branches, such as, cost accounting, financial accounting, management accounting, etc.
The accounting reports help the management to
make informed business decisions.
Accounting
Definition:
Accounting is the process of recording, classifying,
summarizing, and interpreting financial information
of an organization. It provides a systematic approach
to maintaining financial records and preparing
financial statements.
Financial Accounting: Focuses on recording and
reporting financial transactions to external parties
like investors, creditors, and regulators.
Management Accounting: Provides internal
management with financial data for decision-making,
planning, and control.
Cost Accounting:
Analyzes costs of production to help in cost control
and profit maximization.
Tax Accounting: Deals with preparation of tax returns
and planning according to tax laws.
Key Concepts:
Double-entry bookkeeping:
Every transaction affects at least two accounts.
Accrual vs. cash basis:
Recognizes income and expenses when they occur
vs. when cash is received or paid.
Financial statements:
Balance Sheet, Income Statement, Cash Flow
Statement, and Statement of Changes in Equity.
Regulatory Framework:
Generally Accepted Accounting Principles (GAAP)
in the U.S.
International Financial Reporting Standards (IFRS)
used in many countries.
Preparing accurate financial reports.
Ensuring compliance with relevant standards.
Analyzing financial data for strategic planning.
Auditing internal controls and financial statements.
Auditing:
Auditing refers to the examination of the financial
statements or records of an organization. Auditing is
carried out after the final preparation of the financial
accounts and statements. It involves carrying out the
inspection and statutory audit of the financial
statements.
Auditing gives an unbiased and fair opinion on
whether the financial records and statements provide
a fair and true reflection of the actual financial
position of the organisation. The auditors, usually
external persons or entities, carry out the process
of auditing under the provisions of the applicable
laws on behalf of regulators or shareholders.
Auditing has two main categories, i.e., internal and
external audit. Internal audit is an audit conducted
by an internal auditor, generally an employee of the
organisation. External audit is conducted by an
external
auditor who is appointed by the shareholders.
Definition:
Auditing is an independent examination of financial
statements and related operations of an organization
to ensure accuracy, completeness, and compliance
with applicable standards and regulations.
External Audit:
Conducted by independent auditors to provide
an opinion on financial statements.
Internal Audit: Performed by internal auditors to
evaluate internal controls, risk management, and
operational efficiency.
Forensic Audit:
Investigates specific allegations of fraud or financial
misconduct.
Compliance Audit: Checks adherence to laws,
regulations, and internal policies.
Verify the accuracy of financial records.
Detect errors or fraud.
Ensure compliance with accounting standards and
legal requirements.
Provide assurance to stakeholders about financial
health.
Audit Process:
Planning:
Understanding the entity, assessing risks, and
setting scope.
Fieldwork:
Collecting evidence through testing transactions
and controls.
Reporting:
Preparing an audit report with findings and opinions.
Follow-up: Addressing issues and implementing
recommendations.
Standards and Regulations:
International Standards on Auditing (ISA).
Generally Accepted Auditing Standards (GAAS).
Regulatory bodies like the Public Company
Accounting Oversight Board (PCAOB) in the U.S.
Importance:
Enhances credibility of financial statements.
Helps prevent and detect fraud.
Supports good governance and accountability.
Assists management in improving internal controls.
Similarities Between:
Accounting and Auditing
Most of the basic processes of accounting and
auditing are similar. Accounting and auditing need
a thorough knowledge of accounting principles
and basics. They are generally done by persons
with an accounting degree. They use essential
techniques and procedures of computation, book-
keeping and analysis to compile financial reports
and statements.
Usually, the procedures for activities in accounting
and auditing such as tax compliance are similar.
They can also have the same bookkeeping methods,
such as cash or accrual basis. They strive to ensure
that the financial records and statements are
prepared with accuracy and provide a fair reflection
of the financial position of an organisation.
Differences Between
Accounting and Auditing
| Particulars | Accounting | Auditing |
| Definition | Accounting is the process of classifying, recording, interpreting and summarising the financial statements and transactions to determine the actual financial position of an organisation. | Auditing is the process of examining the financial statements and records of an organisation to find discrepancies during the process of recording of transactions and to verify the accuracy of the records. |
| Purpose | Accounting is done with the purpose of reflecting the actual position, performance and profitability of the business or organisation. | Auditing is done to verify the accuracy of records and statements presented by accounting. |
| Objective | To determine the profit and loss or the financial position of an organisation for a period. | To determine the correctness and accuracy of all the recorded transactions. |
| Period | Accounting is done daily, as transactions happen on a daily basis. | Auditing is a periodical assessment and is done on a monthly, quarterly or yearly basis. |
| Responsible person | Accounting is done by accountants. | Auditing is done by auditors. |
| Initiation | Accounting starts at the end of bookkeeping. | Auditing starts at the end of accounting. |
| Concentration | Concentrates on the current financial activities and transactions. | Concentrates on the past financial statements. |
| Scope | All records, transactions and statements having financial implications. | Final financial records and statements. |
| Details used | Captures all details related to financial records and transactions. | Uses financial records and statements on a sample basis. |
| Governing standards | Governed by Accounting Standards. | Governed by Standards on Auditing. |
| Carried out by | Carried out by an internal employee. | Carried out by an external person or independent agency. |
| Appointment and removal | Accountants are appointed and removed by the management. | Auditors are appointed and removed by the shareholders. |
| Remuneration | Accountants receive a salary. | Auditors receive auditing fees. |
| Deliverables | Financial statements, i.e., income statement or profit and loss account, balance sheet, cash flow statement, etc. | Audit report |
| Report submitted to | Management | Shareholders |
| Suggestions | Accountants can make suggestions for improving the accounting and related activities. | Auditors usually do not make suggestions. |
| Liability | Liability ends with the preparation of the accounts. | Liability ends after preparation and submission of the audit report. |
| Attend meetings | Accountants do not attend shareholder’s meetings. | Auditors can attend shareholder’s meetings. |
| Prosecution for misconduct | Accountants are not usually prosecuted for professional misconduct. | Auditors can be prosecuted for professional misconduct. |
Why do we Need Accounting
and Auditing?
Accounting helps to keep track of all the financial
activities of a business, irrespective of the
organisation size. It reliably records every aspect
of financial activities taking place, which is a crucial
piece of information for the management of your
company.
When the books of a business or organisation are
kept up-to-date in accordance with the generally
accepted accounting principles, it makes it possible
for the business owners to gauge the business
performance and also make peer to peer
comparisons. This is an important aspect of
creating and maintaining credibility with the
competitors and vendors.
Accounting helps in identifying the areas of
underperformance and those that require corrective
measures. The information derived from accounting
assists in the long term project planning of the
business as well. The financial position of the
business helps to determine how much credit
can be allowed and at what rates, etc. Investors
will get a clear picture of the risk and opportunity
that the company could offer them. Keeping the
accounts in place will serve you well when it is
time to pay your taxes, file your returns and claim
deductions.
Auditing is essential as it gives an unbiased overview
of the business. Auditing often identifies errors that
may exist in the business processes through which
the business owners can make changes to rectify
them. It ensures transparency as well.
External auditing helps to build credibility
of the
business, improve relationships with the
suppliers/clients and
ensures a positive public image.
It becomes easy to sell the business in
future
because the auditing process has already been
done. It can also
improve the credit rating of the
business. Thus, attracting the
investors and bank’s
attention.
What is the Importance of Auditing in
Accounting?
Accounting as a field is vast and comprises many areas
of specialisation within its framework. Auditing is one
of such specialisations. While accounting deals with
the tracking and recording of financial transactions,
auditing fulfils the role of verifying the accuracy of
the accounts. Auditing in many ways determines the
integrity of the whole accounting system of a company.
Auditing of financial statements on an annual basis
is important even if you are a non profit or a public
company. This will add credibility for your accuracy.
Even when auditing is not mandatory it is a good
practise to have it in place.
The importance of auditing is particularly seen in
case of errors in your accounts. If your bookkeeping
has not been up to date or in order, an auditor can
make significant contributions in uncovering those
details. If the details uncovered denote any presence
of fraud or wrongdoings, a forensic auditors service
is advisable. There is a further sub field even in the
realm of audits that deals with cases verging on the
lines of criminal activities.
There are different types of audits that can be availed
depending on the need of the organisation. Financial
audits determine whether an organisation’s financial
statements accurately represent the results of the
business’s financial operations. It makes sure that
the organisation’s financial position is in accordance
with the generally accepted accounting principles.
Compliance audits check if the company has
functioned in accordance with the laws and
regulations that may materially impact the financial
statements.
Financial and compliance audits are more often.
However, they are not combined. Economy and
efficiency audits measure whether a business has
been economically and efficiently managing its
resources. These resources could include personnel
(employees), property, space, etc. The audit also
determines the causes of any problems and checks
if the company has followed the laws and regulations
in this regard. Audits have to be conducted based
on the Standards set by the Auditing and Assurance
Standards board.
Teaching Forum 2014, Volume
52, Number 3