Accounting vs Auditing

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

The key difference between Accounting vs. Accounting is that Accounting is the process of recording, maintaining, and reporting the company’s financial affairs, which shows the company’s clear financial position. In contrast, auditing is the systematic examination of the books of accounts and the other documents of the company to know whether the statement shows a true and fair view of the organization.

Accounting vs. Auditing 

Accounting is an act of maintaining the monetary records of a company to help prepare financial statements, which will give an accurate and fair view of the company’s business. As we note from Colgate’s SEC FilingsSEC FilingsSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities.read more, they must prepare the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more as per the regulatory authority guidelines.

On the other hand, auditing evaluates financial records/statements prepared through the accounting function. The purpose is to ensure the reliability of the financial statements. For example, in the case of Colgate, PricewaterhouseCoopers LLP audited the effectiveness of Colgate’s internal controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more over financial reporting in 2016.

In this article on Accounting vs. Auditing in greater detail –

accounting vs auditing

What is Accounting?

Accounting is the language of business. Any business is measured in terms of numbers, and these numbers are arrived at by employing accounting. Let us take simple examples of what kind of numbers are required by any businessmen on a day to day basis:

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Accounting vs Auditing – Explained in Video

 

The above questions can be answered utilizing accounting. Accounting has various branches, such as:

#1 – Financial Accounting

The main focus of financial accounting is maintaining, processing, grouping, summarizing, and analyzing the company’s financial information to give an accurate and fair view to various internal and external stakeholders of the company.

As we see from the below snapshot taken from Colgate 10K, the main focus of financial accounting is to prepare the financial statements, namely the Income Statement, Balance Sheet, and Cash FlowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more.

Colgate - Accounting vs Auditing

source: Colgate 10K Filings

Following is the graphical representation of the financial accounting process:

Accounting vs Auditing

#2 – Cost Accounting

Cost accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more is beneficial from the point of view of costing various products. It helps to derive a cost price for complex products that require various raw materials, processes, and ingredients in their manufacture. It also helps to identify the key costs (fixed and variable) associated with each product and the break-even point for the products.

This serves an essential purpose for any given company. First, it derives a cost, which helps to calculate the selling price of the product. The selling price will be derived based on various parameters such as the company’s margin percentage, market competitiveness, the strategy involved in selling the product, etc.

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#3 – Managerial Accounting

This section has more to do with planning and support decisions. The data organized by other fields of accounting are analyzed further to plan, make strategic decisions, and prepare a roadmap. Here, reports (MIS – Management Information System) are prepared daily/weekly/monthly for internal audiences such as the chief financial officer, chief executive officer, managers, and other top-level executives who make informed decisions on behalf of the company. The reports help them get a better perspective and make informed decisions. Some of these decisions involve – capital budgeting, trend analysisTrend AnalysisTrend analysis is an analysis of the company's trend by comparing its financial statements to analyze the market trend or analysis of the future based on past performance results, and it is an attempt to make the best decisions based on the results of the analysis done.read more, forecasting, etc.

Some other types of accountingTypes Of AccountingThere are different types of the accounting which an organization can follow as per the scope of its work and need of stakeholders. Some of them include financial accounting, forensic accounting, accounting information system, managerial accounting, taxation, auditing, cost accounting, etc.read more are Tax Accounting, Human Resource AccountingHuman Resource AccountingHuman resource accounting is the accounting and recognition of expenses related to organization's employees, including costs associated with recruitment, selection, training, and hiring.read more, Government Accounting, etc.

What is auditing?

Auditing is an activity of verifying, checking, and evaluating financial statements. As the financial statements are prepared based on an organization’s accounting records, auditing covers the checking of accounting records.

It helps determine the validity and reliability of accounting information represented using financial statements.

Auditing can be said to be more of a post-mortem activity. Once the financial accounting process is completed for a given year, the auditing process can start.

Auditing can be divided into External audits and Internal Audit

costing various products

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costing various products

Accounting vs. Auditing – Top 11 Differences

Sr. No.Point of DifferenceAccountingAuditing
1Definition
(Accounting vs. Auditing)
Accounting is an act of maintaining the monetary records of a company in a way that they can help in the preparation of financial statements, which will give an accurate and fair view of the business of the company.Auditing is the evaluation of financial records/statements prepared through the accounting function. The purpose is to ensure the reliability of the financial statements.
2Regulators
(Accounting vs. Auditing)
Accounting Standards are issued by International Accounting Boards, which need to be adhered to while preparing financial statements.Auditing Standards are issued by International Auditing Boards, which need to be adhered to while auditing financial statements.
3Aim
(Accounting vs. Auditing)
To provide an accurate and fair view of the financial statements to various usersTo verify the reliability of the financial statement’s true and honest view
4Main Categories
(Accounting vs. Auditing)
A few sub-heads of accounting are as follows:

 

Auditing can be bifurcated into:

 

5Key Deliverables
(Accounting vs. Auditing)
Financial Statements is the critical deliverable of accounting, and the same comprises of the following:

 

An audit reportAudit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements.read more is a vital deliverable of auditing, and the same can be classified into the following:
  • Qualified audit reports which state the qualifications or the exceptions which are noted in the Financial Statements and because of which the true and fair view of Financial Statements is affected.The unqualified audit report is the best form of the report, which states that the financial statements give a true and unbiased view of the financial situation of the organization.
  • Unable to provide audit reports. This is also possible when there is not enough data for the auditor to check and give his / her judgment about the financial statements
6Work is performed by
(Accounting vs. Auditing)
Bookkeepers and accountantsAuditors (It is essential for an auditor to have knowledge of accounting. Without thorough knowledge, an auditor cannot certify the financial statements. On the other hand, an accountant need not be well-versed with the auditing processes)
7Key skills required
(Accounting vs. Auditing)
Some of the critical skills needed by an auditorAn AuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more are:

 

  • Knowledge of both accounting standards
  • Ability to take timely and measured decisions
  • Thinking out of the box,
  • Being able to balance the risk & return trade-off for the company,
  • Understanding different revenue models,
  • Interpreting financial statements, and giving valuable suggestions based on experience and knowledge.
Some of the critical skills required by an auditorAn AuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more are:
  • Knowledge of both the auditing and accounting standards is a must for an auditor.
  • Analytical skills

  • Understanding of the accounting framework of the organization and then being able to identify the risk areas, processes, controls, etc.
  • Being able to interpret the financial statements and the effects that different financial transactions have on the financial statements
8Day-to-day activities involved
(Accounting vs. Auditing)
Daily operations of an accountant will include the following:

 


Day-to-day activities of an auditor will involve the following:

 

  • Understanding the financial statements of the organization

  • Performing various process walk-through to understand how the flow of information/accounting works in the organization

9Level of responsibilities
(Accounting vs. Auditing)
An accountant is part of the middle-level management of the organization. Here, the responsibility is to present a true and fair view of the financial position of the company to various stakeholders.
Note: A thorough background check is required in this case as the accountant is in a position to manipulate the financial results of the company.
An auditor can be internal as well as external to the organization. In the case of an internal auditor, he/she will be part of the middle-level management of the organization.
In the case of an external auditor, companies opt for certified auditing firms that are well-known in the industry.
In a way, the level of responsibility of the auditor is more than the accountant. The report issued by them is a certification of the work done by the accountant.
Note: A thorough background check is required, even in this case, because an auditor certifies the work of an accountant. If an auditor is not careful in performing his / her duties, there can be ample fraud opportunities to the accounting team.
10Starting point
(Accounting vs. Auditing)
The starting point of accounting is BookkeepingBookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments.read more, i.e., maintaining records of the financial affairs of the company, which is then used to prepare the financial statements of the organization.Auditing starts when the work of an accountant is complete. Once the financial statements are prepared, the auditor starts verifying the completeness and accuracy of the financial statements.
11Period
(Accounting vs. Auditing)
It is an on-going activity. The financial statements can be prepared on a quarterly and annual basis, but recording journal entries and other accounting functionsAccounting FunctionsAccounting functions are financial systems that help in the bookkeeping of financial information in an organization, financial analysis, summary creation, reporting of transactions and act as the backbone for almost any business. Accounting as a system tries to identify, assess and record the transactions of financial nature in a very systematic approach.read more are a continuous process.This is a periodic activity. An annual audit of the financial statements is a statutory requirement in most countries. Many companies prefer to conduct an audit on a quarterly basis as well.

Conclusion

Accounting vs. auditing are interrelated and go hand in hand with each other. The job done by the accountant is certified by the auditor. The auditor’s job will have no meaning if the basic accountingBasic AccountingAccounting is the formal process through which a company attempts to present its financial information in a way that is both auditable and usable by the general public. read more framework is not established in the organization. Also, if there is no one to certify the work done by the accountant, there will be surety about the reliability of the data presented in the Financial Statements. An auditor adds value to the work done by the accountants.

Also, the two can work hand-in-hand, especially in setting up processes in the organization. The auditor can test the controls designed and implemented by the accountant. Control gaps, if any, which are high-risk areas, can also be pointed out by the auditors. The auditors can use their experience and expertise and provide feasible suggestions/solutions for process improvements. The accountant, for better risk management, can implement these.

These internal controls, which are set by the accountants and auditors together, are generally approved by the management. They can be as simple as a manual maker-checker system where a maker will prepare a document (e.g., a cash voucher) and get it approved by a superior. These controls can also be as complex as an inbuilt feature in the ERP, highlighting and disallowing the creation of a duplicate vendor ledger by checking the unique company identification number.