Accounting vs. Auditing: What are the Key Differences?
Auditing is often part of an accountant’s job. However, accounting and auditing are not the same process. Although many accountants perform internal audits for their employers, it’s not uncommon for companies to employ an external auditor to get a true and fair view of their finances.
In simple terms, accounting is the continuous process of managing and maintaining financial records. Whereas, auditing is a periodic process that validates the accuracy of financial statements. Understanding the difference between accounting and auditing will help you determine when you need someone for each role.
- Accounting is the daily process of recording financial transactions, managing data, and maintaining records.
- Auditing is a periodic process that focuses on ensuring the accuracy and legality of financial statements.
- There are different types of accountants and different types of auditors.
- Both accountants and auditors need a thorough understanding of accounting standards. Auditors also must adhere to specific professional standards, such as IAS (International Standards on Auditing).
- The primary difference between accounting and auditing is their aim, but other important differences exist as well.
In this article, we’ll cover:
- What is Accounting?
- What is Auditing?
- Similarities Between Accounting and Auditing
- Key Differences Between Accounting and Auditing
- Frequently Asked Questions
What is Accounting?
Accounting covers the day-to-day process of recording financial transactions and summarising them in a way that makes sense. Accountants are also responsible for preparing financial statements and ensuring that financial documents follow tax laws.
Most medium-to-large sized companies have an accounting department. This is usually because the sheer number of financial transactions they receive would be too much for one person. It also may be because the business deals with a wide range of accounting standards from different localities.
Comparatively, independent accountants and accounting firms offer accounting services to a variety of clients. These firms typically serve individuals, but some business owners may use one as well. The only real difference between accounting departments and accounting firms is whether they’re part of a company or an independent entity.
Often, an accountant’s work will go beyond financial statements. Accountants frequently review any other documents that could have financial implications. This is because the information on these documents may include important information that they must record. Mazuma’s online accounting services can help you manage your bookkeeping and taxes so you can focus on other aspects of your business.
There are several different types of accounting. Each type of accounting focuses on a different part of your financial health. They include:
- Financial accounting: Financial accounting focuses on recording, analysing, and reporting financial transactions for a business entity.
- Tax accounting: Tax accounting deals with tax matters for businesses or individuals, including tax preparation, tax payments, and filing tax returns.
- Management accounting (or managerial accounting): Management accounting helps managers understand financial data by presenting financial records in a way that makes sense to them. This aids in data-driven decision-making processes.
- Cost accounting: Cost accounting analyses a company’s cost structure, including the costs of goods, services, or any other business expenses.
- Social responsibility accounting: Social responsibility accounting focuses on the costs associated with a company’s environmental or social welfare efforts.
Accountants in the UK usually follow GAAP (generally accepted accounting practices). These accounting standards highlight which financial data every business must provide. Public businesses are the exception. Instead, public businesses follow IFRS (International Financial Reporting Standards) and their accountants follow suit. A well-trained accountant will enhance the financial position of any business or individual. And the right software tool significantly improves anyone’s accounting process. Financial reporting with FreshBooks lets you stay on top of your finances before you meet your accountant. This helps you drive the conversation forward so you can get results faster.
What is Auditing?
Accountants are responsible for the accuracy and legality of every financial statement. However, auditors provide a second set of eyes to verify the accountant’s compliance. Financial information is highly sensitive data, so this extra precaution is necessary for many.
Auditing generally involves a critical examination of all accounting records and the effectiveness of internal controls. This may include a company’s balance sheet, past financial statements, or financial transactions. An auditor’s goal is to make sure that financial claims match financial realities.
There are several different types of auditors.
- Internal auditors: Internal auditors perform audits for one specific organisation. Like all auditors, they must adhere to laws, but they may also follow internal controls.
- External auditors: External auditors audit financial statements for an organisation they don’t work for.
- Forensic auditors: Forensic auditors seek financial evidence that could be used in court. A forensic audit is almost always an external audit.
- Compliance auditors: Compliance auditors confirm an organisation’s adherence to regulatory standards. A compliance audit may be an external or internal audit.
- Payroll auditors: Payroll auditors focus on verifying the accuracy of a business’s payroll system, including fair wages and tax remittance.
In most cases, the auditing process is as follows:
- The company begins the process by preparing financial statements for the auditor.
- The company tells the auditor about any extraneous factors that may affect the data on their records.
- The auditor assesses all financial statements to ensure accuracy and the company’s accounting system to see what protocols are in place to prevent errors.
- The auditor may cross reference details related to financial transactions with final reports to verify alignment.
- The auditor presents their findings on an audit report.
Auditors are also keenly familiar with GAAP and IFRS. While auditing financial statements, they refer to these protocols to verify adherence to accounting standards. An internal auditor will balance these standards with any provided internal rules.
Be mindful that only qualified auditors can perform an audit. You cannot ask someone to audit your financial statements simply because they’re “good with numbers.” Auditors require specialised training in UK laws so they can watch for potential violations.
Similarities Between Accounting and Auditing
Despite their differences, many of the details related to accounting and auditing are similar. As mentioned, both roles need thorough knowledge of GAAP and IFRS. In many cases, auditors and accountants have similar educational backgrounds. Auditors still need comprehensive knowledge of accounting standards even though they are not accountants.
People best suited for either role also share many personality traits. Accounting and auditing both require strong attention to detail, discipline, and interpersonal skills.
Key Differences Between Accounting and Auditing
The primary difference between accounting and auditing is the goal. Accounting is an ongoing process of managing financial records, and auditing is a periodic assessment of its accuracy. However, there are a few more important differences.
- Documentation: Auditing typically only covers final financial statements. Accounting involves developing statements and current financial transactions.
- Consultation: Accountants often consult their clients about how they can improve their financial position based on data. Auditors simply report on whether or not the data is compliant and correct.
- Deliverables: Accountants may deliver an income statement, balance sheet, or any other financial statements. Auditors only deliver an audit report.
- Accounts: Accountants create financial accounts for a business. They work with accounts in progress at every stage of development. Auditors only work with final accounts.
- Reporting: Accountants report to their employers or clients. Auditors will submit their audit report to shareholders or legal entities.
- Payment: Accountants are usually company employees who are paid with a regular salary. Companies will pay an auditor’s fee after they perform the audit from an external body.
- Scope: The scope of accounting is determined by the client or employer. The scope of auditing is determined by the law.
- Employment: Most accountants work for one specific company. An auditor may audit many organisations.
- Time: Accounting is a continuous practice. Auditing is done on a periodic or as-needed basis.
- Objectivity and independence requirements: While companies have the flexibility to hire anyone as an accountant, there are much stricter objectivity and independence criteria involved in hiring an auditor. For example, your employees or family members cannot conduct an audit for your company.
Accounting and auditing deliver related benefits in different ways. Both roles are vital to risk management, increased transparency, and data-driven decision making.
Both professionals provide business owners and shareholders with a fair view of the financial position of the business.
FAQs on Accounting vs. Auditing
Can an accountant perform an audit?
Accountants can perform audits. In fact, audit accounting is an accounting function specifically focused on internal audits. Some large organisations hire an internal audit accountant to continuously perform this work.
However, as of March 2020, auditors cannot perform any additional internal auditing task beyond the scope of their regular work.
Can an auditor provide accounting services?
As of December 2020, auditors can no longer perform “non-audit” services. This includes secondments and accounting functions. You may still use the same professional for both roles, but exercise precaution. Please consult the FRC’s Audit Independence Rules to verify whether this practice is ok at your business.
Is auditing a part of accounting?
Auditing is sometimes part of accounting. Accounting and auditing are more like siblings than two parts of one whole. Both are focused on assessing the financial situation of a business or individual, but with different aims. Accounting collects and presents financial information while auditing ensures that it’s correct and legal.
How do accounting and auditing contribute to the success of a business?
Accounting is required as soon as a business starts processing financial transactions. Every business owner needs accurate records of all financial information.
Auditing ensures that every business presents a true and fair view of their financial position. Auditors can reveal unmet stakeholder expectations to help executives improve their business processes.
Can a company function without an accountant or auditor?
A company cannot function without accounting. Some smaller business owners can perform their own accounting tasks. For most, this becomes infeasible as the business grows, so an accountant is needed.
Not all companies require regular financial audits. It depends on your industry and whether your business is public or private.
Which companies require an auditor?
Companies that require regular audits include:
- All public companies
- Insurance companies
- E-money issuers
- MiFID firms
- UCITS management
- Any pensions or labour relations firm