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 –

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:

  • What is the quantity of goods sold in the current month/quarter/year?What is the total cost incurred during the month/quarter/year?Is the company earning a profit or incurring heavy losses? In either case, what is the quantum of this profit/loss? What is the proportion of profit/loss as compared to the total sales?How much is the saving (positive saving will represent a benefit whereas a negative saving will denote that the company has spent more) in the cost compared to last month?How many employees are currently employed in the organization?What is the profit margin Profit Margin Profit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more the company?What is the growth of the company over the past ten years?What is the total market share of the company?What is the profit of each retail outlet for the company?

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.

source: Colgate 10K Filings

Following is the graphical representation of the financial accounting process:

#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

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Accounting vs. Auditing – Top 11 Differences

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.

 

  • Financial AccountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.read more

  • Managerial Accounting

  • Cost Accounting

  • Social Benefit Accounting

  • Government Accounting

  • Human Resource Accounting

  • Internal AuditingInternal AuditingInternal audit refers to the inspection conducted to assess and enhance the company’s risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more ●      (Generally done by the management for process improvements and / or precautionary purposes) External AuditingExternal AuditingExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more  (Generally, statutory in nature)

  • Statement of Profit & Loss

  • Balance Sheet

  • Cash Flow StatementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more

  • 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

  • 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.

  • 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

  • Maintaining books of accounts Maintaining proper documentation and records for audit purposesAudit PurposesThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported.read more

  • Preparing financial statements for the organization Preparing projections/business models/budgets which will help the management to decide on a roadmap for the future Monitoring the actual spends vis-à-vis the budget (variance analysis)(variance Analysis)Variance analysis is the process of identifying and analyzing the difference between the standard numbers that a company expects to accomplish and the actual numbers that they achieve, in order to help the firm analyze positive or negative consequences.read more

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.

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