Finance is the most crucial function or department in every organization and acts as a strong pillar for their success. Any wrongdoing in finances leads to disastrous results or even fatality to business.
To make sure it runs smoothly, there are sub-categories of activities that are defined under the umbrella of Finance i.e. Accounting & Auditing.
But many people do get confused between them and treat them alike activities or procedures. However, they both are very much different in their scope of work and operability.
- Accounting involves recording, classifying, and reporting financial transactions to provide accurate financial statements for a business.
- Auditing is examining and verifying financial records to ensure the information’s accuracy, compliance, and reliability.
- While accounting focuses on creating financial statements, auditing evaluates the accuracy and integrity of those statements and internal controls.
Accounting vs Auditing
The difference between Accounting and Auditing is that accounting means to maintain the financial statements of a company while auditing means to check whether the financial statements maintained by the company are accurate. Accounting is conducted for daily transactions while auditing is conducted quarterly or annually.
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Accounting refers to the process of keeping the updated records for every financial transaction i.e. sale or purchase of any item and preparing the requisite financial statements.
Whereas Auditing is the process where financial statements prepared under the accounting process are used to analyzed & assessed to verify whether they are correct or not.
Also, steps are taken in Auditing to reach an opinion on whether these financial statements are prepared according to the reporting and legal framework which is specifically defined for preparations & presentations of financial statements.
|Parameter of Comparison||Accounting||Auditing|
|Definition||Accounting is the process by which day-to-day monetary records of the organizations are maintained and are further utilized to prepare the financial statements. These financial statements give a true picture of business health.||Auditing is the process of a comprehensive evaluation of the financial statements or records prepared under the accounting process. The main purpose is to verify the reliability of the financial statements.|
|Initiation||Accounting takes the input from the books of account or bookkeeping i.e. daily transactions that involve sale or purchase of something and then utilize them to prepare financial statements of the organization.||Auditing starts when accounting work is completed. The financial statements prepared by the accounts function are verified to check the accuracy, completeness, and trustworthiness.|
|Mode of Operation||Daily i.e. continuous process||Periodic i.e. quarterly or yearly|
|Scope||Current: The scope of work involves the creation of current year financial statements.||Past: The scope of work involves validating the past financial statements.|
|Objective||The main objective of Accounting is to assess whether a company has earned profits or suffered losses, thus establish the current financial position of the organizations for that particular period.||The main objective of Auditing is to verify the correctness of the organization’s account and financial statements, thus certain or certify that they exhibit the true view.|
|Level of Detail||Very detailed as every financial transaction need to be captured||Sample-based|
|Key Deliverables||Financial statements e.g. Income Statement or statement of Profit & Loss, Balance Sheet, Cash Flow Statement, etc.||Audit Reports|
|Performed By||Carried by Bookkeepers and Accountants (internal employees of the organization)||Qualified Auditing agency or auditors (external & independent to the organization)|
|Regulated or Governed By||Regulated by Accounting Standards that are issued by Accounting Boards of the specific country, and which need to adhere while preparing the financial statements.||Regulated by Auditing Standards that are issued by Auditing Boards of the specific country and also certain international compliance laws that need to adhere while auditing the financial statements.|
|Reports Submission||To the management of the organization||To management, the board of directors, and shareholders|
What is Accounting?
Accounting also referred to as the language of business as every business is measured in terms of certain figures or numbers and these numbers are prepared by the means of accounting.
In simple terms, accounting can be well understood with the help of following questions that gives specific numbers,
- How many goods are sold in this current month or quarter or year?
- What is the total cost incurred in this month or quarter or year?
- Is the company is running in loss or earning profits?
- What proportion of profit or loss incurred as compared to the total cost or sale?
- What is the strength of the workforce or employees in the organization?
- What is the current market share of the organization?
- What is the exact profit margin as a whole and from each outlet?
What is Auditing?
Auditing is the process of checking, verifying, and evaluating the financial statements of the organization. As financial statements are prepared with the help of accounting records, thus auditing also covers the checking of those accounting records on a sample basis.
It assesses the reliability and validity of the accounting information of the organization that is represented by the means of financial statements. Auditing starts when the process of financial accounting is completed and financial statements are prepared for the given year.
Auditing can be termed as a post-mortem activity.
It is internal i.e. done by internal employees as well as external i.e. done by certified external auditing agency or an independent auditor. But external auditing is the actual assessor.
Main Differences Between Accounting and Auditing
Accounting and Auditing both are essential and critical for every organization and plays a decisive role.
The key difference between the two is,
- Accounting is a continuous process where the focus is to accurately record the financial transactions daily and then prepare the financial statements. Whereas Auditing is an independent activity and conducted quarterly or annually. Auditing involves a critical evaluation of the financial statements of the organization and providing an unbiased opinion on accuracy.
- Accounting is done by an internal employee i.e. bookkeeper or an accountant, whereas Auditing is done by an external agency or an independent auditor.
- The focus of accounting is on current financial information, whereas auditing use past financial records and statements. Auditors ensure the internal controls are intact and no falsification is there.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.