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Accounting Vs Auditing

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Differences between accounting and auditing
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The Essential Practices for Business and Personal Financial Ownership

No financial situation can be adequately managed—overseen and understood—without a healthy system of accounting and auditing.

Although some might confuse these two fiscal procedures, the truth is that they rely on one another to exist and work hand in hand.

Both practices must be used properly to ensure that the financial procedures of either an individual or a business institution are legal, accurate, and proper.

And there is a very distinct difference between auditing and accounting, one that must be understood if business owners are to fully equip themselves to conduct both operations.

Please, be guided that without a solid understanding of accounting, you will not be able to track your business’ finances and make tweaks and corrections where they are needed.

Without a solid knowledge of accounting and auditing, you will not be able to identify pain points and strengths within your own organization.

Without auditing your business, meanwhile, you run a double risk.

First, there is the risk that those outside your company (or even outside the accounting office) will have trouble trusting you.

And secondly, you won’t be able to say with absolute certainty that your own records are accurate.

An audit can give you that final, certain peace of mind.

This article will explore more deeply the practices of accounting and auditing and the differences between them, allowing our readers to gain a more developed understanding of why both processes are necessary and how they can best be brought to bear.

What is Accounting?

Often referred to as the language of business, accounting is a means of tracking and reporting on the economic activities of an entity.

Businesses conduct accounting practices by recording the financial transactions they undertake each day.

Whenever money changes hands, whether digitally or in cash, a solid accounting system requires that that money be noted and categorized. This is what every financially savvy business owner is known for.

The categorization of accounting expenditures and revenue allows businesses to break down into digestible information packets where money is being spent and where it is being earned.

Accounting is so called because it accounts for the financial transactions of the business. Without good accounting, a business’ financial practices would remain a mystery.

Accounting includes keeping records of the following processes, each of which are common in business:

  • Accounts Payable
  • Accounts Receivable
  • Payroll
  • Marketing
  • Equipment Expenses
  • Operational Expenses

Accounting teams, or individual accountants, are also responsible for the tax preparations of the business.

If you don’t have an accountant as one of your staff, you might want to contact a professional CPA, such as the team at Nguyen CPA in Denver, Colorado, USA to help you with this process.

An experienced accountant will make sure your books are in order leading up to tax season.

What is Auditing?

If accounting is an act of reporting, auditing is an act of checking, and it picks up where the accountant’s work leaves off.

Many of us have experienced the vague anxiety of wondering if our personal or business tax returns will undergo an audit. 

When we speak of audits, we are talking about the careful examination of an accounting of one’s personal or business finances to ensure that everything has been reported properly.

Private and public businesses are subject to regular auditing to ensure that everything is being handled by the books, which is just one of the many reasons to make sure you’re working with an accountant who knows what they’re doing.

Auditing as a term does not refer solely to the financial records of the company. Businesses can and most likely will be audited for several different things in their time. Some of the kinds of audits you can undergo include:

  • Financial audits – in which the auditor will look through the company’s accounting records to see if they accurately reflect the financial state of the company. This audit will also investigate whether the company is complying with the generally accepted accounting principles (GAAP).
  • Program results audits – in an audit of a business’ programs, the auditor will be looking to see whether each program has achieved its intended results and is providing the benefits it was intended to provide.
  • Compliance audits are intended to ensure that the business is cooperating with local, state, and federal laws. These audits are often carried out in tandem with financial audits.
  • Economy and efficiency audits review the way the company is managing its assets, including property, personnel, and space.

A company will certainly be subjected to audits in its time, but it may be able to exert some control over who does the auditing.

Although all publicly traded companies are required by law to submit to external auditing, many think it is wise to keep internal auditors on staff to review the accounting processes by which the company is run.

Government agencies too are susceptible to audits, although in their case the legal rules are more particular. At the federal level, agencies lose most of their power to conduct internal audits. Separate agencies are assigned to carry out these audits.

The purpose of audits is to provide a layer of transparency to the taxpaying public. A successful audit reveals accurate and honest accounting, which lets the public know that their money is being used as intended.

The Practical Differences Between Accounting and Auditing

Now that you have a fairly comprehensive understanding of the definitions of accounting and auditing, and what each discipline consists of, let’s take a look at the differences between the accounting and auditing.

By doing so, we can more specifically delineate which processes are the purview of accountants and which should be undertaken by auditors.

It’s also noteworthy that each process informs the other, so that accountants can hone and refine their job skills by studying the role of the auditor, and vice versa.

So what are some of the specific differences that set accounting and auditing apart?

1. Auditing Ends Where Accounting Begins

What does this mean? Unless thorough accounting has been conducted and records are available to review, no audit will be possible. Auditing is dependent upon accounting in order for it to take place at all.

2. Auditing is Periodic While Accounting is Constant

Accounting should be part of the daily practice of business, not something you do weekly, monthly, or quarterly.

Accounting should be live, and the records of your company’s profits and expenditures should be accurate day by day. Auditing, conversely, is something that only happens once in a while, such as every quarter.

3. Auditing and Accounting Are Carried Out by Different People

Whether for an independent individual, a business, or a government entity, accounting is generally handled by either the person themselves or an individual or team within the organization. This is not required—it is certainly possible and sometimes even advisable to enlist the services of an outside accountant—but it isn’t intrinsic to the process.

When it comes to auditing, however, the rules are different: audits are carried out by an independent person or organization that has no financial connection to the subject of the audit. 

What Auditing and Accounting Have in Common

Although auditing and accounting are two very different business practices and must be treated as such, there is a reason we are discussing them here in the same article.

Accounting and auditing are very closely tied together—so closely, in fact, that it may be a mistake to consider one without the other.

Accountants and auditors do not have the same job—in fact, far from it—yet they may have more to talk about than any other two people in a given room. Let’s wrap things up with a look at some of the ways in which accounting and auditing overlap.

1. Both Operate According to a Strict Set of Standards

The Accounting Standards and the Standards on Auditing. These standards are guidelines put in place to govern the ways in which accountants and auditors go about their business. There can be no freewheeling or creative solutions in these jobs.

2. Both Deal with the Financial Affairs of Individuals or Organizations

Both processes are just as important as the money is involved. Without careful accounting, one cannot be certain where the money went. Without good auditing, one can’t hope to know if the accounting is reliable or trustworthy.

Accounting and auditing processes have the same end goal—to ensure that the accounting records of a business (or an individual) adequately reflect that entity’s true financial position.

3. Both Require a Deep Knowledge of Accounting Procedures

Although auditors are not accountants, they usually do come from an accounting background and often hold an accounting degree, just because the education and experience leaves them better equipped for the responsibilities they will face as auditors.   

Conclusion

Understanding the difference between accounting and auditing is vital for business owners because both business processes are so integral to the functioning of a successful business.

The terms cannot be interchanged or mistaken for one another, and you need to make sure that both are taking place.

Put your business’ finances in the hands of a good, well-educated accountant, and prepare yourself to cooperate with an auditor, remembering that in many important ways they are there to help you. With the right combination of accounting and auditing software, your business will thrive.

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