Accounting

Accounting vs Auditing – Differences You Must Know!

In this post, we’ll take a look at the differences between the accounting and auditing functions and provide some background on the career path for accounting professionals today. 

What is accounting?

The accounting function for a company involves the steps taken with the financial data in order to compile it into the financial statements. The standard statements included in the financials are the balance sheet, income statements and cash flow statement, all compiled to help the reader of the financial statements evaluate the financial position of the company. Accounting also provides the information needed to file tax returns for a company. 

The accounting cycle begins with coding the financial transactions to the correct ledgers (also called accounts). This function is also called bookkeeping. The transaction coding for bookkeeping happens in two main books of accounts: journal and ledger. The journal is used to record the financial transactions in date order and is compiled in the ledger. The ledger is the method used to classify the financial transactions by nature. For example, all expenses for paper and pens will be classified in the office supply accounting ledger. 

The bookkeeping process forms the foundation of the accounting cycle and the remainder of the work involved in creating the financial statements adjusts the results of the bookkeeping. Accounting entries are recorded after the bookkeeping is complete and involve entries to record depreciation, prepaid expenses, and other adjustments to ensure the most accurate presentation of the company’s financial condition. 

Modern accounting standards as outlined in Generally Accepted Accounting Standards (GAAP) must be followed when preparing financial reports in order to ensure transparency and consistency in assessing the financial position of a company.  

The financial accounting function requires distinct types of accountants who specialize are trained in specific areas of the accounting process. One example is management accountants who focus on cost accounting functions by analyzing, interpreting and communicating financial information to management. Another accounting job specialty is a general ledger accountant. These positions focus on the financial reporting side by compiling the financial data to create the final financial statements.  

What is auditing? 

Auditing, put simply, is the process of inspecting records to ensure accuracy of an output. When it comes to financial information, the most common outputs are tax returns and financial statements. The findings of all audits are outlined in audit reports. While there are many types of audits, the most common are financial statement audits, internal audits and compliance (tax) audits.  

Financial audits carry the very specific purpose of an “objective appraisal of an organizations financial position”.  In order to maintain independence, these types of audits are performed by external auditors (to the company) who are Certified Public Accountants. The auditing firm is tasked with using auditing standards to review the monetary records of the company. A financial audit also includes an assessment of the effectiveness of internal controls to help the external auditors access the accuracy of the accounting records. 

Internal auditors work for the company itself and the internal audit function is a key piece of risk management. The internal audit department focuses on compliance with regulations and the strength of internal controls. Accounting processes are also evaluated for both efficiency and accuracy. Internal auditors review financial documents and the work of the accounting staff within the company in order to maximize operational efficiencies and head off issues before they are discovered in an external audit. Internal auditors must understand the company’s operations and use the financial and operational information to improve the company’s results. This role is much broader than an accountant or external auditor. These folks must have the ability to see the forest through the trees. 

As compared to an external audit which is conducted on an annual basis, internal audits are ongoing and have various timelines driven by the scope and purpose of the internal audit.  

Accounting versus auditing – tabular comparison

While the accounting function results in the publication of financial reports for a company, the auditing function is the process that verifies the financial information is presented accurately.  Auditing starts when the accounting cycle finishes. 

The level of detail of each function is also a significant distinction. The Small Business Chronicle explains that accounting includes using the financial information found in bank statements and other detailed source documents. Auditing on the other hand, samples the information to form an opinion on the likeliness of errors and opportunities for improvements.  

Below is a comparison of the two accounting functions. 

Related to the positions themselves, all auditors must have a strong knowledge of accounting and both auditors and accountants typically have a bachelor’s degree in accounting. Many people hold both types of accounting positions in their career. The Bureau of Labor Statistics lumps the positions together when considering median income. 

Conclusion – accounting vs. auditing

While the difference between accounting and auditing can seem as if we are splitting hairs to non-accountants, the actual difference is quite distinct and can be easily described as managing (accounting) versus examining (auditing) the financial records of a company. Accountants and auditors have similar educational foundations, but usually choose one field over the other based on the subtle differences in each along with the individuals interests and strengths.

Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.