Accounting and Auditing

Auditing is described as the on-site confirmation activity of a process or quality systems, such as inspection or examination, to guarantee compliance with regulations. An audit can cover the entire company or focus on a particular function, process, or manufacturing step. In addition, some audits have administrative functions, such as auditing documentation, risk, or performance, or following up on corrective actions that have been done. Accounting is the practice of keeping track of a company’s financial activities. 

Summarising, analysing, and reporting these transactions to oversight authorities, regulators, and tax collection entities are part of the accounting process. Accounting financial statements are a succinct overview of financial transactions over a period of time that summarise a company’s operations, financial status, and cash flows. Accounting plays a crucial role in decision making, cost planning, and economic performance monitoring, regardless of the size of an organisation.

A bookkeeper can manage basic accounting needs, but a Certified Public Accountant (CPA) should handle bigger or more complicated accounting chores.

The Three Different Types of Audits

An audit is defined as a “systematic, independent, and documented process for gathering audit evidence (relevant and verifiable records, statements of fact, or other information) and objectively evaluating it to determine the extent to which the audit criteria (a set of policies, procedures, or requirements) are met.” There are three sorts of audits: internal audits, external audits, and internal revenue service audits.

Process audit: This sort of audit checks to see if processes are operating within set parameters. It measures compliance to established instructions or standards and the effectiveness of the instructions by evaluating an operation or procedure against predetermined instructions or standards. During a process audit, check for compliance with established standards such as time, accuracy, temperature, pressure, composition, responsiveness and component combination.

Analyse the resources (equipment, materials, people) used to convert inputs into outputs, as well as the environment, the methods (procedures, instructions), and the metrics used to assess process performance. Examine the process controls provided via procedures, work instructions, flowcharts, training, and process specifications for sufficiency and effectiveness.

Product audit: This sort of audit examines a specific product or service, such as hardware, processed material, or software, to see if it meets specifications (i.e., specifications, performance standards, and customer requirements).

System audit: An audit of a management system is known as a system audit. It is a documented action that is carried out to ensure that functional system elements are acceptable and effective and have been developed by examining and evaluating objective evidence.

Limitation

1. For estimating and assessing fixed assets and the estimation of contingent liabilities, an auditor must rely on professionals such as engineers, valuers, and lawyers.
2. An auditor does not comment on the effectiveness of management in client business, and audited financial statements cannot be used to forecast future performance.
3. An auditor cannot possibly review all business transactions, especially in large businesses with many transactions. Sampling and test checking are the only options available to an auditor.
4. Any fees and other expenses incurred from conducting an audit add to an organisation’s financial burden.
5. Deeply rooted frauds like forgery, misstatements, and non-recording are difficult for an auditor to identify.

Difference between Accounting and Auditing

1. Accounting is the discipline of keeping detailed records of monetary transactions and preparing financial statements for a business. Auditing is an analytical task that entails an independent review of financial data to provide an opinion on whether it is genuine and fair.
2. Accounting is governed by Accounting Standards, whereas auditing is governed by Auditing Standards.
3. Accounting is a simple process that Accountants execute, however auditing is a more difficult task that requires Auditors to complete.
4. Accounting’s primary goal is to expose an organisation’s profitability, financial status, and performance. Auditing, on the other hand, is the process of verifying the accuracy of a financial statement.
5. Auditing confirms the dependability of a company’s financial records, whereas accounting gives a true and accurate perspective of those data.
6. Financial accounting, managerial accounting, cost accounting, social benefits accounting, government accounting, and human resources accounting are all types of accounting. As previously stated, auditing can be internal or external. Management frequently requests internal auditing to aid with process improvement. External auditing is typically performed as a regulatory review to guarantee that fiscal laws and regulations are being followed.
7. Accountants keep books of accounts, keep documentation and records, generate financial statements as needed, prepare financial estimates, analyse business models, implement budgets, and track actual expenditure on any given day. Auditors spend their time examining a company’s financial statements, following the company’s financial processes step by step, identifying critical areas of fiscal risk, recommending controls for each risk identified, verifying financial documents, creating an audit trail, and writing audit reports to share with employees or business units who rely on the accountant’s financial statements.
8. Accountants are usually found in middle management positions. Internal auditors frequently communicate this information. While external auditors are not part of a company’s structure, their job takes precedence over that of accountants, therefore they tend to outrank internal finance professionals.

Conclusion

Accounting and auditing are both specialised disciplines, but auditing has a broader scope than accounting because it requires a complete study of numerous legislation, tax rules, accounting standards, and auditing standards, as well as communication skills.

Apart from that, the key characteristics that must be maintained while completing the audit procedure are secrecy, integrity, honesty, and independence. The auditor’s reports assist users of financial statements like creditors, shareholders, investors, suppliers, debtors, customers, government, and others in making reasonable decisions.

Like any other profession, accounting necessitates a thorough understanding of accounting standards, concepts, conventions, and assumptions, as well as the Companies Act guidelines and tax legislation.