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Accounting and Auditing – What is the Importance of Accounting & Auditing?

Updated on :  

08 min read

Accounting and auditing are two important processes for an organisation related to the financial activities and records of an organisation.

Accounting and audit have a pivotal role to play in the financial activities and record keeping process of any business. However, their roles and focus are different. While accounting translates to a much wider field, encompassing everything, including the flow of money from the organisation to the management of the company, auditing is more of a specialised service.

Auditing is a part of the accounting world. It is an examination of accounting and financial records that is undertaken independently. This is done to determine if the company or the business undertaking has conformed its operations to the laws and the generally accepted accounting principles.

What are Accounting and Auditing?

Accounting:

Accounting is one of the key functions of a business. Accounting refers to the process of capturing, classifying, summarising, analysing and presenting the financial records, transactions, profitability, statements and financial position of an organisation. It is the process of recording financial transactions of a business.

Accounting of an organisation is usually done by its own employees. The financial statements used in accounting are a brief summary of financial transactions over an accounting period. Accounting is categorised into various branches, such as, cost accounting, financial accounting, management accounting, etc. The accounting reports help the management to make informed business decisions.

Auditing:

Auditing refers to the examination of the financial statements or records of an organisation. Auditing is carried out after the final preparation of the financial accounts and statements. It involves carrying out the inspection and statutory audit of the financial statements. 

Auditing gives an unbiased and fair opinion on whether the financial records and statements provide a fair and true reflection of the actual financial position of the organisation. The auditors, usually external persons or entities, carry out the process of auditing under the provisions of the applicable laws on behalf of regulators or shareholders. 

Auditing has two main categories, i.e., internal and external audit. Internal audit is an audit conducted by an internal auditor, generally an employee of the organisation. External audit is conducted by an external auditor who is appointed by the shareholders. 

Similarities Between Accounting and Auditing

Most of the basic processes of accounting and auditing are similar. Accounting and auditing need a thorough knowledge of accounting principles and basics. They are generally done by persons with an accounting degree. They use essential techniques and procedures of computation, book-keeping and analysis to compile financial reports and statements.

Usually, the procedures for activities in accounting and auditing such as tax compliance are similar. They can also have the same bookkeeping methods, such as cash or accrual basis. They strive to ensure that the financial records and statements are prepared with accuracy and provide a fair reflection of the financial position of an organisation. 

Key Differences Between Accounting and Auditing

ParticularsAccountingAuditing
DefinitionAccounting is the process of classifying, recording, interpreting and summarising the financial statements and transactions to determine the actual financial position of an organisation.Auditing is the process of examining the financial statements and records of an organisation to find discrepancies during the process of recording of transactions and to verify the accuracy of the records.
PurposeAccounting is done with the purpose of reflecting the actual position, performance and profitability of the business or organisation.Auditing is done to verify the accuracy of records and statements presented by accounting. 
ObjectiveTo determine the profit and loss or the financial position of an organisation for a period.To determine the correctness and accuracy of all the recorded transactions.
PeriodAccounting is done daily, as transactions happen on a daily basis.Auditing is a periodical assessment and is done on a monthly, quarterly or yearly basis.
Responsible person Accounting is done by accountants.Auditing is done by auditors.
InitiationAccounting starts at the end of bookkeeping.Auditing starts at the end of accounting.
ConcentrationConcentrates on the current financial activities and transactions. Concentrates on the past financial statements.
Scope All records, transactions and statements having financial implications.Final financial records and statements.
Details usedCaptures all details related to financial records and transactions.Uses financial records and statements on a sample basis.
Governing standardsGoverned by Accounting Standards.Governed by Standards on Auditing.
Carried out byCarried out by an internal employee.Carried out by an external person or independent agency.
Appointment and removalAccountants are appointed and removed by the management.Auditors are appointed and removed by the shareholders.
Remuneration Accountants receive a salary.Auditors receive auditing fees.
DeliverablesFinancial statements, i.e., income statement or profit and loss account, balance sheet, cash flow statement, etc.Audit report
Report submitted toManagementShareholders
SuggestionsAccountants can make suggestions for improving the accounting and related activities.Auditors usually do not make suggestions.
LiabilityLiability ends with the preparation of the accounts.Liability ends after preparation and submission of the audit report.
Attend meetingsAccountants do not attend shareholder’s meetings.Auditors can attend shareholder’s meetings.
Prosecution for misconductAccountants are not usually prosecuted for professional misconduct.Auditors can be prosecuted for professional misconduct.

Why do we Need Accounting and Auditing?

Accounting helps to keep track of all the financial activities of a business, irrespective of the organisation size. It reliably records every aspect of financial activities taking place, which is a crucial piece of information for the management of your company. 

When the books of a business or organisation are kept up-to-date in accordance with the generally accepted accounting principles, it makes it possible for the business owners to gauge the business performance and also make peer to peer comparisons. This is an important aspect of creating and maintaining credibility with the competitors and vendors.

Accounting helps in identifying the areas of underperformance and those that require corrective measures. The information derived from accounting assists in the long term project planning of the business as well. The financial position of the business helps to determine how much credit can  be allowed and at what rates, etc. Investors will get a clear picture of the risk and opportunity that the company could offer them. Keeping the accounts in place will serve you well when it is time to pay your taxes, file your returns and claim deductions.

Auditing is essential as it gives an unbiased overview of the business. Auditing often identifies errors that may exist in the business processes through which the business owners can make changes to rectify them. It ensures transparency as well.

External auditing helps to build credibility of the business, improve relationships with the suppliers/clients and ensures a positive public image. It becomes easy to sell the business in future because the auditing process has already been done. It can also improve the credit rating of the business. Thus, attracting the investors and bank’s attention. 

What is the Importance of Auditing in Accounting?

Accounting as a field is vast and comprises many areas of specialisation within its framework. Auditing is one of such specialisations. While accounting deals with the tracking and recording of financial transactions, auditing fulfils the role of verifying the accuracy of the accounts. Auditing in many ways determines the integrity of the whole accounting system of a company. Auditing of financial statements on an annual basis is important even if you are a non profit or a public company. This will add credibility for your accuracy. Even when auditing is not mandatory it is a good practise to have it in place.

The importance of auditing is particularly seen in case of errors in your accounts. If your bookkeeping has not been up to date or in order, an auditor can make significant contributions in uncovering those details. If the details uncovered denote any presence of fraud or wrongdoings, a forensic auditors service is advisable. There is a further sub field even in the realm of audits that deals with cases verging on the lines of criminal activities.

There are different types of audits that can be availed depending on the need of the organisation. Financial audits determine whether an organisation’s financial statements accurately represent the results of the business’s financial operations. It makes sure that the organisation’s financial position is in accordance with the generally accepted accounting principles. Compliance audits check if the company has functioned in accordance with the laws and regulations that may materially impact the financial statements.

Financial and compliance audits are more often. However, they are not combined. Economy and efficiency audits measure whether a business has been economically and efficiently managing its resources. These resources could include personnel (employees), property, space, etc. The audit also determines the causes of any problems and checks if the company has followed the laws and regulations in this regard. Audits have to be conducted based on the Standards set by the Auditing and Assurance Standards board.

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