You'll find there is more than one simple difference between accounting and auditing. Accounting is a whole different creature. When you're working on accounting, you’re going to track, review, and perform analysis of various transactions. You, or other professionals, track large and small transactions following a specific process or procedures, such as journal entries, based on GAAP. This work might include looking at a financial statement or tax return. This is the most basic work that’s done so that a business can check and know with accuracy its revenues, assets, expenses, and profits.
Meanwhile, auditing closely examines an organization’s financial statements, records, operations, and systems after they've been made. This is often a legal necessity and can help companies or government entities spot differences and discrepancies in tracked data and determine if there is fraud. Audits are often performed by outside firms who can objectively review all of a company's systems with an objective, professional view.
On the other hand, there are Management Accountants who review a firm's systems with specific goals in mind. These auditors might review their employer's inventories, payroll, supply chains, or operations in search of ways to maximize efficiencies. Management audits are intended to be kept in-house and are not shared with the IRS or any other public entity.
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When you compare auditing and accounting, you quickly learn that the difference isn't merely academic. They are two different, yet interdependent, functions. One function tracks the work done by the other to ensure that everything has been done in accordance with standard, accepted accounting principles and policy.
When you are working in an accounting role, you’re given a set of dollar amounts and categories. It’s up to you to put the dollar amounts into the correct categories and make them balance. Accountants work with sales reports, expense reports, profit and loss statements, or a general ledger, you’re responsible for making sure that the numbers you report are accurate. For instance, if you are given a payment for $100, but mark it down as $1000, someone is going to have to catch that error in the data. They often do this using specific technology, systems, or secured websites that have been created for this purpose.
Accountants also work on tax documents. If you’ve been given such an assignment, you already know the IRS wants the content of everyone’s returns to be absolutely correct. The information you put into a client’s tax return is only as good as the information they give to you. Just as with computer software, an accountant is only as good as the information they're given.
Auditing checks the work an accountant has done in the past. The accounting of private companies and public organizations gets audited, either on a regular basis, or after some issues about the numbers reported by employees come to light. An internal auditor (one who works for the organization) or external (one who works for a different organization) will review the company’s books. Regardless of who is conducting the audit, they must have full access to the firm's financials, operations, etc.
All accountants and auditors are expected to work within generally accepted accounting principles (GAAP). In the United States, GAAP has been established by the Governmental Accounting Standards Board (GASB), which is an institute that oversees states and local governments and the Financial Accounting Standards Board (FASB), which oversees the federal government. Both of these organizations created and work to maintain GAAP standards as requirements for accountants in the US. International accounting systems vary slightly, but follow the general principles closely.
How Auditing Began
Auditing may have begun as early as 4th (BC) century Greece. There are signs that Chinese auditors were hard at work in the 11th century. The Greek and Chinese governments wanted to know how public funds were being used and moving from country to country. Some of these activities involving public funds led government officials of the day to believe that tracking the usage and movement of public funds was a good idea.
Fast-forward to 1857, when Great Britain created the Office of Comptroller-General, modern auditing got its start. Sixty-four years later, the United States created the U.S. General Accounting Office (GAO). Now, this office has the same acronym, but, in 2004 its name was changed to the Government Accountability Office. The functions of both agencies are to track the use and movements of money that the British and U.S. governments use in running each country.
This practice isn’t perfect. In fact, several huge financial disasters have put auditing guidelines in use during each disaster under an unwelcome spotlight. These include the Wall Street meltdown of 2008 and the Enron collapse in the early part of this century. Thus, accounting systems have been in a constant state of evolution and change since their inception.
Just as with types of accounting and classes of accounting certifications, auditors undertake several different reviews.
- Financial audits
Look through a company’s financial statements to see if they provide an accurate report of its health. Financial audits also verify whether a company is complying with GAPP practices or not.
- Program results audits
Scan through particular programs, looking to see if they have achieved the results they were intended to reach. This also looks at whether the stated benefits of a program are being reached.
- Compliance audits
Examine organizations and companies to see if they have followed local, state and federal laws and regulations. The results of the organizations’ practices, as well as the compliance audits, may impact their financial statements. These are sometimes carried out at the same time as regular reviews.
- Economic and efficiency audits
Test whether a company is managing its assets efficiently and economically. These assets include property, personnel and space. This type of audit also examines whether the organization in question has followed applicable laws.
Inside and Outside Audits
This means that a company can be audited by its own auditors or an outside team may visit the company to carry out at least one type of review.
Internal auditors work within the company. They focus on internal controls, organizational operations, governance processes and risk management. Their role is to carry out all necessary reviews that can inform company officers and/or shareholders about the efficiency of its operations. If they detect any issues, they put these into their reports, advising company officers on measures that can be taken to correct shortcomings.
External auditors come into the organization from an auditing firm. Their purpose is to complete the needed reviews, then deliver their expert and independent opinions on the company’s records and accounting.
Every publicly traded company is required by law to undergo external audits of their financial statements and records.
Government agencies, at the state and federal level, do go through internal reviews. However, federal government agencies have little to no internal audit capability. Agencies tasked with providing federal assistance may spend 60 to 80 percent of their official time in going through the reports completed by local and state auditors or independent public accountants. They may also complete they carry out external audits themselves.
Whether internal or external, each review system serves to reassure the taxpaying public that their money is being used wisely and in compliance with GAAP, local, state and federal regulations. If an audit uncovers misuse of public funds, it should be dealt with by the appropriate agency, punishing wrongdoers.
When both functions are properly carried out, public funds are used as intended, for infrastructure, welfare, operation of government, for the military, education or healthcare.