CONCEPT & PRINCIPLES| ACCOUNTANCY & AUDITING|L-1|

What’s the difference between accounting vs auditing?

Accounting and auditing are related and go hand in hand with one another. Accounting provides information on the financial health, profitability and performance of a company, while auditing aims to determine whether or not the financial data provided by accounting is correct. Essentially, the work completed by an accountant is certified by an auditor. 

The purpose of conducting an audit is to obtain an independent opinion about a company’s financial statements. This opinion provides insight into whether the company’s reports and financial statements are accurate and reliable. 

Financial statements (i.e., income statements, balance sheets, and cash flow statements) capture the operating, investing, and financing activities of a company through various transactions. Because these statements are developed internally, there is a need for an independent third party to verify that there is not any fraudulent behavior by the preparers of the statements.  

Auditing makes certain that companies represent their financial positioning fairly and accurately, and in accordance with accounting standards. 

Are there different types of auditing in accounting?

In accounting, there are three main types of audits: external, internal, and Internal Revenue Service (IRS) audits.  

Accountants who specialize in internal audits are company employees who examine issues related to the company’s financial and business practices. The findings of an internal audit are used to ensure compliance with laws and regulations, make improvements to internal controls, and help management identify flaws in processes prior to a review by external auditors. 

External auditors work outside of the company and independently evaluate financial records. After a comprehensive assessment, they provide an objective opinion that either confirms the company’s financials are both accurate and complete or offers guidance to help the company make more informed financial decisions. 

The IRS also performs audits to verify the accuracy of a taxpayer’s tax return and specific transactions. An IRS audit is typically determined by a random statistical formula that analyzes a taxpayer’s return and compares it to similar returns. A taxpayer may also be selected for an IRS audit if they’ve had transactions with another person or company found to have tax inaccuracies during an audit. 

What does an audit accountant do?

Accountants who specialize in auditing evaluate financial records to validate accuracy. They may focus on internal or external audits to ensure that a company’s income statement, balance sheet, and cash flow statements are in compliance with tax laws, regulations, and all applicable accounting standards.  

In their work to verify the accuracy of financial statements and tax filings, internal and external auditors may search for clues as to why some figures don’t quite add up. By identifying discrepancies and providing guidance, auditors can help protect businesses from fraud, boost operational efficiencies, and mitigate risk. 

In terms of an IRS audit, an audit accountant provides support to an individual taxpayer by representing them before the IRS and communicating with the IRS on their behalf. This includes preparing, filing, and submitting documents, and providing advice on federal tax matters. Of course, the goal of most accountants is to be proactive by teaching clients how to avoid IRS tax audits in the first place.  

Why do accountants get into auditing?

Accounting and auditing require similar skill sets; however, slight differences exist.  

An accountant is typically detail-oriented and meticulous. For organizations large and small, even the slightest mistake can be costly. As an accountant, the last thing accountants want is for an auditor to come in behind them only to discover discrepancies or errors.