Many people find it difficult to understand the difference between accounting vs auditing, especially when deciding which career path to embark upon graduation. The complication is amplified even further when we realise that the audit process can be further classified into internal auditing and external auditing. Here are the classic definitions for the 3 terms to help establish a rudimentary understanding:
- Accounting – The measurement, processing, and communication of financial information about economic entities
- Internal Audit – An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations
- External Audit – Periodic or specific purpose audit conducted by external qualified accountants
Being able to understand the meaning of each term will prove useful in the business world, as all public companies will need accountants and external auditors. As an accounting student myself, I would like to use this opportunity to share with you the key differences between these terms in simple words.
Key Differences between Accounting vs Auditing
There are many incorrect perceptions and myths about accountants and auditors. One of the classics is that ‘internal auditors are all essentially accountants’. To a certain extent, that is true – auditors must have deep knowledge about accounting, and they usually hold an accounting degree.
Auditing is a sub-field of accounting; therefore, they do have some similarities. One of the similarities is that they both ensure a company’s statements reflect its financial position, and lead to better decision making, planning and forecasting.
Despite their similarities, it is important to understand that accounting and auditing are two different fields, and here’s why:
- Accounting and auditing have different purpose
At the end of every financial cycle, accountants produce the financial statements from account balances and trial balances of the company. These are used to determine the financial position of the company. Auditors will only come in after the reports are produced to check the statements and identify any potential errors. This process is to ensure the financial statements are credible and reliable.
- Accounting is continuous While audit is periodic
Accountants must record daily transactions, and the process cannot be paused. On the hand, auditors check the financial statements on a periodic basis (usually monthly, quarterly, or yearly). In other words, auditing only takes place after the accountants complete their work.
Related: A Beginner’s Guide to Audit
Key Differences Between Internal Audit vs External Audit
Although internal and external audits are different, the knowledge is transferable. Therefore, it is common to see auditors switch between external to internal auditing. Moreover, they both ensure the validity of financial statements. That being said, the difference between internal and external audit can be significant:
- Internal and external auditors have different goals
Internal auditors’ goal is to minimize errors in the financial statements and reports produced. They also help an organization to increase its efficiency by detecting any internal problems. An internal auditor’s job scope includes helping the business to manage risks and meet its strategic objectives. However, internal auditors (who are normally employees of the company) might be too close to the business due to their position within the company.
External auditors are always from an external audit firm to ensure they are unbiased. This is required because their objective is to double check the statements and reports to detect potential inaccuracy or frauds. They also ensure the financial statements and reports meet the legal requirements.
- External Auditors are Provided with More Support
External auditors can be more knowledgeable than internal auditors due to the nature of their employment and work scope. Audit firms often provide training and workshops to their auditors to ensure that their auditors have the required knowledge and can adapt to the industry changes.
However, for internal auditors whose company does not focus on assurance service like audit firms do, they can only seek for advice from their seniors or related professional bodies.
To summarise the overall process, the financial statements of public companies are developed by accountants, verified by internal auditors, and audited by external auditors. For private companies, the process will often stop at the accountants or internal auditors, depending on the size and nature of the company.
Both internal and external users (including managers, investors, debtors of the companies) will depend on the financial statements when making their decisions. Therefore, the hard work of accountants, internal auditors and external auditors are crucial for the development and wellbeing of an enterprise.