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Accounting & Auditing

Accounting involves maintaining financial records and preparing financial statements to provide an accurate view of a company's finances. Auditing evaluates the financial records and statements prepared through accounting to ensure their reliability. There are three main types of accounting: financial accounting focuses on financial information for stakeholders, cost accounting derives product costs, and managerial accounting analyzes data for planning and decision making. Auditing checks accounting records and determines the validity of financial statements. Accounting and auditing are interrelated and work together, with auditors certifying the work of accountants.

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Ihab Al-Anabousi
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639 views12 pages

Accounting & Auditing

Accounting involves maintaining financial records and preparing financial statements to provide an accurate view of a company's finances. Auditing evaluates the financial records and statements prepared through accounting to ensure their reliability. There are three main types of accounting: financial accounting focuses on financial information for stakeholders, cost accounting derives product costs, and managerial accounting analyzes data for planning and decision making. Auditing checks accounting records and determines the validity of financial statements. Accounting and auditing are interrelated and work together, with auditors certifying the work of accountants.

Uploaded by

Ihab Al-Anabousi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Contents

Accounting vs. Auditing..................................................................................................................................6


What is Accounting? .......................................................................................................................................7
#1 – Financial Accounting...........................................................................................................................8
2 – Cost Accounting ....................................................................................................................................8
#3 – Managerial Accounting.......................................................................................................................9
What is auditing?..........................................................................................................................................10
Conclusion ....................................................................................................................................................11
Accounting vs. Auditing
Accounting is an act of maintaining the monetary records of a
company to help prepare financial statements, which will give an
accurate and fair view of the company’s business. As we note
from Colgate’s SEC Filings, they must prepare the financial
statements as per the regulatory authority guidelines.

On the other hand, auditing evaluates financial


records/statements prepared through the accounting function.
The purpose is to ensure the reliability of the financial
statements. For example, in the case of Colgate,
PricewaterhouseCoopers LLP audited the effectiveness of
Colgate’s internal control over financial reporting in 2016.
What is Accounting?
Accounting is the language of business. Any business is
measured in terms of numbers, and these numbers are arrived
at by employing accounting. Let us take simple examples of what
kind of numbers are required by any businessmen on a day-to-
day basis:

What is the quantity of goods sold in the current


month/quarter/year?
What is the total cost incurred during the month/quarter/year?
Is the company earning a profit or incurring heavy losses? In
either case, what is the quantum of this profit/loss?
What is the proportion of profit/loss as compared to the total
sales?
How much is the saving (positive saving will represent a benefit
whereas a negative saving will denote that the company has
spent more) in the cost compared to last month?
How many employees are currently employed in the
organization?
What is the profit margin the company?
What is the growth of the company over the past ten years?
What is the total market share of the company?
What is the profit of each retail outlet for the company?
The above questions can be answered utilizing accounting.
Accounting has various branches, such as:

#1 – Financial Accounting
The main focus of financial accounting is maintaining,
processing, grouping, summarizing, and analyzing the company’s
financial information to give an accurate and fair view to various
internal and external stakeholders of the company.

2 – Cost Accounting
Cost accounting
is beneficial from the point of view of costing various products.
It helps to derive a cost price for complex products that require
various raw materials, processes, and ingredients in their
manufacture. It also helps to identify the key costs (fixed and
variable) associated with each product and the break-even point
for the products.

This serves an essential purpose for any given company. First, it


derives a cost, which helps to calculate the selling price of the
product. The selling price will be derived based on various
parameters such as the company’s margin percentage, market
competitiveness, the strategy involved in selling the product,
etc.

If you want to learn Cost Accounting professionally, you may


want to look at 14+ video hours of Courses on Cost Accounting.

#3 – Managerial Accounting
This section has more to do with planning and support
decisions. The data organized by other fields of accounting are
analyzed further to plan, make strategic decisions, and prepare a
roadmap. Here, reports (MIS – Management Information
System) are prepared daily/weekly/monthly for internal
audiences such as the chief financial officer, chief executive
officer, managers, and other top-level executives who make
informed decisions on behalf of the company. The reports help
them get a better perspective and make informed decisions.
Some of these decisions involve – capital budgeting, trend
analysis
, forecasting, etc.
What is auditing?
Auditing is an activity of verifying, checking, and evaluating
financial statements. As the financial statements are prepared
based on an organization’s accounting records, auditing covers
the checking of accounting records.

It helps determine the validity and reliability of accounting


information represented using financial statements.

Auditing can be said to be more of a post-mortem activity. Once


the financial accounting process is completed for a given year,
the auditing process can start.

Auditing can be divided into External audits and Internal Audit


Conclusion
Accounting vs. auditing are interrelated and go hand in hand
with each other. The job done by the accountant is certified by
the auditor. The auditor’s job will have no meaning if the basic
accounting
framework is not established in the organization. Also, if there is
no one to certify the work done by the accountant, there will be
surety about the reliability of the data presented in the Financial
Statements. An auditor adds value to the work done by the
accountants.

Also, the two can work hand-in-hand, especially in setting up


processes in the organization. The auditor can test the controls
designed and implemented by the accountant. Control gaps, if
any, which are high-risk areas, can also be pointed out by the
auditors. The auditors can use their experience and expertise
and provide feasible suggestions/solutions for process
improvements. The accountant, for better risk management, can
implement these.
These internal controls, which are set by the accountants and
auditors together, are generally approved by the management.
They can be as simple as a manual maker-checker system where
a maker will prepare a document (e.g., a cash voucher) and get
it approved by a superior. These controls can also be as complex
as an inbuilt feature in the ERP, highlighting and disallowing the
creation of a duplicate vendor ledger by checking the unique
company identification number.

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