Auditing is a detailed examination of the financial reports of an organization. It is used to provide confidence for all stakeholders that the organization’s accounting reports are accurate.
In accounting, we look at the different accounting rules, journal entries, financial statements, and other bookkeeping duties. All these tasks are important because, with these skills, accountants can then be involved in an engagement team to perform an audit on both internal or external clients. The most common audits are performed by the Big Four accounting firms for large publicly-traded companies around the world. To summarize the auditing process, see the diagram below:
The financial statements in the first box, which include the balance sheet, income statement, statement of cash flows, and note disclosures, are evaluated against some form of accounting criteria, such as Generally Accepted Principles of Accounting (GAAP). Different regions around the world adhere to different accounting standards. Commonly used standards include the IFRS or US GAAP. The bottom line is that these are established criteria that are known publicly. Finally, the work culminates in an audit report where the findings are communicated to the users.
More formally, auditing is referred to as the accumulation and evaluation of evidence to determine and report on the degree of correspondence between the information presented (i.e., the financial statements) and the established criteria. Auditing should be done by a competent, independent person or entity.
Accounting vs Auditing
Overall, auditing is a more specialized field of accounting but the two go hand in hand. This means that auditors cannot be totally unaware of accounting rules. In fact, auditors must be qualified and competent in accounting in order to properly conduct an audit. Let’s take a look at the following table to compare the two topics:
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Accounting |
Auditing |
|
Recording, classifying, summarizing transactions in accordance with GAAP |
Accumulating and evaluating evidence |
|
Bookkeeping, financial statement preparation |
Determines if the financial statements are prepared in accordance with GAAP |
External Auditors vs Internal Auditors
There are basically two types of auditors: external auditors and internal auditors.
External auditors refer to public accountants who take on different clients and perform the audit together with an engagement team. As mentioned before, these are the usual public accounting firms such as the Big Four firms that audit large public companies in addition to large private companies. External auditors are employees of the accounting firm they are associated with and only interact with their clients through the audit process.
Internal auditors, on the other hand, are actual employees of the company. Their role is to perform general auditing procedures all year to ensure that all accounting and record-keeping is being done properly so that the external audit becomes more feasible. Internal auditors usually exist only in large companies.