Accounting is a whole different creature from auditing. When you are working on accounting, you’re tracking and analyzing various financial transactions. You’re reporting those transactions. These might include financial statements or tax returns. This is the most basic type of work that’s done so an organization knows its revenues, assets, expenses and profits.
Auditing, on the other hand, closely examines accounting and an organization’s statements and records.
When you compare accounting and auditing, you quickly realize they are two different functions. One function tracks the work done in the other function, to ensure that everything has been done in accordance with accounting principles.
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, then make them balance. Whether you’re doing this 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.
Accountants also work on tax documents. If you’ve been given such an assignment, you already know the IRS wants 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.
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 reported numbers come to light. An internal auditor (one who works for the organization) or an external auditor (one who works for a different organization) will audit the company’s books.
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 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.
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.
Auditing isn’t perfect. In fact, several huge financial disasters have put the 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.
Just as with types of accounting and classes of accounting certifications, auditors undertake several different types of audits. These include:
Look through a company’s financial statements to see if they provide an accurate report of its financial 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 audit also looks at whether the stated benefits of a program are being reached.
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 audits are sometimes carried out at the same time as financial audits.
Economy 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 of auditors may visit the company and carry out at least one type of audit.
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 audits 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 audits, then deliver their expert and independent opinions on the company’s financial 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 audits. However, federal government agencies have little to no internal audit capability. Agencies tasked with providing federal assistance may spend between 60 and 80 percent of their official time in going through the audit reports completed by local and state auditors or independent public accountants. They may also complete they carry out external audits themselves.
Audits, whether internal or external, serve 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.