Accounting Compared with Auditing
Chapter Five
Syllabus topic 1, "Basics – Financial Statements, Users of Information, Definition of Auditing, Objectives of Auditing, Inherent limitations of Audit, Difference between Accounting and Auditing, Investigation and Auditing."
Pages 12 to 13 of 98
In one line
Accounting records and summarises the transactions; auditing examines what accounting produced and reports an opinion on it.
The ten points
| Basis | Accounting | Auditing | |
|---|---|---|---|
| 1 | Meaning | Recording, classifying and summarising transactions, and preparing the financial statements | Examining those statements and the records behind them to express an opinion |
| 2 | When it begins | With the transaction | Where accounting ends; the audit starts after the statements are prepared |
| 3 | Object | To ascertain the profit or loss and the financial position | To report whether the statements give a true and fair view |
| 4 | Who does it | An accountant, who need hold no particular qualification | Only a chartered accountant, section 141 |
| 5 | Whose employee | Usually an employee of the business | An independent person appointed by the members |
| 6 | Nature of the work | Constructive: it builds the statements | Analytical: it tests what was built |
| 7 | Governed by | The accounting standards, and section 128 | The Companies Act and the auditing standards, and section 143 |
| 8 | Period | Throughout the year, continuously | After the year end, usually |
| 9 | Output | The financial statements | The audit report |
| 10 | Responsibility | To the management that employs him | To the members, section 143(2) |
Rows 5 and 10 are the two that carry the most weight. Independence and the person reported to are what make an audit an audit, and an answer that gives only the first four rows has described a bookkeeper and a reviewer.
The relationship between them
They are not rivals and they are not alternatives.
| Auditing depends on accounting | There is nothing to audit until the accounts exist, and the auditor uses the same books |
| Auditing does not do accounting | Section 144 forbids the auditor of a company to provide accounting and book keeping services to it, so the two cannot be done by the same person for the same company |
| Both rest on the same knowledge | An auditor must know accounting better than the accountant whose work he tests, because he must know when it is wrong |
Section 144 is the point to add. The prohibition is statutory, it is one of nine services listed, and it is the sharpest illustration of the independence in row 5.
Where the two are confused
"The auditor prepares the accounts." He does not, and for a company he may not. Where a small entity's accountant also assists with the accounts, that is an accounting service and not an audit.
"The auditor is responsible for the accounts." He is not. Section 134(1) puts the financial statements on the Board. The auditor is responsible for his opinion on them.
"An audit corrects the accounts." It does not. The auditor reports what he finds; if the Board will not correct a material misstatement, his remedy is to qualify his report, not to alter the books.
Accounting Compared with Auditing
The third member: investigation
MU names it in the same topic line and it has its own chapter next. Keep the three apart:
| Does what | |
|---|---|
| Accounting | Builds the statements |
| Auditing | Reports an opinion on them |
| Investigation | Establishes a particular fact for a particular person, for a particular purpose |
Quick revision
| When auditing begins | Where accounting ends |
| Nature | Accounting constructive, auditing analytical |
| Qualification | None required for accounting; chartered accountant for a company audit |
| Independence | Accountant is an employee; auditor is independent |
| Reports to | Accountant to management; auditor to the members |
| Statutory bar | Section 144: the auditor may not provide accounting and book keeping services |
| Responsibility for the statements | The Board, section 134(1), not the auditor |
Test yourself
- Give five points of difference in matching pairs.
- When does auditing begin?
- Which section forbids the auditor to keep the company's books?
- Who is responsible for the financial statements?
- If the Board refuses to correct a material misstatement, what is the auditor's remedy?
Answer in one sentence
1. Accounting records and auditing examines; accounting begins with the transaction and auditing where accounting ends; an accountant needs no qualification while a company auditor must be a chartered accountant; an accountant is usually an employee and an auditor is independent; and an accountant reports to management while an auditor reports to the members.
2. Where accounting ends, after the financial statements have been prepared.
3. Section 144 of the Companies Act 2013, which lists accounting and book keeping services first among the services an auditor may not render.
4. The Board of Directors, under section 134(1), which requires them to approve the financial statements before they are signed.
5. To qualify his report, since he may not alter the books and the accounts remain the Board's.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.