Difference between Auditing and Accounting

. 7 min read
Difference between Auditing and Accounting

Proper business management tools help a business reach new heights. No matter what type of business it is, a few methods always make it up to the list of priority management tools. The company needs to be aware of where its business stands frequently. All companies need to keep up with the accounting part to run the business smoothly. Knowing the current financial status may help the company recognise if the sales are decreasing or increasing or keeping constant.

Also, it may help prepare statistical data to find out the customer base during that period. A company is bound to pay a lot of taxes, license fees, salaries, and securities. To meet your tax obligations, terms like accounting and auditing come into the picture. The vastness of a business does not define the need for account management. All companies, big or small, must maintain financial records. These financial records help:

  • To identify the company's market position.
  • To prepare better business tools to increase brand visibility.
  • To measure the company's performance.
  • To assist with any future needs.
  • To attract a better audience.

The primary financial terms related to accounting and auditing are explained here:

Financial terms



Cash, cash equivalents, inventories


Debt, rent, taxes


Common stock, paid-in capital, retained earnings

What is Accounting?

In simple terms, accounts are a record of assets, liabilities, income, expenses, and more. Accounts include all these terms in written format and the respective dates of the transactions, be it credit or debit. The technique of maintaining such records, personal or commercial, is called accounting. The knowledge of accounts requires a person to know about rules and standard principles about financial records. We call such a person an accountant.

The ability of accounting has been long known since ancient times when kings of Egypt and Rome kept financial records. Modern-day accounting has seen a considerable increase with the growing number of businesses. In accounting, it is necessary to balance the debits with their credit counterparts. The accounting equation is considered to be the foundation of the double-entry accounting system. The assets of a company are equal to the sum of the liabilities and the owner's equity.

For example, If a project is valued at $500 and the loan amount due is $400, the owner's equity will be $100. Here, the assets are $500, liabilities are $400, and the equities are $100. The following formula represents the accounting equation. The left-hand side and the right-hand side of the accounting equation must be equal to satisfy the financial records.

Assets= Liabilities + Owner’s Equities

Types of Accounting

The three main types of accounting include financial accounting, managerial accounting, and tax accounting.

1. Financial accounting

Financial accounting is the field of accounting concerned with the summary, analysis, and reporting of financial transactions related to a business. Financial accounting makes use of certain standard principles. The financial accounting aspects are used both in the public as well as private sectors.  Again, financial accounting involves the basic terms of assets, liabilities, expenses, revenues, and equities. All these terms are well defined on the balance sheet and help to calculate the financial income statement. In terms of a company, financial accounting keeps check of a company's financial records, including all transactions, credit, or debit. Financial accounting includes two methods of cash and accrual accounting.

hand written text showing managerial accounting at white paper on cardboard

2. Managerial accounting

Taking well-thought decisions is an integral part of a company's management. Managerial accounting is that branch of accounting that helps businesses make critical financial decisions better. It makes use of the identification, measurement, analysis, and interpretation of accounting information. Managerial accounting may effectively help a company to reduce its expenses and make better use of its assets.

3. Tax accounting

Rather than creating account statements, this branch of accounting uses the concepts of taxes, returns, and payments. A tax accountant may not only prepare tax databases but may also identify errors in them.

What is Auditing?

It is well-known that human errors are inevitable. As we read that preparation of financial statements is prioritised in the smooth functioning of a company, it is equally essential to check for any issues. Auditing is the process of examining and checking the financial records of a firm to figure out any discrepancies in the reports. Auditing is a common annual requirement for certain companies to prevent any transactional fraud. Auditors require the accepted auditing standard knowledge to go ahead with the official auditing process. Auditing helps in the confirmation of the audacity of the prepared financial statements. The auditor needs to have extra knowledge than that of an accountant, for auditing is a more critical process and may use laws for confirmation. An essential role of the auditor is to question the company members to gather evidence about the financial accounts.

Types of Auditing

1. External audit

In this case, the auditing is performed by any third party. As mentioned earlier, auditing is generally an annual requirement of any company; hence the auditing can be done by external auditors or the company's auditors. In external auditing, the third party's opinion does not ruin the working relationship amongst the company's employees. Also, it helps the company get a crystal clear idea about where the company stands financially from a fresh perspective.

External audits also add value by identifying areas where efficiency can be improved and where controls and processes may be made more effective. The external auditors report to the finance committees, who by their suggestions may improve the financial status of a company.

2. Internal audit

Internal auditing is generally done by auditors who themselves work for that particular firm. Internal auditors report to the board of directors or the executive committee of a company. Internal auditors work very closely with the employees of the company and can provide regular suggestions to them. Internal audits are conducted often in a year, whereas external audits are usually conducted once a year.

3. Internal Revenue Service audit

IRS auditing contains tax-related auditing exercises. It is a detailed review to check if the tax returns comply with the written amounts. It is not usually seen as positive auditing but more like an issue with the tax-paying accounts of the company. Either the taxes are well in compliance with the reports, or the taxes are not rightly paid, accepted by the payer, and paid later. The last case is when the payer disagrees about the tax changes. In this case, a legal process may be followed.

IRS tax auditor man with a stern

The Main Differences Between Accounting and Auditing

As the definitions and types of accounting and auditing have been mentioned already, it is clear that there is a visible difference between the two terms. Although both accounting and auditing are closely interrelated, the variations between the two make up most financial operations. These terms are a significant part of any firm, whether big or small. The smooth functioning of the companies depends entirely on these financial aspects.

  • The fundamental difference between accounting and auditing is their definitions alone. Accounting is the preparation and management of records for a business or an individual. On the other hand, auditing is a more critical process that involves the use of principles and standards to confirm the credibility of the statements. Also, it helps lookout for any errors and assists in providing suggestions for better financial operations of a company.
  • Accounting is an essential process to record the debits and credits and identify where the company stands. Auditing is an assessment to verify the written accounts with the other financial parameters of the company that include expenses, taxes, debts, etc.
  • Accounting is a task that is generally performed regularly. On the other side, auditing is done less frequently than accounting, usually once a year.
  • The knowledge base of an accountant and auditor varies in areas of standards, rules, and laws.
  • Accounts are managed regularly. The process of auditing is performed when the accounting is complete.
  • The objectives of accounting may vary a lot concerning auditing because accounting recognises the gains/losses/performance of a company, but auditing verifies the correctness of the financial data prepared.

Also read:

1) How To Open A Bank Account?
2) What is Online Money Transfer? Changing Contemporary Financial Transaction.
3) What are Mutual Funds? Here's what you should know
4) Difference Between Payout Modes: Wallet vs UPI vs NEFT vs RTGS vs IMPS

5) OkCredit: Simple, Paperless & Secure solution for businesses

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Q. What is the primary difference between accountants and auditors?

Ans. Accounts prepare daily financial records, whereas auditors verify the accuracy of those records.

Q. How often does auditing take place?

Ans. It often takes place annually. In some instances, it may be done quarterly.

Q. What does internal auditing involve?

Ans. Internal auditing involves interviewing the staff, examining the documents, and suggestions to improve the company's position.