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Accounting and Auditing (Auditing) are two related concepts in the field of finance that have very different functions and purposes. Their definitions, purpose, scope, actors, procedures, and relationships are elaborated below, and their differences are compared in a clear manner.

1. Accounting

definition

Accounting is the process of recording, classifying, summarizing, and reporting the financial transactions of a business or other organization. It is the foundation of a financial information system and is designed to provide a comprehensive record of an organization’s financial health and operating results.

objective

– Record financial activities: Ensure that all transactions (e.g., income, expenses, asset purchases, etc.) are accurately recorded.

– Provide financial information: Provide financial statements (e.g., balance sheets, income statements, cash flow statements) to management, investors, creditors, and other stakeholders.

– Supporting decision-making: Helping businesses with budgeting, cost control, and financial planning.

– Compliance: Ensure that financial records are in compliance with local accounting standards (e.g. Hong Kong Financial Reporting Standards (HKFRS) or International Financial Reporting Standards (IFRS).

range

– Daily records: Includes transactions that record income, expenses, assets, liabilities, and equity.

– Preparation of financial statements: generation of balance sheets, income statements, cash flow statements, etc.

– Internal Management: Provide management accounting information such as cost analysis, budgeting.

– Tax treatment: Calculate the tax payable and prepare tax returns.

executor

– Accountant or finance department employee, usually by someone within the business.

– Specific qualifications are not necessarily required, but professional accountants may hold qualifications such as CPA (Chartered Public Accountant) or ACCA (Association of Chartered Certified Accountants).

procedure

1. Transaction records: Use accounting software or books to record each transaction (e.g., sales, purchases, payroll payments).
2. Classification & Adjustment: Classify transactions into appropriate lethal accounts (e.g., income, expenses) and make adjusting entries (e.g., accrued expenses, depreciation).
3. Preparation of Statements: Generate financial statements based on records.
4. Internal Review: Ensure that the statements are accurate for management or external use.

peculiarity

– Accounting is an ongoing day-to-day work within a business.

– Focus on recording and reporting, with a bias towards action.

– Independence is not required, accountants are usually corporate employees.

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2. Auditing

definition

Audit (commonly referred to as “audit” in Hong Kong) is the process of independently examining and evaluating a company’s financial statements or other financial information to verify its authenticity, accuracy and compliance.

objective

– Verify the reliability of financial statements: Ensure that the financial statements truly reflect the financial position and operating results of the business.

– Ensure compliance: Check that the business is following applicable accounting standards and regulations.

– Enhance trust: Provide independent assurance to investors, creditors, regulators, etc.

– Identifying risks and errors: Identifying errors, fraud, or risks in financial reporting.

range

– Financial Audit: Check the authenticity and fairness of financial statements.

– Compliance audits: Ensure that businesses comply with laws and regulations or specific requirements.

– Internal Control Audit: Evaluate the effectiveness of an enterprise’s internal control system.

– Special audits: such as tax audits, performance audits, etc.

executor

– Performed by an independent external auditor (Auditor), usually a Certified Public Accountant (CPA) or a professional audit firm (such as a Big Four accounting firm).

– The auditor must be independent of the auditee to ensure objectivity.

procedure

1. Planning stage: Understand the business, risks and internal controls of the enterprise, and develop an audit plan.
2. Testing phase: Checking the effectiveness of financial records, transaction vouchers, and internal controls, and conducting sampling tests or substantive tests.
3. Assessment and Reporting: Based on the audit results, an audit report is issued to explain whether the financial statements are true and fair.
4. Expression of opinion: The auditor may issue an unqualified, qualified, negative, or unable to express an opinion.

peculiarity

– An audit is a third-party inspection that is independent of the business.

– Usually done on an annual or project-specific basis, not on a daily basis.

– Auditors are required to have a high degree of professional qualifications and independence.

Key Differences Between Accounting and Auditing

objective

Accounting: Records, classifies, and reports financial transactions and provides financial information. Auditing: Inspects and verifies the authenticity, accuracy, and compliance of financial statements

executor

Accounting: An in-house accountant or financial officer.

Auditing: An independent external auditor or auditor.

independence

Accounting: Independence is not required, and accountants are usually employees of the business.

Auditing: Must be independent of the audited company to ensure objectivity.

frequency

Accounting: Ongoing, covering day-to-day financial activities.

Auditing: Conducted on a regular basis, usually annually or project-specific.

range

Accounting: This includes recording transactions, preparing statements, managing accounting, and more.

Auditing: Focuses on examining and verifying financial statements or specific financial processes.

output

Accounting: Financial statements (e.g. balance sheet, income statement).

Auditing: An audit report expressing an opinion on the financial statements

Eligibility Requirements

Accounting: Professional qualifications are not necessarily required, but professional accountants are more common.

Auditing: Professional qualifications (e.g., CPA, ACCA) are usually required

The relationship between accounting and auditing

– Interdependence: Auditing is based on accounting records and financial statements, and accounting is the premise of auditing. The auditor relies on the information provided by the accounting department for the examination.

– Independence requirements: Accounting is an internal business process, and audits must be performed by an independent third party to ensure objectivity.

– Complementary purposes: Accounting provides financial information, audits verify its reliability, and together they provide credible financial information to stakeholders.

– Quality impact: High-quality accounting helps the audit run smoothly, and the results of the audit may feed back into recommendations for improvements to the accounting process.

Examples in practical applications

– Accounting: The finance department of a Hong Kong company records sales revenues, pays suppliers, calculates employee salaries on a daily basis, and prepares annual financial statements at the end of the year for submission to management and the Inland Revenue Department.

– Audit: An independent accounting firm audits the company’s financial statements, checks the transaction records, internal controls and accuracy of the statements, and ultimately issues an audit report certifying that the statements comply with the HKFRS standard.

Special situation in Hong Kong

In Hong Kong, audit is often referred to as “audit”, which is a direct translation of the English word “audit”. According to the Hong Kong Companies Ordinance, all limited companies, regardless of size, are required to undergo a statutory audit annually and have an audit report issued by a licensed accountant. This is in stark contrast to the day-to-day record-keeping work of accounting, which is an ongoing internal work, while auditing is a statutory external check.

Audit requirements in Hong Kong

– Listed companies and certain companies (e.g., banks, insurance companies) are subject to stricter audit requirements.

– The audit report must be submitted to the Companies Registry for public inspection (listed companies).

– The audit of SMEs may be simpler, but it still needs to meet the standards of the Hong Kong Institute of Certified Public Accountants (HKICPA).