Finance & Accounting

Why are Audits Important in the Context of Financial Accounting?

In today’s developing era accounting and auditing are two crucial processes for an organization related to the financial activities and records of an organization.

Accounting and audit have an important role to play in the financial activities and record-keeping process of any business. However, their roles and things to focus on are different. While accounting translates to a much wider field, encompassing everything, including the flow of money from the organization to the management of the company, auditing is more of a specialized service in a specific area of work in finance.

Auditing is a part of the accounting world. It is an examination of accounting and financial records that is undertaken independently. It is done to determine if the company or the business undertaking has confirmed its operations to the laws and the generally accepted accounting principles.

In this blog, we will understand audits in depth, including their importance in the context of financial accounting, and we will also compare the similarities and differences between audits and accounting and explain why we need audits.

Audits: A Brief Explanation

Audits refer to examining the financial statements and records of an organization. After a final prep of all financial accounts and statements, an audit is carried out simultaneously. It includes conducting the scrutiny and legal review of the financial statements.

Auditing offers an impartial and just evaluation of whether the financial documents and reports accurately represent the real financial status of the company. External individuals or organizations, typically auditors, perform auditing following relevant laws on behalf of regulators or shareholders.

Auditing is divided into two primary categories: internal audit and external audit. An internal audit is a review performed by an internal auditor, typically a staff member of the company. An external auditor, appointed by shareholders, carries out external audits.

Similarities to Cover between Audits and Accounting

Most of the basics, including the process of audits and accounting, are mostly the same. Both audits and accounting require in-depth knowledge of accounting principles and the basics of the same. The process or work done in them is required to be done by a professional who carries an accounting degree. That person uses a specific kind of essential techniques and procedures of computing, bookkeeping, and analysis to make all financial reports and statements.

Generally, the procedures of activities such as tax compliance for both auditing and accounting are similar. They can sometimes also have a similar method for bookkeeping, including cash or accrual basis. They make sure that the records and statements of finance are made accurately and portray a clear image of the organization by their financial position.

Differences to Note between Audits and Accounting

Listed below are the key differences between audits and accounting for your understanding:

1. Definition: Accounting involves the classification, recording, interpretation, and summarization of financial statements and transactions to assess the true financial status of an organization, while auditing refers to the evaluation of an organization’s financial statements and records to identify any discrepancies that may arise during the transaction recording process and to confirm the accuracy of those records.
2. Purpose:  The purpose of accounting is to depict the true status, performance, and profitability of a business or organization, while auditing is conducted to confirm the correctness of the records and reports provided by accounting. 
3. Objective: The aim of accounting is to identify the profit and loss or the financial status of an entity over a specific period, while auditing seeks to verify the accuracy and correctness of all documented transactions.
4. Period: Accounting should be conducted on a daily basis since transactions occur every day, while auditing is a periodic evaluation that is carried out monthly, quarterly, or annually.
5. The person responsible: Accounting responsibilities should be managed by qualified accountants. The auditing process should be conducted by certified auditors.
6. Initiation of the process: Bookkeeping concludes before accounting commences, while auditing starts after accounting has been completed.
7. Concentration: Accounting focuses on present financial activities and transactions, while auditing is concerned with past financial statements.
8. Scope: All documentation, transactions, and statements that carry financial significance. Definitive financial records and statements.

Different types of Audits

Here is a brief explanation of the three main types of audits:

1. Internal Audits:

Internal audits are performed by personnel within the company to enhance decision-making processes, ensure compliance with applicable laws and regulations, maintain the integrity of accounting advisory and financial reporting, and identify potential flaws or inefficiencies prior to the evaluation of financial statements by external auditors. This proactive approach promotes timely and equitable reporting.

2. External Audits:

External audits conducted by independent organizations and third parties provide impartial assessments aimed at identifying material misstatements or errors in a company’s financial statements. These audits enhance confidence in the accuracy and completeness of the financial reports, thereby enabling stakeholders to make informed decisions regarding the company under review.

3. Government Audits:

Government audits verify the accuracy of financial statements and taxpayers’ tax returns. The Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) use statistical formulas and machine learning to identify high-risk taxpayers. Audits may result in no changes, accepted or rejected changes, and if not accepted, the issue may go through legal mediation or appeal.

Why do we Require Audits?

Auditing is crucial as it provides an impartial assessment of the organization. It frequently uncovers mistakes that may be present in the business operations, allowing owners to implement necessary corrections. It also promotes transparency.

External audits enhance the credibility of the organization, foster better relationships with suppliers and clients, and contribute to a favourable public reputation. When it comes time to sell the business, having completed an auditing process simplifies that process. Additionally, it can boost the organization’s credit rating, which in turn can attract the interest of investors and banks.

Why are Audits Important in Financial Accounting?

The field of accounting is extensive and includes numerous areas of specialization under its umbrella. Auditing falls under one of those specializations. Accounting involves tracking and recording financial transactions, while auditing involves verifying the accuracy of accounts. Auditing plays a crucial role in assessing the overall integrity of a company’s accounting system. It is crucial to audit financial statements annually, regardless of whether your organization is a non-profit or a public company. This will enhance your credibility in terms of accuracy. Even if auditing is not required, it is still advisable to have it implemented.

The significance of auditing is especially evident when errors are found in your financial statements. If your financial records are not current or organized, an auditor can provide valuable assistance in revealing those discrepancies. It is recommended to use a forensic auditor’s services if any uncovered details indicate fraud or misconduct. There is an additional subcategory within the audits domain that focuses on cases bordering on criminal behaviour.

Different audits can be utilized based on the organization’s specific requirements. Financial audits assess if an organization’s financial statements truthfully depict the outcomes of its financial activities. It ensures that the organization’s financial status complies with commonly accepted accounting standards. Compliance audits verify if the company has operated in line with the laws and regulations that could significantly affect the financial statements.

Financial and regulatory audits are increasingly frequent. Nevertheless, they are not merged. Audits on economy and efficiency assess if a company has been effectively and efficiently handling its resources. These assets may consist of staff (workers), real estate, area, etc. The audit additionally identifies the reasons for any issues and verifies whether the company has complied with the relevant laws and regulations. Audits must be performed under the standards established by the Auditing and Assurance Standards Board.

To Wrap Up

The most critical aspect of the financial accounting scenario is the audits. These help as checks to ensure that the financial records are correct, transparent, and comply with the relevant laws and regulations. Besides building the confidence of the stakeholders, investors, and regulatory bodies, the audits help strengthen the integrity of the financial statements by relating the accounting with independent verification. They protect businesses from financial imbalances, fraud, and waste, thereby improving their reputation and operational effectiveness.

Audits, whether internally, externally, or government-mandated, provide a solid foundation for the basis of informed decisions, responsibility, and continued growth. If you need professional help in simplifying your auditing process, you may seek assistance from Enterslice. Our skilled team offers a wide array of auditing and financial advisory services customized to meet the specific needs of your business. Work with us to ensure accuracy, compliance, and transparency in your financial operations. Visit https://enterslice.com/ today to get started!

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