Difference between Accounting & Auditing-Free-Samples for Students

Questions: 1.What are the Objectives of Financial Statement 2.Discuss the differences between Accounting and Auditing. Answers: Introduction A literature review have been given on managements assertion and the differences between accounting and auditing is being discussed. The objective behind this literature review is to develop a learners ability on managements assertion, a clear view of objectives of financial statement in auditing terms, a detailed discussion of differences of auditing and accounting has been done (Siagian, Siregar, and Rahadian, 2013). The management assertions are defined on the basis of existence, completeness, its valuation and presentation. The impacts of auditing which helps to improve the firms performance have been discussed here under (Haji, 2014). Objectives of Financial Statement The general purpose of preparing financial statement for the year is to provide few information about the financial position and financial performance of the entity to the third party users in order to make informed economic decisions. According to the author Noor Adwa Sulaiman, Zarina Zakaria and University Malaya. They have mentioned in the chapter that the objectives of financial statement in auditing is to ensure the reliability of the financial statements that they are made in with the compliance of accounting standards and Financial Reporting Act 1997 which has establish the foundation of this act and based on Malaysian Accounting Standards Board (MASB); Though each statement has its own particular objective to serve but they are interconnected that the sole purpose of statement can be fulfilled and looked as a whole not to be considered separately. The financial statement should depict true and fair value of the organizations financial position and it should be free from the m aterial misstatements. Also it showcases the flow of cash of the organization which affects the financial performance of the entity. The statement shows the company affairs which are regulated by the Companies Act 1965; so that third party users can rely upon the financial statement of the company and the entity itself can make economic decisions (Weil, Schipper, and Francis, 2013). Difference between Accounting and Auditing Generally, when the process of accounting ends and the auditing process begins for the sole purpose of defining the true and fair view of books of accounts. It is basically an activity of recording, preparing, classifying and presenting the financial statements. Accounting is used to keep the track of monetary transactions and audit on the other hand means an inspection of the books of accounts and the financial statement of an entity with an intention to reveal the fact that at what extent does financial statement is giving a fair picture of an organization. According to the author the distinction between accounting and auditing is that, accounting is a process of recording, classifying and summarizing the transactions or events in a manner that fulfilment of the purpose of providing financial statement to third party users for decision making (Yu-Shu, Chyi-Lin, and Altan-Uya, 2015). Whereas audit is a process of improving the trustworthiness of financial statements. A thorough unde rstanding of accounting principles and the rules of law is must in evaluating the relevancy of financial information that the statements are depicting the true value of an organization. The economic events that have been occurred in the accounting period are also covered in by the auditors while auditing (Wang, and Huang, 2014). The standards and procedures of accounting and auditing are correlated. This integrated system of both help managing the accounts of a company. The application of GAAP (generally accepted accounting principles) is only being determined by applying the auditing procedures in companys financial statements. According to the author Weirich, (Weirich, Pearson, and Churyk, 2013). In his Accounting and auditing research, accounting is one studied language of business whose purpose is to provide economic activities carried on by the entity. It captures the day to day monetary transactions of business by classifying those transactions into groups and summarize them in a way that in case of urgency one can refer to them easily. Thereafter analyzing the results of financial statement made and communicate the same to the interesting parties. The key function of accounting is to help in decision making by providing material information of financial nature. There are varied field of accounting namely Cost Accounting, Management Accounting, Human Resource Accounting, so it can be said that the scope of accounting is wide in nature. Objectives of Accounting are maintaining proper record in Journal, Ledger books and Trial Balance and determining the profitability position from these records by prepar ing Trading and Profit Loss Account. Lastly, Balance Sheet is prepared to showcase the financial position of the entity, as it provides necessary information regarding insolvency and liquidity position to the interested parties (Turner, 2013). On the other hand, auditing is known to be a methodical procedure of examining financial information with an intention of giving an opinion about the truthfulness and fairness of the financial statement. Auditing is critical in nature and an unbiased thorough investigation of each and every aspect starting from vouchers, receipts, account books that needs to be verified with an objective of spotting the reliability and validity of the financial statement. A detailed scrutiny is done to detect frauds, errors and manipulation if any. The accuracy and transparency is being inspected in compliance with the accounting principles and standards. After all the inspection of books of accounts and financial records, auditor gives his opinion in the form of a report. The report made by the auditor for the person who has appointed auditor to carry on the auditing process in his organization (Brooks, Cheng, and Reichelt, 2013). The report are of two types called as Unmodified and Modified, it can be conducted internally and externally depending upon the requirements of organization. If management wants to improve their accounting as well as internal control systems then auditor is appointed to do auditing internally within a specific time decided by directors (Cassell, Drake, and Dyer, 2014). The external auditor is appointed by the shareholders of the company because they are the interested parties who need the true and fair picture of financial statement to make formed economic decision for the company. The scope of Auditing is not as wide as of Accounting. It is being concluded from the articles and theory given by the mentioned authors that: Accounting is more of a simplified task whereas Auditing is a complex one. The purpose of accounting is revealing the profitability position and performance of an entity where auditing is done to check the correctness and detect errors and frauds in the financial statement. Auditing seems to be a periodic activity unlike accounting which is a continuous activity. Auditing governs auditing and accounting is governed by Accounting principles and standards. Accounting is an orderly preparations of monetary transactions and on the other hand auditing is an analytical task involves evaluation of financial statement independently (Farouk, and Hassan, 2014). Review of Management Assertions The definition pounded by the author Leow that Management Assertions are mere representations in the annual report made through the financial statements (Leow, and Khong, 2015). The directors do so to discharge their responsibility towards shareholders of the company. These representations may be implicit or explicit by the management which are exemplified in the financial reports of the company. These assertions are broadly classified into five categories which are as follows: Existence; Completeness; Allocation; Presentations or Disclosures. These assertions are further explained by Leow in his journal article where author tried to explain Management assertions are the claims made by members in relation to certain aspects of a company. When audit is conducted, auditors rely on the variety of assertions in regard to business. The concept of management assertions is to provide a source while applying audit procedure in the company. But before applying such assertions, auditors make sure by conducting audit tests on given assertions and check the reliability of these assertions. Management assertions are further classified into three levels named as Transaction-level assertions, Account balance assertions and Presentation and disclosure assertions. In Transaction-level assertions, the assertions are related to transaction which are mostly in relation to income statement and they are as follows: Existence: Here the accuracy in assertions is measured in a way that it detects the error presented in transactions and the existence of reported assets and liabilities whether they exist at the balance sheet date or not or occurred in the period which was covered by financial statement. Completeness: Every transaction and account must be complete and there should not be any undisclosed assets, transactions or liabilities. Valuation: All transactions and assets, liabilities, revenues and expenses must be valued properly. Presentation: The transactions must be presented in a proper way and disclosed all the facts necessary in the financial statements of the organization (Sayyar, Basiruddin, Rasid, and Sayyar, 2014). In Account balance assertion, the assertions related to the end balance of accounts and mainly relates with the balance sheet only. Existence: The account balances must exist for assets, liabilities and equity. Completeness: Here the assertion is that the balances of all assets, equity and liabilities must be completed and fully reported. Valuation: The balances of asset, liabilities and equity should have been recorded properly at their exact valuations. Rights and obligations: The rights and obligations under this assertion is that the entity has all the rights and obligations over assets and liabilities (MBA, 2013). In Presentation and disclosure assertion, the information under financial statement must be presented and disclosed with the compliance of accounting standards. Accuracy: All the information presented in financial statement should be disclosed correctly in terms of amounts and time period, proper values along with it. Completeness: The assertion here is that the transactions that needs to be disclosed must be there with the disclosure and an explanation with the same. Occurrence: The assertion in here is that the transactions which are recorded and have been disclosed, must be occurred specifying the time they had occurred. Understandability: The information which includes financial statements has been presented appropriately which is clearly understandable and with no question of doubts (Martinez, and de Jesus Moraes, 2014). The author said in a clear way these assertions may sound almost same or may show repetition in the types of assertions which are categorize in three levels. Although they are repetitive in nature but they do carry a different aspect of the financial statements. As discussed they carry these three sets accordingly, the first set which is related to income statement and the second set to the balance sheet. Lastly, the third set to the presentations and disclosures (Mahzan, and Binti Hassan, 2015). It is the responsibility of senior management to provide auditor appointed the letter containing management assertions. Because without the management assertions the auditor cannot proceed with the audit activities (Kwon, Lim, and Simnett, 2014). The management assertion letter is sort of an indicator that the management practices are engaged in fraud in the preparation of financial statements. The letter makes auditor able to perform their task in an orderly and well manner with a quite intensive examination to detect errors at the first place only. Management assertions are a sufficient evidence to support the audit procedure and every material component of financial statements. Implications of auditing on Firms performance Author Knechel (Knechel, and Salterio, 2016) has said in his study that there are few implications of audit on firms performance. Researcher supported the theory of auditing that how auditors help and contribute to a companys audit system in various ways. These implications are as follows: Fulfilment of business objectives: An effective audit system enables the firm to pursue their corporate objectives. Varied business processes need internal controls matching to the business processes and facilitate monitoring, supervising and detecting, preventing errors or irregular transactions at the point of occurrence. Later they measure the ongoing performance and maintain required business records to make improvement by correcting irregularities if any. In this way audit affects firms performance. Assessment of risk misstatement: In order to create reliable financial reports for many purposes there is a requirement of system of internal controls, where auditors assess financial statements to found out the risk of misstatement. This assessment help firm to allocate their resources in a profitable segment or product lines which is of great importance for a firm (Mahamud, and Salad, 2013). Prevention of frauds: Auditing serves an important aspect to companies by preventing frauds and errors. A periodic analysis of operations in a company and maintain a rigorous systems of internal control can help detect, prevent varied forms of frauds and other irregularities in accounts. For the purpose of preventing frauds at an earlier stage of its occurrence there is an high need of audit professionals who would design and modify the internal control system. The implications of such modified internal control system come as profitable and smooth flow of business activities also it helps in gaining the trust of interested third parties. An effective audit system in firm will not allow an employee to attempt any kind of fraud scheme (Nyakundi, Nyamita, and Tinega, 2014). Cost of Capital: Regardless of the size of a company the cost of capital is an important key aspect for a company. The cost of capital comprises high amount of risk associated with the investment. Higher the investment is, the requirement of investor will be higher rate of return in order to invest. Only a rigid and strong audit system can reduce the varied forms of risk in a firm. As discussed above, it will also reduce the risk of material misstatement in financial statement (Ojong, 2014). Whereas the risk of misappropriation of assets, fraud and risk of insufficient information in management process can be reduced by an effective audit system in a firm. Conclusions From the Literature review, there are several researchers who have seem to found out that audit and financial performance of an organization are inter-related. It is concluded after confirming from the empirical evidence that was obtained from the research. 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