A State By State Accounting Guide

Accounting vs. Auditing

Accounting involves tracking, reporting, and analyzing financial transactions. It covers everything from preparing individual tax returns to preparing financial statements for multinational corporations, and is considered a fundamental discipline within the field of accounting.

An audit is an independent examination of accounting and financial records and financial statements to determine if they conform to the law and to generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) set and maintain these principals.

The Origins of Auditing

Although records exist of government auditing in 11th century BC China and 4th century BC Greece, the modern audit evolved in the 19th century when public activities involving the movement of large amounts of money around the world  made an independent and objective assessment of financial management a prudent idea. In Great Britain, the Office of Comptroller-General was created in 1857, and in 1921, the U.S. created the U.S. General Accounting Office (which became the Government Accountablility Office in 2004).

Auditing practices continue to evolve and have come under fire more than once, most recently after the collapse of Enron, Worldcomm, and their auditing firm, Arthur Andersen, in the early 2000s, and again after the Wall Street financial meltdown of 2008.

Types of Audits

Financial audits determine if an organization's financial statements fairly represent the results of an organization’s financial operations and the organization's financial position while conforming to generally accepted accounting principles.

Compliance audits determine if the organization has followed the laws and regulations that may materially affect the financial statements. Financial and compliance audits are often combined.

Economy and efficiency audits determine if an organization is economically and efficiently managing and using resources, such as personnel, space, and property; the causes of any problems in this area; and if the organization has followed laws and regulations relating to this area.

A program results audit looks at a specific program to determine if the desired results or benefits are being achieved and if the desired results can be achieved at a lower cost.

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Internal vs. External Audits

External auditors come into organizations from outside for the purpose of providing an independent opinion on accounting and financial records. All publicly traded companies are required by law to have their financial statements externally audited.

Internal auditors are part of the organization. Their purpose, according to the Institute of Internal Auditors, is to help the organization accomplish its objectives by improving operations, internal controls, risk management, and governance processes.