Definition of auditing & Dissimilarity connecting – Auditing and Accounting

Introduction: Generally we know that a financial statement means the balance sheet and profit & loss accounts. The financial statement provide the actual financial position or financial information in an organization or business,

 

The opinion on financial information is articulated after examination and verify of books of Accounts documents, records & voucher and go on to point out the true and fair financial position or result of operations in an organization. For complete all this prosecutions the owners of the business would appointed a person to check the accounts documents with determining the accuracy and reliability accounting statement & reports. Those appointed person who completely the accounts examined and tender a report to the authority as a rule the person is a auditor, and his profession of accounts examination, verify and obtainable  report all this task typically we called auditing,

 

Author note: A lot of analyst and authors has illustrated about the “definitions of auditing” although they elucidated very well but at times it’s actually complex to recognize for the learners clearly. I had a dreadful experience when I was a learner. Now, as a financial analyst I felt to write this matter in a very and easy way so that the learners/professionals don’t have to go door to door to understand this. Below is my definition of auditing and others importance matters that related with auditing. I hope a student, learner & auditors will be helpful from this,

 

 

Definition of auditing: audit is a process of examining and verifying a company’s or organizations financial records and supporting documents, this audit process is a step by step systematic appraisal of a company’s operating systems. that properly drawn up so as to exhibit a true and fair view of the financial state of affairs of the business financial period.

 

 

“Dissimilarity connecting Auditing and Accounting “

Most of the public confuse about the auditing and accounting, the confusion arise due to the most auditing is usually concern with accounting information and many auditors have considerable expertise in accounting matters. Basically the general public confusion are increased by the designation “certified public accountant (CPA) or chartered accountant (CA) but the designation holder perform audit,

 

Before make discussion about auditing, I think it is necessary to explained “Dissimilarity connecting Auditing and Accounting “it will helpful for leaner to clear understand about the auditing process and accounting method, below I have presented “Dissimilarity connecting Auditing and Accounting “

 

01. Accounting: Accountancy is to record the contract in the book of accounts, removal of trial balance, preparation of Trading and profit and loss account and balance sheet etc.

01. Auditing: Auditing is the examination of books of account and scrutiny the financial statement for the purpose of finding out the true and fair position and results of action of a concern

02. Accounting: The auditor is asked to write the books of accounts, remove an agreed trial balance and profit and loss account and Balance sheet; he would be doing the work of an accountant and not the work of an auditor.  Grounding of account is not the part of auditing.

02. Auditing: An auditor, using his assigning  power, needs to check methodically, whether the Profit and Loss account  and the Balance Sheet have been properly haggard up and revel the ‘true and fair view’ of the state of relationships and results of operation of the concern and report it to the gathering attracted.

03. Accounting: Auditing without the prior continuation of accounts is not possible.

03. Auditing: The accountant finishes his work, the auditor starts his work.

 

04. Accounting: all the Accountants are not auditor.

04. Auditing: the all auditors are accountant

 

05. Accounting: An accounting has to record the transactions in the books of accounts.

05. Auditing: An auditor has to check and verify such transactions and accounts and send a report to the person who appointed him.

 

 

Conclusion: I further of considerate accounting – the auditor must process capability in the gathering and the explanation of audit evidence. this proficiency that differentiates auditors from accountants formative the proper audit procedures deciding the number and types of items to test and evaluating the results are problems unique to the auditor.

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Accounting & balance sheet

I would like to start speaking about this topic with defining what accounting is. So accounting is keeping financial records, recording income & expenditure, valuing assets& liabilities, eleberation of budjets & so on. We can devide accounting into two large groups.

Accounting:

Financial accounting

preparing financial statements of various kinds

- financial statements

- tax reterns                                             -

is used for:

Managerial accounting

preparing financial information,

necessary for the company itself;

- controlling

- marketing & management

- pricing

- negotiations

- analyzing the flows of capital

But also there are a lot of other kinds of accounting, such as:

Cost accounting – working out the unit cost of products, including materials, labour & all othe expenses.

Tax accounting – calculating an individual’s or a company’s liability for tax.

“Creative accounting” (or “window dressing”) – using all available accounting procedures & tricks to disguise the true financial position of a company.

Also at the begining of the topic I would like to stress, that we shouldn’t muddle accounting with bookkeeping. Bookkeeping is just writing down (recording) all the details of transactions (debits & credits). Bookkeepers have to record every purchase and sale that a business makes, in the order that they take place, in journals. At a later date, these temporary records are entered in or posted to the relevant account book or ledger. At the end of an accounting period, all the relevant totals are transferred to the profit and loss account. Double-entry bookkeeping records the dual effect of every transaction – a value both receives and parted with. Payments made or debits are entered of the left-hand (debtors) side of an account, and payments received or credits on the right-hand side. Bookkeepers periodically do a trial balance to test whether both sides of an account book match.

So as you see it’s not the same as accounting, actually, I would define bookkeeping as a necessary part (one of the functions) of accounting. Because accountants do record cash flows, & the value of assets & liabilities, & they calculate profits & losses, & so on. But it’s not just writing down numbers. They are in the business of supplying people with information (e. g. shareholders). Even managers always need the help of accountants. They need financial statements & budgets, & cash-flow projection, & so on, to measure the success of what they’ve done, & to make decisions about allocating resources for future projects. They try to find a way to allocate all the overheads to different products. Also accountants try to make a company’s financial situation look as good as possible in the balance sheet (I’m talking about “creative accounting”) & reduce tax bill, despite of the fact, that it’s not legal. So it’s not a full list of everyday duties of any accountant.

One of the function of accounting is also valuing assets, which are things of value or earning power to a firm. Assets can include cash, receivables, bank deposits, and trade investments: investments in other companies. Such assets are called current assets. Assets including land, plant, buildings, and furniture, are called fixed assets. Assets such as plant and equipment that over time wear out or become outdated are said to depreciate. A charge must be made for this depreciation or amortization in calculating a business’s profitability: the assets are depreciated or amortized by an amount each year. Also there are intangible assets, which may include such things as patents owned by the company, and goodwill, the value of the company as a functioning business or going concern with a client base, experienced management, and other benefits that a start-up may not have.

All the money that a company will have to pay to someone else in the future, including taxes, debts, and interest and mortgage payments is calledliabilities. Long-term debts are long-term liabilities. The ratio of a firm’s debt to equity is its gearing or leverage; a firm with a high proportion of debt in relation to equity is highly geared or highly leveraged. Short-term debts and debts to suppliers are among its current liabilities.

& here I would also like to define two more concepts (they seem to be key definitions in topic accounting). I’m talking about debtors & creditors. So

-                     debtors (or account receivable) – are the sums of money owed by customers for goods or services purchased on credit

-                     creditors (or accounts payable) – the sums of money owed to suppliers for purchases made on credit

As it has been already mentioned there are different kinds of accounting, different functions of accountants, various possible ways of recording debits & credits, valuing assets & liabilities, calculating profits & losses, etc. But there are generally accepted “accounting principles” that any accountants must follow in order to present “a true & fair view” of a company’s finance. So here are some of them:

The matching principle – the revenues generated in an accounting period are identified with related costs whenever they were incurred. The objectivity principle – all data recorded should be verifiable & free from bias. The consistency principle – the same methods (of inventory valuation, depreciation, etc.) must be used from one period to the next. The full-disclosure principle – financial reporting must include all significant information. The principle of conservatism (or prudence) – where alternative accounting methods are possible, one understates rather than overstates profits. The separate-entity or accounting entity assumption – an enterprise is an accounting unit separate from its owners, creditors, etc. The continuity or going-concern assumption – the business will continue indefinitely into the future. The unit-of-measure assumption – all transactions & other items to be accounted for must be in a single, supposedly stable monetary unit. The time-period or accounting period assumption – financial data must be reported for particular (short) periods, which makes accrual & dererral necessary.

10.  The historical cost principle – the initial price paid for the asquisition of assets is the one that is recorded in accounts.

11.  The revenue or realization principle – revenue is realized at the moment when goods are sold (or change hands) or when services are rendered.

In accordance with the principle of double-entry bookkeeping, the basic accounting equation is Assets = Liabilities + Owners’ (Stockholders’) Equity. This can be rewritten as Assets – Liabilities = Owners’ Equity or Net Assets. This includes share capital (money received from the  issue of shares), share premium or paid-in surplus (any money realized by selling shares at above their nominal value), and the company’s reserves, including the year’s retained profits. Stockholders’ or shareholders’ equity or net assets are generally less than a company’s market capitalization, because net assets do not record items such as goodwill.

Also there are various standart ratio measures which are simple enough to calculate:

The liquidity ratio = liquid assets/current liabilities The current ratio = current assets/current liabilities Return on capital employed = net profit/capital employed Profit on sales = net profit/turnover Debtors ratio = debtors/sales Creditors ratio = creditors/purchases Debt/equity ratio = long-term loans/shareholders’ funds

These ratios are also often use in simulation or case studies, because they allow students to make an initial assesment of a company’s performance & situation.

Speaking about accounting we can’t but giving difinitions for the following words:

-                     turnover – the amount of business done by a company over a year

-                     depreciation – the reduction in value of a fixed asset during the years it is in use (charged against profits)

-                     inventory – the value of raw materials, work in progress, and finished products stored ready for sale

-                     overheads – the various expenses of operating a business that cannot be charged to any one product, process or department

Company law specifies that shareholders must be given certain financial information (as it was said at the very beginning). Companies generally include three financial statements in their annual reports:

The profit and loss account (or income statement) – shows revenue and expenditure. The balance sheet – shows a company’s financial situation on a particular date, generally the last day of the financial year. The third financial statement has various names, including the source and application of funds statements, and the statement of changes in financial position. This shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation provisions, sales of assets, borrowing, and the issuing of shares. Application of funds include purchases of fixed of financial assets, payment of dividends, repayment of loans, and – in a bad year – trading losses.

I would pay special attention to the balance sheet, because the biggest part of the accountant’s work is concerned with this document.

So the balance sheet is a document that shows the totals of money received and money paid out by a company and the difference between them. The balance sheet includes two parts:

assets liabilities and share capital.

Both parts should always be balanced.

The item current assets includes cash, marketable securities, accounts receivable and stock-in-trade. Thus these assets appear to be working assets. Current assets are the assets which a company can convert quickly into cash, usually stock and accounts receivable falling due within one year. Cash includes bills, petty cash fund and money on deposit.

Marketable securities are a short-term investment of surplus or temporary free assets. Normally these assets are allocated into commercial securities or federal bonds. As securities can be required at short notice they are to be easily realized and be subject to price fluctuations as little as possible. The balance sheet shows their nominal cost, their market value is given in brackets.

Account receivables are amounts owed to a business by suppliers of goods and services. Usually customers are allowed a 30, 60 or 90 days period of time within which they are to effect a payment. However. Some customers are not able to pay owing either to financial difficulties or contingency. Hence, the amount is to be reduced for the reserve allowance for bad debt.

Stock-in-trade includes raw materials to be used for production and semi-finished goods. The stock-in-trade value is defined either by its cost or cost market value. The preference is given to a lower one.

Capital assets include property, premises, plant and machinery, and equipment. They are not meant for sale but for the goods production, storage and transportation. This category comprises land, buildings, machinery, equipment, furniture and vehicles. Thus, net capital assets reflect the volume of investment made into property, plant and machinery, and equipment. Capital assets lose their value with age and use. The ral cost of capital assets may gradually lose their value as a result of obsolescence of machinery. New modern technologies make the old equipment obsolescent. Thus, depreciation is a gradual loss in the value of something, such as a vehicle, a machine or any asset that wears out with use and age. The land cannot be depreciated; its value stays unchanged year after year.

Prepayments and deferred charges include, for instance, insurance against fire prepayment or lease prepayments etc.

Deferred charges are similar to prepayments. For instance, a manufacturer allocates money into research work, positive results of which and profit will be seen many years later. So costs are to be discounted within the years to follow.

Intangibles like patents, goodwill and trademarks are not physical substances and are differently evaluated by various companies or may not be evaluated at all.

GET THE FULL VIDEO HERE: goldsilver.com Welcome to the 7th episode in our 10 part series.

Accounting Principles

In all, there are nine accounting principles that are used to prepare all business accounts. Any business accounts that are created using any of these principles, are deemed by the professionals in the accounting world, as accounts that were prepared with principles that are generally accepted by all accountants throughout the world.

If these principles were not used, and financial data was just thrown together haphazardly, then the accounting for your companies accounts, would be complicated to say the least. All of these nine accounting principles will help to keep your corporate accounting needs straight, and in a methodical method that every accountant will be able to understand.

The mother of all accounting principles is the accrual principle, and will ensure that all of the business revenues and expenses are methodically recorded when the money is earned, and not when it is paid for. There is a set way that money is recognized in the accounting world of high financed businesses, and the principles of revenue recognition are followed to make sure the recognition is interpreted right.

Accountants will use a historical cost principle when they are filling in the financial data for your business accounts. These accounts can glace at a balance sheet, and see what the price of the item that was sold, cost the company that they are recording business accounts records for. There are other account transactions that might be confused with this principle, and that is the current cost accounting feature.

For financial records to be consistent, accountants often require their clients to methodically record their financial transactions using the consistency principles. This way their financial information is recorded the same, time after time, and there will be no confusion over the entries after a long period of time.

If other principles are mixed with the constancy principles, the end result may provide the wrong financial figures. Tax auditors find that this will be the case in businesses that are performing illegal activities, and do not want to leave a lot of financial information that can be easily traced, and legitimate business do not want to leave this bad impression on such a major faction such as the Internal Revenue Service.

To keep financial accounting of business records from becoming confused with other expenditures made by the business owner, accountants like to use the separate legal entity concept when they are performing financial services for a company, and the personal banking transactions of a person that is small business owner. Some business owners get confused and make withdrawals from their business accounts for personal use, and make the wrong entries in both sets of checkbooks.

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Final segment in series of 17 videos describing the essential ideas typically covered in early weeks of a university-level accounting principles course. This explains reversing entries.

Cash Accounting or Accrual Accounting

The tax authority require bookkeeping records to calculate the tax due. The choice for small business is basically cash accounting or accrual accounting each of which has advantages and disadvantages.

The date of the sales invoice and the date of purchase invoice are known as the tax point. The tax point does not determine the spread of that transaction over the tax period which can be different when accounts are prepared on an accruals basis as opposed to a cash basis.

For the purposes of cash accounting the effective inclusion of the transaction in the financial records is the date the cash or bank receipt or payment was made. The tax point date on the document is not the deciding factor to include the item in the accounts. The date the amount was paid out or received into cash funds or bank account is the date to be used fopr inclusion in the accounts.

There are disadvantages to maintaining accounts on a cash basis in that records must be kept of all payments received and paid out and those records supported by the actual primary accounting documents to which they relate. That entails matching the financial documents to the payments and receipts records, a feature many small businesses might find onerous as record keeping ios often regarded by samll business as an administrative burden.

Virtually all professional accountants adopt an accruals basis for clients accounting purposes as it is based upon recording all financial information whether relevant to the tax period or not and then adjusting the management accounting profit indicated to produce the net taxable profit or loss.

By operating an accruals basis all financial documents are recorded according to the tax point date. If every transaction was paid or received within the year then the cash accounting and accruals basis would produce the same tax accounts.

The main adjustment a small business or the accountant might make to accounts prepared on the accruals basis is to first prepare the set of accounts according to the tax point of the primary accounting records and then examine those transactions and adjust them according to their relevance to the financial period for which the accounts are being prepared.

A typical example of the difference would be the rent invoice for the business premises. Let us assume a quarterly rent invoice was received dated 1 December for the 3 months from December 1 to February 28 which was paid by the small business owner by cheque on December 31 and a year end date also of December 31

On a cash basis the rent would not technically be included in the accounts as it would be shown as a rent payment from the business bank account on January 2 or later if cashed by the recipient at a later date. Therefore that quarters rent would be included in the following year accounts not the current year as issuing a cheque is not a payment but actually a promise to pay.

Assuming the rent was paid in cash prior to the 31 December then the whole 3 months rent would be included in the current financial year. That treatment may have distorted the accounts as more or less than 12 months rent might have been included in the tax calculations.

On an accruals basis the rent invoice would have been entered in the accounting records with an effective date of December 1. The accountant or small business owner preparing the accounts would deduct 2 months from the qaurterly amount leaving one months rent in the current year accounts with the other 2 months being included the following year.

That is more accurate as the other side of the accounting would be for that same accountant or bookkeeper to further include the 2 months rent not already claimed to be included in the tax calculation for the next financial year. Mvoing the prepayment not specific to the accounting period is how business treats a prepayment under accrual accounting.

When operating cash accounting only transactions actually paid for or received are valid. On an accruals basis provisions can be made for costs incurred by the business whicvh have not yet been invoiced.

Cash accounting might appear easier but has the disadvantage of maintaining receipts and payments records in addition to the primary documents which should also be matched to the financial transactions to support the accounts.

Accrual accounting is based upon recording all financial transactions and then adjusting the end result to determine the most accurate net taxable profit. The accruals basis is favoured by accountants as it reaches an accurate tax liability as opposed to more or less tax being payable on the cash basis according to the credit control policies and practises of the business its suppliers and clients.

Rep. Elijah Cummings (D-MD) and Chairman Henry Waxman of the Committee on Oversight and Government Reform question witness on the accounting arrangement that led to .8 billion in missing funds.
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