Accounting and Auditing

Accounting

■ Accounting involves recording and summarizing an organization’s transactions or business deals, such as purchases and sales, and reporting them in the form of financial statements. In many countries, the accounting or accountancy profession has professional organizations which operate their own training and examination systems, and make technical and ethical rules: these relate to accepted ways of doing things.

■ Bookkeeping is the day-to-day recording of transactions.

■ Financial accounting includes bookkeeping, and preparing financial statements for shareholders and creditors (people or organizations who have lent money to a company).

■ Management accounting involves the use of accounting data by managers, for making plans and decisions.

Auditing

Auditing means examining a company’s systems of control and the accuracy or exactness of its records, looking for errors or possible fraud: where the company may have deliberately given false information.

■ An internal audit is carried out by a company’s own accountants or internal auditors.

■ An external audit is done by independent auditors: auditors who are not employees of the company.

The external audit examines the truth and fairness of financial statements. It tries to prevent what is called ‘creative accounting’, which means recording transactions and values in a way that produces a false result - usually an artificially high profit.

There is always more than one way of presenting accounts. The accounts of British companies have to give a true and fair view of their financial situation. This means that the financial statements must give a correct and reasonable picture of the company’s current condition.

Text 5

Bookkeeping