Hong Kong company law requires that all Hong Kong limited companies perform an audit of their financial statements. There is generally some confusion about what the differences between accounting and auditing are. That is why we are here to explain these differences.
By definition accounting is keeping records of financial transactions and preparing the financial statements of the company. Auditing, on the other hand, is analysing this financial information to express an opinion on whether the financial statements give a true and fair view in accordance with the financial reporting framework used for preparation and presentation.
Generally speaking, accounting is governed by Hong Kong Financial Reporting Standards (HKFRS) for Hong Kong companies. On the other hand, auditing is governed by Hong Kong standards on quality control, auditing, assurance and related services, including Hong Kong standards on auditing (HKSAs).
Auditing and accounting serve two different purposes. The major purposes of accounting are to determine the profitability position, the financial position as well as the cash flow position of a company. It is also used to determine how well a company is performing. The purpose of auditing is to check whether the financial statements give a true and fair view.
Accounting is an activity that never ends and is a continuous activity. Auditing, on the other hand, is done on a periodic basis, e.g. annually. Accounting begins when a financial transaction takes place. Meanwhile, auditing begins generally when the accountants have finished their work. This means that the financial statements an accountant prepares need to be ready for the auditors before they can begin work.
Accountants prepare profit and loss, balance sheet as well as other statements for use by the management, such as cash flow forecast statement, debtors’ ageing statements. After an audit is performed, the auditor will express an opinion on whether financial statements give a true and fair view. He or she will then sign an auditor’s report that will reflect the opinion he/she has about the financial statements that have been prepared by accountants. An auditor can also claim that they don’t receive enough information and, as a result, fail to come up with an opinion.
#5 Level of Detail
Accounting is a very detailed financial task. Auditing, on the other hand, uses samples of financial information to reach a professional opinion.
It’s necessary for all businesses to have accountants. On the other hand, sole proprietors, partnerships and dormant companies do not necessarily need auditing in Hong Kong.
#7 Focus: Current vs Past
Accountants deal only with the most current information. They tackle day to day issues and are in charge of making sure financial tasks such as paying bills are done in an orderly fashion. Auditors use past accounting transactions and classifications. They are there to ensure the information is free from material misstatements. They also look at the internal controls of a company. Auditors may test these controls and recommend how they can be improved.
After reading this you should have an understanding of the clear difference between accounting and auditing. To put it simply though accounting is keeping track of financial information while auditing is making sure these financial records are free from material misstatements.