“Accountant” and “Auditor” are often used interchangeably, but are they really the same thing?
An audit is typically performed by a Certified Professional Accountant, or CPA. Auditing is taught in all AASCB-accredited accounting programs. So in many ways, you could consider auditing to be a type or sub-field of accounting, but in practice, the two look very different.
In this post, we’ll break down the basic definitions and purposes of accounting and auditing, who does what, and what you should know as a tax preparer.
What is it?
At its most basic, accounting can be defined as a system for organizing and recording a business’s or other entity’s finances. Of course, accounting gets vastly more complicated from there. Different governing bodies, such as the AICPA and the FASB, determine the accounting practices for different organizations and situations.
Who can do it?
The term “accountant” isn’t regulated, so anyone with that job title can call themselves an accountant, even without any formal accounting education. The title of CPA, however, is highly regulated, requiring graduate-level education, a challenging four-part exam, at least two years of practice under other CPAs, and continuing education.
Different businesses and positions will require different amounts of expertise. Public accounting firms almost always want their employees to be CPAs or to be pursuing the CPA credential.
Private companies vary greatly in their requirements. A small-business owner with straightforward financials might be able to manage their books and file their taxes on their own, effectively acting as their own accountant. Some businesses may not require a formal accounting education for a bookkeeping role, but most will want at least a bachelor’s degree for staff accountant positions. For senior accountant positions and beyond, most companies want CPAs.
While several other types of audits exist, the most common are internal and external financial audits and IRS tax audits.
What are they?
Contrary to popular belief, financial auditors aren’t primarily looking for instances of fraud when they audit a company. While discovering fraud is sometimes a part of the job, the external financial auditors’ role is to help provide reasonable assurance that a company doesn’t have what’s known as “material misstatements” in their financial reporting.
External audits result in a professional audit opinion, which gives users of financial statements — such as potential investors or lenders — confidence that the financial statements are accurate.
Internal audits are performed to help management identify areas for improvement in their company’s internal controls and compliance with relevant regulations.
Who can perform them?
While non-CPAs (such as interns or staff accountants working towards their CPA) can assist with an external audit, the professional audit opinion must always come from a CPA. Additionally, external auditors must be independent in appearance and fact, meaning they can’t have any conflict of interest such as investing in or accepting gifts from the company they are auditing.
Internal audits are generally performed by a company’s own employees rather than a public accounting firm. Because internal audits aren’t regulated by governing bodies like the SEC, internal auditors don’t necessarily have to be CPAs, though many are.
What are they?
Tax audits determine the accuracy of a business’s or individual’s tax return. Auditors will examine a taxpayer’s current and past tax returns as well as any relevant documents and financial records.
Who can perform them?
IRS audits are performed solely by agents of the IRS. While standards vary, the IRS usually requires at least some hours of accounting education for entry-level positions and graduate-level education, or a CPA title for senior-level positions.
What should tax preparers know about accounting and auditing?
Tax preparers usually don’t need detailed knowledge of accounting unless you’re offering additional services like bookkeeping. However, it can be helpful to know the difference between accrual-basis and cash-basis accounting, especially as they pertain to reporting income for taxes.
While tax preparers usually won’t deal with financial audits, you may find yourself involved in an IRS audit if one of your clients is selected. Your credentials will determine how involved you can be in representing your client before the IRS. Enrolled agents, attorneys, and CPAs have unlimited representation rights; Annual Filing Season Program participants have limited representation rights; and PTIN-holders with no other credentials have no representation rights beyond filing a return.
For more ways to stay well-informed and up-to-date, take a look at our post on continuing education for tax preparers.
The information in this article is up to date for tax year 2020 (taxes filed in 2021).