Management accounting and financial accounting are two primary branches of the accounting field. From the definition of accounting, it is clear that the social role of accountant is that of information scientist. Insofar as business entities are concerned, a distinction is normally made between financial accounting and management accounting. Evidence evaluated includes results of operations and cash flows for the purpose of conveying an opinion for users of the financial data.
Financial accounting deals with recording and analysis of financial results of transactions as a means of arriving at a measure of organization’s success and financial soundness. Management accounting is concerned with the activity of providing information (financial and non-financial) to enable management to take decisions about operations of business. Besides, it develops other information (quantitative and qualitative, financial and non-financial), which is futuristic in character and relevant for decision-making in the organization.
Further, financial accounting information serves the stewardship function while management accounting aids in internal decision-making by management. Therefore, financial accounting is a sub-system of accounting information system (AIS), which in turn is part of management information system. The accounting equation is the foundation for the double entry accounting system where debits must equal credits. Financial statement audits are performed in coordination with GAAP and other established criteria when obtaining evidence about a company’s presentation of its financial position.
To ensure independence in mental attitude, as noted under GAAS general standards, most states have enacted laws so that only certified public accountants (CPAs) can perform financial statement audits. A compliance audit determines if a company is acting in accordance with rules and regulations in financial and operational activities. This type of audit demonstrates a standards of reporting element of GAAS and a requirement under SOX.
The Sarbanes-Oxley Act of 2002 requires companies to have a dual-purpose audit that audits both the financial statements and management’s assertion as to whether it has complied with criteria regarding an adequate system of internal control over financial reporting”. Auditing conducted under PCAOB Auditing Standard No. 6 must properly evaluate consistency of financial statements.