GAAS stands for generally accepted accounting standards, whereas GAAP stands for generally accepted accounting principles. While people often use these two terms interchangeably, they are different. GAAP is used by accountants when creating financial documents. GAAS, on the other hand, is used by auditors to double-check those documents once they’re done.
Here’s what you need to know about GAAS vs GAAP, including how each one works, how they differ, and how they work together.
What Is GAAP?
GAAP is a set of accounting procedures and principles issued by the Financial Accounting Standards Board (FASB). GAAP was established to provide consistency in how financial statements are created, eliminate the potential for fraudulent or misleading financial reports, and make it easier for investors and creditors to evaluate companies and compare them apples-to-apples.
All publicly traded and regulated companies must follow GAAP when compiling their financial statements. While small businesses that don’t get audited aren’t required to use GAAP, hiring an accountant to create GAAP-compliant financial documents for your business can still be helpful. It allows you to compare your company to other companies in your industry. It can also be useful if you’re looking to attract an investor or apply for a small business loan. Without GAAP, it’s harder for lenders, investors, and other interested parties to know whether a business is performing well or poorly.
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What Is GAAS?
GAAS is a set of systematic guidelines used by auditors (not accountants) when checking the accuracy of financial statements disclosed by GAAP-compliant companies. The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) created GAAS.
GAAS helps to ensure the consistency and verifiability of auditors’ actions and helps make sure that auditors don’t miss any material information. The use of GAAS also means that auditing is of the highest quality and that reports from different auditors are comparable.
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How Does GAAS Work?
The Securities and Exchange Commission (SEC) requires that the financial statements of public companies be examined by external, independent auditors. These auditors are tasked with determining whether those financial statements follow GAAP. GAAS lays out the auditing standards and guidelines that auditors must follow.
What Are GAAS Standards?
There are 10 GAAS standards auditors must follow, divided into three categories:
General Standards
1. The auditor must be trained and qualified to do the audit.
2. The auditor should be objective and not allow their personal opinion to sway their findings.
3. The auditor must be professional during the audit and during the writing of the report.
Standards of Field Work
1. The auditor should plan the work that must be done and properly supervise any assistants during the audit.
2. The auditor must thoroughly understand the business or entity that is being audited so as to understand the risk of fraud or error during the reporting of financial statements; furthermore, the auditor should also plan future audits, if needed, based on their findings.
3. The auditor must acquire sufficient evidence during the audit process so that they can form an opinion on their findings (whether everything is copacetic, there has been error, or there has been deliberate fraud).
Standards of Reporting
1. The auditor must determine and state in their report whether the financial statements they reviewed were written following GAAP regulations.
2. The auditor must state when, and under what circumstances, GAAP principles and regulations were not followed.
3. The auditor must state whenever financial disclosures are not adequate.
4. The auditor must state their opinion regarding any financial disclosures they review. If they are unable to reach an opinion, then they must state their reasons. Lastly, when an auditor’s name is linked to an audit, they must state what degree of responsibility they are taking to the veracity of their findings.
Comparing GAAP to GAAS
GAAP and GAAS have some similarities, as well as some key differences.
Similarities
1. Both are designed to make sure a company’s financial statements are complete, consistent, and comparable. While they are used by different professions, the mindset behind them is the same.
2. Both consist of 10 rules or principles. The guidelines are different, but the behavior that is expected of either accountants or auditors is summed up in 10 key concepts.
3. Both were created to instill trust and confidence in a company’s financial records. Thanks to GAAP and GAAS, investors, lenders, and other third parties know they can trust the financial information released by GAAP-compliant companies.
Differences
1. They are used by different professions. GAAP is used by accountants; GAAS is used by auditors.
2. They have different functions. The primary function of GAAP is to assist firms in making their financial statements. The main job of GAAS is to help auditors properly audit companies.
3. They are used at different stages. GAAP is used first, when companies are preparing financial statements. GAAS is later, after those documents have been prepared.
| GAAS | GAAP | |
|---|---|---|
| Guides accountants when preparing financial statements: | X | ✓ |
| Guides auditors when auditing companies: | ✓ | X |
| Is a set of guidelines and standards used primarily within the U.S.: | ✓ | ✓ |
| Consists of 10 principles or concepts: | ✓ | ✓ |
| Is used when preparing financial documents: | X | ✓ |
| Is used when reviewing financial documents: | ✓ | X |
Pros and Cons of GAAS
Here, in chart form, are the upsides and downsides of GAAS.
| Pros of GAAS | Cons of GAAS |
|---|---|
| Ensures compliance with GAAP | Auditing fees can be expensive for companies |
| Gives investors confidence because they know public companies are audited by independent auditors | Time-consuming process |
The Takeaway
The difference between GAAP vs. GAAS revolves around who is doing the work. If an accountant is preparing financial statements, then GAAP is being followed. If the veracity of the financial documents is under review, then GAAS is being observed.
Publicly traded companies must follow GAAP principles and be audited by someone following GAAS standards. Both act as checkpoints that companies must get through before they can be publicly traded. Small businesses aren’t required to follow GAAP regulations. However, doing so can make it easier for outsiders to evaluate your business, such as when you are seeking approval for certain types of business loans.
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FAQ
Who uses GAAS?
Auditors use GAAS (generally accepted auditing standards) to review financial statements issued by a company that follows GAAP (generally accepted accounting principles).
How are GAAP and GAAS connected?
GAAP (generally accepted accounting principles) are the guidelines used by accountants when preparing financial statements for publicly traded companies or private companies that wish to use GAAP. GAAS (generally accepted auditing standards) are the guidelines used by auditors when reviewing the financial statements of public companies to make sure GAAP guidelines have been followed.
What does GAAS stand for?
GAAS stands for generally accepted auditing standards.
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