Auditing history

1. HISTORY OF AUDITING

2. The word “audit” comes from the Latin word audire, meaning “to hear”. According to R. K. Moutz,
"Auditing is concerned with the verification of accounting data with determining the accuracy and
reliability of accounting statement and record.“ An audit is the examination of the financial report of an
organization - as presented in the annual report - by someone independent of that organization.

3. Objectives Of Audit Basic objective of auditing is to prove true and fairness of results presented by
profit and loss account and financial position presented by balance sheet The main objectives of audit
are known as primary objectives of audit. They are as follows: Examining the system of internal check.
Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing etc.

4. Verifying the authenticity and validity of transactions. Checking the proper distinction of capital and
revenue nature of transactions. Confirming the existence and value of assets and liabilities. Verifying
whether all the statutory requirements are fulfilled or not. Proving true and fairness of operating
results presented by income statement and financial position presented by balance sheet.

5. Evolution of Auditing To facilitate the examination of the historical development of auditing, this
review will be divided into the following five chronological periods:  Prior to 1840;  1840s-1920s; 
1920s-1960s;  1960s-1990s; and  1990s–present.

6. Prior to 1840 Generally, the early historical development of auditing is not well documented .
Auditing in the form of ancient checking activities was found in the ancient civilizations of China, Egypt
and Greece. The ancient checking activities found in Greece (around 350 B.C.) appear to be closest to
the present-day auditing Similar kinds of checking activities were also found in the ancient Exchequer
of England.

7. Prior to 1840 When the Exchequer was established in England during the reign of Henry 1(1100-
1135), special audit officers were appointed to make sure that the state revenue and expenditure
transactions were properly accounted. The person who was responsible for the examinations of
accounts was known as the “auditor”. The aim of such examination was to prevent fraudulent actions .
According to Porter, et al (2005), auditing had little commercial application prior to the industrial
revolution.

8. Prior to 1840 This is because industries during this period were mainly concerned with cottages and
small mills which were individually owned and managed. Hence, there was no need for the business
managers to report to owners on their management of resources. As a result, there is little use of
auditing. In a nutshell, in the period pre-1840, the auditing at the time was restricted to performing
detailed verification of every transaction. The concept of testing or sampling was not part of the auditing
procedure.

9. 1840s-1920s During industrial revolution practice of auditing was emerged. According to Braown
(1962) large scale operations, large factories and machine based production were resulted form
industrial revolution and for that large amount of capital was needed.  The emergence of a “middle
class” during the industrial revolution period provided the funds for the establishment of large industrial
and commercial undertakings

10. 1840s-1920s Innocent investors were liable for business failure. Then the need for protection and
this time was ripe for profession of auditing to emerge Under company’s act 1862, in 1900 statutory
audit was mandatory. Porter, et al (2005) commented that in this period the duties of auditor were
influenced by the decision of court. The audit objective was mainly detection of fraud and errors.  It
can be concluded that the role of auditors during the period of 1840s-1920s was mainly on fraud
detection and the proper portrayal of the company’s solvency (or insolvency) in the balance sheet

11. 1920s-1960s   The growth of the US economy in the 1920s-1960s had caused a shift of auditing
development from the UK to the USA.  Meanwhile, the advancement of the securities markets and
credit-granting institutions had also facilitated the development of the capital market in this period. 
The concept of materiality (Queenan, 1946) and sampling techniques (Brown, 1962) were used in
auditing during this period

12. 1920s-1960s It was not necessary to make a detailed examination of every entry, footing, and
posting during the period in order to get the substance of the value which resulted from an audit. In
short, the social-economic condition in the period had highly influenced the development of auditing.

13. 1920s-1960s The major characteristics of the audit approach during this period, among others,
included: (i) reliance on internal control of the company and sampling techniques were used; (ii) audit
evidence was gathered through both internal and external source; (iii) emphasis on the truth and
fairness of financial statements; (iv) gradually shifted to the audit of Profit and Loss Statement but
Balance Sheet remained important; (v) physical observation of external and other evidence outside the
“book of account

14. 1960s to 1990s The world economy continued to grow in the 1960s-1990s  This period marked an
important development in technological advancement and the size and complexity of the companies 
The duties of auditors were to affirm the truthfulness of financial statements and to ensure that
financial statements were fairly presented

15. In the earlier part of this period, a change in audit approach can be observed from “verifying
transaction in the books” to “relying on system”. Such a change was due to the increase in the number
of transactions which resulted from the continued growth in size and complexity companies where it is
unlike for auditors to play the role of verifying transactions. As a result, auditors in this period had
placed much higher reliance on companies’ internal control in their audit procedures.

16. 1960s to 1990s Risk-based auditing is an audit approach where an auditor will focus on those areas
which are more likely to contain errors. Similarly, auditors placed heavy reliance on the advanced
computing auditing tool to facilitate their audit procedures. In addition to the auditing of financial
statement, auditors at the same time were providing advisory services to the audit clients.
17. 1990s-present Present-day auditing has developed into new processes that build on a business risk
perspective of their clients  Presently, the ultimate objective of auditing is to lend credibility to financial
and non- financial information provided by management in annual reports.  High level of litigation and
criticism against the auditors observed.

18. 1990s-Present Day Some of the key reform activities include: The Sarbanes-Oxley Act (The US) It
outlines the rules on auditor independence, for example, the control of audit quality, and the rotation of
audit partners as well as the prohibition of conflict-of-interest situation.

19. 1990s-Present Day Ramsay report (Australia): It was recommended that auditor independence can
be improved through the following ways: Include a statement in the Corporations Act that auditors are
to be independent;  Require auditors to declare to the Board of Directors that their independence is
maintained;  Prohibit special relationships between the auditor and client

20. 1990s-Present Day Establish an auditor independence supervisory board  Establish an audit
committee to oversee the issue of non-audit services, audit fees, scope disagreements and auditor-client
relationships

21. 1990s-Present Day In summary auditing first engaged in form of ancient checking in China, Egypt,
Greece. The modern auditing established during industrial revolution. Mid 1800 to early 1900 audit
practice can be regarded “traditional conformance role of auditing”. Over the past 30 year or so
auditor played an “enhancing role” by enhancing integrity and credibility. Today auditor not only
enhancing integrity and credibility also provide value added service. It is evident that the paradigm of
independent auditing has shifted over the year.

22. History of Auditing in Bangladesh Introduction The purpose of govt. audit is to ensure transparency
and accountability in the use of resources in all types of govt. management. The objectives of audit
work includes verification of statements of accounts and statement of income and expenditure to
determine whether these are prepared truly and correctly.

23. BACKGROUND The major concerns in the context of public financial management in Bangladesh
have always been to see how well the scarce public resources are utilized The stakeholder expect that
the audit office provide them with more information in the line of 3Es

24. AUDIT IN BANGLADESH In Bangladesh , the Office of the Comptroller and Auditor General(C&AG) is
the supreme audit institution and it is the only body entrusted to carry out the performance audit The
legal authority of C&AG to carry out the performance audit derives from two main sources

25. TYPES OF AUDIT Financial Audit: The purpose of conducting a financial audit is to give an opinion on
whether the financial statement prepared by the public sector agencies shows a true and fair view of
the Financial position Compliance Audit: Compared to a financial audit, it is not compulsory for the
compliance audit to be conducted to all government agencies yearly. This type of audit is performed on
cyclical basis. In compliance auditing , the Auditor General will examine and review the transactions and
activities of ministers/departments or agencies to determine whether they have conformed to all laws
and regulations.

26. TYPES OF AUDIT Performance Audit: The performance audit involves studies and evaluation of
specified programs or activities of ministers/department and other government agencies

27. Advantages of Audit 1. Verification Of Books And Statement :- The main object of audit is the
verification of the books and the financial statements of the company concerned. 2. Discover and
Prevention Of Error :- While examining the books, auditors detect some errors. These are various kinds
of errors. So audit is very useful in preventing and detecting the errors. 3. Moral Check :- When each
staff of the company knows that this financial transactions will be examined by the auditor then he fears
to do that fraud. The fear of their detection acts as a moral check on the staff of the company

28. Advantages of Audit 4. Check On Directors :- Audit acts a check upon the directors and precaution
against fraud on the part of the management. 5. Proper Supervision :- Sometimes owner of the
business can not look after the business personally. Audit acts as a check on employees and it saves the
owner from losses. 6. Valuable Advice :- The auditor has expert knowledge about the accounts and
finance problems, so he may be consulted about these problems.

29. Disadvantages of Audit  The payment of audit fee brings extra cost burden to the organizations 
During and audit the auditors requires the attention several companies stuff and therefore cause
disruption  An audit doesn’t assure future viability of the organization audited  An audit doesn’t
assure the effectiveness and efficiency of management  Auditor express opinions and therefore doesn’t
give total assurance of the two fair presentation of annual reports

30. Conclusion A review of the historical development of auditing has shown that the objective of
auditing and the role of auditors are constantly changing as they are highly influenced by contextual
factors such as the critical historical events (e.g. the collapsed of big corporations), the verdict of the
courts, and technological developments (e.g. advancement of computing systems and CAATs). It can be
observed that any major changes in these contextual factors are likely to cause a change in the audit
function and the role of auditors. As a result, auditing is seen to be evolving at all times.

31.  However, it is important to note that the change in society’s expectation and the response of the
auditing profession towards these changes are not always at the same pace. Hence there is a natural
time gap between the changing expectation of the users and the response by the profession and due to
this time gap there arises what has been stated as the expectation gap or audit expectation gap (Saha &
Baruah, 2008). Even though the existence of such a natural time gap is inevitable, Flint (1998) advises
that auditors should be sensitive to the changing expectation of the relevant groups while at the same
time containing these expectations within the constraints of what is possible. He also claims that there
are inevitably economic and practical limitations on what an audit can do, and this is something which
those who wish the benefit must understand.