A Brief History of Auditing
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| History of auditing The term “Audit” is derived from the Latin
term “Audire” which means “to hear”, because in ancient times auditors listened
to the oral reports of responsible officials to owners or those having
authority, and confirmed the accuracy of the reports. Over the years the role
evolved(বিবর্তন )
to verify written records also. Prior
to 1840 Earlier
practices of auditing though not well documented present proof for the
existence of auditing. Auditing
was found to be present in the ancient civilization of China, Egypt and Greece
in the form of ancient checking activities. The checking activities
found in ancient Greece appear to be closest to the present day auditing. The first
recorded auditors were the spies
of king Darius of ancient Persia (প্রাচীন পারস্যের রাজা দারিয়াসের গুপ্তচর) (522 to 486 B.C.). These auditors
acted as “the King’s ears” checking on the behaviour of provincial(প্রাদেশিক) satraps(প্রাদেশিক শাসক)
(a provincial governor in ancient Persia).
In 1494
Luca Pacioli published the book on double entry bookkeeping system of
accounting used by merchants in Venice, Italy. This was the first book on
accounting. 1840s
- 1920s Modern
auditing began in 1844 when the British Parliament passed the Joint Stock
Companies Act. For the first time the act required that directors, report to
shareholders via an audited financial statement, the balance sheet. In 1844 the
auditor was not required to be an accountant or independent, but in 1900 a new Companies
Act was passed that required an independent auditor. The first public accountants organization
was the Society of Accountants in Edinburgh, formed in 1854. The American
Association of Public Accountants was formed in 1887, which later became
American Institute of Certified Public Accountants (AICPA).
Until 1930 the auditing was transaction
oriented.
That is, it focused on the procedures that were followed to process a
transaction; these procedures largely relied on internal evidence. 1920s
- 1960s U.S.
practice evolved since the late 19th century towards a process of collecting
evidence as to assets and liabilities or what is frequently referred to as a
balance sheet audit. As a result of extensive misleading financial reporting
that contributed to the stock market crash of 1929. The U.S.
Securities Acts of 1933 and 1934 created the Securities and Exchange Commission
(SEC), which regulated the major stock exchanges in the United States. These
legislations(আইন) greatly influenced
auditing around the world.
Companies
wishing to trade shares on the American Stock Exchanges were required to issue
audited income statements as well as balance sheets. Also, because of the
earlier problems with misleading financial reports of the 1920s, the emphasis
switched to fairness of presentation of these financial statements, and the
auditor’s role was to verify the fairness of presentation. 1960s
- 1990s The duties of auditors, among others, were
to ensure that financial statements were fairly presented. The role of auditors
with regard to the audit of financial statement generally remained the same as
of the previous period. In the
1970s, a change in audit approach was 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 of companies. As a
result, auditors in this period had placed much higher reliance (নির্ভরতা)on company’s
internal control in their audit procedures. When internal control of the company was
effective, auditors reduced the level of detailed substance testing.
In the
early 1980 there was a readjustment in auditors approaches where the assessment
of internal control systems was found to be an expensive process and so
auditors began to cut back their systems work and make greater use of
analytical procedures. An extension (প্রসার) this was the development during the mid-1980s of
risk-based auditing. Risk-based
auditing is an audit approach where an auditor will focus on those areas which
are more likely to contain errors. 1990s
- Present The early 2000s saw various accounting
scandals like WorldCom, Enron, Tyco, etc. In response to the Enron fall,
Sarbanes-Oxley Act 2002,
was passed, which brought various accountability provisions for both management
and auditors. The Sarbanes-Oxley extended the duties of auditor to audit the
adequacy of internal controls over financial reporting. These
accounting scandals also led to the fall of Arthur Andersen one of the Big 5
audit firm at that time, due to its role in Enron scandal.
Although
the overall audit objectives in the present period remains the same, i.e.,
lending credibility(ঋণ প্রদানের বিশ্বাসযোগ্যতা to the financial
statement, critical changes have been made to the audit practice as a result of
the extensive reform in various countries. |
