Origin of Financial Audit

The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them. Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt, Rome, United Kingdom (UK) and India. The Vedas contain reference to accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances.

The original objective of auditing was to detect and prevent errors and frauds. The objective of audit shifted and audit was expected to ascertain whether the accounts were true and fair rather than detection of errors and frauds.

Auditing evolved and grew rapidly after the industrial revolution in the 18th century with the growth of the joint stock companies the ownership and management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors who were the employees. Following the need for an independent expert, the world’s first professional body of Chartered Accountants was formed in Scotland under the name ‘Institute of Chartered Accountants of Scotland’ in 1954. Although this body was different society of accountants, for example Edinburgh Society of Accountants, Glasgow Institute of Accountants and Actuaries, Aberdeen Society of Accountants. Overtimes, the profession has been expanded all over the globe.

With the increase in the size of the companies and the volume of transactions the main objective of audit shifted to ascertaining whether the accounts were true and fair rather than true and correct. Hence the emphasis was not on arithmetical accuracy but on a fair representation of the financial efforts.

 

N.B. This post was originally written as a project term paper for MBA.

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