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A Brief History of Auditing

A Brief History of Auditing
Photo by Joanna Kosinska / Unsplash

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 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 (522 to 486 B.C.). These auditors acted as “the King’s ears” checking on the behaviour of provincial satraps (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 greatly influenced auditing around the world.

Companies wishing to trade shares on the New York Stock Exchange or the American Stock Exchange 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 the 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, where it was unlikely 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. 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 of 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 an 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 remained the same, i.e. lending credibility to the financial statement, critical changes have been made to the audit practice as a result of the extensive reform in various countries.


Source: (i) Auditing: An International Approach by Wally J. Smieliauskas and Kathryn Bewley, & (ii) The evolution of auditing: An analysis of the historical development by Lee Teck-Heang and Azham Md. Ali