Audit as a demand driven discipline has contributed to the

advancement of the civilization

Mumtaheena Anwar

ntroduction

Audit by its definitional term is regarded as the expression of an opinion on the true and fair view of
some assertion. According to UK Auditing Standards & Guidelines, Audit is an independent
examination of an expression or an opinion on a set of financial statement prepared by the enterprise by
an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory
requirements. With the advent of time the role and nature of auditing and auditors has undergone
continuous modifications. Gradually the process based concept of auditing has been modified by a social
concept of auditing. Flint, Robert gray and many notable scholars emphasized audit being a social tool
that has emerged due to social demand. According to them, audit function can be seen as a means of
social control because it serves as a mechanism to monitor conduct and performance, and to secure or
enforce accountability. Mackenzie (as cited in Normanton, 1996, p.vii) in the foreword to The
Accountability and Audit of Governments made the following remark: Without audit, no control; and if
there is no control, where is the seat of power? Audit function plays a critical role in maintaining the
welfare and stability of the society. Emerged as a social need it has constantly contributed to the
development of civilization.

Auditing as a demand driven discipline:

Demand driven discipline refers to the discipline that is developed due to the demand of the society. In
this sense, audit is purely a demand driven discipline. It evolved because society demanded for it. As Flint
suggested, The audit function has evolved in response to a perceived need of individuals or groups in
society who seek information or reassurance about the conduct or performance of others in which they
have an acknowledged and legitimate interest. Again in 1998 he argued that, Audit exists because
interested individuals or groups are unable for one or more reasons to obtain for themselves the
information or reassurance they require. Many other scholars agree with Flint on Audit always being a
dynamic rather than a static concept. Brown (1962) suggested that, audit during the four hundred years
from its emergence has undergone constant change with regard to its objective and techniques. Auditing
thus has evolved to match with the changing needs and demand of the society. Through this adaptation it
constantly contributed to the development of the civilization. The changes in needs and expectations of
society are highly influenced by the factors contextual to the economic, political and sociological
environment at a particular point of time. So the development of auditing as a demand driven discipline is
deeply rooted in the evolution of auditing through different time frame and the change in expectations of
the society throughout that time.
Prior to 1800:
Earlier practices of auditing though not well documented present substantial proof for the existence of
auditing. The first recorded auditors were the spies of King Darius of ancient Persia (522 to 486 B.C.).

These auditors acted as the Kings ears checking on the behavior of provincial satraps. The word
Auditing came from the Latin word Audire which means he hears. In approximately 15 th century
while there was manorial system present in society, the landlord used to hear accounts of his staples. So a
form of accountability was present even in that early stage. A need thus for audit was present too.
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. In this case Aristotle can be cited:
Ten [logistae].and ten [euthuni].are chosen by lot. Every single public officer must account to
them. They have sole control over those subject to [examination]. they place their findings before the
courts.
Similar kinds of checking activities were found in England Exchequer. During the reign of Henry 1(11001135), special audit officers were appointed to make sure that the state revenue and expenditure
transactions were properly accounted for. 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. In
Italian City States the merchants of Florence, Geneo and Venice used auditors to help them to verify the
riches brought by captains of sailing-ships returning from the Old World and bound for the European
Continent. Again, auditing in this period was concerned about detection of fraud.
According to Porter, et al (2005), auditing had little commercial application prior to the industrial
revolution. 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.
Fitzpatrick (1939) commented that the audit objective in the early period was primarily designed to verify
the honesty of persons charged with fiscal responsibilities.
From 1800 to 1920:
Audit took birth from its germination stage of pre-1800s during the industrial revolution in UK from
1840-1920. During this time, large factories and machine-based production were established. As a result,
a vast amount of capital is needed to facilitate this huge amount of capital expenditure. The emergence of
a middle class during the industrial revolution period provided the funds for the establishment of large
industrial and commercial undertakings. But, the share market during this period was unregulated and
highly speculative. As a consequence, the rate of financial failure was high and liability was not limited.
Innocent investors were liable for the debts of the business. In view of this environment, it was apparent
that the growing number of small investors was in dire need of protection. Again the management of these
large corporations activities was not an easy thing to do. This gave the need for separation on
management from ownership control. Detachment of shareholders from their investments laid the ground
for mistrust that is theoretically known as Agency Theory. Hence, the time was ripe for the profession
of auditing to emerge.
In response to the socio-economic developments in the UK during this period, the Joint Stock Companies
Act was passed in 1844. The Joint Stock Companies Act stipulated that Directors shall cause the Books
of the Company to be balanced and a full and fair Balance Sheet to be made up. In addition, the Act
provided the appointment of auditors to check the accounts of the company.

Brown (1962) claimed that the auditors during this period were required to perform complete checking of
transactions and the preparation of correct accounts and financial statements. Little attention was paid to
internal control of the company. Porter, et al (2005) commented that the duties of auditors during this
period were influenced by the decisions of the courts.
For example, the verdicts from the case of London and General Bank (1985) and Kingston Cotton Mill
(1896) reinforced that the audit objective was detection of fraud and errors. These cases in turn
established the general standard of work expected of auditors.
The social need for detection of fraud and misappropriation of the managers and other responsible
officers necessitated the practice of audit during this time and auditing profession responded accordingly.
The first authoritative body ICAS was founded in 1857 followed by establishment of ICAEW in 1864.
From 1920 to 1960:
The growth of the US economy in the 1920s-1960s had caused a shift of auditing development from the
UK to the USA. In the years of recovery following the 1929 Wall Street Crash and depression, investment
in business entities grew rapidly. Meanwhile, the advancement of the securities markets and creditgranting institutions had also facilitated the development of the capital market in this period. As
companies grew in size, the separation of the ownership and management functions became more evident.
Hence to ensure that funds continued to flow from investors to companies, and the financial markets
function smoothly, there is a need to convince the participants in the financial markets that the companys
financial statement provided a true and fair view of the relevant companys financial position and
performance.
The shift of the auditing function from detecting and checking fraud to adding credibility to the financial
statements was started during this period. Such a change in audit objective is evidenced in successive
edition of Montgomerys Auditing text which stated An incidental, but nevertheless important, objective
of an audit is detection of fraud. (1934, p. 26). Primary responsibilityfor the control and discovery of
irregularities necessarily lies with management.
The fundamental principles of auditing during this period were influenced by some major auditing cases
such as the case of McKesson and Robbins (1938). The verdict of this case had resulted in the emphasis
of physical observation of assets such as cash and stock, and the use of external evidence. In addition, the
Royal Mail case highlighted the need of audit for the profit and loss statements.
Due to the increasing complexity of business it was also became necessary to improve internal control.
Society demanded auditor to play role in ensuring compliance with internal control.
From 1960 to 1990:
During this time the world economy continued to grow rapidly. This period marked an important
development in technological advancement and the size and complexity of the companies. Auditors in the
1970s played an important role in enhancing the credibility of financial information and furthering the
operations of an effective capital market. The New York Times of 6 April, 1975 can be cited in this
regard, The duties of auditors, among others, were to affirm the truthfulness of financial statements and
to ensure that financial statements were fairly presented.

Despite the overall audit objectives remaining similar, Davies (1996) opines that auditing had undergone
some critical developments in this period. 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 and 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. But 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. According to Porter, et al (2005), most of
the companies in this period had introduced computer systems to process their financial and other data,
and to perform, monitor and control many of their operational and administrative processes. To cope with
this changing social trend, auditors placed heavy reliance on the advanced computing auditing tool to
facilitate their audit procedures. Moreover provision of advisory services emerged as a secondary audit
objective in the period of 1960s-1990s.

From 1990 to Present:

Since 1990 the world economy has witnessed accelerated change. Present day audit is observed to have
expanded its scope beyond the basic financial statement attest function. According to Porter et al (2005),
Present-day auditing has developed into new processes that build on a business risk perspective of their
clients. The business risk approach rests on the notion that a broad range of the clients business risks are
relevant to the audit.
Presently, the ultimate objective of auditing is to lend credibility to financial and non-financial
information provided by management in annual reports; however, audit firms have been largely providing
consultancy services to businesses. But recently some phenomena brought auditors activities under deep
scrutiny. The collapses of giant corporations such as Sunbeam, Waste Management, Xeror, Adelphia,
Enron and WorldCom had brought about a crisis of confidence in the work of auditors. For example,
Delloit being the external auditor of Adelphia, had a stronger role to play when conducting audit.
Interestingly, Delloit originally issued an unqualified report to Adelphia the year for which it was
convicted of conducting fraud. But due to a series of legal actions taken by Adelphia, Delloit reconsidered
their position. In light of historical background and daunting image people expected auditors to play a
much meaningful role in this case. Due to these incidents, the image of auditing as a reliable profession
was in threat. But the profession responded quickly. In response, reform actions were taken. Some
reforms are as follows:
(1) The Sarbanes-Oxley Act (The US)
In response to the fall of Enron the Sarbanes-Oxley Act was implemented. 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. Furthermore, the act also requires auditors to report to the
audit committee on those significant matters. The Sarbanes-Oxley extended the duties of auditor to audit
the adequacy of internal controls over financial reporting.
(2) Ramsay report (Australia)

As a result of the collapse of HIH Insurance Ltd, the Australian Government Commission engaged
professor Ian Ramsay to investigate the issue of auditor independence. 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;
Establish an auditor independence supervisory board;
Establish an audit committee to oversee the issue of non-audit services

Contribution of Auditing to the development of the civilization:

Auditing as a demand driven discipline has largely contributed to the society. Auditing emerged because
society needed it. Though not as the present form but the seed of auditing was always there in the society.
It germinated and evolved as the time demanded. Through constant evolution auditing greatly contributed
to the advancement of civilization. Hence Flint rightly referred it as the social tool to stabilize human
relationship.
From the very early time of civilization when people realized the necessity of depending on each other for
living, the demand for assurance of the property and belonging being transferred or shared also took birth.
People wanted to be sure that the responsible persons were not being involved in fraudulent acts.
Auditors, though not known as auditors that time, contributed towards ensuring that no such
misappropriation was happening. The role of the auditors was played by the renowned and trustworthy
persons of the society. The trade and commerce was thus facilitated by enhanced level of confidence of
the people.
As time went by the economic as well as social and political structure of the society became complex.
The need for large scale production during and after industrial revolution was constantly giving signs for
the necessity of the separation of ownership and management. The pressure too was increasing from the
part of the investors who were worried about their investment to ensure just and proper use of their penny.
The need of auditing was never this pressing before. Auditors again played their role in stabilizing the
business, economic, political and most importantly the social structure by providing high quality service.
To provide high quality assurance service and take a more constructive role toward the development of
society auditing profession came under certain structured organizational frame, like-ICAS, ICAEW,
AICPA, IASB and such.
In last few decades, auditors slowly shifted their role as watchdog from a more rigorous bloodhound
role. The main objective was readjusted as providing opinion on true and fair view of financial statement
than detecting fraud. But society somehow still expected them to be bloodhound. This change in
objective did not undermine the role of auditing as an important contributor to the development of the
civilization. Yet today auditing profession is constantly upgrading itself to better serve the society.

Conclusion:

Auditors, be as bloodhound or watchdog has played an important role throughout the development of
civilization. It evolved as society evolved; changed when society demanded change. As a purely demand
driven discipline it always strived to meet the societys need. Auditors, more relied and trusted by the
society, have a lot to contribute to the society if only they allow themselves to look beyond the boundary.
Recent corporate scandals , like Enron, had left auditing with detrimental long term effect. Peoples trust
was shaken by the auditing firms role being of so low a standard. These incidents have shaken the
profession as well. Nonetheless, the huge demand of auditing yet today indeed provides us with hope.
Auditing as it has evolved for the society, to serve with best regard, should continue maintaining that
prestige whatsoever. It is expected to continue contributing to the civilization as it has been doing for so
long.

References:
Manohar, Jyothi Cultural changes in external auditing
Teck-heang, Lee; Mohammad Ali, Azam,(2008) The evolution of auditing: An analysis of the
historical development, Journal of Modern Accounting and Auditing, Dec. 2008, Vol.4, No.12
(Serial No.43)
Van peursem, Karen; Zhou, Maiqing; Flood, Tracey; Buttimore, James,(2007) Three cases of
corporate fraud: An audit perspective, working paper series, no. 24, June 2007
Eric Byrnes, Paul; Al- Awadhi, Abdullah; Gulvist, Bennita,(2012) Evolution of Auditing: From the
Traditional Approach to the Future Audit, white paper, November 2012