The origin of auditing is derived
from Italy in the year 1494 when Luca Pacioli introduced the double-entry
system of bookkeeping and also describes the duties of auditors.
Generally, auditing is defined as
the independent examination of books of accounts maintained by the company and
also to express an opinion on the financial statements. Since the auditor is
independent of the entity therefore his opinion on the books of accounts and on
financial statements add credibility to it. By auditor we mean the “external
auditor” not the” internal auditor (As
internal auditor is an employee of the company and is not independent)”.
Key Takeaway Points
=> The origin of auditing is quite old
and is derived from Italy when Luca Pacioli introduced the double-entry system
of bookkeeping.
=> Auditing is the independent
examination of the books of accounts and other records maintained by the
company.
=> Along with checking the books of
accounts and other relevant records of a company, the auditor also
expresses an opinion on the truth and fairness of the financial statements
as his independent opinion adds credibility to the financial statements.
=> Each country has its own laws and
regulation for the appointment of auditors and business entities shall follow
their own country’s laws and regulations for the appointment of auditors.
=> Auditing is a regulated profession
in most of the countries of the world therefore the auditor shall be a
Chartered Accountant (CA), Certified Public Accountant (CPA), and Associated
Certified Chartered Accountant (ACCA).
=> The auditor is not expected to perform any duty of an accountant and it is strictly prohibited for the auditor to prepare the financial statements of an entity as he may be asked by an entity to prepare the financial statements too along with the audit mandate. Things prepared by someone himself and to check the same things for the errors and fairness is quite absurd, therefore, auditor shall not indulge in such practice of the preparation of the financial statements as the duty of auditor begins where the duty of accountant ends so let the accountant do his job.
In companies where the owners and
management are in hands of different persons then owners appoint an independent
external auditor to satisfy himself that his business is going in the right
direction with respect to the record and data maintained by its employees. The
auditors here inspect the books of the accounts and various records and assure
the owner(s) of a business that the record and financial statements reflect the
true face of the financial performance and financial position correctly and
that there are errors and misstatements in the records maintained by the
employees.
The concept of the appointment of an
independent person to check the record of business and its activities is quite
an old one as in good old days when people were handover certain possession
like cattle to others to take care of them then the real owners were often
appointing an independent third person to inspect the possession like cattle to
count them and to assures the owners that the cattle are healthy one and in
good condition.
Since auditing is a regulated
profession in most of the countries of the world therefore the appointment of
an auditor shall be as per the relevant laws and regulations of own country.
Since the laws and regulations of each country are different therefore the
methods of appointment of auditors could be a little bit different and any
business entity should seek guidance from the relevant laws and regulations for
the appointment of an auditor.
There are regulated bodies for the
regulation of the auditing profession so such professional bodies are
responsible for the producing of the finest auditor to the corporate world
to conduct audits of the affairs of the business as per the relevant standards
of auditing.
In most counties of the world,
an auditor shall be a qualified professional accountant who holds
the membership of a regulated professional body. The auditor in most of the
cases are Chartered Accountants (CAs), Certified Public Accountants (CPAs),
Associated Certified Chartered Accountants (ACCAs).
Generally, speaking an
auditor is expected to be more qualified than an accountant of a business
entity so that he might be in a better position to better scrutinize the
accounting records maintained by an accountant. Therefore, in most of the countries
of the world, it become the requirement to appoint only a qualified
professional accountant who holds the degree of a professional body of
accountants. The appointment of a graduate or undergraduate is generally not
preferred to be appointed as an auditor.
Any business entity going through
the following sequence in maintaining the business record and for the
preparation of the financial statements:
=> Record the business transaction at
first instance as and when it occurred (Journalizing)
=> Classify the transactions in its
respective accounts (Ledger)
=> Summarize the account balances
(Trial balance)
=> Preparation of the financial
statements
The preparation of the financial
statements is the final step and it is the duty of an accountant to prepare the
financial statements. Auditors should not prepare the financial statements
although they are expected to prepare the financial statements too for a
business entity which is strictly prohibited it is sad to say that auditors are
often involved in such practice of the preparation of the financial statements
for a business entity.
Reviewing and auditing the things
that the auditor prepared himself is quite absurd so he is not supposed to
prepare the financial statements. Remember that the duties of an auditor begin
when the duties of an accountant end.
Since the auditor is in a credible
position therefore he is expected to have sound knowledge of the accounting
principles and standards, auditing principles standards and also should have
the sound knowledge of corporate and taxation laws of own country.