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.