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Department of Accounting & Information Systems

Faculty Of Business Studies
University Of Dhaka
Assignment On
Evolution of Auditing

Course Title: Audit & Assurance 1

Course Code: 3103

Submitted to:
Dr. Mohammad Moniruzzaman
Associate Professor
Department Of A&IS
University of Dhaka
Prepared By
Group:09. Section:A
Group Members:
1. Al Shihab Shadman ID: 26177 Exam Roll:12512
2. Ahmed Ali ID: 26155 Exam Roll:12509
3. Farjana Akter Mim ID: 26051 Exam Roll:12542
4. Md. Amirul Islam ID: 26035 Exam Roll:12596
5. Md. Arman Khan ID: 26158 Exam Roll:12598
6. Fuwad Ahmed ID: 26216 Exam Roll:12549

Submission Date: 16th October 2022.

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Introduction
Audit is not evolved in just few years, it has taken almost two centuries to come to the stage that we
see today as what audit is. Currently, auditing is at a pivotal point. In particular, the auditing profession
is facing challenges from real-time business practices and information technology advancements. As
a result, the main goal of this essay is to assess the level of development of the auditing discipline and
to suggest possible future directions for its growth and long-term benefits to society.

Historical Background Of Auditing

The word “audit” comes from the Latin word audire, meaning “to hear” “to listen”. Generally, it is a
synonym to control, check, inspect, and revise. Auditing has its history to a large extent determined
by the history of accounting, as the lattermetamorphosed and culminated with the development of the
world economy.Ancient cultures of Mesopotamia,Egypt,Greece and Italy show evidences of highly
developed economic systems, yet the economic fact during these periods were limited to the recording
of single transactions.
In ancient past about 5000 years B.C., there was evidence of first writings, developing new forms of
organization, new socioeconomic formations, and philosophical, cultural ones. Once tothese has
appeared the necessity of improving the economic situation of the tribes or kingdoms. Therefore this
task has been given to a member of the community, who knew how to write and dominated the
numbers to realize activities of organizing the data and figures, which would allow an evaluation of
the economic situation to make appropriate decisions. Auditing is as old as accounting, and there are
signs of its existence in all ancient cultures such as Mesopotamia, Greece, Egypt, Rome, UK, and
India.Arthashastra by Kautilya detailed rules for accounting and auditing of public finances.In olden
days the key purpose of audits was to gain information about the financial system and records of the
business. Auditing was primarily a method to maintain governmental accountancy, and record-
keeping was its mainstay. The main objective of auditing of those days was to locate frauds and to
determine whether the receipts and payments were properly recorded by the person responsible,the
punishment of the thieves for the funds changing direction,Protecting assets. The financial audit has
progressed and perfected itself step by step, with economic development answering society’s
challenges.It has also progressed from the historical point of view, being present in different forms in
all the periods, from the concept point of view, and mostly from the objective point of view. A
prominent work in the examination of history of auditing is the work of Lee and Azham (2008), they
divided the history into five chronological periods of:

Before 1840s

1840s - 1920s

1920s - 1960s

1960s – 1990s

1990s - Present.
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Before 1840s

Auditing's origins and early history are often poorly recorded. Ancient China, Egypt, and Greece all
had some type of auditing and checking processes in place. Some of the first examples of auditing,
dating back to ancient Greece (about 350 B.C. ), were discovered in rituals of checking. The ancient
exchequer of England was also discovered to engage in similar auditing tasks. During the reign of
Henry 1 (1100-1135), England's exchequer was set up, and in that capacity, special audit officials
were employed to ensure accurate accounting of governmental income and spending activities. The
"Auditor" was the title given to the person in charge of conducting financial audits. The purpose of
this review was to forestall any fraudulent behavior. Prior to the Industrial Revolution, auditing had
little practical use, according to Porter et al. This is because most manufacturing in this era consisted
of tiny, family-run mills and cottage industries. Because of this, there was no need for corporate
managers to provide reports to owners about the management of resources. This means that auditing
is mostly unnecessary. Essentially, before 1840, auditing was limited to a manual inspection of every
single transaction. The auditing process did not include any kind of testing or sampling.

1840s-1920s

In the UK, the industrial revolution (1840s–1920s) marked the beginning of the establishment of
auditing as a profession. According to Brown (1962), the industrial revolutions' large-scale activities
elevated the corporate form of company to the forefront. Large industries and manufacturing using
machines were built. To enable this enormous level of capital spending, a significant quantity of
capital is thus required.
The emergence of a “middle class” during the industrial revolution period provided the funds for the
establishment of large industrial and commercial undertakings. However, the stock market was
uncontrolled and quite speculative during this time. As a result, financial collapse was common and
responsibility was unrestricted. The obligations of the company were owed by unwitting investors.
This atmosphere made it clear that the expanding number of small investors needed protection more
than ever (Porter, et al, 2005). Consequently, it was a good moment for the profession of auditing to
develop (Brown, 1962).
The government of Great Britain began taking emergency measures to rescue the investors. In 1844,
Govt. enacted the Joint Stock Company Act.. Directors are required to ensure that the books of the
company are balanced and a thorough and fair balance sheet is prepared in accordance with the Joint
Stock Companies Act. The Act also allowed for the appointment of auditors to examine the company's
financial records. However, the Companies Act of 1862 did not mandate the disclosure of the balance
statement to shareholders or the performance of a statutory audit until 1900 (UK).
According to Porter, et al. (2005), the accountant was typically the firm manager in the early stages
of this era, and his responsibilities included ensuring the appropriate use of the funds entrusted to him.
During this time period, auditors consisted of regular shareholders who were elected to the position
by the membership as a whole. Brown (1962) said that auditors in that era were obligated to conduct
exhaustive checks of transactions and to ensure accurate accounting and financial statement
preparation. Internal business control was given a low priority.
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When describing the role of auditors at this time, Porter et al. (2005) noted the impact of judicial
judgements. Auditing's goals were to I identify fraudulent activity, (ii) identify technical faults, and
(iii) identify errors of principles. It may be stated that the focus of auditors from the 1840s to the
1920s was on ensuring the accuracy of the balance sheet and the identification of fraud.

1920s-1960s

During this period, Porter(2005) explained that as companies grew in size, the separation of the
ownership and management functions became more evident. Thus, agency theory was evident. The
following are the main activities of this period: started as a result of inflow of funds from investors
to companies, and the existence of functioning financial markets.
(2) The audit function was mainly to provide credibility to the financial statements prepared
by company managers for their shareholders. Hence, lending credibility theory was developed and
the primary objective of an audit function changed to adding credibility to the financial statement
from the detection of fraud and errors.
(3) Queenan (1946) explained that the concept of materiality was used in this period. Also, Brown
(1962) observed that sampling techniques were used in auditing during this period was due to the
voluminous transactions involved in the conduct of business by large corporations operating in
widespread locations. It was no longer practical for auditors to verify all the transactions.
(4) Porter, et al (2005) highlighted the major characteristics of the audit approach during this
period, among others, to include: (i) reliance on internal control of the company and sampling
techniques were used; (ii) audit evidence was gathered through both internal and external source; (iii)
emphasis on the truth and fairness of financial statements; (iv) gradually shifted to the audit of Profit
and Loss Statement but Balance Sheet remained important; and (v) physical observation of external
and other evidence outside the “book of account”.

1960s-1990s
According to Davies (1996), auditing had undergone some critical developments in this period. He
explained that 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 where it is unlike for auditors to play the role of verifying transactions.
As a result Lee and Azham (2008) explained that auditors in this period had placed much higher
reliance on companies’ internal control intheir audit procedures. Furthermore, auditors were required
to ascertain and document the accounting system with particular consideration to information
flows and identification of internal controls. When internal control of the company was effective,
auditors reduced the level of detailed substance testing.Salehi (2007) observed that in the early 1980,
there was a readjustment in auditors’ approaches where the assessment of internal control systems
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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 (Turley andCooper, 1991). Risk-based auditing is an audit approach
where an auditor will focus on those areas which are more likely to contain errors. To adopt the use
of risk-based auditing, auditors are required to gain a thorough understanding of their audit clients in
term of the organization, key personnel, policies, and their industries (Porter, et al., 2005) Hence, the
use of risk-based auditing had placed strong emphasis on examining audit evidence derived from a
wide variety of sources, that is both internal and external information for the audit client

1990s-present

The audit profession started to assume more responsibility for fraud detection and reporting in the
early 1990s. It also started to evaluate and more explicitly report any concerns regarding an auditee's
ability to continue in accordance with society's and regulators' growing concern over corporate
governance issues.

Many accounting scandals, including those involving Tyco, WorldCom, and Enron, occurred in the
early 2000s. The Sarbanes-Oxley Act of 2002 was passed in response to the collapse of Enron and
included a number of requirements pertaining to management and auditor accountability. By
extending the responsibilities of auditors to include evaluating the effectiveness of internal controls
over financial reporting, Sarbanes-Oxley. Arthur Andersen, one of the Big 5 audit firms at the time,
was also brought down by these accounting scandals as a result of its involvement in the Enron
scandal.Ramsay report is also known where Professor Ramsay was engaged by Australian
Government because of the collapse of HIH Insurance Ltd,Australia.

Although the overall audit goals for the current period—namely, enhancing the credibility of the
financial statement—remain the same, there have been significant modifications made to the auditing
process as a result of the comprehensive reform in many different countries.

The primary goal of auditing in present days is to give validity to the financial and non-financial data
that management includes is in annual reports; nonetheless, audit firms have mostly been offering
consulting services to companies.
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History of Audit in Bangladesh ( after independence)

A number of laws were passed after Bangladesh was founded in 1971 to regulate auditing in
Bangladesh.
The only entity authorized to conduct a performance audit in Bangladesh is the Office of the
Comptroller and Auditor General (C&AG), which is also the country's highest administrative agency.
The Comptroller and Auditor General's (Additional Functions) Act of 1974 and Article 128 of the
Constitution of the People's Republic of Bangladesh are the fundamental legal foundations for the
C&AG's ability to conduct the performance audit.

The Bangladesh Chartered Accountants Order, 1973 (President's Order No. 2 of 1973), which
established the Institute of Chartered Accountants of Bangladesh (ICAB) as the country's national
professional accounting body, was created to control the accounting profession and issues related to
it. The Institute of Chartered Accountants of Bangladesh's administrative ministry is the Ministry of
Commerce, Government of the People's Republic of Bangladesh (ICAB).

Conclusion

Although auditing has advanced significantly in the last ten years, it does not appear to have kept up
with the real-time economy. Some auditing methods and procedures that were effective in the past
now seem out of date. Additionally, the development of auditing has reached a turning point where
auditors can either take the initiative in advocating for and implementing the future audit or stick in
some way to the more conventional paradigm. Future audit methods would probably necessitate
considerable changes from regulators, standard-setters, and auditors. These modifications could
involve: (1) altering the audit's timing and frequency; (2) raising awareness of technology and
analytical techniques; (3) switching to full population examination from sampling; (4) reexamining
ideas like materiality and independence.