Evolution of Auditing

From Ancient Times to Modern Age

The profession of auditing has gained much importance by the emergence of Joint Stock
Companies and by rapid growth in business sector. Nowadays, it is necessary to take care of
the people in-charge of the accounts and funds of such gigantic businesses. Without a
regularized system of auditing it would be a piece of cake for the officials to misappropriate
the funds and cash of the business and not even bothering to get caught. Auditors,
nowadays, serve a very important job of examining the financial statements in order to
check any unwanted events. In this article, we would come to know that how does this
system of auditing evolved, since when is this practice of checks and counterchecks in use, and
when did professional auditing and accounting, as seen in today’s world, come on the scene.

The word ‘audit’ is derived from the Latin word audire which means to hear. In the good old
days whenever the proprietors of a concern suspected a fraud, certain people were
appointed to hear verbal evidence of transactions of barter etc., and to judge the facts. They
heard the points of view of those who maintained the accounts.

‘Audit’ is defined as follows:

“An audit is an examination of accounting records undertaken

The practice of auditing had been in use since ancient times. Mesopotamian relics
pertaining to 3600 – 3200 BC have been found with tiny marks, dots, ticks and circles placed
on sides of the figures. It indicates that those figures had been checked. Ancient Egyptians
got there financial transactions recorded by two separate persons and another person was
appointed for conducting their audit. Greeks also used to appoint officials who checked the
accounts of public officials at the expiry of their term. Romans developed an effective
system of financial administration and there was a system of checks and counterchecks.
Signs of audit are also found in early Islamic history. A Muslim official, called Muhtasib was
appointed by the government in those days to oversee the functioning of the traders in
order to prevent them from exploiting the consumers. He would also deal with the
complaints of bribery and misappropriation of public funds. Besides these, he would also
serve many other functions. In the times of Mughals as well, officials responsible for the
accounts and audit of the state were appointed.
In UK, the Exchequer was established in the reign of Henry – I, around 1100 – 1135 AD.
There was a regular system of accounting and auditing of state transactions in the 12th
century. In this period accounting system for cities, individual agriculturists, and traders was
also developed. But the professional auditors did not still appear on the scene.

In 1494, Luca Pacioli from Italy, wrote first printed treatise on art of book-keeping, named
Summa de Arithmetica, Geometrica, Proportioni et Proportionalita, which means ‘Everything
about Arithmetic, Geometry and Proportion’. Pacioli gave a clear description of the art of
double entry book-keeping. It was practiced in Venice at that time. During this period
mercantile accounting took a definite shape.

Industrial Revolution in 18th century resulted in gradual increase in the size of business
undertakings. Railways, banks, insurance and other joint stock companies emerged and
hence there arose a need for independent auditing. Although the system of state auditing
date back to ancient times, but mercantile accounting and the profession of independent
auditors came into being comparatively recently.

In UK, the profession of accountancy and auditing gained importance in 19th century when
different laws emphasized the need of audit for gigantic business concerns. In 1845 the
Companies’ Clauses Consolidation Act 1845 provided for appointment of auditors for
railway companies. The Companies Act of 1862 contained a provision relating to the audit
of joint stock companies. Audit of the accounts of limited companies became compulsory by
the Amendment Act of 1900. With the growing importance of accounting and auditing, a
number of societies of professional accountants came into existence during the years 1870
to 1880. In 1880, the Queen granted a charter incorporating these various societies into a
single body: The Institute of Chartered Accountants in England and Wales (ICAEW).
Following this, admission to the membership of this Institute became possible only after an
applicant fulfilled certain conditions relating to examinations and training.

The profession of audit and accountancy gained popularity in the sub-continent because the
early legislation relating to companies in India was modelled more or less on the British
pattern. The Joint Stock Companies Act of 1857 in its Table A (containing regulations, the
adoption of which was entirely optional) contained provisions for the annual audit of
company accounts. The Companies Act of 1913 made the audit of company accounts
compulsory. Under the section 130 of this Act the maintenance of books of accounts was
made mandatory. For the first time, the qualifications of the auditor, his powers and duties,
and the procedure for his appointment were laid down. According to section 144 of the Act,
only a person holding a certificate from the government, or a member of an association or
institute recognized for this purpose, could act as an Auditor of a public limited company.

After 1914 for some time the provincial governments used to issue Auditor’s Certificate to
those who possessed some knowledge of accountancy. But in 1918 the Government of
Bombay formulated a scheme for training of entrants in this field. Government Diploma in
Accountancy (GDA) examination and articleship of 3-years was prescribed. The Government
of India approved this scheme as a qualification for granting “Unrestricted Certificates” by
provincial governments, entitling the holders to practice throughout the British India.

Around 1930, an Accountancy Board was set up by the Government of India and the control
was shifted from Provincial to the Central Government. The Board was required to conduct
the required examinations, register apprenticeships and grant GDA diplomas. The Board was
also required to advise the Government on matters relating to profession accounting.

The Government of India framed rules under Companies Act 1913 called “Auditors’
Certificates Rules 1932”. The objectives of these rules to register apprenticeships, conduct
examination, and control and regulate the profession of auditing. The Rules required
passing of two examinations – Registered Accountants first and final. It further laid down
the tenure of the prescribed training which was required to be completed during the period
of apprenticeship.

Pakistan emerged as a sovereign state on August 14, 1947, and adopted the Auditors’
Certificates Rules, 1932. Amendments were made in 1950 to the Rules and then the affairs
of the accountancy profession were administered under the Auditors’ Certificates Rules,
1950. A person who passed the Registered Accountants first and final examination and who
satisfied the Ministry of Commerce, Central Government of Pakistan that he had completed
the prescribed practical training, could have placed his name on the register maintained by
the said Ministry and was entitled to use the designation ‘Registered Accountant’ (RA). The
Companies Act, 1913 allowed only RAs to act as auditors of a public limited company,
although his service could also be utilized for the audit of private companies, partnership
concerns and sole traders.

In 1952, the RAs formed a private body known as ‘Pakistan Institute of Accountants’ for
looking after their own interests. The Institute wanted to establish an autonomous body for
the regulation of the profession of audit and accountancy.

In 1959, the Department of Accountancy was formed under the Ministry of Commerce due
to growing importance of the profession. The Pakistan Institute of Accountants persisted
with the idea of establishment of an independent body. An advisory body called the
“Council of Accountancy” was set up under the Auditors’ Certificates Rules, 1950 which
recommended the establishment of the Institute of Chartered Accountants in Pakistan.

On July 1, 1961 the Institute of Chartered Accountants of Pakistan (ICAP) was formed as an
autonomous body. As of that date the Department of Accountancy and the Pakistan
Institute of Accountants having served a very useful purpose were liquidated. ICAP is
governed by the Council which consists of nineteen members. Fifteen members are elected
from amongst the members for a period of four years. The remaining four of the Council
members are nominated by the Government of Pakistan.
Now, a person to be appointed as an auditor of a public company or a private company
which is a subsidiary of a public company he must be a member of ICAP. All Private Limited
Companies having a paid up capital is of Rs. 3 million and above are required to get their
accounts audited by a member of ICAP.

In December, 1984, the Companies Act, 1913 was replaced by Companies Ordinance, 1984.
Section 252 to 260 of the Ordinance outlines the audit requirements in relation to
companies. Section 252 requires that every company shall appoint an auditor at each annual
general meeting (AGM) and he shall hold the office till the conclusion of next AGM.
Moreover, the first auditor of the company shall be appointed by the directors of the
company and he shall hold the office till the conclusion of first AGM. The Companies
Ordinance, 1984, under section 230, requires manufacturing industries to keep cost
accounting records as well. Section 258 of the Ordinance requires cost audit of
manufacturing industries on annual basis. This audit can be conducted by a member of ICAP
or a member of Institute of Cost and Management Accountants of Pakistan (ICMAP),
established in 1951.

All new International Standards on Auditing (ISAs) issued by the International Auditing and
Assurance Standards Board (IAASB) are made known to members of the national accounting
bodies through publication in accounting journals, e.g., “The Pakistan Accountant” and
various newsletters.