Audit Definition Objectives, Features, Origin (Explained)

audit definitionThe audit is one of the most dynamic areas of the accounting sciences.

The word “audit” has Latin origins (audio, audire, means listening). During the time this word has known a lot of definitions and classifications. In general, it is a synonym to control, check, inspect, and revise.

While the accounting has suffered a little change in time, the audit has permanently evolved, answering to the changes in the environment and modifying its objectives starting the middle age, passing through the industrial revolution up to the 21st century.

Companies prepare financial statements of their activities, which represent their overall performance. These financial statements are examined and evaluated by independent persons, who assess them according to the industry’s generally accepted standards.

This examination and evaluation is an audit.

Thus, an audit is an examination and verification of a company’s financial and accounting records and supporting documents by an independent professional against established criteria.

Definition of Audit

A precise definition of the term ‘auditing’ is difficult to give. Some of the definitions given by different authors are as follows:

According to the International Federation of Accountants (IFAC);

An audit is the independent examination of financial information of an entity, whether profit oriented or not and irrespective of its size, or legal form, when such an examination is conducted with a view to expressing an opinion thereon.

Spicer and Pegler, have defined audit as;

such an examination of the books, accounts and vouchers of a business, as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up,

so as to give a true and fair view of the state of the affairs of the business, and whether the Profit and Loss Account gives a true and fair view of the profit or loss for the financial period,

according to the best of his information and the explanations given to him and as shown by the books; and if not, in what respect he is not satisfied.

According to the American Accounting Association (AAA);

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions

and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

According to Montgomery;

Auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the financial operation and the result thereof.

It is clear from the above definitions that;

  • auditing is the systematic and scientific examination of the books of accounts and records of a business,
  • enables the auditor to judge that the Balance Sheet and the Profit and Loss Account are properly drawn up so it exhibits a true and fair view of the financial state of affairs of the business and profit or loss for the financial period.

The auditor will have to go through various books and accounts and related evidence to satisfy himself about the accuracy and authenticity to report the financial health of the business. Companies are expected to pass their audits, as the results are very important to the company’s reputation and success.

Audits are very valuable to external company affiliates, such as shareholders and investors, because they provide an extra reassurance of their choice in investments when issues arise.

Definition of an Auditor

Definition of an Auditor

An auditor is a professional that accumulates and evaluates evidence to report on the degree a company’s assertions that they comply with an established set of procedures or standards (criteria).

While it takes a highly trained accountant to work as an auditor, there are different types of auditors with different aims.

An efficient auditor must have certain qualities besides Professional qualification. It is essential for him to carry out the audit efficiently and smoothly.

Origin and Evolution of Auditing

Origin and Evolution of Auditing

Auditing existed primarily as a method to maintain governmental accountancy, and record-keeping was its mainstay. From the time of the ancient Egyptians, Greeks, and Romans, the practice of auditing the accounts of public institutions existed.

It wasn’t until the advent of the Industrial Revolution, from 1750 to 1850, that auditing began its evolution into a field of fraud detection- and financial accountability.

In the early 20th century, the reporting practice of auditors, which involved submitting reports of their duties and findings, was standardized as the “Independent Auditor’s Report.”

The increase in demand for auditors leads to the development of the testing process. Auditors developed a way to strategically select key cases as representative of the company’s overall performance.

This was an affordable alternative to examining every case in detail, and it required less time than the standard audit.

Essential Features of an Audit

Essential Features of an Audit

From the definitions, the six essential features of auditing can be described as follows:

  • Systematic process
  • Three-party relationship
  • Subject matter
  • Evidence
  • Established criteria
  • Opinion

Objectives of an Audit

Objectives of an Audit

The objective of an audit is to express an opinion on financial statements. The objectives of the audit can be categorized into (i) primary objectives and (ii) subsidiary objectives.

Primary Objectives of Audit

The main objectives of the audit are known as the primary objectives of the audit.

They are as follows:

  1. Examining the system of internal check.
  2. Checking arithmetical accuracy of books of accounts, verifying posting, casting, balancing etc.
  3. Verifying the authenticity and validity of transactions.
  4. Checking the proper distinction between capital and revenue nature of transactions.
  5. Confirming the existence and value of assets and liabilities.

Subsidiary Objectives of Audit

These are such objectives which are set up to help in attaining primary objectives.

They are as follows:

  1. Detection and prevention of errors.
  2. Detection and prevention of frauds.
  3. Under-or over-valuation of stock.

Scope of Audit

Scope of Audit

The scope of an audit is the determination of the range of the activities and the period of records that are to be subjected to an audit examination.

The scope of an audit are;

  • Legal Requirements.
  • Entity Aspects.
  • Reliable Information.
  • Proper Communication.
  • Evaluation.
  • Test.
  • Comparison.
  • Judgments.

Read More about Scope of Audit.

Organizations Establishing International Standards for Auditing

There are few international organization of Chartered Accountants, who are responsible for setting Auditing standards. They are;

International Federation of Accountants.

International Federation of Accountants (IFAC's Functions Explained)International Federation of Accountants (IFAC) is an independent global organization of accountancy profession for establishing international standards on ethics, auditing and assurance, accounting education, and public sector accounting.

What is the International Federation of Accountants (IFAC)

International Federation of Accountants (IFAC) is the global organization for the accountancy profession.

Founded in 1977, IFAC has 179 members and associates in 130 countries and jurisdictions, representing more than 2.5 million accountants employed in public practice, industry and commerce, government, and academe.

The organization, through its independent standard-setting boards, establishes the globally accepted and implemented standards of ethics, auditing, accounting education.

It also issues guidance to encourage high-quality performance by professional accountants in business.

To ensure the activities of IFAC, and the independent standard-setting bodies supported by IFAC are responsive to the public interest, an international Public Interest Oversight Board (PIOB) was established in February 2005.

Functions of International Federation of Accountants (IFAC)

As a global body of the accountancy profession; the International Federation of Accountants (IFAC) performs;

  • Set Global Standards for Accounting and Auditing Practice.
  • Monitor the public sector accounting.
  • Standardize the Accounting education.
  • Serve public interest in account profession.

The mission of International Federation of Accountants

IFAC’s mission is to serve the public interest by contributing to the development of high-quality standards and guidance.

International Federation of Accountants facilitates the adoption and implementation of high-quality standards and guidance.

By contributing to the development of strong professional accountancy organizations and accounting firms and high-quality practices by professional accountants, and promoting the value of professional accountants worldwide; and speaking out on public interest issues.

The vision of the International Federation of Accountants is that the global accountancy profession is recognized as a valued- leader in the development of strong and sustainable organizations, financial markets, and economies.

Structure & Governance of International Federation of Accountants

IFAC’s structure and governance are designed to promote transparency, to facilitate collaboration with members and consultation with stakeholders, and to ensure the efficient operations of the organization.

Founded in 1977, IFAC is a Swiss-registered association whose members are professional accountancy organizations.

Council of International Federation of Accountants

Ultimate governance of IFAC rests with the IFAC Council, which comprises one representative from each member.

The Council meets once a year and is responsible for deciding constitutional and strategic matters and electing the Board.

Operations of International Federation of Accountants

Overall direction and administration are provided by the IFAC Secretariat headquartered in New York IFAC are staffed by accounting professionals from around the world.

Institute of Chartered Accountants in England and Wales.

How ICAEW Works (Institute of Chartered Accountants in England and Wales)The Institute of Chartered Accountants in England and Wales (ICAEW) was established by a Royal Charter in 1880. It has over 147,000 members.

Over 15,000 of these members live and work outside the UK. The Institute also has some 9,000 students.

The Institute is a member of the Consultative Committee of Accountancy Bodies (CCAB), formed in 1974 by the major accountancy professional bodies in the UK and Ireland.

The fragmented nature of the accountancy profession in the UK is in part due to the absence of any legal requirement for an accountant to be a member of one of the many Institutes, as the term accountant does not have legal protection.

However, a person must belong to the ICAEW, ICAS or CAI to hold themselves out as a chartered accountant in the UK (although there are other chartered bodies of British qualified accountants whose members are likewise authorized to conduct restricted work such as auditing).

The ICAEW has two offices in the UK; the main one is in Moorgate, London and the other in Central Milton Keynes, in the newly built Hub: MK complex. In 2009 it also opened regional offices in Singapore and Dubai to support its members in Asia, followed by Beijing in 2011.

Early Years

Until the mid-nineteenth century, the role of accountants in England and Wales was restricted to that of bookkeepers in that accountants merely maintained records of what other business people had purchased and sold.

However, with the growth of the limited liability company and large-scale manufacturing and logistic in Victorian Britain a demand was created for more technically proficient accountants to deal with the increasing complexity of accounting transactions dealing with depreciation of assets, inventory valuation and the Companies legislation being introduced.

To improve their status and combat criticism of low standards, accountants in the cities of Britain formed professional bodies.

The ICAEW was formed from the five of these associations that existed in England prior to its establishment by Royal Charter in May 1880.

  1. The Incorporated Society of Liverpool Accountants, formed in January 1870;
  2. The Institute of Accountants in London was formed in November 1870, comprising 37 members under the leadership of William Quilter. In 1871, standards for membership were established with new members having to show knowledge and aptitude through successfully passing an oral examination. Initially, the London Institute restricted its membership to that city, but as other institutes were established elsewhere (for example, in Manchester and Sheffield) it was decided to remove this restriction and as such in 1872 it simply became known as the Institute of Accountants to reflect its new national coverage;
  3. The Manchester Institute of Accountants, formed in February 1871;
  4. The Society of Accountants in England (1872);
  5. The Sheffield Institute of Accountants (1877).

The Institute headquarters, Chartered Accountants’ Hall, in the city of London, was designed in the Italian Renaissance style by John Belcher in 1890. It was built by Colls & Sons. It is widely regarded as one of the finest examples of Victorian Baroque architecture.

In 1948, the institute received a Supplemental Charter.

In 1957 the ICAEW merged with the Society of Incorporated Accountants (founded in 1885 as the Society of Incorporated Accountants and Auditors).

Recent Developments

In 2005 the ICAEW sought to merge with the Chartered Institute of Management Accountants (CIMA) and the Chartered Institute of Public Finance and Accountancy (CIPFA).

However, this project proved unsuccessful.

The Institute also announced at this time that it was considering dropping the reference to England and Wales in its title to become the Institute of Chartered Accountants.

However, this plan was also withdrawn following objections from the Institute of Chartered Accountants of Scotland.

The Institute introduced a new syllabus in 2007. In order to make it more appealing to prospective students, the mandatory examinations will become more flexible based on a modular structure.

In addition to paper-based assessments, there are now computer-based assessments of objective test questions (multiple choices).

American Institute of Certified Public Accountants.

AICPA: How American Institute of Certified Public Accountants WorksThe American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, founded in 1887.

AICPA has 394,000 members in 128 countries in business and industry, public practice, government, education, student affiliates and international associates.

It sets ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state and local governments.

It also develops and grades the Uniform CPA Examination. The AICPA maintains offices in New York City; Washington, DC; Durham, NC; and Ewing, NJ. The AICPA celebrated the 125th anniversary of its founding in 2012.

The AICPA’s founding established accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, and a commitment to serving the public interest.

History

The AICPA and its predecessors have a history dating back to 1887 when the American Association of Public Accountants (AAPA) was formed. In 1916, the American Association of Public Accountants was succeeded by the Institute of Public Accountants, at which time there was a membership of 1,150.

The name was changed to the American Institute of Accountants in 1917 and remained so until 1957 when it changed to its current name of the American Institute of Certified Public Accountants.

The American Society of Certified Public Accountants was formed in 1921 and acted as a federation of state societies. The Society was merged into the Institute in 1936 and, at that time, the Institute agreed to restrict its future members to CPAs.

Mission

The AICPA’s mission is to provide members with the resources, information, and Jeadersbuft that enable them to provide valuable services.

In the highest professional manner to benefit the public, employers, and clients. In fulfilling its mission, the AICPA works with state CPA organizations and gives priority to those areas where public reliance on GPA skills is most significant.

Professional Standards Setting

The AICPA sets generally accepted professional and technical standards for CPAs in multiple areas. Until the 1970s, the AICPA held a virtual monopoly in this field.

In the 1970s, however, it transferred its responsibility for setting generally accepted accounting principles (GAAP) to the newly formed Financial Accounting Standards Board (FASB).

Following this, it retained its standards-setting function in areas such as financial statement auditing, professional ethics, attest services, CPA firm quality control, CPA tax practice, business valuation, and financial planning practice.

Before passage of the Sarbanes-Oxley law, AICPA standards in these areas were considered generally accepted for all CPA practitioners.

In the early 2000s, federal public policymakers concluded where independent financial statement audits of public companies regulated by the U.S. Securities and Exchange Commission are concerned.

That the AICPA’s standards-setting and related enforcement roles should be transferred to a government empowered body with more enforcement authority than a non-governmental professional association, such as the AICPA could provide.

As a result, the Sarbanes-Oxley law created the Public Company Accounting Oversight Board (PCAOB) which has jurisdiction over virtually every area of CPA practice about public companies.

However, the AICPA retains its considerable standards setting, ethics enforcement and firm practice quality monitoring roles for the majority of practicing CPAs, who serve privately held business and individuals.

Conclusion

The audit is a systematic process of obtaining an objective evaluation of the evidence referring the statements regarding documents or events with the economic character in order to appreciate the degree of conformity of these with pre-established criteria, to communicate the results of the interesting parts.

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