Evolution of Audit

The evolution of audit as a separate discipline as well as a profession can be discussed in four

phases as follows –

A. First Phase

Auditing, being an examination of accounts (in its primitive form at least) evolved with the

development of accounting. However, even in ancient times, auditing did exist. Historical

evidences suggest that audit of state accounts was an established practice in Greece, Egypt and

Rome. As soon as new states were acquired, public accounts were checked coherently to know

the position of the treasury. Similar practices were prevalent in India and other parts of the

world also. The legendary ‘Arthashastra’ written by Kautilya, a minister of Mouryan emperor

Chandragupta, contains evidence of a well organised accounting and auditing system of state

treasury. However, auditing during these years were limited to only public accounts. This is

because, privately owned business organisations were small in size and a result owner himself

could examine the business accounts.

B. Second Phase

The last decade of the fifteenth century witnessed significant development in trade and

commerce due to the Renaissance in Italy. This necessitated the introduction of a formal system

of accounting applicable for all types of transactions. Coincidentally, during this period (in

1494), Luca Pacioli, a mathematician from Italy, published a book titled ‘Summa de Arithmetica,

Geometria, Proportioni et Proportionalita', which had a dedicated chapter on double entry book

keeping system. Pacioli’s book paved the way for a whole host of literature in the similar lines

which significantly helped in improving the existing accounting system into a formal one.

With the development in accounting, auditing as a process of examination of the reliability of

recorded facts also became important.

C. Third Phase

Industrial revolution in England in eighteenth century and subsequent developments led by it

was another landmark in the history of trade and commerce. Keeping pace with the expansion

of organisations, introduction of mechanised production system, large scale production etc.

railroads were established in Nineteenth century. All these significantly affect the nature,

organisation structure, ownership and control of business. Apart from proprietorship and

partnership form of business came the Joint Stock Company form of organisations. Since in a

company form of business ownership is explicitly separated from the management, concept

of stewardship became relevant. Moreover, the perpetual legal existence of Joint Stock

Companies significantly changed the system of accounting. Reporting of the final outcome

of business transactions assumed greater importance to ensure the appropriate use of funds

by the management. All these increased the need for an independent appraisal of accounting

records and reports by a qualified third party. Auditing, in its formal shape started being used

extensively in almost all the countries.

D. Fourth Phase

Introduction of Cost Accounting during the end part of the Nineteenth Century and

Management Accounting during the middle of Twentieth Century further extended the scope

of auditing. As a result, auditing ceased to remain confined within authentication of recoded

numbers and reports. Evaluating the performance, determining propriety and recommending

the future course of action also got included in the broader scope of auditing. Today, auditing

has assumed a multi-dimensional approach to achieve business solutions.