Evolution of audit profession, audit
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  • 1. 1 Introduction Actually it is difficult to say when the need of inspection and verification of someone’s activities was felt. But it can be said that in human civilization, the unknown demand for inspection was created, when Luca Pacioli, the mark and the mathematician, first felt the need of record keeping. With the expansion of economic and social activities the need for recording keeping and assessing its justification the importance of accounting and related activities also increased. With the expansion of human civilization moral value of the human being is also decreasing simultaneously. Along with the divorcement of management and ownership the necessity of neutral third party was also raised. There is a fiduciary relationship between the management and the owner. But relation has two side- one side trust and another is distrust. Every man in this world try to position oneself-refers to maximizing personal benefit. Fear of future uncertainties human being always tries to secure personal position. The great economist Adam smith said that “Management has a inherent tendency to manipulate”. The owner and the management both try to maximize own benefit. But dint of agency relationship, management has much more information rather than owner. So the power of yardstick always remains in the hand of management. As a result, there is always a conflict of interest continues between management and owner. So an independent third is needed to make a breeze between them. Definition of Audit Auditing starts from where accounting ends. Before getting clarification of audit we need to get visualize the role of accounting. The accountant refers to management has get the power from the owner by dint of divorcement of management and ownership. Management takes all kind financial and operating decision to run the organization. Management has to take decisions that maximize the interest of the owner. But all decisions do not bring the benefit of owner. Some decision brings management personal benefit. Management stays always in a better position than owner as they are more involved in organization’s activities and they have more confidential information which is not at owner. Already said management has a inherent tendency to manipulate. But this kind self enlightening by management violates the principle of agency relationship. For this reason owner cannot keep trust on management. Here owner feel the need
  • 2. 2 of third independent opinion to protect their interest. It is the place where the auditing starts its journey. Auditing is such a profession that is independent and neutral by nature. “Auditing and Accounting tends to be associated. This is because universally diverse organization accounting is exacted for the custodianship and stewardship of financial resources of many organization especially a business firm accountability is demonstrated by the preparation of periodic accounts and reporting on the custodianship and management of resources” ( David Flint,19880. Custodianship, stewardship and management are the three elements of auditing. Auditor usually inspects the decision of the management whether it is beneficial of the owner or not. If the role of custodianship and stewardship are met by management then it can be said that management is following agency relationship. So by definition of audit we can say “audit refers to a systematic process of objectivity obtaining and evaluating a set of evidence regarding assertion about economic events and actions to ascertain the degree of correspondence between their assertion and established criteria” (American Accounting Association). Audit is a systematic, logical and structured set up process that ensures independent and professional service. Primary audit objective is to give an opinion- truth and fairness of management assertion. The Role of Audit as Demand Driven Discipline Management deals with the resources of the society. Resources refer to manpower, natural resources and other environmental factors. It costs to the society. But management has no right to do so unless the benefit goes to the society exceeds the cost of society. . By condition of the agency relationship, management has to keep record of all financial and nonfinancial events and action. Society as a whole does not have right to direct access of management activities. Here the society depends on the third party who is reliable and independent in nature. “Auditing is the examination of, and an expression of opinion on, a set of financial statements of an enterprise by the appointed auditor, in pursuance of that appointment and in compliance with any relevant statutory obligation” (Auditing standards and guidelines, UK) .Auditor gets remuneration from the society for conducting this service. So it is the auditor responsibility to provide an opinion on the management activities for accomplishment of the engagement between the management and the society. So fiduciary relationship now creates not only between management and owner
  • 3. 3 refers to society but also management, society and auditor. So audit is the demand of the society and it is the duty of the auditor to meet the demand. Auditor’s Role to the Advancement of the Civilization Society is dynamic in nature it is always changing it characteristics changes it need and expectation. So demand of the audit from the auditor also changes. Audit is a systematic discipline. And gets popularity when it posses complexity and explanation to that complexity. And we that if any discipline needs to sustain then it must have to justify about its existence and activities. To meet the changing demand of the society auditing also needs to be updated. Actually, there is no necessity of audit if management is wholly trustable. But management stays away from that position. Audit is the process that gives an opinion about truth and fairness of management assertion. Here management assertion refers to financial statement. . By issuing financial statement management publish its performance that is obtained by conducting operating, investing and financial activities during the whole year. And it is only source of information to the outsiders. The importance of financial statement to the society as a whole is widespread. Now it is the age of social marketing concept. Now not only the interest of the shareholders is considered but also stakeholders are considered. The society as a whole is affected by the operation of the management. As for divorcement of ownership from management, the owner has limited opportunity to direct access of the organizations books and documents. Rather than stakeholders may have limited knowledge to understand the facts of financial statements. This kind of complexity can be removed only if reliable third that have knowledge of the organization be appointed to verify that records. So the auditor need to be very careful not only independency but also in the process how they perform the audit. But audit is such types of activities that are not visible. So the auditor must establish a system and procedure from that auditor’s activity can be understood. In pursuance of engagement of shareholder and auditor, auditor tries to follow their rules and procedures strictly. If the stakeholders lose the faith of the activities of the auditor then the profession as a whole will lose its importance to the society. This fear always keeps them in the rules and regulation. To meet the changing demand of the society audit also updated its
  • 4. 4 procedures by this way new knowledge and understanding are invented and shared to the society and ultimately effects the advancement of the civilization. Auditor usually gets 4-6 weeks. In this short time period auditor has to justify the whole year management activities. Management can do so as they have greater technical and analytical ability. It is auditors professional responsibility that now engagement will be accepted unless they are eligible and competent to conduct the audit successfully. In the course of audit both management and stakeholder hold different expectation from the auditor. As management wants the audit opinion must not go against them and stakeholders want auditor should find out every material misstatement of the financial statements. The stakeholder think auditor will give absolute assurance about financial statements. But due to inherent limitation of the audit, the auditor cannot do so, they only provide reasonable assurance. So an expectation gap creates in this time, auditor by professional knowledge and skepticism makes a tradeoff to solve this problem. Auditor tries to stay at moderate position to avoid any future actions against them. It is found by many study that auditors actions favors to management. As if auditor gives any opinion that goes against the management, then the possibility of losing the client and cut down the audit fee may arise. Users of financial statements always rely on audited financial statements; this creates a pressure on the auditor. Unaudited financial statements have information value. In the first hand management is honest until any discrepancies found against them. Audit is utility service that adds value to the management generated information. Auditor works that are invisible by the outside user and they have little knowledge on audit works, for this reason auditor have no right to break the independence and auditor always ensure that although they work outside the eye of the public this does not mean that they are compromising their ethical values to the society and profession. This is way how audit contributes to the advancement of civilization by enhancing mutual trust and belief. Except other professions, audit profession always maintains professional integrity and always tries to protect the profession from any unusual intervention.
  • 5. 5 Conclusion The civilization gets advancement when new knowledge and understanding are discovered and shared. The existence of the society also depends on the capability of its pragmatism. Along with the society audit profession always keep that pace of improvement by exploring new knowledge and challenging new threats and uncertainties. To explore new knowledge and challenge auditing spread its arena for this reason we now see forensic audit, environment audit, compliance audit, IT audit, social audit etc. By dint of maintaining functional, legal and social construct audit enriches the civilization. For ensuring the proper and efficient use of limited financial resources the only alternative is audit. Auditing maintains this essence from the inspection of their journey to the civilization.