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
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
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
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
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.
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.