ASR-02 (Part 4 of 4) Introduction to Auditing | CPA Exam

Summary

This script traces the evolution of auditing from its ancient roots in record-keeping to a formal profession during the Industrial Revolution. It highlights the shift from fraud detection to expressing opinions on financial statement fairness. The role of technology, corporate scandals, and regulatory changes like SOX in shaping modern auditing practices is discussed, emphasizing the current risk-based approach and the potential for AI and big data to further advance the field.

Takeaways

• 📚 Auditing has ancient origins, dating back to civilizations such as Mesopotamia, Egypt, and Babylonia, where early records show signs of audit functions like check marks and symbols.
• 👂 The term 'audit' comes from the Latin 'audeo', meaning 'to hear', reflecting the historical practice of listening to accounts described by servants to a lord's trusted person.
• 🏛 In ancient Greece, philosophers like Plato advocated for government accountability, laying the groundwork for auditing public expenditure and financial management by an independent body.
• 👔 The Industrial Revolution marked a significant shift in auditing, as management separated from ownership, leading to the rise of corporations and an increased demand for independent auditors.
• 🔍 Initially, auditors focused on detecting fraud and errors, but their role evolved to include expressing an opinion on the fairness of financial statements.
• 📊 Auditing methodology has advanced over time, with the introduction of concepts like audit sampling and the evaluation of internal controls to improve efficiency.
• 🌐 The 20th century saw a divergence in audit objectives between American and British auditors, with the former focusing on reporting actual financial conditions and the latter on fraud and error detection.
• 🌐 The post-WWII period saw widespread acceptance of audit sampling and the recognition that strong internal controls could reduce the extent of external testing.
• 📉 Accounting and corporate scandals have continually shaped the auditing profession, leading to the development of new standards and methodologies to address emerging challenges.
• 🛠️ The Treadway Commission, formed in response to fraudulent financial reporting, resulted in the COSO framework, an internal control framework that has influenced auditing practices.
• 🤖 Modern auditing faces opportunities for further automation and integration with technologies like artificial intelligence and big data, requiring accountants to adapt and innovate.

Q & A

What was the primary purpose of auditing in its early stages?

In its early stages, auditing was primarily for governmental accounting and was mostly concerned with record keeping rather than accounting procedures.

When did auditing begin to evolve into a formal profession?

Auditing began evolving into a formal profession during the Industrial Revolution, roughly from 1750 to 1850.

What was the initial focus of auditing during the Industrial Revolution?

The initial focus of auditing during the Industrial Revolution was on fraud and error detection.

How did the objective of auditing change over time?

Over time, the objective of auditing became more refined and aligned with expressing an opinion about the fairness of financial statements.

What does the term 'audit' originate from and why?

The term 'audit' comes from the Latin term 'audire', which means to hear or to listen. It is related to the auditory system because in the past, when common people could not read or write, trusted individuals would listen to servants describe the resources entrusted to them and note any discrepancies.

What was the role of auditing in ancient civilizations like Mesopotamia, Egypt, and Babylonia?

In ancient civilizations, auditing was performed through the use of check marks, dots, and other symbols on documents, indicating some form of auditing even before the term was used.

How did the concept of auditing public expenditure and financial management by an independent body originate?

The concept originated in ancient Greece, where philosophers like Plato advocated for government officials to be accountable for the resources entrusted to them.

What was the significance of the Industrial Revolution for the auditing profession?

The Industrial Revolution marked a period of economic growth that led to the separation of management from ownership, increasing the demand for auditors to detect errors and frauds, and thus giving birth to the concept of the independent auditor.

How did audit practices differ between American and British auditors in the early 20th century?

American auditors focused on reporting the actual financial condition of an entity, while British auditors focused on the detection of fraud and error. American audits also supported audit sampling, whereas British auditors favored detailed testing.

What is the significance of the Treadway Commission in the auditing profession?

The Treadway Commission sponsored a study on the causes of fraudulent financial reporting and made recommendations to reduce its incidence. Their work led to the development of the COSO framework, an internal control framework.

What major legislation was enacted in response to the Enron scandal, and what was its impact on auditing?

The Sarbanes-Oxley Act of 2002 was enacted in response to the Enron scandal. It introduced significant changes in the auditing of public companies, focusing on auditor assessment of internal controls and setting new standards for corporate accountability.

How is the auditing profession expected to evolve with advancements in technology?

The auditing profession is expected to elevate to a higher level of automation with the advent of artificial intelligence and big data, requiring accountants to adapt and implement new auditing methods to remain the professionals of choice for audit engagements.