Audit and Auditing Process

Topics: Audit, Big Four auditors, Financial audit Pages: 6 (2013 words) Published: November 16, 2013


The Auditing Process
INTRODUCTION
Auditing is defined by the American Accounting Association or AAA as “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” (cited in Turney et al p. 108). From that definition, it is evident that the auditing process consists of three elements: evidence collection and evaluation; comparison of collected evidence with established criteria and; results-sharing with interested parties. In obtaining evidence for auditing purposes, a systematic approach is taken. A well-planned, logical approach is vital so that important aspects of the process are not missed or bypassed. On the other hand, the rationale behind comparing assertions of a firm and control structure is to determine the authenticity of those assertions and whether they truly reflect its transactions. Lastly, the most important aspect and end goal of the auditing process is to provide true and accurate information to interested parties, such as shareholders, creditors and investors, from which they will find basis in their future transactions and decisions involving the firm. The importance of the auditing process today, as defined above, cannot be argued against. It does not only ensure that firms keep track and control their financial activities, but it forms the rudimentary foundation of businesses and on a larger scale, the economy. Without the auditing process to ensure that the public put their trust on business entities and their activities, the economy will stagnate and perhaps eventually collapse. THE HISTORY OF AUDITING PROCESS IN THE USA

To understand just how important the auditing process is, it is necessary to trace its origin to have some inkling on why it has gained so much prominence today. Historical accounts show that the auditing process did not originate in modern times, but was a product of early civilizations as far back as ancient Egypt, the Roman Empire and in the Middle Ages (Page 2000, p. 173). In the United States, however, the auditing process only started to flourish during the Industrial Revolution because of the explosion of business activities. It was the railroad companies that first heavily relied on the process to control and report costs and to keep operating expenses down. Furthermore, companies wanted to keep track of possibilities of fraud and determine the financial accountability of specific personnel. The participation of businesses in the stock market also added a new value for the auditing process and this was to keep investors abreast of the financial profiles of such companies (Byrnes et al 2012, p. 2).

It was only in 1929, however, that the process took on a compulsory character. In that year, the stock market crashed and among the changes brought by that event was the subsequent creation of the Securities and Exchange Commission by the Securities and Exchange Act of 1934. With the creation of SEC, the auditing process became an integral responsibility of publicly traded companies because of the requirement of submission of periodic financial reports. Public accounting firms were subsequently required to provide guarantees that reports were made using the generally accepted accounting principles (GAAP hereafter) (Byrnes et al 2012, p. 2). Nonetheless, the auditing process was generally backward and not very reliable in those times. Many aspects of the auditing process were conducted only in reaction to the happening of adverse events and much information were obtained only from management personnel rather than independently taken (Byrnes et al 2012, p. 2). Even automated accounting, although already in existence in 1954, took flight only after Felix Kauffman published his book Electronic Data Processing and Auditing in 1961 and the Integrated Business Machine...

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Byrnes, Paul Eric, Al-Awadhi, Abdullah, Gullvist, Benita, Brown-Liburd, Helen, Teeter, Ryan, Warren, Jr, J. Donald and Vasarhelyi, Miklos. Evolution of Auditing: From the Traditional Approach to the Future Audit. AICPA White Paper, 2012.
Couch v United States 409 U.S. 322 (1973).
Page, Stephen Butler. Achieving 100% Compliance of Policies and Procedures. Mansfield, OH: Policies and Procedures, 2000. Print.
Pavel, Tobia and Encontro, Mylene. The Enron Scandal.
Turney, Peter and Watne, Donald. Auditing EDP Systems. Pearson South Africa, 2002. Print.
United States v Arthur Young & Co 465 U.S. 805 (1984).
Wallace, Wanda (2005). ‘The Economic Role of the Audit in Free and Regulated Markets: A Look Back and a Look Forward.’ Research in Accounting Regulation, Volume 17, 267– 298.
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