Research Handbooks in Financial Law series
Edited by Barry Rider
Chapter 50: Auditors and fraud detection: an elusive role?
Etymologically, the word ‘audit’ is derived from the Latin word ‘audire’ which means to hear. Auditing appears to date back to around 350 BC in ancient Greece, Egypt and China and, in England, to the Exchequer during the reign of Henry I (1100–1135), where audit officers were appointed to make sure that state revenue and expenditure transactions were properly accounted for. Similar auditing activities have also been traced back to the Italian City States of Florence, Genoa and Venice. It seems that pre-1840 auditing involved the performing of detailed verification of every transaction. Some authors have argued that the audit objective was that of verifying the honesty of persons in charge of fiscal rather than managerial responsibilities. Following the industrial revolution, auditors began utilizing sampling techniques because it was nearly impossible to audit every transaction. This came about because of the accelerating growth of the world economies, the advancement of credit granting institutions, the socio-developments in the UK and the development of the Stock Exchange. The evolution in auditing as well as the application of the materiality concept caused a change in audit opinion from ‘complete assurance’ to ‘reasonable assurance’. The auditing profession has been criticized and auditors have been sanctioned for failure to: (a) gather sufficient competent evidence, (b) exercise due professional care, (c) exercise a sufficient level of professional scepticism, (d) obtain evidence related to management representations and (e) express an audit opinion.
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