Generally speaking, an audit is an examination and evaluation of the financial statements as well as non-financial disclosures of an organisation to make sure that the records are a fair and accurate representation of the transactions they claim to represent and that there is no misrepresentation or fraud that is being conducted.
Audits can be done internally by employees of the organisation, designed to examine and identify the key risks facing the business and to produce recommendations on managing those risks effectively by developing specific risk management policies, along with overall improvements across the company. Both financial and non-financial elements are usually included, and as a rule, the internal auditing reports are not published publicly.
External auditing, on the other hand, performed by independent professionals and auditing firms, focuses on finance and financial risks, evaluating all the internal controls put in place in accordance with legal requirements, where the main external auditors’ report will be usually publicly available. Naturally, external auditors can not have a financial interest in the company they audit.
The very word audit derives from the Latin noun auditus ‘a hearing, a listening,’ past participle of the verb audire ‘to hear,’ to enter the English language in the early 15th century when manual book-keeping was prevalent and the official examination of accounts was an oral procedure, with British auditors hearing the accounts read out for them. The term was first recorded in use in
Some Account of the Worshipful Company of Grocers for the period of 1435-36.
The term has served religious purposes as well, referring to the examination of personal acts and accounts performed on the Day of Judgement, and first recorded in use in the English translation of the Latin Biblical paraphrases, re-writings of the Gospels by Desiderius Erasmus, published in 1548: “The …audit to be made at the throne of God.”
And was also formerly used in a sense of “official audience, judicial hearing or examination”, first recorded in 1598.
And while auditing has always been around, used mostly for the detection of fraud, it came to play an important role in the late 1800s with large corporations going public. The Industrial Revolution and expansion of businesses led to passing the Joint Stock Companies Act in UK, in the year 1844, providing for the appointment of auditors to check the account of companies.
And in the mid 1900s, the inflow of funds from investors to companies, along with the functioning financial market, changed the primary objective of an audit from the detection of fraud and errors to adding credibility to the financial standing of an organisation. The late 90s saw the introduction of Computer Assisted Audit Techniques (CAATs) that facilitate data extraction and analysis procedures to make the auditors’ job more efficient; and to today, when financial statements’ testing and certification though auditing is the backbone of the business world and its economic growth.