The Definition of Internal Auditing states the fundamental purpose, nature, and scope of internal auditing.
“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”
The auditing profession has evolved throughout the years to meet the needs of the changing business environment. Auditing existed since the beginning of human civilization. It is known that the Sumerians developed the first known elaborate systems of law and government. In the Babylon city existed a man named Hammurabi who was a great law maker who established laws that were imprinted on a stone pillar. These are now on display at the Louvre in Paris. Those laws were used at the time to punish crimes and to protect people from any committing fraud.
In the Zhao dynasty in China (1122 – 256 B.C) they have created an official record keeping systems as their worries about correctly accounting for receipts are documented.
During reign of calif Omer bin Al Khattab (may God be pleased with him), he implemented the internal and external audit concept among cities that were under his rule at that time. This rose from the idea that high profile officials may use their position for unfair benefits.
From then onwards, all the upcoming dynasties were concentrating on decreasing accounting errors and ensuring accuracy. Therefore, throughout the centuries, auditing concept started to arise in the accounting practices.
The concept of auditing started to gain importance in the beginning of 20th century when business activities started to grow in size and scope. There was a vital need for a separate internal assurance function which was needed to authenticate all accounting records for decision making.
Victor Z. Brink and Lawrence B. Sawyer were the most two influential individuals in the IIA’s history. They have created the auditing standards which are now used by the auditors during their audit inspections.
An example of a fraud case which was famously known in the 18th century is “South Sea Bubble” scandal. The South Sea Company was established in 1711. The company had been given a promise by the British Government to have all types of trade in the Spanish Colonies in South America in exchange for taking over the national debt that has risen by the war of Spanish succession.
The war ended in 1713 and tightened the scope of trade opportunities for the South Sea company by confirming Spain’s rule over its new world colonies. This left the company with limited options in the slave trade and the interest to be paid by the government on the loan from the South Sea Company. Although unsuccessful in trade, the company was able to convince the British government to approve the conversion of successive portions of the national debt into company shares.
The company started to trade stock at a f128 (f stands for shilling). This caused the share price to rise to f175. Due to the rise in share price, the government recommended a proposal from the company to assume yet move of the national debt in exchange for shares in company. This caused share price to rise in three months to f330.
This caused a general interest in joint-stock investment opportunities. This event occurred 1720 and was called “Bubble year” and as a result of this the South Sea company established a Charter which was an essential item for any company to join stock market.
By early July 1720, South Sea Company started to sell off and the share price of the company started to fall gradually. By September of the same year, the share prices reached f175. In 1721 an investigation launched revealed deception, corruption and bribery as the causes that led to this fall in share price between company and government officials and caused bankruptcy and the closure of the company.
At the end, I would like to conclude that audit was practiced since the beginning of the human beings as it was an essential item that was needed to monitor and keep the records of all monetary activities to protect both people and business and country rights and to avoid any deceptions activities, which might increase crime activities and cause insecurity feeling in society.