The beginnings of the present Audit Department in Sri Lanka, then known as Ceylon, can be traced to early British times. From the records available it would appear that there had been an Auditor-General by the name of Cecil Smith as far back as the year 1799, just three years after the British occupation of the maritime provinces of the Island in 1796. His designation was Accountant and Auditor-General, but there is no information as to the precise nature of his functions. From his designation, it might be inferred that he discharged dual functions, namely, that of Accountant, presumably at the Treasury, and also that of Auditor-General, responsible for the audit of Government accounts which would have included those of the Treasury as well. Such an arrangement could not by modern standards be considered as being conducive to an independent and effective audit.

The year 1806 marks an important change in the designation, signifying presumably the removal of the accounting functions from Head of the Audit Department. The designation was altered to Civil Auditor General.

The separate existence of the Audit Office continued for the next 35 years until Britain decided to increase the scope of functions. It was then amalgamated with a part of the Treasury in 1841 and placed under one of the highest Government officials of the time who combined in himself the three important offices of the Auditor-General, the Accountant-General and the Controller of Revenue. The high executive position held by this officer in his capacity as Controller of Revenue secured for him a seat in the Executive Council of the day through which the Government of the time was carried on by a succession of Colonial Governors from Britain. Though, no doubt, this arrangement helped to raise the status of the Auditor-General, it cannot be regarded as retrograde from the point of view of the effectiveness of audit.

The Audit Department continued to function under this arrangement for a period of 66 years until the year 1907, when the very desirable separation of the Audit Office from the Treasury Department took place. This far reaching decision was announced by the then Acting Colonial Secretary in the following words. "His Excellency the Governor with the sanction of the Secretary of State for the Colonies, has been pleased to order that from March 1907, the offices of the Auditor-General, Accountant-General and Controller of Revenue, shall cease to be administered by a single officer and that in future there shall be two officers severally described as those of (a) the Controller of Revenue (b) the Colonial Auditor the duties of the Accountant-General being discharged by the Treasury".

It is to be noted that the designation of the head of the Audit Department was also changed to that of Colonial Auditor at the same time.

While the department has continued its separate existence since then the designation of its head underwent a change to that of Auditor-General in the year 1931 with the introduction of the Donoughmore Constitution. This designation continues to date. The head of the Audit Department up to this time had been a British officer. A fact worthy of note in this connection is that the first Auditor-General under the Donoughmore Constitution was also the first national of the country to hold the post, namely Mr. O.E. Goonetilleke (later Sir Oliver Goonetilleke) who was also the first Ceylonese Governor-General of the Island after she gained her independence from Britain in 1948.

All these persons with the varied titles from Accountant to Auditor-General right down to Colonial Auditor, were not responsible to any legislative body in this country, but to the Government of Britain through its agents in this country. With the adoption of the Donoughmore Constitution in 1931 however, the Auditor-General was made responsible for the first time not to the Government in Britain but to the legislature here.

The Donoughmore Constitution of 1931 defined the functions of Audit with some degree of elaboration but the Soulbury Constitution of Ceylon which replaced the Donoughmore Constitution in 1947 restated the functions and powers of audit in more general fashion. As a precise statement would only act as a limitation such a generalization was considered to give the Auditor-General a larger degree of scope. Though these two Constitutions provided for the accounts of Government departments to be audited by the Auditor-General , there was no provision for the audit by the Auditor-General of the accounts of Local Authorities or State Corporations. Until the adoption of new Constitution in 1972 which declared Ceylon as the Republic of Sri Lanka, these institutions were being audited by the Auditor-General under the provisions of the laws relating to Local Authorities and State Corporations.