29-05-2017

Rethinking the audit

Innovation is transforming how audits are conducted—and even what it means to be an auditor.

Today's audit profession is driving exciting and unprecedented changes that are fundamentally evolving the role of the auditor and how audits are performed.

Breakthrough innovations in areas such as artificial intelligence, workflow automation, and data analytics are eliminating a number of the tedious and labor-intensive manual processes traditionally associated with an audit. More importantly, innovation is enabling auditors to deliver powerful insights that simply weren't possible before. These changes can enhance audit quality and deliver higher value for audit stakeholders—from clients and audit professionals to investors and the capital markets as a whole. (See How to Enable Audit Innovation, page 33, for details on how Deloitte nurtures in-house ideas to innovate audits.)

Insights enhance quality
Automation and other cutting-edge innovations reduce the amount of manual and time-consuming data collection required for an audit. But that's just the beginning.

An even bigger benefit of audit innovation is the ability to generate new kinds of insights that increase the value of an audit and bring audit quality to a new level. Powered by innovative technologies and supported by a risk-based methodology, auditors now have more resources, tools, and time to strategically apply their most important skills—professional skepticism and judgment—to business issues, controls, and risks. What's more, auditors are armed with advanced analytical tools to provide deeper insights, including areas beyond the limits of a more traditional audit.

For example, using the latest technologies, auditors can analyze complete data sets rather than samples. Advanced tools can be applied to all of a company's contracts related to an area of audit interest, or to metadata about an automated key control. This can reduce audit risk by making it less likely for an unusual transaction to slip through the cracks. Also, given the transformational nature of advanced technologies and analytics, innovative ­audit tools can readily reveal valuable insights about a business for clients to consider, such as operational inefficiencies and areas for potential improvement.

Innovations reshape the audit
Technology and innovation are advancing at breakneck speed with unprecedented computing power to transform the audit. These advanced technologies, sometimes referred to as "exponentials," represent technological breakthroughs at the intersection of information technology and science, and they are increasingly a driving force behind audit innovation. Here are some examples of how these exponential technologies and other forms of innovation are powering audits forward and promise a bright future for audit professionals:

Artificial intelligence
Artificial intelligence (AI) involves the theory and development of computer systems able to perform tasks that normally require human intelligence. Because AI technologies (also called cognitive technologies) can tackle many tasks performed traditionally by humans, they can enable an audit to avoid the typical trade-offs between speed and quality. Two AI technologies that are especially relevant to audit are natural language processing (NLP), which enables a system to read and understand key concepts in electronic documents, and machine learning, which enables a system to improve itself without being reprogrammed. As audit evidence increasingly becomes more digitized, these technologies, combined with workflow automation, enable auditors to do significantly more analysis in less time. This can allow auditors to spend more time on tasks that add more value to the audit.

Workflow automation
Through the creative use of technology, many audit activities that previously required time-consuming manual processing by auditors can now be automated. As a result, much of an audit's tedium can be reduced and enable analysis that is faster and more comprehensive. Rather than burning the midnight oil lost in piles of paper, audit professionals can experience higher-level activities sooner in their careers and make a faster impact in driving quality and insights.

For example, electronic document review is one important audit area that is already being transformed with workflow automation and AI. Deloitte auditors teach Argus, an application that runs on a licensed cognitive technology, to enable rapid audit-specific document interrogation and analysis. This tool uses NLP and machine learning to read and analyze any kind of electronic document.

After reviewing a population of documents (e.g., leases), Argus uses machine learning to help identify and visualize items of interest to an auditor, and then extracts its findings into a working paper. Argus can examine hundreds of documents and identify areas that were modified from a standard form of the contract. In situations when the auditor expects all documents to be consistent for a type of transaction, Argus can find the needles in the haystack with just a few clicks. Argus also completes document reviews in a fraction of the time, enabling auditors to review and assess larger samples—even up to 100% of a population.

A practical use for Argus is the review of executive compensation arrangements. An auditor can use Argus to look at all of the contracts and identify what is different across the entire population. In a large multinational audit, this could require days to complete, or the auditor might have selected a sample. With innovative technology, the auditor can now read one agreement and then just look at what changes across the population and focus on the why, almost in real time. The insights that are derived and the quality of the questions increase, and auditors can acquire greater understanding about their clients. This benefits audit quality and the client.

Since Argus's release last year, Deloitte's auditors have used the application to review a wide range of document types including, but not limited to: Sales, leasing and derivatives contracts, Employment agreements, Invoices, Client meeting minutes, Legal letters and Financial statements.

Analytics and visualization
Analytics and data visualization enable auditors to uncover valuable insights hidden within large and complex data sets, and better inform the risk assessment process.

A common audit area in which analytics can streamline the audit is performing tests on massive journal-entry populations to identify risks and items of audit interest. With this information, auditors are uniquely positioned to generate powerful insights about a client's accounting functions, business operations, and internal control processes, such as how many manual entries are being booked across an organization for very low dollar values. Aided by advanced technology, an auditor can not only interrogate millions of journal-entry records in-memory on a computer in real time, but also visualize the journal-entry population in just a few clicks and share real insights about how many journal entries are booked for under $100, run a Benford analysis, or evaluate the quantity of manual journal entries at a particular location, which could highlight an opportunity for automation or process improvement. (For more about how to apply Benford's Law by using a common accounting technology tool, see Using Excel and Benford's Law to Detect Fraud, page 44.)

While journal-entry testing is a good foundational use case, analytics and visualization have the potential to evolve the audit in so many ways. For example, Deloitte has an advanced analytics application that leverages data science to analyze volumes of financial information from SEC filings to identify and visualize potential accounting, fraud, and failure risks for all public companies. Such capabilities contribute to enhanced quality and faster delivery of insights to audit committees and management for their consideration.

Mobile
Mobile devices can have a major impact on how audits are conducted. For example, mobile technologies are transforming the inventory count process, a task performed by auditors that used to be as old-fashioned as it gets: visiting a client and using a pencil and clipboard to document information related to inventory of materials and finished goods.

Now, Deloitte auditors can run a proprietary mobile application called Icount on tablets and smartphones to collect and consolidate inventory count results automatically for real-time consolidation and analysis in an online portal. While conducting the count, the auditor can use a voice-to-text capability to create working paper review notes, take pictures of the inventory being observed, and generate the working papers automatically. The benefit of mobile, however, is more substantial than just using a smartphone to conduct audit procedures, because the audit evidence is captured digitally—and therefore is instantly available to all members of the audit team for analysis. Thus, an activity that could take weeks to compile is transformed into essentially a real-time process. Moreover, since it is standardized and scalable, it focuses auditors on what matters most—observation and inquiry, not data collection and documentation—because that is handled by the technology.

Advanced mobile capabilities such as these will profoundly change the profession and how auditors do their jobs. As we move toward a more connected future with the Internet of Things (IoT), we will likely see the emergence of mobile audit applications featuring secure communication between intelligent electronic devices with no human involvement whatsoever—enabling auditors to focus their time and attention on activities that are more strategic and impactful. For example, with IoT a machine can, in essence, report in real time its usage and production, completely changing how depreciation might be calculated and driving advanced analytics and real-time auditing of fixed assets. Also, IoT data can be used to create substantive analytics about revenue expectations and impairments, just to name a few possibilities.

Blockchain
To stay in front of the innovation curve, auditors must monitor and understand emerging trends and technologies with the potential to improve or even disrupt our profession.

Blockchain is a technological breakthrough being evaluated as a way to enable a wide range of financial transactions that, in theory, may be reliable and potentially streamline the audit for certain financial statement assertions. The digital currency bitcoin is an application that uses blockchain. In one example of a possible audit application for blockchain, the processing of derivative transactions via the embedded code of a "smart contract" (an automated routine that executes specific code when certain events occur—like a settlement of a derivative after a period of time based on the price of particular stock) within a blockchain could digitize and enhance components of the audit process. At the same time, blockchain may present new audit-related risks and opportunities—such as the need for IT controls of blockchain participants, or even assurance over the blockchain itself—that would require the profession to evolve quickly. For example, would an independent auditor provide assurance that smart contracts operate as intended? Would members of a blockchain consortium want independent assurance about who can access a private blockchain and whether the data are secure?

A new kind of auditor
Innovation that is truly transformative requires more than just technology—it also demands fundamental changes in culture, processes, methodology, and talent. Without all five elements, the profession cannot realize the full impact of audit transformation.

Auditors will always need deep knowledge and experience in traditional areas such as auditing standards, financial accounting and reporting, internal controls, IT, managerial accounting, and taxation. However, these core capabilities are only a starting point.

Auditors also need superior communication skills, deep industry expertise, and the ability to think critically and creatively while using technology to manipulate and analyze client and external audit data and find hidden risks and insights. They will also need strong technology skills and experience in key areas such as data analytics and visualization.

Auditors don't necessarily need to be technology development experts or computer programmers; however, they do need practical knowledge, experience, and a high level of comfort using cutting-edge, rapidly evolving technology to manipulate and analyze data. Important technology skills include:

  • Mining structured and unstructured data from a wide range of sources
  • Identifying potential data risks and findings (including security)
  • Working with relational and nonrelational databases
  • Applying statistical methods and advanced analytics within tools to turn raw data into useful insights
  • Understanding how to leverage analytics to perform robust risk assessments to identify areas for further audit analysis
  • Using visualization tools to present complex data analysis in a way that is compelling and easy to understand

Developing this new kind of auditor will require significant time and effort, with universities and audit firms joining forces to identify what's needed and provide education and training, in the classroom and on the job, that combines leading-edge instruction with practical, hands-on experience. The good news is that an innovative, technology-driven approach to audit is a natural fit with today's tech-savvy students, giving them ample opportunities to leverage their existing skills and interests quickly in a way that delivers maximum value and impact.

Moreover, this new approach to education and training starts to instill a culture of innovation among today's new auditors. Audit firms need to capitalize on this and nurture it, making a culture of innovation part of a firm's DNA. Case in point: At Deloitte, we have harnessed the power of crowdsourcing by holding an annual contest that challenged our audit professionals to submit their best ideas on how to innovate the audit. The ideas presented by the finalists became the next chapter of our audit innovation strategy.

An exciting time
The audit profession has a reputation for being steady. In one sense, that's arguably the way it should be, since an audit enhances trust and confidence. However, that doesn't mean the process of conducting an audit shouldn't evolve to meet the needs of companies, investors, and the capital markets. Today's audit profession is aggressively developing and implementing a wide range of innovations—including cutting-edge breakthroughs in digital technology—that make audits more streamlined and effective than ever. The results? A transformed audit process. Auditors that add more value. And a high-quality audit that is more insightful than ever before.

This is truly a dynamic and exciting time for the audit profession. 

Source: journalofaccountancy.com

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