Use of sophisticated technology and data analytics in the audit is fast becoming a standard operating practice at Aronson LLC as firm leaders are embracing the digital-first approach to engagements that is becoming more prevalent at firms across the country.
Alan Langelli, CPA, the lead partner in the Technology Services Group at the assurance, tax, and consulting firm with 35 partners headquartered in Rockville, Md., said technology is efficient and effective at helping auditors organize their data and enables more informed and timely decisions. He said the pandemic has shown that the benefits of technology are accelerating, and firms that don't embrace the digital revolution will be left behind.
These factors have caused firm leaders and professionals to take a completely different approach to their audit work.
"A digital mindset refers to a new way of thinking regarding how our work is completed and accomplished," Langelli said. "It's more than just digitizing a manual task. It really forces us to think about how technology can help us plan and execute our audits."
The discussion about technology, digital platforms, and data analytics in audits refers to use of software that gives practitioners the ability to analyze complete datasets in ways that were not possible in the past. Armed with information generated by the software, auditors can more effectively perform risk assessments, design more appropriate procedures, and investigate anomalies that might have gone undetected if the audit relied on sampling rather than a full analysis.
It's important to state that for all of technology's benefits, it is not intended to replace humans in the audit. The human qualities of evaluation, analysis, and judgment remain an irreplaceable part of the audit process, and the use of technology can give the people on an audit the ability to focus on those higher-level skills rather than getting bogged down by mundane, rote processes. In the same way that a calculator enables math students to solve more complex problems by allowing them to forgo long division or multiplication computations, technology helps auditors focus their time where it's needed the most.
One of the biggest benefits of using technology and data analytics in the audit is the elimination of constraints that sampling places on an engagement. Data analytics gives practitioners the ability to analyze an entire population of data for anomalies, trends, and areas of risk.
Auditors are also using analytics to gain an understanding of the flow of data through a client's system, enabling more effective and precise audit planning.
"Everybody knows that the best audits are the ones that are planned well," said Carolyn Newman, CPA, founder of data analytics firm Audimation Services in Houston, which is now part of CaseWare International. "And so if you can focus on what you want to look at because you've used audit data analytics to risk-assess and identify things to focus on, the auditors can be the most effective."
Jon Cardiello, CPA, an audit manager who manages the internal data analytics process team at 48-shareholder firm Schneider Downs in Pittsburgh, gets started on technology-driven methods by looking for problems to solve.
"We're asking ourselves questions like, 'What problems do we have? What takes the most time on our audits? What's highly repetitive or what requires a lot of data entry? Where's the risk on these audits?'" he said.
Schneider Downs leaders use these questions to discover areas of opportunity where value-added solutions can be developed for the audit process. That's one of the big advantages of technology-driven audits.
These processes enable the firm to analyze full datasets and identify and target test risk, providing more complete and detailed insights. Because the technology is performing the routine tasks of the audit, the auditor is freed from those duties and has more time to consider and deliver meaningful information to the client.
"A real benefit of audit data analytics is the better insights that you can get and more time to be able to offer those better suggestions," Newman said. "And that will increase the relevance of every auditor."
Use of data analytics also can improve the effectiveness of an audit, as testing an entire population can expose problems that could be missed with an approach that uses sampling. In risk assessment, as well, properly planned audit data analytics can help identify previously unidentified risks and provide information to help the auditor better design or tailor audit procedures to address risks of material misstatement.
But adopting new technology in the audit is not an overnight process, according to Samantha Bowling, CPA, CGMA, a partner at Garbelman Winslow CPAs in Upper Marlboro, Md. Her firm's integration of artificial intelligence (AI) into its audit processes was a three-year journey. It began with testing the technology with one client, then adding more clients the following year, and then overhauling the audit processes for the entire firm the third year.
"People think that you adopt a technology and within three months you're running with it and you've changed all your processes and you're changing everything dramatically, and that's not the case," Bowling said.
For successful implementation of technology and analytics, it's important also to have staff prepared to think differently about the audit than they did in the past. To that end, Aronson embarked on its transformation by having the assurance partners and other audit team members undergo training on establishing a digital mindset.
Within each of the firm's assurance and tax business units, Aronson also has established innovation business optimization committees. Team members' ideas for specific improvements are presented to these committees, which evaluate and assess the best opportunities for the firm to pursue.
Aronson team members look for static tasks, processes, and deliverables that don't have a lot of nuance or don't change much. Often, robotic process automation (RPA) or even basic automation tools allow the firm to perform these tasks more efficiently and effectively.
They automated some of the standard engagement letters and post-audit letters that they send to their clients. They are developing processes to use machine learning to scan contracts and summarize some of the key terms in those contracts to make the analysis easier. In general, automation is useful for auditors (and preparers) when dealing with large volumes of contracts that contain data needed to perform accounting under FASB's new revenue recognition and lease accounting standards.
The firm also is working on automating its billing process to make invoicing more seamless and effective for clients. But the work is not finished, and Langelli considers it to be a journey that will take time to complete. The evolution of technological innovations as well as professional standards will enable more digital processes over time.
For example, the AICPA Auditing Standards Board's new risk assessment standard includes extensive guidance regarding the use of technology.
"Part of what's next is always being on top of where things are in the evolution of our professional standards, in the evolution of technologies, but clearly incorporating on a much deeper level, AI machine learning, data analytics, into our audit process," Langelli said.
Schneider Downs, meanwhile, has a dedicated Automation and Data Analytics Process Team that goes by the acronym ADAPT and evaluates automation opportunities.
"We have a dedicated group of people who are focused and who are specialists with different pieces of technology or different software that looks to implement technology-driven solutions to the audit process," Cardiello said.
An internal I-ADAPT group focuses specifically on the audit process. One of the biggest challenges in this area is evaluating what data is available and how reliable that data is.
Reliability of data is an area that regulators as well as firms are still wrestling with, as it provides tremendous opportunity for greater insights if only the data can be relied upon. For example, the PCAOB staff recently issued guidance for auditors to consider regarding the relevance and reliability of information from external sources that the auditor plans to use as audit evidence.
For example, finance departments in the hospitality industry and their auditors may use interactive applications to provide real-time industry data such as occupancy rates and trend reports to inform their work. Product reviews, weather patterns, and customer web traffic and preferences also may inform businesses and financial reporting decisions.
"What are the controls around this data, what's the flow of data, who touches each piece of the data through this process?" Cardiello said. "... In more instances than not, this type of data is available. It's just a matter of finding it and working together with our clients to do so."
The process is easier, Cardiello said, when auditors can interface their systems with the clients' systems and data.
"One of the best uses and benefits of audit analytics is helping you understand the client system," Newman said. "Because once you get your hands on the transactional data and gain an understanding of the flow of data — the profile, if you will, of that data — you can plan your audit more effectively and more precisely."
At a time when firms are struggling to handle workloads and dealing with a shortage of skilled people, finding the time to implement technology is one of the biggest obstacles to adoption. At firms where compensation is based strictly on billable hours, the challenge is greater because there's no reward for spending time trying to innovate in a way that will make the whole firm more effective and efficient. Bowling's firm found a way around that by awarding bonus compensation for successful innovation.
She suggests the following tips for adopting technology in the audit:
- Find automation opportunities by asking staff what frustrates them at work. "Once they tell you what drives them crazy, you say, 'OK, well, how about we compensate you for finding a solution for that?'"
- Understand that technology is constantly improving. Don't be discouraged if you've been burned by expensive, ineffective software in the past. Bowling said the technology is much better and less expensive now, and the software is constantly improved through regular updates.
- Make sure the software will protect data. The software provider should provide a nondisclosure agreement related to clients' data and should be able to provide a SOC report stating that it has strong internal controls over data.
- Test the technology with one of your less complicated audits. It's better to start with something easy and work your way up to more challenging audits.
- Be patient. When Bowling started using her current AI auditing platform, it took three weeks to migrate the data needed to successfully perform the processes. Three years later, that migration activity took five minutes.
Perhaps most importantly, Bowling said that firms should think differently about everything — risk assessment, processes, and procedures — as they implement technology. The ensuing improvements in quality and effectiveness can be substantial.
"When CPAs adopt a new technology, they always want to use it for the same thing they did before, just faster," she said. "But they really need to be saying, let's use this technology to see how it can transform what we do, and do it better."
To comment on this article or to suggest an idea for another article, contact Ken Tysiac at Kenneth.Tysiac@aicpa-cima.com or 919-402-2112.
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"PCAOB Issues Staff Guidance on Audit Evidence From Other Sources," JofA, Oct. 7, 2021
"Making Audits More Effective Through Data Visualization," JofA, May 2021
"Wanted: More Systems and Analytics Training for Accounting Students," JofA, March 12, 2021