Audit evolution in action: Part 1

The auditing profession was already in the midst of transformation, thanks to technological advances and other factors. Then, the COVID-19 pandemic came along and accelerated those changes, further challenging auditors and their view of business as usual. As auditing continues to transform, Sue Coffey, CPA, CGMA, the Association’s CEO of public accounting, and Jennifer Burns, CPA, CGMA, the Association’s chief auditor, explain some of the drivers behind audit transformation — where it began and where it’s headed.

What you’ll learn from this episode:

• An overview of the auditing landscape and why a transformation discussion is happening now.
• Insight into the key drivers of that transformation.
• The specific challenges the COVID-19 pandemic created for auditors.
• Details on the AICPA Auditing Standards Board’s work to update certain standards.
• New ways or new tools to approach auditing differently.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.

Transcript:

Neil Amato: Welcome to the Journal of Accountancy podcast. I’m senior editor Neil Amato. On the podcast over the coming weeks and months, we’ll be talking with profession leaders, technology experts, and firms to discuss audit transformation. We’ll speak with firms to learn their journey, including how technology is shifting their methodology, i.e., the way they’re approaching the audit.

To kick off the series, I’m joined by CPAs Sue Coffey and Jennifer Burns of the Association. Sue is the Association’s CEO of public accounting, and Jennifer is chief auditor. Thank you both for being here today.

Sue Coffey: Thank you, Neil. Happy to be here.

Jennifer Burns: Same here, Neil. Thanks for having me.

Amato: And we will hear more from them after this brief sponsor message.

[Sponsor message]

Amato: First, what’s the current audit landscape like and why are we talking today about it changing? I guess Sue can answer that first.

Coffey: Thanks, Neil. You know, the audit landscape has really been shifting for quite a few years now. The use of technology has really been the primary driver of that change, but when you think about how clients’ business models have been changing, it really is demanding new ways of working and we really need to be looking at the audit and how to do things differently.

Burns: And just to add to that, Neil, it’s been interesting because of the pandemic. It actually accelerated the profession’s use of technology and where we were already moving toward in terms of using technology. As a profession I would say we were actually very well prepared to pivot at the time of the start of the pandemic, because we had already been used to working in a remote environment, but everyone moving to remote at the same time really pushed everyone to adopt technologies and to work in new ways. So working remotely full time really has brought up all sorts of interesting questions, including how do we manage the engagement team, how do auditors manage the client and its dispersed staff, how do we gather evidence and complete field work when everybody is out of the office, and probably most importantly, how do we perform quality audits and keep everyone safe?

The Association has been helping auditors with all of these questions and more. We have a COVID-19 Resource Center set up on our website, and we’ve been fielding questions through our technical hotline. Both auditors and companies have had to figure out how to do things remotely. For example, we’ve seen new technologies pop up during this time frame, including using videoconferencing technology to complete inventory observations. I even heard an example the other day of a firm that’s developed something called Smart Glasses, which was fascinating. We’re also seeing auditors using secure web portals to share information. So we’ve had to add the use of new technologies as we’ve figured out how to work in this remote environment.

Coffey: If I could add, Jennifer, as I mentioned a bit earlier, the businesses we audit are obviously changing themselves. They’re using new technologies. They’re leveraging things like public and private blockchains. They’re using artificial intelligence in all sorts of ways to manage their businesses and understand their opportunities, and they have way more complex transactions than they’ve ever had before and in some instances are using digital currencies to transact business. Their risk management needs are changing. There’s a whole host of things, and this is really causing us to think about our audits much, much differently.

For example, can we, and we should be using advanced data analytics to analyze entire populations of data to identify relationships and patterns that are not necessarily intuitive to us or even visible to the human eye, right? AI and analytics can help us with that. We can then use that information to transform how we assess risk, which is the foundation of our audit, and help us understand what we need to test and how we need to test it. This use of technology really makes way for a much better audit, which in turn creates greater confidence in financial statements and then, of course, our capital markets.

Amato: Jennifer mentioned some resources earlier. I’m going to kind of follow on that topic a little bit more. What is the Association doing to prepare the profession for the transformation of auditing?

Burns: In a nutshell, we’re doing a lot of things to help prepare the profession for the future. I’d like to talk for a little bit about what the ASB, the Auditing Standards Board, has been doing.

First, we’ve been considering how to evolve the standards to keep pace with the changes that are taking place with technology. So, for example, last July the ASB approved a new standard on audit evidence, and one of the objectives of the new standard is to acknowledge the automated tools and techniques that auditors are using and can use for both risk assessment and substantive testing. The new standard provides some examples of tools and techniques that may be used, such as what Sue was just talking about: data analytics, remote observation tools, recalculating 100% of the population. So we’re really trying to acknowledge within the standards themselves these advances in technologies and how they can be incorporated into the audit process in order to enhance the effectiveness of the audit.

We really think we, as a profession, we want to harness the power of technology to advance the effectiveness of the audit. And along those lines I think the Auditing Standards Board is going to continue to further explore how we can facilitate the use of new technologies as it continues to advance at a rapid pace.

Coffey: Yeah, Jennifer, I think the agenda of the ASB is really interesting, and I very much appreciate, you know, the innovation that you and the board are really going through and really transforming the audit. I think it’s really great work, so thank you for that.

The one thing I did want to mention as it relates to preparing the profession is the skill sets or the new skill sets that the profession needs in order to really do this work differently and do it well. We know the skills needs are changing. As businesses’ needs change, we need to not just keep up, but we really need to be ahead of the game and we need to be able to critically challenge what we see and apply professional judgment. That’s what we’ve always done, but I think we need to enhance our skills in this area.

We certainly need knowledge of new and emerging technologies such as RPA and machine learning, and we need an understanding of how to really leverage those technologies to create efficiencies and promote quality. We also need, and I would say this is probably one of the biggest needs, is expertise in extracting data, assessing the integrity of that data, and evaluating relevant information from disparate as well as integrated systems.

And then I’d say, to top that off, we need a better understanding of business systems, processes, and controls. Those are becoming more and more important as technology takes hold.

I think I’d probably be remiss if I didn’t mention the soft skills that we’re going to continue to need, those skills that allow us to communicate well about what we do, the leadership skills that we’re going to need, the coaching skills we’re going to be needing, particularly in a remote auditing environment. So we have a ton of resources at the Association to support the profession in all of these areas. We have on-demand, live, and virtual.

We’re also working with the National Association of State Boards of Accountancy, NASBA, on transforming the CPA entry-level licensure model, which encompasses many of these issues as well. Along those lines you’ll start to see changes in academic programs starting this fall, as well as a new CPA Exam in early 2024.

The last thing I want to mention here is our development of the Dynamic Audit Solution. The Dynamic Audit Solution, or the objective of the DAS is really to transform the audit leveraging data and emerging technologies to really enable firms of all sizes to bring greater quality efficiency and value to their audits. It’s a data-driven, technology-enabled audit solution really designed to enhance the effectiveness of audits and it’s in development right now. Our version 1 will launch later this year. It will be an end-to-end audit solution.

But as a precursor to this, we’ve also launched a preparation, compilation, and review tool that is available to all firms that support the performance of these types of services, as well as an employee benefit plan audit tool that’s focused on — I know I’m not supposed to say this anymore, but I’m going to say it anyway, limited scope 401(K) audits. I know that verbiage has changed.

Amato: For auditors, the arrival of these initiatives, these tools that have been mentioned, what does that mean in practice?

Burns: So it’s great to hear this lively discussion about how we’re trying to use technology, because this really underscores about the profession as an agile, dynamic, and exciting place to be right now, and I would say we’re really disrupting the way audits have always been performed and we’re trying to figure out ways to deliver more effective audits, which is, again, I think very exciting as we’re pushing the profession towards the profession of the future with all of these advances. So, for example, auditors remain laser focused on applying independence and professional skepticism, and the silver lining of the pandemic is that it has given everyone the push we needed to quickly implement new tools, techniques, and technologies.

Looking ahead, I do encourage auditors to think about how they will continue to innovate and use disruption to deliver greater value to clients and maintain an enhanced audit quality. We really need to be using technology to the greatest extent possible. It remains to be seen what pre-pandemic business practices will come back in use. So, for example, remote work, whether the CPA firms, clients, or both will continue to embrace a remote work environment and how that impacts the audit going forward. I don’t see a world in which we go back to being at the audit client site five days a week during fieldwork. I think all of us have gotten used to this remote environment, and we’ve proven that it can work. So I think there will be a lot of hybrid approaches going forward, and the use of technology has allowed for that.

No matter how much we embrace technology or how good and useful it is, it will not remove the need for people. We still need human interaction. This is why initiatives such as the CPA Evolution and upskilling efforts are so important. Technology can only do so much, and there needs to be accounting and finance professionals at the helm really overseeing how technology is being used and figuring out and applying the outcomes and analyzing the outcomes. So again, I think this is a really exciting way we’re trying to advance the profession and enhance the way we perform audits.

Coffey: Yeah. You know, Jennifer, I think to your point, we have to focus on retooling ourselves. Constant learning is really a requirement now and we have to think about it as an investment in ourselves. It’s no longer an option if we want to stay ahead of the game and continue to be that trusted business adviser, and I’d go on to say super auditor. The pandemic showed us that we’re ready, but we have to continue to kind of lean into this kind of new digital, dynamic era where we can really be ready for anything. As I said, I think we showed we can, but we have to make it just like a regular practice now.

Amato: Sue and Jennifer, thank you very much. This has been an excellent kickoff to the series. There’s more to come on the topic, which is one of really critical importance for the profession. Listen for more on future episodes of the Journal of Accountancy podcast.