Enterprises of all sizes across the US have embraced the benefits of advanced cloud-based automation, big data and real-time reporting to advance nearly every aspect of their business. Meanwhile, we in the accounting profession have carefully—albeit slowly—adopted new analytical tools to improve auditing processes and outcomes for these same businesses and organizations.
Changes in audit methodology and standards, however, happen slowly.
Traditional auditing will test controls, and it is based upon risk. The audit itself happens weeks or months after transactions have occurred. The auditor looks at completed reconciliations, tests samples of data and reviews policies and procedures. This process tends to deliver limited information to improve internal controls and hindsight guidance on business performance. It’s why many leaders consider the audit a necessary, but low-value requirement rather than a catalyst for business planning.
Enter audit analytical software; a powerful connection between your financial data and your internal controls — and a breakthrough opportunity for the auditor to deliver greater value.
What is a Continuous Audit?
The advent of relational databases, faster computing technology and vastly improved financial software has opened the door to remarkably powerful tools for improving the assurance process. Although continuous audit is not a replacement for the annual audit, it is instead a new way to make the audit process and results more valuable.
Continuous audit is a method to perform control and risk assessments automatically on a more frequent basis, allowing business leaders and/or their advisors to monitor and improve financial data throughout the year. By installing software that taps directly into the client’s data in real time, the auditor now has an opportunity to develop and refine internal control testing, on a more frequent basis and on multiple data sets, simultaneously.
Continuous Audit Concept is Old, Tools are New
Realizing the need for improved audit philosophy in business, the Canadian Institute of Chartered Accountants (CICA) and the AICPA in 1999 developed a research report entitled Continuous Auditing. The report discussed the viability of continuous audits. The group also outlined a conceptual framework for conducting audits and identified significant issues that auditors would likely encounter when performing this type of work. From this foundation, the accounting industry, including several software developers catering to industry, began developing tools and training to help professionals mastermind new ways to harness the power of audit analytics to extract added value from the audit process.
Continuous audits are usually technology-driven and designed to automate error checking and data verification in real time.
Audit Dashboards Are Evolving
More executives, as well as internal auditors, are becoming familiar with dashboards. They can set up reporting in real time for everything from sales and backlog to inventory and expenses. Invoices, payroll expense, it is all there.
Where are the independent auditors? Still relying on analyzing data from three-month-old Excel sheets? Instead, audit analytics is bringing dashboard-style control testing that is truly automated.
The Excel sheet is not extinct; in fact, a major financial reporting software firm has designed their analytic product as a plug-in to the all-powerful Excel platform to create what they refer to as Computer Aided/Assisted Auditing Technique, or CAAT. Through CAAT, the audit team can efficiently manipulate and extract data delivered in universally-accepted Excel spreadsheets.
In this example, a user-friendly interface makes it possible for finance professionals to unleash over 150 different tools and techniques to organize data. They can select worksheets and data within Excel to verify completeness of the information provided, select samples for confirmation and testing and perform testing and other value-added services.
Improving the Efficiency of Annual Audits
With audit analytics injected into the annual audit process, we can accurately sample and test large amounts of data more quickly, efficiently, and in-depth.
That translates into better financial reporting, more agile decision-making, and more powerful improvements. The continuous audit process can break down the entity into different transactions cycles, such as:
- cash receipts
- disbursements
- payroll
You can set up audit tools to monitor each cycle and develop testing. Depending on volume within each segment and the type of risk that needs to be addressed, each tool or test might look different.
Information is power. With the right information, you can dive deeper in less time. The automated analytics tool lets the audit team develop a myriad of automated, well-scripted tests. For example:
- Benford’s Law analysis
- Duplicate invoices (either on A/R or A/P ledger)
- Transactions posted on unusual days (holidays, weekends)
- Transactions posted after hours
- Missing check numbers
- Missing journal entry numbers
- Invoices without a sales order or purchasing order (if entity uses these)
- Unexpected transactions (journal entries to cash, negative invoices, etc.)
- Employees with excessive time off or over time, or employees with minimal time off
- Journal entries with unusual account combinations or seldom-used accounts
- Transaction scoring (assigns a score to each transaction based on risky attributes so the higher the score, the riskier the transaction)
Once testing modules are set up, the actual time to compute and run reports is a repeatable exercise requiring a few hours (rather than days or weeks) to perform.
If your Company is searching for a way to accurately and efficiency analyze your controls and data in real time, contact Meg Hampton, CPA, Audit & Assurance Manager at Anglin Reichmann Armstrong.