Question

How data analytics and AI (Artificial Intelligence) can improve the audit process

Answer 1

Data analytics and AI in auditing process

Data Analytics

Regardless of the industry or profession, the prospect of mechanization or automation brings concerns about the potential loss of jobs. But increased use of data analytics in auditing is not expected to diminish the need for skilled and trained auditors.

“The software programs are fantastic,” said James Comito, CPA, the national director of the Professional Standards Group for Mayer Hoffman McCann PC. “They can aggregate data and provide us with a whole lot of information. But at the end of the day, it still requires a knowledgeable auditor to stand back from that, analyze that information, and make a determination whether that information is consistent with what the auditor expected, or whether it’s not, in which case there is more investigative work that the auditor has to do. And I don’t think that will change anytime soon.”

As data analytics takes on a larger role in auditing of financial statements, auditors may want to consider:

Planning carefully. While maintaining objectivity and skepticism, auditors may want to inquire extensively with clients about the metrics monitored by clients’ management. This effort to understand the business and what’s important to management can help the auditors set up data analytics tools in the most useful way for the audit.

Getting IT involved. Auditors may have their firms’ IT professionals engage the clients’ IT staff to make sure the clients’ systems are producing reliable data. Audit data analytics software won’t produce the desired results if the data entering the system are not reliable and appropriately precise.

Learning how to use the tools. Younger auditors may be more comfortable at first with the technology than veteran auditors who have been conducting engagements for a long time with little or no use of analytical technology. Firms that plan to use audit data analytics need to have programs in place to train all auditors on how to use the technology.

Maintaining traditional testing skills. “There will always be a need to do a certain amount of detailed testing around certain aspects of U.S. GAAP,” Comito said. “You’re going to have to read contracts. There are clauses in contracts that have meaning in U.S. GAAP that a pure analytic may not cover.

AI (Artificial Intelligence)

AI is already being applied in areas as varied as driverless cars, home energy systems and investment portfolio management. Accounting and auditing will also be affected.

AI enables the analysis of a full population of data and can identify outliers or exceptions.

The term “AI” describes computing systems that exhibit some form of human intelligence. It covers a number of interlinked technologies including data mining, machine learning, speech recognition, image recognition and sentiment analysis.

For instance, machine learning can be used to automatically code accounting entries. By creating sophisticated machine learning-based models, auditors can also improve fraud detection.

The audit is set to be further transformed by deep learning, a form of AI that can analyze unstructured data such as emails, social media posts and conference call audio files.

An example of how AI can be applied to the audit is in contract review. Machine learning tools allow humans to analyze a larger number of contracts, such as leases, in a much shorter timeframe than is possible with a traditional manual review. In a recent pilot, AI tools were able to accurately extract information from lease contracts using pre-selected criteria in the vast majority of cases – a higher level of precision than the average human reviewer is capable of.

By making it possible for auditors to work better and smarter, AI will help them to optimize their time, enabling them to use their human judgment to analyze a broader and deeper set of data and documents.

It also enables them to ask better questions and to interact more with CFOs, audit committees and company boards, adding value to the audit process. In this way, AI could contribute to providing better-quality audits – and an exciting future for auditors.