The intersection of technology and quality in the audit

By Russ Banham

According to a global executive survey conducted by KPMG and Forbes Insights, almost all executives (98%) say their external accounting firm makes extensive use of advanced technology.

There is no doubt that technology is transforming auditing, as technical solutions give auditors “more insight than they ever thought possible,” according to Christian Peo, National Managing Partner, Audit Quality and Professional Practice, KPMG LLP.

As discussed in a recent article with Lou Trebino, Chief Technology Officer, KPMG LLP, on how technology is modernizing testing to deliver insights, the overall advanced technology topic is a big umbrella. For example, when it comes to improving exam quality, which technology exactly makes the difference? In this regard, what exactly can accountants expect from the wide range of solutions available today?

The following three areas can help answer these questions and highlight where technology can have a significant positive impact on exam quality.

1. Analyze entire data sets and detect anomalies earlier

By using bots trained to run rule-based business processes and identify data anomalies, auditors can spot discrepancies in an entire population of transactions—not just a representative sample.

“If a company has millions of sales transactions…the audit team should go in and decide how risky the population is,” Peo explains. “Until recently, unless you went and looked at every transaction, you had to make some generalizations about this population.”

With automated processes, it is now possible to check each transaction against predetermined criteria and flag outliers for human verification.

Consider the transactions that take place in the traditional order-to-cash process. When a manufacturer buys a significantly higher volume of raw materials from a specific supplier in a specific region than historical data shows, automated routines can flag the transaction, classifying it as higher risk and requiring further analysis.

“It tells you, ‘Here are some potentially risky transactions,'” says Peo. “Then the investigator can go in to investigate. They may find actual issues that need to be followed up and act accordingly, or they might recognize that they might seemed riskier, but all the evidence is actually reasonable – and that’s exactly how a specific type of transaction can be recorded for this company.”

If this is the case – everything is reasonable as recorded – and the transaction actually went as usual, the bot can integrate this new evidence and update its criteria. Subsequent analyzes then become more accurate based on these findings.

2. Improvement of a company’s own internal controls

It may go without saying that accountants use advanced technologies, but many of these tools — artificial intelligence (AI) and data visualization, for example — are also finding their way into the companies themselves. In terms of which specific technologies will “dramatically change” auditing , the future proof A study conducted by KPMG and Forbes Insights found that most executives have their eyes on AI (61%) and smart analytics (50%). Robotic process automation is also expected by many to play an important role (48%).

“Companies have to keep up with us, at least to some extent, and can’t fully rely on us to give them the insights,” says Peo. “They need to see how we use technology, build technology into their internal financial controls, and start thinking about the same things.”

The advantages for the customer quickly become clear. By maintaining a modern tech stack that is on par with their examiner, clients can communicate more clearly, quickly and accurately with their examiners during the examination process. They also have more control over their internal analysis. After all, “you don’t want your investigator to have more information than your SOX team or your internal investigator or manager,” says Peo.

That future proof The study also found that “Most executives are confident in their own finance department’s current and planned technology, but most (58%) are also willing to admit that their external auditors are more likely to adopt the technology.” Customers may be reluctant to evaluate their internal Changing controls, and that’s understandable – especially when management thinks they’re already in a good place.

But, Peo warns, “when a company’s technology lags too far behind ours, it can increase risk from an internal control perspective. … There is a greater danger that the auditors will find problems before management does, which could lead to the possibility of a significant deficiency or even material weakness.”

3. Free up auditors to do more meaningful work

As financial technology advances, most executives understand the need and are excited about the efficiencies that have accelerated their adoption of automation technology. As referenced in the future proof to learn, “[Executives] expect this technology to provide more accurate and reliable data; gain deeper insights into their businesses; recognize increased risk factors; and help their finance functions identify data outliers and anomalies – ideally in real time.” Additionally, “the key benefits they expect from their external auditors’ technology are deeper insights into areas of increased risk and control weaknesses (90%) and benchmarking of KPIs across processes, business units and industry peers (86%). ”

Peo has seen this firsthand, noting, “Automation provides an opportunity to focus our work on transactions that are genuinely riskier and helps flag markers and identify risk. Data and analytics help you understand transactions that you should review. By looking at these transactions in different ways, you’ll have a better sense of what you’re testing, where the risks are, and how much risk there is.”

Most agree that this improves the quality of their assessment (98%) by providing deeper insights into areas of increased risk, allowing better benchmarking with KPIs and increasing data coverage. The majority of executives also believe that technology improves the customer experience (94%).

Additionally, when a company has more advanced systems in place, it is more likely to be able to take advantage of its auditor’s own more advanced technologies. It’s a symbiotic relationship in that regard. For example, an auditor is better able to extract complete records from a company if the company has an optimized ERP system; that data extraction can make the process significantly more efficient (in addition to the increased quality that comes with analyzing complete datasets rather than representative samples).

“Our ability as auditors to use technology can be severely limited if there is no effective quality management system in place within the organization [being audited]’ Peo explains. “Having this effective system, especially in relation to financial reporting, is very important not only to get the insights but also to make them useful.”

As the exam technology becomes more powerful and intelligent, the human touch will always be crucial as noisy future proof Aside from basic accounting and finance skills, most executives believe that financial reporting professionals must have skills of their own.

What professional skills are most valued by leaders of financial reporting teams?

80% critical thinking, reasoning and problem solving

66% Financial investigative skills

66% Ability to develop data analytics to achieve specific goals

57% instinct for business strategy and strategic insights

“Those who are intellectually curious and able to pull insights from diverse pools of data will be truly exceptional,” said Scott Flynn, Vice Chair, Audit, KPMG LLP.

How can Advanced Tech improve your audit?

Ultimately, technology is a powerful factor that can help auditors improve accuracy, completeness, and overall audit quality. It is also possible that customers use the same technologies to improve their own processes.

Whether it is AI, machine learning, data visualization or any number of other advanced technologies, the most important factor, like the process or technology along with examiners experienced in such advanced technologies, critical thinking and analysis, is the exam quality for stakeholders and the broader capital markets.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

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