The intersection of technology and quality in auditing

By Russ Banham

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

There is no doubt that technology is transforming auditing, with technical solutions giving 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 auditing to deliver insights, the common theme of advanced technology is a large umbrella. When it comes to improving audit quality, for example, which technology exactly makes the difference? What exactly can auditors expect in this regard from the wide range of solutions available today?

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

1. Analyze entire datasets and detect anomalies faster

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

“If a company has millions of revenue transactions … the audit team has to 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 that population.”

With automated processes, it is now possible to examine each transaction against predefined criteria and flag outliers for human review.

Consider the transactions that occur in the traditional order-to-cash process. If a manufacturer purchases a significantly larger volume of raw materials from a particular supplier in a particular region than historical data indicates is typical, automated procedures may draw attention to the transaction, flagging it as higher risk and requiring further analysis.

“It tells you, ‘Here are some potentially risky transactions,'” Peo says. “Then the auditor can come in to investigate. They may discover actual problems that need to be tracked and acted upon, or they may realize that perhaps they it seemed riskier, but all the evidence is actually relevant – and that’s just how a certain type of transaction can be recorded for that company.

If that’s the case—everything matches as written—and the transaction really did work as usual, the bot can incorporate this new evidence and update its criteria. Subsequent analyzes then become more precise based on these findings.

2. Improvement of the company’s internal control

It may be a given that auditors use advanced technology, but many of these tools—artificial intelligence (AI) and data visualization, for example—are also finding their way into companies themselves. In terms of which specific technologies will “dramatically transform” auditing, Prepared for the future A survey conducted by KPMG and Forbes Insights found that most executives have paid attention to AI (61%) and intelligent analytics (50%). Many also expected robotic process automation to play an important role (48%).

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

The benefits to the customer soon become clear. By maintaining a modern technology stack that is on par with their auditor, clients can communicate with their auditors more clearly, quickly and accurately throughout the audit process. They also have more control over their internal analytics. After all, “you don’t want your auditor to know more information than your SOX team or your internal auditor or manager,” Peo says.

The Prepared for the future survey also notes that “most executives are confident in their own finance function’s current and planned technology, but most (58%) also readily admit that their external auditors are adopting technology more quickly.” Clients may be hesitant to change their internal controls and this is understandable – especially when management believes they are already in a good position.

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

3. Freeing up auditors to do more meaningful work

As financial technology continues to evolve, most executives understand the need and are eager for the efficiencies that have increased their adoption of automation technology. As stated in Future proof study, “[Executives] expect this technology to provide more accurate and reliable data; delve deeper into their business; detection of increased risk factors; and help their finance functions identify deviations and anomalies in data—ideally in real time.” Additionally, “The top-ranked benefits they expect technology to provide their external auditor are deeper insights into areas with increased risk and control weaknesses (90%) and comparing KPIs across processes, business units and industry partners (86%). “

Peo has seen this firsthand, noting, “Automation provides the ability to focus our work on transactions that are truly riskier, helping to flag and identify risk. Data and analytics help you understand the transactions you need to audit. By looking at these transactions in multiple ways, you have a better sense of what you’re testing, where the risk is, and what the risk is.”

Most agree that this improves the quality of their audit (98%) by providing deeper insight into areas of increased risk, enabling better comparison to KPIs and increasing data coverage. The majority of executives also believe that technology improves the customer experience (94%).

Also, when a company has more advanced systems in place, they are more likely to be able to take advantage of their auditor’s own more advanced technology. It’s a symbiotic relationship in that regard. For example, an auditor is better able to extract complete data sets from a company if the company has a streamlined ERP system; that data mining can introduce significant efficiencies into the process (in addition to the increased quality that comes with analyzing complete data sets instead of representative samples).

“Our ability as auditors to use technology can be significantly limited when there is no effective quality management system in place [being audited],” explains Peo. “Having this efficient system in place, especially around financial reporting, is very important not only to get insights, but to make them useful.”

As audit technology becomes more powerful and intelligent, the human touch will always be vital because, according to Future proof In addition to basic accounting and financial skills, most executives believe that financial reporting officers should bring their own skills.

What professional skills are most valued by financial reporting team leaders?

80% Critical thinking, reasoning and problem solving

66% Financial investigative skills

66% Ability to develop data analysis to achieve specific objectives

57% Instinct for business strategy and strategic insights

“Those people who are intellectually curious and can extract insights from disparate data sets will be truly outstanding,” says Scott Flynn, vice president, audit, KPMG LLP.

How can modern technology improve your audit?

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

Whether it’s artificial intelligence, machine learning, data visualization, or any number of other advanced technologies, the most important factor is how the process or technology, along with auditors experienced in such advanced technologies, critical thinking, and analysis, can demonstrably improve audit quality for stakeholders and the wider capital markets.

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

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