Step change in use of technology to improve efficiency and quality of audits
News types: Guidance, Publications, Statements
Published: 25 March 2020
The use of automated tools for audit such as data analytics has grown dramatically in the last three years and if used appropriately can improve audit quality. A new report from the Financial Reporting Council (FRC) highlights that audit firms have invested considerably in the infrastructure required to efficiently capture, collate and organise data. Auditors are however dependent on whether companies have a robust IT infrastructure that allows data to be extracted in a useable form to challenge management.
The FRC’s report follows up a review in 2017 which highlighted that the use of data analytics for audit was not as prevalent then as the market might have expected. Three years on and there has been a step change, with data-led audits more prevalent and the use of technology being routine at the largest UK audit firms.
The FRC also found that emerging technologies such as machine learning and predictive analysis, although in their infancy, can help to identify unusual transactions or challenge judgements around going concern or impairment that would not otherwise be found by a human auditor. The FRC encourages the audit firms to continue to develop their technologies in these areas to seek further improvements in audit quality.
A closer analysis of audit inspections also revealed:
The FRC’s report follows up a review in 2017 which highlighted that the use of data analytics for audit was not as prevalent then as the market might have expected. Three years on and there has been a step change, with data-led audits more prevalent and the use of technology being routine at the largest UK audit firms.
The FRC also found that emerging technologies such as machine learning and predictive analysis, although in their infancy, can help to identify unusual transactions or challenge judgements around going concern or impairment that would not otherwise be found by a human auditor. The FRC encourages the audit firms to continue to develop their technologies in these areas to seek further improvements in audit quality.
A closer analysis of audit inspections also revealed:
- the most prevalent use of audit data analytics (ADA) beyond journals is in high volume, low judgement transactions such as revenue testing
- audit teams use ADA to focus audit testing on the areas of highest risk through stratification of large populations
- in response to audit inspection findings, audit teams have improved their documentation and evidence supporting the use of ADA
- automated tools are deployed with sufficient training and support
The FRC’s Executive Director of Supervision, David Rule said:
“Technology provides opportunities to deter fraud and the manipulation of accounts by analysing entire populations of data and identifying unusual transactions. . We support wider use of audit data analytics. We are looking to the market to continue to develop innovative solutions and are now consulting stakeholders to inform our policy for the future of audit technology.”
As the development of technology is fast moving, the FRC has outlined a number of expectations for audit firms, including:
- responsibilities for ongoing development, testing and approval of existing and new automated tools
- demonstrating the integrity of extracted data for use by automated tools
- clear articulation of how automated tools support audit procedures
A link to ‘The use of technology in the audit of financial statements’ can be viewed here .
A link to the FRC’s discussion paper “Technological Resources: Using Technology to Enhance Audit Quality” which will inform its audit policy work programme can be viewed here .