Originally published in The Accountant, 9 January 2017
Being willing to embrace new ways of doing things is part of making progress in any field of endeavour. In terms of truly embracing the potential for data analytics to change the audit, it has been a long time coming.
Computer assisted audit techniques (CAATs) were first used in the audit over 50 years ago and yet progress since has been painfully slow despite the acceleration in development of available IT tools and the data explosion.
Despite all the talk about data analytics and big data, the audit has remained largely based on traditional evidence gathering procedures. The traditional auditing technique of selecting a risk-based sample remains central to the audit but fails to take advantage of the digital age which often allows 100 per cent of the population to be examined allowing work effort to focus on understanding outliers.
Of course there have been legitimate challenges to embracing data analytics. In the early days proprietary programs were expensive, cumbersome, inefficient, and in need of constant reprogramming. This understandably inhibited their widespread adoption, however the variety of software now available makes it increasingly viable for even small and medium firms to implement data analytics.
Data analytics provides a huge opportunity for auditors to provide a more relevant, better quality audit, which can more clearly demonstrate the value of audit. It presents the possibility for auditors to reinvent themselves as leaders in innovation rather than laggards. There is no doubt that data analytics will revolutionise the audit but just how quickly this occurs depends on shifting the impediments to innovation.
Auditors argue the biggest impediments to embracing the potential of data analytics are the standard setters and audit regulators. The requirements of the auditing standards and audit regulators’ approach to oversight favours traditional audit practices.
Data analytics does not lend itself to the same type of documentation and audit methodologies currently reflected in the auditing standards. As auditors are expected to comply with the auditing standards - standards which are mandated by law in some jurisdictions - regulators understandably match compliance against each of the requirements in those standards.
In this environment, any divergence creates extra work for firms as they need to justify their approach to the regulators. Clearly auditing standards need to change.
To its credit, the International Auditing and Assurance Standards Board’s (IAASB) working group on data analytics is seeking views on factors impacting the use of data analytics and how the standard setting challenges can be addressed. For the long term, changes to the standards need to be forward looking and future proof.
While this process is very welcome, it is also comes with a long time frame. Acknowledging this, stakeholders are suggesting that the standard setters and regulators need to take action now so that these impediments in the standards do not continue to hamper innovation and the full benefits of data analytics can start to be realised.
Regulators need to find ways to ensure they are encouraging data analytics where it will result in better audit evidence by upskilling their teams on data analytics techniques, embracing new forms of documentation and sampling techniques and not discouraging the improvements to audit quality which effective use of data analytics can bring.
Development of guidance by standards setters regarding how existing standards may be met while utilising data analytics would go a long way to allaying auditors’ fear of regulator backlash.
Data analytics provides an opportunity to improve audit quality by expanding and deepening the analysis of a client’s operations. Auditors are currently being held back from fully embracing the possibilities of the digital age, not by any desire to hang onto the past but by the restrictive regulatory environment in which they operate.
The wheels of regulatory change turn slowly, but hopefully 2017 will be the year we see real movement in the development of new audit methodologies to enable the full utilisation of data analytics.
Alex Malley is chief executive of CPA Australia