The following is a guest post by Marc Staut of Boomer Consulting.
Data analytics has become a buzzword in the accounting profession, but it’s not just hype. It’s something that every accounting firm needs to understand.
Essentially, data analytics is the process of gathering and analyzing data and using it to make better decisions. That’s something that accounting firms and their clients have always tried to do. But today there is so much data available from so many sources that auditors have more opportunities than ever.
Data analytics as an innovative audit tool
In an audit, data analytics can help audit teams discover and analyze patterns, deviations and inconsistencies, and extract other useful information from the underlying data through analysis, modeling and visualization.
More simply put, it helps auditors and their clients see the big picture and details that may have been harder to see in another format.
For example, say your client has an internal control procedure requiring that all purchases over $50 are authorized by a purchase order. With traditional sampling, your population would be all vendor invoices for purchases over $50, and you would pull a sample from that population. Let’s say, after reviewing the sample, you discover several invoices that aren’t supported by a purchase order, and the population error rate is higher than your tolerable error rate. Using traditional methods, you would have to increase your sample, redo your calculations, and see if a larger sample brings the error rate down to an acceptable number.
With audit data analytics, rather than selecting a sample, you could test 100% of the invoices over $50. If your error rate was still higher than the tolerable rate, you could create a visualization, summarizing the entire population by enterer, department, vendor, or any other relevant characteristic. At that point, you realize that all of the invoices that aren’t supported by a purchase order came from one employee in one department. That’s a much more useful piece of information and one that your client can use to reinforce training around proper purchase order procedures where it’s needed most.
Challenges of audit data analytics
The introduction of data analytics in auditing isn’t without its challenges. Some issues that can arise with the introduction of data analytics as an audit tool include:
- First, data capture. Some ERP and financial accounting systems may not have the ability to extract large volumes of data or transactions necessary to perform the analysis.
- Second, data quality. Old and inaccurate data can have a significant impact on results. Maintaining data that is correct, consistent and usable can be an overwhelming task, but standardizing processes can ensure a good point of entry and reduce the risk of duplication and errors.
- Third, skill sets. Auditors are being asked to do things differently than they’ve done in the past. Instead of sampling, they need to know how to interpret large amounts of data. Firms need to find the right people with the right skills and expertise to deal with data analytics in their audits. The right person may not always have an accounting degree or CPA license.
Preparing your firm for the future of audit data analytics
The following are some key questions that your firm and IT leaders should be asking to ensure that your investments in audit data analytics are successfully leveraged:
- One, what resources do we have in place?
- To capitalize on the opportunity, you need the right technology, process, talent, and leadership.
- Two, what is our strategy?
- How do you plan to leverage data analytics in your audit today, and what are your plans for doing so in the future? Consider the value data analytics can provide today, whether it improves audit quality, provides new revenue-generating opportunities, increases the profitability of audit engagements, or drives continued engagement with clients.
- Three, what is the scope of data currently being captured?
- Data capture is often a barrier to using data analytics in an audit. Look for ways your client’s internal IT function can work with the firm to streamline the data capture process.
- Four, how will we maintain the security of client data?
- Effective use of data analytics in audits required auditors to access internal client data. However, many companies have invested heavily in protecting their data with multilayered approval processes and technology safeguards. How can your clients provide access to data with assurance that your firm will maintain the security of that data?
Meaningful operational change comes from the top. The leaders in your firm need to enable change by establishing clear leadership and executive support, prioritizing clean and reliable data, increasing fluency across the firm and developing a two-to three-year roadmap. Focus on ways your firm can become transformation agents who continue to move your firm and the profession forward. Not only will integrating big data into your audits help mitigate compliance risks, but it will ultimately drive better decisions and create strategic value.
Check out TeamMate Analytics
A good audit data analytics tool to investigate is TeamMate Analytics. This Wolters Kluwer solution offers more than 150 tools specifically designed to meet the analytic needs of CPA firm auditors and accountants. Users range from sole practitioners to Big 4 accounting firms in more than 70 countries worldwide, with departments that have one auditor to departments with more than 100.
And on May 28, 2020 you can join a complementary webinar to see what’s new in TeamMate Analytics. This 45-minute presentation will highlight:
- Easier working with PDF files in Import Wizard, and how the import wizard checks for problems
- New expert analyzer workflows in the test library, and new tests in journals workflows
- Additional capabilities for stratification to work with text and split samples, and more
Simply register here to save your seat.