Auditors using data analytics: An inside look

The use of audit data analytics (ADAs) is an important advancement in audit innovation. Learn about CPA Canada's recent initiative on the use of ADAs in Canada.

CPA Canada's Audit Data Analytics Committee has undertaken an initiative to obtain and communicate insights from external auditors who have started to use Audit Data Analytics (ADAs). Auditors who have not yet started to use ADAs may benefit from, and be encouraged by, the experiences of those auditors who have already taken this important first step.

The initiative involved CPA Canada holding a series of interviews with engagements teams from nine participating public accounting firms ranging in size from very small to very large to discuss the use of data analytics on specific audit files. The primary objective was to empower auditors to plan and integrate the use of ADAs into their audits. To achieve this objective, efforts have been made to:

  • obtain and communicate information on why and how some auditors in Canada are using ADAs in their financial statement audits and the results of such use
  • identify and make auditors aware of important matters to consider in deciding the nature, timing and extent of their use of ADAs going forward
  • build on previous initiatives undertaken by CPA Canada regarding the use of ADAs

Based on the results of this initiative, the use of ADAs is not yet widespread. However, firms and practitioners are obtaining the skills needed to perform ADAs and building advanced ADAs that can execute enhanced risk assessments and carry out substantive procedures. The real challenge remains in extracting the data - both the right data for the ADA and in the right format for the tool being used. This is further complicated when an entity has more than one enterprise resource planning (ERP) system or a customized ERP system. Time and effort are required by both the auditor and members of entity management to progress the use of ADAs.

What types of ADAs are being used and why?

There were 16 different automated audit procedures identified by participants as being ADAs. The most commonly used among participants included:

  • journal entry analysis
  • process mapping using transaction logs
  • two- and three-way matches of aspects of one or more transaction streams
  • general ledger account balance analysis
  • general ledger continuity analysis (trial balance completeness test)
  • scanning data populations for various attributes (e.g. large items, duplicates)

All participants concurred that their primary objective for using ADAs was to improve the quality of audit evidence obtained to support the auditor's opinion. Improved audit efficiency, while desirable, was not their main objective.

What challenges were encountered?

Participants identified a number of significant challenges to using ADAs; some participants had success (or at least partial success) in meeting these challenges. Examples include:

Establishing ADAs as a replacement for traditional audit procedures

Participants noted that this challenge results, for example, from lack of experience in using ADAs and the absence of auditing standards directed specifically at the use of ADAs. Some participants noted that experience gained in using ADAs in the audit of the previous year significantly helped implement the ADAs in the current year's audit.

Establishing that ADAs are at least as efficient and effective as traditional audit procedures

A common challenge noted by participants was difficulty in extracting data with appropriate form and content from the entity's information system. Some participants were able to overcome this challenge by testing smaller sample sets of data in advance and learning from past experiences.

Obtaining the support of entity management and the audit committee regarding the use of ADAs

Management is sometimes concerned using ADAs may cost more. On the other hand, examples were cited where support for the use of ADAs by management and the audit committee increased when such use provided detailed insights on matters relevant to the entity's operations.

What does the future hold?

Virtually all participants expressed a strong commitment to continue improving how they use ADAs and to expand such use. This commitment includes, for example, using ADAs in performing substantive procedures intended to be a primary source of audit evidence and as tests of controls. Participants expressed optimism that significant progress will be made; however, they also acknowledged that there is still much to learn about how to make more widespread use of ADAs. In addition, some noted a need for changes in auditing standards to address the use of ADAs specifically and for a transparent conversation with audit regulators about their views of such use.

On that note, are auditing standards changing?

Participants in the initiative identified challenges with the auditing standards related to analytical procedures (Canadian Auditing Standards [CAS] 520) and suggested that when the use of ADAs can significantly enhance the risk assessment performed under CAS 315, then the nature and extent of procedures required should be considered within CAS 330.

Through other discussions with auditors, challenges have been noted regarding the extent of work required over the accuracy and completeness of the data provided by the entity that is used to perform the ADA.

The International Auditing and Assurance Standards Board (IAASB) is currently revising International Standard on Auditing (ISA) 315 and is conducting research on whether to undertake a project to revise ISA 500, Audit Evidence. These projects, as well as proposed ISQM 1, consider the use of automated tools and techniques, including data analytics, to perform risk assessment procedures.

How will auditors keep up with education?

From a pre-certification perspective, the 2019 update to the competency map incorporates data analytics and information systems.

In addition, CPA Canada offers a certificate in data management and is currently developing courses related to audit data analytics.

Next steps

Read the full report. You can hear exactly what participants said about their challenges and what they are doing to successfully implement ADAs and reap benefits from their use. For first-time users, the report also includes 10 steps for a successful transition to use ADAs. For additional guidance, refer to CPA Canada's Audit Data Analytics Guide which assists auditors in applying ADAs efficiently and effectively in each of the phases of the financial statement audit, performed in accordance with the Canadian Auditing Standards (CAS).

Keep the conversation going

Are you having challenges implementing ADAs? What support are you looking for? We want to hear from you. Post a comment below or email me directly.

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Taryn Abate, CPA, CA, CPA (IL)

Director, Audit and Assurance, CPA Canada