Break on through to the digital world: Do auditors need to take a quantum leap forward?

Audit processes have not changed much for many years. Meanwhile, information technology has evolved by leaps and bounds.

Audit processes have not changed much for many years. Meanwhile, information technology has evolved by leaps and bounds. Is now the time to re-think audit processes to make optimal use of today’s available technology, not just to make audits more efficient, but to increase their effectiveness and value?

The American Institute of Certified Public Accountants (AICPA) issued a white paper exploring how financial statement audits might be designed if auditing were a new service just invented to make best use of technology within the bounds of economic viability. The paper discusses some of today’s technology enablers and their potential for improving audits in the following areas:

  • Using advances in audit data analytics to more effectively identify and assess risks, including the risk of fraud, and perform analytical procedures. 
  • Achieving the same level assurance, but more efficiently at lower cost, or even increasing assurance, for example by using technology to test 100% of the population where economically feasible. 
  • Auditing with Big Data (the technological environment in which almost anything can be recorded, measured and captured digitally, and thereby turned into data). Using it as an auxiliary to the data actually being audited to identify and analyze patterns and correlations that reveal matters of audit interest. 
  • Continuously monitoring and auditing an entity’s transactions in close to real time so that auditors can respond more quickly to risks. This would enable auditors to spread the work effort throughout the year, thereby improving audit quality and permitting auditors to provide assurance not just at year end.

A big question discussed in the paper is: how do we make this happen? The paper proposes three key areas where change is needed:

  • Encouraging audit research and development into how data science and information technology can improve the quality and effectiveness of auditing, perhaps through a consortium of universities, firms, professional bodies, solution providers and experts in related fields. 
  • Providing guidance and updating auditing standards because basic auditing standards were set a long time ago and having to comply with them discourages auditors from considering how to do things better; and because some new technology-driven audit methods appear to contravene auditing standards. 
  • Encouraging and recognizing new resource models because auditors will be obliged to make increasing use of professionals with skillsets other than traditional auditing.

The AICPA white paper refers to the required change as being a quantum leap. There is no doubt in my mind that a “quantum leap” is a very apt description. But in looking at what would have to be done to make that leap, it seems to me that it likely cannot be done by any one group of organizations in one jurisdiction. It would require a significant collaborative international effort. For example, just making changes to basic auditing standards to recognize new technology-driven audit methods would likely require the involvement of numerous different stakeholders, such as standard setters, auditing firms, and audit regulators, and involve significant background research.

Further, how would efforts be coordinated in such a way as to avoid duplication of effort and to promote an accepted end goal? Could a quantum leap be achieved through an international organization similar to the International Integrated Reporting Council (IIRC) (which was formed in 2010 to create a globally accepted framework for integrated reporting that would serve as a foundation for a new reporting model)? These are questions that still need to be answered if the authors’ goal is to be achieved.

Keep the conversation going… does the AICPA paper lead you to believe we need to make a quantum leap? How else can the auditing profession change to take advantage of new technologies? How can Canada play its part in these exciting opportunities?

Post a comment below; or email me directly.

Eric

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

Highlights

Gain practical organizational insights and learn from industry experts at this annual event for not-for-profit financial leaders.

Our Firm Directory allows you to search for Canadian CPA firms using our interactive map as well as other criteria.