Making the most of tech and data for improved audits

Audit firms and their audits rely on the application of a growing range of technologies and tech-enabled software and services across both audit-specific and non-audit specific areas.

These range from old favourites, such as software tools to automate aspects of audit engagement and practice management, to myriad tech tools that auditors now rely on to facilitate remote and hybrid working, as well as a host of increasingly smart tools to help auditors get the most from the data they have access to.

When the Financial Reporting Council (FRC) published its latest Audit Quality Inspection and Supervision Report (for seven ‘Tier 1’ firms) in July 2022, tech was one of the areas (along with methodology, culture and resourcing) where it found ongoing investment and improvement to improve audit quality. “All firms are continuing to invest in technology such as new audit systems and data analytical tools, and some are looking to the future of audit and developing AI tools,” it says.

Smaller audit firms may not be developing their own artificial intelligence (AI) tools, but access
to AI-enabled tools is no longer the preserve of those with the deepest pockets and most extensive resources.Multiple software developers and service providers now offer access to products and services that utilise AI techniques such as machine learning (ML) and neural networks (a type of ‘deep learning’ ML that uses interconnected nodes or neurons in a structure that resembles the human brain).

Smart thinking

Software and services are getting smarter, and so are the ways audit firms (and clients) use them. The audit data analytics specialists Inflo and MindBridge both utilise ML to make processes smarter and faster for auditors, and firms are adapting to make the most of such tools. The 17-partner firm Beever and Struthers has created a team of master’s graduates with data analytics expertise to support its approach to this.

The team has assisted with data ingestion processes and initial analysis and insight. John Toon, Senior Audit Manager and Tech Strategy Lead at Beever and Struthers, says a clear strategy for data analytics use in a specific area of audit is also helpful. “We’ve managed to make better use of analytics around the management override of transactions in financial statements and around journals testing in particular.”

Connect and collaborate

Application programming interfaces (APIs) and the connectivity they enable between separate software and services (and initiatives such as ‘open banking’) also make it easier for auditors to get more from available data. The benefits for Beever and Struthers are shared by Toon in a recent ICAEW Insights article (at tinyurl.com/AB-TechChal). They include being able to more easily access and combine client data from multiple software products and data repositories.

“We use Circit for accessing open banking data for our clients. It’s very powerful to have that information available without having to go through the process of a bank confirmation,” says Toon. Beever and Struthers recently started to combine client bank account information (accessed via Circit) with general ledger data from Inflo. This means teams are spending far less time tracing bits of information through the bank.

This sort of connectivity between systems may create all sorts of opportunities for Beever and Struthers and other audit firms. “We could conceivably get to a point where you will be verifying transactions as they happen in the general ledger, against the bank transactions, almost in real time,” says Toon. As more processes get automated and more systems can easily access, analyse and exchange data, more possibilities will emerge.

Working smarter

As auditors sharpen their focus on fraud see our recent report on this, they have increasingly smart tools at their disposal to assist with the identification and investigation of irregularities. Document authenticity tools, for example, can automate analysis of a document’s structure to detect anomalies and identify miniscule ‘micro-misalignments’ that may have been altered or backdated (even by a graphics editing system).

Firms aren’t only working to get the most from software, data and functionality they have access to through relatively recent innovations and investments. Attention is also falling on software tools that auditors (and other accountants) have been using for decades, such as spreadsheets. “Firms have been asking us for practical information on how to do more analysis using spreadsheets,” says Alex Russell, Head of Audit and Assurance Strategy in the Audit and Assurance Faculty – hence the recent Audit & Beyond articles.

There are various reasons for this. It’s not just because firms want to get as much as possible from their Microsoft (MS) 365 licensing agreements, although that is an understandable motivation. Software applications are in a constant state of evolution and what MS tools make possible – and how easily – is changing, in ways that can also make it easier for auditors to get more value from MS Excel, other MS applications and the data these tools can be used to access and process.

Take the data ingestion and analysis capabilities of MS Excel, for example. “Power Query tools were an optional add-in when they were first introduced in Microsoft Excel in 2010, but went on to become a built-in option and are now the default method for linking Excel to all sources of external data,” says Excel expert Simon Hurst, who recently shared Power Query tips for auditors in Audit & Beyond.

As well as using Power Query for data processing and mash-ups, auditors can use MS Power BI for more advanced analytics and to visualise the results. Power BI can be used to create personalised and interactive dashboards and give insights into reports and analyses. The strong integration between MS 365 applications can also make MS Power Automate and MS SharePoint a powerful combination for firms to apply in various aspects of audit and other service lines.

MS Power Automate and MS SharePoint (which is bundled with some versions of Office 365, but not all) can be used together to build workflows that streamline processes, improve efficiency and have a positive ‘knock-on’ effect on audit quality. Power Automate can automatically update a template based on source files, so a user can point at files stored locally or on SharePoint and, with zero coding, set up a workflow.

“There’s a democratisation process going on,” says Ian Pay, Head of Data Analytics and Tech, ICAEW. “Everyone has access to tools that can be used to do some pretty powerful stuff. You still have data specialists to do the very complex tasks, but that accessibility reaches down right across the spectrum now.”

This is an area where ICAEW has, for some years, been taking steps to support auditors and other members of the accountancy profession with practical resources.

Whether your firm wants to focus on strengthening people’s spreadsheet expertise or equipping them with the skills to make better use of specialist audit data analytics tools, ICAEW can help.

• The Excel Community offers articles, Excel hints and tips, webinars and an extensive 19-part introduction to financial modelling;
• The Data Analytics Community assists finance professionals to develop advanced data analytics and visualisation skills – with articles, events, a newsletter and other resources;
•  ICAEW’s Data Analytics Certificate programme (developed with Kaplan Financial) offers the profession two distinct learning pathways. The first is for analysts and the second is aimed at management.

The auditor’s increased use of third-party tech is not, of course, without some risks. This is reflected in requirements in the new international quality management standards. You may want to review the faculty guidance regarding this issue.

For many firms, tech is also part of the process of designing, implementing and operating a system of quality management (SoQM) under ISQM 1. “I decided to have a piece of software because otherwise it can get messy,” says Rachel Davis, Managing Director of Just Audit, a firm she launched to do just that.

In an ICAEW Insights article, Davis outlines the role of tech and training in Just Audit’s preparations for the new QM standards. But it’s vital to remember that ISQM 1 requires each firm to tailor its approach to QM.

Tech platforms may help to make the process of designing an SoQM less daunting for some firms, while other firms may prefer to design their own SoQM – and the responsibility for design, implementation and operation rests with the firm alone. As is often the case with tech use by auditors, it helps, but it’s no replacement for professional judgement.

The quality of software and services

Given the extent to which audit firms now depend on external providers of software and tech-enabled services, it is perhaps unsurprising that this is on the radar of standard-setters such as the FRC and the International Auditing and Assurance Standards Board. As each firm works to implement the new International Standards on Quality Management (ISQMs), it will need to consider its use of these and other third-party providers.

One of the key concepts underlying ISQM 1 is that a firm is solely responsible for the design, implementation and operation of its own system of quality management (SoQM) – even where it obtains resources (such as manuals, software tools, training, methodology and so on) from service providers. Given the extensive use of external service providers, these new QM requirements are important.

As well as supplying, implementing and maintaining the software and services mentioned above, there are many other kinds of tech-enabled third-party software, tools and services that firms may be utilising. Each firm will need to consider whether such resources are appropriate for use within its SoQM or the performance of engagements. The faculty has produced a guide that will be of assistance: ISQM 1: Use of resources obtained from service providers.

This guide outlines the requirements of ISQM 1 and the types of information that may help audit firms be in a position to identify and assess quality risks in relation to the quality objectives in ISQM 1 and their use of resources from service providers. It walks member firms through the information they might need for four types of resources: methodologies, training provision, software and audit quality support services such as file review/technical consultations.