Audit of the future

Where are we now?

The pace of technological change in recent years has been immense and innovation shows no signs of slowing down.  Most audit firms have moved towards paperless files, Mercer & Hole included, and for all of us within the profession the challenge is to improve audit quality but this often comes with cost pressures too.

Technology can improve both audit quality and drive efficiencies into the audit process and there is a real need to ensure this is incorporated into the audit process – if a firm does not they may not be giving their clients the best possible service. The audit of the future definitely needs to incorporate technology in what is fundamentally a three step process:

1. Extraction of the data;
2. Performing analytics on the data; and
3. Investigation of exceptions

Data extraction

All firms have historically had some form of data extraction techniques, this is more often to select a relatively small sample and then to form some sort of audit conclusion based upon the sample selected.  By embracing technology the auditor can access the whole of the client’s system, sort its data and analyse 100 per cent of the transactions for a certain data set to identify exceptions for further investigation. The benefit of this for the client is that they can get appropriate feedback on their systems and have confidence their auditors are drawing conclusions around the whole data set and not just a small sample which may not be representative.

Historically, many companies have operated through different systems and therefore being able to extract the data in a consistent format has been difficult.  This is one of the key challenges technology is overcoming. The combination of technological advancements, with smaller accounting software systems becoming more standardised, as well as the available data extraction tools becoming more sophisticated, means data extraction is becoming a lot easier than it was a few years ago.

Data Analytics

Once the data is extracted the auditor can then perform data analytics on the extracted data sets.  In simple terms the auditor can analyse the data using a programme with a number of parameters that will provide data exceptions.  These exceptions can be unmatched lines. For example, the purchase invoice is matched back to the purchase order or, the goods received note is matched to the purchase order. Where there are differences or exceptions the programme will identify these and provide the auditor with a report for further investigation. The parameters can be set by the auditor using their skill, judgement and knowledge of the client.  Such parameters can be used to ensure authorisation levels have been adhered to or for simple ageing techniques to calculate a provision based upon age for inventory or debtor balances.

This adds value to the audit in terms of reliability and accuracy as it is possible to ensure 100 per cent of a data set is checked rather than a smaller sample. It can also provide valuable insight and information to the client, on both the number of exceptions and the effectiveness of their procedures’ processes and controls in the areas being reviewed.

Investigation of exceptions

While technology is fast-changing audit, the exception to this is process of reviewing the exceptions report. This requires a more personal approach to check out the exceptions, to work out the implications on the audit and the extent of any further work necessary.  Clearly the whole of the data extraction techniques provide the data but having quality input into the parameters and assessing any exceptions require experience and expertise.  The quality of the auditor’s judgement is, and will remain to be, a critical audit success factor.

At Mercer & Hole we have a very strong emphasis on the advisory qualities we bring to an audit. Our approach is to look for areas where we can add tangible value. As such, we ask our clients to view their audit as an investment in the future of their business as opposed to an overhead.  This is a successful approach for us and one which saw our fee income from Audit and Business Advisory outperform the market at 10% over the past year. It is clear, there is an appetite for high-quality advisory in addition to the quest for new technology efficiencies.

The Future

What does the future hold for audit?

Much has been said about the use of drones in audit and this is an area which is being heavily invested in. At the start of the year, ICAEW reported that PwC had used drones for audit stock count purposes on energy business RWE. The drone was used to capture images to measure stock. The article reports time-saving efficiencies with the drone approach taking 30 minutes, opposed to around four hours of using the manual, traditional method.

Drones are clearly here to stay and to make their mark on the audit landscape. Currently, they can perform test counts on certain line items, automatically check the ledger and report and differences, and record the people doing the counting to confirm they are doing it correctly. Research predicts that by 2030 drone technology could boost the UK’s economy by £42bn so it is little wonder that this is an area the Big Four and the accountancy profession is committed to expanding in audit terms.

A further concept, and not an unrealistic one, is that we could get to the stage where the auditor has a dashboard for each client and if the client’s system generates an unusual transaction they will get a notification. This prompt to perform follow up work could result from, for example, an unusual and not normal paring double entry or just a large variation in actual to budget.

Going forward

While a variety of developing and future processes are being explored, there is one thing for certain: technology will continue to grow its role in audit and whilst there could be an element of artificial intelligence incorporated in the future, the data analytic tools will continue to be in demand. The auditor will still need to use their experience and key skill of judgement in analysing the exceptions and it is unlikely that they will be replaced by a computer, for now anyway.