Big (huge) Data and a continuous and

predictive audit: new evidence, new

methods, a reconceptualization

• 34WCAS, May 21 2015

• Miklos A. Vasarhelyi

• KPMG distinguished Professor of AIS

• Director, Continuous Audit and Reporting Laboratory

• Rutgers Business School, Newark, NJ USA

CRMA

CCM CDA

Itaú-

Unibanco

P&

G

PPP Insurance

Inventory Dashboard

Siem

ens Continuous Control Monitoring

Audit Automation P&G: Order to Cash Auditor Judgment Siemens- AAS Automation AICPA – ADS / APS

Audit Methodologies •Multidimensional Clustering •Process Mining •Continuity Equations •Predictive Auditing •Visualization •Analytic Playpen

Itaú-

UniBanco

P&

G

HC

A Me

t-

Lif

e

Durate

x

J+

J CA

Technologies

Supply Chain

Inventory

FCPA Sales Commission

ID

T

Claims Wires

FCPA

Duplicate Payments

PPP Credit Card Insurance A/P

A/P

HP

GL KPIs/KRIs

Sig

ma

Ban

k Process Mining

KPM

G

American

Water /

Caseware

Verizo

n

Talec

ris /

ACL

AT&

T D&

B

AIC

PA

2

FUTURE OF THE AUDIT (I.E., INVENTORY)

Looking ahead (Imagineering)

3

Traditi

onal

data

Scann

er

data

Web

data

Mobilit

y

data

Clickpath

Analysis

Multi-URL

Analysis

Soci

al

med

ia E-

mail

s New

spie

ces

Securi

ty

videos News

videos Media

programmi

ng

videos

ERP

data legacy

data

Hand

collection

Automatic

collection

Telepho

ne

recordin

gs

Security

recordin

gs

Media

recordin

gs

Can you keep

real time

inventory?

Can you audit

inventory real

time ?

Can you

predict

results?

Can you

control

inventory

online?

What did

you buy?

What

Products

relate?

BIG

DATA

Where are

/ were

you?

4

RF

ID RF

ID

RF

ID GP

S

GP

S

Security

videos

News

videos Media

programmi

ng

videos

Socia

l

medi

a E-

mails News

piece

s

Telepho

ne

recordin

gs

Security

recordin

gs

Media

recordin

gs

sales

A/R

cash

Inventor

y

Purch

ases

PP&E

Supp

ly

chain

Custom

er

service

Supp

ly

chain

Marke

ting

Bridges

Info &

Product

Flows

Process

es

B2B

mkts

B2C

mkts

RF

ID GP

S

5

ASSURING INVENTORY

and other things

Inventory

Year end physical counts RFI

D GPS

Year end RFID counts

Month end RFID counts

Day end RFID counts

Real time detection of

inventory reduction

Real time detection of

inventory receiving

GPS

Tracking merchandise

path

E-

commerc

e

ordering

And managing everything

Every second RFID

and GPS and e-

commerce records

Supliers Sales

Real time recording of

sales & cash &

receivables Real time inventory

ordering, supplier

managed inventory,

product mix

management

6

• Forget about privacy…. Its

gone…. Fortunately you are not

very interesting

• Technology giveth ….

Technology taketh

CPAS – CONTINUOUS AUDIT

AT AT&T

9

Trans

Data

fer

FlowFront - Interactive Flow Diagram Viewer - AT&T Bell Laboratories - Murray Hill, NJ

Date:

RPC:

04/01/89

Silver Springs

Set Date Recalculate Metrics Plot Request graph.level 1

Help Text Quit! PE: 60

FlowFront Hierarchy

Overview

Pay

Billing

Inquiry

Errors

Bill Upda

AmtDue

Billing System - Overview

Percent Of Accounts Successfully Billed

S Graphics

Per

cent

Bil

led

0 20 40 60 8

0 100

100 99 99 99 100 98 98 97

95 98

67

23

85

3/16 3/17 3/18 3/21 3/22 3/23 3/24 3/25 3/28 3/29 3/30 3/31 4/1

Mean: 89.076923076923 StdDev: 21.872591442494

4/1/89 Pro

Tra

fernsu

PREDICTIVE AUDIT ANALYTICS:

EVOLVING TO A NEW ERA

Dissertation

Siripan Kuenkaikaew October 2013

11

Predictive Audit

• Can we use CA to predict the future?

• Predictive audit is a look forward audit that examines the

validity of business transactions before they are

executed and compares the results to normative models.

Auditors and management will be notified beforehand on

the areas that prone to error.

• Continuous assurance, utilizing some techniques such

as analytical method and validity test, could detect

anomalous transactions sooner than traditional audit

does (Vasarhelyi et al, 2002) .

12

13

Upstream data

Audit Analytics

predictive and forensic

techniques

Downstream

Systems

filtering

Exception

Treatment

Predictive Auditing

Audit Data Analytics,

Scholarship and public good (AICPA)

Trevor Stewart & Qi Liu

14

Audit Data Analytics (ADA)

One way to define… Audit Data Analytics (ADA) is the analysis of data underlying financial statements, together with related financial or non-financial information, for the purpose of identifying potential misstatements or risks of material misstatement.

ADA includes methodologies for:

• Identifying and analyzing anomalies in the data

• Identifying and analyzing patterns in the data including outliers

• Building statistical (e.g., regression) or other models that explain the data in relation to other factors and identify significant fluctuations from the model

• Synthesizing pieces of information from disparate analyses and data sources into wholes that are greater than the sum of their parts for purposes of overall evaluation

ADA

Analytica

l

Procedur

es Traditional

file

interrogation

ADA defined in this way includes:

• Analytical Procedures (AU-C 520)—

preliminary, substantive, and FS review—

including reasonableness testing

• Traditional file interrogation

15

THE AUDIT DATA STANDARD AND AUDIT

APPS

Dissertation in Progress

Jun Dai

16

ADA Plans

•Assertion1: Audit

Procedure1

•Assertion2: Audit

Procedure2

•Assertion3: Audit

Procedure3

…

Corporate data stores

Audit

Data

Standards

Use process mining to

generate Audit Data Analytics

plans

Audit apps

App recommenda

tion Systems

Synthesize

results and

plan for further ADA

Final repor

t

Audit usable data

Use belief network to

analyze results and provide

further guidance

Process mining

Dissertation

Mieke Jens (Hasselt University)

18

Designed (“Ideal”) Process Model

19

Social Network of 175 cases by three

individuals violating SOD

20

THE APPLICATION OF DATA VISUALIZATION IN AUDITING

Dissertation By : Abdullah Alawadhi

Dissertation Committee: Miklos Vasarhelyi (Chair)

Michael Alles Helen Brown-Liburd

Asli Basoglu

VISUAL ANALYSIS OF DATA

VISUALIZATION RESEARCH IN AUDITING

• Communicating findings in such visual

form help decision makers gain more

understanding from the data and come

up with unique conclusions.

• E.g. Hans Rosling TED 2006

ANALYSIS AND RESULTS

• These dashboards are only a mean to

present the data in ways that would

summarize multiple information in

one simple view.

• Tables vs graphs

ANALYSIS AND RESULTS

Graphs usually works best when

dealing with multi-dimensional data,

and incorporating multiple sources of

Big Data.

ANALYSIS AND RESULTS

Provider

310041

Provider

310001

• An optimal form of exploratory data

visualization where no prior

imagination of how the data would

be portrayed

• More ideal forms?

ANALYSIS AND RESULTS

Continuous Audit and Audit Analytics

(red book revisited)

AICPA 2015

27

Pink Book Outline Target Completion Date: November

Paper / Chapter Suggested Author Comments

Theory: Modern Continuous Assurance

- Linkage to analytics

- Elements of CA/CM

- Organizing for CA/CM

Miklos Vasarhelyi

Survey of CA/CM in professional accounting Complete

Evolution of auditing Complete

Blue Sky Scenario Complete

Mapping the traditional vs. the continuous audit

- Data analytics

- Should cover the conceptual issues included in

the original outline that the ADA working group

developed

Trevor Stewart The “mapping” piece of this paper is already

being covered by the Audit data analysis working

group.

On standards and modern auditing Bill Titera Draft is complete

Continuous risk monitoring 1. Rod Brennan, Siemens

Corp.

2. ??

Assurance products

- Audit apps

Make this more web based, where vendors can

add in their products.

Case Studies in CA 1. Jim Littley, KPMG ?

2. Proctor and Gamble ?

3. Jason Gross, Siemens

4. Unibanco?

5. CA Tech. ?

6. Rutgers Students?

If Jason is available to help with this paper, we

can include his case study as part of Rod’s paper

on continuous risk monitoring.

Traditional Definition

• “A continuous audit is a

methodology that enables

independent auditors to provide

written assurance on a subject

matter, for which an entity’s

management is responsible, using a

series of auditor’s reports issued

virtually simultaneously with, or a

short period of time after, the

occurrence of events underlying the

subject matter.” (CICA/AICPA, 1999)

The New CA

• A methodology that enables auditors to provide assurance

on a subject matter for which an entity’s management is

responsible, using a continuous opinion schema issued

virtually simultaneously with, or a short period of time after,

the occurrence of events underlying the subject matter. The

continuous audit may entail predictive modules and may

supplement organizational controls. The continuous audit

environment will be progressively automated with auditors

taking progressively higher judgment functions. The audit will

be by analytic, by exception , adaptive, and cover financial

and non-financial functions.

CONTACT

miklosv@rutgers.edu

http://raw.rutgers.edu

31