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A New Audit Methodology for the Digital Era | Audit Data Analytics 1

A New Audit Methodology for the Digital Era

inflosoftware.com

October 2021

Mark Edmondson FCA

CEO, Inflo

Audit Data Analytics

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Inflo Insight

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Launched in 2021, Inflo Insight delivers thought leadership guides, research and expert opinions on accounting and audit issues. Our content examines the complexity and challenges audit firms are facing in an evolving business landscape. Our intention is to summarise and simplify key trends and takeaways to save you time, build knowledge and adaptability.

Inflo was founded by former Big Four auditors with the objective of making more progressive audit technologies and methodologies available to audit firms of all sizes. Our Digital Audit technology and approach improves the quality and relevance of the audit product for over 85% of the UK’s largest, non-Big Four firms. Our goal is to educate and support the profession to embrace change and to strengthen your advantage.

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About the Author

Author

Mark Edmondson FCA, CEO, Inflo

As the mastermind behind Inflo, Mark aims to transform the audit and accounting profession by making innovative technologies and broader expertise available to all.

With the global audit profession facing heavy criticism after high-profile business failures and frauds, Mark has stepped forward as a voice for progress. As well as being quoted in Sir Donald Brydon’s and other audit market reviews, Mark has been called upon to support international efforts to modernise and transform the audit and accounting profession.

Mark is a member of the Advisory Panel to the IAASB’s Technology Working Group as well as the Reference Group supporting the development of the IAASB’s new standards for auditing less complex entities. He also leads a US AICPA working group to tackle innovation barriers through advancing data standards.

Mark’s efforts centre around developing the relevance and value of the accounting profession’s work, and ensuring accountancy offers an exciting career pathway.

Mark has a strong passion for advancing the skills and expertise of his peers in the profession and Inflo now performs a key role within education, including within the ICAEW’s Chartered Accountant qualification.

2021

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Audit Data Analytics

Background

Inflo’s Digital Audit methodology transforms the audit process. It takes a truly data-driven approach, while harnessing the power of digital workflow to achieve a more efficient and higher quality audit - yielding a vastly improved staff and client experience.

The Digital Audit methodology has many differentiators from traditional audit methodologies. In this series we outline some of the unique functionality utilized within the methodology and how it supports auditors. In this article we cover the use of Audit Data Analytics (ADAs) within the methodology.

The Digital Audit methodology’s data-driven approach provides the first audit methodology to fully embed ADAs across the end-to-end audit process. Leveraging the increased availability of financial data and Inflo’s award winning data acquisition capabilities, the Digital Audit methodology puts advanced ADAs at the fingertips of auditors.

This automates manual tasks while improving the quality of work, the experience of staff and the value provided to clients.

The Digital Audit methodology utilizes two distinct applications for ADAs:

While ADAs by their nature can often perform multiple roles within the audit process, differentiating these two applications aids understanding and the adoption of such techniques.

Risk Audit Data Analytics (RADAs) to inform the assessment of audit risk1 Substantive Audit Data Analytics (SADAs)

to respond to the assessed audit risk2

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The Digital Audit methodology emphasizes the value of well-executed preliminary analytics. Year over year analytical review is automatically produced and auditors can add their own expectations. Notable variances are instantly highlighted and can be queried with the client directly, with their responses captured in the platform.

Using this RADA achieves efficiencies through automating financial analysis and working paper preparation, while improving quality by ensuring decisions are based on reliable data and freeing time for professional skepticism.

2. Ratio analysis (RADA)

The use of ratio analysis adds an additional sophistication to the risk assessment process in the Digital Audit methodology. A broad range of ratios and KPIs are automatically calculated using client data, with benchmarking available against comparable peers to provide perspective.

This RADA offers further efficiencies by automating ratio calculation, while also increasing the reliability and comparability of this work. The use of benchmarking improves audit quality and offers opportunities to add value to clients.

1. Preliminary analytical review (RADA)

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As a core response promoted by the Digital Audit methodology for any significant account class, the interrogation of data with visualizations offers an effective and efficient technique to collecting substantive audit evidence. Auditors can visualize characteristics such as the users making postings and the dates of transactions to focus effort on notable areas.

This approach improves quality through greater understanding of the financials, while also improving staff experience through more engaging work.

3. Visualization interrogation (SADA)

4. Management override testing (SADA)

The Digital Audit methodology incorporates a progressive approach to journal entry testing. Every automated and manual transaction is subjected to a multi-dimensional risk scoring technique, which instantly and visually identifies the riskiest transactions for testing.

Utilizing this SADA radically improves quality in one of the highest risk areas of any audit. The focus on unusual transactions often yields additional value for clients too.

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5. Revenue testing (SADA)

6. Concluding analytical review (RADA)

Recognizing the challenge of utilizing traditional audit techniques to audit revenue, the Digital Audit methodology strongly promotes the use of ADAs. The revenue SADA technique analyzes every revenue transaction’s accounting entry to identify outliers against expected business processes for review and testing.

This revenue approach improves the quality of audit work and often leads to efficiency. Focusing effort on outliers rather than standard transactions also unlocks new insights for clients.

The Digital Audit methodology includes a concluding analytical review which mirrors the approach to preliminary analytics. Year over year analytical review is automatically produced, with notable variances between final values and prior versions instantly highlighted. Management and auditor commentary from the prior phases of the audit are also visible to assist concluding rationale.

Using this RADA achieves efficiencies through automating financial analysis and working paper preparation, while improving quality by ensuring consistency in documentation and freeing time for areas that require professional judgment.

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7. Data acquisition and ingestion

8. Procedure-level integration

One of the biggest barriers to adopting audit data analytics is the extraction of data from general ledger accounting systems, transformation to structure the data and the loading of data into analytics tools. This “ETL” process is resolved through Inflo’s unique approach to data ingestion.

Clients directly upload their general ledger data to Inflo, with automated routines performing the ETL process as well as completeness and accuracy checks.

Inflo’s unrivalled approach to data ingestion also includes an expert team of data scientists on-hand to support more complex client or system scenarios. This means access to reliable transactional data on 100% of clients, with auditors completely removed from this challenging and time-consuming activity.

To support auditors in expanding the use of ADAs throughout the audit process ADAs are integrated within prepopulated responses, highlighting where advanced techniques can satisfy audit procedures. With hyperlinks taking users directly to the relevant ADAs, auditors follow a logical workflow to replace traditionally manual audit work with automated ADAs.

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ADAs play a critical role in the future of audit. Within Inflo’s Digital Audit methodology ADAs are placed at the fingertips of auditors, with automated analytics dramatically improving the quality of audit work while achieving clear efficiencies.

By moving staff from low value, manual tasks to more engaging visualization interpretation, their experience is improved. Clients also benefit by receiving greater value from benchmarking comparisons and the insights over outlier transactions.

To learn more about Inflo’s Digital Audit methodology subscribe to receive our future articles covering topics such as risk assessment, planning and sampling.

Read our previous article on workprograms here.

In summary

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Learn More About the Digital Audit

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