Financial statement auditors increasingly need to know more about their clients' businesses.

Thanks to advances in data analytics and software, many auditors are finding ways to gain deeper understanding of their clients' organizations than ever.

The power found in data analytics could make it possible for external financial statement auditors to improve audits by:

• Testing complete sets of data, rather than just testing samples.
• Aiding risk assessment through identification of anomalies and trends, perhaps even through comparison to industry data, pointing auditors toward items they need to investigate further.
• Providing audit evidence through comprehensive analysis of organizations' general ledger systems.

Data Analytics - Better Understanding of Clients?

The possibilities for data analytics technology to change auditing are explored in the white paper Reimagining Auditing in a Wired World, published by the AICPA.

From the white paper:

• The profession needs to achieve a "quantum leap" to redesign audit processes using today's technology, rather than using information technology to computerize legacy audit plans and procedures.
• Existing auditing standards that are the framework for audit procedures need to be modified to incorporate the concepts of Big Data and "continuous auditing" and encourage auditors to use technologies that increase assurance beyond minimum required levels.

Advances in data science can be applied to perform more effective audits and provide new forms of audit evidence. Audit data analytics methods can be used in audit planning and in procedures to identify and assess risk by analyzing data to identify patterns, correlations, and fluctuations from models. These methods can give auditors new insights about the entity and its risk environment and improve the quality of analytical procedures in all phases of the audit. Technology permits the collection of Big Data that can be analyzed to improve auditors' knowledge about the transactions and balances underlying the financial statements. This can help them obtain better evidence for their audit opinions and understand fundamental causes of restatements, fraud, and going-concern issues.

Thanks to technology, audit procedures such as bank confirmations, analytical procedures, and journal-entry testing do not have to be performed on-site by local audit teams. Instead, these tasks can be outsourced to remote teams of specialists and third-party providers, creating opportunities for auditors to focus on higher-risk areas and the potential for fraud.

The white paper recommends that while technology can be used to achieve the same level of assurance more efficiently at a lower cost, a greater benefit would be to achieve a higher level of assurance at a similar cost, resulting in better audit quality for clients and investors and reduced audit risk and liability. For example, computerized data and file interrogation software can be used to perform transaction testing on 100% of a population.

Technology permits more frequent or continuous monitoring of transactions by external auditors. Auditors can benefit from being able to spread audit work throughout the year rather than only during "busy season," identifying potential issues earlier, and having the ability to modify audit plans in response. Companies can benefit from improved audit quality and client service. Continuous reporting and web-based availability of financial information is replacing periodic issuance of financial statements, which may lead to the requirement for continuous audit assurance, the white paper found.

5 Steps to Prepare for Technological Changes

1) Educational needs must be met. Education is needed for students at the university level and for auditors within accounting firms in areas such as information technology, statistics, modeling, and machine learning methods. In addition, the CPA exam should be updated to test these areas. Many universities are offering courses in these areas and creating new majors, but the existing accounting curricula are full and would need to be changed to accommodate additional coursework. Note that the AICPA is in the midst of the practice analysis research study that will define the next version of the CPA examination, to be announced in 2016 and launched in 2017

2) CPA firms should expand their assurance services. These services should grow beyond annual financial statement audit opinions. Businesses have larger assurance needs in the areas of data quality, security, compliance, fraud prevention and detection, and internal controls. CPAs should offer a different value proposition by offering to provide "coordinated assurance' on functions running on different technologies and platforms.

3) Auditors should use Big Data and perform deeper analytics. These procedures can help them better understand their clients' environment and use exception reporting to improve audit quality and detect fraud. Every auditor should have the ability to use stronger audit tools than spreadsheets. They should make use of specialists to perform data analytics as part of the engagement, where available, and work with their clients to incorporate more advanced data analytics throughout the audit program within the IT environment.

4) Audit procedures should be continuous. Audit procedures should be performed throughout the year, and audit testing should occur more frequently than annually. Auditors should educate their clients on the advantages of continuous auditing, including reduced errors and risk.

5) Auditing standards need to be updated. Changes in audit approach and procedures are needed to provide the required level of assurance in today's changed business environment.

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