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November 2017

Artificial Intelligence Embracing Technology – New Age Audit Approach

By Akeel Master
Rupali Adhikari Sawant
Chartered Accountants
Reading Time 12 mins

With technology becoming a disruptor across
businesses, the issues facing the auditors in the current environment are:

Are we setting ourselves up for
redundancy with cognitive technology driving audits in future? 


Would the proliferation of technology
push the auditor to innovate and augment the value accreted through audit?

Cutting across the ‘black box’

Not so long ago, audits were performed
manually scouring reams of financial information. Data and records back then
were less complex, generated and maintained mostly in physical form, which
facilitated the traditional approach of vouching to deliver a robust audit.
Over time, growth of business operations both in terms of volume and across
geographies compelled organisations to embrace technology and automation as a
means to reduce cost and introduce operational efficiencies. The introduction
of ERP systems and straight through transaction processing application systems
ushered in a change in the way business was run, accounts were maintained and
audits were executed. The audit approach primarily entailed ‘audit around’
the proverbial ‘black box’.
With the ever changing business dynamics,
steadily increasing operational complexities including the wave of centralised
operations and the consequential shift in the epicenter of audit from branches/
factories to ‘shared service centres’, the sheer expansiveness of data
generated and the rapid changes in the IT landscape, it has become
imperative for the auditor to execute an ever more scrupulous audit which is
only possible by auditing ‘through’ the proverbial ‘black box’.
Artificial intelligence based programmes aids in auditing through the black

The changing regulatory and governance

It is pertinent to note that, much of the
above transition has happened against the backdrop of a continually changing
business and regulatory environment,
where stakeholders have become more
empowered by stepped up laws and regulations and the heightened standards of
governance, resulting in increased expectations from auditors. As an example,
the Board of Directors, under the Companies Act, 2013, are responsible not only
for the preparation of financial statements that provide a true and fair view
of the financial position and performance of a Company, but also safeguarding
the assets of the company, implementing effective internal controls for
ensuring the propriety of business and looking after the interests of all
stakeholders. Audit committees, as a result, are far more involved in their
interaction and engagement with auditors. Moreover, the game changer, mandatory
auditor rotation, has increased the degree of competitiveness and left the
auditor with no choice but to deliver not only a highly effective and efficient
audit but also a value accretive audit. Auditors’ effectiveness is often
measured by the value they bring to the table, their ability to partner in the
progress of companies they audit, help management see around the bend, identify
risks and provide incisive business insights and do all of this whilst
upholding the highest ethical and professional standards. Further, with the
quarterly reporting and ever-crashing deadlines every quarter, the time at the
disposal of the auditor is ever-reducing.

Very little of the above may realistically
be achieved by merely deploying additional resources in an audit. The logical
and sustainable (and perhaps the only) solution is through increased
integration of technology into the audit approach. Embedding technology into
audit can help enhance productivity and reduce response time to clients.
Digital innovations in audit will help rebalance
and redirect resources to more complex and higher risk areas e.g. areas
entailing judgement and use of management estimates.

Auditing with technology

Technology enables an auditor in:



of substantive analytical procedures;

audit procedures;

And offer benefits as more fully explained

Greater assurance- Moving away from
samples to testing the entire population

Under the traditional method, the auditor
would more often than not, select samples to test, based on a quantitative
materiality threshold, for example, vouching ‘top 20 instances’ of operating
expenditure incurred during the period under audit, representing a defined
coverage of the general ledger account or vouching all individual instances
above a specific threshold by value. Such samples were then tested as per
planned audit procedures and conclusions reached based upon these tested
samples. One of the potential areas of redundancy linked with increased use
of technology in audit is that of using a sample-based method in audit testing.

The new age technology tools subject
the entire population of the selected general ledger account to testing. These
tools are capable of analysing (literally scrubbing) the entire population and
highlighting outliers or exceptions e.g., a routine could highlight all
instances of breaks in a ‘three-way match’ (i.e. relationship between purchase
order, goods inward note and supplier’s invoice) in respect of purchases. With
a 100% test of the population, the level of assurance an auditor obtains is far
greater than that achieved through the traditional method of sample testing.

Deeper insights: There’s more to it than
meets the eye

Cognitive technology embedded in audit tools
and routines are capable of correlating data and in identifying patterns,
trends and outliers that may otherwise go unnoticed in a traditional auditing
technique (including those entailing 100% sample testing manually or through
vouching). For example, an unusual spike in orders from a particular geography
or during a particular time of the year, transactions recorded by seldom users
and/ or transactions recorded not in conformity with normal procedure, could
potentially raise a red flag for the auditor to investigate. Such insights may
often go undetected through implementation of traditional methods of vouching,
which primarily focus on agreeing the vouchers to the general ledger entries
and the underlying supporting documents.

The ability to correlate and analyse varied
data points within the population helps the auditor to have deeper insight into
business operations, which enables him to provide greater assurance to the
management and the audit committees. It also provides direction to the auditor
in terms of focus areas and indicates where effort should be focused.

Cognitive abilities in new age technology
tools enable assimilation of data and help provide value accretive insights to
management e.g., we as auditors examine ‘goods returned’ and ‘issue of credit
notes’ for return of goods or defects in a product. With technology, the
auditor could catalogue reasons for return of goods, which could be a useful
insight for management and form the basis for either an internal review or an
external specialist to be consulted so as to improve the product, reduce costs
or enhance employee productivity.

Efficient audits: Delivering more with

The auditor often faces a conundrum in
testing manual journal entries for the risk of override of controls. It
is almost impossible to scrutinise ?manual journal entities,’ recorded through
an audit period, due to inherent time and resource constraints. Technology
can instead slice and dice the population and highlight manual
journal entries which seem more vulnerable to fraud risk
e.g., journal
entries posted on a public holiday or directly by the CXOs or by super users in
the IT department, or journal entries in an accounting caption where one would
normally expect only automated entries etc.

Further, with the expansive data available
at one’s fingertips and capable of being combed through cognitive technology
tools, the auditor could even reduce the frequency of branch or factory visits.

With technology tools doing much of the
‘heavy lifting’ of planned audit procedures, auditors may be able to redirect
their time and focus on areas that entail judgement, or contain high level of
management estimation and assumptions based on unobservable inputs.
Technology at times makes unobservable – observable.

All of the above, lends itself to a more
effective and efficient audit.

The ask

Auditing ‘with’ technology seems to be an
imperative and not an option. The transition needs to be meticulously planned
and seamlessly implemented through timely involvement of all constituents. What
will it take to embrace this change? The answer is:

u  Investment-
of both time and money;

u  Extensive
training and adapting new skillsets; and

u  Educating
all constituencies including regulators.

The cost of initial investment, including
the time taken for careful selection or development of relevant technology
tools and the continual availability of resources for upgradation of such tools
should not be overlooked.

The effectiveness of the output generated by
the technology tools is determined by the relevance and appropriateness of data
that is input into the tools and the management assertions that it helps
address. The old adage persists `garbage in – garbage out’. Hence, selection of
inputs is imperative.

The tools may have to be tailored to
auditee’s ERP systems, so as to render them capable of ‘talking to IT systems’
at the client. Developing a bespoke tool so as to efficiently extract data, on
a timely basis, from the client organisation could be an option.

The rising popularity of cyber currency and
block chain technology in consummating transactions and sharing information
amongst peers will leave auditors with no choice, but to embrace the change,
update their business understanding and risks associated with it. For example:
accepting the risk of cybercrime in designing audit procedures will be an
imperative and auditors will have to be more receptive towards accepting
contemporary basis of audit evidence. Auditors will need to upgrade their
skillsets through focused trainings. They would also need to develop the
ability to read, analyse and interpret the results produced by `technology
tools’. Similarly, regulators may need to be educated, so as to embrace audit
procedures driven by technology tools and routines as acceptable in reaching
audit conclusions.

Whilst the benefits of using technology in
an audit far outnumber the challenges associated with it, the pitfalls should
be identified and catalogued and not be overlooked.

Today’s students and the future professionals
are more tech-savvy than their predecessors. They take easily to a
technology-based audit. The audit fraternity needs to embrace technology also
to attract and retain talent. However, that said, over-dependency on
technology in an audit has its own perils.
Whilst cognitive technology may
shore up an audit, its use should not lead to complacency and preclude an
auditor from applying his mind and questioning e.g., instead of relying
completely on the output from audit tests performed by automated routines, an intuitive
would always question, for example, the existence of coffee
plantations in the State of Punjab! The auditor should always guard and not
become a victim of technology where we are susceptible to miss the ‘woods for
the trees’. Technology is a tool – it is not a substitute for human

Embracing technology as a proponent to

The changing role of a CFO from someone who
whips out timely financial and regulatory reports, to someone who lends a
perspective and participates in active decision making in the Boardroom, casts
an increased expectation upon the auditor to remain in-step and transform into
a value accretive and trusted business advisor.

We’re witnessing CFOs convincing Boards to
embrace digitisation and use innovative technology in enhancing customer
experience and as a cost efficient means to propel business growth. It goes
without a doubt that this expectation of using more of technology to deliver
results, is also extended to all those constituents for whom the CFO is a
stakeholder. The key lies in how quickly the auditor accepts, adapts and
embraces technology to enhance the audit experience and leverage upon it as a
differentiator to deliver a value accretive audit.

technology enabled Audit: will there be a human touch, after all?

Machines can at best only mimic the human
mind, however, they cannot entirely replace it. What will not be taken away
by proliferation of technology tools in audit is the application of
professional skepticism and the use of professional judgment
in areas such

critically evaluating purchase price allocation in a business combination;

reviewing underlying assumptions in respect of valuation of an unlisted
subsidiary and testing the same
for impairment;

reviewing reasonableness of cash flows and assumptions while testing impairment
of Goodwill, etc.

In short, learnings from cumulative
experience, understanding varying perspectives and nuances, application of
rationale and reasoning whilst making decisions based qualitative, quantitative
and subjective determinants, the human mind, no doubt, is supported and
supplemented by the technology tool.

Technology tools will take away the
monotony from audit
, facilitate efficiency and bring the focus onto
analytics by highlighting outliers
such as:

 u  Debit
entries in revenue accounts such as interest income;

u  Credit/Negative
balances in expenditure accounts;

u  Entries
inconsistent with an organisation’s authority matrix, etc.

Undoubtedly, the future of audit seems much
different than what it is today as technology will become central to the
planning, execution and delivery of an effective audit. Those who try to
obviate technology and resist change may risk their relevance in the commercial
arena. In the future, an auditor will have to be a combination of an
Accountant, an investigator(forensic skills) and a Data Scientist!! _

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