Module 9: Emerging Audit Tools, Technology, and AI

Data Analytics

The process of using technology to transform data into transformation

Descriptive Analytics — Definition and Audit Application

• Identifies trends and patterns from raw data and describes past or present events

• Used in analytical procedures (trend analysis) and helps auditors spot unusual fluctuations

“What happened?” can be answered with what type of data analytics?

Descriptive Analytics

“Sales increased 20% in December” could be a result of what type of data analytics?

Descriptive Analytics

Diagnostic Analytics — Definition and Audit Application

• Used to compare simultaneous trends, relationships between income and financial statement items, and to determine the cause of events

• Helps auditors investigate unexpected variances and supports the risk assessment process

“Why did it happen?” can be answered with what type of data analytics?

Diagnostic Analytics

“Sales increased due to holiday promotions” could be a result of what type of data analytics?

Diagnostic Analytics

Predictive Analytics — Definition and Audit Application

• Used to make predictions about future trends or events. How can the organization formulate future strategies?

• Used in reasonableness tests and helps form expectations for account balances

“What might happen?” can be answered with what type of data analytics?

Predictive Analytics

What type of data analytics would be used to project next year’s revenue?

Predictive Analytics

Prescriptive Analytics — Definition and Audit Application

• Used to account for all possible factors in an event and suggest next steps.

• Less common in traditional audits (more common in advisory/consulting), but can guide the audit focus area

“What should we do?” can be answered with what type of data analytics?

Prescriptive Analytics

Adjusting the pricing strategy may be a decision derived from what type of data analytics?

Prescriptive Analytics

Big Data

Extremely large, complex, and unstructured data sets that cannot be easily managed or analyzed with traditional processing tools

What are the characteristics of Big Data?

• Volume: Amount of data

• Velocity: Rate of collection

• Variety: Types of data available

• Veracity: Truthfulness

• Value: Insights derived from the data

Audit Data Analytics (ADA)

The art of using analysis, modeling, and visualization to discover patterns, trends, and anomalies for planning and performing an audit

Data Visualization

The process of presenting data graphically to make patterns, trends, and anomalies easier to understand

What are the common visualization tools used in audit practice?

• Tableau

• Alteryx

• Python

• Machine Learning Tools

• Count Things Tool for Inventory

Tableau involves…

Advanced dashboards and visualizations

Alteryx involves…

Data prep, analytics, and visualization

Python involves…

Data analysis and visualization

How is ADA used in Risk Assessment and what is the outcome of it?

• Analyzing large datasets to find unusual trends, unexpected relationships, and outliers

• Auditors can decide where to focus testing and which accounts are risky

The use of ADA leads to auditors observing the following:

• Revenue spikes at year-end

• Unusual journal entries

• Declining margins as sales increase

What part of the audit process are the auditors most likely in?

Risk Assessment

How is ADA used in Substantive Analytical Procedures and what is the outcome of it?

• Compare expected vs actual values using trend analysis, ratio analysis, and reasonableness tests

• Auditors deem less detailed testing is needed if the results are reasonable, while further investigations are needed if there are unreasonable results

If the auditors are:

• Predicting revenue using prior trends and comparing to actual revenue

and

• Comparing inventory turnover to prior years and the industry

Which part of the audit process are the auditors most likely in?

Substantive Analytical Procedures

How is ADA used in Tests of Details and what is the outcome of it?

• Analyzing entire populations and identifying high-risk items for testing

• Auditors may focus their testing on exceptions and high-risk transactions

If the auditors are:

• Flagging duplicate payments

• Identifying large or unusual journal entries

• Finding transactions outside of normal patterns

Which part of the audit process are the auditors most likely in?

Tests of Details

How is ADA used in the Final Review and what is the outcome of it?

• Perform final analytical procedures and re-evaluate trends, ratios, and relationships

• Confirmation of no remaining unusual relationships and verification that financials are consistent and reasonable overall

If the auditors are:

• Seeing if net income aligns with revenue trends

• Seeing if ratios make sense compared to prior years

Which part of the audit process are the auditors most likely in?

Final Review

Liquidity Ratios

Ratios that indicate the entity’s ability to meet its current obligations/liabilities with its current assets

Solvency Ratios

Ratios that indicate the entity’s ability to use assets (both current and long-term) to pay off its liabilities (both current and long-term)

Profitability Ratios

Ratios that indicate the entity’s success or failure for a given period by assessing its ability to generate profits from its sales, operations, assets, and shareholders’ equity

Examples of Liquidity Ratios

• Working Capital

• Current Ratio

• Quick Ratio

• Current Cash Debt Coverage Ratio

• Inventory Turnover Ratio/Days in Inventory

• Receivables Turnover/Average Collection Period

Examples of Solvency Ratios

• Debt to Equity Ratio

• Debt to Total Assets Ratio

• Times Interest Earned Ratio

• Free Cash Flow

Examples of Profitability Ratios

• Earnings Per Share

• Price-Earnings Ratio

• Gross Profit Rate

• Profit Margin Ratio

• Return on Assets Ratio

• Asset Turnover Ratio

• Payout Ratio

• Return on Common Stockholders’ Equity Ratio

Other Common Ratios

• Gross or Net A/R as a % of Net Sales or Sales

• Allowance for doubtful accounts as a % of accounts receivable

• Interest expense as a % of Total Debt

• Depreciation expense as % of total PPE

• Reserve for obsolete inventory as % of inventory

• Cost of goods sold as a % of sales