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Tax & AccountingDecember 07, 2021

CCH Audit Talks Partner Insights: Audit Data Analytics Insights With Jason Miller

By: Wolters Kluwer Tax and Accounting

The auditing industry continues to move toward performing fully data-driven audits. As firms take initial steps toward becoming more data-driven, they benefit by adding audit data analytics and automation to the audit process. This leads to efficiency gains, better risk assessment and ultimately, higher quality audits and more value delivered to clients.

Recently, Jason Miller, a partner at Anglin Reichmann Armstrong, joined a webinar sponsored by Wolters Kluwer to talk about how to execute data-driven audits. He has unique insights to share because he is also a peer reviewer. This article will summarize five of his tips, or you can listen to the entire discussion on Soundcloud to capture all of his advice.

What Is a Data-Driven Audit?

First, let’s define the data-driven audit. It means that data will be the starting point of every audit. Beginning with the trial balance and general ledger, auditors should have that data drive the audit. Pulling in client data and then leveraging it all the way through the audit, starting with a good risk assessment, then tailoring the audit program based on risk, and having a methodology that helps auditors tailor each audit, scoping and mapping to risk and choosing the right procedures.

Data-driven audits should make use of data analytics for greater efficiency. Finally, data-driven audits need to be documented effectively, with every risk linked to procedures.

 

Insight #1: Quality and Efficiency Both Start With Risk Assessment

For several years, firms have faced pressure on fees as audits have become increasingly commoditized. Clients have more pushback about fee increases, so it’s important for firms to make each audit as efficient as possible. It is also important to differentiate your product from competitors in the market. To do so, audits must be more convenient for clients and deliver added value.

According to Jason Miller, the best way to ensure quality and efficiency in an audit is to start with a data-driven risk assessment:

“As a practitioner, two areas of an audit that are really important to me are delivering an effective quality audit and also an efficient audit to where we have good realization. This all starts with having a quality risk assessment, which comes from that data-driven audit… And that quality risk assessment will protect your firm by making sure you've addressed all of the risks the data has led you to, as well as, provide the support you need to identify areas that aren't risky, and limit procedures in those areas, so you don't have over auditing driving down your realization.”

Insight #2: Adopt a Data-Driven Methodology

A data-driven audit methodology helps move your audit procedures away from manual techniques to make better use of data analytics procedures instead. Once you have a data-driven risk assessment, it is important to have a good methodology tool in place to help them make sure the audit program is driven by the risk assessment.

If a risk is higher this year than last year, you may not be able to use the same method. Conversely, if you are accepting a lower risk level this year, you might be able to make use of more efficient procedures by using a substantive analytical procedure. Anytime you can replace a manual procedure with data analytics, you will most likely save time, gain efficiency, and gather more insight.

Jason Miller led his firm to adopt Knowledge Coach as a methodology tool to help auditors tailor procedures to the risk assessment. He described how the Knowledge Coach methodology helps auditors keep a tight relationship between the risk assessment, audit procedures and analytics:

“I felt that in doing the reviews that a lot of times I was finding myself completing checklists and practice aids, and still not covering everything I needed to in the standards. You have to follow the standards, not your practice aids. That's where making sure you’ve got a quality practice aid and methodology really helps you.

I also think this specific methodology helps me really think through the risk assessment process continuously. It allows me to go in and assess risk the way that I think, do my substantive analytical procedures, and then reassess risk. On audit steps, having them flag TeamMate® Analytics has helped. I know our firm is newer to using enhanced analytical procedures and audits. And a lot of times it's, what do I do? How can I use these? So having those suggestions within the test library, or the procedural library, where you can easily see them in your audit programs is a really big plus.”

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Insight #3: Tailor, Scope, Map and Document Each Audit

Firms need auditors to spend their time on the parts of the audit that matter most. That’s why tailored audits are efficient audits. Knowledge Coach uses tailoring questions at the start of each engagement to help point auditors toward the data that is most important. Within the audit program, tailoring questions help remove any steps that aren’t relevant to the audit, so auditors can focus on high-risk areas.

After tailoring, perform scoping and mapping, where you can identify all of your audit areas and determine the significance of each area, depending on whether they are material, or a significant transaction class, or have specified risk or significant disclosures. These steps help you identify areas where you need to do full audit procedures versus other areas where substantive analytics or risk assessment is appropriate. Jason Miller added that auditors need to also ensure proper documentation:

“Most people do a risk assessment to determine what procedures you want do and how much of them you want to do. The problem is getting it documented. Knowledge Coach gives you all of these forms and procedures and prompts you to think through it to make documentation fairly easy. And then once you've got that understanding, you can get into your actual risk assessment and lay in all of your inherent risks and assess those, as well as your control risks and control testing. And it even has separate risk assessments for your specified risk. That way, you have the option to risk score that high, but the rest of the audit area low, if that's the case, and really dial in your audit procedures.”

Insight #4: Use Analytics to Eliminate Over-Auditing

Over auditing normally occurs because an auditor assesses one or two assertions in an audit area as high, forcing the auditor to bring in an extended or additional procedure and program.

If auditors do a poor job with risk assessment, they will normally tend to overestimate risks. This is because auditors are nervous to say a risk is low or moderate if they haven’t conducted a very thorough risk assessment. Simply doing the same as last year may seem efficient because you’ve done it before and have the workpapers ready to go again.

However, if you haven’t done a thorough risk assessment, chances are that “same as last year” will lead to over auditing. Jason Miller explained it this way:

“As a peer reviewer, when I'm looking at firms that have not conformed with the risk assessment standards, probably four out of five of those times, they've over audited in their audit. Whether it's they spent too much time in a section, or they've spent too much time in the wrong sections and not enough in the others. I found in one out of five times it's swinging the other way, where they didn't do a good risk assessment and they under audited. Everybody's making up for that risk assessment by over auditing, and that's really just not going to help you for quality or efficiency.”

To avoid over auditing, Miller coaches his engagement teams to perform their initial risk assessment and then identify the areas they think are not particularly risky. He advises them to search the TeamMate Analytics test library to find substantive analytical procedures they can do at a high level to get comfortable with the section, instead of spending a lot of time performing tests to details.

During peer review, he has often seen firms do both detail tests and substantive analytical procedures. If they had simply performed those tasks in reverse, they might have found they could skip the test to details. Many times, instead of doing high-risk procedures on an entire section, analytics can help auditors scope down to just the part of the section that affects a specified risk.

Insight #5: Choose an Analytics Program That Is Easy to Use

When firms want to begin incorporating audit data analytics, they will need to adopt one or more analytics tools. Ease of use and ease of learning are essential in the selection of your firm’s first analytics tool. If it is too difficult to identify which test to run or understand how to interpret results, auditors may avoid using the tool.

In comparing data analytics tools, Jason Miller observed that auditors need less training in order to set up and use TeamMate Analytics than other tools:

“With TeamMate Analytics, it's a plug into Excel, so if you have Excel you can use Teammate Analytics no matter what your methodology is. I found it to be fairly user-friendly. There's a test library. You can just go search keywords, like accounts receivable, and come up with different options in it. To me, that makes it a lot easier to use than some of the others. And when you design a test, there's a button you can click and it'll kick out a PBC list in Excel, which will give all the data fields and inputs you need so that you could provide to your clients.”

For more insights about how to automate the audit process and leverage the power of data analytics to increase realizations, listen to the complete podcast.

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