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Use of innovative processes and to enhance an external audit

  • 05 Pages
  • Published On: 06-12-2023
Use of innovative processes and to enhance an external audit

Overview

These days’ Companies & Organizations have been using more technology in business, impacting how it is operating for having positive impact on basis of productivity, effective communication, reduction in costs due to automated business processes. Providing a large reach to businesses and hence having large amount of data for auditor to provide opinion on.

Therefore, companies are also looking towards the auditors which are willing to innovate, which are trying to take the advantage of the technology which is present there in the world today. It increases the auditor ability to analyse the data of client and put auditor in a position to give a much greater level of assurance and provide recommendations.

Automating processes of audits and using innovative processes is giving rise to highest quality and efficient audits. These processes are really impactful with respect to outcomes required while performing external audits. It makes auditor to perform their work in better, faster and more efficient way altogether ultimately providing higher quality audits.

For instance, a script taking time of 12 hr per quarter will cut down to 3 hr per quarter, increasing payback, efficiency and auditor time can be allocated to other important areas. Which will ultimately enhance the quality of audit performed.

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Value addition by Innovative techniques

New Innovative processes like data analytics, artificial intelligence allows auditors to dive just the numbers and recognize the story those set of financials are stating whether it could be possibility, on one hand data analytics helps auditors to picture what is happening in the business and helps auditor to see the impact on financial statement and see where potential areas of financial statement cold be where there could be some risk of material misstatement exist. Coming on to the other part which is artificial intelligence which allows to identify risky areas even at the transaction level of the audit.

Artificial Intelligence

The basic concept of artificial intelligence is to understand the information from financial and non-financial data and make human like decisions. Auditors have to face the challenge in evaluating numerous documents & huge data, reviewing the implementation of legal changes, investigating unambiguous transactions. Due to this reason and high costing man hours, auditors chooses sampling to assess risky areas. Artificial intelligence goes beyond sampling of data, it reviews all the available information and highlights potential risky areas to auditor attention.

While integrating artificial intelligence into audit tools and training employees, Artificial intelligence technology constitute key technologies like machine learning, natural language processing and automation. The automation and decision support system can be achieved through these technology, which is ultimately going to enhance audit efficiency an effectiveness. Nevertheless, artificial intelligence is a mere tool to help auditors to save time and decrease different expected risks but it cannot solve challenges which came in audit alone. Therefore, it is important to identify challenges to successfully use these technologies.

Using artificial intelligence in audit enhances the quality of the audit process. This is necessary in current times as auditing frauds can lead to the end of auditing firms or significantly hamper the reputation too, now days due to technology of artificial intelligence and machine learning audit firms can focus on high risky areas and avoid such frauds.

Focus of Artificial intelligence capabilities in audit by automating of labour-intensive tasks. Labour-intensive tasks are organized and monotonous activities performed throughout the audit. The impact of Artificial intelligence is likely to be the often associated in audit activities that were performed manually once, but which have been already been underpinned by some technology. For recognizing audit areas that are probable to get impacted by Artificial intelligence to the maximum extent, it is paramount to break the audit into a sequence of activities and recognize those with the most structure. Past finds that largely the work of audit work consists of organised activities and semi-organized activities, with only a minimal part of activities categorised as unorganised. Maximum organised activities appear to be in the substantive test audit phase. Furthermore, reports states that the substantive tests were considered to have the largest proportion of activities acceptable for decision-aid development.

Extent to which artificial intelligence enhance audit quality & how it covers client system and internal control

Consolidating artificial intelligence in every step of auditing will withdraw the repetition of activities which are common in the process and scrutinizing large amount of information to enabling an in-depth comprehension of the business activities making it easier for auditors to focus on activities that constitute high potential risk of material misstatement.

Artificial intelligence can be used to automatically code accounting entries, it can also be used to further transform by deep learning a form of AI that can analyse unstructured data. Artificial intelligence can also be used into analyse large number of contracts such as loan agreements, lease contracts in a much shorter timeframe than manual traditional review. Artificial intelligence extract data from documents from preselected criteria on a more precise basis than average human enabling auditor to manage time effectively an performing judgement on only relevant data extracted. It also enables ask better questions and interact with client’s staff, audit committee, company boards ultimately adding value to audit process.

Considering speed as one aspect artificial intelligence tools in audit focuses on other factor like relevance and risk, Artificial intelligence tool removes the use of haphazard sampling by the auditor includes all the transactions in current period and subsequent so that auditor can look at transactions happened before auditor was appointed, after auditor was appointed (different periods). It divides risk on basis of samples in different buckets from high risk, medium risk and low risk bucket. Auditor can then look upon risks as per the discussion or past experience and proceed further in audit process. This enables auditor to perform high quality audit even if there is limited time to process audit.

Use of artificial intelligence also increases quality of judgement that the auditor makes as it shows auditor why that transaction is considered as risk why it is not validated by artificial intelligence tool, previously as business industry changed or there is new client audit used to be little less sceptical on transaction level compared to now on AI based tools.

Another area where artificial intelligence enhances audit quality is expense. Artificial intelligence tools can help business to identify duplicates expenses, expenses made which are not as per pre-determined policies, amounts incorrectly recorded, suspicious vendors, and expenses exceeding budgets. Reducing workload on auditors, reducing costs and enhancing quality.

b. Appraisal of innovative methodology & whether principles of audit flexible for such innovation

Artificial intelligence tools have led to change in audit tasks as automation of manual tasks of auditors such as haphazard sampling compared to manually done before which used to be far more time consuming. Analysing the all structured and unstructured data that came through the financial information system of the client.

Artificial intelligence also identifies unusual activities such as unusual deviations or other that natural transaction that would not come under the lens of audit while performing audit manually.

While making forecast about the future expected risk and happenings by analysing historical data and covering many assumptions altogether in spite of manual audit procedures which is have limitations to take assumptions with high risk of being biased and risk of chance of not being correct.

Auditors have to face many challenges while going through many contracts of client, by going through clauses and reviewing any regulatory compliances, and performing investigation on susceptible transactions. As due to this huge data and expensive approach auditor relies on sampling which increases the sampling risk in audit and ultimately increases audit risk. Machine learning in artificial intelligence can be used beyond sampling through which all information can be reviewed automatically and all the high risky areas can be find out in comparatively less time and more accurately.

In traditional audit considerable amount of time is spent turning pages and going through digital files and same checklist has to be gone through with each case. These processes can be automated allowing auditors to focus on areas requires human judgement.

The Artificial intelligence tools changes the way audit procedures are performed but they are required to keep in consideration of General Principals of audit which are Integrity, Independence and Objectivity

The auditor has to be honest and can’t be biased to the client. Must be objective through the audit performance. Any malpractices shall be avoided by use of his integrity. Auditor shall not have any direct or indirect interest in the client organisation, allowing him to be independent every time.

Confidentiality

While performing audit, it has access to vast confidential financial information, he shall respect the confidential aspect of client documents and related information. Auditor shall not disclose any information unless required by the law or if it is in the public interests

Skill & Competence

Auditor must have all the skills and experience and any certifications from relevant professional bodies. He must keep his knowledge up to date against any changes in law, rules or against any announcements.

Work Performed by Others

During the course of audit auditor has to delegate work to others who work under him. Auditor will be considered fully responsible for that. Auditor shall carefully review such work and certify when satisfied with the accuracy.

Documentation

Auditor maintains the record of work performed by him as it also works as an evidence against the work performed by him, audit documents or audit file also helps in track of detailed issue in previous years.

Planning

Plan of auditor allows audit to be performed more efficient and timely. With every audit a different audit plan is made as per different external and internal factors of the client organization.

Audit Evidence

Enough evidences shall be collected by the auditor to support its opinion. Compliance procedures and substantive procedures are performed against it. Evidences can be obtained from external and internal sources. External sources of evidences are considered to be more reliable

Accounting Systems and Internal Controls

It is the responsibility of auditor to assure that financials of the company represents true and fair picture of the organisation. Auditor shall also ensure that all the information related to organisation has been recorded in the financials. Keeping a test on internal control system is equally important as it tells the same story.

Audit Conclusions and Reporting

After performing all procedures auditor shall provide opinion on the basis of criteria as all relevant accounting standards has been applied, all regulatory and statutory requirement has been followed upon and all relevant material information has been disclosed.

On the other hand, Artificial intelligence is a new technology so there are certain principals stated by certain major bodies which makes it comply with the principles of audit some of these major organisation are Organisation for Economic Co-operation and Development (OECD) an international organisation which works for making better policies for the businesses. Other organisation are Google & Microsoft which are worldwide tech giants provide internet related services and products. In last the big partner in relation to corporate software making company is SAP which is Germany based organisation specialises in enterprise resource planning software and business intelligence tools.

Organisation for Economic Co-operation and Development (OECD) principals of artificial intelligence states that it shall benefit people and planet inclusive growth and development. Artificial intelligence system shall be developed in such way that it shall respect the laws stated shall also include appropriate safeguard and be fair to society. Artificial intelligence shall be transparent and proper disclosure shall be made against it enabling people to challenge the outcomes. Potential risks related to the tool shall always be assessed and managed, functioning shall also be fully secured. Every organisation handling, developing and deploying the artificial intelligence tool shall be held responsible for violation of breaking of any of stated principles

On the other hand, google has also stated some principles which it follows while developing and maintaining its AI tools which are that it shall be socially beneficial, it considered a broad image of social and economic factors that its benefits exceeds its risky by a huge margin. Google also focuses on respecting national norms which could be social, cultural and legal wherever it operates. It also clarifies that its tools work on an unbiased algorithms and being fair from any race, gender, political influence etc. Its AI tools are accountable and provide platform for feedback and relevant explanation.

Considering the Microsoft AI tools, it also stands on principles similar to Google and OECD which are to be fair, inclusive, transparent, secure, respects privacy, and responsible against the algorithms

SAP principles on artificial intelligence covers auditor perspective more closely as it provides AI tools directly to the firms to perform audit. Principles ar

SAP specifically states where there is a conflict with principles, SAP will attempt to prevent the inappropriate use of the Artificial intelligence tool

SAP Artificial intelligence tool are beyond bias and help to steer against potential issues. SAP strive for transparency in everything which is done through the tool. It provides oversight to the users of the tool. Upholds safety and quality standards tested under real world conditions. Upholds protection of data and its privacy, enhancing confidence of users of the tool. Numerous challenges relating to complying with industry, borders, cultural and religious traditions.

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Going through all these principals some common string is present there which focuses on transparency, national compliance, legal compliance be unethical which directly links up with principals under which auditor has to perform audit.

Therefore, innovation of AI tool is flexible worldwide to comply with countries national standards and laws and rights of clients also.

Reference

Alex Moltzau (2019, Dec 10). Artificial Intelligence and the Various Principles of AI Website. https://medium.com/dataseries/artificial-intelligence-and-the-various-principles-of-ai-b98d772748d6 Atakan Kantarci (2021, January 1) AI Audit in 2021: Guide to faster & more accurate audits

Website. https://research.aimultiple.com/ai-audit/#external-audit

Alfredo Collosa (2020, October 2020) Artificial Intelligence applied to auditing Website. https://www.ciat.org/ciatblog-artificial-intelligence-applied-to-auditing/?lang=en

Kamil Omoteso (2012, July 1) The application of artificial intelligence in auditing: Looking back to the future Website. https://www.sciencedirect.com/science/article/abs/pii/S095741741200111X

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