The advent of Fourth Industrial Revolution (4IR) technologies has presented both clients and auditors with massive opportunities and challenges which, if fully embraced, can completely change the face of the audit experience for both client and auditor.
Much has been said about the 4IR and its disruptive impact on many industries, including the accountancy sector. Much of what has been said has rather led to fear of and resistance to 4IR technologies, yet much on offer by 4IR should be embraced due to the positive changes that these technologies bring to the ways of doing business for many organisations. This, in turn, has a ripple effect in the accountancy sector, whose professionals service these organisations as employees, consultants and auditors. 4IR technologies have a significant direct impact on the work of auditors.
The much talked about 4IR technologies − which include artificial intelligence (AI), machine learning, deep learning and blockchain technologies − have presented unforetold opportunities for various organisations, which in turn has had a huge impact on auditors’ work. Central to these 4IR technologies is data that is created, processed, analysed and reported using these technologies. The clients’ business processes and models have changed drastically as a result of 4IR – and this calls for responsive and agile auditors.
THE AUDIT PROCESS AND CLIENT DATA
The auditor’s objective is to express an opinion on the annual financial statements (AFS). The auditor goes through the audit process: the pre-engagement phase, audit planning phase, gathering audit evidence phase and summarising, concluding and reporting phase. In the audit planning phase, the auditor needs to obtain an understanding of the entity and its environment, its financial reporting framework and its system of internal controls in order to be able to identify and assess the risks of material misstatement (caused by error or fraud). Then auditor must then respond to the risks identified and assessed by performing audit procedures which will enable the him or her to gather enough quality audit evidence in order to express an audit opinion at the conclusion of the audit.
Part of gaining an understanding of the client, its business and environment will require the auditor to understand the client data which is derived from the 4IR-disrupted client’s business processes. No matter how complex the data is or how that data is accessed, analysed and used – the auditor is required to have a very good understanding of the technologies that affect these developments. For example:
- Client data is no longer accessed from client-based servers but on cloud-based applications. It has become the norm for clients to use cloud-based financial systems and applications. The necessity for cloud-based applications has gained momentum due to work-from-home adoptions: a common feature across organisations.
- The large volume of data has become characteristic of clients’ data. The auditor needs to make sense of data provided by the client and derive meaning from it.
- The sources of data have increased significantly to include texts, images, GIS, etc, other than the traditional forms of well-organised data (eg on Excel spreadsheets). At times, the auditor is able to convert one form of data into another form of data.
- The client is able to provide real-time data at quite a high speed – it helps quick decision-making by both clients and auditors.
These positive changes help clients as well as auditors to gain meaningful insight into the data, which leads to efficient decision-making.
A lot more demanded from the auditor
The 4IR developments could make auditors’ future more demanding, as clients are requiring auditors to provide assurances other than on historical AFS. Auditors may now be called on to provide assurances over risk management approaches applied by the client’s management and even controls over these risks. This means that auditors may be called upon to provide assurance on forward-looking client issues instead of historical financial transactions.
Naturally, clients tend to be more receptive to the changes brought about by 4IR technologies due to the inevitable impact on business processes and models. As a result, some clients have designed and implemented controls which are 4IR-embracing. There is now a further call for auditors to adapt their audit approaches to be more inclusive of tests of controls which indirectly ‘assure’ the client’s management about the controls they have put in place. This is especially the case if an ‘unqualified’ audit opinion has been expressed by the auditor. If the auditor expresses an ‘unqualified’ audit opinion on AFS where the auditor followed a test of controls approach, this indirectly provides an assurance over the client’s controls.
WHAT HAPPENS WHEN THE AUDITOR HAS EMBRACED 4IR?
The increased automation from 4IR technologies drives audit efficiencies – with auditors now able to have ‘more’ coverage of the extent of audit work performed. 100% audit testing is now a real possibility with less effort from the auditor!
100% testing will fundamentally change the risk-based foundation upon which the external audit function is based, which is currently ‘reasonable’ rather than ‘absolute assurance’.
As a result of 4IR technologies and the related possibilities noted above, clients who previously saw the audit function as a replaceable commodity which was forced upon them, are now seeing the increased value of the audit function. The trick is for the auditing profession as a whole to embrace the challenge to provide more assurances to the client’s business processes, which may fall outside the traditional scope of the audit work.
WHAT THE FUTURE LOOKS LIKE
We may begin to have clients with the view: ‘If auditors can do more in less time, why can’t they also look at fraud – they have the technology that can test and report on unusual journal entries and entries during unusual times,’ etc.
Also, the size of the audit firm may not mean much if the firm is not 4IR techno-smart. A firm may be small yet 4IR techno-smart, which may increase the chances of it performing better and value-adding audit services on large corporates’ audits. However, the current landscape indicates that larger audit firms have the financial, human and technological resources to be more embracing of 4IR technologies − which continues the cycle of ‘big firm, big client’ we have seen all along! Smaller audit firms simply do not have the resources to fully embrace 4IR technologies.
These are exciting times … Auditors’ agility has never been more required, due to the technological advancements brought about by 4IR in particular.
This article draws on a paper developed from comments from a breakfast briefing jointly organised by the Institute of Chartered Accountants in England and Wales (ICAEW) and the Dubai Financial Services Authority (DFSA).
Sitembele James CA(SA), RA, MAcc, MzaServe Consulting and Advisory (Pty) Ltd