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RECOMMEND: Feedback on exploring the growing use of technology in the audit

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Subsequent to the board meeting held in December 2017, the Data Analytics Working Group (DAWG) of the International Auditing and Assurance Standards Board (IAASB) issued a feedback statement to inform stakeholders of the key messages received in response to their outreach activities. This article provides an overview of this feedback statement

In September 2016, the DAWG issued a Request for INPUT: exploring the growing use of technology in the audit, with a focus on data analytics (RFI).1 In line with the objectives of the IAASB to set high-quality international standards that form the basis for audits that add value, both in terms of the credibility and relevance of the process, they recognised the importance of understanding how the use of technology, specifically data analytics, impacts audit quality.  The purpose of the RFI was to explore whether the ISAs remain ‘fit for purpose’ to audits that are conducted in an environment that continues to evolve.

The RFI highlighted key benefits and challenges that can be achieved by using data analytics in the performance of an audit. It informed stakeholders about the IAASB’s ongoing work to explore effective and appropriate use of technology with the view to obtaining further inputs and perspectives on whether all the considerations relevant to the use of data analytics in a financial statement audit had been identified.

In January 2018 the DAWG issued a Feedback statement: exploring the growing use of technology in the audit, with a focus on data analytics2 to inform stakeholders of the key messages received in response to the RFI, with the view to provoking further thinking and exploration of data analytics.

General overview of responses received

The 51 response letters3 received from stakeholders representing a wide range of jurisdictions confirmed support of the DAWG in the current role that it is playing and encouraged the future direction thereof, as indicated in the RFI.  Common, overall key messages received from respondents indicated that the current ISAs are still appropriate and should remain principle-based but need to incorporate practical guidance on the use of data analytical technology in the performance of an audit. The important role that professional scepticism plays in using data analytics, including linking this to procedures performed, the nature of the audit evidence obtained and evaluating the results of the procedures performed using data analytical technology, was also emphasised.

Overview of responses to specific questions

The RFI included six specific questions on areas for the DAWG to consider in determining the way forward. The following is a summary of the responses to these questions:

(a) Have we considered all circumstances and factors that exist in the current business environment that impact the use of data analytics in a financial statement audit?

Although certain stakeholders showed more concern for specific circumstances and factors than others, there was overall agreement with the DAWG’s list of circumstances and factors that impact on the use of data technology, as follows:

  • Data acquisition
  • Conceptual challenges
  • Legal and regulatory challenges
  • Resource availability
  • How regulators and audit oversight authorities maintain oversight, and
  • The investment in re-training and re-skilling auditors

Regulators and oversight authorities and national auditing standard setters were most concerned with challenges around data acquisition and the skills of auditors, highlighting that the results of the data analytical procedures are only as reliable as the data used in the performance thereof.

The concern around the skills of the auditors was shared by accounting firms, but also expanded on in that this concern impacts a broader audience, including regulators and audit committees who also need to understand the role of the data analytical procedures in overseeing the work of the auditor. This concern is exacerbated by the limited experience that regulators and oversight bodies have in inspecting audits involving the use of data analytical procedures. It was suggested that collaboration with universities and other educational institutions may be necessary to address the issue of training and re-skilling these affected parties.

The accounting firms also indicated a reluctance to embrace technology due to a fear of regulators having a different interpretation of how the data analytics procedures met the objectives of the auditing standards.

(b) Is our list of standard-setting challenges accurate and complete?

Regulators and oversight authorities identified that the biggest challenge relates to assessing whether the requirements of the ISAs have been met. Other respondents raised a particular concern around how the audit evidence obtained through the performance of data analytical procedures fits into the existing audit model, specifically as far as complying with the documentation requirements is concerned.

National auditing standard setters were most concerned with the challenge of considering the relevance and reliability of data upon which the data analytical procedures will be performed, as well as the appropriate level of work effort in relation to any exceptions identified.

Other challenges identified included how stakeholder expectations are managed and not misguided in relation to the procedures undertaken, when for example ‘100% testing’ is performed and how the concept of performance materiality is applied when designing analytical procedures.

(c) To assist the DAWG in its ongoing work, what are your views on possible solutions to the standard-setting challenges?

The common consensus in the responses was that the standards should remain principle-based as this provides flexibility for the standards to remain relevant in and adapt to a rapidly evolving environment.

While the current standards do not prohibit the use of data analytical procedures, they also do not encourage this in designing and performing innovative audit procedures. Accounting firms cautioned that premature standard setting may actually hinder or even slow down innovation, with public sector organisations echoing this and suggesting that, at this stage, the focus should be on observing the responses to these challenges in practice. Respondents suggested that non-authoritative guidance on the use of data analytics in compliance with the requirements of the ISAs, including real-life practical examples, may result in a more timely solution to the standard-setting challenges, as against revising existing standards.

Academics indicated that active communication among the affected stakeholders is essential to ensure that standards are responsive to current practice and developments. Individual respondents raised the concern that at present, auditors generally do not have a sufficient understanding of IT to be able to design and perform relevant and effective data analytical procedures. To this end, the importance of training and upskilling auditors to remain relevant in the market was emphasised.

(d) Is the DAWG’s planned involvement in the IAASB projects currently underway appropriate?

The IAASB currently has numerous projects underway, including, among others:

  • The project to revise the quality control standards
  • The project on group audits and the revision of ISA 600
  • The project on professional scepticism, and
  • The revision of ISA 315 (revised)

The DAWG continues to be actively involved in the above-mentioned IAASB projects, in highlighting areas where the applicable standards may make reference to data analytical procedures, including expanded application material where appropriate. All respondents were in support of the DAWG’s continued involvement in these projects, some even suggesting that the involvement be intensified.

(e) Beyond those initiatives noted in the Additional Resources section of this publication, are there other initiatives of which we are not currently aware of that could further inform the DAWG’s work?

Respondents identified the following initiatives that could be useful in informing the DAWG’s work:

  • The Rutgers AICPA Data Analytics Research Initiative, which undertakes research projects that focus on the potential for integration of analytics into the auditing process at foundational level;
  • A series of articles issued by the Institute of Chartered Accountants of England and Wales, aimed at facilitating dialogue and raising awareness around the use of data analytics in the audit; and
  • The work of CPA Canada’s Audit Data Analytics Committee, which focuses on performing research and delivering quality thought leadership and non-authoritative audit guidance with respect to the use of data analytics in the audit of the financial statements.

(f) In your view, what should the IAASB’s and DAWG’s next steps be?

In the RFI, the DAWG indicated that it plans to continue exploring and understanding how the use of technology can enhance audit quality and in doing this, engage with affected stakeholders, including accounting firms of all sizes, regulators and audit oversight authorities, preparers, investors, those charged with governance and national auditing standard setters. Respondents to the RFI were supportive of the suggested way forward.

Specific suggestions on the way forward included that the revision of ISA 230, Audit Documentation and ISA 500, Audit Evidence be given priority and that the effects of new technologies, including blockchain, artificial intelligence and robotics, be considered.

The Data Analytics Project Advisory Panel (PAP)

In the RFI, the IAASB indicated its intention to form a PAP to enable the IAASB to engage directly with subject-matter experts and other interested parties on a particular topic. The PAP has subsequently been established and will be used by the DAWG for the following:

  • To advise on developments in data analytics and the use thereof in an audit, which in turn will be used to inform the IAASB’s response in terms of standard-setting activities
  • As a technical resource available to the IAASB and the related working groups and in obtaining an external perspective on the use of data analytics in the performance of an audit on financial statements, and
  • As a sounding board in considering feedback received from the RFI, to determine how to meaningfully progress with this project and to provide input to any guidance or other material that the IAASB may develop

The way forward

The IAASB has recognised the importance of understanding the use of technology, specifically data analytics in the performance of an audit of financial statements. It therefore intends to continue with its project on data analytics, including the provision of input into other projects that are currently under way to ensure that the standards remain relevant by incorporating up-to-date considerations in the use of data analytics. The DAWG will continue to engage with affected stakeholders through appropriate outreach activities to further understand the current application of data analytics and any concerns that accounting firms may have, as well as to identify best practices that firms have established based on practical experience with the use of data analytics.

In response to the calls for guidance, the DAWG has commenced with drafting examples and illustrations of how data analytics can be used in compliance with the requirements of the audit standards and continue to enhance audit quality.

From a SAICA perspective, emerging technology, including data analytics, has been identified as a priority focus area. It has created a repository of information  that we believe will be useful to members. SAICA will also continue to monitor the progress of this IAASB project.

[Author]

Hayley Barker Hoogwerf CA(SA), Project Director: Assurance at SAICA

NOTEs

1 https://www.ifac.org/publications-resources/exploring-growing-use-technology-audit-focus-data-analytics.

2 https://www.ifac.org/publications-resources/feedback-statement-exploring-growing-use-technology-audit-focus-data.

3 https://www.saica.co.za/Portals/0/Technical/assurance/Data_Analytics.pdf.