UK audit firms are at the forefront of developing and using data analytic techniques which have the potential to improve audit quality, but need to adopt a more structured approach to deployment to ensure they are effective, according to a review carried out by the Financial Reporting Council (FRC)
The regulator looked at the use of audit data analytics (ADA) in the UK’s six largest audit firms as part of an initiative to gauge best practice.
Specialist IT audit inspectors reviewed 19 examples of ADA tools and techniques used in audits of financial statements with year ends in 2015. Of these, 16 examples arose from the FRC’s normal inspection of 109 audits, while a further three audits were nominated by audit firms to demonstrate a particular ADA tool in use.
The examples included enabling audit staff to build experience and confidence in using a specific ADA tool through a structured roll-out programme; using data analytics for the first time at an interim audit date to improve the prospect of obtaining robust audit evidence at the financial year end, particularly in a first year audit; and using data analytic techniques to improve oversight and consistency of multiple auditors contributing to group audit audits where organisations have global accounting systems.
FRC’s analysis shows that while ADA tools are widely used for journal entry testing, and for general ledger analysis, examples of process analysis or impairment modelling were usually at a limited or pilot stage of deployment.
Overall, the FRC review found the use of data analytics in the audit is not as prevalent as the market might expect, suggesting audit firms and teams feel pressure to promote the use of ADA techniques on audits to meet audit committee expectations, to achieve efficiencies and to win competitive tenders. This may result in the pace of ADA development and usage being overemphasised.
However, the review also found that audit quality can be enhanced through the use of data analytics, and where firms focus deployment efforts on supporting a small number of ADA tools, use is more successful and uptake by audit teams increases.
Specialist, dedicated support for data capture for use in ADA tools increases effective use, the review found, and the FRC says audit teams need to have a clear understanding of the purpose of the ADA technique within the audit methodology to ensure that they obtain sufficient and appropriate audit evidence.
Where ADA tools are adopted globally, group teams can instruct that specific tools are used. Where entities use global systems, ADA can be used to execute testing centrally. This promotes efficiency and central oversight, but provides additional evidential challenges for component auditors.
Melanie McLaren, executive director for audit and actuarial regulation, said: ‘UK audit firms are at the forefront globally of developing data analytic techniques with the potential to improve audit quality. In reporting on our thematic review of their use in practice, the FRC hopes to accelerate effective usage for the ultimate benefit of those who rely on UK audit.’
The FRC’s audit quality thematic review: the use of data analytics in the audit of financial statements is here.
