Exploring the Growing Use of Technology in the Audit, with a Focus on Data Analytics

In September 2016, the International Auditing and Assurance Standards Board (IAASB)’s Data Analytics Working Group (DAWG) released a Working Group Paper, Exploring the Growing Use of Technology in the Audit, with a Focus on Data Analytics. The Paper is open for comment until February 15, 2017. In addition, this publication is a call for nominations for a newly formed Project Advisory Panel to further advise the IAASB and the DAWG on developments relevant to standard setting.

The Paper provides insights into the opportunities and challenges with the use of data analytics in the audit of financial statements and outlines the insights gained from the activities to date. The purpose of the Request for Input is to:

• Inform stakeholders about the IAASB’s ongoing work to explore effective and appropriate use of technology, with a focus on data analytics, in the audit of financial statements; and 

• Obtain stakeholder input and perspectives on whether all the considerations relevant to the use of data analytics in a financial statement audit have been identified.

The DAWG paper (page 16) emphasizes that: “The use of data analytics in an audit of financial statements will not replace the need for the auditor to exercise appropriate professional judgment and professional skepticism. Strong views have been expressed by the IAASB CAG and at IAASB roundtables about the importance of the auditor having a thorough understanding of the entity and its environment in order to facilitate a high-quality audit in which professional skepticism is appropriately applied.”

For additional insights, refer to the June 2016 Audit Data Analytics Alert  issued by CPA Canada.

Do auditor judgment frameworks help in constraining aggressive reporting?

A 2016 research paper investigates whether alternative judgment frameworks help Big 4 audit managers and partners constrain management’s aggressive financial reporting under accounting standards that differ in their precision. The authors found that a framework based on the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR) recommendation that auditors critically evaluate the pros and cons of alternative accounting methods helps auditors constrain aggressive reporting under less precise standards.

Although the results highlight a limitation of counterfactual reasoning on its own at enhancing auditor constraint of aggressive reporting, this study provides evidence on how structured thinking can overcome this limitation. In particular, combining this consideration of the alternatives with a structured thought process that encourages auditors to think about the issue at increasing levels of abstraction effectively shifts auditor focus away from client considerations and towards substance-over-form considerations, thereby incrementally enhancing auditor constraint of aggressive reporting across different levels of accounting standard precision.

These research findings should be of interest to academics, regulators, standard-setters and auditors as they continue to contemplate ways to improve auditor professional judgment under different levels of accounting standard precision. For more information, read the research paper, Do Auditor Judgment Frameworks Help in Constraining Aggressive Reporting? Evidence under More Precise and Less Precise Accounting Standards by Ann G. Backof (University of Virginia - McIntire School of Commerce), E. Michael Bamber (University of Georgia) and Tina Carpenter (University of Georgia - C. Herman and Mary Virginia Terry College of Business) published in the journal, Accounting, Organizations and Society, Volume 51, May 2016, Pages 1–11.