ICAS responds to FRC discussion paper: ‘Technological resources: using technology to enhance audit quality’
ICAS responds to the FRC discussion paper: ‘Technological resources: using technology to enhance audit quality’.
ICAS has responded to the Financial Reporting Council (FRC) discussion paper, ‘Technological resources: using technology to enhance audit quality’. This discussion paper was published in March along with the FRC Audit Quality Review (AQR) Thematic paper, ‘The use of technology in the audit of financial statements’.
AI and a higher quality of audit
ICAS believes that the use of AI and other advanced technological tools has the capability of enhancing audit quality, beyond efficiency gains. The indicators will ultimately be a higher quality of audit evidence although the nature of that evidence may evolve.
The ability to interrogate large populations of data offers the ability to more effectively identify outliers that require investigation e.g. in key transaction streams such as revenue.
As highlighted in the AQR Thematic Paper the ability to utilise predictive analysis in areas such as the valuation of long-term contracts and financial instruments will provide further scope for where technology will enhance audit quality.
As identified in the FRC Thematic paper, one of the key challenges in many instances remains the extraction of the data from client’s systems. The extent to which this is an issue obviously varies from entity to entity and very much depends on their respective systems.
Exploring the introduction of common data standards may be a potential way forward in this respect. Auditor buy-in may be an issue if the technology is not developed and rolled out in an appropriate manner. Auditors need to feel engaged in the process and to understand the benefits of the technology in order to best facilitate the tools being fully adopted and utilised.
Modernising audit standards
Whilst the current auditing standards have not prevented firms from utilising technological innovation, one must question whether the standards, as drafted, appropriately take account of such developments.
One of the key standards currently under consideration by the International Auditing and Assurance Standards Board (IAASB) is International Standard on Auditing (ISA) 500, Audit Evidence. Stakeholders have identified several areas where they believe this standard needs to be revised to better reflect developments in audit, including those related to technology.
The IAASB continues to explore potential revisions to this ISA. Additionally, as recognised by the FRC the IAASB also recently revised ISA 315, Identifying and Assessing the Risks of Material Misstatement, partly to better reflect the increased usage of technological tools by some audit firms.
Technology, AI and ethics
In terms of potential ethical issues, as highlighted by the FRC, there is a risk that the increased use of technology may result in the auditor inadvertently providing services which have implications for the auditor’s independence and objectivity. Additionally, there may be threats to the professional competence of the auditor if they do not properly understand the nature of the technology tool.
There will also be issues related to confidentiality in ensuring safe storage and retention of any client data and in ensuring that this data is not used inappropriately.
In conclusion, as the FRC recognises, it is important that this is an area that remains under observation as the use of technological tools on an audit starts to evolve.