FRC issues AQR Thematic Review on the use of technology in the audit of financial statements
The Financial Reporting Council (FRC) has published an Audit Quality Review (AQR) paper on the use of technology in the audit of financial statements.
The Financial Reporting Council (FRC) has published an Audit Quality Review (AQR) paper on the use of technology in the audit of financial statements. This highlights that in the period since early 2017 when the FRC published its thematic review ‘The Use of Data Analytics in the Audit of Financial Statements’, it has seen an increase in the use of audit data analytics (ADA) by audit firms. Additionally, the FRC is aware that audit firms are considering the use of other emerging technologies within the audit process.
The FRC has identified that the audit of revenue and the use of ADA for risk assessment are the two audit areas with the most prevalent use of ADA beyond journal entry testing. It has only evidenced isolated examples of pervasive use of ADA across multiple financial statement line items on an individual audit, reflecting the firms’ focus on building capability in specific areas.
The large-scale investment by the larger audit firms in the infrastructure required to capture, collate and organise data completely and accurately into a format their automated tools and techniques can analyse, is recognised as a notable development. This infrastructure as well as serving the data requirements for the current generation of ADA tools also provides a foundation for the needs of emerging technologies. Of course, the auditor’s ability to extract useful data remains dependent on the availability of granular data at the audited entity, and the capability and willingness of management to provide that data for auditor analysis.
The review highlights that the use of automated tools and techniques may promote audit quality by deterring fraud and the manipulation of accounts, and as the use of ADA is now pervasive in the audit of
Journal entries, management may be less inclined to make aggressive adjustments via simple journal entries. Similarly, it recognises that the analysis of entire populations of transactions using ADA should assist the auditor to identify unusual activity.
The FRC notes that other emerging technologies, such as machine learning and predictive analysis, although largely at a research stage, present further opportunities to improve audit quality but raise challenges for both audit firms and regulators in terms of compliance with standards. It highlights that predictive analytics would assist auditors in challenging and corroborating scenarios to facilitate better challenge of management e.g. in accounting for long-term contracts where significant judgement is required.
The FRC concludes that:
(i)Technology has much to offer the auditor in terms of efficiency and effectiveness.
(ii)It may be used increasingly to support the assessment of the reasonableness of estimates made by management.
(iii)The potential for the use of technological resources to enhance audit quality is clear but there are some additional challenges including the increasing involvement of third-party providers and tools in the audit process, particularly in the area of data extraction.
(iv)Whilst technology provides many benefits to the auditor it is no replacement for the skills and informed professional judgement of an experienced auditor.
The FRC has also published a discussion paper Technological resources: using technology to enhance audit quality in which it is seeking views on matters related to the use of technology in the audits of financial statements. The primary areas of focus are:
- Areas where technological resources are enhancing audit quality, and potential obstacles to further innovation (including those arising from regulation and standards);
- The increasing use of artificial intelligence, machine learning and natural language processing within the audit process;
- Data Standards and Extraction Issues;
- Audit Documentation;
- Data analytic exceptions; and
- The growing use of third-party technology providers.