Key Data Analytics takeaways from the FRC audit quality reports

The FRC published its annual Audit Quality Inspection Reports for six largest audit firms in mid-June. What lessons do they contain for everyone else when it comes to one of the most keenly-discussed topics across the profession – using audit data analytics (also known as ADAs)?

Data analytics are now an integral part of the audit
The reports point to widespread use of ADAs amongst the larger firms, particularly in fraud work across journal transactions and revenue testing. They are no longer emerging technologies, but rather an established part of the audit toolkit.

Data analytics can drive quality in key risk audit areas

PwC were praised for the impact of their use of ADAs over revenue and journals, and EY’s introduction of a revenue tool was highlighted as having the potential to continue to improve audit quality. Advanced ADA techniques over highly transactional areas such as revenue are now firmly established, offering an approach to substantive analytical procedures or substantive sampling.

In contrast, weaknesses were highlighted in BDO, Deloitte and KPMG’s use of substantive analytical procedures to test revenue. Regulators clearly recognise that innovative data tools can significantly increase audit quality provided they are used appropriately and consistently.

Training and oversight is important
Whilst the impact of EY’s revenue tool was considered positive, practitioners did not always apply the methodology consistently or ensure that sufficient evidence was obtained over assertions not addressed by the ADAs. Firms need to consider how they educate and train their staff at the outset to make effective use of the data analytic tools, considering audit test objectives and assertions. It’s also important to review the effectiveness of monitoring controls, to understand when further guidance or support is required.

Proactive steps are needed

The largest audit firms started to introduce modern data analytics to their audits over 5 years ago – or much earlier under umbrella of Computer Assisted Audit Techniques (CAATs). Only now are we starting to see these being used consistently and effectively as a core part of the audit process and methodology.

Other firms are unlikely to be able to close the gap on the capabilities offered by the largest firms if they start along the same path today. The level of investment required in building bespoke tools and recruiting teams of technology and data specialists may be a tough pill to swallow. Firms can however take advantage of recent technology advancements, offering commercially-available automated techniques for extracting data from accounting packages, intuitive dashboard outputs and guided techniques to more quickly embed ADAs across their business.

A successful implementation will depend on firms advancing at a pace appropriate for their teams and client base. However, to avoid the risk of obsolescence firms must embark on this journey as soon as possible.