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Firms seek to streamline audit tests in a hybrid world


A shift to hybrid and remote working is changing how audits are conducted, with firms turning to third-party audit tools in the hunt for efficiencies and improved client service levels.

22nd Mar 2022
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The traditional way of doing things, typified by manual, often paper-based processes, is increasingly being replaced by an digital audit fit for new working patterns that also introduces efficiencies for audit firms and their clients.

Many traditional audit tests are now being re-engineered to leverage open finance tools and data aggregation capabilities that increase the quality of assignments.

Challenger audit firm Jeffreys Henry, which specialises in auditing small-cap listed companies, estimate around 80% of their audits are now remote, with 20% being a hybrid on/off-site. This shift has only been made possible due to technology tools we use,” according to audit partner Sachin Ramaiya. “Once clients are educated about the benefits, switching to this new way of working becomes easier.,” he told AccountingWEB.

Some work will always remain on site, with Ramaiya highlighting the importance of conducting certain elements of audits in-person to understand the client and the nature of their business. However, the technology is here to complete digital audits today and its benefits are so compelling in terms of efficiency and scope that all audit firms should consider incorporating some elements to modernise their processes.

Accessing client data

The first step to being able to complete audits in a hybrid world is to access client data.

Regulatory changes related to open finance have resulted in the creation of an independent verified data network that makes it easy for auditors to access client data from financial institutions and fintechs, including the likes of Paypal and Stripe. 

Third-party audit tools such as Circit and Inflo act as an intermediary, making verified and real-time data easily accessible for auditors. This provides auditors with third-party evidence in the form of an accurate and complete set of transactions.

To access data, the auditor generates a unique authorisation link via the software provider’s platform. Clients then login to the audit platform and are securely transferred to their bank’s online banking page to provide consent. Once consent has been granted, auditors can retrieve balances and transactions directly from source. 

It’s important firms ensure any data provider meets their firm’s compliance requirements. Some suppliers use an aggregator service, meaning client data is transferred to another sub-processor, many of which are based in the US with different data protection policies. A safer approach is to use a directly regulated provider, allowing independent evidence to be obtained from a direct-to-bank relationship. 

Immediate efficiency gains

The time saved in accessing this data is significant compared to pulling out and organising large files of paper bank statements. Some auditors watch clients login to their online banking to download bank statements or use PDF extraction software to read scanned documents.

All of this is unnecessary as unlike traditional approaches, new tools allow data to be accessed in a standardised Excel format that makes it easy for auditors to work with. 

“For bank access, we just ask clients for their authority to provide information through the platform,” said John Toon, digital strategy lead at Beevers and Struthers. “We can then get data and are instantly given high-level information such as the largest transactions and a breakdown of the client’s cashflow.”

Streamlining existing tests

Bank transactions and balances hit every stage of the audit lifecycle from planning to sign-off, as well as almost every section of the audit file. 

The majority of audit firms trace samples to bank statements during substantive testing. Therefore, it’s not surprising that open finance is a major enabler of efficient hybrid auditing. 

Substantive income and expenditure testing

With many firms having to increase their sample sizes following regulatory scrutiny of outdated sample size caps, the importance of saving time in audits has become heightened. 

Digital tools streamline tests by enabling auditors to search and filter for transactions, as well as  further enhancing efficiencies when samples are traced to the bank.

This is achieved by audit software now being able to detect or suggest the bank transaction corresponding to the auditor’s sample. Additionally, automated Excel working papers are often used as part of the process, documenting the sample and corresponding bank entries and saving auditors time in documenting their work.

Unrecorded liabilities and debtor recoverability

Tests related to cut-off require confirmation that sales and purchases have been recorded in the correct period. For example, it’s common for post-year-end payments to be reviewed to identify potentially unrecorded liabilities. 

Auditors can now use platforms to select and send samples directly to the client to respond to queries ‘in platform’. This streamlines client communications and automatically creates working papers. 

Debtor testing includes matching outstanding invoices to post year end receipts. Real-time access to clients’ bank transactions provides auditors with an up-to-date view of recoverability and similarly streamlined in platform communication and automated Excel output.

Large and unusual transactions

The standardised format of data means staff don’t require analysis skills to identify risky transactions.

Algorithmic risk profiling, consisting of the identification of large and unusual payments, mean testing no longer has to be limited to a sampling basis and instead, transactions are automatically flagged and sent on to clients for explanation through a single portal where they can upload documentation.

“I can view all transactions over a certain value, alongside irregular ones,” said John Toon. “This is massively valuable and means you don’t have to rely on a junior who is unlikely to have the experience to identify something risky.”

Going concern status

Going concern testing has become more enhanced over the last couple of years due to the pandemic.

Direct bank access makes going concern and post-year end reviews seamless by providing a live view of cash activity and balances up to the date of signing. This allows actuals to be compared against management forecasts as well as removing the need for audit partners to request a last-minute bank statement before signing the accounts.

Celebrate the excellence in your audit team by entering the Accounting Excellence awards. This year Accounting Excellence has launched a brand new audit team of the year category. This is your chance to shout about how you've rolled out efficiencies and improved client services as part of your audit process.   

Enter today

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23rd Mar 2022 10:31

The tokenistic "large and unusual transactions testing" still requires a human to set the parameters, and then lots of trainees who probably have no idea what they are looking at to clear all the thousands of exceptions generated. The criteria are often performative, based on whatever the software developer thinks might work, and therefore of the arbitrary "find me all transactions posted between 9PM and 5AM" or including the word 'fraud', without anything other than the vaguest of hunches that the selected criteria generate exceptions that are worth looking at.

It's really not a game changer that someone doesn't need to jump onto a Teams call to check bank balances on the internet banking screens for going concern. It is mildly helpful, and it probably saves between 15 minutes and 1 hour of a newly qualified accountant's time, representing about 0.1% of the costs of a Top 10 small listed company audit. The reality is that the vast majority of SME auditors will, reasonably on a risk assessment basis, accept a screenshot or bank statement emailed to them by the client without any supervision at all, so no saving at all.

Despite all the hype, CAATs actually risk lowering audit quality by wasting audit team's time on yet more unfocussed and performative paperwork dictated by auditing standards written by New York litigation attorneys.

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