A3 - Audit Data Analytics (ADA)

Question 1

what are audit data analytics?

Answer 1

• are techniques that enable auditors to analyze and review both financial and non-financial data to discover patterns, relationships, and anomalies during the audit
• ADAs can be used in essentially all areas of an audit, such as to perform risk assessment procedures, test of controls, substantive procedures, and can assist in the overall conclusion of an audit
• Most ADAs are performed using software: spreadsheets, data transform and cleaning software, data visualization software,…

Question 2

what are the 5 steps applying ADAs?

Answer 2

1. Plan ADA
2. Access and obtain the data
3. Review and analyze
4. Perform ADA using selected tools and techniques
5. Evaluate and address the outcomes

Question 3

what are the 4 ADAs techniques?

Answer 3

1. Descriptive analytics: explain WHAT happened or what is happening with data through statistics, data sorting, aging data and data reduction
2. Diagnostic analytics: explain WHY something happened with the data through clustering (gather), drill-down and drill-thru analysis, period-over-period analysis, sequence check,…
3. Predictive analytics: predict WHAT will happen by using historical data to make predictions, estimates, and assertions about future events thru classification, forecasting, regression, sentiment (opinion), time-series modeling analysis
4. Prescriptive analytics (the most advanced and complex type): this is built on predictive analysis and shift the focus from what will happen to how to make things happen. Prescribe courses of how to help optimize decisions through what-if analysis, machine learning, natural language processing…

Question 4

what are the 4 areas where ADAs can be utilized?

Answer 4

1. Risk assessment:
   - identify and assess the risk of MM at the FS level
   - identify and assess the risk of MM at the relevant assertion level
2. Tests of controls: ADA can provide support and evidence in evaluating the design and operating effectiveness of internal controls
3. Substantive procedures: to detect MM. ADAs can apply both tests of details and analytical procedures.
   - Tests of details: performed both transactions and balances. ex: perform sequence checks on prenumbered source documents
   - Analytical procedures: ex: comparing CY to PY date, develop expectation for transaction or balance,…
4. Concluding the audit: allow auditor to gain comfort that no MM when unidentified when forming an overall conclusion

Question 5

How do auditors create data visualizations?

Answer 5

• Auditor must understand and evaluate the output of ADAs by creating and reviewing reports, charts, or other data visualizations
• Auditors should follow the below when creating visualizations:
  + choose the right TYPE
  + apply correct SCALING: example scaling on the y-axis should start at zero
  + utilize appropriate COLORS
  + emphasize focus areas: ensure visualization was designed to focus on the objectives the ADAs want to achieve

Question 6

what is data visualization?

Answer 6

data visualizations take complex activities or content and transform them into easy-to-read graphs, charts, or other visuals to provide the auditor with insights to make decisions

Question 7

How do auditors interpret visualizations results?

Answer 7

Below are common ADA techniques and their presentation:

+ Regression analysis: to evaluate relationships between variables and show direction and strength of the relationships. Ex: auditor may predict an entity’s supplies expense is driven by total numbers of labor hours worked

+ Variance analysis: to compare a company’s forecasted or budgeted values against actual values. A BULLET CHART is used to show BAR chart values against LINES designating budget

+ Period-to-period analysis: to compare financial or nonfinancial values across given periods. A BAR or COLUMN CHART is used

+ Classification: to utilize historic data to predict what classes or categories would best fit a new data point and show relationships among variables. SCATTER PLOTS (analyzing relationship NI vs. Rev), or PIE CHART (proportion such as sales by state) is used

+ Trend analysis: can be used to develop expectations of future results by comparing internal values to external industry values. LINE CHART is used

Question 8

what are the 2 broad categories the auditor may divide various output in ADA?

Answer 8

• Clearly inconsequential: it means that the auditor believes that these items do NOT pose a RISK of MM individually or in aggregate
• Not clearly inconsequential: possible RISK OF MM

Question 9

what are the 2 types of ADA data?

Answer 9

1. Structured: organized data such as spreadsheet, data mart…
2. Unstructured: unorganized such as social media posts which have variety of data formats and types