Audit Expert Systems

Audit planning, risk assessments, materiality, and controls evaluation– If/then rules– Returns answer based on inputs

Advantages– Unbiased, captures expertise, always available

Disadvantages– Difficult to develop

Computer Assisted Audit Techniques

Testing client’s controls (Assess control risk)– Test data (or test decks)

– Parallel simulation

– Integrated test facility Testing client’s data (Substantive testing)

– Data extraction and analysis (e.g., ACL)

– Fraud detection (e.g., ACL)

– Continuous auditing techniques

CAATs to Detect Fraud

Digital analysis– Benford’s Law for a series of naturally

occurring numbers– Deals with expected frequency of first digits– Exponential distribution– Requires large sample size

Computer-Assisted Audit Techniques CAATs - the use of software to perform

audit procedures Topics

– Benefits of CAATs– Examples and success stories– Tools available– Implementation issues

Benefits of using CAATs Increases Audit Economy and Efficiency Improves Audit Effectiveness Enhances Image of Auditing

Using CAATs Increases Audit Economy and Efficiency Example

– Auditing an employee savings plan allowed the audit team to recalculate benefits for all 2,000 employees and test more items than prior year in 26% less time

Results– Planning investment recovered that year– Better coverage and assurance obtained

Using CAATs Increases Audit Economy and Efficiency Example

– Audit of healthcare payments enabled the identification of over-billing by matching mutually exclusive services performed by doctors or laboratories for the same patient

Benefits– The volume of transactions would have made

this task impossible to perform manually

Using CAATs Improves Audit Effectiveness Join, concantenate and compare different files to quantify

findings Calculate field statistics (totals, high, low and average value) Use multiple indexes to create summary information and

highlight possible errors Perform detailed analysis

– Total file recalculations

– Stratification

– Gap and duplicate key detection

Document work performed

Using CAATs Improves Audit Effectiveness Example

– Comparing inventory on hand with subsequent sales enabled auditors to identify slow-moving and obsolete inventory

Results– Better findings/recommendations– Higher assurance on inventory valuations

Using CAATs Improves Audit Effectiveness Example

– Analyzing freight charges in a distribution operation identified opportunities for cost savings through relocation of warehouses

Results– Better findings/recommendations– Sales management now requests quarterly

analysis of this area

Using CAATs Enhances Image for Auditing Example

– Auditors prepared a summary report in two hours that IS had said would take six months to create an application to produce

Results– IS department obtained the software to better

serve end users – Auditors became creative problem solvers rather

than policemen

Using CAATs Enhances Image for Auditing Example

– Auditors performed analysis on data from remote divisions at Corporate, prior to commencement of the audit.

Results– Focus moved to areas where risks noted– Questions were specific rather than general – Findings backed up with detail– Time in field reduced

An Overview of the Process for Using CAATs Caats Planning Considerations Caats Development More Examples

CAATs Planning Considerations Understand system and environment Define the problem or need Set objectives Identify files (format and content) Determine method for obtaining files Outline processing and output specs. Estimate cost/benefit of CAATs

CAATs Development Design the report format Set automated procedures to be performed

on the data files Code the application Test results Document the application and control

procedures

More Examples of CAATs Identification of potentially fraudulent

payments using accounts payable files Calculate effects of recommended changes

in company policies (credit limits, interest rates/service charges, commissions, payroll, payment terms, quantity discounts, etc.)

Continuous monitoring applications

Tools Available for CAATs Mainframe/Minicomputers

– Report writers – Utilities and Query tools– Conventional programming languages– 4th generation languages– Hardware specific software– Generalized audit software (CA-Panaudit,

FOCAudit, Dyl, SAS, etc.)

Tools Available for CAATs Microcomputers

– ACL– Applaud– CA-Panaudit Plus– IDEA– PC/FOCAudit– Print report converters (DataImport, Monarch, Link

& Load for use with PC database & spreadsheet packages)

Using a Mainframe for CAATs Potential Advantages Direct data access Speed of processing Ability to deal with very large files

Using a Mainframe for CAATs Potential Disadvantages Reliance on technical specialists Lack of independence and control Platform specific software required Slow turnaround time Cost of resources and software is high

Using a PC for CAATs Potential Advantages Ease of learning and use Interactive processing for immediate results

(auditors have control) Software functionality reduces need to

design reports or code/test processes Can use data transferred from any platform Low cost

Using a PC for CAATs Potential Disadvantages Access to data Storing and processing very large files Dealing with complex data and file

structures (variable length and relational database files)

Technology Aids Trend Toward Use of PC-based CAATs Speed and storage capacity improvements

in PCs PC prices are not increasing Migrations to Client/Server technology will

eliminate data access concerns Many gateways and file transfer utilities are

available

CAATs: Implementation Issues Senior management commitment and

support Hardware and environment being audited Data access Selecting tools Use of technical specialists Training staff

Implementation Issues: Senior Management Support Commitment statement

– Use of CAATs: target areas and timeframe– Cooperation from other departments– Provision for hardware and software needs– Provision for training– Cost/benefit measurement based on periods after

learning curve– Promotion decisions acknowledge creative and

efficient use of CAATs

Implementation Issues: Understand Environment What is the status of environments to be

audited?– Single platform - mainframe or mini– Multiple platforms - networked or not

networked– Migrating to Client/server

Is data easily accessible? Are systems understood?

Implementation Issues: Data Access Methods Using client’s computer and query facility Using file transfer and communications

software Obtaining report print files on diskette Obtaining files downloaded to magnetic

tape, diskette or cartridge Connecting to client’s LAN

Implementation Issues: Data Access Problems Inaccurate record layouts Data elements residing in different files Relational databases - possible need to

flatten files Security issues Limited technical assistance from client

Implementation Issues: Use of Technical Specialists More specialists are required for mainframe

CAATs tools Fewer specialists are required for PC-based

CAAT tools– Reassign them to data security, new systems and

downloading files projects– They can become consultants to the financial

auditors by training/helping them to use software, client files and PCs

Implementation Issues: Training Staff Training program should try to integrate

auditing with use of the software where appropriate

Consider concentrated “just-in-time” training on CAATs tools

For PC-based CAATs tools, provide general training for financial auditors and advanced training for technical specialists

Implementation Issues: Selecting New Tools Define the purpose/use Network - what are others using? Identify available tools Compare features and prices Analyze cost/benefit of options: what’s the

payback?

Implementation Issues: Traps to Avoid The “Expectation Gap” Spending more on the search and evaluation than

the cost of the tool warrants Waiting for the perfect solution Ignoring staff ideas and concerns Underestimating the hardware and additional

software costs Underestimating the training time and expense

CAATs Can Help Auditors Add Value

- The Key is Planning Obtain senior management support Understand the environment Address data access Select a good tool Plan implementation and training Start slow and build up your CAATs successes

Generalized Audit Software Tools

Include:– ACL and Idea– Audit expert systems– Utility and statistical software

ACL

Widely used for data extraction and analysis

Allows for virtual 100% testing of client data