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How to increase efficiency and minimize risk in the audit process using analytics

March 29, 2017
Read Time: 0 min
Jackie McLaughlin, CPA, started her career in a Big 4 public accounting firm. Since leaving public accounting, she has been an internal auditor, a tax preparer and a controller. She’s also done forensic accounting and has written extensively on the accounting field. Currently, in addition to serving as the controller for a large heavy equipment company, she instructs all four parts of the Becker CPA Exam Review and serves as a course reviewer for The National Association of State Boards of Accountancy (NASBA). Needless to say, McLaughlin knows what she is talking about when it comes to auditing. She shared her expertise in a recent Sageworks webinar, “How to Increase Efficiency and Minimize Risk in the Audit Process.”

During the webinar, McLaughlin explained that the two biggest challenges for audit firms lie within the tension of managing risk while creating more efficiency during the audit process. McLaughlin noted that “without appropriate risk mitigation, a firm could issue an incorrect opinion, and without efficiency, a firm may find it difficult to turn a healthy profit.” The goal is to do less work while managing an appropriate level of risk.

As technology-enabled analytics (“analytics”) have gained momentum in audit firm practice management, McLaughlin explained that “data analytics are the panacea for the challenges we face as they reduce budgeted hours and risk by efficiently guiding firms in identifying the areas at most risk for misstatement.” Analytics can more effectively focus firm resources. In fact, in its 2015 publication “Audit Analytics,” the AICPA stated that “data analytics have the potential to transform the way financial statement audits are conducted, making them significantly more effective and possibly more efficient.”

Learn more: Watch a replay of “How to Increase Efficiency and Minimize Risk in the Audit Process

Beyond the automation benefits provided by technology-enabled analytics, McLaughlin explained that the results of the analysis are powerful since they provide a means for visualization of the data. Visualization through graphics is especially useful to auditors since it enables examiners to respond to what is being presented. In learning theory, if you can picture it, you can understand it. Visualization has the potential to focus the firm on areas most subject to risk.

What analytics cannot do is enhance professional skepticism for the auditor.

Professional skepticism is vital for evaluating and processing the information gained during an audit exam. Quicker turnaround times and other efficiencies do not mean that auditors can become less vigilant and accepting of what may seem to be objectivity in the data, according to McLaughlin. Why? A study by the Global Public Policy Committee, “Enhancing Auditor Professional Skepticism,” found that common judgment tendencies in auditors act to weaken skepticism and lead to bias.

According to McLaughlin, some of the most common causes of bias in an auditor include:

Overconfidence – Overestimation of one’s own ability.

Confirmation – Placing more weight on evidence that confirms management’s position rather than on evidence that refutes it.

Anchoring – Being overly influenced by the initial numbers reported by the client.

Availability – Considering material that is more readily available by memory as more relevant or more important for judgment.

Whether auditor bias is inherent to human nature or is a result of a natural tendency to become too familiar with long-term clients, McLaughlin noted that financial statement fraud is on the rise and auditors by necessity need to overcome common areas of bias and develop stronger skepticism. According to a 2014 report by Cornerstone Research, allegations of accounting fraud surged 47 percent in securities class actions lawsuits in 2013. That’s partly a reflection of an increase of 46 percent in accounting fraud enforcement cases brought by the U.S. Securities and Exchange Commission (SEC) in the 2013-2014 fiscal year.

Tech-enabled analytics can objectively analyze and highlight unusual areas in client financials that warrant further investigation and test work. This technology and the resulting analytics focus the auditor while performing analysis more quickly and accurately, but even so, artificial intelligence (AI) and technology will never replace human judgment. McLaughlin explained that analytics will require even more human judgment since AI can produce broader and deeper ranges of information from aggregated client data. AI will not replace your job, or your need to be vigilant in risk mitigation.

While they don’t replace sound judgement, tech-enabled analytics can remove doubt in risk management. They help ensure that variances are properly investigated since analytics easily highlight unusual variances that are not obvious on first read of the financial data. As an added benefit, analytics can minimize disruption to the client, as well as improve communication among the parties involved with the audit. Altogether, data analytics provide enhancements and benefits needed by clients and auditors alike. To learn more, view the webinar, “How to Increase Efficiency and Minimize Risk in the Audit Process.”

Additional Resources

eBook: Audit & Review Best Practices and Pain Points

Article: The benefits of audit technology

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About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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