Introduction

The audit profession is witnessing unprecedented changes due to increased regulatory scrutiny, talent development and retention, rising costs, changing stakeholder expectations, and the technological evolution of businesses.

Currently, businesses are going through a technological revolution at lightening speed. Many industry leaders believe it is the fourth industrial revolution. Though business houses were gearing up for digital transformation for the past few years, the global pandemic acted as a ‘catalyst’ for digital transformation and has proven to the world how quickly businesses could transform when required.

Using disruptive digital technology, businesses transformed with improved, complex processes, products, and services that contributed to the company’s profitability. Robotic Process Automation (RPA), Workflow Automation (WA), and Natural Language Processing (NLP) have changed human lives in shared service centers, whereas artificial intelligence (AI) is widely used in customer service. With a rise in cryptocurrency, the concept of blockchain is currently being picked up by banks and financial institutions to drive efficiency. The impact of these advanced technologies has virtually touched every industry, every organization, and every function, from marketing to financial reporting. The way in which data and transactions are processed has been completely transformed, resulting in different risks, and paving the way for newer opportunities.

As the way businesses are carried out is transformed due to the digital revolution, the audit profession also needs to adopt and digitalize its ways of working to keep pace with the changing business risks and meet stakeholders’ as well as regulators’ expectations by enhancing audit quality.

Benefits of adopting technology

• Enhancement in the quality of audit
• Improvement in efficiency
• Retention and development of talent
• Driving a culture of innovation

As organizations embark on the digital transformation journey and a lot of data becomes available, there is an increased expectation from the auditors to use the available data effectively to deliver quality audits. Technology helps to not only improve the quality of audits but also provide better insights into client businesses that add value to the clients. It also helps the auditor analyse the complete population and obtain a higher level of assurance than if he were to verify a few samples in a large population. It helps auditors move from being reactive and, post facto to proactive, forward-looking, and working on a real-time basis. It provides an opportunity to help clients by providing timely insights and increasing the ability to identify areas of heightened risk, control weaknesses, increase data coverage, and improve the ability to find anomalies and outliers.

“The profession has evolved significantly in the past decade on the digital front with auditors focusing on the use of data analytics and artificial intelligence while auditing.”

The profession is now moving towards 100% review of transactions, review of unusual patterns, and abnormal transactions as opposed to statistical sampling approaches.

Gone are the days when financial statements were concise and short audit reports were preferred. With Revised Schedule III and CARO 2020, the trend now is clearly towards more disclosures and transparency in financial statements, and audit reports with greater details, and that too within a couple of days after the financial year-end, which puts further stress on audit firms to innovate and find effective ways of working. Technology helps auditors to effectively and efficiently complete quality audits within stringent timelines, without further increasing stress on the audit team.

Technology permits more frequent or real-time audits of transactions. Auditors can benefit from being able to spread audit work throughout the year rather than only during the “busy season,” identifying potential issues earlier, and improving auditors’ ability to timely modify audit plans in response to address those issues.

In today’s world, where all audit firms are facing a talent war and are finding it difficult to hire and retain talent within the firm, the wave of digitalization will not only help by automating routine activities but will also help to retain talent by providing them the opportunity to learn new and niche technologies. Using these technologies, people will need to think outside the box and come up with new, efficient, and effective ways of working. This will drive a culture of innovation in the audit profession, reshaping the future. In addition to this, automating routine and mundane tasks will reduce the stress on the audit team, and help firms help people focus on their well-being.

Use of various technologies

1. Data Analytics

“Data analytics is widely used by audit firms. Data analytics helps firms analyse 100% of the population, find unusual patterns and transactions, and spot anomalies.”

An auditor can then focus their audit procedures around those unusual transactions, which in turn improves the audit quality. Analytics allows auditors to audit large amounts of data held and processed in the IT systems for larger clients more effectively, aiding risk assessment through the identification of anomalies and trends. Analytical tools have the power to present and analyse the data in pre-structured forms and presentations, which can even help generate tailored audit programs to mitigate client-specific risks.

Examples of the use of data analytics to perform audit procedures:

• Analysis of revenue trends by product, region, and month
• Comparison of client data with industry trends
• NRV testing: comparison of the last selling price with inventory value
• Employee category-wise analysis of average salary cost per employee
• Analysis of inventory items with no movement during the year

2. Artificial Intelligence (AI)

“AI can evaluate large volume of structured and unstructured financial data and helps identify patterns and anomalies.”

The term “AI” describes computing systems that exhibit some form of human intelligence. It covers several interlinked technologies, including machine learning, speech recognition, image recognition, and sentiment analysis. AI can be used in each phase of the audit.

Using machine learning, AI can assess general ledger data based on in-built algorithm/logic, and segregate transactions into routine/non-routine or high and low risk. In the traditional method, the auditor would perform statistical/random sampling to test the data. The above segregation performed by AI will help the auditor to quickly identify risks, and focus and plan appropriate audit procedures to mitigate the same. AI tools can also extract predetermined information, which allows the auditor to estimate large data sets quickly and more efficiently.

For example, in the case of a large number of lease contracts, machine learning tools can analyse the contracts in a shorter timeframe and more accurately as compared to traditional manual reviews.

AI-powered tools can also help in automating audit processes such as expenses, which may help to spot anomalies or frauds. Most of us would agree that reviewing financial statements and ensuring completeness and accuracy of the information is extremely important in the audit of any financial statements. AI tools can be used to help in completing such procedures e.g., tying amounts on the financial statements to the audited trial balance, ensuring that the notes to the financial statements tie back to the income statement/balance sheet and disclosures wherever applicable, tracing prior period numbers with previous year financial statements.

Thus, the days are not far off when AI programs will do a large portion of the execution of audits, teams will conduct audits in the metaverse, and inventory counts and asset verification will be observed using drones. In substance, the use of advanced technology has become a ‘must’ for auditors.

3. Robotic Process Automation (RPA)

Audit firms have also started using RPA to automate time-consuming routine work procedures. RPA is used by audit firms to verify the statutory dues of their clients, send confirmations to customers and vendors, and prepare a summary of the differences once confirmations are received.

Challenges and a way forward in moving towards digital audit

• Adaptability
• Need for specialised training
• Investment in tools and technologies
• Regulatory changes

“The biggest challenge in moving towards the digitalization of audit is the adaptability of audit firms, and the shift in their mindset towards new and diverse ways of auditing using technology.”

Many believe that automation and paperless audits tick the box for ‘digitization’. Several audit professionals believe that while the medium of communication and documentation may have changed with the adoption of technology, nothing about the audit process itself has been altered with it.

Essentially, the auditors are not yet using technology optimally to enhance decision-making but more as the next step up from pen and paper. Audit professionals need a mind-shift to adapt to the changes, keep themselves updated and relevant, and develop and use tools and technology to identify and mitigate audit risks rather than relying solely on documentation.

As business models grow in complexity, firms will require professionals with the ability to leverage wider specialist expertise across multiple areas of business. Further, small and medium professional firms will need to ensure that they adapt to new ways of digital auditing and keep themselves abreast with the latest technological changes.

In the case of new talent, the course curriculum is required to be revisited to ensure it keeps pace with the changing technology. Simple analytical tools like Power BI should be included in the course so that the new audit generation is ready to use the same for analytical procedures. In addition to this, professionals will be expected to have multidisciplinary knowledge in areas such as cybersecurity, fraud, sustainability, and technology, which can be leveraged to provide high-quality audit services.

Experienced professionals need to undertake specialized digital courses, focus on understanding new technology, and find more innovative ways of auditing. However, technological empowerment can be a double-edged sword as these skills are extremely important but are short-lived.

Employers also need to reinvent themselves and train future business professionals accordingly. Ultimately, the people (and not the technology itself) will define and drive audit quality. Auditors should learn to use technology as a tool for providing them with insights on several financial and operational matters and to leverage those tools to automate time-consuming routine tasks.

As professionals are trained, it becomes extremely important for audit firms to strategize and retain their talent. With a growing focus on audit quality, the firm needs to offer varied learning opportunities. Audit firms will also need to invest in tools and technologies along with investment in the training and development of their people.

Further, regulators also need to revisit the auditing standards to ensure that the use of different technologies is widely acknowledged and governed by the standards. New standards should be developed to examine and regulate the adoption of modern technologies for analytic purposes (such as blockchain and artificial intelligence) in audit procedures.

A key skill for auditors — at least during the coming years — will be the flexibility to adapt to a working environment and keep abreast with technological changes which will continue to evolve.

Key Takeaways

“In spite of the tremendous benefits and future potential of technology in auditing and assurance, it can never substitute an auditor’s knowledge, judgment, and exercise of professional skepticism.”

Digital transformation is extremely critical for the future of the audit profession and to improve audit quality. However, in spite of the tremendous benefits and future potential of technology in auditing and assurance, it can never substitute an auditor’s knowledge, judgment, and exercise of professional skepticism. Advanced technologies offer great promise to audit, but it is important to remember that these can provide great insights only when the audit team is able to analyze the results appropriately. Therefore, it is extremely important that audit professionals adapt and invest in learning and embracing technology to keep themselves relevant in today’s world. The question is no longer “whether” the auditor needs to change; it is “how fast can we embrace technology?”

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Author may be reached at: cashraddha@yahoo.in and eboard@icai.in