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Evolution of Auditing Standards Dealing with Audit Analytics

October , 2013. Evolution of Auditing Standards Dealing with Audit Analytics. Greg Shields Director, Auditing and Assurance Standards. Understanding the entity’s business. NOW. FUTURE. Use of analytics is REQUIRED : as part of risk assessment procedures (315.6 (b ))

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Evolution of Auditing Standards Dealing with Audit Analytics

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  1. October , 2013 Evolution of Auditing Standards Dealing with Audit Analytics Greg Shields Director, Auditing and Assurance Standards

  2. Understanding the entity’s business NOW FUTURE • Use of analytics is REQUIRED : • as part of risk assessment procedures (315.6 (b)) • to assist in forming an overall conclusion on whether the f/s are consistent with the auditor’s understanding of the entity (520.6) Will still be required but with more explicit recognition of the IT environment in which entities operate, including “Big Data”

  3. Substantive procedures NOW FUTURE Use of analytics is OPTIONAL in performing substantive procedures. But if analytics are used, the auditor must audit must evaluate the reliability of data to be used (source, comparability, nature and relevance, controls over preparation) (520.5(b) In some circumstances, use of data analytics may be required (as the only viable audit approach). Data reliability will still need to be evaluated, and relevance may become a more important issue.

  4. Financial reporting standards Management & auditors already have to deal with vast amounts of diverse types of financial and non-financial data ( “information”) 2012 IFRS ED FINANCIAL INSTRUMENTS: EXPECTED CREDIT LOSSES Specifically, this Exposure Draft would require an entity to measure expected credit losses using relevant information about past events, including historical credit loss events for similar financial instruments, current conditions and reasonable and supportable forecasts that affect the expected collectability of cash flows on financial instruments. As a result, an entity would consider quantitative and qualitative factors that are specific to the borrower, including the entity’s current evaluation of the borrower’s creditworthiness. An entity would also consider general economic conditions and an evaluation of both the current point in, and the forecast direction of, the economic cycle.

  5. Some key matters to consider in updating standards Standards cannot (and are not meant to) provide the competencies required to effectively apply analytics, or detailed guidance on the tools available. But someone has to. • Having standards recognize the merits of more use of analytics as substantive procedures may be a tough sell because: • There is a lack of understanding of high-powered analytics • Regulators (PCAOB, CPAB) find that some auditors pay little attention to data reliability • Many audit firms/auditors resist change.

  6. Some key matters to consider in updating standards (cont.) Establishing the reliability of data may remain a tough nut to crack (especially re data that is outside the scope of the audited entity’s controls) Standards evolve from existing good practice. Firms that are having success in effectively applying analytics may be reluctant to share their expertise (why give up your firm’s sustainable competitive advantage?).

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