DEREE – THE AMERICAN COLLEGE OF GREECE

Business School

Accounting & Finance Department

Internal Auditing
AF3224 – L6

Internal Audit and CAAT’s:

Vasilis Afratis
 Table of Contents.

1. Introduction
2. Internal Audit and CAAT’s
3. Time Efficiency
4. Population versus Sampling
5. Modelling and Simulations
6. Disadvantages
7. Conclusion
8. References
Introduction

Claiming its place as one of the most dramatic changes in the history of mankind,
digitalization of modern society has transformed the way we produce, store, and
consume data. According to Google’s CEO, Eric Schmidt “Every two days now we create
as much information as we did from the dawn of civilization up until 2003”
(Huffingtonpost, 2011), and although this statement seems a bit exaggerated, and has
been debated among expertise, it highlights the fact that our lives are becoming digital,
both personally and professionally. Companies have already realized the opportunities
of this change and through corporate intelligence software, they produce, store and
analyze information in order to improve their operations, reach new customers and
create value for their stakeholders (EY, 2014). The purpose of this paper is to examine
whether Internal Auditing, given the digital framework in which organizations operate,
can achieve its objectives without resorting to Computer Assisted Audit Techniques
(CAAT’s) and what are the advantages and disadvantages of such practice.

Internal Auditing and CAAT’s

According to the Chartered Institute of Internal Auditors, the role of Internal Auditing is
“to provide independent assurance that an organization’s risk management, governance
and internal control processes are operating effectively.” (IIA). In order to achieve these
objectives internal auditors will have to use data from all available sources, analyze
them and look for trends, patters or gaps, a procedure that traditionally has been
performed with Microsoft Excel or similar software. But, with the increase of the
amount of data available and its complexity, some auditors have taken the next step
and started using more advanced programs like ACL and IDEA in order to extract data
from other systems and run data analysis routines against this information. (DeRoche,
2015). The Institute of Internal Auditors has release a practice guide called GTAT 16 –
Data Analysis Technologies. In this guide it highly recommends its members to move
forward “from the tried and true methods of manual auditing toward improved data
analysis using technology” (IIA, 2016). This, technology supported auditing method, will
allow management to “answer questions more quickly, accurately and comprehensively
than following a manual line of investigation.” and at the same time it will provide
recommendations and ways to improve. (PWC, 2012)

Time Efficiency

One of the main advantages of using CAAT’s is the fact that long, manual procedures
that otherwise would take hours to complete, through the use of CAAT’s do not last
more than a few minutes. For example, comparing invoices with purchase orders and
payments can be a tiresome task that would otherwise require a lot of time and effort,
is easily performed with the help of an auditing software as most have already installed
the relevant functions. (TopCaat). Most of the software available, is capable of
processing all kind of structured and semi-structured data for many different kind of
sources and formats, turning them easily into table entries. In addition, for processes
that have to run periodically that process can be made even simpler as most programs
offer a macro record feature that enables the user to record the commands of a
repeating task and run the same procedure without user interference.

Population versus Sampling

When it comes to large corporations an auditor may be up against a vast amount of data
that have to be processed and analyzed. Without the use of CAAT’s the solution to that
problem was sampling. If an unexpected record is found in the sample examination, the
process is repeated for further clues. This kind of process runs the risk of missing an
unexpected outcome in the initial sampling procedure. Specialized auditing software has
the ability to input and process huge number of records, allowing the auditor to test
100% of the population, a feature that minimize that risk of important information being
left out because of sampling. (TopCaat). The auditing process itself, is also of better
quality as even the slightest deviation or inconsistency is revealed. This way the auditor
can provide hard evidence based on real data, rather than estimates based on sampling,
which subsequently adds value to the company itself.

Modelling and Simulation

Sophisticated auditing software can also run computer models and simulations. Most
commonly used for financial purposes, simulations can be used by an auditor to
reproduce the outcomes of all possible scenarios, usually when the restructure of a
process is considered. Also through modelling, potential risks stemming from fraud,
mistakes or other issues can be judged and evaluated. (Lacoma)

Disadvantages

Like others, CAAT’s are also tools and like such, the quality of the output matches that of
the input. In order to be able to make the most out of it an auditor should be well
familiarized with its capabilities and functions. CAAT’s offer features that can provide an
auditor with all the necessary information he or she needs but in order to achieve the
desired result the auditor must know what he or she is looking for and most important
how to extract it. One of the drawbacks of CAAT’s is the fact that many auditors are not
yet trained for using such techniques and training is cost for companies both in money
and time. (Lacoma). Adding to that cost, one should also consider the cost buying the
software license, as well as setup and upgrade. Extra consideration is required upon
choosing for the appropriate software, as there is always the risk that the software
chosen is not suited for the auditing purposes of the specific company, causing more
damage than good.
Conclusion

It is a fact that the framework within organizations operate has changed dramatically
during the last two decades. Information is produce in an unprecedented scale and as
competition increases, companies want to benefit from this data explosion and the
opportunities it offers. The available literature seems to agree that the use of CAAT’s is a
one way road for internal auditing. The fact that most companies produce large amount
of mostly digital information means that internal auditing must build the capability to
analyze this information and by doing so it will accept the fact that it plays the leading
role in turning data into insight.(EY, 2014)

Word count: 1172

DeRoche T, 2015, Increasing Internal Audit Effectiveness with Data Analytics

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Huffingtonpost 2011, Google CEO Eric Schmidt: “People Aren’t Ready For The
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IIA, “What is internal audit?”, https://www.iia.org.uk/about-us/what-is-internal-audit/

IIA, 2016, GTAG 16: Data Analysis Technologies https://na.theiia.org/standards-

Lacoma, T. Advantages and Disadvantages to an Assisted Audit

PWC, 2012 Computer Assisted Audit Techniques (“CAATs”): Using automated tools to
address common Building Society challenges,
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automated-tools-to-address-common-building-society-ch.html
TopCaats, “The benefits CAATs bring” http://www.topcaats.com/mes-guide/mes-
benefits/