Internal Auditing & Risk Management Year XVI, No 1(61) March 2021

TECHNOLOGIES AND THEIR IMPACT ON AUDIT

Viorica NEACȘU (BURCEA), PhD Student

University of Valahia Targoviste, Romania
[email protected]

Abstract: As technology has become indispensable in any field of life and

therefore in auditing, this paper aims to study the influence of technology on
the audit and how this process can be improved. In an economic environment
characterized by frequent changes, technological information and increasingly
specialized software are essential and are an invaluable help in conducting a
modern audit. Given the pace at which technology is advancing like never
before, allowing organizations to process and analyze large amounts of data,
the audit is driven to adapt and make profound and rapid changes. The paper
analyzes the effect of technology on the skills required by auditors in order to
perform a high-quality audit in a digital world.
Keywords: audit, technology, Big Data, digital world, challenges
JEL Classification: M40, M42, Q55

Introduction

In the contemporary economic environment, the audit plays a vital role in

the business, government, and economy of each country. Investors, financial
analysts, bankers, bondholders, and other creditors appreciate the work of
auditors and rely on audits of financial statements to ensure that they use reliable
information when lending to public and private companies. The management
of a company needs reliable and timely information to make different types of
business decisions.
Over time, external stakeholders - customers, creditors, banks,
governments, the business and financial community, investors, and regulators -
have increasingly sought information on the activities, governance, decisions,
and strategic direction of companies, based on which they can take important
investment or business decisions. In other words, the audit is the way through

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which managers find out if the business they lead is reliable and whether it’s
ready or not to meet potential challenges, and it is the way through which
stakeholders receive the assurance on the financial, operational, and ethical
well-being of the organization. Moreover, studies argue that both the technology
and the work undertaken by the auditor have a major role in guaranteeing the
integrity of financial statements (Taremwa, 2019).
As new technologies are accepted and adopted, giving clients
accessibility to a great amount of data, investors are looking for broader
assurance services in order to reduce risks in their business, beyond the
focus on historical information. Certainly, auditors should adapt to the new
requirements to benefit from more information available to further improve
the quality of the audit of financial statements and to provide an additional
perspective.
Internationally, institutions are beginning to use digital and automation
technologies, but it will take some time before they begin to understand how to
capture value from them. Financial professionals need to start assessing how
these technologies will affect their work, as well as the type of talent needed
to deliver on the promise of digital instruments. Technology has become
indispensable, but it is also very important that these tools be used correctly
and efficiently.
If the financial-accounting function had in the past the role of “technical
support” then this function must be considered today as a “business partner”
that offers vision for the future, helping the company to achieve its objectives
and contributing to its long-term success (IFAC, 2019).

Auditing at the Speed of Change

Due to advanced technology, important changes are expected in the field of

accounting and auditing, in terms of speed and accuracy of information, but
also the adoption of new technologies such as tax software and tools that
help accountants improve their traditional working methods, thus reducing
the number of mistakes made. In a rapidly changing environment, information
technology is becoming an important strategic business partner. The use of IT
— the technology used to process, store, and transmit information — improves
the organization’s performance by helping management make decisions. The
digitalization of the business model is the main factor for competitiveness and
long-term success.
According to Ursillo (2018), the partner in Cherry Bekaert’s Risk
Assurance & Advisory Services (RAAS) group, “new accounting technologies

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are likely to significantly impact the way auditors execute engagements and
client services,” even though traditional audit will remain essential. Until
recently, auditors worked in an office. Due to the evolution of technology,
auditors can now work remotely, using data and analytics, automation and
visualization in real-time. Traditionally, an audit process is performed by
following several stages such as accepting and planning the audit mission,
evaluation of the internal control, verification of financial statements, and
audit report. As organizations increase the adoption of big data, the audit
profession is forced to evolve and change the methods employed in audit
processes oriented towards improving engagement output (ICAEW, 2018b).
It is important for the information systems (IS) auditors “to understand the
associated risk and consider approaches to ensuring that the risk is properly
managed” (McDermott, 2018).
According to a survey conducted by Harvard Business Review
Analytic Services, 72% of the 600 respondents found that the strategies and
operations of the institutions they run are sensitive to digital disruptions
generated by their competitors that offer simpler and cheaper solutions.
These business leaders understand that their ability to perceive and react
in time to ever-changing conditions such as internal operational problems
as well as external market conditions, all of these are a matter of survival
and that only those who are able to use data, analysis and automation to
anticipate and take the necessary action will have a competitive advantage.
All these realities help us understand the important role that both financial
audit and financial accounting activity play in meeting these challenges.
Some researchers (Griffin & Wright, 2015; Earley, 2015) have
complained about the lack of big data in the audit. Earley (2015) argues that
big data could be a game-changer in auditing. Researchers as Brown-Liburd et
al. (2015), Moffitt and Vasarhelyi (2013), Yoon, Hoogduin, and Zhang (2015)
embrace the use of technologies and argues that big data would add value
in the audit process. In an economic environment characterized by frequent
changes, technological information and increasingly specialized software are
essential and are an invaluable help in conducting a modern audit. It is essential
that auditors and other professionals in this field not only be informed about
the recent technological developments but obtain a sufficient understanding of
these new technologies to get the most out of them. These technologies require
redefining audit processes, frequently updating software tools, and acquiring new
skills and abilities from professional accountants.
According to Bloomberg Tax (2020), the major international public
accounting firms - Deloitte, PricewaterhouseCoopers (PwC), KPMG, and Ernst

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& Young - set a new record in investing billions into artificial intelligence &
data analytics products, and changing the way they have traditionally operated.
These firms, known as the Big Four, also want to train employees to bring
advanced digital solutions to all consulting and auditing practices within
companies. In an interview on December 2020, Narayanan Vaidyanathan,
head of business futures at the Association of Chartered Certified Accountants,
declared that “new technology was fundamentally changing the nature
of accounting.” Although some of the jobs will no longer exist with the
automation of invoices, however, accountants and auditors “will be expected
to become business advisers, not just number checkers. They need to be on top
of technology and train staff to use it.”
All these technological advances certainly lead to a rethinking of the
audit process and we need to recognize that this requires time to happen.
Auditors not only need to be sharp as they understand and adopt these new
tools, but they must be well ahead of these changes to be able to provide
relevant counseling and support services. Before using the new technologies,
auditors first need to understand them (Appelbaum et al. 2017).

An overview of technologies that can change audit

In today’s digital transformation, technology and tools such as artificial

intelligence (AI), cloud systems, blockchain, and data analytics are key
challenges for any organizational activities and processes. In the last 10 years,
Big Data has been one of the most frequently discussed phenomena as well as a
challenge in many organizations around the world. However, when we are talking
about big data, the audit industry lags behind.
Big Data is usually described using the three Vs model. Many
information systems (IS) auditors and risk professionals are already familiar
with this model, which represents the concepts of volume, velocity, and variety
(McDermott, 2018).
The National Science Foundation (NSF, 2012) defined Big Data as
“large, diverse, complex, longitudinal, and/or distributed data sets generated
from instruments, sensors, Internet transactions, email, video, click streams, and/
or all other digital sources available today and in the future.” Big Data can be
defined based on large volumes of extensively varied data that are generated,
captured, and processed at high velocity (Laney, 2001). Drew Conway, head of
data at Project Florida, concluded that “Big data, which started as a technological
innovation in distributed computing, is now a cultural movement by which we
continue to discover how humanity interacts with the world—and each other—at

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large-scale.” Kord (2012) highlighted 4 elements of Big Data ethics: identity,

confidentiality, ownership and reputation. Although in the meantime things have
evolved, these elements may still be relevant in risk assessment, audit planning
and alignment between the company’s documented values and practices in the
methods and tools used (such as algorithms), buying, selling, etc.
Artificial intelligence, blockchain and data analytics are game changers
for both the finance and accounting sector and the audit profession, transforming
the roles of both finance professionals and auditors (ICAEW 2018b). Auditing
will continue to be transformed through deep learning. With regard to auditing,
it is anticipated that AI will change the definition of reasonable assurance by
identifying risk-based anomalies, not just rules.
Blockchain can be defined as a network software protocol, which is
a set of rules and conventions which allow network devices to communicate
with each other (ICAEW 2018b). Blockchain is like a protocol, a way for
recording transactions. Unlike the internet, in which data is shared, blockchain
ownership can be transferred from one party to another. The good thing is
that “Blockchain is a system of recording information in a way that makes it
difficult or impossible to change, hack, or cheat the system.” (ICAEW 2018b).
Related to Big Data is also the development of cloud computing. One of
the advantages of using cloud services is that users can benefit from these services
without having to maintain and operate their own IT infrastructure. According
to the US National Institute of Standards and Technology (Mell, and Grance,
2011), cloud computing is a “model for enabling convenient, on-demand network
access to a shared pool of configurable computing resources (e.g., networks,
servers, storage, applications, and services) that can be rapidly provisioned and
released with minimal management effort or service provider interaction.” Cloud
computing is the best way to manage information technology (IT) resources, as
companies manage to store as much data as they need (Bhardwaj et al. 2010).
According to KPMG (2018), auditors need to integrate more cyber security
capability in the audits and also, they need to rethink their approach in providing
assurance around cloud systems.
There are various technologies like Apache Hadoop, NoSQL, Data
Analytics, CATT that can be very helpful in financial audit missions, by simplify
audit procedures, improve organizational performance and reduce risk (Cristea,
2020). Hadoop is one of many open-source software platforms that help store
and manage large amounts of data. Also, an advantage offered by Hadoop
in favor of auditors is the tolerance for errors, resuming the order, allowing
security analysis and storage of APT (Advanced Persistence Threats). The
adoption of HDFS and Map Reduce makes it much easier and more secure for
the auditor to verify information about company transactions. MapReduce can
process huge amounts of data at high speed and can also remove duplicates.

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These audit softwares add value to the financial auditor in conducting au-
dit activities, creating a hybrid environment in which systems are responsible for
monitoring an overly voluminous external data environment (Krahel, and Vasar-
helyi, 2014). All these technological developments tend to lead to the adoption of
a continuous audit and the extensive use of IT tools.

The advantages and challenges offered by technical tools

Some research (Marr, 2018) estimate that 90% of the world’s data has
been generated since 2016, and significant amounts of it are financial data.
Furthermore, according to a survey by the International Data Group (2020),
81% of survey respondents reported already using computing infrastructure or
having applications in the cloud, compared to 73% in 2018, and another 12%
of them projecting to implement cloud-based applications in the near future.
Cloud adoption has also reached more than two-thirds in every industry,
with about 75% in financial services, and 92% of the organization’s total IT
environment is at least somewhat in the cloud.
An increasing number of organizations recognize the many benefits
of the cloud-computing trend. Among the key benefits of cloud computing,
we can list agility, scalability, greater efficiency, reduced costs, data security,
business continuity and flexibility, and many others. Given the increasing use
of big data by audit clients, it leads to urgency for auditors to conform to the
existing trend (Appelbaum et al. 2017).
Technology has the capability to transform the audit. It increases
competitiveness in the world market, having a positive impact on organizational
processes, including accounting, finance, marketing and human resources.
Technology offers the ability to improve the quality of audit and also to add
more value (ACCA, 2019). Furthermore, technology can considerably improve
the work of the accountant and the auditor, increasing the economic efficiency
and speed of the processes. It reduces the time to complete the audit mission
because it accelerates the identification of exceptions, simplifies the preparation
of worksheets, and the reports are generated automatically. It provides immediate
benefits to the audited client by reducing the daily risk, detection of irregularities
and fraud, data analysis may indicate forecasts, ensuring greater independence
from the audited environment. Technological advances might allow auditors to
move toward a more continuous auditing and monitoring process.
The use of IT devices has changed significantly the activity of
auditors, and also improves the financial reporting system. For instance, “new
technological tools have the potential to enable the auditor to mine and analyze
large volumes of structured and unstructured data related to a company’s
financial information. This capability may allow auditors to test 100 percent of

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a company’s transactions instead of only a sample of the population” (Harris,

2017). By adopting big data techniques, auditors could provide reasonable
assurance about the relevance of the financial statements (Hogan, Rezaee,
Riley, & Velury, 2008).
There is no doubt that technology presents opportunities that help
increase the efficiency and quality of the audit, but along with these opportunities
comes also considerable risk that must be properly managed. An important
concern associated with big data is ensuring that adequate safeguards are in
place to protect the data and adhere to privacy requirements, particularly for
consumer information (ISACA, 2018). Another concern is, When AI and other
technologies are fully accepted and put into practice, what happens to the
independence of the auditor?
The rapid technological evolution brings opportunities but also
challenges for the financial-accounting function. The only thing we know
for sure so far is that technology cannot completely replace the “auditor’s
knowledge, skill, judgment, and exercise of professional skepticism” (Harris
2017), and human involvement is still necessary to effectively communicate
and advise investors and information users. Despite these advantages offered
by technology, professional reasoning will always be necessary for the audit,
the financial auditor’s thinking and analysis will not be able to be replaced.
“The future is one where humans and machines work together” (ICAEW
2018b). What real effect the technology will have on the audit process is yet
to be determined.

Conclusion

Technology has the capability to transform the audit. It enables the increase the
assurance that professional auditors must give, thus contributing to ensuring
confidence in the system. As recent research highlights (ACCA, 2019), a key
skill for auditors in the near future will be the flexibility to adapt to a working
environment that will continue to evolve. The auditing profession will certainly
not disappear, however, it will need a new approach. To improve audit quality
and investor protection, there are several challenges that auditors need to
consider. Besides being up to date with new technologies, audit professionals
must be able to find information that is important to clients, such as tracking
trends and emerging issues, in order to provide more insights to help make
more-informed business decisions. In addition, they need to improve their
critical thinking, technology skills, professional judgment, and look ahead and
provide insights on future challenges and opportunities in order to meet the
rising expectations on audit quality.

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