CFA Institute recently provided input to the International Auditing and Assurance Standards Board (IAASB) on its proposal of Exploring the Growing Use of Technology in the Audit, with a Focus on Data Analytics. The proposal was prepared by the IAASB’s Data Analytics Working Group (DAWG), which was established to inform the IAASB about how and when to respond most effectively to developments in technology in the public’s interest.
CFA Institute supports the direction and approach of the DAWG to incorporate data analytics into the International Standards on Auditing (ISAs). As we talk about in our report, Data and Technology: Transforming the Financial Information Landscape, we believe that the use of data, data analytics, and technology can result in a more effective and efficient overall financial reporting process, including the audit. The result would be investors receiving more transparent, better-quality information on a timely basis.
The Old CAATs Are Today’s Data Analytics
The current ISAs do acknowledge the use of computer-assisted audit techniques (CAATs) by the auditor in executing the audit. But we believe that the simple reference to CAATs is insufficient given the technological developments and new ways of using data that have taken place since the ISAs were developed. As the proposal from the DAWG states, “the reference to CAATs in the ISAs was created in a completely different technological era, and CAATs have evolved significantly into what is now being referred to as data analytics.”
The proposal goes on to state that although the ISAs do not prohibit the use of data analytics techniques, the lack of reference to data analytics in the ISAs may be viewed as a barrier to their adoption, which is a cause for concern in the investor community. Auditors should not be deterred from using data analytics, and hence, the ISAs need to reference data analytics.
The proposal goes on to state the following:
This lack of reference to data analytics in the ISAs also results in some being of the view that gathering information from the use of data analytics does not necessarily reduce the procedures required by the ISAs today, even if those required procedures now appear redundant as a result of the information gained from the use of data analytics.
We agree with the proposal that although “the auditing standards are not broken, they need to reflect current practices and developments in order to remain relevant and meet investor expectations of the effective use of technology by the auditor to deliver high-quality audits.”
But as we note in our Data and Technology report, “greater research is required by both accounting firms and academics on how and which audit procedures and audit standards may be changed — not just to improve the audit process but also to allow it to truly evolve.”
As the DAWG conducts further research — alongside the research being conducted by academics and accounting firms — and outreach, as well as participates in future standard-setting activities, the goal will be to find how best to reference the use of data analytics in the ISAs without making wholesale changes that could lead to unintended consequences.
As Technology Evolves, So Must Standards and Education
We believe the DAWG has correctly identified those projects under review by the IAASB in which data analytics will likely have a role: professional skepticism, the revised ISA 315 (Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment), quality control, group audits, and ISA 540 (Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures).
In addition, we agree that the DAWG needs to work with the International Accounting Education Standards Board to update and expand education in technology and analytic methods because accountants and auditors will need to develop different skills to implement data analytics into their work.
Furthermore, as we say in our report, there is also a need for “a reexamination of concepts, such as materiality, independence, and what constitutes sufficient audit evidence.” The standards need to be able to accommodate for such changes as continuous auditing. Indeed, when considering changes to the ISAs, the DAWG needs to keep in mind what changes the future may bring to ensure that principles-based standards can appropriately accommodate those changes.
We encourage the IAASB to continue to remain in contact with all stakeholders through direct outreach, roundtables, and other means. We also hope the DAWG has or will consult with the Public Company Accounting Oversight Board (PCAOB) and enforcement agencies, such as the US SEC.
CFA Institute would be happy to be involved in such outreach efforts.
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