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3 Steps to Better Audits Using Data Analysis

Carolyn Newman, CPA, CISA

Client retention remains at the top of the priorities list for CPAs, and fee pressures can be alleviated when a firm adopts data analysis technology to help lower the costs of their audit and add more quality to their work – including wowing their clients with what they’ve found.

For example, firms like Macias Gini & O’Connell – a statewide CPA and business management firm based in Scramento, Calif., ranked among the fastest growing CPA firms in the nation – handles numerous government clients, entities with thousands of employees processing hundreds of thousands of transactions. The firm’s managing partner, Jim Godsey, believes data mining with good analytic tools changes everything, especially when you consider the only alternatives are random sampling and more aggressive interviewing procedures – both of which tend to underwhelm board members when it comes time for audit closing meetings.

“The profession is relying heavily on internal controls. In a large company with a lot of transactions, you’re not in a good position with random sampling,” Godsey said. Audit closings based on random sampling get couched in theoretical terms; they describe probabilities of risk that are not well understood by the board members, he said. “It’s not as pressing as actually showing them, ‘Here are 500 transactions where your policy says these should have been getting a second approval and that approval is missing.’ People at the board level, they’re fascinated by that. Their reaction is, ‘Whoa! That’s impressive.’”

The best solution for firms that want to implement data mining tools for more effective (and profitable) audits is to first understand how their use changes the process of conducting each engagement. You can’t mine the data without obtaining the data. And you should always identify prior year procedures that can be dropped because of the powerful evidence data mining provides. Following are three steps to help you get started.


Step 1: Find the Mother Lode


The general ledger (GL) is the core of the financial reporting system. First, request a detailed year-to-date GL report in electronic form, including detailed transactions with user input information. Data analysis tools allow you to analyze 100 percent of the GL data to gain an overall understanding of what has transpired during the year. Next, import the GL into the data analysis software, which can handle large amounts of data in all forms, from PDFs to ERP views or extracts. Once the data is imported, check the field statistics and perform a summarization to see the account activity. The summarized data will show the dollar changes in each account as well as the number of items or entries affecting each account. This information can help you develop more specific questions during preliminary analytical review.


Step 2: Dig into the Analysis


Data analysis software can be used “forensically,” to gain greater insight into the organization’s business activities and identify anomalies. The data can be extracted, sorted, searched, grouped and joined to look at the data from different angles. Some of the more commonly used features are field statistics/ manipulation, stratification, summarization and pivot tables. Using these capabilities, you can identify duplicate items, detect gaps in numeric/date/alphanumeric sequences and conduct an age analysis. Sampling is also key in testing a sub-set population, then using the results to draw a conclusion about the entire population.


Step 3: Review and Share the Results


IDEA from Audimation Services, Inc., is the only data analysis tool that includes a project overview feature to present a graphical representation of the entire audit or investigation process, which may be shared with clients, or used to meet documentation requirements. The graphical overview includes all the actions performed within a Working Folder, including the creation, deletion, and modification of databases. Effective auditing requires the adoption of data analysis to get more work done with less effort, without compromising quality. For more than 20 years, top accounting firms have used IDEA® – Data Analysis Software to help improve audit performance, identify errors and detect fraud, and meet documentation standards. More importantly, IDEA helps CPAs keep their clients happy.

Carolyn Newman, CPA, CISA, is the president and co-founder of Audimation Services, Inc., the sole U.S. distributor of IDEA® – Data Analysis Software.

Best Practices , CaseWare IDEA

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