We could be standing at a turning point where audit can help provide businesses with game-changing insights and a confidence and trust model through the use of artificial intelligence (AI).
The information age challenges our ability to consume and understand the increasing amounts of data created every day. It’s likely that the pace of data creation will only increase, leading to a deeper pool of information that if effectively consumed, analyzed and understood by the audit process, can lead to a higher quality audit.
Supporting greater confidence and trust
AI technology is being embedded more and more into the fabric of an audit approach, and it is increasingly becoming a tool an auditor has at their disposal to help them through their decision-making.
Take the very beginning of the audit process: At EY, we are working on automation between how a client closes their books and provides us with the information we need to conduct the audit, no matter what process clients are using for their financial close. This dramatically reduces the time that our clients spend supporting an audit, as well as the administrative time our staff spend gathering this information. Instead, our auditors begin the process at the point they need to start applying judgement, thereby enhancing audit quality.
It’s in an auditor’s DNA to be inquisitive and to interrogate data, asking the right questions to provide an audit opinion that provides trust and confidence to the capital markets. However, with so much data now available, it is not humanly possible to go through each expense, contract and receivable with a fine-toothed comb.
AI can help auditors work through these greater volumes of information as it relates to new regulations. Take IFRS 16 for example, which focuses on lease accounting and can require the analysis of thousands of lease contracts for many organizations. AI can help auditors uncover insights when addressing this new global regulation as it comes into force. EY uses AI technology to digitize intelligence, using it to help us analyze contracts and extract information from them using statistical and basic text analysis. As AI technology recognizes text pattern commonalities, as well as the statistical modelling of text, we can extract almost all the information required for lease accounting.
Providing value and insights
AI technology is also being used to identify the probability of accounting fraud. EY has devised an accounting fraud prediction model to help us improve audit quality. This prediction model calculates the probability of misstated financial statements, which can occur in 1 to 2 percent of a company’s financial statements each year.
By applying machine learning techniques to a company’s previous financial statements (including those that were misstated), the prediction model learns the traits and characteristics of a company’s financial and non-financial information. By combining sector insight along with other variables, EY can determine if the financial statements could be indicative of a misstatement or even fraud. This means the audit team can revisit the audit procedures to better understand the potential risk and subsequently address this concern as part of additional audit procedures.
Why it matters
Ultimately, the purpose of an audit is to provide confidence to the capital markets, and that won’t change. What will change, however, is how the auditor takes advantage of new technology and embeds it as a fundamental and required part of audit service delivery. AI will provide stronger and more perceptive tools for auditors to interrogate the data, find anomalies and improve techniques, thereby leading to higher-quality audits.