How would the emerging technology affect the future of auditing? - PowerPoint PPT Presentation

How would the emerging technology affect the future of auditing? AC4342 Auditing S01 Group 4 54818800 CHAN Shu Wah 54791726 IP Sunny 54814013 WAN Chun Fai 54808805 YIU Ho Fung

How would the emerging technology affect the future of auditing? Agenda Intro to emerging technologies 1 Impact of emerging technologies 2 ● Benefits in audit procedure ● Challenges to the audit industry How can accounting firms prepare? 3 How can students prepare? 4 Conclusion 5

1 Introduction to Emerging technologies

Introduction to Emerging technologies Big Data Velocity Real-time generation 1.7MB of data created every second for every person Volume approximately 10 18 bytes of data generated every day Variety Other than in textual forms

Introduction to Emerging technologies Big Data Growth of: ● cannot be effectively - Volume captured and processed with traditional applications - Variety - Velocity ● A need of using other kinds of emerging technologies

Introduction to Emerging technologies Robotic Process Automation (RPA) ● Can be applied to routine (rule-based) tasks ● With clear-defined rules and parameters ● 24/7: removes the constraints of office hour ● No diminishing efficiency and human involvement E.g. BOTs for bank confirmation, discovering non-balancing journal entries, ratio calculations, and more…(refer to the next section)

Introduction to Emerging technologies Artificial Intelligence (AI) ● Enables machines to perform cognitive work E.g. problem-solving, identification ● Recognition and processing of: natural language, voice, and gesture ● Low margin of error, increasing efficiency ● review F/S, analyse financial ratios, identify trends from the figures, and more… (refer to the next section)

Introduction to Emerging technologies Machine Learning (ML) and Deep Learning (DL) ● On top of AI ● Trained to recognize patterns in vast volumes of data ● Especially unstructured data e.g. emails, social media, conference call audio files ● Problems feed back able to auditors’ identified, to the respond to judgement recognized and machine similar remembered problem by the machine in the future the more is carried out, the better the machine will get at spotting real anomalies

Introduction to Emerging technologies Machine Learning (ML) and Deep Learning (DL) Daily example: Machine learning “taught” by human the more is carried out, the better the machine will get at spotting real anomalies

Introduction to Emerging technologies Machine Learning (ML) and Deep Learning (DL) Deep Learning ● Part of a broader family of ML methods ● Ability to process a larger amount of data at the same time + learn without the aid of human

Introduction to Emerging technologies Machine Learning (ML) and Deep Learning (DL) Deep Learning ● Part of a broader family of ML methods ● Ability to process a larger amount of data at the same time + learn without the aid of human ● Use of neural networks -- ↑ relationship complicity

Introduction to Emerging technologies Machine Learning (ML) and Deep Learning (DL) Deep Learning ● Part of a broader family of ML methods ● Ability to process a larger amount of data at the same time + learn without the aid of human ● Use of neural networks -- ↑ relationship complicity -- ↑ layers of data

Introduction to Emerging technologies Blockchain / Distributed Ledger Technologies Information is to form a Blocks linked together stored in batches continuous line in a chronological order (blocks) (chain)

Introduction to Emerging technologies Blockchain / Distributed Ledger Technologies ● An open and decentralized database for transactions involving value E.g. business transactions, money, goods, property, work, votes ● Modifications need to be approved by the community → higher data security → can act as a trust → use as validation Blockchain audit

2 Impact of emerging technologies 2.1 Benefits 2.2 Challenges

Impact of emerging technologies 2.1 Benefits in audit procedure

Impact of emerging technologies - Benefits in audit procedure Client acceptance / continuance

Impact of emerging technologies - Benefits in audit procedure Client acceptance / continuance Understand client business Textual analysis and industry environment ● Going through company document ○ transcripts of conference calls ○ press releases ○ management discussion and analysis (MD&A) ● Capable of identifying concepts or sentiments ○ Positive, neutral and negative ● Extract useful information

Impact of emerging technologies - Benefits in audit procedure Client acceptance / continuance Understand client business Textual analysis and industry environment ● repetitive and time consuming Automation ● reduce human efforts and time consumed

Impact of emerging technologies - Benefits in audit procedure Client acceptance / continuance Making inquiry Speech recognition with related parties ● Oral communication e.g. phone inquiry ● AI: recognize keywords or tone → Interpret the meaning ● Reminds auditor to carry out suitable engagement actions ● ML: Ability to accumulate experience

Impact of emerging technologies - Benefits in audit procedure Client acceptance / continuance Making inquiry Speech recognition with related parties ● human are somewhat ‘weak’ in some wordings ○ “kind of”, “maybe” or “sort of” ○ Uncertainty → Further investigation ○ Spots indicators / signals of concealment or falsification ● Process the entire oral information efficiently ● Easier to keep the record for reference

Impact of emerging technologies - Benefits in audit procedure Preliminary engagement activities

Impact of emerging technologies - Benefits in audit procedure Preliminary engagement activities Change of audit engagement team requirement ● expertise / knowledge on special sectors include: ■ manufacturing ■ logistics ■ finance and ... ■ information and technology e.g. employed more data analysts than Google (2016)

Impact of emerging technologies - Benefits in audit procedure Plan the audit

Impact of emerging technologies - Benefits in audit procedure Plan the audit ● Impact on timing of audit ● Audit work initiates earlier ● Possibility of continuous / real-time auditing ● Begin gathering audit evidence earlier ● focus human resources on high-risk items or where judgment is required

Impact of emerging technologies - Benefits in audit procedure Audit business processes and related accounts

Impact of emerging technologies - Benefits in audit procedure Audit business processes and related accounts ● Cost-effectiveness issue ○ Audit with sampling ● E.g.: time consumed for reading a 100-page legal doc. ○ Human: 4 hours ○ AI: less than 1 second ● Human power constraint makes ‘full audit’ unreasonable ● AI makes impossible possible

Impact of emerging technologies - Benefits in audit procedure Audit business processes and related accounts Stock-taking ● Flying a drone to client’s warehouse ○ High quality photo with comprehensive information ■ Model ■ Quantity ■ Condition ● Reduces time on physically travelling between sites

Impact of emerging technologies - Benefits in audit procedure Audit business processes and related accounts Audit sampling ● AI lowers the sampling risk than traditional method ● AI: Analysis based on whole population → Ability to discover default samples and outliers ● Auditors: carry out further investigation ● Prevents human error due to carelessness / massive document

Impact of emerging technologies - Benefits in audit procedure Audit business processes and related accounts Audit confirmation ● RPA assists auditor to send confirmation + verify the authenticity of client’s response ● Possibility of blockchain validation ● Manual procedure can be reduced ○ Preparing confirmation letters ○ Putting into envelopes ○ Sending and waiting for reply ○ Reminding for reply

Impact of emerging technologies - Benefits in audit procedure Completing the audit

Impact of emerging technologies - Benefits in audit procedure Completing the audit ● Contingency: scanning through documents during subsequent period (AI) → potential contingency issues → proper modification in disclosure or audit opinion ● Schedule of proposed adjusting entries: Generated by RPA ● Final analytical procedure: RPA: Computation of accounting ratios AI: Comparison with other companies / industry standard

Impact of emerging technologies 2.2 Challenges to the audit industry

Impact of emerging technologies - Challenges to the audit industry Data Governance and Return On Investment ● Data governance - usefulness of data Requires labeling, categorizing, and validating by human in the incubation stage ● Having the ability to capture high volume of data does not necessarily mean having good data governance ● Ineffective governance may result in a negative ROI