The profession of audit in India is on the threshold of change — it wouldn’t be wrong to say that the profession is undergoing a revolution. This will be the first year that the Internal Financial Controls over Financial Reporting (IFCFR), similar to the ICFR requirements of the US Sarbanes-Oxley Act, will be implemented.
To implement financial controls that are required by these regulations, companies are resorting to technology, using complex ERP systems, cloud computing with in-built controls and system-dependent processes.
Audit professionals, who have hitherto been resistant to adopting advanced technology, would now have to not only be IT-literate but also be able to comment on the adequacy and the operating effectiveness of the company’s controls, which would include automated (system-driven) controls.
Another change
Another change that will significantly affect the profession this year is the implementation of Phase I of Indian Accounting Standards (Ind AS) (converged with IFRS).
While companies wade through the new standards, that would require them to present not two, but three balance sheets in their first Ind AS financial statements for year ending March 31, 2017 (the third being the balance sheet as at the beginning of the previous year), the audit profession is embracing technology to find efficient ways to cope with these changes and add value to its clients.
Though the core principles of audit remain the same — that reported numbers correspond with the records, and testing details and supporting documents are examined for samples based on a risk-based approach — the manner in which the risk is assessed (or the sample selected), will change. It will soon be through Computer Assisted Audit Tools (CAATs) and algorithm-based software, which will analyse large data sets and identify patterns such as entries having unusual account combinations, or journal entries passed by certain personnel.
Advantages
This would help auditors review larger sets of data (possibly complete data sets in each class of transactions) based on customised parameters, which would in turn facilitate focusing on assessing higher risk areas, and selecting sample entries for testing during the course of the audit.
For example, if there are over 100,000 transactions relating to sales to customers, earlier, manual sampling would lead to about 1-2 per cent of the total population being sampled and examined. But algorithm-based tools, which are expected to be implemented by one of the Big Four firms this year, would help analyse the entire class of transactions.
Tool to the rescue
Audit has always been a process highly dependent on information-sharing, between the auditor and clients. The process of coordinating for sharing relevant reports from the companies for each caption in the financial statements, and details relating to the sampled transactions, generally takes up a significant amount of the auditors’ time.
A tool that has been launched recently at one leading firm addresses this issue. It enables audit teams to key in their requests and queries, which the client can see and deal with, through the online tool. This makes data sharing more reliable and helps manage and monitor the audits effortlessly.
Regulatory requirements need audits to be documented in such a manner that an experienced auditor who isn’t related to the audit in question, understands the nature, timing and extent of audit procedures performed, the results and significant matters and conclusions reached.
These requirements are likely to become more stringent, considering a new standard on auditing (SA 701) is under consideration. This standard is expected to make audit reports more informative and include “Key Audit Matters” as an integral part of the report, in addition to the usual reasonable assurance audit opinion.
These requirements will prompt auditors to maintain audit work papers of high standards, which would not have been possible manually, considering the dynamic environment, the enormity of the data audited and procedures performed. To attain this goal, firms use various tools, which enable both the documentation of work and a risk-based audit by means of in-built guidance.
Inventory count, a mandatory audit procedure, was so far largely untouched by technology; this involved manually examining and ticking printed records. But now, new tools are being tested and implemented, which will standardise the process of observation and make them paperless. This would also reduce the time taken by audit teams to transfer data from manual listings to excel spreadsheets, which form their audit work papers.
Adopting technology has thus become inescapable as an audit tool in today’s dynamic environment. After moving from calculators to Excel spreadsheets and pivot tables over the last quarter century, the time has come for the audit profession to take the next big leap.