Auditing firms continue to use technology-based auditing tools even in the absence of specific auditing standards related to the use of these tools, according to a new Spotlight issued by the PCAOB. The document (which is not intended as staff guidance), titled Data and Technology Research Project Update, May 2021, details observations by the staff from its research and outreach activities as well as the work of its Data and Technology Task Force. PCAOB staff will continue to conduct research and engage in outreach focusing on the use of technology in auditing and financial reporting, including how PCAOB standards affect the use of technology by auditors.
General observations. Reiterating a point made in its Spotlight from May 2020, the PCAOB noted that its auditing standards do not preclude audit firms from using technology-based tools when conducting an audit. However, the PCAOB acknowledged that the standards also do not explicitly encourage the use of these tools. The PCAOB said that it will continue to gather input on the use of technology in conducting audits.
The most recent Spotlight also observed that both large and small audit firms have made use of audit tools. Some audit firms have invested in developing their own tools internally, while others have partnered with software companies to develop customized tools or have purchased "off the shelf" tools. In addition, audit firms have been developing their own tools that are tailored for specific industries, such as healthcare, or for specific components of an audit, such as general ledger, inventory management, or payroll.
Another audit technology use cited by the PCAOB is the use of tools to automate certain aspects of repetitive or less complex audit procedures. These include reconciling account balances to the general ledger, vouching sales transactions to cash receipts, or preparing third-party confirmations.
Risk of material misstatement. Auditing Standard AS 2301 outlines the requirements regarding designing and implementing appropriate audit responses to the risks of material misstatement. The Spotlight described several observations related to the use of technology-based audit tools in the auditor’s overall audit responses. Some firms are using these tools to aid its audit professionals in evaluating unpredictability in the nature and extent of audit procedures, such as identifying transactions outside of the traditional selection criteria. These tools have also been used to analyze transactions that have occurred in new or unexpected ways, which helps thwart management attempts to anticipate the auditor’s procedures, the PCAOB said. In addition, some technology-based tools are used to analyze data for indications of management bias, such as when management consistently selects prices from the upper end of a range when valuing securities.
The Spotlight also makes observation on how technology-based audit tools affect the nature, timing, and extent of audit procedures performed to address risks of material misstatement. These include:
- Refinement of selection criteria within an audit procedure (for example, using a tool to detect items affected by identified risks of material misstatements and then refining the selection criteria);
- Disaggregation of data to improve the precision of an audit procedure;
- Testing data (which can help enable auditors to compare current and prior period data to identify changes in specific attributes);
- Substantive procedures for significant accounts such as revenue, cash, and inventory (for example, using tools to test the occurrence of revenue by comparing quantity of items ordered to those shipped and invoiced); and
- Evaluating disclosures, such as comparing notes to the financial statements to prior periods.
The Spotlight also notes that under the restrictions of the COVID-19 pandemic, tools such as location cameras and drones have been used to virtually observe inventory and physical assets by both companies and by audit firms. In addition, technology-based tools have been used by auditors to perform analytical procedures related to inventory, such as analyzing how inventory composition has changed over time.
Confirmation process. The PCAOB also highlighted how audit firms have used technological tools in the confirmation process, including facilitating the administrative aspects of the process, such as preparing, distributing, receiving, and tracking confirmations. The PCAOB notes, however, that the use of technology generally does not affect the design of the auditor’s confirmation request because many of the factors that affect the reliability of paper confirmations are also relevant to electronic confirmations.
Similarly, many of the same risks associated with paper confirmations, such as false mailing addresses or responses received from someone other than the intended recipient, also exist with electronic confirmations, although they may take a different form like false email addresses or confirmation emails caught in a spam filter. Regardless of the form of the confirmation, auditors should still perform procedures to assess the reliability of the response, such as a telephone call to the intended recipient of verifying the validity of a business, the PCAOB advised.
Nature of Spotlight. The PCAOB noted that the Spotlight is not intended to be read as staff guidance, only to highlight observations of its staff during the course of its interactions with auditors and other stakeholders. The observations should not be viewed as a recommendation for the use of any particular technology-based audit tool, according to the Spotlight.