Financial audits are crucial for ensuring the accuracy and reliability of a company's financial statements. Traditionally, these audits involve days or weeks of manual work, including reviewing documents and analysing data. However, automation technologies are transforming the audit landscape. Automation technology's ability to tackle repetitive tasks expedites financial audits and cuts costs while improving accuracy.
In this article, we’ll explain which aspects of a financial audit can be automated and the role and value automation technologies bring. We’ll also consider the limitations of automation technologies and whether the user can manage these limitations. Ultimately, we'll argue that automation offers significant benefits to its users, with transparency between the auditor and technology vendor paramount for successful implementation.
A financial audit is an objective evaluation of a company's financial statements, verifying their accuracy and ensuring the company's financial records comply with relevant regulations. In most parts of the world, financial audits are legal requirements for large or publicly traded companies.
A financial audit will validate management’s representation of the company’s financial performance (when completed successfully). However, this is a highly time-consuming process. After all, a financial audit encompasses four stages (i.e., planning, internal controls assessment, testing and reporting), which can take up to three months to complete. However, automating some of the administrative tasks from each stage will improve the quality and speed of the audit process.
Basic automation involves algorithms programmed to respond to an input to execute an output. In contrast, intelligent automation aims to replicate human cognition to make context-dependent decisions. Both basic and intelligent automation can be deployed in the context of financial audits, allowing experienced auditors to make complex decisions rather than wasting time on perfunctory admin tasks.
Ultimately, financial automation technologies aim to reduce manual intervention. When correctly implemented, automation eradicates repetitive tasks and, as a result, eliminates human errors.
We spoke with Irina Staneva, a former auditor at PwC, about the value of automation technologies:
‘As someone who started their professional career as an audit associate in a Big 4 company, I am delighted that today’s AI solutions can save a lot of time on some aspects of audit testing – for example, calculating and recalculating financial statement line items, ratios, etc.’
Beyond the clear advantages of saving time and reducing employee frustration, automating aspects of the financial audit can unlock significant benefits. Let’s explore three of them.
Automation minimises (or eliminates) human error in data processing and calculations. Improved data accuracy will facilitate a higher-quality audit with fewer errors that could otherwise delay the process or require costly revisions. Moreover, shaving significant time from the audit could drive more competitive audit rates.
Automation can save tremendous time auditors would otherwise spend on mundane admin tasks, such as restructuring and validating data or client-facing activities. Examples of these activities may include:
The audit industry is fiercely competitive, with nearly 2,300 firms registered with the Public Company Accounting Oversight Board (PCAOB). Auditing firms must develop long-term strategies to stay relevant and ensure their continued success in a rapidly evolving landscape. Carefully deploying automation technologies will afford your team more time to strategise and streamline productivity.
Several types of financial audit technologies are available on the market. Many revolve around document management (i.e. the capturing and tracking of document data), a time-consuming yet necessary component of the auditing process. The exception is continuous monitoring, which involves capturing a real-time flow of data – potentially from documents but also from transactional systems like accounting software, enterprise resource planning (ERP) systems and internal control frameworks.
By leveraging a continuous stream of real-time data, auditors can transform risk assessments into dynamic, ongoing processes. For instance, using continuous data to identify anomalies automatically enables auditors to address potential compliance concerns faster than by manual review.
Automation technology streamlines Provided by Client (PBC) list management by automatically classifying documents by type. For example, isolating the financial statements from quarterly and annual reports saves endless scrolling and searching.
Automated data extraction is generally over 95% faster than manual data extraction. Cloud-based data extraction technologies can simply upload an audit document – a financial statement or budget report – and then download the computed data instantly.
Some data extraction solutions are on the verge of offering automated calculations leveraged from the extracted data. Automated computation is a type of intelligent automation that aims to replicate an analyst's cognitive calculations.
For example, any analyst would be familiar with calculating gross profit as the revenue minus the cost of goods sold (COGS). But for AI and machine learning technology to make the same calculation, it must:
In other words, there is huge scope for machine error. But, if the tool is well-trained on a document base – and can identify where an error may have occurred – it will save an auditor hundreds of hours annually. Talented analysts should be able to leverage their expertise for complex calculations and insights rather than calculating EBITDA repeatedly. Think of it this way – when trained auditors use their analytical skills to uncover deeper insights, they provide more value to the business than when they spend time recalculating annual depreciation or interest expense.
Irina Staneva agrees and explains how trained auditors can use their time and expertise more effectively: ‘Spending time with the client and interviewing key employees to understand better the recent changes of the business and internal processes and procedures are key for planning the audit process.’
First, ‘scalability’ can carry multiple meanings in the context of financial audit automation technology, including:
Scalability is always a concern with automation technology. As businesses scale, their datasets will grow larger and more complex. Existing automation solutions might struggle, leading to performance issues. Plus, automation is often designed for specific tasks. As an organisation's needs change, its existing automation might not adapt seamlessly.
Using automation tools does not replace professional judgment. Auditors must still take full responsibility for the output of the automation technologies.
Explainability is a core concept for ensuring successful interaction between humans and automation technologies. These technologies help auditors maintain accountability for their findings by making the processes that generate their output as accessible—or explainable—as possible.
For example, when using a data extraction tool, each data point must have a trail that logs the original extracted value and any manual changes. Therefore, it is clear what the tool originally extracted and how it was used. Auditors can, therefore, deliver transparency throughout the auditing process.
Protecting sensitive client data is a top priority for the vendor and the user. Exposed information could incur fines and damage the company’s reputation, resulting in financial losses.
Luckily, it is not difficult to ascertain which automation tools are secure. Simply check for the relevant certification ( i.e., generally, an IS027001 or SOC2).
Tools for financial audit automation are not designed to replace the auditor's role. Nor can sophisticated technologies replicate an auditor’s instincts — such as their ability to assess what is material or when to apply professional scepticism.
Driven by factors like stricter regulations, digital transformation across the sector and the ever-growing demands of financial markets, the role of well-regulated IT in auditing is poised to expand. The surge in data volume is prompting fintechs to develop innovative, intelligent solutions for data analysis. Financial solutions can identify hidden patterns within massive datasets– a task that would take even a seasoned analyst days to accomplish manually.
Of course, deploying highly intelligent data analytics (DA) technology in an automated model demands expertise from the auditing firm’s technology leads and the auditors who operate these technologies daily. Accordingly, auditors may have to adjust their skillsets, as in understanding key concepts surrounding automation and how to operate and assess the output of automation technologies.
Although a decade old, a paper by the Federation of European Accountants makes a perennial point that ‘It will be essential for auditors to evolve and maintain professional knowledge and skillsets at the level required to respond to and keep up with the changes [in technology and big data]'.
The future of auditing depends on auditors, analysts and accountants developing competencies for operating automation technology. While the long-term impact of AI on the auditing talent model has not been examined in detail, a PwC paper confirms that the most technologically advanced auditing firms are actively adapting their talent models in tandem with AI developments.
The future of financial audit automation will see generations of auditors harnessing automation technologies to increase productivity. Achieving more sophisticated auditing practices requires a collaborative effort. While automation vendors offer advanced tools, auditing firms must possess the capabilities to both leverage and critically evaluate these technologies.
Though automating audits end-to-end may not be a reality any time soon, fintechs have spent years developing sophisticated audit automation tools. Contemporary financial audit automation tools are designed to complete the tasks that auditors are overqualified for. Automation tools can accelerate audits and drive strategic, client-focused initiatives by taking an innovative approach to administrative and simple financial tasks.
Nonetheless, there are potential shortcomings to audit automation tools that do not undermine their ultimate value but that you must consider during implementation, specifically for managing usage and transparency. Not all financial audit tools offer the same long-term value, either. Therefore, you must take data security and scalability into (strong) consideration during the selection process.
Evolution AI is pleased to present Financial Statements AI: an innovative automation solution that can support auditors by focusing on reading, extracting and computing data from financial statements. Upload a balance sheet or income statement to our platform, and the AI algorithms will extract the data, leveraging it to calculate key ratios like EBITDA, operating expenses (OPEX) and short and long-term debt levels. You can then download the data as an Excel file.
Get started for free - book a demo or email hello@evolution.ai.
