4/12/2013
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© ACL Services Ltd.
© ACL Services Ltd.
Jim Kaplan CIA CFE
AuditNet LLC
Richard Lanza CPA
Cash Recovery Partne...
4/12/2013
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3© ACL Services Ltd.ACL | Connections 2013
 President and Founder of
AuditNet®, the global resource
for audit...
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5© ACL Services Ltd.ACL | Connections 2013
 Gain an appreciation of their success and pitfalls when planning ...
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7© ACL Services Ltd.ACL | Connections 2013
Professional Guidance
Page 7
8© ACL Services Ltd.ACL | Connections ...
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9© ACL Services Ltd.ACL | Connections 2013
 Over 550 auditors responded
 More than 70% reported using data a...
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11© ACL Services Ltd.ACL | Connections 2013
 External auditors, internal auditors, fraud examiners, or financ...
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13© ACL Services Ltd.ACL | Connections 2013
(Company) Size Doesn’t Seem to Matter
For Implementation Rates
Pag...
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15© ACL Services Ltd.ACL | Connections 2013
Planning the Audit Guidance – # 1 and #2
Deep Analytics to Plan Au...
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17© ACL Services Ltd.ACL | Connections 2013
 http://www.nysscpa.org/trustedprof/107/tp11.htm
Malpractice?
18©...
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19© ACL Services Ltd.ACL | Connections 2013
Education
Prepares
Organization
Needs-Wants-Pays
Regulation
Requi...
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21© ACL Services Ltd.ACL | Connections 2013
 Plan on education and make it routine
– Meet every three weeks ...
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23© ACL Services Ltd.ACL | Connections 2013
 Asking for data before understanding reporting needs
 Settling...
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25© ACL Services Ltd.ACL | Connections 2013
Integrating Analytics into Top
Audit Areas
26© ACL Services Ltd.A...
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27© ACL Services Ltd.ACL | Connections 2013
Types of Analytical Tests (Substantive Test)
Page 27
1. Trend Ana...
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29© ACL Services Ltd.ACL | Connections 2013
Audit Objectives / Controls to Scripts
Page 29
30© ACL Services L...
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31© ACL Services Ltd.ACL | Connections 2013
Fraud Risk Assessment Sub-Categories
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32© ACL Services Ltd.ACL ...
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33© ACL Services Ltd.ACL | Connections 2013
When
 Extract journal entries posted on weekends and holidays.
...
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35© ACL Services Ltd.ACL | Connections 2013
Stratification by Month and
Relations Between Years
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36© A...
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37© ACL Services Ltd.ACL | Connections 2013
Transactional Scoring
38© ACL Services Ltd.ACL | Connections 2013...
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39© ACL Services Ltd.ACL | Connections 2013
The result is a sampling
methodology that is now based on
Risk as...
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21
41© ACL Services Ltd.ACL | Connections 2013
Combining the Scores ACL Code
(by supplier number below but this ...
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43© ACL Services Ltd.ACL | Connections 2013
GeoMapping Scores – BatchGeo
Page 43
44© ACL Services Ltd.ACL | C...
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45© ACL Services Ltd.ACL | Connections 2013
Cost Recovery
46© ACL Services Ltd.ACL | Connections 2013
 A/P a...
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47© ACL Services Ltd.ACL | Connections 2013
 Accounts Payable
 Audit Fee Benchmarking
 Advertising Agency
...
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49© ACL Services Ltd.ACL | Connections 2013
 Obtain data at least once a year for use in the planning exerci...
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51© ACL Services Ltd.ACL | Connections 2013
Useful Links
Training | Ideas | Graphics
 www.auditnet.org
 www...
4/12/2013
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53© 2012 ACL Services Ltd.ACL | Connections 2013
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Connections 2013 change your thinking - integrating analytics into the audit process final

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Change Your Thinking - Integrating Analytics into the Audit Process ACL Connections presentation by Jim Kaplan and Rich Lanza

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Connections 2013 change your thinking - integrating analytics into the audit process final

  1. 1. 4/12/2013 1 © ACL Services Ltd. © ACL Services Ltd. Jim Kaplan CIA CFE AuditNet LLC Richard Lanza CPA Cash Recovery Partners LLC ACL Connections 2013 Change Your Thinking - Integrating Analytics into the Audit Process
  2. 2. 4/12/2013 2 3© ACL Services Ltd.ACL | Connections 2013  President and Founder of AuditNet®, the global resource for auditors  Auditor, Web Site Guru, Internet for Auditors Pioneer Recipient of the IIA’s 2007 Bradford Cadmus Memorial Award.  Author of “The Auditor’s Guide to Internet Resources” 2nd Edition About Jim Kaplan, MSc, CIA, CFE 4© ACL Services Ltd.ACL | Connections 2013 Richard B. Lanza, CPA, CFE, CGMA • Over two decades of ACL usage in building automated audit and cost recovery tools • Winner of the 2nd Annual ACL User Challenge • Wrote the ACL publication on how to use the product in 101 ways (101 ACL Applications) • Has written and spoken on the use of audit data analytics for over 15 years. Recently was a contributing author of: • Global Technology Audit Guide (GTAG #13) Fraud in an Automated World – Institute of Internal Auditors. • Data Analytics – A Practical Approach - research whitepaper for the Information System Accountability Control Association. • Cost Recovery – Turning Your Accounts Payable Department Into a Profit Center – Wiley and Sons. • AuditSoftwareVideos.com – Training website devoted to audit analytic training • Received the Outstanding Achievement in Business Award by the Association of Certified Fraud Examiners for developing the publication Proactively Detecting Fraud Using Computer Audit Reports as a research project for the IIA  Please see full bio at www.richlanza.com About Rich Lanza, CPA, CFE, CGMA Page 4
  3. 3. 4/12/2013 3 5© ACL Services Ltd.ACL | Connections 2013  Gain an appreciation of their success and pitfalls when planning data analytics.  Understand some common approaches to overcoming obstacles to planning data analytics based on case studies from companies and surveys conducted by the presenters  See how analytics can maximize the annual audit plan and better ensure focus is placed on organizational risk.  Outline an effective data request process to ensure complete and accurate extractions of data every time.  Learn how planning analytics can be integrated into top audit areas by using statistical analytics and scoring approaches. Learning Objectives Page 5 6© ACL Services Ltd.ACL | Connections 2013 IPPF Standard 1210.A3  Internal auditors must have sufficient knowledge of…available technology based audit techniques to perform their assigned work The Auditor’s Role Page 6
  4. 4. 4/12/2013 4 7© ACL Services Ltd.ACL | Connections 2013 Professional Guidance Page 7 8© ACL Services Ltd.ACL | Connections 2013 Categories of Audit Software Automated Issues Tracking Electronic Work Papers Risk Assessment Continuous Controls Monitoring Anti Fraud Governance Risk Compliance Audit Management Audit Resource Scheduling Data Analysis Page 8
  5. 5. 4/12/2013 5 9© ACL Services Ltd.ACL | Connections 2013  Over 550 auditors responded  More than 70% reported using data analysis software  85% of those using reported purchasing specifically for data analysis  68% reported use to improve audit plan sometimes or always  33% Ad Hoc Beginner (Excel) 37% Intermediate (Excel, ACL, IDEA)  73% use audit staff for data analysis (no outsourcing)  44% use ACL, 33% use Access , 25% IDEA  43% major reason for not using on all audits - staff not trained  75% said greatest benefit - able to review entire population  84% performance objectives/compensation not tied to use  59% indicated would use data analytics if audit programs included steps  58% indicated would use if a script library were available or if vendors provided a lite version of their software 2012 Survey: Using Data Analysis Software Page 9 10© ACL Services Ltd.ACL | Connections 2013 Planning Data Analytics Statistics / Guidance
  6. 6. 4/12/2013 6 11© ACL Services Ltd.ACL | Connections 2013  External auditors, internal auditors, fraud examiners, or finance?  Using ACL in over half your audits?  What percentage of your company’s data have you mapped? – 20% – 50% – Over 80% Quick Attendee Survey (Show of Hands) Page 11 12© ACL Services Ltd.ACL | Connections 2013 AuditNet – 2012 Data Analysis Software Survey – Why Are You Not Using D.A.? Page 12
  7. 7. 4/12/2013 7 13© ACL Services Ltd.ACL | Connections 2013 (Company) Size Doesn’t Seem to Matter For Implementation Rates Page 13 AuditNet – 2012 Data Analysis Software Survey 14© ACL Services Ltd.ACL | Connections 2013 Data Analytics in the Audit Plan AuditNet Nov. 14, 2012 Webinar (Over 350 attendees) Page 14
  8. 8. 4/12/2013 8 15© ACL Services Ltd.ACL | Connections 2013 Planning the Audit Guidance – # 1 and #2 Deep Analytics to Plan Audits – Minimal Guidance Page 15 16© ACL Services Ltd.ACL | Connections 2013 Planning the Audit Guidance - Understanding Risks (AU 314) Mention of Automated Tests Page 16
  9. 9. 4/12/2013 9 17© ACL Services Ltd.ACL | Connections 2013  http://www.nysscpa.org/trustedprof/107/tp11.htm Malpractice? 18© ACL Services Ltd.ACL | Connections 2013 PCAOB – Audit Evidence Standard #15 Page 18
  10. 10. 4/12/2013 10 19© ACL Services Ltd.ACL | Connections 2013 Education Prepares Organization Needs-Wants-Pays Regulation Requires Imagination Transforms What Drives the Data Auditor? Page 19 20© ACL Services Ltd.ACL | Connections 2013  Use data analytics on almost every audit – Brainstorm the use data analytics in the audit planning process – Drop an audit and instead plan 10% for “data fun” across all audits / Understand the process and benchmark it for future reviews – Make it part of annual objectives to use the product – Start looking at recent regulations that are mentioning D.A.s use  Find cost savings to pay for the usage & Track it & Promote it – Risk assess the general ledger – stratify by month by account J/E risk scores – Search for cost recovery opportunities with vendors and improved business methods – Sell the need for increased software and education » Also sell the cost/benefit of ACL to other development platforms (especially for prototyping). Overcoming Obstacles Page 20
  11. 11. 4/12/2013 11 21© ACL Services Ltd.ACL | Connections 2013  Plan on education and make it routine – Meet every three weeks on analytics – no matter what – Build a team of champions to coach the team – Get everyone else involved…..even if it is with Excel to start – Make it part of annual objectives to learn the product  Establish data channels to all (material) parts of the organization – Have more freedom to extract data as needed – Obtain quarterly feeds of data – Obtain data from all locations once a year for audit planning Overcoming Obstacles Page 21 22© ACL Services Ltd.ACL | Connections 2013 Effective Data Import Process
  12. 12. 4/12/2013 12 23© ACL Services Ltd.ACL | Connections 2013  Asking for data before understanding reporting needs  Settling for lesser quality data extracts from the company system  Not knowing what is possible within the tool to import and normalize data  Not documenting (videotaping) past ways to obtain data  Not asking for data early enough  Not obtaining data routinely and building the expectation (UK Bribery Office) Top Data Import Mistakes Page 23 24© ACL Services Ltd.ACL | Connections 2013 AuditNet Nov. 14, 2012 Webinar (Over 350 attendees) Data Request is Sent Prior….. Page 24
  13. 13. 4/12/2013 13 25© ACL Services Ltd.ACL | Connections 2013 Integrating Analytics into Top Audit Areas 26© ACL Services Ltd.ACL | Connections 2013 Where Are You Using Data Analytics? Page 26 AuditNet – 2012 Data Analysis Software Survey
  14. 14. 4/12/2013 14 27© ACL Services Ltd.ACL | Connections 2013 Types of Analytical Tests (Substantive Test) Page 27 1. Trend Analysis 2. Ratio Analysis 3. Reasonableness Tests 4. Regression Analysis “Analytical Procedures – Audit Guide”, AICPA, March 2012 28© ACL Services Ltd.ACL | Connections 2013 PCAOB – Audit Evidence Standard #15 Other Substantive Tests Page 28 > Observation > Inquiry > Confirmation > Recalculation > Re-performance
  15. 15. 4/12/2013 15 29© ACL Services Ltd.ACL | Connections 2013 Audit Objectives / Controls to Scripts Page 29 30© ACL Services Ltd.ACL | Connections 2013 How the Scripts Align to Objectives Page 30
  16. 16. 4/12/2013 16 31© ACL Services Ltd.ACL | Connections 2013 Fraud Risk Assessment Sub-Categories 31 32© ACL Services Ltd.ACL | Connections 2013 Page 32 See the IIA’s website at www.theiia.org Proactively Detecting Fraud Using Computer Audit Reports - IIA Research Paper
  17. 17. 4/12/2013 17 33© ACL Services Ltd.ACL | Connections 2013 When  Extract journal entries posted on weekends and holidays.  Extract journal entries relating to the prior year that were made just immediately following a fiscal-year end.  Summarize journal entry credits and debits processing by day, month, and year. Where  Extract journal entries made to suspense accounts and summarize by the person entering and corresponding account numbers.  Extract journal entries to general ledger accounts known to be problems or complex based on past issues (errors of accounting in journal subsequently corrected by accounting staff or auditors) at the company or the industry in general.  Extract debits in revenue and summarize by general ledger account. Summarize journal entries by the persons entering to determine if they’re authorized. Specific Tests Based on the 5 Ws Page 33 34© ACL Services Ltd.ACL | Connections 2013 Integrating Analytics into The Audit Plan – Specific ACL Cases
  18. 18. 4/12/2013 18 35© ACL Services Ltd.ACL | Connections 2013 Stratification by Month and Relations Between Years Page 35 36© ACL Services Ltd.ACL | Connections 2013 Stratification By Month Secret Code Page 36
  19. 19. 4/12/2013 19 37© ACL Services Ltd.ACL | Connections 2013 Transactional Scoring 38© ACL Services Ltd.ACL | Connections 2013  Modern tests (round numbers, duplicates, missing fields) identify thousands of ‘suspicious’ transactions, usually about 1 in 5 of all transactions get a ‘red flag’  Historically at least 0.02 – 0.03 % of all transactions have real problems, such as a recoverable over-payment  So roughly 0.00025 / 0.2 = 0.00125 or 1 in 800 ‘red flags’ lead to a real problem. Imagine throwing a random dart at 800 balloons hoping to hit the right one!!! The Sampling “Problem” Bottom Line Numbers Page 38
  20. 20. 4/12/2013 20 39© ACL Services Ltd.ACL | Connections 2013 The result is a sampling methodology that is now based on Risk as you define it mathematically in a score Transactional Scoring Page 39 40© ACL Services Ltd.ACL | Connections 2013 Transactional Scoring Summaries on Various Perspectives Summarize by  dimensions (and sub  dimension) to pinpoint  within the cube the  crossover between the top  scored location, time, and  place of fraud based on  the combined judgmental  and statistical score  Page 40
  21. 21. 4/12/2013 21 41© ACL Services Ltd.ACL | Connections 2013 Combining the Scores ACL Code (by supplier number below but this could be record number) Page 41 42© ACL Services Ltd.ACL | Connections 2013 Severity To Value Page 42
  22. 22. 4/12/2013 22 43© ACL Services Ltd.ACL | Connections 2013 GeoMapping Scores – BatchGeo Page 43 44© ACL Services Ltd.ACL | Connections 2013 General Ledger Account Analysis and Unique Journal Entry Test
  23. 23. 4/12/2013 23 45© ACL Services Ltd.ACL | Connections 2013 Cost Recovery 46© ACL Services Ltd.ACL | Connections 2013  A/P and G/L Review Factors – Accounts that are sole sourced – Accounts that have too many vendors – Categories that map to the “recovery list” – Assess to industry cost category benchmarks – Top 100 vendors – Trend analysis over time – Trend analysis by vendor (scatter graph)  Purchase Order / Price List – Match to invoice payments to assess price differences – Strategic sourcing vendor review Cost Recovery Opportunity Tests Page 46
  24. 24. 4/12/2013 24 47© ACL Services Ltd.ACL | Connections 2013  Accounts Payable  Audit Fee Benchmarking  Advertising Agency  Document Fleet  Freight  Health Benefits  Lease  Media  Order to Cash Profit Opportunities Outweigh Analytic Costs  Proactive Fraud Detection  Project Fraud  Real Estate Depreciation  Sales & Use Tax / VAT / R&D tax  Strategic Sourcing  Telecom  Travel and Entertainment  Utilities Page 47 48© ACL Services Ltd.ACL | Connections 2013 Integrating Analytics into the Overall Audit Plan
  25. 25. 4/12/2013 25 49© ACL Services Ltd.ACL | Connections 2013  Obtain data at least once a year for use in the planning exercise – Basic data may all that is needed from key systems and locations  Run a series of tests across each location’s data – Consider focusing on general ledger given its broad exposure to the business – Consider using risk scoring in a consistent fashion across the company  Prototype a few local audit toolkits each year – Most cost effective way to develop and ACL is cheaper than almost any other development platform for finance/audit professionals – Identify “low hanging fruit” for cost savings and improvements. Considerations for Overall Audit Planning 50© ACL Services Ltd.ACL | Connections 2013 Analytic Command Center Proposed Implementation Visual Internal Audit’s Analytic Command Center Analytics 1. Accounts Payable 2. Accounts Receivable 3. Financial Statement 4. General Ledger 5. Inventory 6. Payroll 7. Revenue Data Mart Local Analytic Toolkit Feedback from all locations Recovery Auditors Shared Services
  26. 26. 4/12/2013 26 51© ACL Services Ltd.ACL | Connections 2013 Useful Links Training | Ideas | Graphics  www.auditnet.org  www.auditsoftwarevideos.com  www.aicpa.org  www.pcaobus.org 52© ACL Services Ltd.ACL | Connections 2013
  27. 27. 4/12/2013 27 53© 2012 ACL Services Ltd.ACL | Connections 2013

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