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The Actuary The magazine of the Institute & Faculty of Actuaries

UK audit firms must do more to support data analytic techniques

The Financial Reporting Council (FRC) published a report today warning that the use of data analytic techniques is still not widespread and are urging UK audit firms to adopt a more structured approach to their deployment.

Review to improve audit quality ©iStock
Review to improve audit quality ©iStock

The Use of Data Analytics in the Audit of Financial Statements thematic review gives examples of how to develop and use these techniques in order to improve audit quality.

It notes that the use of data analytics in the audit of financial statements is increasing in the global market, and intends to accelerate this further by highlighting good practice and areas of common weakness.

FRC executive director for audit and actuarial regulation, Melanie McLaren, said: “The FRC promotes continuous improvement in UK audit. Competition on grounds of quality and innovation has increased since the introduction of audit tendering.

“UK audit firms are at the forefront globally of developing data analytic techniques with the potential to improve audit quality.

“In reporting on our thematic review of their use in practice, the FRC hopes to accelerate effective usage for the ultimate benefit of those who rely on UK audit.”

Examples of good practice identified during FRC audit inspections include:

• Enabling audit staff to build experience and confidence in using a specific audit data analytics tool through a structured roll-out programme
• Using data analytics for the first time at an interim audit date to improve the prospect of obtaining robust audit evidence at the financial year end, particularly in a first year audit
• Improving the effectiveness and efficiency of the extraction of entity data into audit data analytics tools by using dedicated specialist staff and/or dedicated software
• Using data analytic techniques to improve oversight and consistency of multiple auditors contributing to group audit audits where organisations have global accounting systems.

However the FRC review shows that firms are not necessarily adopting audit data analytics fast enough, and that more can be done to ensure they result in improved audit quality.

It states: “Although the use of data analytics is increasing, more rapidly at some firms than others, the pace of change is not as fast as thought by audit committees and investors.

“Audit firms are investing heavily in audit data analytic tools, but some firms are not actively monitoring the level of usage by audit teams, or whether the use of the tool was successful in providing appropriate audit evidence.”

It also claims that in some cases, audit teams have overemphasised their use of data analytics in audit committee communications.