Algorithms, Audits, and the Auditor

Remarks as prepared for delivery

[Good afternoon.]  

Today, the Board is considering a staff recommendation to approve the first auditing standard focused on certain technology tools that auditors may deploy during an audit. 

Since the beginning of the profession, technology has been a part of how auditors improve their overall effectiveness and efficiency. As many of you know, the Board has been focused on empowering auditors to obtain higher quality evidence during an audit, and recent advances in technology have become powerful new tools in that regard.

Opportunities abound for innovative technology to increase the coverage of the audit, decrease the effort, and offer deeper insights--through pattern recognition, identification of population anomalies, and most importantly, earlier discovery of fraud. 

The standard also extends the Board’s focus on obtaining evidence from external sources, which was highlighted in the Board’s updating of the confirmation standard last year.

So, I am pleased that the staff has constructed an audit standard the empowers auditors to exercise their professional judgement and skepticism in deploying technology to assist in obtaining high quality evidence during the audit.

Of course, there are also risks when innovative technology is deployed without defining its objective and purpose. The standard before us today recognizes that any benefits obtained from using innovative technologies may be overcome by the risks when deployed without the auditor defining their objective and purpose when conducting audit procedures. Moreover, the benefits of technology can only be realized if the underlying information is dependable.

Today, many original documents are stored electronically, with key attributes extracted into a standardized database. These tools can only be used effectively if the auditor understands the company's information environment, its processes and controls, and its legal and economic environment.

Importantly, the staff recommendation clarifies the need to evaluate the relevance and reliability of information, regardless of its source, because technology also makes it easier to falsify electronic information. Technology will not replace auditor judgment or professional skepticism, which must always be exercised, and is paramount in understanding and evaluating the inputs and outputs of such technology-assisted analysis. 

The phrase “garbage in, garbage out” aptly describes the concern that investors and other stakeholders have with auditors’ increasing usage of technology-based tools. 

Although this makes full-sample analysis feasible, it also raises the need for evaluating the controls of this attribute extraction process.

Better designed and executed audit procedures increase overall audit quality. And higher quality evidence should lead to better outcomes – including the earlier discovery of fraud.

Although this standard does not touch upon more recent technological developments in the audit landscape, it is a necessary first step, and I look forward to the staff’s continued work on Data and Technology.

I would like to thank the Office of the Chief Auditor team: Dima Andriyenko, Dominika Taraszkiewicz, Donna Silknitter, Hunter Jones, Rob Kol, and Fran Lison; From the Office of Economic and Risk Analysis: Erik Durbin, Michael Gurbutt, John Cook, Carrie Von Bose, and Nick Galunic; and  From the Office of General Counsel: Connor Raso, Katherine Kelly, and Vince Meehan.