Ai in Finance Archives

How AI and data can power an effective audit plan

September 29, 2024July 2, 2020 by Gena Song, CPA, CA

An effective audit starts with a solid audit plan. While the overall audit strategy and plan can vary between clients, an auditor will usually establish risk assessment procedures and a how-to response for the risk of material misstatement.

The challenge is that sometimes, even the most thorough and comprehensive audit plans can still have gaps. In fact, every auditor understands there will likely always be some degree of uncertainty and unidentified risks before an audit begins. It’s in the initial audit planning stages that an audit team will often ask:

How can we lessen those unknown risks?
Is there an opportunity to confirm initial assessments about the industry or company?
Are there blind spots that we haven’t considered?

This is where machine learning (ML) and artificial intelligence (AI) can help. In this blog, you’ll learn how you can use MindBridge AI to spot risks and shift resources during preliminary engagement activities through each phase of the audit planning process.

Pinpointing audit risks using a data-driven method

Identifying the inherent business risks associated with the company is an important first step in the audit planning process. An auditor must analyze key risk factors such as understanding the industry risks, the company’s business, and any recent changes within the company to determine if and how these considerations will impact the audit plan.

Using Ai Auditor, an audit team can enhance the risk assessment process by retrieving powerful risk insights. That’s because Ai Auditor examines 100% of the company’s transaction data and alerts the team to any anomalies or underlying risks associated with the entity. With detailed data at-hand, the audit team can then move forward with greater confidence in the audit engagement, trusting that the risk assessment is comprehensive and complete.

Ai Auditor can also help the team to identify new risk areas that have might not been flagged in previous audits and include them in their audit plan. Not only does this ensure a well-planned audit, but it also minimizes the potential for duplicating audit procedures later on.

Evaluating the effectiveness of the company’s internal control over financial reporting is another area where using Ai Auditor can be a benefit. Much like traditional testing, the platform automatically identifies control points to spot high-risks transaction data. The auditing team can also adjust these control points and use other capabilities within the platform to recreate traditional control testing models. This data-driven audit method saves the team time while ensuring high levels of accuracy and diligence.

Building an effective audit strategy with Ai Auditor

After initial risk assessments and tests, the auditors will be able to establish an overall audit strategy. This sets the scope, timing, and direction of the audit and guides the development of the audit plan.

For instance, the audit team will derive important conclusions after evaluating the effectiveness of internal control over financial reporting. These will help them decide whether to use control testing, substantive testing, or a combination of both in their audit plan.

When planning the timing of the audit, the team might also consider using Ai Auditor during interim analysis and take advantage of roll-forward capabilities at year-end to ensure a more effective audit.

Considering how much time and resources go into an audit, Ai Auditor can become a force-multiplier for an audit team. The platform provides insights that help them become more efficient as they move through audit planning to engagement completion.

Developing an audit plan with data at your fingertips

As an auditor begins developing and documenting the audit plan, the reporting features within Ai Auditor can help. An auditing team can export powerful graphs and data to support the audit plan regarding details such as the planned nature, timing, and extent of the risk assessment procedures; the planned nature, timing, and extent of tests of controls and substantive procedures; and other planned audit procedures.

The team can also use Ai Auditor to download a single report that details any flagged items and automatically add this report to the audit plan. This ensures the team conducts deeper investigations on those transactions or simply helps to justify why certain samples were selected.

Completing the audit engagement with success

Ai Auditor helps to simplify auditing planning. The platform offers valuable insights and data that help an auditing team streamline risk assessments, build an effective strategy, and outline a comprehensive audit plan. And since an audit team will be able to conduct investigations easier and faster through every phase of the plan’s process, they’ll have more time to offer clients valuable insights and guidance.

Looking for more? Register to access our on-demand webinar titled ‘Riding the Waves of Transformation’ with Tom Hood, CPA.

Improving audit risk assessments with AI-driven analysis of Accounts Receivable and Accounts Payable subledger data

September 29, 2024June 18, 2020 by Stefano Colaiacovo, CPA, CA

Improving audit risk assessment longterm

The cornerstone of well-planned and high-quality audit engagements is a robust risk assessment process. Such a process is critical to identifying risks of material misstatement and their relative significance by providing a fulsome understanding of the entity subject to audit and the environment in which it operates.

The nature and extent of these audit risk assessment procedures will certainly differ from engagement to engagement, reflecting different types of operations, industries, and financial reporting complexities, however preliminary analytical review procedures are a common thread across all audits as a requisite component of the risk assessment process.

Traditional preliminary analytical review procedures

Practically speaking, preliminary analytical review procedures could include any combination of the following (not exhaustive):

Comparing actual financial performance to historical trends and balances
Reviewing actual financial performance (ratios, key financial metrics) against industry benchmarks
Reviewing actual financial performance compared to management forecasts and/or budgets
Performing inquiry of management to ascertain operational drivers for certain trends and patterns in the year-over-year results (i.e., “what’s changed?”)
Examining any material new contractual agreements executed in the period (leases, customer contracts, debt agreements, etc.)

Traditionally, these types of analytical review procedures take place at the level of how the financial statements aggregate the data by account or class of transactions, or perhaps at more granular levels of the chart of accounts. For example, you may compare how gross margin in the current period compares to historical periods or how increases in inventory year-over-year tracks with corresponding movement in the cost of sales accounts. In any case, it is ultimately the general ledger trial balance data and activity detail that underpins this type of review.

With a view towards a robust risk assessment process and obtaining a deep and operationally relevant understanding of your client’s business environment and financial performance, analysis and interrogation of the AR and AP subledger data as a complement to the traditional preliminary analytical review procedures at the financial statement level could be a source of highly valuable context to the results and empower you to conduct a more focused inquiry of your client’s management.

Accounts Receivable & Accounts Payable as critical inputs to audit risk assessment

Visualizing and interrogating subledger data can provide high-value insights and expose “root causes” behind some of the general ledger variances and patterns identified as part of your traditional preliminary analytical review procedures. This empowers you to better pinpoint an assessed risk and tailor your testing approach to most efficiently respond to that assessed risk.

Some examples of how to best leverage subledger information include:

Understanding how certain vendor and customer aged balances trend throughout the year

The aggregate total values of AR and AP at balance sheet dates might be relatively consistent year-over-year but there may be cause for further investigation and inquiry if, for example, the monthly ending balances demonstrate significant volatility throughout the year or seem out of pace with corresponding monthly sales or purchasing trends.

Understanding operational key performance indicators for customer and vendor “health”, and tracking those over the audit period

Tracking basic operational metrics like Days Outstanding and Turnover ratios, for specific vendors, customers, and in total, provides a lens of relative customer “quality” or vendor settlement patterns that may allow for risk to be identified more granularly. Comparing these ratios for a particular customer against the “aggregate” value allows you to identify specific customers or vendors that lag the overall average and therefore may indicate an existence or valuation risk around those balances or underlying contracts.

Expose the nature and volume of transactions on credit with related-party customers and vendors

Reviewing the subledger detail for transactions with all related entities is information that may not be readily available on the surface of the general ledger data and the relative dollar volume and activity of these transactions could be relevant to how risk is assessed around the accuracy, valuation, and presentation assertions.

Surface invoices or other records in the subledger (debit or credit memos, unapplied payments, etc.) that may be significantly aged

Isolating items in the subledgers that are significantly aged may tie directly to the risk around valuation and existence of these items specifically. Under a more nuanced lens, the existence of these types of stale records (or lack thereof) may be a relevant consideration to corroborating your understanding of the controls framework and how closely the subledgers are being reconciled and actively maintained.

Evaluate the volume and frequency of transactions at the level of a specific customer or vendor to corroborate inquiry of management and your understanding of the entity

Understanding basic data points around volume and frequency of transactions with a particular customer or vendor may help corroborate information learned from inquiry or your knowledge. For example, reviewing transactions with the entity’s landlord to confirm that 12 monthly equal rent payments were posted. Scanning this type of activity (either manually or with automated techniques) can surface invoices or payments for amounts that are potentially unusual for a certain customer or vendor and therefore perhaps may be indicative of risk.

Review for the volume and frequency of manual adjustments directly to the subledger detail

Manual adjustments or entries directly to the subledger, i.e., entries that don’t have a commercial document of record (invoice, cheque, credit memo, etc.) associated to them, may indicate fact patterns or internal processes that warrant further consideration from an audit perspective.

Perform basic statistical and rules-based tests and interrogate the subledger data to inform risk assessment

Certain procedures around data quality that are traditionally associated with journal entry testing, such as the following, may be very relevant to the subledger information. This includes any “hits” that would be relevant to deepen your understanding of your client’s accounting system and internal control framework and also advise the severity of assessed risk:

Reviewing descriptions for suspicious keywords
Duplicate document IDs
Two-digit Benford analysis
Other rules-based tests

How MindBridge automates and streamlines AR & AP subledger analysis

MindBridge AI has dedicated AR and AP modules that automatically analyze the subledger data and, without any scripting, provide high-value visualizations of the data and transaction-level analysis. These capabilities empower you to leverage subledger-level insights and anomalies as critical inputs to the audit risk assessment process.

Trends and patterns

Ai Auditor provides the ability to visualize how monthly AR and AP balances or net monthly activity tracks over multiple years, at the customer and vendor level and also in aggregate. The visualization is customizable and provides the ability to compare certain customer or vendor trend lines against each other and identify patterns of deviation.

Vendors and customers who are related parties to the entity subject to audit are flagged directly in the summary detail to identify for specific review.

Key performance indicators

Days Outstanding and Turnover ratios are calculated at the customer and vendor level and visualized on a monthly basis, allowing you to identify where there are periods of potential distress or deteriorating quality. Similar to the ending balances and activity, you are also able to customize the visualization and compare certain customers or vendors against each other along the lines of these metrics to expose patterns of interest.

Ai Auditor also automatically identifies any new customers or vendors in the audit period, allowing you to identify the related volume of sales or purchasing growth specific to these entities.

Aging

Aging at the customer and vendor level is automatically calculated and captured across respective buckets of days outstanding (0-30 days, 31-60 days, etc.). For certain entries that are significantly aged or stale, you’re able to drill-in to all the transactions with a particular customer or vendor and ascertain which invoice(s) are contributing to those totals.

Data interrogation and risk

Navigating and querying the transactional level data via the Data Table in Ai Auditor provides a powerful and effective way to explore and validate the subledger activity. The Filter Builder functionality allows for multiple conditions to be placed on a query, using any element of the transactional record (date, amount, user, entry type, etc.). This allows you to build and save functions that allow you to get a sense of the type, frequency, and volume of transactions with certain vendors or customers.

Control Points, which are various statistical, rules-based, and machine learning tests, are run against every transaction and the results are summarized on a dashboard that supports interactions like filtering and drill-through.

Combining the query building capabilities of the Data Table with the feature of every transaction being scored against the various Control Point tests, you are empowered to identify relevant populations for sampling and have selections automatically identified on a risk-stratified basis. Approaching the sampling process through the lens of transactional risk ensures that you’re focusing your audit procedures around the entries which appear anomalous.

Take the first step towards unlocking critical subledger-level insights for risk assessment

To learn more about Ai Auditor and subledger analyses, contact sales@mindbridge.ai.

AI in finance: Helping professionals shift from hindsight to insight to foresight

December 18, 2020June 11, 2020 by Eli Fathi

We are facing an unprecedented time of global uncertainty created by the COVID-19 virus that has unleashed a global healthcare crisis. Humanity is fighting a war against an invisible enemy that is attacking humans around the world and sparing no country. We need not be pessimistic or optimistic but rather realists and learn from the history of humanity. Human ingenuity will prevail, and humanity will survive.

We have entered a new world after COVID-19 with very different assumptions than we had in the old world when the world GDP yielded a record high of $85T. The world GDP has been severely impacted by the lockdown stipulations that were imposed to minimize the spread of the virus within the population. The key pillars of the economy are consumer and companies’ spending. If this slows down, it can lead to a recession and even depression. The lockdown restrictions are being relaxed and governments and central banks around the world are injecting massive amounts of funds into the hands of individuals and companies in an effort to reopen the economy to avoid an economic crisis.

How can artificial intelligence in finance help organizations pull through?

A renewed focus on financial errors

During economic uncertainty, an added vigilance is needed by those responsible to ensure the accuracy and integrity of the financial records that are being relied upon to make decisions about the operations of their organizations. A report by the Association of Certified Fraud Examiners (ACFE) “2020-Report to the Nations”- 2020 Global Study on Occupational Fraud and Abuse estimates that the yearly cost to the world due to fraud and abuse is about $4.5T or 5% of the world GDP. They examined over 2500 cases from 125 countries with combined losses of $3.6B with an average loss by case of $1.5M and a typical case lasting 14 months before being detected.

Whereas corruption was the most common type of fraud, the most costly were financial statements fraud schemes, even though they represented only 10% of the cases. The breakdown of the detection methods reveals that analytics plays only a small role in the detection of occupational fraud: Human tips; 43%, internal audit; 12%, management reviews; 5%, by accident; 5%, whereas external audit catches only 4%.

A 2019 survey by Blackline provided insights into the concerns by executives with inaccuracies in financial data. With over 1100 C-suite executives and finance professionals from mid- to large-size organizations around the world, the white paper stated that:

“55% are not confident that they can identify financial errors before reporting results, 70% claim that their organizations made a significant business decision based on inaccurate financial data and 26% are concerned over errors that they know must exist but they have no visibility”.

The power of AI in finance

Finance professionals that rely on outdated tools and methodologies do not offer the best visibility into finding errors, errors with intent, errors that are considered fraud, and general mismanagement of the financial dataset in their organizations. The world is already witnessing a major trend toward moving to the cloud and becoming digital native and these must be vigorously pursued by organizations that want to be of the forefront of growth post the crisis.

Becoming digital native enables companies to move towards a near real-time view of their financial data and, coupled with AI in finance functions, the ability to fully analyze 100% of transactions. This ensures transparency to key stakeholders such as board members and auditors and aids in the identification of any anomalies in their financial records.

Currently, a company’s financial records are examined by external auditors on a yearly basis and evaluated using a sampling method that leaves the bulk of the dataset untouched. This method of rear view-mirror assessment provides C-suite executives with a hindsight perspective and the fear that decisions are made based on inaccurate and untimely information. Using AI-based tools to review 100% of the financial records in near real-time offers C-level executives with insights into data and, by using the appropriate analytics built into the AI applications, offers foresights into the operations of the company.

The two most important behaviors that companies must have to thrive post COVID-19 are resilience and adaptability. Resilience is defined as the ability to withstand or recover quickly from difficult conditions whereas adaptability is defined as the quality of being able to adjust to new conditions. Companies must build their operations and culture around resilience and adaptability so they can work efficiently during the “new normal” when we emerge out of this dark tunnel will become stronger and better off.

An article published by the Boston Consulting Group titled “The Rise of the AI-Powered Company in the Postcrisis World” highlights the tremendous opportunity for companies that are going to digital native, moving to the cloud, and adopting AI in finance applications to supercharge their operations. Arvind Krishna, in his inaugural speech as IBM’s new CEO, said, “I am predicting today that every company will become an AI company – not because they can, but because they must. Digital transformation means putting artificial intelligence at the center of workflows, and using the insights generated from that process to constantly improve products and services.”