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diff --git a/content/blog/2019-09-09-audit-analytics.org b/content/blog/2019-09-09-audit-analytics.org new file mode 100644 index 0000000..77b3082 --- /dev/null +++ b/content/blog/2019-09-09-audit-analytics.org @@ -0,0 +1,229 @@ +#+title: Data Analysis in Auditing +#+date: 2019-09-09 +#+description: Learn how to use data analysis in the world of auditing. +#+filetags: :audit: + +* What Are Data Analytics? +A quick aside before I dive into this post: =data analytics= is a vague +term that has become popular in recent years. Think of a =data analytic= +as the output of any data analysis you perform. For example, a pivot +table or a pie chart could be a data analytic. + +[[https://en.wikipedia.org/wiki/Data_analysis][Data analysis]] is a +process that utilizes statistics and other mathematical methods to +discover useful information within datasets. This involves examining, +cleaning, transforming, and modeling data so that you can use the data +to support an opinion, create more useful viewpoints, and gain knowledge +to implement into audit planning or risk assessments. + +One of the common mistakes that managers (and anyone new to the process) +make is assuming that everything involved with this process is "data +analytics". In fact, data analytics are only a small part of the +process. + +See *Figure 1** for a more accurate representation of where data analysis +sits within the full process. This means that data analysis does not +include querying or extracting data, selecting samples, or performing +audit tests. These steps can be necessary for an audit (and may even be +performed by the same associates), but they are not data analytics. + +#+caption: The Intelligence Cycle +[[https://img.cleberg.net/blog/20190909-data-analysis-in-auditing/intelligence_cycle-min.png]] + +* Current Use of Analytics in Auditing +While data analysis has been an integral part of most businesses and +departments for the better part of the last century, only recently have +internal audit functions been adopting this practice. The internal audit +function works exclusively to provide assurance and consulting services +to the business areas within the firm (except for internal auditing +firms who are hired by different companies to perform their roles). + +#+begin_quote +Internal Auditing helps an organization accomplish its objectives by +bringing a systematic, disciplined approach to evaluate and improve the +effectiveness of risk management, control and governance processes. + +- The IIA's Definition of Internal Audit + +#+end_quote + +Part of the blame for the slow adoption of data analysis can be +attributed to the fact that internal auditing is strongly based on +tradition and following the precedents set by previous auditors. +However, there can be no progress without auditors who are willing to +break the mold and test new audit techniques. In fact, as of 2018, +[[https://www.cpapracticeadvisor.com/accounting-audit/news/12404086/internal-audit-groups-are-lagging-in-data-analytics][only +63% of internal audit departments currently utilize data analytics]] in +North America. This number should be as close as possible to 100%. I +have never been part of an audit that would not have benefited from data +analytics. + +So, how do internal audit functions remedy this situation? It's +definitely not as easy as walking into work on Monday and telling your +Chief Audit Executive that you're going to start implementing analytics +in the next audit. You need a plan and a system to make the analysis +process as effective as possible. + +* The DELTA Model +One of the easiest ways to experiment with data analytics and gain an +understanding of the processes is to implement them within your own +department. But how do we do this if we've never worked with analysis +before? One of the most common places to start is to research some data +analysis models currently available. For this post, we'll take a look at +the DELTA model. You can take a look at ****Figure 2***** for a quick +overview of the model. + +The DELTA model sets a few guidelines for areas wanting to implement +data analytics so that the results can be as comprehensive as possible: + +- *Data*: Must be clean, accessible, and (usually) unique. +- *Enterprise-Wide Focus*: Key data systems and analytical resources + must be available for use (by the Internal Audit Function). +- *Leaders*: Must promote a data analytics approach and show the value + of analytical results. +- *Targets*: Must be set for key areas and risks that the analytics can + be compared against (KPIs). +- *Analysts*: There must be auditors willing and able to perform data + analytics or else the system cannot be sustained. + +#+caption: The Delta Model +[[https://img.cleberg.net/blog/20190909-data-analysis-in-auditing/delta-min.png]] + +* Finding the Proper KPIs +Once the Internal Audit Function has decided that they want to start +using data analytics internally and have ensured they're properly set up +to do so, they need to figure out what they will be testing against. Key +Performance Indicators (KPIs) are qualitative or quantitative factors +that can be evaluated and assessed to determine if the department is +performing well, usually compared to historical or industry benchmarks. +Once KPIs have been agreed upon and set, auditors can use data analytics +to assess and report on these KPIs. This allows the person performing +the analytics the freedom to express opinions on the results, whereas +the results are ambiguous if no KPIs exist. + +It should be noted that tracking KPIs in the department can help ensure +you have a rigorous Quality Assurance and Improvement Program (QAIP) in +accordance with some applicable standards, such as IPPF Standard 1300. + +#+begin_quote +The chief audit executive must develop and maintain a quality assurance +and improvement program that covers all aspects of the internal audit +activity. + +- IPPF Standard 1300 + +#+end_quote + +Additionally, IPPF Standard 2060 discusses reporting: + +#+begin_quote +The chief audit executive must report periodically to senior management +and the board on the internal audit activity's purpose, authority, +responsibility, and performance relative to its plan and on its +conformance with the Code of Ethics and the Standards. Reporting must +also include significant risk and control issues, including fraud risks, +governance issues, and other matters that require the attention of +senior management and/or the board. + +- IPPF Standard 2060 + +#+end_quote + +The hardest part of finding KPIs is to determine which KPIs are +appropriate for your department. Since every department is different and +has different goals, KPIs will vary drastically between companies. To +give you an idea of where to look, here are some ideas I came up with +when discussing the topic with a few colleagues. + +- Efficiency/Budgeting: + - Audit hours to staff utilization ratio (annual hours divided by + total annual work hours). + - Audit hours compared to the number of audits completed. + - Time between audit steps or to complete the whole audit. E.g., time + from fieldwork completion to audit report issuance. +- Reputation: + - The frequency that management has requested the services of the IAF. + - Management, audit committee, or external audit satisfaction survey + results. + - Education, experience, certifications, tenure, and training of the + auditors on staff. +- Quality: + - Number and frequency of audit findings. Assign monetary or numerical + values, if possible. + - Percentage of recommendations issued and implemented. +- Planning: + - Percentage or number of key risks audited per year or per audit. + - Proportion of audit universe audited per year. + +* Data Analysis Tools +Finally, to be able to analyze and report on the data analysis, auditors +need to evaluate the tools at their disposal. There are many options +available, but a few of the most common ones can easily get the job +done. For example, almost every auditor already has access to Microsoft +Excel. Excel is more powerful than most people give it credit for and +can accomplish a lot of basic statistics without much work. If you don't +know a lot about statistics but still want to see some of the more basic +results, Excel is a great option. + +To perform more in-depth statistical analysis or to explore large +datasets that Excel cannot handle, auditors will need to explore other +options. The big three that have had a lot of success in recent years +are Python, R, and ACL. ACL can be used as either a graphical tool +(point and click) or as a scripting tool, where the auditor must write +the scripts manually. Python and the R-language are solely scripting +languages. + +The general trend in the data analytics environment is that if the tool +allows you to do everything by clicking buttons or dragging elements, +you won't be able to fully utilize the analytics you need. The most +robust solutions are created by those who understand how to write the +scripts manually. It should be noted that as the utility of a tool +increases, it usually means that the learning curve for that tool will +also be higher. It will take auditors longer to learn how to utilize +Python, R, or ACL versus learning how to utilize Excel. + +* Visualization +Once an auditor has finally found the right data, KPIs, and tools, they +must report these results so that actions can be taken. Performing +in-depth data analysis is only useful if the results are understood by +the audiences of the data. The best way to create this understanding is +to visualize the results of the data. Let's take a look at some of the +best options to visualize and report the results you've found. + +Some of the most popular commercial tools for visualization are +Microsoft PowerBI and Tableau Desktop. However, other tools exist such +as JMP, Plotly, Qlikview, Alteryx, or D3. Some require commercial +licenses while others are simply free to use. For corporate data, you +may want to make sure that the tool does not communicate any of the data +outside the company (such as cloud storage). I won't be going into depth +on any of these tools since visualization is largely a subjective and +creative experience, but remember to constantly explore new options as +you repeat the process. + +Lastly, let's take a look at an example of data visualization. This +example comes from a +[[https://talent.works/2018/03/28/the-science-of-the-job-search-part-iii-61-of-entry-level-jobs-require-3-years-of-experience/][blog +post written by Kushal Chakrabarti]] in 2018 about the percent of +entry-level US jobs that require experience. *Figure 3** shows us an +easy-to-digest picture of the data. We can quickly tell that only about +12.5% of entry-level jobs don't require experience. + +This is the kind of result that easily describes the data for you. +However, make sure to include an explanation of what the results mean. +Don't let the reader assume what the data means, especially if it +relates to a complex subject. /Tell a story/ about the data and why the +results matter. For example, *Figure 4** shows a part of the explanation +the author gives to illustrate his point. + +#+caption: Entry-Level Visualization +[[https://img.cleberg.net/blog/20190909-data-analysis-in-auditing/vis_example-min.png]] + +#+caption: Visualization Explanation +[[https://img.cleberg.net/blog/20190909-data-analysis-in-auditing/vis_example_explanation-min.png]] + +* Wrap-Up +While this is not an all-encompassing program that you can just adopt +into your department, it should be enough to get anyone started on the +process of understanding and implementing data analytics. Always +remember to continue learning and exploring new options as your +processes grow and evolve. |