Although financial audit utilizes the opportunities offered by digitalization to an increasing extent, successful audit is centred around interaction between people.
Over the past 12 months, the National Audit Office has extensively reformed its financial audit procedures. The reform is a response to the changes that have taken place in the management of central government finances, and one of the aims is to make more extensive use of new digital technologies. The reform has been prompted by the opportunities offered by data analytics, the quality and efficiency benefits arising from centralized implementation, and the aim of providing better service for a wide variety of different customers.
At the National Audit Office of Finland, we are excellently placed to expand the use of data analytics in financial audit, as we have already been utilizing it for more than 20 years. In addition, the level of digitalization in the financial administration of Finland’s central government is also extremely high, which makes it easier to use data analytics.
Over the past few years, central government has introduced shared information systems in key financial management processes. For example, all central government actors use shared processes based on shared information systems in personnel administration, purchase-to-payment, order-to-debt recovery, bookkeeping, and travel administration. Thus, from the audit perspective, all advances in data analytics are available to the auditors of central government finances.
An incomplete and changing environment challenges auditing
Data analytics can only be used efficiently if we have access to reliable and valid data for financial audits. We have noted that obtaining data for audit needs requires a lot of work. Obtaining valid data requires understanding of the objectives and methods of the audit work, of the way in which data can be used, and of the structure of information systems.
The methodology based on financial audit standards also works very well with audits conducted using data analytics. Auditors must, as part of their professional competence, also be familiar with the processes and the most effective controls used in them. After that, the functioning of the controls can be efficiently verified using the datasets available. Walk-through testing remains a workable method. When high-quality data on the process is available, the entire data can be subjected to efficient walk-through testing.
Analytical substantive audit is an audit method that offers great potential, because in normal circumstances, it is fairly easy to make forecasts on central government finances. Naturally, the year of the coronavirus pandemic has been highly exceptional and in the current situation, this method can only be used in a limited scale. Data analytics have also substantially reduced the detection risk of abuses.
Financial administration processes and the controls and information systems pertaining to them are in a constant state of change, and there is no indication that this change process will slow down. Therefore, audit relying on data cannot be based on the assumption that the audited processes are static. It is important to monitor changes actively and react to them. It is also important to be able to collect adequate audit evidence quickly and efficiently in an incomplete and changing environment.
In the near future, machine learning can provide ample opportunities for developing the audit process. For example, potential error situations can be revealed early on by using machine learning. In the future, we will also be able to use artificial intelligence in audit work. However, this may take several years.
There will also be changes in the auditors’ competence requirements in the future. In addition to possessing data analytics skills, they will also be required to understand the functioning of information systems. Nevertheless, understanding the objectives of audit continues to be more important than technical skills. Technological progress should not obscure the objectives of external audit!
The aim of auditing is to help the customer to operate better than before. Therefore, an auditor should communicate findings and conclusions in a comprehensible and effective manner. Ultimately, the effectiveness of external audit depends on smooth interaction between humans.
Read more: Financial audit