AICPA Town Hall Replay: Hear Jim Bourke, Managing Director of Advisory Services for Withum, discuss how the audit is transforming to leverage new technologies and data to improve the quality of audits and deliver more value.

From #ENGAGE2022: CPA.com's Ericka Racca discusses Audit Evolution with Jim Bourke CPA CITP CFF CGMA of Withum.

While many of these firms used to approach an audit by using the previous year’s audit files as a template, they’re now coming at it from a completely different perspective.

Here's a sneak peek at what that means for you.

Wondering when the “audit of the future” that we’ve all heard so much about over the years will become a reality? Well, it’s clear from my conversations with leaders at firms across the country that it’s already happening. While many of these firms used to approach an audit by using the previous year’s audit files as a template, they’re now coming at it from a completely different perspective. They’re fully re-engineering the audit to meet higher client and regulatory standards while achieving new levels of efficiency and delivering a lot more value along the way.

But what does that mean in practice?

I recently discussed this very topic with Jim Bourke, CPA, CITP, CFF, CGMA, Managing Director of Advisory Services for Withum, where we took a closer look at important changes in the audit underway today and what they mean for firms of all sizes. Here is a summary of the key highlights.

New data capabilities are changing what’s possible
Many core aspects of the audit will remain unchanged – regulators will still require a lot of the same basic principles and reporting. But how auditors achieve those outcomes is already changing considerably – starting with data. The difference between old ways of delivering the audit and new approaches is stark. In the past, firms relied on clients to feed them data, often paper-based, and then the firm’s staff would input the data into their own systems. Today it’s all about using advanced digital tools to ingest the data, analyze it, and find patterns and signals buried in the data to inform the audit and provide valuable insights to clients.

How firms are shifting to meet the moment
For many firms, this evolution requires a more dynamic, fast-moving and technology-centric approach than they’re accustomed to using. And it will require that they change in some important ways – not at some unknown point in the future, but right now. The first step is for firm leaders to embrace this change, signaling the importance of conducting the audit in new ways to the entire firm. Without that level of leadership and visibility, don’t expect anything to change. When it starts at the top, the message makes its way throughout the entire organization.

Once the firm recognizes that the audit of the future is a top priority, other critical activities will cascade out. Technology assessment and selection. Process updates. Training. Data strategies. And more. For example, Jim explains how his team routinely assesses the potential impact of new technologies and tool sets on improving audit quality, and how important it is to ensure that team members have the training and support they need to use the tools effectively.

The Dynamic Audit Solution – a practical, powerful tool for firms to transform the audit
The development of the Dynamic Audit Solution (DAS) is a partnership between the AICPA, CPA.com and their technology partner, Caseware International. DAS will play a central role in pulling together all the different threads of the audit of the future – people, processes, technology and data. DAS enables firms to transform the audit, not just make incremental improvements. Today, DAS is being piloted by a limited number of firms before a larger-scale commercial rollout in 2023.

You can read more about what’s next in the audit of the future, and subscribe to receive the latest updates, on our cpa.com/das web site.

In the meantime, you also can watch my full conversation with Jim in this 10min video, where he shares lots of practical front-line insights on the changing world of the audit. It’s an unscripted, insightful conversation that I think you’ll find useful as the profession moves to embrace the audit of the future.

Ericka Racca, director of audit professional services at CPA.com, and Karl Busch, senior director of product management at the AICPA, describe the capabilities of the upcoming Dynamic Audit Solution.

Transcription:

Dan Hood:

Welcome to On the Air with Accounting Today. I'm editor in chief Dan Hood. You know, if you've listened to this podcast for any length of time, you know, that we've been discussing a host of new audit solutions and tools for auditors over the past few years. And one of the highest profile ones has been DAS that's the dynamic audit solution that's being created by a consortium that includes the AICPA, cpa.com, CaseWare and a long roster are some of the largest firms in the profession. Now it's been in development for some time, but it's now approaching a public debut. So we thought it would be a good time to dive deeply into it and here to give us the inside scoop our Ericka Racca. She's a director of audit professional services at cpa.com. Ericka, thanks for joining us. Thank you.

Ericka Racca:

For having me. It's good to be

Dan Hood:

Here. And we've also got Karl Busch. He's a senior director at the a I CPA and a product management for the dynamic audit solution. Carl, thanks for joining us.

Karl Busch:

Hi Dan. Thanks for having us. Appreciate it.

Dan Hood:

All right, Karl, I'm gonna go to you first as, uh, to give us a definition of DAS. How would you describe it?

Karl Busch:

Thanks Dan. I'd be happy to tell you more about the dynamic audit solution or DAS. The goal of the DAS is to provide a transformative audit methodology that utilizes data along with embedded knowledge and advanced technologies to help inform auditor judgment through the selection of relevant procedures performed at the appropriate time. So in a nutshell, it's a completely new audit methodology. That's coming to life using cloud technology, as well as integrating most of the tools that an auditor would use in performing a quote audit of the future. So this includes the audit workflow and management software, data analytics, automation find collaboration and much more in one single tool. If we look back at a recent KPMG study, they found that 47% of respondents said auditors should perform deeper analysis in the areas they already cover. And they also found that 78% said they should use more sophisticated technologies for data analysis, the DAS methodology and tool supports both of the sentiments.

Karl Busch:

We may get a little deeper into the methodology in just a little while, but briefly DAS helps the auditor gain a better understanding of their client, a much deeper understanding of their client along with relevant risk. This allows 'em to focus their efforts in those areas that they identified and assess while also leveraging data from the very beginning of the audit through execution and into reporting and wrap up DAS is also focused on information reuse and providing a guided approach to the audit too often in today's audit world and audit team has to document the same or very similar things and multiple places, which not only is inefficient, but could also lead to inconsistent or worse audit results. Similarly audits today, leverage a lot of audit staff time where they may or may not be getting a lot of experienced auditor assistance training, or other input. So what da does is it delivers a guided approach by providing audit auditors with information that's gonna help them better understand and apply their judgment in deciding what to do, why to do it as well as when to do it.

Dan Hood:

Excellent. Very cool. All right. Like I said, we've already gone deeper into, usually when I've heard it, I say, well, it's X and it's, it's nowhere near as deeper detailed as that. So I think that's a great, uh, overview of what it's all all about and gives people some sense of what they could be looking forward to. Maybe you could give us a little bit of the timeline for, uh, the release. It's a little bit, I think it's a little bit staggered, but anyways, you would know better than I tell us all about that, if you would.

Karl Busch:

Sure thing. So the DAS project's been going on for a little bit of time, uh, last few years, uh, but last year in 2021, we released, um, a user acceptance version. And so all of the participating gas firms were able to use that and provide a lot of great feedback to us. This year's really exciting for us in 2022 in the fall, we have a release that many of those firms are gonna be using to pilot on live audit and getting some real actual experience using it for, for live jobs. And then next year in 2023, uh, we'll have our first commercial release and expect many of those firms to begin their implementation effort, uh, to move towards fully leveraging gas across their firm.

Dan Hood:

Excellent. Well, let's, uh, you said you, you brought up the firms and that's a, it's such crucial part of it because we know one part of the, the creation of this right, was bringing in expertise from, uh, a lot of these top audit firms, uh, literal people who, I mean, I talked to a number of people on, on webinars about audits and, and it discovered that that all of the panelists, you know, that we assembled randomly had all been working on in one way or another, some committee or some approach to this. So it's brought in a lot of expertise from across the profession. Maybe you could talk a little bit about how it was built and, and how that process was managed and how you leveraged all that expertise to, to build this, uh, this new system

Karl Busch:

Sounds great. Uh, Dan, so one, one, what I'd say is the da project. We're, we're extremely excited about the tool and the methodology that we're building, but probably one of the most, the most special things about it. And one of the, the biggest, uh, reasons why it successful so far is because of the firm. So we've been really fortunate to have exceptionally high caliber experts involved day to day with the da project. So it's a direct result of the approach that we took when beginning the da project. First of all, we had two choices, uh, when we thought about how to build it. Uh, and so what we could do is have an automated, uh, existing methodology, or we could have gone and, and built a audit with a completely new methodology that also leverages advanced technologies. We felt that to try and incrementally improve what people have been using for 30 plus years, wouldn't sufficiently transform the profession.

Karl Busch:

So we knew we had to start by building entirely new methodology, a, a really big effort to do that. And that's where the firms come in. So we needed experts and platforming currently practicing auditors to help define the methodology and the tool. So the experts and the firm practitioners work alongside our internal term teams that we've built@acpaandcpa.com. So that's brought in, uh, many resources for internal teams where we've been building audit and data analytic tools, methodologies, and driving implementation efforts, uh, across the audit and communities for decades. The DAS initiative has really strong support and involvement from the consortium that you mentioned. Uh, so that does include over a third of the top 100 us audit firms. And so this gives us regular opportunities for us to interact with and get input from those firms. There's a couple different ways we do that. I mentioned some of the day to day items and I'll get to that.

Karl Busch:

Um, but one of the most important things is, is we regularly meet with a stakeholder group that represents all of those firms. So we get to bounce things off of them and hear comments back from them. Uh, very, uh, frequently, uh, quarterly. We meet with an advisory group, which is made up of audit and innovation leaders from those firms. Uh, and then, like I said, most importantly, the consortium has given us access to dozens of experts that work on our project on a daily basis. Um, so like I said, that's the most valuable resource that we have in the da project. We often say that DAS is built for auditors by auditors. So it's really important to have that. And then if we broaden it past the people that are just involved in the project, we've been able to open it up. Like I said, last year, we did a user acceptance testing event. We've had other things like that. It allowed us to expand the exposure within those da firms and also get new targeted and unfiltered input on certain features. So the da usability, overall methodology, or other items, we, we get a lot of information and feedback from them, uh, and the tune of thousands of pieces of, of user input that we get to leverage in the design and the delivery of da.

Dan Hood:

Very cool. I mean, I think that combination of, of, of a, of a, a clean slate, right? You said not trying to just automate, what's been done before, but, but saying, let's start with, what is the tech, what can the technology do and then turning to everybody in the profession and saying, what would you like it to do? Or, I mean, that's, uh, that, that combination's gonna be pretty powerful. Eric, I wanna bring you in on this, talk a little bit about the, uh, your take on how it was built and all that background.

Ericka Racca:

Well, as an auditor myself. So I worked as an auditor for many years before I moved into learning. And now kind of helping out on this project with the professional services. It truly is, uh, methodologies for auditors built by auditors. And that's what I think makes it so exciting, you know, as Karl. mentioned, and as we've said, you know, we've been auditing for many years and it's, you know, it's called that paper based audit. And a lot of technology over the years has also come out to assist them and make those audits better, more efficient, more effective, but what makes stats different is that the data is driving the audit, and it's not a linear approach. It's has that like person sitting over your shoulder, really helping guide the auditor as they're doing it in the field, by themselves, without the senior manager there. And it's using technology and building on technology as technology grows to really leverage analytics and AI, and eventually start to help build and, and grow more value to our clients. It's really kind of taking out some of those mechanical decisions and things that we have to do as auditors, so we can focus more on what's important and we can be better at identifying those risks.

Dan Hood:

Cool. Well, I wanna talk more about that, that sort of over the shoulder view of what it's gonna be like to use sort of on a day everyday basis or how it's gonna fit into auditor's workflow. Um, but we need to, to step away for a quick break. All right. And we're back talking with Erica RKA and Carl Bush about the upcoming dynamic audit solution, which is, uh, uh, I don't think it's too much to call it. One of, one of the biggest, if not the biggest sort of technological development in the audit field in a long time, it's pretty exciting stuff. Um, uh, we've talked a little bit about sort of what it is a broad level, how it was built, but now Eric, I wanna to ask you a little bit more about how it's gonna fit into sort of the average auditors day when they look at this and say all well, at what point am I gonna start using da and what's that gonna look like in terms of my workflow,

Ericka Racca:

The firms who decide to make this change, which will be a big change. You know, it's not just a change of adding a new technology onto the way they do things now. I mean, every firm right now has an audit methodology that they follow. So this is changing, not just the tool they're using to help make their audits better and more efficient, but it's also changed the way that they think and the way they conduct their audits, because it's a, it's a new, it's a new methodology and it's, it's taking the audit in a different direction, trying to transform the audit. So once a firm decides that they're gonna make this change, I mean, DAS is a complete solution from end to end. So right now many firms will use one software to manage their work papers. Then they have another software for their audit methodology and their documentation.

Ericka Racca:

Since again, there's a lot of technology tools out there to help auditors now, but that's probably a different vendor than their work paper management tool. And, and then if they have a data analytics that they're trying to incorporate, that's another software and probably another vendor and I could keep going, but those are probably the biggest ones. But with this approach that this approach right now has the audit work and the documentation and multiple places. And then it requires time to pull it together for one complete audit file on the end, da has, or will have in the future. Like once we get to that more end state, they'll have all these tools in one place. So it's a one stop shop. You know, they'll do everything within DAS, they'll start and end in da. And the analytics will be built into there, their sampling and all these different things that they do. So in the end, it's gonna produce a more effective, a more efficient and a more thorough, thorough audit that will add value to our clients. We always talk about how to add value, but oftentimes people. And when they look from the outside in, they see us as like a compliance shop, but we really, yes, there's compliance component, but that's not all it is. And DAS is really gonna give us that edge and the advantage to bring more value to the client and make it a, a better audit.

Dan Hood:

Gotcha. Now I'm taking it from, from some of the things we you've been saying about, uh, right. It's a new methodology in firms are, uh, gonna need to, at the very least adapt their methodology depending on close. Cause it may be, or maybe just adopt this entire new methodology, but I'm gonna guess from that, that, that maybe this workflow's gonna be to some degree, very different from, um, what they're looking at. Carl, I wanna ask you, is, is that fair to say this workflow's gonna be potentially very different from what they've done or is it gonna look like their previous workflow or are they gonna recognize this process,

Karl Busch:

The overall workflow that you are gonna see in might initially feel similar. It's gonna have phases that are like most other audits, but there are also some significant differences. First of all, leverages data, right from the moment that you accept the audit client. So this involves getting a lot more data in getting it earlier from the client. So we support this in many different ways. So we have data request letters, direct connections to ER, uh, cloud-based E systems as well as third party connectors. The data is used initially to get a stronger understanding of the client and their systems and processes help Al is to help by providing suggestions to them that are gonna help to focus the auditors on the relevant thing at their appropriate times as they progress through the audit. So this is gonna shuffle a few things around compared to how people may perform an audit today. The last significant change to note in the audit workflow, uh, in da is one that might feel a bit different than today. And that's that the audit is no longer one long linear process it's completely connected and it can be more multi-directional. So this means that if something is discovered, that changes what you plan for, we need to go and understand what that is, why it happened and determine if you need to change your audit approach.

Dan Hood:

Gotcha. Well, I, I mean, I think what's interesting about that is as you describe that none of those changes seem like they should be particularly terrifying to anybody in the audit world. Um, and, and, and, and where they, even at the moments where they do represent the biggest changes. You talk about getting a lot of the, the data earlier in the process and, and, and spending a lot more time or a lot more focus on the risk assessment. Those are so clearly beneficial, right? That you couldn't imagine anybody, uh, even if it doesn't for the first year, at least may involve some changes and some, some thinking, uh, the benefit to

Ericka Racca:

It's a change your mindset. Yeah. It's a change in mindset, but, you know, I'm new to the project. I'm new to cpa.com. So I've, you know, had to go through some of the learning and training of DAS to understand it. And to me, it's not really, it is definitely a change in how most firms are doing things, but not necessarily a change in what the standards tell them that they should do. So, um, it's just, it's, I think it's a better way to approach it because of that guided methodology and that, you know, auditor over your shoulder, it's helping you remember or realize if you do something in field work that identifies a misstatement or whatnot, that you have to go back, adjust your planning and your risk assessment so that everything flows in ties within the audit. And it's not that you shouldn't have done that before an audit, you know, when the risk students came out years ago, it was trying to make them less linear, but our tools are, were very linear. It's still, it was still that paper based audit, but dads is trying to change that thinking and really help almost force it to make sure that things flow and to help that documentation along the way. So it's more efficient.

Dan Hood:

Excellent. One of the things that sort of underpins this, we talked about is the goal of taking advantage of modern technology, right? The, the, the data tools that we have and all the sorts of, uh, of analytics capabilities, et cetera, et cetera, that are available out there now. And, and the notion, right, for a lot of that is that that will change. Uh, technology's gonna change. We're always gonna find new technologies, new developments, uh, improvements in what we've got. Is there plans to keep gas updated for that kind of technological change? Carl, can you tell us about that?

Karl Busch:

Sure. Yeah. We, we wanna make sure that we're careful, right. There's a lot of change going on over the last couple years that people have been, um, experiencing people have done a really good job. They've adapted, they find new working styles. Uh, and so we wanna make sure that we're not overloading people, but with da, there, there is a, a learning curve, right? You have to turn get those changes that we've been talking about, uh, earlier today into the hands of the otters, make sure that they're comfortable with it. And we wanna make sure that we're keeping, uh, the tool growing, right? So the primary content of DAS we're gonna update on an annual basis. So this has been allow firms to align this with their annual training cycles coming out of business season. Uh, so those release that will have kind of the biggest impact every year, it'll have new standards.

Karl Busch:

Other larger changes, big features that you really need to focus on, on changing. But like you said, with new technology, we can make it, it's easier for us to, to release, um, new features, uh, along the way. So if we have new features that are gonna provide additional value, that won't impact the audit approach that people have already been trained on, we'll be releasing those as we go. So they'll get certain platform features and other da features, uh, coming to them as those are available. And then another important thing to talk about is industry content. So that'll be released as it's being developed for new industries and then updated in accordance with the common timing for each of those industries audit cycle. So it might not necessarily coincide with that annual release. I mentioned for the kind, the core da tool, um, things like EVP and other things are released on a slightly different schedule than that. Uh, but will also be focused on a similar release game than I, what I just talked about.

Dan Hood:

Gotcha. And are there, uh, I mean, I imagine industry, uh, focus must be a big part of this, but as you look ahead, are there specific features that you already have in mind for sort of secondary releases or, you know, or things, you know, you wanna develop,

Karl Busch:

We're definitely not done with next year's 20, 23 da release. There are gonna be continuous improvements. In addition to the DAS after this initial release, since da is intended to be a transformative tool that makes maximum use of the latest technology, uh, for the benefit of audit quality and efficiency, it's never gonna be done. So every release that we'll have for data will evolve the layer in not only updates, but also additional content and functionality as we pursue continuous improvement and transformation. A few examples of this would be more machine learning, additional data analysis tools and procedures, evolving suggestions to the auditor and more third party. Um, integrations of course, the most important thing we have is the professionals that are using the tool. So we'll continue to be informed by their evolving need and the feedback we received from our users.

Dan Hood:

Awesome. Yeah. Well, you couldn't have a better set of, uh, sort of test users. Uh and I'm sure they'll be more than happy to share their thoughts as you go forward. So it'd be great to, to update it that way. Um, Eric, I, we, we could spend a lot more time talking about this. There's a lot more features and I know people are gonna be super excited about it, but we're running short of time. So Eric, I wanna turn to you, cuz you had mentioned, um, you know, the shift in mindset that the DAS is, uh, you getting the most outta da is gonna require a little bit of a shift in mindset maybe have should, and adapt to themselves. Thinking themselves

Ericka Racca:

Mean we keep talking about being a transformative audit. So transformation is probably one of the hardest, but most rewarding things you can go through, whether it's personal or professional. And so this is gonna be a large change it's you know, most firms, as Cole mentioned, there's been a lot of change over the past two years, a lot of technologies that have come out most firms, whether it's because of COVID and having to make that transition, or just because of the, the new tools out there have done some kind of a change within their firm already. So they have some experience. So I would say one of the first things they wanna do is just think about a recent change, like a technology change of software change, what went well, what didn't go well, I mean, if they haven't done that already, a big part of change management is to try to do that assessment and the end.

Ericka Racca:

And that will kind of help them think about how they can make a big transformational change like that. And that's, you know, that's pretty high level, uh, and you know, change itself is not just about it's about the people and the process. And sometimes they think that when we go through change or companies go through change, they forget about the people and they focus on the process from a general standpoint, I kinda look at change management as the three CS. So you need to commit to it. You need to collaborate and you need to communicate. So commitment is at top down a change like that, where you're not just adding on a technology tool, your audit, like you're changing your methodology and that mindset and how you approach things and really where you spend your time. You need to be willing to make that change.

Ericka Racca:

It needs to come from the top down. And a lot of times what will happen with change references that they'll fail is leadership just says, we're gonna do this. Um, you'll wanna make sure that you bring people together to collaborate, to plan and execute. So start thinking about if, you know, when you wanna make this change to Daaz who are those key people, those champions that you wanna be part of it, the auditors, it, other people, getting the clients involved, kinda creating a task force of who can help make those decisions and start thinking about a strategic plan that will have goals and milestones. So here's what we are today, but here's what we need to get done. And then that last see is to communicate because communication is key, no matter what you're doing, make it early clear, consistent to all parties, not just what you're doing, but why.

Ericka Racca:

So what's the value of this new tool and this new methodology, how will it improve the audit? So for example, we're improving our enhancing the quality of our audit. We're creating value to the client taking away. Like I said earlier, taking away some mechanical processes of the audit so we can fo focus on what's more important. So we call this the with and learning. We call this the with concept w I, I FM what's in it for me, when you explain the benefits, the why you'll get a lot stronger buy in, cuz you wanna avoid those who are using the tool the most, not like pushing back and not buying in and then finding work around. So they're not using the tool the way it's designed to be used. So that's kind of like a broad perspective of just thinking about change management. If you wanna think more like specifically to DAS and some things that you could do to help you to prepare for it.

Ericka Racca:

Um, DAS is cloud based. So if you're not already in the cloud, are there things you could do now to move to the cloud? Or what would your firm need to do in order to transition to the, to cloud? And you know, Carl mentioned, or we both mentioned how data is at the core of da. So talk, talking to your clients now about data, help them understand what you're gonna need, why you're gonna need it, cuz it will be different. You know, firms are getting ready to start their planning for 2022 audits, which they're not using dash, but you can start having the conversations. Now take advantage of being in front of them because getting the data is gonna take time. It's gonna trial and error. You're gonna wanna start with like a small subset and then gonna kind of go back to get what you need, but then when you're ready, make it to transition to da, you've got that data, you know what you need and you're ready to go.

Ericka Racca:

DAS also has a standard taxonomy. So does your firm have a standard taxonomy and account mapping if not start getting like some of the participating firms, that's what they're focusing on. They're just trying to get the firm to a standard taxonomy. So it's easier to transition to the DAS taxonomy and the DAS taxonomy is pretty much based off XBRL, which is very common. And then taking the inventory of your tools. You've got a lot of tools already. You've like I said earlier, you've got all these different technology tools. So what do you have? How are you using it? Who's using it and what might change if and when you adopt DAS.

Dan Hood:

Excellent. Right? Well, that's a, that's a great roadmap. And I think, uh, you've covered a lot of the things they need to communicate, right? This whole podcast is they should just play this podcast and say, this is why we need it. Get to work. Uh, no can, but they, uh, but it's been a great primer. I think for firms as they look to, to prepare themselves, to adapt, to adapt this and adapt to it, um, and uh, a great set of ideas for how they can communicate the value of, to, uh, to both their staff and their clients. So that's awesome. Ericka Racca and Karl Busch. Thank you so much. Uh, I appreciate, uh, your joining us today. Thank you. Thanks a lot. And thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production, by Kellie Malone. Rate or review us on your favorite podcast platform and see the rest of our content on AccountingToday.com. Thanks again to our guests and thank you for listening.

Listen to the episode on Accounting Today or Read the Transcript below

Transformation of the audit goes beyond simply automating rote tasks, as Amy Pawlicki, vice president–Assurance and Advisory Innovation at the Association of International Certified Professional Accountants, explains in this episode. She details some of the ways that audits can be more data driven while still complying with standards. The interview with Pawlicki is part four of a series on audit evolution in action. Here are links to the previous three parts:

• An introduction to the topic, including the key drivers of the transformation
• A closer look at audit data analytics with two firm leaders.
• The importance of "digital mindset" in audit transformation.
• Also, get caught up on several news items covered recently by the Journal of Accountancy:
  • Paul Bonner's articles on the Biden administration's proposed budget for fiscal 2023 and a TIGTA report about IRS inefficiencies.
  • Jeff Drew's coverage of a proposal by the AICPA's Auditing Standards Board.
  • Ken Tysiac's article on not-for-profits working against the clock on implementation of FASB's lease accounting standard.
• What you'll learn from this episode:
  • Pawlicki's definition of a data-driven audit.
  • How a data-driven audit can help identify and manage risks.
  • An overview of the Dynamic Audit Solution (DAS).
  • Why Pawlicki says that automation is "one small piece" of audit transformation.

Transcript:

Neil Amato: Welcome to the Journal of Accountancy podcast. This is your host, Neil Amato. In this episode, we have part of a continuing series on the transformation of auditing and the opportunities in that realm. We will also share coverage related to a report on IRS processes, a proposal by the AICPA Auditing Standards Board, and more news. That's all coming up after this brief sponsor message.

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Amato: Welcome back to the Journal of Accountancy podcast. This is part four of an ongoing series on the podcast. The series is about audit evolution in action. Today's guest is Amy Pawlicki. Amy is the vice president–Assurance and Advisory Innovation at the Association of International Certified Professional Accountants. Amy, thank you for being on the podcast. First, why in your mind does the audit need to be transformed? What specifically about auditing needs to be transformed?

Amy Pawlicki: Whenever I talk about this topic, I like to address it more in terms of the opportunity than the need. I think firms are out there today performing quality audits every day, and that's great. They're also making a lot of progress in terms of utilizing new tools and integrating data analytics and other opportunities into the process to help them continuously adapt audits and leverage technology. But I do think there's a tremendous opportunity to go further than we've gone today.

When you think about the audits that are done today and the methodology that's used today or followed today by most firms, much of it was developed many years ago, long before firms had access to the technology that they have today in terms of computing power.

By computing power, I mean, processing power, the ability to use large quantities of data, analyze large quantities of data, and also storage. We didn't use to have the cloud storage that we have today. That represents a tremendous opportunity to transform methodology, to take advantage of and maximize what technology can do for us today.

Amato: You touched on those technology advancements and some of the opportunities they present. What are some of the opportunities in the area of client expectations and then also on the staffing and skill set front?

Pawlicki: To me, I think a lot of people maybe view this as a challenge, especially in terms of what's needed from a staffing perspective, but I actually think it's one of the most exciting things about the potential to transform the audit, that we can do a better job of supporting clients and client collaboration and the client experience through the audit by having more efficient connectivity and communications with the client throughout the process of the audit.

It's no longer the days where you're going into their office and holing up for weeks on end and going through file cabinets. The audit is done very differently today, and thank goodness, as we've gone through COVID, for example, that we have the ability to do remote audits where necessary, again, using technology. But it's not just a matter of being able to be remote, it's a matter of making the process more efficient and enjoyable for the clients.

Also in terms of the auditor experience, those same benefits that accrue to the client can also accrue to the staff auditor conducting the audit. We are hearing from a lot of new auditors entering the field that they really enjoy the incorporation of things like audit analytics into the process that enable them to dig deeper and to add more value and insight to their clients.

That's something that, yes, it requires additional analytical skill sets above and beyond what an auditor would have traditionally had, although I would argue auditors have always had statistical backgrounds that lend themselves to analytics. But today, definitely those needs are deeper. But I think that's also more exciting to new and younger auditors coming into the profession to actually attract them to the job and make it more exciting and something that they're more interested in pursuing from a career perspective.

Amato: In a pre-call, you said, "Most firms' methodology is checklist driven, not data driven." What do you mean by that?

Pawlicki: I think a lot of firms, as they're starting to incorporate data analytics into audits, they're trying to get to a place that is more data driven. They're trying to actually use the client data, and sometimes, in some cases, even external data, to help them understand risks with their client.

Historically, firms got to a place where they were more or less following the same approach as last year, you'll hear the term SALY, which means same as last year, where they would pick up last year's file, look at that, and then look at this year's data, and try to figure out if anything has changed. But that's not really a truly data-driven approach where you're bringing data analytics into the process from the very beginning, from risk assessment, even from the perspective of understanding the entity and its environment and using that data throughout the process repeatedly in an iterative way.

You're not just going through each phase of the audit in a linear way using data analytics in a particular spot and not in another spot. What we're trying to get to is a place where you're doing procedures throughout the audit to assess risk and respond to risk, and part of that is the integration of data analytics. Data analytics are essentially a set of procedures that you can use to understand what's happening at the client. That is really what we're driving towards and what we mean when we say data driven. I think a lot of people look at the audit as something that's compliance driven.

We are certainly all for doing an audit in compliance with the standards. The spirit of the standards and the objectives of the standards are right on point in terms of helping you to deliver a quality audit. But you can't achieve that through a checklist. You actually achieve that by doing things that help you identify and respond to relevant risks. That really is the focus of what we're trying to accomplish through the Dynamic Audit Solution, or DAS, which is a technology-enabled tool that the AICPA is working on together with CPA.com and software provider CaseWare to help actually enable a technology-driven methodology in a workflow tool to help auditors implement that new methodology.

Amato: You use that word "methodology," you use the acronym DAS, Dynamic Audit Solution. What's different about the Dynamic Audit Solution methodology?

Pawlicki: A second ago, I just talked about the focus being on relevant risk, so not just the risks you saw last year. There may be some of the same risks that were in play last year, but there might be different risks. Things might have changed. You might have different suppliers, you might have a different customer base. There are lots of things that can change.

When you think about the COVID, post-COVID world that we live in today, supply chain is a huge issue. There are likely risks that have come into play as a result of that that weren't there last year or two years ago or three years ago. The focus of DAS is really on risk identification and assessment. What's different about DAS is instead of just thinking about risk at the assertion or the financial statement, line-item level, DAS looks at risk at the individual risk level. That is essential for really understanding and honing in on and doing assessment of what are the most relevant risks and responding to those risks. That is different and it does require a little extra work on the front end in terms of identifying individual risks.

But what it enables down the line is that truly data-driven audit where you are analyzing and responding to risks at the individual risk level. And as you're learning things throughout that data-driven audit, you're able to dive deeper and deeper into the areas where you see potential risk. You're truly using the data to drive auditor actions and steps throughout the process.

Amato: What do you think is different about DAS from other solutions as far as how it will benefit firms and clients?

Pawlicki: There's a couple things that are different. Well, probably more than a couple. There are a couple primary things that are different about the Dynamic Audit Solution, and truly different. First of all, there are a lot of great apps out there today that help auditors with certain aspects of the financial statement audit.

For example, there are great analytics tools. Many of them are starting to incorporate machine learning. Many of them incorporate technologies like robotic process automation to help automate rote or repetitive tasks so that humans can spend their time on the higher value, more analytic activities. Those things are all super important. They're all super valuable.

But DAS isn't just about automating what we've always done. It goes further to maximize the potential of technology to add additional value and bring additional insight to the audit and really enhance audit quality. That's a major difference. Not just automation, but actually transforming how we go about conducting the audit to really drive quality. Certainly, automation is part of that, but it's one small piece.

Another thing that's different is that most workflow tools, which DAS is a complete end-to-end audit workflow tool, don't incorporate these other apps that support things like data integration, data ingestion, and export. If you're trying to actually bring in data to analyze it, you may need a separate app to help you with that process. DAS is being built to help facilitate that because it's critical to the methodology and to the functioning of the tool.

Another example is analytics. Most analytics tools are sort of bolt-on, where you'll export the data out, do some analytics, bring the information back in, and try to integrate it into your workflow. With DAS, the data analytics are actually procedures that are suggested as you go through the process of the audit. They are legitimately integrated with the workflow in a very direct way, which is very different. The DAS audit workflow tool actually incorporates a lot of these different functions that firms today are having to look to other apps to be able to leverage.

Finally, the most different thing about DAS is that it has a tremendous amount of knowledge built into it to help guide the auditor in completing an efficient and quality audit.

What I mean by that is we are actually structuring and standardizing not only the data that's coming in, client data or external data that's being used for analytics, but also the auditor knowledge that accumulates through the process of actually conducting the audit.

By structuring all that and linking it all together, we are actually enabling the tool to make suggestions that guide the auditor through the process based on what the data is telling them. No one has ever done that before in a fully integrated fashion, and if you think about it, not only is that important to accomplishing a data-driven audit, it's also critical to being able to use artificial intelligence in a really meaningful way.

Specifically, I'm talking about machine learning, where as you build up data and auditor knowledge, eventually, you get to a point where not only are you using auditor insight as part of the process and benefiting from the auditor on the job, you can actually leverage the insight of multiple auditors and multiple audits through the use of machine learning.

You'll never get there if you don't structure the data and the knowledge to that level of specificity, but by building that infrastructure, we enable that bonus of bringing in artificial intelligence down the line, which really amplifies our potential of driving a more efficient and higher quality audit through the incorporation of the artificial intelligence and specifically machine learning.

We don't need that right away to benefit. Even from the earliest versions, that knowledge and that integration will benefit a guided audit. But again, once you build that infrastructure, you have the potential to amplify that benefit exponentially over time.

Just like if you think about the way that artificial intelligence has been used in other professions, like the medical profession. A doctor only has the benefit of their own experience, but through the use of a tool like Watson, you can benefit from the experience of thousands of doctors and thousands of diagnoses to better pinpoint what an appropriate diagnosis might be.

We have the same potential for the financial statement audit, but we can't get there unless we have structured standardized data similar to what you might see in medical files historically, which is why that profession has been enabled to use artificial intelligence so effectively.

Amato: That's a really good comparison. Amy, thank you very much.

Pawlicki: Thank you so much for having me. This is one of my favorite topics to talk about. After many years of having worked on it, I am super excited to see all the progress that's happening in the industry among firms and especially with the work that we're doing through the Dynamic Audit Solution.

Amato: In other news, Paul Bonner of the Journal of Accountancy has coverage of a recent report that takes a closer look at IRS processes. The pandemic and changes to laws were primarily responsible for the IRS failing to meet timeline standards for a majority of taxpayers' cases last year, but it was inefficiencies in staffing, equipment, and procedures that also made the backlog worse. That's one conclusion of an audit report by the Treasury Inspector General for Tax Administration, or TIGTA. You can find a link to that coverage on journalofaccountancy.com/news or in this episode's show notes. And the Office of Management and Budget on Monday released the Biden administration's budget proposal for the federal government for fiscal year 2023. Among the provisions in that budget are a higher corporate tax rate, 28% instead of the current 21%, as well as a 20% billionaire minimum income tax on realized and unrealized gains and other income. Visit journalofaccountancy.com for more on that story. Also, the AICPA Auditing Standards Board is seeking comments on a proposed Statement on Auditing Standards that seeks to strengthen the auditor's approach to planning and performing group audits and to improve the quality of such audits. Jeff Drew of the JofA has that story. And, finally, Ken Tysiac has an article on how the wait is finally over for not-for-profits when it comes to implementing FASB's lease accounting standard. According to the article, organizations that have multiple buildings or a fleet of vehicles may face challenges in implementation, especially if they elected to put off implementation until now. That article and all the other content mentioned can be found on the Journal of Accountancy's website. We will also include links in this episode's show notes.

Thanks for listening to the Journal of Accountancy podcast.

• An introduction to the topic, including the key drivers of the transformation.
• A closer look at audit data analytics with two firm leaders.
• The importance of "digital mindset" in audit transformation. Also, get caught up on several news items covered recently by the Journal of Accountancy:
• Paul Bonner's articles on the Biden administration's proposed budget for fiscal 2023 and a TIGTA report about IRS inefficiencies.
• Jeff Drew's coverage of a proposal by the AICPA's Auditing Standards Board.
• Ken Tysiac's article on not-for-profits working against the clock on implementation of FASB's lease accounting standard. What you'll learn from this episode:
• Pawlicki's definition of a data-driven audit.
• How a data-driven audit can help identify and manage risks.
• An overview of the Dynamic Audit Solution (DAS).
• Why Pawlicki says that automation is "one small piece" of audit transformation.