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Otniel Didraga
West University of Timisoara
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Claudiu BRANDAS
West University of Timisoara, Romania
claudiu.brandas@e-uvt.ro
Mihaela MUNTEAN
West University of Timisoara, Romania
mihaela.muntean@e-uvt.ro
Otniel DIDRAGA
West University of Timisoara, Romania
otniel.didraga@e-uvt.ro
Abstract. The evolution of technology brought new challenges and opportunities to auditing:
the use of Big Data Analytics and Machine Learning (Artificial Intelligence) in the audit
process, although they were not widely used until recently. Most of the financial transactions
and documents are only in electronic format in a large data collection. So, the auditors must
be able to work and minimize the audit risk in the context of the huge and heterogeneous source
of data regarding financial transactions and client business. The use of intelligent decision
support based on Big Data Analytics and Machine Learning in the auditor’s work could
increase the quality of audit and reduce the level of audit risk. In this paper, we present an
overview regarding Big Data and Machine Learning technologies usage to improve the
support and quality of the audit process.
Keywords: Financial Audit, Big Data Analytics, Machine Learning, Artificial Intelligence,
Decision Support Systems
JEL Classification: M15, M42, O3
1. Introduction
In the last years, the evolution of technology resulted in creating systems that are “artificially
intelligent”, and AI is discussed both by academics and business practicians [1]. Auditing is
also evolving, but new technologies like Big Data and machine learning are still not widely
used [2]. Traditional auditing methods are based on large amount of data that can lead to
ambiguity, work overload, difficulties in identifying relevant information, and suboptimal audit
results [2], [3]. Thus, the introduction of Big Data techniques and machine learning methods
and algorithms to detect risks and fraud in auditing is a must. Also, AI brings great potential to
Big Data [1], [4], [5].
In September 2016, the International Auditing and Assurance Standards Board’s Data
Analytics Working Group elaborated a document in which they emphasized the necessity of
using advanced data analysis technologies such as Data Analytics to enhance the quality of the
audit process and minimize audit risk in the context of Big Data. According to IAASB’s Data
Analytics Working Group “In an increasingly complex and high volume data environment, the
use of technology and data analytics offers opportunities for the auditor to obtain a more
effective and robust understanding of the entity and its environment, enhancing the quality of
the auditor’s risk assessment and response.” [6]
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Public accounting firms made significant investments were made build experts systems to
support risk management and decision making [1].
To enhance auditing effectiveness and efficiency, many accounting companies (including Big
4 accounting firms: PricewaterhouseCoopers, KPMG, Deloitte, and Ernst&Young) are
investing and adopting AI technologies like IBM Watson, Kira Systems Inc. analysis system,
DeNovo and so on [1], [8], [12]. This happened because the expectations of stakeholders
regarding technology and using it in auditing financial statements are evolving [7].
Auditor’s judgment can be enhanced with the help of machine learning analytical power for
better decision as they will start using AI for analyzing Big Data [1].
Big Data techniques are often referred to as “data analytics”, or “predictive analytics” [2], [9].
Big Data analytics helps to investigate risks in auditing [9], [10] and to detect fraud [11], [12],
[13], [16].
To be relevant, Big Data must be innovatively analyzed, making it relevant and useful for
decision making [9].
Large volumes of data in auditing are difficult to analyze, and the use of technology and data
analytics offers many opportunities for auditors, improving professional skepticism and
professional judgment [6]. Professional skepticism is a part of understanding the advantages
and limits of data analytics in auditing [7].
Machine learning methods like: logistic regression, decision trees, neural networks, Bayesian
methods, SVM, and ensemble methods can be used to set up an early warning system against
fraud [14] and to support decisions of auditors.
The use of predictive analytics offers increased revenues in a random audit strategy [15], and
AI can be an assistant for an auditor that facilitates access to and processing of data [1], [12].
Complex tasks can be automated by braking them in smaller tasks, leaving the decision to the
auditor [1].
For auditors, Big Data refers to “collections of multiple types of data, which could include
some mix of traditional structured financial and non-financial data, logistics data, sensor data,
emails, telephone calls, social media data, blogs, as well as other internal and external data”
[9].
Adding Big Data techniques as tools for auditors can add value in the audit process [2], [3],
and improve audit results through evidence sufficiency, reliability, and relevance [2], [12].
“By using Big Data Intelligence analytics technology to combat fraud, businesses can identify
fraud risk earlier and easily uncover trends and patterns” [13].
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· Logistic regression is a tool used in two-class and multiclass classification when data needs
to be divided into two or more groups (e.g., choosing between two or more sales strategies).
· Decision trees (forests, jungles) “subdivide a feature space into regions of roughly uniform
values” [17] (e.g., sensitivity analysis on risks).
· Neural networks are learning algorithms based on brain-like interconnected layers (e.g.,
bank loan repayments).
· SVMs (Support Vector Machines) can separate two classes of data when they cannot be
separated clearly. The algorithm finds the best way to separate the classes and can be used
for classification, as well as regression challenges (e.g., text categorization).
· Bayesian methods use statistically independent data points [18], and make “assumptions
beforehand about the likely distribution of the answer” (e.g., pattern recognition, identifying
e-mail spam, etc.) [17].
· PCA-based anomaly detection (principal components analysis) is a specialized algorithm
used to identify items that do not fit a certain pattern (e.g., data security applications).
· Clustering (K-means clustering) is used for discovering structure in data [19] (e.g., market
segmentation, image recognition, etc.).
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Another application of machine learning in the audit process is Text Analytics. For example,
the use of Text Analytics in BoD Meetings Notes, Management Reports and Letters, etc.
Auditors can use Cognitive Intelligence Applications for understanding the client business
environment.
For example, the IBM Watson News Explore can be used to identify news and events with
significant impact on the client’s business.
The use of Big Data analytics and machine learning in financial audit could significantly
improve the quality of audit process in compliance with: “ISA 240, The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements”; “ISA 315 Identifying
and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its
Environment”; “ISA 320, Materiality in Planning and Performing An Audit”; “ISA 330, The
Auditor’s Procedures in Response to Assessed Risks”; “ISA 500, Audit Evidence”; and “ISA
520, Audit Sampling” [20], [21].
4. Conclusions
Although technology evolved, auditors still use traditional methods and techniques in their
work, leading to ambiguity, difficulties, and suboptimal results.
Some accounting companies began to realize the need for new technologies like Big Data and
artificial intelligence in supporting auditing decisions.
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Thus, using Big Data techniques and machine learning algorithms and methods can improve
audit results, making them more relevant, reliable and sufficient.
Machine learning methods can be used as a system against fraud and to support the decisions
of auditors.
Big Data and machine learning algorithms and methods are only support-technologies to
improve the quality of the audit process and to support the decision-making process of auditors.
The use of Big Data and machine learning in the audit process is limited to the planning and
execution phases.
Two big problems remain unsolved: data quality and data governance. Regardless of the
algorithms used, an important step must be to ensure the quality of the processed data. Without
this step, it can often lead to distorted, unreliable results that may adversely affect the audit
process.
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