Data and Technology Research Project Spotlight

In light of the ever-increasing use of technology-based tools by auditors and preparers, the Public Company Accounting Oversight Board (PCAOB) on May 12 released an update on its Data and Technology Research Project and inquiry into the need to amend oversight board standards and other regulatory actions. The project had been initiated based on the acknowledgement that current standards don’t explicitly encourage the use of technology-based tools, nor do they indicate when their use might be appropriate or highlight related associated risks. As a result of its review, the PCAOB has stated that principles-based auditing standards are likely to be adapted to accommodate the increased use of technology-based tools in the future, but current standards don’t preclude or detract from a firm’s ability to use such tools in a way that could enhance audit quality.

In the new release, the oversight board analyzed the impact of technology-based tools within the context of two standards: AS 2110, Identifying and Assessing Risks of Material Misstatement, and AS 1105, Audit Evidence, as well as some general best practices on firm policies and procedures on the use of such tools, including:

• Establishing and maintaining criteria for acquiring and developing new technology-based tools or making changes to existing tools.
• Maintaining an inventory of approved tools and policies and procedures regarding the use of such tools at the engagement team level.
• Establishing requirements for training necessary for engagement team members to use such tools.
• Establishing engagement team responsibilities regarding the use of such tools.
• Requiring engagement teams to involve firm personnel that have experience in the use of more complex technology-based tools.

Regarding AS 2110, Identifying and Assessing Risks of Material Misstatement, the PCAOB released findings related to four areas where technology-based tools are being used and how compliance with current standards is being accomplished:

• Technology-based tools enable auditors to efficiently and effectively analyze much larger amounts of data to identify relationships and reveal previously unrecognized risks when compared to using manual auditing techniques alone.
• Technology-based tools may be utilized in addressing PCAOB risk assessment standard requirements, e.g., considering a wider range of characteristics of accounts and disclosures in the financial statements or assisting in determining whether relevant controls have been effectively implemented for certain automated processes.
• The use of technology-based tools may provide better information to enable compliance with requirements related to risk assessment in a more meaningful and productive manner.
• The auditor’s ability to select the appropriate technology-based tool, determine the appropriate parameters and appropriately interpret the results all contribute to whether use of the tool enhances the identification and assessment of risks of material misstatement (RMM).

The PCAOB also identified four areas related to AS 1105, Audit Evidence, where technology-based tools are being used, and how compliance with current standards is being accomplished:

• The definition of audit evidence and the objective of the auditor to plan for and obtain sufficient and appropriate audit evidence can be applied regardless of the nature or form of information being considered or evaluated as audit evidence.
• The audit evidence standard does not preclude the auditor from using technology-based tools to perform audit procedures more efficiently to obtain audit evidence or procedures specifically described in the standard, such as inspection, recalculation or re-performance.
• The audit evidence standard does not preclude the auditor from designing multipurpose audit procedures including technology-based tools.
• When using information provided by the company as audit evidence, the requirement to test the accuracy and completeness of information and evaluate whether the information is sufficiently precise for purposes of the audit applies.

In addition to the findings above, the PCAOB will continue to conduct research and engage in outreach activities focusing on the use of technology-based tools in auditing and financial reporting, how those tools are being used to identify RMM and how requirements in PCAOB standards apply, as well as collaborating with regulators and standard setters.  The PCAOB is also considering the impact of technology use by firms on engagements as part of the project on potential revisions to PCAOB quality control standards.