Jessica Fino 30 Jan 2017 05:24pm

Audit firms must improve use of data analytic techniques, says FRC

The Financial Reporting Council (FRC) has urged UK audit firms to do more to support the roll-out of cutting-edge data analytic techniques

The FRC said that the use of audit data analytics (ADA) is not yet widespread among audit firms, even though such companies are often at the forefront of developing and using such techniques.

It argued that "the pace of change is not as fast as thought by audit committees and investors".

The regulator concluded that although audit firms are investing heavily in ADA tools, some companies are not actively monitoring the level of usage by audit teams or whether the use of the tool was successful in providing appropriate audit evidence.

It also warned that firms feel pressured to promote the use of ADA techniques on audits to meet audit committee expectations, to achieve efficiencies and to win competitive tenders. This, the FRC argued, may result in the pace of ADA development and usage being overemphasised.

Moreover, for complex entities, it can take at least two years of investment by the audit team and entity management to deliver the full benefits of a data driven audit approach.

Melanie McLaren, executive director for Audit and Actuarial Regulation, said, “The FRC promotes continuous improvement in UK audit. Competition on grounds of quality and innovation has increased since the introduction of audit tendering.

“UK audit firms are at the forefront globally of developing data analytic techniques with the potential to improve audit quality. In reporting on our thematic review of their use in practice, the FRC hopes to accelerate effective usage for the ultimate benefit of those who rely on UK audit.”

The report identified examples of good practice during the inspections, including cases where audit staff were able to build experience and confidence in using a specific ADA tool during a well-structured programme, or where they used ADA for the first time at an interim audit date.