Digital Auditing & Auditing Digitally using AI

Context

I recently graduated from UT Austin, USA by completing a Professional Certificate Post Graduate Program in AI/ML. During the course, as I progressed through various topics, I became more and more interested in AI/ML and how I can use this professionally in a corporate setting. Among all such topics, it is Generative AI that impressed me the most. I decided that I need to do some research on my own or via a university on Gen AI and its impact on a particular corporate area. While my main expertise is in Digital and FinTech, I am by nature a very risk and governance focused person, and logically the corporate area that immediately came to my mind is Internal Auditing that can use AI for its transformation. While I have some auditing experience (in IT Auditing) and I have managed risks and auditing a few times, I wanted to venture into the Internal Auditing space to study how digital technologies like AI and especially Generative AI can impact the auditing approaches and processes. The following are my study findings so far – this is just a thought paper which I want to eventually convert to a research topic, should I decide to do a formal masters level research course.

Internal Auditing is no longer considered policing the organization, rather it is now considered a value driver for the organization - internal audit plays a crucial role in enhancing company value by managing risks and improving processes through few key steps: planning, fieldwork, reporting, follow-up, and continuous improvement. Each step, from identifying risks and objectives to implementing recommendations and adapting for future audits, is designed to align with company goals, enhance efficiency, and ensure effective governance. Such a structured approach allows internal audit to deliver actionable insights, foster accountability, and support continuous operational enhancement, ultimately driving success and value creation for businesses.

However, an evolution is going on in Internal Auditing - how AI is revolutionizing the auditing processes, i.e. digital auditing (which is the focus of this thought paper). It highlights the potential of AI in enhancing the efficiency, accuracy, and scope of audits by analyzing large volumes of data (as opposed to limited sample data), identifying patterns, and detecting anomalies. This advancement is indeed a significant shift in the auditing profession, suggesting a move towards more innovative and technologically driven approaches.

There was a study titled “Is artificial intelligence improving the audit process?” by Fedyk, A., Hodson, J., Khimich, N.?& Fedyk, T which was published on July 07, 2022 in the Review of Accounting Studies (url: https://doi.org/10.1007/s11142-022-09697-x ). Leveraging a dataset of over 310,000 resumes from the 36 largest audit firms, the study reveals AI's significant impact on audit quality and efficiency. Study findings include a 5.0% decrease in audit restatements and a 0.9% reduction in audit fees, with AI investment leading to a 3.6% reduction in accounting staff after three years, expanding to 7.1% after four. The centralized deployment of AI, not only enhances audit quality but also streamlines operations, reflecting a strategic shift towards integrating AI within the auditing space including internal auditing.

Digital Audit Explained

A digital audit evaluates web and mobile experiences through a detailed, personalized reports mainly focusing on digital channels to meet organizational strategic goals. It combines quantitative and qualitative analyses of digital portfolios, including metrics from things like Google Analytics, PPC ads, social media, SEO, and e-commerce data, alongside website design, UX, and brand messaging. Digital audits can also cover website crawls, competitive analysis, channel breakdowns, and provide strategic recommendations, tactical advice, and potentially even a timeline for future digital marketing initiatives. Key performance indicators and digital accessibility are assessed to enhance external and internal digital use, aiming for efficiency, compliance, and broader audience reach.

A digital audit evaluates all active media channels' effectiveness critically in current campaigns, guiding strategic planning with a foundation on historical performance. This process encompasses a detailed assessment of sites, social media profiles, and digital marketing activities, ensuring comprehensive understanding and control over digital assets. It involves site and social channel audits, access verification, administrative oversight, resource allocation, command chain clarity, and historical data analysis, ultimately enhancing digital strategy and operational efficiency through informed decision-making and efficient resource utilization.

What about auditing AI?

Digital auditability in the context of AI encompasses an AI system's capability for thorough assessment of its algorithms, models, data, and design processes to ensure trustworthiness and compliance with ethical standards, legal requirements, and privacy considerations. This process involves both internal and external audits to evaluate the system's operations, identify anomalies, and ensure accuracy and fairness. Effective AI auditing also requires collaboration with internal teams and third-party auditors, requiring careful documentation of data management practices to align with regulatory and industry standards.

Now, let’s focus our attention to “Auditing Digitally” using AI.

Revolutionizing Auditing Digitally - The AI Driven Transformation

The AI transformation in auditing is marked by the integration of artificial intelligence technologies that significantly enhance the efficiency, accuracy, and scope of audit processes. This revolution involves leveraging AI to analyze vast datasets, identify complex patterns, and detect anomalies more effectively than traditional methods. It signifies a shift from manual and time-consuming tasks to automated, data-driven analyses, enabling auditors to focus on higher-level insights and strategic decision-making. This transformation is not just about technological adoption but also about rethinking the audit approach to embrace innovation and improve audit quality, provided without compromising ethical standards. Such an AI driven transformational auditing of organizational assets and artefacts links auditing especially internal auditing directly to strategic as well as tactical planning goals –adding tremendous values to the organization.

The integration of AI into auditing heralds a new era characterized by unprecedented levels of efficiency and accuracy. Through advanced data analytics and machine learning algorithms, AI enhances the auditor's ability to process and analyze vast amounts of data rapidly. This capability not only speeds up the audit process but also improves the precision of audit outcomes by identifying discrepancies and anomalies that might be missed through conventional methods. As a result, AI is already setting new standards in audit quality, providing deeper insights and contributing to more reliable financial reporting.

The future of auditing is destined to be transformed by AI and digital innovation. Such transformation will involve leveraging AI technologies to automate routine auditing tasks, to enhance data analysis, and to provide deeper insights into financial statements and processes. By embracing AI, auditors can improve audit quality, increase efficiency, and offer more value-added services. This transformation will also require auditors to adapt to new skill sets and understand the technological workings of their tools, ensuring they remain at the forefront of ethical standards and professional excellence in the digital age.

In the context of current modern auditing landscape, AI can play a crucial role in navigating the digital shift, enabling auditors to manage and analyze vast datasets with a very high efficiency and insight. This transformation allows for more sophisticated risk assessments, fraud detection, and compliance monitoring, thereby enhancing the overall audit quality and providing auditors with powerful tools to meet the challenges of an increasingly complex digital world.

The AI revolution in auditing, thus marks a significant transition from traditional, manual processes to digital, AI-driven methodologies. This shift enhances the speed, accuracy, and depth of audit engagements, allowing auditors to leverage complex algorithms for data analysis and insights generation. It represents a profound change in how auditors interact with data, making the audit process even more efficient and comprehensive.

Digital Auditing Unleashed - The Impact of AI on Audit Practices:

AI is redefining the audit landscape beyond traditional number crunching, introducing capabilities that extend into qualitative analysis and predictive insights. This shift enables auditors to analyze non-numeric data, assess the broader implications of their findings, and predict future trends. By harnessing AI, the next generation of audits will not only evaluate financial records but also provide strategic advice, enhancing the role of auditors as trusted advisors in addition to their traditional functions.

The AI audit revolution is transforming the digital auditing realm by significantly enhancing the scope and accuracy of audit processes. Through AI, auditors can now access and analyze data on a scale and depth previously unattainable, allowing for more comprehensive audits. This revolution not only improves the precision of audits but also extends their capacity to cover broader areas, including predictive analytics and real-time monitoring, thereby elevating the standards and expectations of audit quality in the digital age.

The impact of AI on audit practices has unleashed a new paradigm in digital auditing. It has revolutionized how auditors approach data, offering tools for deeper analysis, real-time insights, and enhanced decision-making. This shift not only increases the efficiency and accuracy of audits but also broadens their scope, allowing for a more holistic understanding of financial health and risks. AI's role in auditing signifies a leap towards more dynamic, informed, and strategic audit practices, reshaping the profession for the digital era.

Auditing Ethics - Ethical challenges around the auditor's adoption of AI

The adoption of AI in auditing does raise several ethical challenges, including concerns about data privacy, the potential for bias in AI algorithms, and the accountability for decisions made by AI systems. Auditors need to navigate these issues carefully, ensuring that their use of AI respects clients' confidentiality and maintains the integrity and objectivity of the audit process. Additionally, there's a need for transparency in how AI models are developed and used, to prevent biases from influencing audit outcomes and to ensure that decisions can be justified and explained. Addressing these ethical considerations is crucial for maintaining trust in the audit profession as it evolves with AI technology.

Generative AI and Auditing Processes

As my interest is mostly in Generative AI, I've been closely studying the potential of Generative AI in transforming any processes including the auditing processes. Generative AI, with its ability to analyze and interpret vast datasets, presents an unprecedented opportunity to enhance audit accuracy and efficiency. By deploying AI for tasks such as anomaly detection in financial transactions and using predictive analytics, auditors can identify potential risks and irregularities more swiftly and with greater precision than ever before.

Additionally, Generative AI can automate the generation of audit reports, summarizing findings in a clear, concise manner that's easily understandable. This will not only speed up the audit workflows but will also allow the auditors to allocate more time to complex audit areas requiring human expertise. Another promising application is around regulatory compliance, where AI can keep pace with the latest changes and ensure audit practices meet all legal requirements. AI model or even bots can be trained in the regulatory requirements and the same AI model or bot can be used automatically to find any wrongful application of such regulatory requirements anywhere within the organization. Furthermore, by utilizing AI to simulate various financial scenarios, auditors can provide their clients with insights into potential future risks and opportunities, enhancing the strategic value of their audit services. A lot of Generative AI enabled tools are already available in the market that can easily be applied in the auditing processes.

The adoption of Generative AI in the audit processes is not without challenges, including ensuring data privacy and managing the integration with an organization’s existing systems and platforms. However, the potential benefits in terms of enhanced audit quality, risk management, and operational efficiency are substantial. As auditors move forward, it's crucial that they stay at the forefront of this technological revolution, continuously exploring and integrating AI capabilities to maintain their leadership in the auditing field. This technology enables auditors to focus on strategic decision-making and advisory roles, enhancing audit quality and efficiency. Generative AI's capacity for deep learning and natural language processing can also improve the detection of anomalies and fraud, offering a more nuanced understanding of financial health beyond what traditional methods allow.

Conclusion

AI plays a critical role in the innovation of digital auditing by enabling more accurate, comprehensive, and efficient audits. Through data analytics and machine learning, AI assists auditors in identifying risks, anomalies, and trends, transforming the audit process into a more proactive and predictive practice. This shift will not only enhance the quality of audits but will also propel the auditing profession into a new era where digital tools are integral to addressing the complexities of modern financial landscapes.

I am now planning to work on my next thought paper which will be around the idea of AI driven digital transformations and change management of the internal auditing functions using my own conceived 6Pi framework.

What are your thoughts / suggestions?

#DigitalAuditing #AIAuditingRevolution #GenerativeAIInAudit #AuditInnovation #AuditTech #RiskManagementAI #AIAndGovernance #StrategicAuditing

Notes:

1.??? Some contents (around 25-30%) were generated using Generative AI based on my prompts which I then paraphrased and used it in my thought paper. One of the reasons of my writing such articles is also to become skilled in the art and science of “Prompt Engineering” and I strongly believe more and more internal as well as external auditors will be using prompt engineering alongside Generative AI for doing their auditing.