Academic journal article Auditing: A Journal of Practice & Theory

Continuous Auditing: Building Automated Auditing Capability

Academic journal article Auditing: A Journal of Practice & Theory

Continuous Auditing: Building Automated Auditing Capability

Article excerpt

INTRODUCTION

Electronic commerce, electronic data interchange (EDI), and the Internet are dramatically changing business practices and record keeping. Doing business on the World Wide Web enables organizations to connect into the online world and improve all aspects of their business. In this high-technology environment business transactions are conducted entirely in electronic form. Technological advances have taken the form of low-cost, high-speed digital data transmission by utilizing hardware that produces information quickly and easily, and using software that reduces and, in many cases, eliminates much time, space, and other constraints to information. The progress in information technology, while reducing both transaction costs and asymmetric information problems, has increased economies of scale and scope in all business sectors (Albrecht and Sack 2000). The 1998 Vision Project of the American Institute of Certified Public Accountants (AICPA) states that technological advances are significant forces affecting the accounting profession (AICPA 1998a).

Traditionally, credible financial reports could only be produced on a periodic basis, primarily because the information needed to generate the reports was too costly to obtain on a real-time basis. Consequently, reports have been issued months after the occurrence of the actual events they represent. In this setting, auditing is mostly a backward-looking exercise testing the accuracy of the reported numbers. Today, organizations can produce standardized financial information on a real-time, online basis. The time is near when companies will allow shareholders and others to have access to real-time corporate financial information. Real-time accounting needs real-time auditing to provide continuous assurance about the quality of the data. Thus, continuous auditing is likely to become commonplace as audit clients increasingly shift to electronic real-time accounting systems. Continuous auditing enables auditors to significantly reduce and perhaps eliminate the time between occurrence of the client's events and the auditor's assurance services thereon.

This article discusses the nature of continuous auditing and describes audit data marts as an auditing approach in a real-time business environment. A joint Canadian Institute of Chartered Accountants (CICA) and Accounting Standards Board (ASB) of the AICPA study group (also known as Wood Committee) issued a report, Continuous Auditing, in March 1999. This exploratory study (1) examines conditions that must be met for continuous audits to be viable; (2) describes how a hypothetical continuous audit engagement might be conducted; and (3) presents areas where further research is needed for the proper implementation of continuous auditing (Study Group 1999). One of the recommendations of the study group is more research by academicians and practitioners on continuous auditing. This article is a response to this important call by the study group.

The remainder of this paper is organized as follows. The next section discusses real-time accounting and electronic financial reporting and their impacts on continuous auditing. This is followed by a description of the definition, concept, and process of continuous auditing. The next section presents a methodology for building continuous auditing capabilities and describes illustrations of innovative continuous auditing applications. Finally, conclusions and suggestions for future studies are offered.

REAL-TIME ACCOUNTING AND ELECTRONIC FINANCIAL REPORTING

Making good decisions depends, in part, on the quality and timeliness of information. Electronic and digital information is more timely, flexible, accessible, transferable, transparent, and can be more easily stored, retrieved, summarized, and organized than paper-based information. Technology has enabled organizations to conduct an increasing percentage of their business transactions electronically and prepare their financial statements on an online and real-time basis. …

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