Information Technology and

Artificial Intelligence in Auditing

MBAB 5P37 – Assurance II
Section 1

Winter 2021
 Today’s topics
• Auditing complex IT environments
– Testing electronic accounting systems and
automated internal controls

• Use of artificial intelligence in auditing

– Introduction to machine learning and AI
– MindBridge Ai auditor, group assignment 5
Auditing complex IT environments
• Auditing through the computer—auditing by
testing automated internal controls and account
balances electronically

• Three approaches to test the effectiveness of

automated controls when auditing through the
computer:
– Test data
– Parallel simulation
– Embedded audit module approach
 Test data
• Uses the auditor’s test data to determine whether the
client’s computer program correctly processes valid
and invalid transactions

• Three main considerations when using this approach:

1. Test data should include all relevant conditions that the
auditor wants tested.
2. Application programs tested by auditors’ test data must
be the same as those the client used throughout the year.
3. Test data must be eliminated from the client’s after
testing
 Parallel simulation
• Involves the auditor’s use of audit software to
replicate some part of a client’s application
system

• Auditors commonly do parallel simulation testing

using generalized audit software (GAS)
– Computer programs used by auditors that provide
data retrieval, data manipulation, and reporting
capabilities specifically oriented to the needs of
auditors.
Embedded audit module approach
• A method of auditing transactions processed by IT
whereby the auditor embeds a module in the client’s
application software to identify transactions with
characteristics that are of interest to the auditor;
– The auditor is then able to analyze these transactions on a
real-time, continuous basis as client transactions are
processed.

• In recent years, artificial intelligence has started to

become used in audits to identify high risk
transactions, and transactions patterns associated with
errors/fraud
 Machine learning
• A form of artificial intelligence that uses
pattern recognition and inference to improve
a program/algorithm without explicit
instructions
Unsupervised learning Supervised learning
Machine looks for patterns or Machine is trained to find
groupings in big data. Machine specific patterns or groupings in
is not taught what to look for. big data. Machine receives
training data and knows what it
is looking for.
 Applying AI to financial audits
• AI audit programs are trained to detect errors and
fraud using:
– Analysis of transaction/account relationships
– Machine learning
– Statistical methods
– Input of auditing experts

• AI programs recognize and highlight irregular or

high risk transactions (or groups of transactions)
 Augmenting financial anomaly
detection with machine learning and AI

Domain expertise Statistical Machine Cross

business rules Modelling Learning correlation

MindBridge‘s Standard tests Benford’s law, Expert Score, Correcting Controls

Ai Auditor Advanced tests Statistical Outlier detection combining methods
Completeness checks Variance Reinforced Learning
 Traditional audit activities that AI can
aid in the completion of
• Find journal entries that do not balance
• Find gaps in journal entry number sequence
• Find high-dollar journal entries
• Find round-dollar journal entries
• Sample journal entries
• Find all entries containing specific account(s)
• Find entries posted on weekends
 Learning to audit
• Machine learning also allows for the AI auditor
to find:
– Journal entries with accounts that are not typically
seen together
– Journal entries that appear in a pattern that is not
typical of regular business operations
– Incomplete pairs of journal entries such as sales
and COGS
 Example of a CFO fraud scheme
• Jack (CFO and a former auditor), knew most of
the audit procedures a company performs at
year-end and more importantly how to evade
them:
– Recorded fictitious sales in small amounts to avoid
creating an unusually large transaction.
– Was also careful to record the sales at least five days
before year-end to avoid any cutoff tests.

• How can this fraud be more reliably detected?

 AI’s assistance in auditing
• This type of fraud would be much more quickly
detected by AI than by standard audit procedures
– Fictitious sales invoices
– Sales with no corresponding cost of goods sold
• Exaggerated profit margin for otherwise legitimate sale
– Otherwise legitimate revenue pulled into earlier
accounting periods
– Pushed cost of goods sold into later accounting
periods
– Double-booked sales transactions
 Case Study A: Details
• Builder Inc. is an innovative construction company
located in Western Canada. It employs staff of 150 and
is relatively successful. Even though the company
experiences steady growth in recent years, competition
is fierce and margins are shrinking.

• A significant portion of the CEO’s pay (Steve Smith) is

profit-related. During audit planning this risk is
identified and appropriate audit procedures are to be
planned and executed to address this risk.
 Case Study A: General Journal
• The company provided you with a partial General
Journal (Case_A data set.xlsx).
• The total balance of the Journal is around $4.4 million.
• The FY start date is January 1.
– For all cases, you should make the fiscal year studied 2014.
• Note that the materiality for this audit engagement is
$10,000
– Reduce the weighting for the material value control point
to 5% in the MindBridge tool.
• It is also important to note that bookkeeping is
regularly done on weekends.
 Case Study A: Task
• Analyze the general journal using the
MindBridge tool and addressing the above
fraud risk.
• Identify no more than 20 transactions using
the various investigative features in
MindBridge’s Ai Auditor.
• Create ‘tasks’ for these transactions and
export them from the Audit Plan section.