Impact of XBRL on Assurance Environment

REPORT TO ACC 626: IT ASSURANCE AND COMPUTER ASSISTED AUDIT TECHNIQUES

JASON LO

Introduction

XBRL and it’s impact on the Assurance Environment

Goal is to provide a two lenses of looking at XBRL Impact upon audit procedures

Impact upon fraud detection

Twofold view to provide current year and post year analysis

Agenda

XBRL goals, capabilities and functionality

Audit procedures Continuous auditing

Implications on fraud detection Automated detection

Going forward…

XBRL : What is it?

eXtensible Business Reporting Language >> XBRL

Universal business taxonomy Define elements in the financial statements

Goal: Facilitate the automated production and consumption of large volumes of business performance information with high degrees of data quality

XBRL: Functionality

“Tagging of Financial Data <Identification of element> <accounting policy> AMOUNT </policy>

</element>

Results in: Computer readable financial information, thus

Shift from humans reading and analyzing, to computer algorithms, thus

Rapid scalable increase in analysis capability and speed

XBRL: Reason for implementation

Technology has existed since Internet in the form of HTML

Reasons for impact: SEC reporting requirements

Improved analytical capability due to computing technology

Audit Process: Impact

Current Challenge: Information to be audited is only available after year end

Contrasted with consumer demands for improved timeliness

Drive to shift procedures to occur DURING the reporting period

Audit Process: Continuous Audits

Shifting audit procedures to during the reporting period Control testing

But only prevents certain things from occurring

Embedded Audit modules

Tracks all transactions

Screens on specific criteria and posts alerts upon red flags

But… low adoption across industries

Audit Process: XBRL-GL

Facet of the XBRL reporting environment

Taxonomy used to report into a GL

Corporate benefit Modular GL can be placed into various templates to support differing

reporting standards / report to other organizations

Auditor benefit Export data, run through audit modules

Audit Process: Audit Implications

Potential to bring back the continuous audit Time improvements

Accuracy improvements

Obligation to: Push for companies to increase usage of XBRL-GL

Fraud Detection: Impact of Fraud

$400 Bn of losses attributed to fraudulent activities in the United States

But fraud detection is beyond the scope of auditors – so why is it relevant?

Changing technological environment threatens the relevance of the auditing profession

Fraud Detection: Methodology

Heavy area of research Focus upon development of “fraud detection algorithm”

Success rates increasing – 90% success in predictions

Identification of statistically significant variables that predict the existence of fraud

But… Difficulties in entering data into models

Reliance on manual or error prone data extraction processes

Fraud Detection: XBRL implications

XBRL reporting solves the data entry issue

Can run company, or even industry wide financials through fraud detection models

Widespread and comprehensive analysis Hole in the market for fraud detection software

Auditor implications? Will we become irrelevant?

Conclusion on Assurance Environment Impact

Revolutionizes the concept of a continuous audit Makes it possible again

Significant benefits and potential in developing automated fraud detection

Going Forward…

Assurance Currently, no level of assurance required in the preparation of XBRL

documents

However, with increase in usage, demand for assurance will also increase

Could change the role of auditors in terms of the scope of assurance required

Conclusion

XBRL = Paradigm shift in reporting environment

Auditors have a responsibility to keep abreast of these changes else risks significant damage in: Value proposition of audits

Reputation