04/21/2011 Meeting - Auditing with Data Analytics

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Copyright © 2010 Deloitte Development LLC. All rights reserved.
ACFE
April 21, 2011
Taking Your Audits to the Next
Level with Data Analytics

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Speakers
Dale Livezey
Senior Manager
NorPac Regional Technology Leader
Deloitte & Touche LLP
Audit and Enterprise Risk Services
San Francisco, CA 415-783-4208
dlivezey@deloitte.com

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• Benefits of Analyzing Data
• Audit Planning with Data Analytics
 Integrating Data Analysis into the Audit
plan
 Planning Considerations
 Best Practices for Sustainability
• Case Study
 Example Deliverables
• Business Cycle Examples
 Detailed Data Analytics by area
• Data Analysis Execution Phases
Agenda

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Benefits of Analyzing Data

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More efficient and effective manual testing
Assist in root cause analysis
Test Validity and accuracy of reports
Target and assess specific risk areas
Identify control weakness / effectiveness gaps
Data Analytics can help in many aspects of business process testing
Overall more effective
control testing
services for our clients
Data analysis improves the quality, effectiveness and efficiency of audits
• Performs 100% recalculations and verification of transactions in a timely and repeatable fashion
• Compares data from multiple / disparate systems
• Provides business insights and identifies process improvement opportunities
• Presents quantifiable results from analysis based on complete population

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Why Use Data Analytics?
Enhanced Risk Identification
• Early identification of risks and
trends
• Enhanced capabilities for
identifying fraud and
management override of controls
Deeper Insights
• Fact-based insights that are
difficult to glean from interviews
Enhanced Efficiency and
Coverage
• Greater focus on high risk areas
than is possible with sampling
• Greater coverage of the entire
population than is possible with
sampling
Fact-Based, Quantifiable
Findings
• Ability to quantify control
weaknesses
• Ability to provide detailed
examples of exceptions at the
transaction level

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Approach Benefit
Profiling and trending • Focus on specific areas of risk or interest
• Provide insights into transactional history and behavior
• Test internal controls effectiveness
• Identify hidden relationships between people, organizations
and events
Customized transactional
analysis
• Geared towards a clients specific business process
• Reduction in manual testing procedures
• Perform proactive instead of reactive audits
• Identify potentially improper or fraudulent transactions
Statistical Sample
selection and evaluation
• More efficient and accurate selection procedures
• Reduces time spent on selections of little or no interest
• Analyze the full population of transactions instead of a
traditional sampling approach
• Focus on risk!
Report re-performance
and metric recalculation
• Validate operational reporting systems and assist in the
documentation of current reporting process
• Reduce manual testing procedures

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Integrating Data Analytics
into the Audit Plan

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1) Data analysis needs assessment
A Data Analysis needs assessment should cover each major business process area.
Identify audit areas to benefit most from the use of automated data analytics
Select a pilot area and a prioritized list of all areas for future audit automation
2)Plan, design and implement data analytics for a Pilot area
Design, Develop and Implement the data analysis methodology, deliverables and
tools for a pilot area.
Assess the success of the pilot area; Identify lessons learned; and modify the
approach, as needed, for the extension of the project to other areas.
3) Develop and implement data analytics to other areas
Extend the approach used to the pilot phase to the other key business process areas

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Planning
2. Pilot Business Process
Scripts Design &
Implementation
3. Other Business
Processes
Same phases as the pilot
business process, adding
lessons learned during the
pilot project assessment
1. Data Analysis
Needs Assessment
Test
Select desired analytics
Data Needs
Assessment
Identify relevant
business areas
Identify relevant
computer systems
Review prior
findings and audit
summaries
Risk rank business
areas
Develop
Implement
Document
Design
Assessment of
hardware/software
requirements

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In many cases, obtaining the data will be the
most time-consuming part of the data analysis. If
you have your IT group provide the data:
Communicate the following in writing:
• Dataset(s) to be received (Field and Table names)
• File format (character set, structure, etc.)
• Delivery media
• Control totals
• Documentary evidence
• Delivery date
Obtain an idea of the size of the file(s) that will
be provided
Obtain a sample file before the complete data file
Planning Considerations

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Your technology platform may lend itself to auditor
self-service. If you obtain the data for yourself:
Be cognizant of complex data models
Take advantage of ODBC, if possible
• Open Database Connectivity
 MS Access
 ACL
 IDEA
 SAS
Be aware of the performance impact on
production or warehoused data
Perform Data Integrity tests upon receipt of data
(i.e. Reconcile to Control Totals, etc)
Planning Considerations

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Best Practices for Sustainability
1) Use Data Analytics to assist Planning each Audit
Each Business Process area has varying challenges and risks; which may change over time:
Data Analytics profiles activity in each area, to help focus the scope of the audit
Early identification of potential risk areas allows more time during the audit to
analyze the root cause of issues identified during the planning phase
Examining 100% of an account balance allows more comfort over the application of
automated controls
Treat anomalies found during data analysis in planning phase as selections
2)Ownership over Data Analytics
Establish a Data Analytics Champion to support the integration of tools, and
repeatable analytics throughout the audit process
Formalize policies and procedures around how data will be acquired, used, and
maintained by the internal audit department
Support Recurring use of Analytics as a part of each audit; incorporating time to
design new procedures, as appropriate, each time the audit is performed

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Best Practices for Sustainability
3) Consider applying Continuous Control Monitoring
Data Analytics embedded into regular reporting can reduce required audit
procedures
4) Routinely Redesign Analytics
Data analytic procedures will often become routine, and lose their focus if the
approach and scope are not regularly challenged and modified as variables change
Source Data Changes
Operational Risks change over time
 Reward innovation
Some organizations provide incentives for auditors who identify new techniques
and routines

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Case Study

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Data Analytics in Procurement Audit
Travel expenses have always been a concern at ABC Company
since it is an area where controls are weak.
• When traveling, employees have a maximum per diem rate and are
required to submit receipts coinciding with their actual expenses.
• Established maximums for meals are:
 Breakfast = $10
 Lunch = $20
 Dinner = $20
Analytics were performed to identify meal expenses that were
in multiples of $10.00
Transactions meeting the criteria were compared to receipts to
ensure that the amounts expensed were appropriate
The results…
Many employees were charging the maximum rates for meals even
though their receipts did not justify the amounts

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Data Analytics in Procurement Audit
Identify additional insights to questions such as:
• Is your company paying invoices on time?
– Are payments consistently too late, leading to missed vendor discounts and/or
resulting in potential late fees or finance charges?
– Are payments consistently too early, leading to potential cash flow issues?
– Are payment patterns in line with your company‟s guidelines?
• Are there vendors who currently owe money to your company?
– Are these balances associated with vendors with whom you no longer do business?
– Are these balances such that they should be recorded as receivables?
• Have payments been made to unauthorized or restricted vendors?
– Is the vendor master being maintained in a timely manner?
– Is there a break in the controls surrounding vendor master maintenance?
– Is there a pattern in users posting such payments?
• Are you paying invoices to vendors with potential relationships to
your personnel?
– Are these payments related to a legitimate business purpose or is there a potential
for fraudulent activity?
– Who is posting these payments?

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Percentages of
invoices paid late
or early are easily
ascertained, as
well as the
corresponding
invoice amount.
Sample Analytic: Payment Date vs. Due Date
• Uncover potential lost discounts or cash management issues
• AP tests with further ad-hoc analyses can yield additional insights such as:
• Do payments relate to a single vendor?
• Do late/early payments relate to only certain individuals within the AP department?
• What was the available discounts vs. discount lost?
• How much interest was paid due to missed due dates?

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Sample Analytic: Disbursements to Invalid Vendors
Identify potential
circumvention of
or issues with
system controls,
and the
corresponding
financial impact.
•Drill into detail transactions to understand the vendors
•Determine whether there is an issue with timely maintenance of the vendor
master file
•Are there noticeable patterns in the users posting these transactions?

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Sample Analytic: Duplicate Disbursements
Identify potential
duplicate
payments based
on multiple sets of
criteria, as well as
potential financial
impact.
•Detailed transaction information can provide insights into:
•Are duplicate payments consistently related to the same system user?
Are they the result of potential duplicate invoices?
•Are these erroneous payments or an indication of fraudulent activity?
•Further ad-hoc analyses can help refine the set of criteria to zero in
on the payments that present a greater risk of being “true” duplicates.

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Tests by Business Cycle Area

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Business Cycle Testing Areas
• Revenue
• Expense
• Fixed Assets
• Payroll / Personnel
• Inventory
• Financial Reporting

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Tests by Business Area: Revenue
Process Area Potential Tests
Maintaining Customer Master
File
• Assess customer master file for duplicates / integrity
Managing & Processing
Orders
• Analyze sales data by customer, product, region, etc.
• Identify customer purchases over approved credit limit
• Calculate order fulfillment time from customer order to shipping
Ship / deliver Orders • Identify gaps or duplicate in shipping document numbers
Invoicing, Sales, Returns &
Adjustments
• Identify duplicate invoices
• Analyze lag between shipping and invoicing
• Compare cost with profit margins to identify trends and opportunities
to improve pricing
• Generate profitability reports by sales person, product, customer
• Generate invoice summaries by customer, invoice, amounts, etc.
• Report and automatically age total receivables
• Identify top customers for past due accounts, outstanding balances,
etc.
• Identify duplicate credits
• Analyze customer returns and identify outliers
Process Receipts • Identify duplicate cash receipts
• Profile customer payment history / average customer collection time.
• Average collection time by salesperson / location
Manage Collections • Determine carrying costs by comparing days in collection by customer
• Determine the percentage of receivables written off as bad debt.
Perform trend analysis to determine significant changes over time.

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Tests by Business Area: Fixed Assets
Asset Maintenance and
Classification
• Keywords wearch: „Fix‟, „Maint‟, „Break‟, „replace‟, etc to confirm
whether items should be capitalized or expensed
• Identify cost and net book value less than or equal to zero
• Identify fixed assets with no associated useful life
• Identify duplicate fixed assets.
• Identify active plants with no fixed assets at closed locations
Depreciate Assets • Recalculate depreciation for any or all assets
Asset Transfer,
Reclassification and
Retirements / Disposal
• Identify asset additions, disposals, and transfers throughout the year
• Identify disposals before end of useful life

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Tests by Business Area: Expenses
Purchasing • Identify duplicate purchase orders
• Stratify POs by purchase approval limits
• Analyze purchasing card activity
• Analyze employee entertainment & travel expenses
Receiving • Identify duplicate receipts and receipts with out purchase orders
• Analyze receiving adjustments (i.e. returns, short / over shipments,
damaged goods)
Processing A/P and
disbursement
• Extract invoice pricing and receipt quantity variances by vender and
PO
• Extract invoices posted with duplicate PO numbers / receipts
• Identify all invoices that were not subjected to three way match
• Identify duplicate payments for single invoices
• Identify missing, duplicate, void or out of sequence check numbers
• Identify payments to unapproved venders / brokers
• Identify low-dollar payments to the same vendor for potential
consolidation of payments
• Analyze payment cycles and processing time. Payments made before /
after invoice due date to identify discounts lost to early payment.
• Identify vendors with net debit balances
• Generate cash requirements by bank, period, product, vendor, etc.
Manage Supplier Master File • Identify vendors of interest such as duplicate vendors, vendors who
are employees, vendors with addresses at Mail Boxes Etc.

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Tests by Business Area: Payroll / Personnel
HR / Employee Master File
Maintenance
• Check employee master file for invalid social security numbers,
potential duplicate employees, invalid / incomplete address information
• Profile salary ranges to identify outliers
• Identify pay rate higher than the corresponding pay grade rates.
Payroll Disbursement • Identify employees in payroll that are not in the employee master file
• Compare time-card rates and pay to payroll and indicate variances.
• Identify employees making over a certain amount in annual salary
that do not have any benefits deducted from their payroll.
• Compare and summarize costs for special pay, overtime, premium,
etc.
• Provide statistics related to Equal Employment Opportunity
Commission (EEOC) requirements
• Analyze payroll disbursement to identify outliers (e.g. trends in bi-
weekly payments, excessive hours worked, etc.).
• Identify employees who received overtime pay but did not have the
full required hours in a time period.
• Extract all payroll checks where the gross dollar amount exceeds set
amount.
•Identify duplicate or missing payroll checks

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Tests by Business Area: Financial Reporting
Perform Financial Analysis • Analyze account balances including significant changes and
reclassifications.
• Calculate financial ratios (and changes) for sales/assets, debt/equity,
etc.
• Track year-to-date activity for large operating accounts (rent, taxes,
etc.).
Analyze and Validate Journal
Entries
• Analyze journal entries to identify significant transactions, as well as,
groups of transactions.
• Identify and analyze reversal entries, recurring entries, late adjusting
entries.
• Perform a dollar stratification
• Analyze revenue entries on volume, amount and timing (large credits
to revenue just before period close, etc).
•Search for invalid entries (i.e. blank User ID, blank GL account
number(s), entries that do not net to 0, invalid GL Effective Date,
negative debit or credit amount, blank posted date, blank description)
• Search for key words of interest in journal entry descriptions
• Analyze entries with round dollar amount or recurring ending digits
•Perform trending analysis to identify unusual trends in Journal Entry
amount by income statement / balance sheet.
• Perform analysis of entries that might indicate a management
override of controls.
•Print custom balance sheets, P&L statements, cash flow analyses, etc.

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Tests by Business Area: Inventory
Maintain Inventory Master
File
• Assess inventory master file for integrity
• Identify items with zero or negative unit costs or negative quantity
• Test for duplicate item numbers, prices or descriptions
Store and ship inventory • Analyze where product is made/stored and where it is shipped to
identify possible freight expense savings.
• Analyze inventory receiving and shipping lead time.
Conduct inventory counts • Apply statistical counting techniques
• Analyze significant inventory adjustments
Inventory valuation • Summarize and stratify turnover by stock item to identify slow-
moving or obsolete items
• Recalculate inventory based on valuation method (LCOM, FIFO, LIFO)

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Data Analysis Execution Phases

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Step 1: Define Objectives
Step 2: Request Data
Step 3: Address Technical Issues
Step 4: Perform Tests
Step 5: Present Results
Data Analysis Phases

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Step 1: Define Objectives
• Create your test plans
 Identify potential efficiencies
 May need to determine other factors, like sampling method
 Establish time period
 Include or exclude certain information
 Determine if the data is available or retained
• Define your deliverables
 Know what your final result is going to look like, for example,
a report or a presentation, etc.
• Assess the costs
 Include potential considerations:
- Is this a compliance objective?
- How often will this test plan be used?
- How complex are the files?
Planning for a Data Analysis Project

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Step 2: Request Data
• Identify the necessary data fields
 What fields are required?
 Which reports contain the information audited manually in the
past?
• Meet with IT, IS, and/or MIS
 List the required fields and identify additional fields
 Know the scope of data (e.g., all divisions)
 Cleansing or manipulation of the data may be needed (e.g.,
unit cost may need to be calculated by taking the extended
cost divided by quantity)
 Identify potential cutoff date and time issues
 Determine how you will access and acquire the data
• Submit and document a written data request
 Retain data requests for workpapers

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Step 3: Address Technical Issues
• Considerations for your “data request”
 Which applications are the source of the data and are
they compatible?
 How is the data stored?
 What skills are needed to access the data in its natural
format?
 What data analysis tool should be used and what
platform or environment?

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Step 4: Perform Tests
• Execute the plan in place
• Remember: based on what you find out, things may
need to be modified
• Always remember what your objective is! And
will your test plan meet your objective?

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Step 5: Present Results
• As you complete your testing procedures, you will
want to think about how to present your results:
 Who is your audience?
 Present summary versus detail results?
 What format should be used to present the results?
 How could pictorial representation help?

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Questions?

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