AI and the Audit: What does a robot need to audit your numbers?

In the previous post, we examined the value propositions that Appzen's AI brings to auditing expense reports.

In this post, we analyze what insights we can extract from Appzen when it comes more broadly to applying AI to the external financial audit.

The following gives a refresher on how the Appzen AI audit works:

Based on this we look at a number of factors that exist in this process to develop

Standardized process:
The expense report process that has been fairly standardized for over a decade: employees submit a digitized report of what they spent, expense codes, commentary and all the supporting documentation (e.g. receipts, invoices, etc.).  This is similar to how factories needed an assembly line before they could be automated.

Standardized capture and presentation of audit evidence:
I think this is a key piece: the actual audit evidence (i.e. receipts) must also be included in what's submitted to the auditor. As the evidence is provided in a standardized format, it enables machines to analyze these digitized source documents to run the necessary correlative models to run the risk scores and enables the automated analysis.

Audit evidence retains its chain of custody through the digitization process:
The auditor does not need to expend additional resources verifying that the evidence actually relates to the item being audited, nor do they have to expend additional resources ensuring that the independence of the evidence wasn't lost through digitization process. For example, when receiving a bank confirmation the auditor needs to ensure that this received directly from the bank and not the client.

Evidence provider identity is verified and contractually obligated to follow-up with the auditor:
The party submitting the audit evidence, the employee, has been verified in the system through the employee onboarding process. The implication of this is that the auditor doesn't have to expend audit resources confirming the identity of the evidence provider. Secondly, and perhaps more importantly, the auditor doesn't have to expend significant resources following up with the evidence provider. For example, not all customers will respond to accounts receivable confirms and then auditor will have to perform alternate procedures.

Evidence provider has incentives to produce the proper evidence: 
The previous point is closely related to the issue of incentives: if the employee fails to provide evidence then they will not be reimbursed. This puts a strong incentive on the employee to provide the evidence in a timely manner.

Provider of the evidence is trained on providing evidence:
The employee has been trained to provide complete, accurate and valid evidence. They also have access to help if they have issues with submitting expense receipts or understanding whether that evidence will be accepted.

Violations can be clearly defined and examples of violations can be taught to the system:
For fraud or errors to be flagged there needs to be rules that can be fed into the system to identify whether the item submitted needs further review or audit. For example, if the amount on the receipt doesn't match this would be flagged and has a high likelihood of error. But more importantly,  the examples of violations identified can be fed into the system to teach the system (via machine learning) what to look for.

In a future post, we will use these factors to look at how easily (or not) AI can automate financial audits.

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else

AI and the Audit: Why hire a Robot as your Auditor?

On this blog, we've covered the topic of exponential change and how audit/accounting is prone to such forces.

Despite this, I am tempted to say financial auditing is different. It's not like factory work or more controversially like the pharmacist profession where AI claims to offer a safer alternative to dispensing medication.

But does that make me just one of the people who think that their profession is unique because they are in the midst of seismic change but refuse to see the writing on the wall?

At the same time, I don't want to come across as an alarmist claiming that the world is going to end when it really isn't.

It's the challenge of nuance.

While trying to figure out how to tackle this challenge, I came across AppZen; an app that uses artificial intelligence to audit expense report. It was identified in this post as being one of the game-changers in the fintech scene and was also featured in Accounting Today.

According to the company's website, the application "combines computer vision, deep learning, and natural language processing to understand the full context of expenses, not just amounts, dates, and merchant names. ReceiptIQ detects unauthorized charges in real-time from receipt images, boarding passes, travel documents, cell phone bills and any other expense documentation. Cross-checks expenses in real-time against thousands of external and social sources to determine if they are legitimate and accurate... Real-time identification of unauthorized upgrades in airlines, hotels and car rentals as well as out of policy claims for hotel laundry, alcohol purchases, cell phone charges and more."

Reviewing the company's video, I was able to extract the following value propositions:

• "100% Testing":  I put it in quotes on purpose because the idea is that the whole population is analyzed but only the high-risk ones are further analyzed. That is, this is still "examining on a test basis" but uses a risk based approach to identify what reports should be further examined. This is in contrast to the manual approach of sampling.  
• Automated exception analysis: Closely connected to the previous point, but to emphasize that there is an automated review of the population.
• Real-time analysis: Reports can be analyzed instantaneously. Although not explicitly identified in the video, this could have real world savings. Faster reviews - leading to faster reimbursement to employees - could reduce the overall amount owing on corporate credit cards thereby offering more favourable position with the credit card companies. 
• Seamless integration into existing processes: Add-on to an existing process is a much easier sell than an app that requires replacing the existing app you may have just bought.  
• Use of external data: The app uses 100s of external data sources to develop. It seems that this assists in building an expectation of whether the expense needs further analysis. 
• Limited false positives: Not explicitly stated, but it is strongly implied that the number of reports that need to be reviewed is few - meaning it's not flagging reports that are valid.   
• Reduction of audit costs and fraud: Finally, the app promises greater efficiency in the use of audit resources deployed and greater effectiveness in catching fraud. 

When looking at these benefits of AI-enabled automation, they are based on certain assumptions that may exist in the expense report realm but not in the external audit realm. For example, accounting records at a company are not normally accompanied by a digitized copy of the source document (e.g. invoice, receipt, etc.) that provides evidence of its validity, accuracy, etc. of that accounting entry. 

So which of these assumptions applies in the world of external financial audits? 

This will be the topic of the next post where I will develop a list of factors that enabled expense report to by automated by AI and see if they apply to our world. 

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else