How Data Analytics is revolutionising internal audit...

Hi Everyone!

Welcome, the topic of this post is “How Data Analytics is Proving to be a Game-changer for Internal Audit”. All of us, who have been performing internal audits or are getting it done, would vouch for the fact that it has evolved enormously over the years. Internal audit, which was perceived as a process to review financial records in a more detailed manner, when compared with statutory audit, has now evolved with times, to play a more strategic role by laying down a cohesive approach towards risk management. With the evolution, there has been a clear shift from a document-based audit to a data-based audit, whereby internal audit function is deploying modern technologies and techniques like data analytics to create more value for businesses.

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When we talk about data, it is something which is everywhere, from a mouse click to a tap on the mobile app, to a phone call, to a punch-in at office gate. The reason for the availability of such huge volume of data can be attributed to the change in the mindset of the consumers & easy accessibility of technology to them. Consumers, where some years ago, were not willing to share their personal details, are now with a change in their aspirations & needs not worried about sharing them. Thus, giving birth to the huge volume of data, which businesses are using to understand the customer need and the changes in their needs. Taking advantage of the availability of such huge volume of data & applying data analytics, internal audit function can create more value for businesses than ever before by providing valuable business insights, a greater degree of assurance and predicting emerging risks. Given below are some of the advantages that internal audit function can reap by using data analytics- 

Increase in Effectiveness of Internal Audit.

By using data analytics, internal auditors can audit the entire population instead of auditing a sample of transactions to form a judgment. Data analytics also empowers auditor to conduct several audit checks just by applying a program to generate exceptions which auditor needs to check in detail.

Enhancing the Efficiency of Audit Function.

Data Analytics also help in increasing efficiency of an audit function, as an internal auditor can always re-use the same data analytics script for periodical reviews, saving a lot of time & effort on the part of the auditor. Auditor can deploy the same in some other areas, resulting in higher effectiveness as well.

Mitigation of Risk & Fraud Detection.

Data Analytics also enables internal audit function to identify trends, that are appearing in datasets over a period of time indicating a potential threat to the organization. Data analytics also enables auditors to identify & uncover any fraudulent activities that are happening in the organization. Thus, audit function can create a greater value for the organization, by using data analytics, whereby they can ensure the organization is prepared for emerging risks and is secure against any type of fraud.

Greater Assurance.

Data Analytics also helps in delivering a higher sense of assurance to all stakeholders in relation to operations of the organization and ensuring that company does have proper controls in place to mitigate emerging risks in the organization. The higher assurance is achieved by the fact that internal audit can virtually review entire population to identify risks and frauds, by using data analytics.

Greater Focus on Strategic Risk

By deploying Data Analytics & combining it with machine learning, internal audit function can automate the routine audit checks of similar transactions and can shift their focus towards the strategic risks that might challenge organizations in future.

CASE- STUDY

Given below is the case study where internal audit function deployed Data Analytics to identify potential risk, which otherwise would have been a real daunting task for the auditors-

Background

ABC Private Limited was a big FMCG company having headquarters in New Delhi & 5 plants across India employing more than 3000 people.

Majority of staff strength comprised of workers & supervisors. The hiring was done by each Factory Department respectively.

The company had biometric devices installed across all locations to monitor daily in & out time of each personnel.

At each month end, HR Department generated the attendance report from biometric software and basis such attendance report, payroll was prepared.

Scope

Internal audit function was required to conduct payroll audit to ensure that –

• Employees are getting paid for the actual number of days worked by them.

• There are no ghost employees in the system.

• All statutory dues pertaining to employees are duly deducted & deposited.

Approach

Internal audit team deployed Data Analytics to -

• Ensure all employees were paid in accordance with the biometric record by plotting paid days as per biometric record and comparing it with paid days as per salary sheet.

• Review employee master to highlight missing key data points in it like PAN Number, Bank Account Number, Aadhar Number, Date of Birth etc.

• Identify any duplicate employees being created in the system and to check for duplicate payments being made to a single person.

• Review of employee records to check for any incorrect data being recorded in the system.

Results

Following observations were noted –

• In case of 17 employees, joining date was a Sunday (weekly off in the company), which was wrongly entered in the system resulting in the excess pay of Rs. 113,000.

• 78 employees were noted who were not recording attendance in Biometric System on a regular basis. Out of the same, 50 employee records were not properly filed in ERP & out of this, 23 employees were found to be fake.

• Excess overtime amounting to Rs. 337,000 was paid to the employees due to wrong calculation of overtime hours in case of 327 employees.

• The scope of process improvement in human resource management was identified to reduce fraudulent records and transactions.

While Data Analytics offer abundant possibilities in internal audit function, one should first understand the scope of using it. Further, like any other business function, internal audit’s forte lies in the adoption of new techniques & the use of Data Analytics is no different. The scope of using Data Analytics in internal audit is further widened when it is combined with Machine Learning to automate routine procedures.