Principles of Analytic Monitoring Miklos A Vasarhelyi Michael

Principles of Analytic Monitoring Miklos A. Vasarhelyi Michael Alles Alexandr Kogan Rutgers Business School

The continuous assurance will change • • • 1) objectives 2) levels and hierarchy 3) timing 4) process 5) tools 6) outcomes

Real Time Economy

Objective changes • 1) changes in the environment and industry, 2) the existence and effectiveness of controls, 3) increased human resource risks, 4) process continuity and integrity, and 5) coherence between endogenous and exogenous factors:

Effects on Controls • • The existence of the controls, That they are operational, That their warnings are properly observed and distributed, That the controls are comprehensive, covering all relevant aspect of operational risk.

ERPSs • • Integration Automation Common processes and data Facilitate the deployment of CA by providing a common platform

Supply, demand, technology and CA

The continuous assurance will change • • • 1) objectives 2) levels and hierarchy 3) timing 4) process 5) tools 6) outcomes

Four levels of CA

Pensions: 4 levels of CA • • Level 1: Flag and extract all transactions that pass resources between the company and its pension fund, extract all transactions that affect pension related ledger accounts and vouch for these transactions. Level 2: GAAP specifies maximum and minimum contributions to pension plans as well as ways to account for pension obligations, and other pension related items. This level would create a logical template evaluating the obedience for the rules of ERISA and GAAP. Level 3: On a more analytical level, the continuous assuror can examine the formally disclosed rules relative to pensions that allow for the organizations actuarial estimates. Accounting standards require the disclosure and usage of an interest rate in the assumptions about pension estimates such as interest rate, employee related obligations vis-à-vis age and years of employment, asset returns but the standards do not require a relationship between the historical returns of the fund and the future return assumptions. The future will bring corporate measurement rules that link endogenous and exogenous data in the measurement of business and its assessment. Level 4: the auditor could make assertions at a strategic level about the appropriateness of pension plan funding and the quality of the management of the fund

The continuous assurance will change • • • 1) objectives 2) levels and hierarchy 3) timing 4) process 5) tools 6) outcomes

Timing issues • • Extensive Front end work Monitoring of system changes Alarm based intervention Evergreen opinion (of different forms) Automated interim work Continuous confirmation Very limited, if any, detail testing

The continuous assurance will change • • • 1) objectives 2) levels and hierarchy 3) timing 4) process 5) tools 6) outcomes

Evidence • Major change on the nature of relied evidence • Automated confirmations will take a progressively larger role • Alarm frequency and nature will be evidential matter • Joint systems (with other entities) will become prevalent

The continuous assurance will change • • • 1) objectives 2) levels and hierarchy 3) timing 4) process 5) tools 6) outcomes

Architecture

Tool Category Tools for CA Specific technique Transaction Monitoring Example / comment XML tags can be used to provide invisible referentials and markings for audit usage Invisible sequencing Sequence number and time stamps can be included Invisible signaturing Electronic signatures can be used for determining sourcing and to increase non-deniability Invisible linking two /ten pieces of data are logically linked so they get information ally linked Data entry edits Data can be edited with specific content knowledge I increasing its value Knowledge-based template review (heuristic rule based) Into the process editing (after entry Verifying extensions Intermediate total usage for controlling

Continuity equations Tools 2 Structural knowledge models Industry structure knowledge models Customer behavior models (purchasing, paying, brand switching, Physical world rules Discriminant , nn, etc models that parameterize events but causality or relationships cannot be determined Time series analysis Very little if ever in auditing Month and years are very coarse measures Processes have their own lives and biorhythms KPI’s based analyses Processes have overlaps, sub processes, macro-processes, a management, aberrations, cyclicalities, reasons for leaving steady-state

Tools 3 Time series analysis Very little if ever in auditing Month and years are very coarse measures Processes have their own lives and bio -rhythms KPI’s based analyses Cross sectional analysis Comparison across firms Compression across firm processes Cross sectional time series analyses KPI’s based analyses Processes have overlaps, sub processes, macro-processes, a management, aberrations, cyclicalities, reasons for leaving steady-state

Corporate modeling For risk analysis For development of standards Qualitative screening (parameter based) Transactions from the governors mansions Transactions that the IRS is watching Transactions by crooks Sensitive transactions money laundering Payments to management Modified audit procedures Confirmatory extranet Data level reliability measure Automatic transaction rejection Automatic fraud detection

Confirmatory Extranets

The continuous assurance will change • • • 1) objectives 2) levels and hierarchy 3) timing 4) process 5) tools 6) outcomes

Assurance Hierarchies

Multiple Outcomes • Assurance of a wider range of stakeholders • Front-end work more consulting-like (Sarbanes – Oxley ? ? ? ) • Opinions will be mainly negative assertions of the sort: no alarms level 5 occurred • Major cultural changes needed

Opinion with futurity • We have examined the reliability and financial reports of ABC corporation and have been engaged on a continuous assurance engagement for the fiscal year of xxxx. We will monitor the organization’s operations and strategic accomplishments using a wide set of analytics as described in http: //www. ca. com/analytics and other analytics we deem appropriate and will report on an audit by exception basis when more than xx % variance is found in operational and strategic standards or when we deem it appropriate. This exception report will be issued to all customers registered ( paying ) at http: //www. ca. com/analytics/customers