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Financial Analytics: Best Practices to Prepare for an Upcoming Audit

Keaton Alexander April 8, 2022 at 12:15 PM
Finanial planning business analytics software

In many ways, detailed and comprehensive financial analytics are the lifeblood of your entire organization. They help you track productivity, identify inefficiencies, and manage risks. Furthermore, financial data analytics are required for compliance auditing purposes.

 

But what can you do to help your entire team prepare for an upcoming audit?

 

Many organizations use software like IBM Planning Analytics to organize financial information, but the processes and best practices below apply to all modeling efforts, including simpler ones.

 

Prioritizing Essential Documentation For Financial Audits

Every publicly-traded company in the U.S. is subject to an annual financial audit, per the Sarbanes-Oxley (SOX) Act. Many small firms are also subject to other audits, such as IRS audits.

 

At a minimum, these audits require the following documents: 

  • Income statements
  • Balance sheets
  • Cash flow statements

 

Additionally, some organizations may be subject to additional audits, for assurances such as credit card data security (PCI DSS compliance) or general personal information security for protected individuals, such as European citizens (GDPR) and residents of California (CCPA). 

 

Common Kinds of Financial Audits

Generally speaking, there are three types of financial audits companies are subject to: 

  • Internal – While internal audits are helpful in steering management decisions, the fact that the auditor is working for the organization they’re auditing often results in bias. Often, internal audits are used as a preparatory effort for external and government assessments.
  • External – These audits from third-party firms eliminate the most potential for bias, but you need to ensure that you’re working with a qualified and up-to-date auditing partner. External audits can be further broken down into two categories:
  • Consultancy firm – These audits will resemble their internal counterparts but are performed by a partner to remove any potential instances of bias, as mentioned above.
  • Non-government associations – Some audits bear similarly severe consequences to government assessments, as they’re overseen by third parties such as industry-standard associations.
  • Governmental – High-stakes audits are typically performed to ensure legal and compliant operations, such as accurate oversight structure and fraud controls (e.g., SOX compliance) and tax records (e.g., the IRS). There is an undeserved stigma associated with these since some audit subjects may be randomly selected.

 

Knowing which audit you’re preparing for is essential to ensuring the availability and accessibility of the correct documentation, reports, and analyses. In the case of internal and third-party audits, you’ll need the minimum documentation noted above.

 

External and IRS Audit Documentation

During an external or IRS assessment, auditors often examine the following information: 

  • Organizational and operational flow
  • Required licensure and accreditation
  • Documented policies and procedures

 

Ensuring the availability of these documents, as well as any other information specific to your audit, will help ensure a smooth and efficient auditing process for everyone involved.

 

Specifically, the documentation above will help your external auditor in the following ways: 

  • Enabling them to test complete datasets instead of limited samples
  • Strengthening risk assessment by quickly identifying gaps, shortcomings, and anomalies
  • Establishing a digital paper trail of audit evidence
  • Helping them gain a deeper understanding of your organization

 

The best way to streamline our audit in this manner is to use powerful finance and operations analytics tools.

 

Applying Data Analytics to Prepare for an Audit

Preparing basic documentation for an audit is only the first step. Most likely, you’ll want to present auditors and other stakeholders with more advanced insights into your company’s finances, which you can generate through financial analytics.

 

Leveraging extensive datasets, financial analytics, and changelogs helps streamline the audit process by providing easily reviewed and verifiable information to auditors. An easier audit is less disruptive to your operations and, overall, less costly for your organization.

 

Common Analytical Methods to Apply

It's ultimately up to organizational leaders to pick and choose the datasets and analytical methods they want to use. Some analytical methods will be more suited for audit preparation than those intended more for assessing organizational performance and competitiveness.

 

You can start by considering the following:

  • Descriptive analysis – A method that provides a straightforward, concise description of raw data, often serving as a framework for other types of analytics, like data modeling
  • Diagnostic analysis – An approach to analytics that tries to determine why an event has happened or why a dataset appears the way it does
  • Predictive analysis – A means for professional analysts to forecast future trends and predict upcoming events
  • Prescriptive analysis – The contrast to predictive analysis—a direct, data-driven evaluation of the event sequences leading up to favorable (or unfavorable) outcomes, which is then used as a guide to best ensure (or avoid) their recurrence
  • Comparison analysis – Numerous datasets and types are used in comparison analytics, including contract lengths, employee wages, gross revenue, product costs, and profit margins.

 

Although the approaches above present broad categories commonly relied upon, your team can also use others, hybrids, or custom analysis.

 

Important Datasets to Include

Now that you have a better understanding of some methods you can use for analyzing data, it’s time to determine which datasets to include and which to ignore. In most cases, you’ll want to include the following datasets:

  • Year-end balance, income, deposit, and cash flow statements
  • Fiscal year budget reports
  • General ledger and journal entries
  • Partnership, service provider, lease, and grant agreements or contracts
  • Meeting minutes as necessary
  • Personnel training and quality review reports
  • Internal policies and procedures
  • Charitable donations
  • Investment summaries

 

As long as your organization has the analytical tools and processing power, more relevant data sets generally equate to better and more accurate findings—and reaching that determination faster.

 

However, it's crucial that all data sets are, in fact, relevant. Broadening scope simply for the sake of more data regardless of its applicability will likely begin distorting your conclusions.

 

Fraud Investigations and Compliance

Data analytics are invaluable when investigating potential fraud and non-compliance in the workplace that may be identified during an audit. By utilizing ongoing trend analysis, you'll easily spot discrepancies—which you can further investigate through root cause analysis or predictive analytics.

 

They can help you verify employee expenses, spot ghost vendors, and identify potential conflicts of interest.

 

Handling these matters before they're discovered during an external or IRS audit will be invaluable to your organization.

 

Using Analytical Software

Modern and next-gen analytical software should be used alongside financial analysts to augment their capabilities and streamline their day-to-day responsibilities.

 

IBM’s Planning Analytics powered by TM1, previously known as IBM Cognos TM1, provides full-scale business planning, forecasting, and budgeting. With a dedicated TM1 server, the platform utilizes a functional database architecture that promotes and supports ongoing data analytics.

 

However, much like you should augment financial analysis professionals with dedicated software, you should do the same for TM1. While the platform remains exceptionally powerful, it’s not always the best when it comes to intuitive usability.

 

For example, TM1 lacks a native search function, and any changes that your analysts make must be manually documented for compliance purposes. Without a documented changelog, your organization risks the harshest penalties given by external, SOC, or IRS auditors.

 

How QUBEdocs Bolsters Your Data Analytics

Thanks to QUBEdocs’ IBM Planning Analytics solutions, you’ll be able to make the most of your financial analytics. Whether you’re preparing for an upcoming audit, correcting issues from a prior audit, or just trying to optimize your data collection and analysis processes, QUBEdocs simplifies and enhances TM1 and IBM Planning Analytics with optimizing user functionality—automatic change documentation, in particular.

 

For more information—or to get started with QUBEdocs and reclaim the significant bandwidth that manually logging each change consumes—schedule a consultation with one of our representatives today.

 

 

Sources: 

CaseWare. Top 10 Areas Where Data Analysis Adds the Most Value. https://www.audimation.com/top-10-areas-where-data-analysis-adds-the-most-value/

Control Risks. Five tips to transform your compliance function using data analytics. https://www.controlrisks.com/our-thinking/insights/five-tips-to-transform-your-compliance-function-using-data-analytics

eFileCabinet. Financial Audit Types and How Best to Prepare. https://www.efilecabinet.com/financial-audit-types-best-prepare/

Harvard Business School Online. 4 Types of Data Analytics to Improve Decision-Making. https://online.hbs.edu/blog/post/types-of-data-analysis

Investopedia. Audit. https://www.investopedia.com/terms/a/audit.asp

ISCA Journal. Using Data Analytics in a Financial Statements Audit. https://journal.isca.org.sg/2020/09/30/using-data-analytics-in-a-financial-statements-audit/pugpig_index.html

Journal of Accountancy. Data analytics helps auditors gain deep insight. https://www.journalofaccountancy.com/issues/2015/apr/data-analytics-for-auditors.html

SmartSheet. The Ultimate Survival Guide for Financial Audits. https://www.smartsheet.com/financial-audit

Towards Data Science. 6 Data Analysis Methods to Help You Make Great Financial Statements. https://towardsdatascience.com/6-data-analysis-methods-to-help-you-make-great-financial-statements-2bd573a19b17



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