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Artificial Intelligence for Audit, Forensic Accounting, and Valuation

A Strategic Perspective

 

AL NAQVI

 

 

 

 

 

 

Dedicated to
My father, D. H. Naqvi (1935–2018) – the very first accountant/auditor in my life

Preface

AUDITORS AND ASSURANCE PROFESSIONALS: Do you know how to build a comprehensive plan to achieve intelligent automation of your audit function? More importantly, at personal and professional levels, are you ready for the greatest transformation in the human history?

An artificial intelligence revolution is sweeping through the world. Auditors and forensic accountants in firms of all sizes and types are trying to understand what it means for them. Many want to explore how to build plans for total intelligent automation to move their companies forward into the new AI economy. Many have recognized the imminent need for augmenting skills because of increasing automation. The recognition that the AI economy will be led by business professionals is finally sinking in. But auditors, accountants, finance professionals, and forensic accountants must develop a deeper and more pragmatic understanding of the AI revolution. They must do it fast before the opportunity passes them by. This book will be your guide to improve and implement intelligent automation in your firms – and to do it in a structured, efficient, and disciplined way.

Artificial intelligence and audit are not strangers to each other. For decades researchers and practitioners have been trying to marry the two. Audit, if automated, can improve the audit quality and reduce its cost. On one hand it will improve the audit efficiency for companies; on the other hand it will enhance the trust and confidence of investors and other stakeholders who rely upon audited financial statements.

While the research and reports on artificial intelligence–centric audit automation have been plenty, there has not been a structured model of end‐to‐end audit automation. Sporadic collection of papers on audit does not translate into a workable audit model. Neither does haphazard capability building. In some ways, it was never deemed important to build a comprehensive framework from the perspective of how to build an audit automation plan for a company. After all, up until very recent times, the technology was not advanced enough to even begin to think about a fully automated audit. It was no different than the application of artificial intelligence in a car or an airplane. Automating some functional parts of a car's or an airplane's operation is one thing, creating an autonomous car or an autonomous drone another. But just as advances in technology have now given us the comfort to envision putting autonomous vehicles on the road and autonomous drones in the sky, the time for autonomous and continuous audit has come.

However, automating audit does not mean eliminating human work. If anything, it means eliminating the mistakes and errors, whether intentional or not, of the human work. Thus, a structured model of intelligent automation of audit will incorporate the automation of both cognitive and physical human work and will focus on enhancing the human ability to function far beyond what normal human capacities allow humans to do. Lifting the human constraints is not simply a function of enhanced computational efficiency. It results from embedding intelligence in machines.

Embedding intelligence in machines is no ordinary change. It is one of the most extraordinary developments in the course of human history. Machines have always been subservient to human control. The new type of machine, with a mind of its own, is something humans have no experience with. This new development implies that we cannot approach intelligent automation in audit as a standalone phenomenon. We must consider the management, economic, technical, organizational, and governance aspects of introducing this magnificent technology. The book addresses all of those areas and provides a comprehensive first look at the entire discipline of intelligent automation in audit.

The book has been divided into four parts. Part One orients you to the fascinating world of audit automation. By addressing the following questions, it establishes the foundational knowledge for an AI business professional:

  1. What is the AI revolution and how does it impact economy?
  2. What is the role of an audit professional? How does AI change that role?
  3. What is artificial intelligence technology?
  4. What are the best practices and methodologies to build intelligent solutions?

In the first six chapters, this book walks you through the amazing forces that have come together to launch the AI revolution. Chapter 5 introduces machine learning and explains some of the algorithms. The book is written for business audience and therefore the idea is not to make you a machine learning expert but instead to equip you with the knowledge necessary for you to take ownership of business solutions in AI.

With the foundational knowledge covered in Part One, we then introduce the intelligent automation of audit model in Part Two. This is a structured model that gives companies the ability to envision and understand what a comprehensive automated audit solution looks like. We dedicate five chapters (7 to 11) to the automation of the audit process. Each of the five chapters addresses a process area of audit, including preplanning, inherent risk, controls risk, audit procedure, and post‐audit management. The approach in this book is to focus on automation. Since the book is authored for a global audience, reference to accounting standards of any single country was intentionally avoided.

After covering the audit process automation, in Part Three the focus shifts to fraud detection, forensic accounting, and valuation. Part Three is designed to equip assurance firms to develop automation to offer forensic services. The automation strategy in those areas is defined by introducing a model known as Infinity Cycle and building automation around that model. In four chapters (12 to 15) we cover various aspects of traditional and modern forensic accounting to build a highly automated forensic automation firm.

This book is about practical solutions. In the first three parts we covered the technical and automation aspects of intelligent automation of audit. Those parts are incomplete if we fail to address the fact the intelligent automation is not just changing the technology, it requires changing our approach and understanding of the organization. The organization in the AI economy will look and feel different than the one in the digital economy. The AI solution development will also require a change in how projects are developed. An intelligent solution also requires different types of governance than a non‐intelligent machine. Developing a pragmatic solution necessitates addressing organizational issues, project management, and governance. Part Four has three chapters (16 to 18) and they address those critical solution development issues.

How to get the most out of this book?

There are three ways to get the most out of this book. First, read it with the mindset that you are designing and envisioning the future of your firm and the audit/assurance function. This means to think in terms of the framework. Second, as a businessperson, unless you want to, you don't have to understand the technical details beyond what is presented in this book. To take ownership of projects, you need enough knowledge to have a reasonable conversation with your data science or AI team. This book enables you to do that. If you encounter a technical concept that you don't grasp, try to understand it with the analogies provided in the book. Third, apply the knowledge by building a working plan for your audit automation.

Given the state of the technology, intelligent automation of audit is imminent. Start early to get a strong lead. Stay ahead by doing it effectively. Your journey has just begun. Expect the world to be transformed in the next few years. Have a wonderful journey!

Acknowledgments

I AM GRATEFUL TO MY WIFE for her unconditional support for my intellectual pursuits. I want to thank my children for their understanding as I spent countless hours working on this and other books. Many thanks to my mother for providing motivation to learn and develop.

Special thanks to Sheck Cho at Wiley. Also, many thanks to Elisha (Wiley) and the entire Wiley team. I have worked with several publishers; however, I find Wiley to be the most professional.

My courses are offered via AICPA and I want to thank the AICPA team, including Penelope Johnson, Sandeep Rao, Nisha Gordhan, Jeffery Drew, Jeremy Clark, and Ami Beers. Amazing people and a truly inspiring team!

I want to acknowledge all the researchers and authors whose work I have cited in this book.

PART I
Foundations for AI and Audit

PART ONE ORIENTS YOU TO THE artificial intelligence revolution and prepares you for Part Two and Part Three, which are focused on audit automation and forensic accounting automation. Approaching it from a historical, business, and technical perspective, it is composed of six chapters. The first two chapters explain the underlying drivers of the artificial intelligence (AI) emergence as a global phenomenon. Chapter 3 to Chapter 5 explain AI and machine learning in a gentle and business friendly manner. Specifically, Chapter 5 introduces various algorithms but does so in a manner that people with no formal training in AI or technical background will be able to follow. Chapter 6 focuses on business analysis tools that are used to develop requirements and use cases for artificial intelligence applications.