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There is no doubt that data analytics is anticipated to have a significant impact on the accounting profession at large. It is observable that data analytics is intensely emerging as a powerful tool in different areas related to the accountancy profession such as financial reporting, auditing, tax as well as managerial accounting.
The article “Impact of data analytics in accounting” mainly focuses on the effect of data analytics on auditing and managerial accounting.
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The role of data analytics in financial statements auditing has been expanding for several years. The changes imposed by the rise of data analytics knowledge and tools on the audit profession is represented in several attributes. First, auditors have the ability to extract, load, and transform (ETL) larger amounts of data, which provides them with the ability to audit and attest the entire sample of transactions or accounts for an auditee.
This indicates that one of the most important factors that determine the level of assurance that the external auditor provides on how the financial statements fairly represent the economic standing of the auditee, sampling, is expected to fade away (if it didn’t already especially for engagements with smaller firms).
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Twenty years ago, due to the lack of the currently existing technology and human skills, auditors used to very carefully, build their attestations about the financial statements relying on auditing a sample of the auditee’s accounts, transactions, documents, etc. However, this has changed now due to the availability of technological tools that can absorb enormous datasets and records.
Challenges of data analytics in accounting
1. Increase in qualified workforce members with analytics skills
One challenge here to note is that the increase in qualified workforce members with analytics skills is significantly lagging behind the increase in demand in the job market for such skills (US Bureau of Labor Statistics, 2022).
2. Availability and ease of collection of data from the auditee
Second, due to the availability and ease of collection of data from the auditee compared to earlier years, it is expected that auditors would now collect and analyze the auditee’s data on a rolling basis throughout the fiscal year designated for the audit engagement.
This means that the auditors will be engaged with the auditee before, during and after the official engagement time window. This further allows the auditor to automate several tasks and provide more time and resources to carefully examine and investigate critical audit issues and identify potential red flags that could lead to material misstatements in the current year or in subsequent years.
3. Availability of a large mass of financial data from the auditee
Third, the availability of a large mass of financial data from the auditee on a continuous basis would provide the auditor with more resources to apply predictive analytics tools and models that will be of great relevance and importance for identifying and predicting fraudulent transactions, significant internal control weaknesses or deficiencies in business processes that could affect the figures reported on the financial statements. This will lead to a more efficient audit risk assessment process that is expected to improve audit quality.
That being said, the effect of data analytics on other areas of the accounting profession is not negligible. One major area that is expected to change due to and also benefit from data analytics is management accounting. By definition, the function of management accounting is to internally use financial data to enhance decision-making and firm performance in the future.
The normal task of a management accountant includes several processes that could be enhanced due to the emergence of data analytics in accounting. To mention a few, defining cost drivers for manufacturing overhead, predicting cost behavior, master budgeting, and capital budgeting.
While the aforementioned tasks are expected to benefit from descriptive analytics and statistical analysis, other strategic decisions could be enhanced by introducing data analytics to the skillsets of management accountants like identifying the sales mix, dropping or keeping a business segment, special order requests, make or buy decisions and process further or sell and so many other important decisions.