Continuous Auditing: Definition, Techniques & Examples

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

While audits are an excellent tool to provide independent, objective feedback about a process or organization, they often only provide point-in-time snapshots. In this lesson, we'll discuss continuous auditing and how it can overcome those shortfalls.

Defining Auditing and Continuous Auditing

Before we talk about continuous auditing, let's ensure we have a good understanding of what we mean when we talk about auditing. Auditing is an objective review and assessment activity, independent of management, with the objective of identifying weaknesses in processes and opportunities for improvement. While auditing is a very valuable activity, an audit is often a long process that can take weeks or months.

The Institute of Internal Auditors (IIA) states that continuous auditing is the audit-related activities that are done more continuously than activities scheduled as part of the annual audit plan.

The annual audit plan is a schedule of audits planned for any given year, but continuous auditing goes above and beyond those point in time audits and is frequently mining, reviewing, and assessing information, typically with the help of technology.

Continuous Auditing Techniques

Continuous auditing has the same objective of traditional auditing, which is to identify weaknesses in processes and opportunities for improvement. Continuous auditing cannot, however, replace the judgment and discretion of an auditor who understands the context of processes and can think about how metrics, processes, and assessments are related. But, there are three important techniques that can be used with continuous auditing to significantly reduce the time it takes to identify potential weaknesses in processes.

These techniques are not specific to continuous auditing and are some of the same tools and techniques auditors have used for years. But, they are able to be easily and quickly assessed with the help of technology.

The first is a binary check to determine whether a control is working effectively. An example of this is a system check of whether or not something was done according to policy or a predetermined requirement, such as if a payment request was approved. The inventory count example you'll read below is a binary check.

The second technique is identifying outliers. An outlier is a numerical value that is significantly different than one might expect. For example, if the average travel reimbursement for employees is $1,500, and 95% of the reimbursements are under $5,000, a continuous auditing program might look for travel reimbursements for more than $5,000. This does not automatically mean that something is wrong, but it is certainly a signal that an auditor may want to look at that transaction.

The third, and perhaps most useful technique for continuous auditing, is using analysis software to identify trends. The prior two techniques look for isolated events, specific instances when something might need to be assessed. Because technology has made it quick and efficient to analyze data, continuous auditing can keep track of trends.

To use travel expenses again, imagine if the average travel reimbursement went from $1,500 to $2,000 in one year. That could have a serious impact on an organization's financial, but may not be easily identified because managers approving those expense reports only see them one at a time. Whatever the cause for the increase in average travel expenses, understanding it by tracking these trends might help control costs.

Examples of Continuous Auditing

Let's look at a quick example of continuous auditing that uses a binary check. An important internal control over inventory is to count physical inventory to ensure it matches the inventory levels reported in the inventory management system. If there are differences, adjustments should be made. A company may have an internal control stating that a certain number of products should be counted each day and either confirmed or adjusted in the inventory management system.

An audit may test that control by going into the inventory management system and looking at the adjustments or confirmations made each day. If there were at least as many as required by policy, the control is in place. If not, the control is not in place.

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