Ron Phipps-Ellis, founder and CEO of SMSF audit specialists Evolv, explains the firm’s cost-effective approach to auditing data fed transactions.
Data feeds not only have the potential to streamline the audit process, they also pave the way for automation, making the audit more efficient and more cost-effective for the client. However, SMSF auditors need to determine how much reliance can be placed on data fed transactions, and decide how much transaction testing should be performed.
It’s an area where Evolv has undertaken considerable research – and as consequence, developed a revolutionary new approach.
What the audit standards say
In the absence of minimum industry standards to certify data quality, the issue of how much testing needs to be done on specific data fed transactions is more important than ever.
Technology has enabled the analysis of larger data sets, driving a fundamental shift from sample testing to only testing exceptions. However, there is currently no right or wrong answer, or proper guidance, on how we should be auditing data fed transactions in SMSFs.
ASA 500, the Australian equivalent of ISA 500 Audit evidence, calls for “sufficient appropriate audit evidence” to support the auditor’s opinion.
ASA 315 makes it clear that audit risk is a function of the risks of material misstatement and detection risk. This generally means that for SMSF audits, control risk is normally assessed as high, so no control testing is performed. And detection risk is normally assessed as low, so substantive testing is high.
Additionally, ASA 300 states that planning an audit of financial statements describes the scope and the conduct of the audit with an overall audit strategy.
At Evolv, we’ve developed a new automated risk and exceptions based audit approach that shapes the audit plan.
Using tech to verify data fed transactions
Evolv has gone to the heart of detecting where risks really lie. We have shifted the audit focus away from manual random sampling to reviewing automatically generated reports on exceptions and anomalies – and only investigating those transactions that our software has automatically highlighted as potential material misstatements.
This review process is a combination of relying on both systems controls and substantive testing. It’s a mind-set shift, and I believe it is the next generation of auditing.
It is worth stressing that this process only works when SMSF accounting platforms such as Class, are themselves independently certified. In addition to their data feed error reports, they must also produce specific reports identifying if a data fed transaction has been edited or deleted by the fund’s accountant.
This is fundamental to Evolv’s risk and exceptions based audit methodology. If the auditor cannot identify if a transaction has been modified by the accountant, then it cannot be relied upon as a true and clean feed.
Every audit conducted by Evolv starts with a report generated by our software, which shows those SMSF investments that have been data fed. This drives the audit planning process as it gives the auditor a quick snapshot of how much work they’ll need to do in this fund.
Our SMSF audit software features a unique ‘testing tab’. This is the essence of our exceptions based testing approach. It integrates into a single view, all the reports that the fund’s accounting platforms generate for data feeds. From here, the software automatically assesses the accuracy and completeness of the feed by cross-matching each report for each investment. Importantly, it highlights if a feed has been edited. The probability of an error not being automatically detected via this process is extremely low.
The software then assesses risk, and automatically calculates a suggested sampling size, which can be manually overridden. If the investment isn’t data fed, the system allows for a suggested sample size to be pre-set.
At this stage of the audit, if 100% of the fund’s investments were fully data fed with no cross-matched errors from the reports, and were not modified by the fund accountant (remember, this is the critical determinant that we are testing for), it’s feasible, in theory, that the system can automatically validate all of the fund’s data fed transactions. This is very powerful.
But, there’s much more to Evolv’s automated system.
Identifying exceptions
Evolv has developed a risk matrix, which calculates the total audit risk based on the fund’s inherent risk and particular client risk. It does this for all of the fund’s investments, not just the data fed transactions. The risk rating and materiality then form the basis of the suggested testing calculator.
Once the planning tab in Evolv’s software has given the auditor a clear direction of what exceptions have been identified, it’s time to investigate them. This further refines the audit plan.
There’s no real need to test any other data fed cash transactions because we’ve relied on a variety of reports to corroborate the accuracy and completeness of the entire data set, not just a few randomly selected transactions. In this way, we have resolved the question of “how much is enough” audit evidence.
Of course, we still manually test non-data fed cash transactions. However, when it comes to data feeds, we focus on finding any anomalies or errors that haven’t been automatically allocated. Within reports issued by SMSF administrative platforms such as Class, there are other reports that check the transactions that we review through our exception based testing approach.
We know for example, that BHP has paid one dividend during the year. If the dividend was incorrectly allocated or manually adjusted by an accountant, we will pick up this exception and investigate. By looking for exceptions, we are on the lookout for errors, fraud or anything the trustees may be trying to hide.
Time and cost savings
Focusing the audit on exceptions as opposed to validating every transaction that has already been allocated, represents an immense cost saving for SMSF members, potentially cutting audit time by up to 70 percent.
The whole crux of what we are doing at Evolv is focusing the auditor on risk. Before the advent of data feeds, auditors were testing for up to 100 percent accuracy. Given the amount of data supplied by platforms such as Class, we no longer need to ask what a transaction is for unless it is something that cannot be data fed.
Our full service Evolv Black offering has a built-in exception based testing approach. It means we have verified and allocated data feeds, and in a perfect world, we have automatically tested 100 per cent with our exception based approach. An auditor can’t do any more substantive testing than this.
Only Evolv has taken an exception based testing approach in the SMSF auditing space. It’s a unique approach that uses relevant technology across broad applications, and it goes to the heart of where the risks are with SMSF, saving time, creating consistency in each and every audit, and importantly, reducing the numbers of queries forwarded to accountants and SMSF members.
Why change?
Resistance to change is common. But as auditors, we not only have to audit the financials of an SMSF, we also have to review a fund’s compliance with the SIS Act. Evolv’s exception based testing approach enables auditors to move on quickly through the financials and focus on the compliance component. That’s because our exception based testing approach lets auditors see from the outset where they need to focus their time. It signposts where the risks lie.
Auditors that don’t embrace this approach risk falling behind. Embracing new technology enhances productivity, enabling the completion of a greater number of audits, and this is especially important given the enhanced demand for auditor independence.
Don’t wait, start your journey today
Discover the Evolv solutions that are right for your practice and start the transition today by contacting David Goldsmith at Evolv on dgoldsmith@evolvsuper.com.au.
