Sequential Series Regression Techniques In Continuous Auditing

1
Sequential Series Regression Techniques In
Continuous Auditing

• Benedetto Bongiorno CPA, CRE
• Lynford Graham CPA, PhD, CFE

2
Objectives of Sequential Series Regression

• Continuous Audit As In Frequently Periodic To
  Continuous Monitoring
• Development of Audit Expectations
• Detection Testing of Risks Controls
• Extensive Use of Substantive Analytical Procedure
  (SAP)
• Efficient Integration of SAP, Sampling Testing
  of Controls

3
The Continuous Process

• Review Documentation of Internal Control
• Review of Automated and Manual Controls
• Verification of Stationary Sequential Events
• Verification of Non-Stationary Sequential Events
• Independent ODBC /JDBC Connection to DBS
• Import Records For Current Previous Periods
• Based On Company Operations, Combine Into Equally
  Spaced Events Days, Months, Quarters

4
The Continuous Process

• Segregate Records Into Financial Statement
  Segments - Assets, Liabilities
• Segregate Segments Into Financial Statement
  Categories - Cash, Revenue
• Segregate Categories By Debits and Credits
• Segregate Debits and Credits By Sources of
  Transactions
• Cross Reference Sources To Processes (Cycles)

5
The Continuous Process

• Segregate Sources of Transactions By Stationary
  Non-Stationary Events
• Reference Sources of Transactions By Automated
  Manual Controls
• Apply Appropriate Regression Model To Each Group
• Establish Audit Expectations For Periods Under
  Audit
• Update Documentation

6
The Regression Model

• Based on Company and Industry Information
• Works Best With Discrete, Sequential, Successive
  Equally Spaced Data Produced With Automated
  Processes
• Algorithms That Are Multifaceted Variations of
  ARMA
• Different Models For Different FS Categories
• Does Not Replicate History But Anticipates
  Results

7
Comparison of Actual To Expectations

• Sequential Automated General Administrative
  Expenses - Historical Debits
• Period, Source, Monthly Total,
• 200601, AP, 392,907.11,
• 200602, AP, 416,209.05,
• 200603, AP, 681,756.33,
• 200604, AP, 541,760.38,
• 200605, AP, 863,814.03,
• 200606, AP, 518,772.63,
• 200607, AP, 405,766.90,
• 200608, AP, 483,285.86,
• 200609, AP, 450,928.49,
• 200610, AP, 437,524.51,
• 200611, AP, 506,150.81,
• 200612, AP, 792,556.24
• Sequential Automated General Administrative
  Expenses - Audit Expectation Debits

8
Comparison of Actual To Expectations

• Non Sequential Manual General Administrative
  Expenses - Historical Debits
• Period, Source, Monthly Total,
• 200609, AD, 509,152.15,
• 200612, AD, 20,944.81
• Period, Source, Monthly Total,
• 200604, AL, 953.58,
• 00605, AL, 14,970.82,
• 200609, AL, 323.24
• Non Sequential Manual General Administrative
  Expenses - Audit Expectations Debits
• Period, Source, Monthly Total Expectation,
• 200709, AD, 265,048.48,
• 200712, AD, 265,048.48

9
Graphic Examples of Results
10
Questions

• Is It Presently Used In Audits? YES
• Is The Process Truly Continuous? YES
• Is This a Silver Bullet For All Audits? NO, Must
  Be Tailored By Specifics of Industry and Company
  
• Is It An Efficient Way To Audit? YES, Time
  Efficient Cost Effective
• Is It a Effective Way To Integrate New SAS AS
  Pronoucments Into Audits? YES