Data Mining As A Continuous Auditing Tool for

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Data Mining As A Continuous Auditing Tool for
Soft Information A Research Question

• A Research Proposal
• By
• J. Donald Warren, Jr.

Rutgers University Fifth Continuous Assurance
Symposium Rutgers Business School November 22-23,
2002
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Data Mining As a Continuous Auditing Tool for
Soft Information A Research Question What
this proposal is about

• Auditors will have to address soft information
  in a continuous auditing environment.
• Soft information defined as management
  estimates and/or judgments
• Timing of traditional audit procedures may not be
  appropriate in continuous audit environment
• Data mining may provide necessary tools to
  provide competent evidence for soft information
  in a continuous auditing environment

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Data Mining As a Continuous Auditing Tool for
Soft Information A Research Question How
this proposal contributes to body of knowledge

• A continuous audit will require tools and
  techniques to provide the auditor with sufficient
  competent evidence on a real time basis.
• Data mining has been used in other disciplines
  with success for profiling customers or in
  forensic projects
• Valuation accounts in a continuous auditing
  environment creates challenges to auditors in a
  continuous auditing environment

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Data Mining As a Continuous Auditing Tool for
Soft Information A Research Question
Development of Research Question

• Allowance for doubtful accounts selected as soft
  information account
• Traditionally allowance for doubtful accounts has
  been the subject of differing opinions between
  auditors and clients
• Auditors cannot apply traditional procedures in a
  continuous auditing environment

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Data Mining As a Continuous Auditing Tool for
Soft Information A Research Question
Development of Research Question (continued)

• Embedded audit modules may be used to address
  soft information accounts
• In case of allowance for doubtful accounts,
  auditor will be unable to discuss questionable
  accounts and review subsequent collections for
  accounts receivables at the date that a soft
  information account may be reported upon

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Data Mining As a Continuous Auditing Tool for
Soft Information A Research Question
Development of Research Question (continued)

• Data mining provides a process to ferret through
  voluminous data to identify patterns
• Research question
• In a continuous auditing environment, do data
  mining techniques provide auditors with a
  methodology which generates sufficient competent
  evidential matter on accounts containing soft
  information and enable auditors to rely on the
  results computed as being adequate for such
  accounts?

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Data Mining As a Continuous Auditing Tool for
Soft Information A Research Question
Research Methodology

• Obtain a database for a company which contains
  accounts receivables as well as other accounts
  which may be necessary to test for the adequacy
  of such accounts in a continuous auditing
  enviroment

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Data Mining As a Continuous Auditing Tool for
Soft Information A Research Question
Research Methodology

• Use data mining tools such as stepwise
  regressions, decision trees and logistic
  regressions to address soft information
• Three samples required training, testing and
  validation