Data Analytics For Accounting: Vernon J. Richardson

Rev.
Confirming Pages
Data Analytics for

Accounting
Vernon J. Richardson
University of Arkansas,
Xi’an Jiaotong Liverpool University
Ryan A. Teeter
University of Pittsburgh
Katie L. Terrell
University of Arkansas
ric75196_fm_i-xxi.indd i 03/26/18 10:32 AM

Rev. Confirming Pages
DATA ANALYTICS FOR ACCOUNTING
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. No part of this publication may be
reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the
prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic
storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the
United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI/LWI 21 20 19 18
ISBN 978-1-260-37519-0
MHID 1-260-37519-6
Portfolio Manager: Steve Schuetz
Product Developer: Alexandra Kukla
Marketing Manager: Michelle Williams
Content Project Managers: Fran Simon/Angela Norris
Buyer: Sue Culbertson
Design: Egzon Shaquiri
Content Licensing Specialist: Shawntel Schmitt
Cover Image: © SUNSHADOW/Shutterstock
Compositor: SPi Global
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Names: Richardson, Vernon J., author. | Teeter, Ryan, author. | Terrell,

Katie, author.
Title: Data analytics for accounting / Vernon Richardson, University of
Arkansas, Xi’an Jiaotong Liverpool University, Ryan Teeter, University of
Pittsburgh, Katie Terrell, University of Arkansas.
Description: First Edition. | Dubuque : McGraw-Hill Education, [2018]
Identifiers: LCCN 2018009171 | ISBN 9781260375190 (alk. paper)
Subjects: LCSH: Accounting—Data processing.
Classification: LCC HF5679 .R534 2018 | DDC 657.0285—dc23
LC record available at https://lccn.loc.gov/2018009171
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
ric75196_fm_i-xxi.indd ii 03/26/18 10:32 AM

Dedications
My wonderful eldest daughter, Alison.
—Vernon Richardson
My wife, Erin, and children, Sylvia

and Theodore.
—Ryan Teeter
My husband, Kevin. Thank you for your

support and patience along the way!
—Katie Terrell
iii
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Preface
Data Analytics is changing the business world—data simply surrounds us! With so much data
available about each of us (i.e., how we shop, what we read, what we buy, what music we listen
to, where we travel, whom we trust, etc.), arguably, there is the potential for analyzing those
data in a way that can answer fundamental business and accounting questions and create value.
According to the results of 18th Annual Global CEO Survey conducted by PwC, many
CEOs put a high value on Data Analytics, and 80 percent of them place data mining and
analysis as the second-most important strategic technology for CEOs. In fact, per PwC’s
6th Annual Digital IQ survey of more than 1,400 leaders from digital businesses, the area of
investment that tops CEOs’ list of priorities is business analytics.1
This text addresses what we believe will be a similar impact of Data Analytics on
accounting and auditing. For example, we argue that Data Analytics will play an increasingly
critical role in the future of audit. In a recent Forbes Insights/KPMG report, “Audit 2020:
A Focus on Change,” the vast majority of survey respondents believe:

No longer will auditors simply check for errors, misstated accounts, fraud, and risk in the
financial statements or merely report their findings at the end of the audit. Through the use
of Data Analytics, audit professionals will collect and analyze the company’s data similar
to the way a business analyst would help management make better business decisions. In
our text, we emphasize audit data analytics and all the testing that can be done to perform
audit testing.
Data Analytics also potentially has an impact on financial reporting. With the use of
so many estimates and valuations in financial accounting, some believe that employing
Data Analytics may substantially improve the quality of the estimates and valuations.
Likewise, the use of XBRL data gives accountants access to more timely and more extensive
accounting data for financial analysis.
This text recognizes that accountants don’t need to become data scientists—they may never
need to build a data repository or do the real hard-core Data Analytics or machine learning.
However, we do emphasize seven skills that we believe analytic-minded accountants should have:

1
PwC, “Data Driven: What Students Need to Succeed in a Rapidly Changing Business World,” https://
www.pwc.com/us/en/faculty-resource/assets/pwc-data-driven-paper-feb2015.pdf posted February
2015, extracted December 14, 2017.
iv
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Preface
Consistent with these skills we desire in all accountants, we recognize that Data Analytics
is a process. The process begins by identifying business questions that can be addressed
with data and then testing the data, refining our testing, and finally, communicating those
findings to management. We describe our Data Analytics process by using an established
data analytics model called the IMPACT cycle, by Isson and Harriott:2
Adapted from Win with Advanced Business Analytics: Creating Business Value from Your Data,
by Jean Paul Isson and Jesse S. Harriott.
We describe the IMPACT cycle in the first four chapters and then illustrate the process
in audit, managerial accounting, and financial reporting in the final four chapters.
We also emphasize hands-on practice. Students will be provided hands-on learning
(click-by-click instructions, screenshots, etc.) on datasets within the chapter; within the end-
of-chapter materials; and in the four to eight hands-on labs at the end of each chapter, where
students identify questions, download data, perform testing, and then communicate the
results of that testing. We highlight the use of real-world data from LendingClub, College
Scorecard, Dillard’s, the State of Oklahoma, as well as other data from our labs.
We also emphasize the tools students will use. In this text, we emphasize data analysis using
Excel, Access (including SQL), Tableau (free student license), IDEA (free student license),
and Weka (free student license). Students will compare and contrast the different tools to
determine which one is best suited for the necessary data analysis, data visualization, and
communication of the insights gained—for example, which tool is easiest for internal controls
testing, which is best for big datasets or big SQL queries, and so on.
ric75196_fm_i-xxi.indd v 03/26/18 10:32 AM

About the Authors

Vernon J. Richardson is a Distinguished Professor of Accounting and the G. William
Glezen Chair in the Sam M. Walton College of Business at the University of Arkansas and
a Research Fellow at Xi’an Jiaotong Liverpool University. He received his BS, Master of
Accountancy, and MBA from Brigham Young University and a PhD. in accounting from
the University of Illinois at Urbana–Champaign. He has taught students at the University
of Arkansas, University of Illinois, Brigham Young University, Aarhus University, and
University of Kansas and internationally at the China Europe International Business School
(Shanghai), Xi’an Jiaotong Liverpool University, and the University of Technology Sydney.
Dr. Richardson is a member of the American Accounting Association. He has served as
president of the American Accounting Association Information Systems section. He previously
served as an editor of The Accounting Review and is currently an editor at Accounting Horizons.
He has published articles in The Accounting Review, Journal of Information Systems, Journal
of Accounting and Economics, Contemporary Accounting Research, MIS Quarterly, International
Journal of Accounting Information Systems, Journal of Management Information Systems, Journal
of Operations Management, and Journal of Marketing.
Ryan A. Teeter is a Clinical Assistant Professor of Accounting in the Katz Graduate

School of Business at the University of Pittsburgh. He teaches accounting information
systems, auditing, and accounting data analytics. Prior to receiving his PhD. in accounting
information systems from Rutgers University, he worked at Google in Mountain View,
California. He has since worked with internal audit organizations at Siemens, Procter
& Gamble, Alcoa/Arconic, and FedEx, helping to develop robotic process automation
programs and data analytic solutions.
Dr. Teeter is a member of the American Accounting Association and has published
articles in the Journal of Strategic Technologies in Accounting and Issues in Accounting
Education. He has received grant funding for data analytics research from PwC.
Katie L. Terrell is an instructor in the Sam M. Walton College of Business at the University
of Arkansas. She received her BA degrees in English literature and in the Spanish language
from the University of Central Arkansas and her MBA from the University of Arkansas. She
expects a doctoral degree by 2019. She has taught students at the University of Arkansas;
Soochow University (Suzhou, China); the University College Dublin (Ireland); and Duoc
UC, a branch of the Catholic University of Chile (Viña del Mar, Chile).
She is a member of the American Accounting Association and has published a Statement
on Management Accounting for the Institute of Management Accountants on managing
organizational change in operational change initiatives. She has recently been recognized
for her innovative teaching by being the recipient of the Mark Chain/FSA Teaching Award
for innovative graduate-level accounting teaching practices in 2016. She has worked with
Tyson Foods, where she held various information system roles, focusing on business
analysis, project management for ERP implementations and upgrades, and organizational
change management.
vi
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Acknowledgments
Our sincere thanks to all who helped us on this project.
Our biggest thanks to the awesome team at McGraw-Hill Education, including Steve
Schuetz, Tim Vertovec, Allie Kukla, Fran Simon, Kevin Moran, and Shawntel Schmitt.
Our thanks also to each of the following:
The Walton College Enterprise Team (Paul Cronan, Ron Freeze, Michael Gibbs,
Michael Martz, Tanya Russell) for their work helping us get access to the Dillard’s data.
Lucas Hoogduin from KPMG for reviewing the textbook and providing comments.
Shane Lunceford from LendingClub for helping gain access to LendingClub data.
Julie Peters from PwC for her support and feedback on this project.
Ali Saeedi of University of Minnesota Crookston, for his accuracy check and review of
the manuscript.
In addition, the following reviewers and classroom testers who provided ideas and
insights for this edition. We appreciate their contributions.
Amelia Annette Baldwin Karen Schuele

University of South Alabama John Carroll University
Andrea S. Kelton Lorrie A. Metzger
Middle Tennessee State University University at Buffalo
Ali Saeedi Margarita Maria Lenk
University of Minnesota Crookston Colorado State University
Drew Sellers Marcia Watson
Kent State University University of North Carolina at
Dereck Barr-Pulliam Charlotte
University of Wisconsin–Madison Partha Mohapatra
Elizabeth Felski California State University, Sacramento
State University of New York at Geneseo Sharon M. Lightner
National University
Heather Carrasco
Texas Tech University Uday Murthy
University of South Florida
Joe Shangguan
Robert Morris University Vincent J. Shea
St. John’s University
Kathy Nesper
University at Buffalo
Vernon Richardson
Ryan Teeter
Katie Terrell
vii
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Key Features
• Emphasis on Skills: Working through the IMPACT cycle framework, students
will learn problem assessment, data preparation, data analysis, data visualization,
control contesting, and more.
• Emphasis on Hands-On Practice: Students will be provided hands-on learning (click-
by-click instructions with screenshots) on datasets within each chapter, within the
end-of-chapter materials, and in the labs and comprehensive cases.
• Emphasis on Datasets: To illustrate data analysis techniques and skills, multiple
practice datasets (audit, financial, and managerial data) will be used in every
chapter. Students gain real-world experience working with data from LendingClub,
Dillard’s, College Scorecard, the State of Oklahoma, as well as financial statement
data (via XBRL) from Fortune 100 companies.
• Emphasis on Tools: Students will learn how to conduct data analysis using Excel
Access (including SQL), Tableau (free student license), IDEA (free student
license), and Weka (free student license). Students will compare and contrast the
different tools to determine which are best suited for basic data analysis and data
visualization, which are easiest for internal controls testing, which are best for SQL
queries, and so on.
©Tableau Software, Inc. All rights reserved.
viii
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Main Text Features Confirming Pages
Chapter Maps
These maps provide a guide of what
we’re going to cover in the chapter
Chapter 2
as well as a guide of what we’ve just Data Preparation and Cleaning
learned and what’s coming next.
Chapter-Opening Vignettes
Because companies are facing the new
and exciting opportunities with their
A Look at This Chapter
use of Data Analytics to help with This chapter provides an overview of the types of data that are used in the accounting cycle and common data that
accounting and business decisions, we are stored in a relational database. The chapter addresses mastering the data, the second step of the IMPACT cycle.
We will describe how data are requested and extracted to answer business questions and how to transform data for use
detail what they’re doing and why in our via data preparation, validation, and cleaning. We conclude with an explanation of how to load data into the appropri-
ate tool in preparation for analyzing data to make decisions.
chapter-opening vignettes. Confirming Pages
A Look Back
Chapter 1 defined Data Analytics and explained that the value of Data Analytics is in the insights it provides. We
described the Data Analytic Process using the IMPACT cycle model and explained how this process is used to
address both business and accounting questions. We specifically emphasized the importance of identifying appropri-
ate questions that data analytics might be able to address.
We are lucky to live in a world in which data are abundant.
However, even with rich sources of data, when it comes to being
able to analyze data and turn them into useful information and A Look Ahead
insights, very rarely can an analyst hop right into a dataset and
begin analyzing. Datasets almost always need to be cleaned Chapter 3 describes how to go from defining business problems to analyzing data, answering questions, and address-
and validated before they can be used. Not knowing how to ing business problems. We make the case for three data approaches we argue are most relevant to accountants and
clean and validate data can, at best, lead to frustration and poor
insights and, at worst, lead to horrible security violations. While
provide examples of each.
this text takes advantage of open source datasets, these datas-
ets have all been scrubbed not only for accuracy, but also to pro-
tect the security and privacy of any individual or company whose
Shutterstock / Wichy
details were in the original dataset.
In 2015, a pair of researchers named Emil Kirkegaard and
Julius Daugbejerg Bjerrekaer scraped data from OkCupid, a free dating website, and provided the data onto the
“Open Science Framework,” a platform researchers use to obtain and share raw data. While the aim of the Open
Science Framework is to increase transparency, the researchers in this instance took that a step too far—and a step
into illegal territory. Kirkegaard and Bjerrekaer did not obtain permission from OkCupid or from the 70,000 OkCupid
users whose identities, ages, genders, religions, personality traits, and other personal details maintained by the dat-
ing site were provided to the public without any work being done to anonymize or sanitize the data. If the researchers
had taken the time to not just validate that the data were complete but also to sanitize them to protect the individuals’
identities, this would not have been a threat or a news story. On May 13, 2015, the Open Science Framework removed
the OkCupid data from the platform, but the damage of the privacy breach had already been done.1 38
OBJECTIVES
After reading this chapter, you should be able to:
ric75196_ch02_038-091.indd 38
Learning Objectives 02/19/18 03:55 PM
We feature learning objectives at the beginning

LO 2-1 Understand how data are organized in an accounting information
system
LO 2-2 Understand how data are stored in a relational database
LO 2-3 Explain and apply extraction, transformation, and loading (ETL) of each chapter. Having these learning objec-
techniques
Confirming Pages
tives provides students with an overview of the
concepts to be taught in the chapter and the
labs.
Chapter 2 Data Preparation and Cleaning 43

1
B. Resnick, “Researchers Just Released Profile Data on 70,000 OkCupid Users without Permission,”
2016, http://www.vox.com/2016/5/12/11666116/70000-okcupid-users-data-release (accessed
Progress Checks
October 31, 2016).
39 PROGRESS CHECK
1. Referring to Exhibit 2-1, locate the relationship between the Employee and
Periodic progress check questions are posed to Purchase Order tables. What is the unique identifier of each table? (The unique
ric75196_ch02_038-091.indd 39 02/19/18 03:55 PM
identifier attribute is called the primary key—more on how it’s determined in
the students throughout each chapter. These the next learning objective.) Which table contains the attribute that creates the
checks provoke the student to stop and con- relationship? (This attribute is called the foreign key—more on how it’s deter-
mined in the next learning objective.)
sider the concepts presented. 2. Referring to Exhibit 2-1, review the attributes in the Suppliers table. There is a
foreign key in this table that doesn’t relate to any of the tables in the diagram.
Which table do you think it is? What type of data would be stored in that table?
ix
DATA DICTIONARIES
In the previous section, you learned about how data are stored by focusing on the procure-
to-pay database schema. Viewing schemas and processes in isolation clarifies each indi-
vidual process, but it can also distort reality—these schemas do not represent their own
separate databases. Rather, each process-specific database schema is a piece of a greater
whole, all combining to form one integrated database.
ric75196_fm_i-xxi.indd ix As you can imagine, once these processes come together to be supported
03/26/18 in one
10:32 data-
AM
base, the amount of data can be massive. Understanding the processes and the basics of
flat file (41) A means of storing data in one place, such as in an Excel spreadsheet, as opposed to stor-
ing the data in multiple tables, such as in a relational database.
foreign key (42) An attribute that exists in relational databases in order to carry out the relationship
between two tables. This does not serve as the “unique identifier” for each record in a table. These must be
identified when mastering the data from a relational database in order to extract the data correctly from
more than one table.
mastering the data (40) The second step in the IMPACT cycle; it involves identifying and obtaining
the data needed for solving the data analysis problem, as well as cleaning and preparing the data for analysis.
End-of-Chapter Materials
primary key (41) An attribute that is required to exist in each table of a relational database and serves
as the “unique identifier” for each record in a table.
relational database (41) A means of storing data in order to ensure that the data are complete, not
redundant, and to help enforce business rules. Relational databases also aid in communication and integra-
tion of business processes across an organization.
Confirming
Answers to Progress Confirming Pa

ANSWERS TO PROGRESS CHECKS
Checks
1. The unique identifier of 5. the Employee
Depending ontable is [EmployeeID],
the level and the
of security afforded to unique identi-
a business analyst, she can either o
Allow students to evaluate if they are on track with fier of the Purchase Orderdata table is [POfrom
directly No.].theThedatabase
Purchase Orderortable
herself she contains the the data. When obt
can request
foreign key.
their understanding of the materials presented in data herself, the analyst must have access to the raw data in the database and
6.
2. The
The metadata
foreign key that describes
attribute that each
doesn’t
knowledge attribute
appear
of SQL intoand
a belong
database
data in is which
the of the
Suppliers
extraction following?
table
techniques. is When
[Supplier
requesting the data, the
the chapter. Type].
a. This attribute
Composite primaryprobably
key lystrelates
doesn’ttoneed
the Supplier
the same Type table.
level The data skills,
of extraction in thisbut
table
shewill
still needs to be familia
be descriptive, categorical the datadata
about the suppliers.
enough in order to identify which tables and attributes contain the inform
b. Data dictionary
3. The purpose of the primary she
keyrequires.
is to uniquely identify each record in a table. The pur-
c. Descriptive attributes
pose of a foreign key is6.toFour create a relationship
common issues thatbetween
must two tables.
be fixed areThe purposeheadings
removing of a or subtotals, cle
d. Flat file attribute is to provide
descriptive leading meaningful information characters,
zeroes or nonprintable about eachformatting
record in anegative
table. numbers, and corr
Descriptive
7. As mentioned attributes aren’t
in the chapter, required
which offor
inconsistenciestheaacross
database
following tonot
run,
theisdata. but they way
a common are necessary for
that data will
people
need toto
begain business
cleaned afterinformation
extraction andabout the data stored in their databases.
validation?
4. a.
Data dictionaries
Remove provide
headings descriptions of the function and data contained in each col-
and subtotals.
umn
b. (attribute)
Format of a database.
negative numbers.Data dictionaries are especially important when databases
contain several different tables and many different attributes in order to help analysts
c. Clean up trailing zeroes.
identify the information they need to perform their analysis.
d. Correct inconsistencies across data.
8. Why is Supplier ID considered to be a primary key for a Supplier table?
Multiple Choice Questions Multiple Choice

a. It contains Questions
a unique identifier
b. It is a 10-digit number.
for each supplier.
c. It can either be for a1.vendor

Mastering the data canprovider.
or miscellaneous also be described via the ETL process. The ETL process s
Quickly assess student’s knowledge of chapter for: supplier categories.
d. It is used to identify different
content. ric75196_ch02_038-091.indd 51 a. Extract,
9. What are attributes that exist total, anddatabase
in a relational load data.that are neither primary nor 02/19/18 03:
foreign keys? b. Enter, transform, and load data.

a. Nondescript attributes c. Extract, transform, and load data.
b. Descriptive attributes d. Enter, total, and load data.
c. Composite key 2. The goal of the ETL process is to:
a. Identify which approach to data analytics should be used.
d. Relational table attributes
b. Load
10. Which of these is not included in thethe data
five intoofathe
steps relational database for storage.
ETL process?
a. Determine the purposec.andCommunicate
scope of the thedataresults and insights found through the analysis.
request.
b. Obtain the data. d. Identify and obtain the data needed for solving the problem.
c. Validate the data for3.completeness
The advantages of storing data in a relational database include which of the follo
and integrity.
d. Scrub the data. a. Help in enforcing business rules.
b. Increased information redundancy.
Discussion Questions Discussion Questions

c. Integrating business processes.
d. All of the above are advantages of a relational database.
e. Only A and B.
Provide questions for group discussion. 1. The advantages of a relational database include limiting the amount of redundant data
f. Only B and C.
that are stored in a database. Why is this an important advantage? What can go wrong
g. Only A and C.
when redundant data are stored?
4. The purpose
2. The advantages of a relational databaseofinclude
transforming data is:
integrating business processes. Why
is it preferable to integratea.business processes
To validate infor
the data one information system,
completeness rather than
and integrity.
store different business process
b. To data
load in
theseparate,
data intoisolated databases?
the appropriate tool for analysis.
3. Even though it is preferable
c. toTostore data
obtain theindata
a relational
from thedatabase,
appropriate storing data across
source.
separate tables can make data analysis cumbersome. Describe three reasons why it is
d. Toinidentify
worth the trouble to store data which
a relational data are necessary to complete the analysis.
database.
4. Among the advantages5. Whicha attribute
of using relationalisdatabase
required istoenforcing
exist in each tablerules.
business of a relational
Based database and serv
the “unique
on your understanding of how identifier”
the structure for each record
of a relational databasein ahelps
table?prevent data
a. Foreign
redundancy and other advantages, howkeydoes the primary key/foreign key relationship
structure help enforce a business ruleidentifier
b. Unique that indicates that a company shouldn’t process
any purchase orders from suppliers who don’t exist in the database?
c. Primary key
5. What is the purpose of a data dictionary? Identify four different attributes that could be
d. Key attribute
stored in a data dictionary, and describe the purpose of each.
6. In the ETL process, the first step is extracting the data. When you are obtaining the data
52
yourself, what are the steps to identifying the data that you need to extract?
ric75196_ch02_038-091.indd 52 02/19/18
ric75196_ch02_038-091.indd 53 02/19/18 03:5

ric75196_fm_i-xxi.indd x 03/26/18 10:32 AM
10. In the ETL process, one important step to process when transforming the da
with NULL, N/A, and zero values in the dataset. If you have a field of quan
(e.g., number of years each individual in the table has held a full-time job),
be the effect of the following?
a. Transforming NULL and N/A values into blanks
b. Transforming NULL and N/A values into zeroes
c. Deleting records that have NULL and N/A values from your dataset
(Hint: Think about the impact on different aggregate functions, such as C
AVERAGE.) End-of-Chapter Materials xi
Problems Problems
The following problems correspond to the College Scorecard data. You shou
Challenge the student’s ability to see relation- to answer each question by just looking at the data dictionary (College
ships in the learning objectives by employing DataDictionary.pdf) included in Appendix A, but if you would like to use the ra
higher-level thinking and analytical skills. free to do so (CollegeScorecard_RawData.txt).
1. Which attributes from the College Scorecard data would you need to comp
attendance across types of institutions (public, private non-profit, or private
2. Which attributes from the College Scorecard data would you need to co
scores across types of institutions (public, private non-profit, or private for-p
3. Which attributes from the College Scorecard data would you need to compa
diversity across types of institutions (public, private non-profit, or private for
4. Which attributes from the College Scorecard data would you need toConfirm compa
tion rate across types of institutions (public, private non-profit, or private for
5. Which attributes from the College Scorecard data would you need to comp
centage of students who receive federal loans at universities above and below
cost of attendance across all institutions (public, private non-profit, or private f
6. Which attributes from the College Scorecard data would you need to determ
ent regions of the country have significantly different costs of attendance?
Lab 2-1 Create
7. Useathe
Request fordata
Data Extraction
Labs College Scorecard to determine if different regions of the country
icantly different costs of attendance (same as Problem 6 above) and fill out a d
form in order to extract the appropriate data. Use the template from the chapte
One of the biggest challenges you face with data analysis is getting the right data. You
Give students hands-on experience working with may have the best questions 8. If you were analyzing the levels of diversity across public and private institu
in the world, but if there are no data available to support your
different types of data and the tools used to ana- the College Scorecard data, how would you define diversity in terms of th
hypothesis, you will have difficulty providing value. Additionally, there are instances in
vided? Would it be beneficial to combine fields?
lyze them. Students will conduct data analysis which the IT workers may be reluctant to share data with you. They may send incomplete
9. If you were conducting a data analysis in order to compare the percent
using Excel, Access (including SQL), Tableau, data, the wrong data, or completely ignore your request. Be persistent, and you may have to
dents who receive federal loans at universities above and below the m
look for creative ways to find insight with an incomplete picture.
IDEA, XBRL, and Weka. of attendance across all institutions, you would be conducting several st
analysis. What question needs to be answered first in order to complete th
Company summary
Come up with a test plan to address the subsequent questions.
Sláinte is a fictional brewery that has recently gone through big changes. Sláinte sells six dif-
ferent
54
products. The brewery has only recently expanded its business to distributing from one
state to nine states, and now its business has begun stabilizing after the expansion. With that
stability comes a need for better analysis. You have been hired by Sláinte to help manage- Confirm
ment better understand the company’s sales data and provide input for its strategic decisions.
Data
•ric75196_ch02_038-091.indd 54
Data request form 0
• Sláinte dataset
Comprehensive Cases Lab 2-8 Comprehensive Case: Dillard’s Store

Technique Data:
• Some experience with spreadsheets and PivotTables is useful for this lab.
Connecting Excel to a SQL Database
Use a real-life Big Data set based on Dillard’s Software needed
actual company data from 2014 to 2016. This • Word processor Company summary
dataset allows students to build their skills and • Excel
Dillard’s is a department store with approximately 330 stores in 29 states. Its hea
test their conclusions across concepts covered in • Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)
is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at finan
each chapter. The Comprehensive Cases can be In this lab, you will: com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly
followed continuously from the first chapter or William T. Dillard II is an accounting grad of the University of Arkansas and th
Part 1: Identify appropriate questions and develop a hypothesis for each question.
College of Business, which may be why he shared transaction data with us to make
picked up at any later point in the book; enough Part 2: Generate a request
for thisfor
labdata.
and labs throughout this text.
information is provided to ensure students can Part 3: Analyze the data you receive.
get right to work. Data
Part 1: IdentifyThe thedata Questions
for this lab and other all Dillard’s labs are available at http://walton
enterprise/.
One of Sláinte’s first priorities is to Your instructor
identify its areaswill either give
of success youasspecific
as well areas ofinstructions
potential on how to a
improvement. Your managerdata, orhasthere
askedwill
youbetoinformation available
focus specifically on on Connect.
sales The point.
data at this 2016 Dillard’s data
transactions
This includes data related over the
to sales orders, period and
products, 1/1/2014 to 10/17/2016.
customers.
Q1. Given that you are new and trying to get a grasp on Sláinte’s operations, list
Software needed
three questions related to sales that would help you begin your analysis. For
example, how•many Microsoft SQL
products Server
were Management
sold in each state? Studio (available on the Remote Desktop
University of Arkansas)
Q2. Now hypothesize the answers to each of the questions. Remember, your answers
• Excel 2016 (available on the Remote Desktop at the University of Arkansas)
don’t have to be correct at this point. They will help you understand what type
of data you are looking for. For example: 500 in Missouri, 6,000 in Pennsylvania,
In this lab, you will:
4,000 in New York, etc.
• Learn how to access databases, run queries, and perform analyses in Excel.
Q3. Finally, for each question, identify the specific tables and attributes that are
needed to answer your questions. For example, to answer the question about
Part
state sales, you would1:need
Identify
the [State]the Questions
attribute that is most likely located in the
[Customer] master
Because,table as well as a [Quantity
as accountants, Sold]
we are most attribute
familiar withinMicrosoft
a [Sales] table.
Excel, we’d like to
If you had access to store
to access the or distribution
data center in
and run queries location data,the
excel. But you may also
question lookwhy use Excel
is still
for a [State] field there as well.
Q1. What can you do in Excel that is much more difficult to do in other da
ric75196_fm_i-xxi.indd xi agement programs? 03/26/18 10:32 AM
Connect for Data Analytics

for Accounting
With Connect for Data Analytics in Accounting, your students receive proven study tools
and hands-on assignment materials as well as an adaptive eBook. All of the following
assets are assignable in Connect.
SmartBook: SmartBook provides adaptive reading assignments that require students to
answer questions; it then provides feedback to direct a student learning and ensure mastery
of concepts.
Orientation Videos: Video-based tutorial assignments are designed to train students via an
overview video followed by a quiz for each of the assignment types they will find in Connect.
Multiple Choice Questions: The multiple choice questions from the end-of-chapter materials
are assignable in Connect, providing students with instant feedback on their answers.
Test Bank: The test bank includes auto-graded multiple choice and true/false assessment
questions. It is available in Connect and TestGen.
Problems: Select problems from the text are available for assignment in Connect to ensure
students are building an analytical skill set.
xii
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Connect for Data Analytics for Accounting xiii
Labs: Select labs are assignable in Connect but will require students to work outside of
Connect to complete the lab. Once completed, students go back into Connect to answer
questions designed to ensure they completed the lab and understood the key skills and
outcomes from their lab work.
Comprehensive Cases: Select comprehensive labs/cases are assignable in Connect but will
require students to work outside of Connect to complete the lab using the Dillard’s real-world
Big Data set. Once students complete the comprehensive lab, they will go back into Connect
to answer questions designed to ensure they completed the lab and understood the key skills
and outcomes from their lab work.
ric75196_fm_i-xxi.indd xiii 03/26/18 10:32 AM

McGraw-Hill Connect® is a highly reliable, easy-to-

use homework and learning management solution
that utilizes learning science and award-winning
adaptive tools to improve student results.
Homework and Adaptive Learning
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▪ SmartBook helps students study more efficiently
by delivering an interactive reading experience
through adaptive highlighting and review.
Over 7 billion questions have been

Using Connect improves retention rates
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Education products more intelligent, by 12.7 percentage points, and exam
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reliable, and precise.
73% of instructors
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Quality Content and Learning Resources require it; instructor
satisfaction increases
by 28% when Connect
▪ Connect content is authored by the world’s best subject is required.
matter experts, and is available to your class through a
simple and intuitive interface.
▪ The Connect eBook makes it easy for students to
access their reading material on smartphones
and tablets. They can study on the go and don’t
need internet access to use the eBook as a
reference, with full functionality.
▪ Multimedia content such as videos, simulations,
and games drive student engagement and critical
thinking skills. ©McGraw-Hill Education
ric75196_fm_i-xxi.indd xiv 03/26/18 10:32 AM

Robust Analytics and Reporting
▪ Connect Insight® generates easy-to-read

reports on individual students, the class as a
whole, and on specific assignments.
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Instructors can quickly identify students who ©Hero Images/Getty Images
struggle and focus on material that the class

has yet to master.
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As and Bs when they
use Connect.
Trusted Service and Support
▪ Connect integrates with your LMS to provide single sign-on and automatic syncing
of grades. Integration with Blackboard®, D2L®, and Canvas also provides automatic
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phase of your implementation.
▪ If you’re looking for some guidance on how to use Connect, or want to learn
tips and tricks from super users, you can find tutorials as you work. Our Digital
Faculty Consultants and Student Ambassadors offer insight into how to achieve
the results you want with Connect.
www.mheducation.com/connect
ric75196_fm_i-xxi.indd xv 03/26/18 10:32 AM

Brief Table of Contents

Preface iv
Chapter 1 Data Analytics in Accounting and Business 2
Chapter 2 Data Preparation and Cleaning 38
Chapter 3 Modeling and Evaluation: Going from Defining Business Problems and Data
Understanding to Analyzing Data and Answering Questions 92
Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with
Stakeholders 138
Chapter 5 The Modern Audit and Continuous Auditing 190
Chapter 6 Audit Data Analytics 208
Chapter 7 Generating Key Performance Indicators 250
Chapter 8 Financial Statement Analytics 300
GLOSSARY 326
INDEX 330
xvi
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Detailed TOC
Chapter 1 Chapter 2
Data Analytics in Accounting and Business 2 Data Preparation and Cleaning 38
A Look at This Chapter 2 A Look at This Chapter 38
A Look Ahead 2 A Look Back 38
Data Analytics 4 A Look Ahead 38
How Data Analytics Affects Business 4 How Data Are Used and Stored in the Accounting
How Data Analytics Affects Accounting 5 Cycle 40
Auditing 5 Data And Relationships in a Relational
Financial Reporting 6 Database 41
Taxes 7 Columns in a Table: Primary Keys, Foreign Keys, and
The Data Analytics Process Using the IMPACT Descriptive Attributes 41
Cycle 8 Data Dictionaries 43
Step 1: Identify the Question (chapter 1) 8 Extraction, Transformation, and Loading (ETL) of
Step 2: Master the Data (chapter 2) 8 Data 44
Step 3: Perform Test Plan (chapter 3) 9 Extraction 44
Step 4: Address and Refine Results (chapter 4) 11 Step 1: Determine the Purpose and Scope of the Data
Steps 5 and 6: Communicate Insights and Track Request 45
Outcomes (chapter 4 and each chapter thereafter) 11 Step 2: Obtain the Data 45
Back to Step 1 12 Transformation 48
Data Analytic Skills Needed by Analytic-Minded Step 3: Validating the Data for Completeness and
Accountants 12 Integrity 48
Hands-On Example of the IMPACT Model 13 Step 4: Cleaning the Data 49
Identify the Question 13 Loading 50
Master the Data 13 Step 5: Loading the Data for Data Analysis 50
Perform Test Plan 15 Summary 50
Address and Refine Results 17 Key Words 51
Communicate Insights 19 Answers to Progress Checks 51
Track Outcomes 19 Multiple Choice Questions 52
Summary 20 Discussion Questions 53
Key Words 20 Problems 54
Answers to Progress Checks 21 Appendix A: College Scorecard Dataset 55
Multiple Choice Questions 23 Answers to Multiple Choice Questions 55
Discussion Questions 24 Lab 2-1 Create a Request for Data Extraction 57
Problems 24 Lab 2-2 Use PivotTables to Denormalize and
Answers to Multiple Choice Questions 26 Analyze the Data 59
Lab 1-0 How to Complete Labs in This Lab 2-3 Resolve Common Data Problems in
Text 27 Excel and Access 67
Lab 1-1 Data Analytics in Financial Lab 2-4 Generate Summary Statistics in
Accounting 28 Excel 71
Lab 1-2 Data Analytics in Managerial Lab 2-5 College Scorecard Extraction and Data
Accounting 31 Preparation 73
Lab 1-3 Data Analytics in Auditing 33 Lab 2-6 Comprehensive Case: Dillard’s Store
Lab 1-4 Comprehensive Case: Dillard’s Store Data: How to Create an Entity-
Data 34 Relationship Diagram 74
xvii
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xviii Detailed TOC
Lab 2-7 Comprehensive Case: Dillard’s Store Lab 3-4 Comprehensive Case: Dillard’s Store
Data: How to Preview Data from Tables Data: Data Abstract (SQL) and
in a Query 77 Regression (Part I) 125
Lab 2-8 Comprehensive Case: Dillard’s Store Lab 3-5 Comprehensive Case: Dillard’s Store
Data: Connecting Excel to a SQL Data: Data Abstract (SQL) and
Database 80 Regression (Part II) 134
Lab 2-9 Comprehensive Case: Dillard’s Store
Data: Joining Tables 89 Chapter 4
Visualization: Using Visualizations and Summaries to
Chapter 3 Share Results with Stakeholders 138
Modeling and Evaluation: Going from Defining
A Look at This Chapter 138
Business Problems and Data Understanding to
A Look Back 138
Analyzing Data and Answering Questions 92
A Look Ahead 138
A Look at This Chapter 92 Determine the Purpose of Your Data
A Look Back 92 Visualization 140
A Look Ahead 92 Quadrants 1 and 3 versus Quadrants 2 and 4:
Performing the Test Plan: Defining Data Analytics Qualitative versus Quantitative 141
Approaches 94 Quadrants 1 and 2 versus Quadrants 3 and 4:
Profiling 98 Declarative versus Exploratory 143
Example of Profiling in Management Accounting 99 Choosing the Right Chart 144
Example of Profiling in an Internal Audit 99 Charts Appropriate for Qualitative Data 144
Example of Profiling in Auditing and Continuous Charts Appropriate for Quantitative Data 146
Auditing 100 Tools to Help When Picking a Visual 148
Data Reduction 101 Learning to Create a Good Chart by (Bad) Example 150
Example of Data Reduction in Internal and External Further Refining Your Chart to Communicate
Auditing 101 Better 155
Examples of Data Reduction in Other Accounting Data Scale and Increments 156
Areas 102 Color 156
Regression 102 Communication: More Than Visuals—Using Words
Examples of the Regression Approach in Managerial to Provide Insights 157
Accounting 103 Content and Organization 157
Examples of the Regression Approach in Auditing 103 Audience and Tone 158
Other Examples of the Regression and Classification Revising 158
Approach in Accounting 104 Summary 159
Classification 104 Key Words 159
Classification Terminology 104 Answers to Progress Checks 160
Evaluating Classifiers 106 Multiple Choice Questions 161
Clustering 107 Discussion Questions 162
Example of the Clustering Approach in Auditing 108 Problems 163
Summary 109 Answers to Multiple Choice Questions 163
Key Words 110 Lab 4-1 Use PivotCharts to Visualize Declarative
Answers to Progress Checks 111 Data 164
Multiple Choice Questions 111 Lab 4-2 Use Tableau to Perform Exploratory
Discussion Questions 113 Analysis and Create Dashboards 166
Problems 113 Lab 4-3 Comprehensive Case: Dillard’s
Answers to Multiple Choice Questions 114 Store Data: Create Geographic Data
Appendix: Setting Up a Classification Analysis 114 Visualizations in Tableau 175
Lab 3-1 Data Reduction 116 Lab 4-4 Comprehensive Case: Dillard’s Store
Lab 3-2 Regression in Excel 120 Data: Visualizing Regression in
Lab 3-3 Classification 122 Tableau 186
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Detailed TOC
Chapter 5 Sequence Check 225

The Modern Audit and Continuous Auditing 190 Stratification and Clustering 225
Creating Advanced Predictive and Prescriptive
A Look at This Chapter 190 Analytics 226
A Look Back 190 Regression 226
A Look Ahead 190 Classification 226
The Modern Audit 192 Probability 226
The Increasing Importance of the Internal Audit 192
Sentiment Analysis 226
Auditing Data 193
Applied Statistics 226
Automating the Audit Plan 195 Artificial Intelligence 227
Continous Auditing Techniques 196 Additional Analyses 227
Alarms and Exceptions 197
Summary 227
Working Papers and Audit Workflow 197 Key Words 228
Electronic Working Papers and Remote Audit
Answers to Progress Checks 228
Work 198
Multiple Choice Questions 229
Summary 199 Discussion Questions 230
Key Words 199 Problems 230
Answers to Progress Checks 199 Answers to Multiple Choice Questions 231
Multiple Choice Questions 200 Lab 6-1 Evaluate the Master Data for Interesting
Discussion Questions 201 Addresses 232
Problems 201 Lab 6-2 Perform Substantive Tests of Account
Answers to Multiple Choice Questions 202 Balances 234
Lab 5-1 Set Up a Cloud Folder 203 Lab 6-3 Finding Duplicate Payments 240
Lab 5-2 Review Changes to Working Papers Lab 6-4 Comprehensive Case: Dillard’s Store
(OneDrive) 204 Data: Hypothesis Testing (Part I) 241
Lab 5-3 Identify Audit Data Requirements 205 Lab 6-5 Comprehensive Case: Dillard’s Store
Lab 5-4 Prepare Audit Plan 206 Data: Hypothesis Testing (Part II—Data
Visualization) 247
Chapter 6
Audit Data Analytics 208 Chapter 7
Generating Key Performance Indicators 250
A Look Back 208 A Look at This Chapter 250
A Look Ahead 208 A Look Back 250
When to Use Audit Data Analytics 210 A Look Ahead 250
Identify the Problem 210 Identify the Questions 254
Master the Data 210 Master the Data and Perform the Test Plan 257
Perform the Test Plan 212 Address And Refine Results 258
Address and Refine Results 214 Communicate Insights and Track Outcomes 258
Communicate Insights 214 Summary 259
Track Outcomes 214 Key Words 259
Descriptive Analytics 214 Answers to Progress Checks 259
Age Analysis 215 Multiple Choice Questions 260
Sorting 216 Discussion Questions 261
Summary Statistics 217 Problems 262
Sampling 217 Answers to Multiple Choice Questions 263
Diagnostic Analytics and Benford’s Law 219 Lab 7-1 Evaluate Management Requirement
Z-Score 219 and Identify Useful KPIs from a
Benford’s Law 220 List 264
Drill-Down 223 Lab 7-2 Create a Balanced Scorecard Dashboard
Exact and Fuzzy Matching 223 in Tableau 266
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xx Detailed TOC
Lab 7-3 Comprehensive Case: Dillard’s Store The Use of Sparklines and Trendlines in
Data: Creating KPIs in Excel (Part I) 273 Ratio Analysis 306
Lab 7-4 Comprehensive Case: Dillard’s Store Text Mining and Sentiment Analysis 307
Data: Creating KPIs in Excel Summary 309
(Part II) 279 Key Words 309
Lab 7-5 Comprehensive Case: Dillard’s Store Answers to Progress Checks 310
Data: Creating KPIs in Excel Multiple Choice Questions 310
(Part III) 287 Discussion Questions 312
Lab 7-6 Comprehensive Case: Dillard’s Store Problems 312
Data: Creating KPIs in Excel Answers to Multiple Choice Questions 313
(Part IV—Putting It All Together) 295 Lab 8-1 Use XBRLAnalyst to Access XBRL
Data 314
Chapter 8 Lab 8-2 Use XBRLAnalyst to Create Dynamic
Financial Statement Analytics 300 Common-Size Financial Statements 317
Lab 8-3 Use XBRL to Access and Analyze
Financial Statement Ratios—The Use of
A Look Back 300
DuPont Ratios 320
XBRL 302
Lab 8-4 Use SQL to Query an XBRL
Extensible Reporting in XBRL and Standardized
Database 323
Metrics 303
XBRL, XBRL-GL, and Real-Time Financial
Reporting 303 GLOSSARY 326
Ratio Analysis 305
Classes of Ratios 305
INDEX 330
DuPont Ratio Analysis 306
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Data Analytics for

Accounting
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Chapter 5
The Modern Audit
and Continuous Auditing
A Look at This Chapter

Most of the focus of Data Analytics in accounting is focused on auditing. This is partly due to the demand for
high-quality data and the need for enhancing trust in the assurance process. In this chapter, we look at how both
internal and external auditors are using technology in general, and audit analytics specifically, to evaluate firm
data and generate support for management assertions. We also introduce how Data Analytics helps facilitate
continuous auditing.
A Look Back
Chapter 4 completed our discussion of the IMPACT model by explaining how to communicate your results through
data visualization and through written reports. We discussed how to choose the best chart for your dataset and your
purpose. We also helped you learn how to refine your chart so that it communicates as efficiently and effectively as
possible. The chapter wrapped up by describing how to provide a written report tailored to specific audiences who
will be interested in the results of your data analysis project.
A Look Ahead
In chapter 6, you will learn how to use audit software to perform substantive audit tests, including when and how to
select samples and how to confirm account balances. Specifically, we discuss the use of different types of descriptive,
diagnostic, predictive, and prescriptive analytics as they are used to generate computer-assisted auditing techniques.
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The large public accounting firms offer a variety of analytical tools to their customers. Take PwC’s Halo, for example.
This tool allows auditors to interrogate a client’s data and identify patterns and relationships within the data in a user-
friendly dashboard. By mapping the data, auditors and managers can identify inefficiencies in business processes,
discover areas of risk exposure, and correct data quality issues by drilling down into the individual users, dates and
times, and amounts of the entries. Tools like Halo allow auditors to develop their audit plan by narrowing their focus
and audit scope to unusual and infrequent issues that represent high audit risk.
©Shutterstock/Nonwarit
EXHIBIT 5-1
Source: http://halo.pwc.com
OBJECTIVES
After reading this chapter, you should be able to:
LO 5-1 Understand modern auditing techniques

LO 5-2 Evaluate an audit plan
LO 5-3 Understand the nature, extent, and timing of audit tests
LO 5-4 Select appropriate audit tasks and approaches
LO 5-5 Evaluate audit alarms as part of continuous auditing
LO 5-6 Understand working paper platforms
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192 Chapter 5 The Modern Audit and Continuous Auditing
LO 5-1 THE MODERN AUDIT

Understand You’ll recall from your auditing course that assurance services are crucial to building and
modern auditing maintaining trust within the capital markets. In response to increasing regulation in the United
techniques States, the European Union, and other jurisdictions, both internal and external auditors have
been tasked with providing enhanced assurance while also attempting to reduce (or at least
maintain) the audit fees. This has spurred demand for more audit automation along with an
increased reliance on auditors to use their judgment and decision-making skills to effectively
interpret and support their audit findings with managers, shareholders, and other stakeholders.
Auditors have been applying simple Data Analytics for decades in evaluating risk within
companies. Think about how an evaluation of inventory turnover can spur a discussion on
inventory obsolescence or how working capital ratios are used to identify significant issues
with a firm’s liquidity. From an internal audit perspective, evaluating cost variances can
help identify operational inefficiencies or unfavorable contracts with suppliers.
The audit concepts of professional skepticism and reasonable assurance are as much a
part of the modern audit as in the past. There has been a shift, however, of simply provid-
ing reasonable assurance on the processes to the additional assurance of the robots that are
performing a lot of the menial audit work. Where, before, an auditor may have looked at
samples and gathered evidence to make inferences to the population, now that same auditor
must understand the controls and parameters that have been programmed into the robot. In
other words, as these automated bots do more of the routine analytics, auditors will be free
to exercise more judgment to interpret the alarms and data while refocusing their effort on
testing the parameters used by the robots.
Auditors use Data Analytics to improve audit quality by more accurately assessing risk
and selecting better substantive procedures and tests of controls. While the exercises the
auditors conduct are fairly routine, the models can be complex and require auditor judg-
ment and interpretation. For example, if an auditor receives 1,000 notifications of a control
violation during the day, does that mean there is a control weakness or that the settings on
the automated control are too precise? Are all those notifications actual control violations
that require immediate attention, or are most of them false positives—transactions that are
flagged as exceptions but are normal and acceptable?
The auditors’ role is to make sure that the appropriate analytics are used and that the
output of those analytics—whether a dashboard, notifications of exceptions, or accuracy of
predictive models—correspond to management’s expectations and assertions.
The Increasing Importance of the Internal Audit

If you look at the assurance market, there are many trends that are affecting the profession.
First, the major applications of Data Analytics in auditing are not solely focused on the
financial statements as evaluated by public accounting firms. Rather, these tend to focus on
data quality, internal controls, and the complex information systems that support the busi-
ness process—areas typically reserved for the internal audit department at a firm. Second,
the risk and advisory practices of the public accounting firms are experiencing greater
growth, in large part due to firms’ outsourcing or co-sourcing of the internal audit function.
Third, external auditors are permitted to rely on the work of internal auditors to provide
support for their opinion of financial statements.
For these reasons, most of the innovations in Data Analytics have originated in internal
audit departments, where there is constant pressure to enhance business value while mini-
mizing costs. In the recent past, many companies’ experience with Data Analytics in the
internal audit department have come from internal auditors who have investigated Data
Analytics on their own. These individuals then find a champion with management and are
encouraged to continue their work. Under the guidance of the chief audit executive (CAE)
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or another manager, these individuals build teams to develop and implement analytical
techniques to aid the following audits:
1. Process efficiency and effectiveness.
2. Governance, risk, and compliance, including internal controls effectiveness.
3. Information technology and information systems audits.
4. Forensic audits in the case of fraud.
5. Support for the financial statement audit.
Internal auditors are also more likely to have working knowledge of the various enter-
prise resource planning systems that are in use at their companies. They are familiar with
how the general journals from a product like JD Edwards actually reconcile to the general
ledger in SAP. Because implementation of these systems varies across organizations (and
even within organizations), internal auditors can understand how analytics are not simply a
one-size-fits-all type of strategy.
PROGRESS CHECK
How do auditors use Data Analytics in their audit testing?
Make the case for why an internal audit is increasingly important in the modern
audit. Why is it also important for external auditors and the scope of their work?
Auditing Data LO 5-2

While organizations have become more data-centric as they have adopted ERP systems over
Evaluate an audit
the past few decades, these systems can vary greatly among organizations. Some companies
plan
will take a homogeneous systems approach by ensuring that all of its divisions and subsidiar-
ies use a uniform installation of SAP. This approach allows management to consolidate the
information from various locations and roll them up into the financial statements. Other
companies that grow through acquisition, take a heterogeneous systems approach, where
they attempt to integrate the existing systems of companies that they acquire and use a series
of translators to convert the output of those systems (such as PeopleSoft, JD Edwards, and
others) into usable financial information. Systems translator software attempts to map the
various tables and fields from these varied ERP systems and create a data warehouse, where
all of the data can be analyzed centrally, as shown in Exhibit 5-2.
One of the primary obstacles auditors face is access to appropriate data. As noted
in chapter 2, auditors typically request flat files or extracts from an IT manager. In some
cases, these files may be incomplete, unrelated, limited in scope, or delayed when they are
not considered a priority by IT managers. Ideally, auditors will have read-only access to
the data warehouse that pulls in not only transaction data, such as purchases and sales,
but also the related master data, such as employees and vendors. Thus, they can analyze
multiple relationships and explore other patterns in a more meaningful way. In either case,
the auditors will work with duplicated data, rather than querying the production or live
systems directly.
The AICPA’s audit data standards (ADSs) define common tables and fields that are
needed by auditors to perform common audit tasks. They make recommendations to ERP
vendors to standardize the output of common data that auditors are likely to use. The goal
of the standards is to reduce efforts of the auditors with loading and transforming the data
so they can work with the analytics more quickly and have support for more real-time or
continuous analytics through access to data warehouses. These standards are voluntary, and
actual implementation is currently limited, but they provide a good basis for data needed to
audit specific company functions.
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EXHIBIT 5-2 Homogeneous ERP System Heterogeneous ERP System

Homogeneous Systems,
Heterogeneous
Systems, and Software SAP SAP SAP SAP Oracle JDE
Translators
Translator
Data
Warehouse
Data
Audit
Warehouse
Program
Audit
Program
The current set of audit data standards defines the following standards:
• The Base Standard defines the format for files and fields as well as some master data for
users and business units.
• The General Ledger Standard adds the chart of accounts, source listings, trial balance,
and GL (journal entry) detail.
• The Order to Cash Subledger Standard focuses on sales orders, accounts receivable, ship-
ments, invoices, cash receipts and adjustments to accounts, shown in Exhibit 5-3.
EXHIBIT 5-3
Audit Data Standards
The audit data
standards define
common elements
needed to audit the
order-to-cash or sales
process.
Source: https://www.aicpa
.org/InterestAreas/FRC/
AssuranceAdvisoryServices/
DownloadableDocuments/
AuditDataStandards/
AuditDataStandards.O2C.
July2015.pdf
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PROGRESS CHECK

AUTOMATING THE AUDIT PLAN LO 5-3

So far, we’ve discussed many of the tools available to auditors as well as the changing audit Understand the
environment. The main impact of automation and Data Analytics on the audit profession nature, extent,
comes through optimization of the audit plan. When beginning an engagement—whether and timing of audit
to audit the financial statements, certify the enterprise resource planning system, or make tests
a recommendation to improve a business process—auditors generally follow a standardized
audit plan. The benefit of a standardized audit plan is that newer members of the audit team
can jump into an audit and contribute. They also identify the priorities of the audit. LO 5-4
An audit plan consists of the one or more of the following elements: Select appropriate
• A methodology that directs that audit work. audit tasks and
approaches
• The scope of the audit, defining the time period, level of materiality, and expected time
for the audit.
• Potential risk within the area being audited.
• Procedures and specific tasks that the audit team will execute to collect and analyze evi-
dence. These typically include tests of controls and substantive tests of transaction details.
• Formal evaluation by the auditor and supervisors.
Because audit plans are formalized and standardized, they lend themselves to the use of
Data Analytics and, consequently, automation. For example,
• The methodology may be framed by specific standards, such as the Public Company
Accounting Oversight Board’s (PCAOB) auditing standards, the Committee of Sponsoring
Organizations’s (COSO) Enterprise Risk Management framework, or the Information
Systems Audit and Control Association’s (ISACA) Control Objectives for Information
and Related Technologies (COBIT) framework. Data Analytics may be used to analyze the
standards and determine which requirements apply to the organization being audited.
• The scope of the audit defines parameters that will be used to filter the records or trans-
actions being evaluated.
• Simple to complex Data Analytics can be applied to a client’s data during the planning
stage of the audit to identify which areas the auditor should focus on. This may include
outlier detection or other substantive tests of suspicious or risky transactions.
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LO 5-5 CONTINOUS AUDITING TECHNIQUES

Evaluate audit Data Analytics and audit automation allow auditors to continuously monitor and
alarms as part audit the systems and processes within their companies. Whereas a traditional audit may
of continuous have the internal auditors perform a routine audit plan once every 12 to 36 months or
auditing so, the continuous audit evaluates data in a form that matches the pulse of the business.
For example, purchase orders can be monitored for unauthorized activity in real time,
while month-end adjusting entries would be evaluated once a month. When exceptions
occur—for example, a purchase order is created with a customer whose address matches
an employee’s—the auditors are alerted immediately and given the option to respond right
away to resolve the issue.
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Continuous auditing is a process that provides real-time assurance over business pro-
cesses and systems. It involves the application of rules or analytics that perform a continu-
ous monitoring function that constantly evaluates internal controls and transactions. It also
generates continuous reporting on the status of the system so that an auditor can know at
any given time whether the system is operating within the parameters set by management
or not.
Implementing continuous auditing procedures is similar to automating an audit plan with
the additional step of scheduling the automated procedures to match the timing and fre-
quency of the data being evaluated and notifying the auditor when exceptions occur.
Alarms and Exceptions

Whenever an automated or continuous auditing rule is violated, an exception occurs. The
record is flagged and systems generate an exception report that typically identifies the record
and the date of the exception.
Alarms are essentially a classification problem. A data value is sent through a simple
decision tree based on a series of rules and classified as a positive event (alarm) or a nega-
tive event (no alarm). Remember we talked about accuracy of models in chapter 3: These
alarms will not always be correct.
Once the notification of the alarm or exception arrives, auditors follow a set of proce-
dures to resolve the issue. First, they must determine whether the alarm represents a true
positive, a transaction that is problematic, such as an error or fraud, or a false positive, where
a normal transaction is classified as problematic. When too many alarms are false positive,
auditors face information overload, where there are too many incorrect alarms that distract
them from adequately evaluating the system. Because auditors are mostly concerned with
true positives, they should attempt to train or refine the models to minimize the potential
flood of alarms that occurs when too many alarms are false positives. This is summarized in
Table 5-1.
Normal Event Abnormal Event

TABLE 5.1
Four Types of Alarms
Alarm False positive True positive That an Auditor Must
No Alarm True negative False negative Evaluate
WORKING PAPERS AND AUDIT WORKFLOW LO 5-6

As audit procedures become increasingly technical, documentation continues to be essential Understand
as a way for auditors to increase their reliance on automated controls and procedures. The idea working paper
of a black-box audit is no longer sufficient; rather, auditors must have a better understanding of platforms
the tools they use and the output of those tools. This is where working papers come into play.
Working papers are essential to audit planning, performance, and evaluation. They
provide the documentation for the procedures the auditors follow, evidence they collect,
and communication with the audit client. As they relate to Data Analytics, working papers
should contain the following items:
• Work programs used to document the audit procedures to collect, manipulate, model,
and evaluate data.
• IT-related documentation, including flowchart and process maps that provide system
understanding.
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PROGRESS CHECK

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Summary
As auditing has evolved over the past few decades, Data Analytics has driven many of the
changes. The ability to increase coverage of the audit using data has made it less likely that
key elements are missed. Data Analytics has improved auditors’ ability to assess risk, inform
their opinions, and improve assurance over the processes and controls in their organizations.
Key Words
audit data standards (ADSs) (193) The audit data standards define common tables and fields that
are needed by auditors to perform common audit tasks. The AICPA developed these standards.
data warehouse (193) A data warehouse is a repository of data accumulated from internal and exter-
nal data sources, including financial data, to help management decision making.
flat file (193) A flat file is a single table of data with user-defined attributes that is stored separately
from any application.
homogeneous systems approach (193) Homogeneous systems represent one single installation or
instance of a system. It would be considered the opposite of a heterogeneous system.
heterogeneous systems approach (193) Heterogeneous systems represent multiple installations or
instances of a system. It would be considered the opposite of a homogeneous system.
production or live systems (193) Production (or live systems) are those active systems that collect
and report and are directly affected by current transactions.
systems translator software (193) Systems translator software maps the various tables and fields
from varied ERP systems into a consistent format.
ANSWERS TO PROGRESS CHECKS

1. Auditors use Data Analytics to improve audit quality by more accurately assessing risk
and selecting better substantive procedures and tests of controls.
2. There are many reasons for this trend, with perhaps the most important being that exter-
nal auditors are permitted to rely on the work of internal auditors to provide support for
their opinion of financial statements.
3. A homogeneous system allows effortless transmission of accounting and auditing data
across company units and international borders. It also allows company executives
(including the chief executive officer, chief financial officer, and chief information officer),
accounting staff, and the internal audit team to intimately know two systems.
4. The use of audit data standards allows an efficient data transfer of data in a format that
auditors can use in their audit testing programs. It can also save the company time and
effort in providing its transaction data in a usable fashion to auditors.
5. If there are too many alarms and exceptions, particularly with false negatives and false
positives, continuous auditing becomes more of a burden than a blessing. Work must be
done to ensure more true positives and negatives to be valuable to the auditor.
6. PwC’s Aura system would help identify the questions and master the data, the first two
steps of the IMPACT model. PwC’s Halo system would help perform the test plan and
address and refine results, the middle two steps of the IMPACT model. Finally, PwC’s
Connect system would help communicate insights and track outcomes, the final two
steps of the IMPACT model.
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Multiple Choice Questions

5. Which of the following defines the time period, the level of materiality, and the expected
time for an audit?
a. Audit scope
b. Potential risk
c. Methodology
d. Procedures and specific tasks
6. All of the following may serve as standards for the audit methodology except:
a. PCAOB’s auditing standards
b. COSO’s ERM framework
c. ISACA’s COBIT framework
d. FASB’s accounting standards
7. When there is an alarm in a continuous audit, but it is associated with a normal event,
we would call that a:
a. False negative.
b. True negative.
c. True positive.
d. False positive.
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Discussion Questions

Problems

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4. Simple to complex Data Analytics can be applied to a client’s data during the planning
stage of the audit to identify which areas the auditor should focus on. Which types of
techniques or tests might be used in this stage?
5. What approach should a company make if its continuous audit system has too many
alarms that are false positives? How would that approach change if there are too many
missed abnormal events (such as false negatives)?
6. Implementing continuous auditing procedures is similar to automating an audit plan
with the additional step of scheduling the automated procedures to match the timing
and frequency of the data being evaluated and the notification to the auditor when
exceptions occur. In your opinion, will the traditional audit be replaced by continuous
auditing?
Answers to Multiple Choice Questions

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Lab 5-1 Set Up a Cloud Folder

Auditors collect evidence in electronic workpapers that include a permanent file with infor-
mation about policies and procedures and a temporary file with evidence related to the cur-
rent audit. These files could be stored locally on a laptop, but the increased use of remote
communication makes collaboration through the cloud more necessary. There are a num-
ber of commercial workpaper applications, but we can simulate some of those features with
consumer cloud platforms, like Microsoft OneDrive.
Company summary
You have rotated into the internal audit department at a mid-sized manufacturing company.
Your team is still using company e-mail to send evidence back and forth, usually in the form of
documents and spreadsheets. There is a lot of duplication of these files, and no one is quite sure
which version is the latest. You see an opportunity to streamline this process using OneDrive.
Technique
• Gather documents, explore document history and revisions
Software needed
• A modern web browser
Part 1: Create a shared folder.
Part 2: Upload files.
Part 3: Review revisions.
Part 1: Create a Shared Folder

Note: These instructions are specific to the free consumer version of Microsoft OneDrive.
The approach is similar for competing products, such as Box, Dropbox, Google Drive, or
other commercial products.
1. Go to OneDrive.com.
2. Click Sign in in the top right corner.
3. Sign in with your Microsoft account. (If your organization subscribes to Office 365,
use your school or work account here.)
4. On the main OneDrive screen, click New > Folder.
5. Name your folder DA Audit Working Papers.
6. Open your new folder and click Share from the bar at the top of the screen.
7. Add the e-mail address of one of your classmates or your instructor, as directed.
Choose Allow editing from the drop-down box next to the addresses, then click Share.
8. Take a screenshot (label it 5-1A).
Q1. What advantage is there to sharing files in one location rather than e-mailing
copies back and forth?
Part 2: Upload Files

Now that you have folders, you can upload some documents that will be useful for labs in
this chapter and the next.
9. From Connect, download the Audit Analytics Lab Files 1, as directed by your instructor.
10. Unzip the file you downloaded to your computer. You should see two folders: Master
Audit File and Current Audit File.
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Lab 5-2 Review Changes to Working Papers (OneDrive)

See Lab 5-1 for background information on this lab. The goal of a shared folder is that
other members of the audit team can contribute and edit the documents. Commercial soft-
ware provides an approval workflow and additional internal controls over the documents
to reduce manipulation of audit evidence, for example. For consumer cloud platforms, one
control appears in the versioning of documents. As revisions are made, old copies of the
documents are kept so that they can be reverted to, if needed.
Part 1: Upload revised documents.
Part 2: Review document revision history.
Part 1: Upload Revised Documents

Let’s start by making changes to files in your DA Working Papers.
1. From Connect, download Audit Analytics Lab Files 2, as directed by your instructor.
2. Unzip the file you downloaded to your computer. You should see two files: Audit Plan
and Employee File.
3. Return to your OneDrive DA Audit Working Papers folder, and upload the Audit Plan
into your Master Audit File and the User_Listing into your Current Audit File. You will
be prompted to Replace or Keep Both files. Click Replace for each.
Part 2: Review Document Revision History

Now let’s look at the history of the document.
5. Right-click on one of the newly uploaded files, and choose Version history from the
menu that appears. The document will open with a version pane appearing on the left.
6. Click the older version of the file from the Older Versions list.
7. Take a screenshot (label it 5-2B).
8. Move between the old version of the file and the current version by clicking the time
stamp in the panel on the left.
Q1. What has changed between these two versions?
End of Lab
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Lab 5-3 Identify Audit Data Requirements

As the new member of the internal audit team, you have introduced your team to the shared
folder and are in the process of modernizing the internal audit at your firm. The chief audit exec-
utive is interested in using Data Analytics to make the audit more efficient. Your internal audit
manager agrees and has tasked you with reviewing the audit plan. She has provided three “audit
action sheets” with procedures that they have been using for the past three years to evaluate the
procure-to-pay (purchasing) process and is interested in your thoughts for modernizing them.
Technique
• Review the audit plan, look for procedures involving data, and identify the locations of
the data.
Software needed

Part 1: Look for audit procedures that evaluate data.
Part 2: Identify the location of the data.
Part 1: Look for Audit Procedures That Evaluate Data

1. Open your DA Audit Working Papers folder on OneDrive.
2. Look inside the Master Audit File for the document titled Audit Action Sheets and
open it to edit it.
3. Use the Yellow highlighter to identify any master or transaction tables, such as
“Vendors” or “Purchase Orders.”
4. Use the Green highlighter to identify any fields or attributes, such as “Name” or
“Date.”
5. Use the Blue highlighter to identify any specific values or rules, such as “TRUE,”
“January 1st,” “Greater than . . .”
6. Create a new spreadsheet called Audit Automation Summary in your Master Audit File
and summarize your highlighted data elements from the three audit action sheets. Use
the following headers:
AAS# Table Attributes Values/Rules Step(s) Notes
Q1. Read the first audit action sheet. What other data elements that are not listed in
the procedures do you think would be useful in analyzing this account?
Part 2: Identify the Location of the Data

Now that you have analyzed the action sheets, look through the systems documentation to
see where those elements exist.
8. In the Master Audit File, open the UML System Diagram and Data Dictionary files.
9. Using the data elements you identified in your Audit Automation Summary file, locate
the actual names of tables and attributes and acceptable data values. Add them in
three new columns in your summary:
Database Table Database Attribute Acceptable Values
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Lab 5-4 Prepare Audit Plan

With the data elements identified, you can formalize your internal audit plan. In the past,
your internal audit department performed each of the three action sheets once every
24 months. You have shared how increasing the frequency of some of the tests would pro-
vide a better control for the process and allow the auditor to respond quickly to the excep-
tions. Your internal audit manager has asked you to propose a new schedule for the three
audit action sheets.
Technique
• Review the audit plan, identify procedures that must be completed manually, and identify
those that can be automated and scheduled.
• Also determine when the procedures should occur.
Software needed

• Evaluate the timing and scheduling of audit procedures.
1. Open your Audit Automation Summary spreadsheet in OneDrive.
2. Add two new columns:
Auto/Manual Frequency
3. For each element and rule, determine whether it requires manual review or can be
performed automatically and alter auditors when exceptions occur. Add either “Auto”
or “Manual” to that column.
4. Finally, determine how frequently the data should be evaluated. Indicate “Daily,”
“Weekly,” “Monthly,” “Annually,” or “During Audit.” Think about when the data are
being generated. For example, transactions occur every day, but new employees are
added every few months.
6. Save and close your file.
End of Lab
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Data Analytics for

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DATA ANALYTICS FOR ACCOUNTING

Library of Congress Cataloging-in-Publication Data

Names: Richardson, Vernon J., author. | Teeter, Ryan, author. | Terrell,

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My wife, Erin, and children, Sylvia

My husband, Kevin. Thank you for your

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About the Authors

Ryan A. Teeter is a Clinical Assistant Professor of Accounting in the Katz Graduate

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Amelia Annette Baldwin Karen Schuele

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©Tableau Software, Inc. All rights reserved.

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Main Text Features Confirming Pages

We feature learning objectives at the beginning

Chapter 2 Data Preparation and Cleaning 43

Answers to Progress Confirming Pa

Multiple Choice Questions Multiple Choice

c. It can either be for a1.vendor

foreign keys? b. Enter, transform, and load data.

Discussion Questions Discussion Questions

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Comprehensive Cases Lab 2-8 Comprehensive Case: Dillard’s Store

Connect for Data Analytics

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Connect for Data Analytics for Accounting xiii

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McGraw-Hill Connect® is a highly reliable, easy-to-

Homework and Adaptive Learning

▪ Connect’s assignments help students

Over 7 billion questions have been

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Robust Analytics and Reporting

▪ Connect Insight® generates easy-to-read

struggle and focus on material that the class

More students earn

Trusted Service and Support

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Brief Table of Contents

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xviii Detailed TOC

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Chapter 5 Sequence Check 225

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Data Analytics for

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A Look at This Chapter

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LO 5-1 Understand modern auditing techniques

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