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IT in management forecasting – a deep dive for auditors

Author: Andrew Paul

Published: 12 May 2023

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Software plays an important part in management forecasting. Andrew Paul considers some of the software tools that management use to generate forecasts, the timing of their production and implications for auditors.

Forecasts are key in managing a business and its finances: from cash flow and sales to income and profit forecasts. Some would argue that forecasts are even more important than the historical financial statements, as forecasts drive real time decision-making rather than reporting historical performance, so it is important that management have a robust process for developing and updating their forecasts.

Management’s production of a forecast is not a one-off event. It will be revisited and revised on a regular basis as new information becomes available and the results of previous decisions feed into actual performance. The auditor’s work on forecasts should also be ongoing – and look at them throughout the audit process, right up until the accounts are signed – not simply be an isolated exercise that happens at a single point during the audit assignment.

An understanding of information systems for forecasting is important if the ISA 570 risk assessment and evaluation are to to be carried out effectively

There’s a lot for auditors to think about when considering management forecasts, not least the reliability of underlying assumptions. This article follows on from my earlier article on assessing the reliability of management forecasts, and focuses on aspects of information systems for auditors to consider when assessing management forecasts.

How do management generate their forecasts?

Auditors will rightly have a focus on the information systems that support the production of the financial statements. It is important, however, to be aware that there may well be different systems in place that feed into and produce forecasts. An understanding of these information systems for forecasting is important if the risk assessment and evaluation requirements of the going concern standard, ISA 570, are to be carried out effectively.

The extent to which an auditor considers software-related matters will depend on various factors, such as whether the auditor is taking a controls reliance approach, the type of software being used by management – and how. 

Software

There are various types of software on the market with the potential to help businesses with their forecasting. Functionality can, for example, be found in accounting packages and enterprise resource planning (ERP) systems, and in more specialist applications that focus specifically on aspects of forecasting. 

If management are using any of these, key questions to consider are:

  • Is the software fit for purpose? The size and scale of forecasting tools and their capabilities vary enormously and so it is important to understand if the tool does what is needed for management. If the software is too complex this could lead to misunderstandings over use and functionality. If it is too simple, key forecast considerations could be overlooked.
  • Does the software integrate with the financial statements production system? Some of the forecasting packages on the market can be connected to and share data with the financial reporting system; others are completely stand alone. It is important to understand how real historic data moves between the financial statements and forecasting systems and any controls in place.
  • How are assumptions about the future added and updated? As mentioned in my previous article on Assessing the reliability of a forecast, there are a number of factors to consider when building a forecast, including future interest rates, inflation, exchange rates, etc. How are these dealt with in the forecasting software and how are future variations factored in?
  • As with any information technology (IT) system which touches the financial data of the entity being audited, auditors must consider (what ISA 315 refers to as) general IT controls. Matters to consider will range across the quality of the software application, ability to access underlying code, how access is managed and more.

In the revised ISA (UK) 315 Appendix 6 ‘Considerations for Understanding General IT Controls’ and Appendix 5 ‘Considerations for Understanding IT’ valuable information is offered to help auditors understand what’s required.

Where an entity is using an IT application, auditors need to ensure that their knowledge and understanding of it is sufficient

An Audit & Beyond article ISA 315, the entity’s IT systems and related risks will also be helpful, as will a recorded webinar ISA 315 – Intelligent auditing: robust assurance.

Where an entity is using an IT application, auditors need to ensure that their knowledge and understanding of it is sufficient. The application is generating information that will support key audit conclusions, so confidence in the output is important. 

Spreadsheets

Forecasting is one area where management often still rely on spreadsheet software. Matters to be aware of here include:

  • Error checking and design. While everyone thinks they are Excel experts, how reliable is the spreadsheet? Has the designer built in suitable checks and balances to ensure that formulae errors are picked up? Is the design appropriate with variables suitably highlighted rather than buried in formulae?
  • Data ingestion. How is up-to-date data brought into the forecast? Are there controls to reconcile the data in the forecast back to the data source? Is data ingestion manual or automated, and again what are the procedures around this?
  • How up to date is the forecast? Spreadsheets relying on manual updating of data can soon become out of date so care needs to be taken on their usefulness and reliability.
  • Version control. Unlike ERP applications and dedicated forecasting applications, it is likely that individual versions of (spreadsheet-generated) forecasts will be saved as individual documents. This needs to be well controlled to ensure that there is a clear line of sight through their development.

Some see spreadsheets as the comfortable and easy to audit solution, but invariably there are issues with them. Auditors need to be aware of the above matters and ensure they are addressed as part of the overall audit plan.

Timing of audit work on forecasts

The timing of audit work on forecasts traditionally sits later in the audit process when picked up as part of the going concern sign off. However, ISA 570 specifically requires auditors to remain alert throughout the audit for evidence of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. 

Therefore, it is important that forecasts are looked at throughout the audit. Understanding the forecasting system when developing the understanding of the entity and its environment, using forecasts at the planning stage to help focus work in particular audit areas, then reviewing them again at the end of the assignment when drawing final conclusions.

In addition, where audit issues are identified in the risk response phase, seeing how these might impact a forecast is also important. So a good ongoing dialogue with management and those charged with governance is essential.

Andrew Paul, Audit Software and Technical Manager, Baker Tilly International

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