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

1. 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

2. Data Mining As a Continuous Auditing Tool for “Soft Information”: A Research Question What thisproposalis 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

3. 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

4. Data Mining As a Continuous Auditing Tool for “Soft Information”: A Research Question Development ofResearch 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

5. Data Mining As a Continuous Auditing Tool for “Soft Information”: A Research Question Development ofResearch 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

6. Data Mining As a Continuous Auditing Tool for “Soft Information”: A Research Question Development ofResearch 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?

7. 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

8. 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