Sequential Series Regression Techniques In Continuous Auditing

1. Sequential Series Regression Techniques In Continuous Auditing Benedetto Bongiorno CPA, CRE Lynford Graham CPA, PhD, CFE

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

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

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

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

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

7. Comparison of Actual To Expectations • Sequential Automated General & Administrative Expenses - Historical Debits • {Period, Source, Monthly Total}, • {{200601}, AP, 392,907.11}, • {{200602}, AP, 416,209.05}, • {{200603}, AP, 681,756.33}, • {{200604}, AP, 541,760.38}, • {{200605}, AP, 863,814.03}, • {{200606}, AP, 518,772.63}, • {{200607}, AP, 405,766.90}, • {{200608}, AP, 483,285.86}, • {{200609}, AP, 450,928.49}, • {{200610}, AP, 437,524.51}, • {{200611}, AP, 506,150.81}, • {{200612}, AP, 792,556.24} • Sequential Automated General & Administrative Expenses - Audit Expectation Debits • {Period, Source, Monthly Total Expectation}, • {{200701}, AP, 557,926.36}, • {{200702}, AP, 546,124.97}, • {{200703}, AP, 534,323.58}, • {{200704}, AP, 522,522.20}, • {{200705}, AP, 510,720.81}, • {{200706}, AP, 498,919.42}, • {{200707}, AP, 487,118.03}, • {{200708}, AP, 475,316.65}, • {{200709}, AP, 463,515.26}, • {{200710}, AP, 451,713.87}, • {{200711}, AP, 439,912.48}, • {{200712}, AP, 428,111.09}

8. Comparison of Actual To Expectations • Non Sequential Manual General & Administrative Expenses - Historical Debits • {Period, Source, Monthly Total}, • {{200609}, AD, 509,152.15}, • {{200612}, AD, 20,944.81} • {Period, Source, Monthly Total}, • {{200604}, AL, 953.58}, • {{00605}, AL, 14,970.82}, • {{200609}, AL, 323.24} • Non Sequential Manual General & Administrative Expenses - Audit Expectations Debits • {Period, Source, Monthly Total Expectation}, • {{200709}, AD, 265,048.48}, • {{200712}, AD, 265,048.48} • {Period, Source, Monthly Total Expectation}, • {{200704}, AL, 5,415.88}, • {{200705}, AL, 5,415.88}, • {{200709}, AL, 5,415.88}

9. Graphic Examples of Results

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