Is remote auditing the future of financial oversight?

The new normal prompts a shift to virtual working arrangements and a new study finds that remote auditing may become a lasting trend

By Aaron Woolner

The pandemic has changed the world for the better or worse. While the borders have been opened and lockdowns have lifted, the new normal dictates that attitudes to remote work may stay. However, many businesses remain undecided on this issue.

Corporates that embraced remote working during the pandemic have now shifted the practice, with more than 80 per cent of senior executives surveyed by KPMG for its 2024 CEO Outlook expected to see a full office within the next three years. On the other hand, employees are less keen to return, and debate over this issue has been hampered by a lack of clear data showing whether working from home or in the office is more productive.

The unprecedented scale and speed of the pandemic does, however, also offer the opportunity for researchers to test out the impact of the efficacy of remote work in specific industries and locations. According to Xin Xiangang, Associate Professor at the School of Accountancy at the Chinese University of Hong Kong (CUHK) Business School, China’s auditing industry is one such example.

The timing of the outbreak of COVID-19 in January 2020 coincided with the busiest part of the 2019 audit season, and combined with the swift imposition of lockdowns by Chinese authorities, Professor Xin says this provided the opportune background to test the quality of remote auditing. “As a result of the imposition of lockdown and travel restrictions by the local governments, a significant portion of firms were audited remotely in China,” he adds.

“In addition, the audit profession in China is the first to respond to the pandemic by remote auditing. Without precedents to follow, auditors in China undertook different audit practices to improve remote auditing. We can thus observe these practices and evaluate their effectiveness and efficiency in remote auditing,” Professor Xin explains.

Before the pandemic ended, the Chinese Institute of Certified Public Accountants set out a four-year development plan in 2021 for the sector that called for firms to apply “frontier information technology” — big data, artificial intelligence, cloud computing and blockchain — to the audit process.

Some audit firms had been using remote-auditing procedures before the pandemic, but social restrictions brought by it have jump-started the digital transformation process, enabling the switch away from the office during the pandemic, which shows no sign of slowing down.

“The views of the auditors in the field suggest remote auditing, triggered by the pandemic, becomes an irreversible trend in the auditing industry.”

Professor Xin Xiangang

Weighing between challenges and benefits

In a recent paper titled, Remote auditing and audit quality: Evidence from the field, Professor Xin and his colleague from the same department, Professor Wu Donghui, who is also the Director of the CUHK’s Centre for Institutions and Governance, along with Tian Gaoliang and Jin Yige of Xi’an Jiaotong University, evaluated the quality of audits conducted remotely in China during the pandemic.

The researchers first interviewed four partners of international Big Four audit firms in China, two partners from local top-10 audit firms, and two chief financial officers of Chinese listed firms about the challenges that auditors face in remote auditing, the advantages and disadvantages of remote auditing, adjustments made in remote auditing, measures taken to improve quality in remote auditing, and the possible ways to improve remote auditing in the future.

“Several senior auditors shared the view that auditors face great challenges in remote auditing, such as heavier workloads, higher audit risk, and lower communication efficiency,” says Professor Xin. “However, they also believed remote auditing may not necessarily lead to lower audit quality.”

One of the auditors suggests that remote auditing is as efficient as onsite auditing as all the necessary audit procedures have been completed. Another auditor discloses that remote auditing saves 70 million Chinese yuan (US$9.7 million) in one year of travelling expenses, accounting for 15.7 per cent of revenue in their audit firm.

Based on the interviewees’ responses, the researchers then developed 36 questions for a survey of 3,508 auditors of 3,639 listed firms in China. The survey received 2,275 usable responses and found that, similar to the interview with senior auditors, the respondents admitted the benefits of remote working, such as saving time and reducing costs through lower travel expenses.

The transition to remote auditing indeed posed challenges that affected audit quality, mostly due to communication issues with clients and team members, as well as evidence collection issues. However, the survey found solutions to address them. Almost all respondents in the survey answered that exploiting information and communication technologies could tackle the common issues raised in remote auditing.

The survey also found that remote auditing will account for approximately 86 per cent of auditing practices in the future, suggesting a strong expectation that remote auditing will become the dominant method of conducting audits. “The views of the auditors in the field suggest remote auditing, triggered by the pandemic, becomes an irreversible trend in the auditing industry,” says Professor Xin. “Given the increasingly important role of remote auditing during the digital transformation age, our study is timely.”

Remote auditing is here to stay

The researchers then further corroborated their results by running an out-of-sample test based on data from Shanghai’s February 2022 lockdown following an outbreak of the omicron variant. The out-of-sample test result also found that the adverse effect of remote auditing can be mitigated by adjusting audit procedures timely, adopting risk-based approaches, emphasising the sufficiency and reliability of digital evidence, and greater use of information technology.

This provides useful information to the audit sector on adopting digital technologies in practice. “Our paper findings on good practices in remote auditing included things such as relying more on audit risk evaluation and data analysis, emphasising the sufficiency and reliability of digital evidence, and exploiting information and communication technology,” says Professor Xin.

“The advantages of remote auditing can be reflected in these good practices. Securities regulators, accounting or auditing standard setters, and financial-statement users should be aware of how remote auditing may influence audit quality when making their decisions.”