The audit process can benefit hugely from Open Banking: it creates significant improvements for auditors and clients and is considered a game changer by many. In the light of CDR month, we at Circit wanted to demonstrate how Open Banking fits alongside CDR, as well as some of the benefits of Open Banking to the audit industry specifically.

Circit is an audit evidence collection platform for firms to verify the world's assets at source. We help teams save time - on processes, tracking request statuses and collaboration with evidence providers. Firms using Circit deliver higher quality audits by elevating the client experience and streamlining direct from source collection.

Open Banking for audit: the basics

Following the roll-out of Open Banking in the UK and Europe, Australia followed with its own version known as The Consumer Data Right (CDR), an economy-wide, government regulated regime providing consumers and businesses the ability to share their data with service providers. Open Banking has already been rolled out to the banking and energy industry, with other industries planned in the near future.

But how does this apply to audit? Bank statements are a key piece of any audit, and Wirecard filing for insolvency after revelations that €1.9 billion was missing, is a prominent example of what happens when testing in this area is weak.

Open Banking allows auditors to obtain their clients’ bank statements directly from the bank, digitally. This provides auditors with third party evidence in a format that can be analysed instantly by algorithms, while being confident the data is from the true source of data.

How does Open Banking improve efficiency and audit quality?

To help answer this, let’s analyse three common audit tests. Testing for management override, creditors and revenue completeness.

“The fraud test” – management override

To mitigate the risk of management manipulating accounting records or committing fraud, auditors review clients’ bank statements. The aim is to identify any odd or large transactions and to validate these are genuine business transactions.

Today, auditors manually review bank statements, transaction by transaction, trying to identify any unusual transactions. Auditors often use paper bank statements, making the process even more time-consuming. On the average mid-tier audit, this takes four to seven hours.

Using Open Banking and data analytics, this entire process can be automated and 100% of transactions can be analysed. High-risk transactions are flagged to the auditor, including one-off transactions, transactions that contain certain keywords, large amounts and irregularities such as eleven monthly payments in a year, when we would expect twelve.

Creditors completeness testing

Auditors review post-year-end bank statements, going through transactions by transaction, trying to identify payments made after the client’s year-end, but where the expense relates to something before the year-end. These transactions must be treated as creditors in the accounts.

Again, today this is a very manual and time-consuming test which can be fully automated. Leveraging Open Banking and data analytics, all post-year-end payments can be analysed, and any potential creditors flagged to the auditor.

For example, if the client’s year-end is December, and there is a payment made in January where the description on the bank statement refers to ‘Dec’, ‘Christmas’, ‘Party’, ‘Gift’ or similar, this transaction should likely be treated as a creditor.

Revenue completeness testing

Usually, the revenue completeness test design is flawed, for example because it is tested back from the accounting records rather than forwards from outside the accounting system.

As Open Banking data is obtained directly from the bank, it is third party evidence gathered from outside of the accounting system. Therefore, it is a great starting point for any revenue completeness testing.

Data analytics allows the move from sampling to testing 100% of transactions as all receipts in the bank statements are matched to the revenue transactions in the accounting system.


So does Open Banking and the analytics it unlocks allow auditors to make better use of their clients’ data and hugely improve audit quality?

Yes. Open Banking is a huge opportunity for auditors. What’s great about Open Banking and the three example audit tests above, is that these tests are applicable to almost all audits. This allows all audit firms to adopt data analytics in a standardised way across their entire portfolio, ensuring cost-effective efficiency and quality improvements on every audit.

The audit tests discussed above are just the start of what Open Banking enables. In Australia, where CDR is just taking off and currently focused on other industries and use cases, it’s particularly interesting to see where these new opportunities could lead for the profession and the finance industry.

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