Tag: GAAS Audit Standards

Short Answer: Yes. But Be Very, Very, Carefully

Can AI be a helpful resource tool for audit and accounting research? Of course, it can. But the real question is this: can you rely on the response — can it be trusted to give you a correct, non-misleading answer? Will it be complete? Will it pick up on the nuances that often cling to such research? Would you take it to your supervisor or your client or to court?

This article will generally focus on generative AI tools that leverage large-language models, such as ChatGPT and Perplexity. This article is not intended to be a commentary on enterprise tools like Deloitte DARTbot and PwC ChatPwC.

The use of AI is changing how CPA firms conduct accounting and auditing. It should not be considered a complete overhaul, though. It’s another tool to be added to the research toolbox. AI tools like Perplexity can enhance the efficiency and accuracy of research tasks, but they also present challenges, particularly regarding data security and client confidentiality.

Benefits of AI in Audit and Accounting Research

1. Efficiency: AI can analyze massive amounts of information, identify relevant information, and summarize complex accounting standards. This may reduce the time spent on research and minimize the risk of human error.
2. Access to Comprehensive Resources: AI tools can access various financial databases and regulatory sources, ensuring researchers have the most current and comprehensive information.
3. Personalized Insights: AI can provide tailored insights based on specific client needs, helping accountants offer more relevant advice and solutions. It’s an idea generator. Go with the good ones, and chuck the ideas your experience tells you are not so good.
4. Accuracy: I use this word with a lot of caution. You never take the AI response at its word. In limited cases, it may confirm your understanding of the issue. But depending on the importance of the question at hand, you often need to dig even deeper using more conventional sources. AI can help put you on the right path, which you can confirm with traditional resources and by relying on your professional experience and judgment.

Using Perplexity As An Assist for Audit and Accounting Research

Perplexity is a powerful AI tool that can assist financial research by scouring the web and integrating with third-party data sources. Here’s how it can be used for GAAP, GAAS, and SSARS research:

1. Searching Accounting Standards: Perplexity can quickly locate and summarize relevant GAAP standards related to specific accounting issues. For example, suppose you need to research the latest guidance on accounting for leases under ASC 842. In that case, Perplexity can find and summarize the most relevant information from the Financial Accounting Standards Board (FASB) website and other authoritative sources.

   Or, perhaps, you wish to get more specific. You can frame a lease question like “If both the lessor and lessee can cancel the lease at any time without substantial penalty, do you have a lease required to be accounted for under ASC 842?” You can ask a follow-up question, such as, “What if the lessee incurs prohibitive relocation costs if the lessee cancels the lease? Does that change the response?”

   And again, you do not accept the AI response as gold. However, it quickly gives you an excellent avenue for further research using more traditional sources.

2. Analyzing Audit Standards: For GAAS research, Perplexity can help analyze auditing standards such as those related to risk assessment (AU-C 315) or audit evidence (AU-C 500). It can summarize recent updates and interpretations from the AICPA.

   You can ask questions like: “In IT general controls, are there new requirements under AU-C 315?” Or, “What other risk assessment requirements have recently changed or are new compared to the previous requirements?”

3. Reviewing SSARS Updates: Perplexity can assist in reviewing updates to SSARS, such as SSARS No. 26, which enhances quality management objectives for accounting and review services. It can provide insights into how these updates impact accounting and review services for nonpublic entities.

   For example, you can frame the following question and get a quick response: “Summarize the new requirements under SSARS No. 26. Discuss the implications for a small CPA firm. Also, when is the effective date?”

It is also helpful to check the response with a follow-up inquiry where you ask the question again to see if you get a similar response. I often ask, “Are you sure?” or “Double-check yourself” in a follow-up question.

Viewing and Managing Sources with Perplexity

One of the key features of Perplexity is its ability to provide transparent sourcing for its answers. Here’s how you can view and manage sources:

1. Viewing Sources: Perplexity provides a list of sources used to generate answers. You can view these sources by clicking on the citations within the answer or accessing the source list directly. This allows you to verify the accuracy of the information and explore topics further.
2. Removing Sources: If you are uncomfortable with specific sources used in your research, you can remove them from the list. This is done by selecting the source and clicking the remove button. This feature helps ensure your research is based on credible and preferred sources.

AI Assist with Financial Statement Disclosure

AI can provide time-saving assistance by providing the first draft of financial statement disclosures, especially those that are not common in many financial statements. Here is an AI-generated example of disclosure for payments under a lease agreement that does not qualify as a lease under ASC 842:

Note X: Usage-Based Expenses

The Company has entered into specific arrangements for the use of construction equipment and vehicles that do not qualify as leases under Accounting Standards Codification ASC 842, Leases. These arrangements lack enforceable rights and obligations as required by the standard, as both the Company and the counterparty have the unilateral right to terminate the arrangement without permission from the other party and with no more than an insignificant penalty.

Although structured similarly to lease agreements, these arrangements are not recognized on the balance sheet and are not subject to the lease accounting and disclosure requirements of ASC 842. Instead, the Company accounts for the payments made under these arrangements as usage-based expenses.

For the year ended December 31, 202x, the Company incurred $xxx,xxx in usage-based expenses related to these arrangements for construction equipment and vehicles. These expenses are recognized in the period incurred based on the Company’s use of the underlying assets and are included as operating expenses in the income statement.

The Company continuously evaluates these arrangements for any changes in terms or circumstances that could alter their accounting treatment. If the arrangements become enforceable or meet the criteria for lease classification in the future, the Company will reassess its treatment under ASC 842.

AI Assistance with Excel

AI can significantly enhance the use of Excel by improving formula management and resolving issues. By “significantly enhance,” I mean it can save much research time when you face a complicated formula you have not used for several years. Just provide the AI tool a query explaining what you wish to do, and it will do its best to give you the formula. The more details you give in your inquiry, the more refined the response will be. I suggest that you give this a try.

Analyzing Complex Documents with AI

AI can be particularly useful in analyzing complex documents such as construction contracts and loan agreements. Here’s how:

1. Construction Contract Analysis: AI tools can quickly review contracts to identify key terms, such as payment schedules, termination clauses, liquidated damages, and other liability provisions. Identification and understanding of these terms help accountants understand these agreements’ financial and risk implications for accounting and disclosure requirements.
2. Loan Agreements: AI can assist in identifying essential dates, data points, and potential risks within loan documents, such as interest rates, maturity dates, financial loan covenants, security provisions, and due on-demand clauses that may impact financial reporting or compliance with accounting standards.

Security of Confidential Information

Of paramount concern when using AI to analyze a client’s complex documents is that of security and client information confidentiality. Accordingly, we are uncomfortable with assurances provided that data security will not be breached. Therefore, the use of AI to analyze client-sensitive documents is limited only to those that have been appropriately redacted.

Mitigating Risks

In regards to AI, there must be a balanced approach. Maintain a balance between AI-driven research and human expertise. AI should augment, not replace, human judgment in complex accounting and auditing decisions.

Conclusion

AI tools like Perplexity offer significant benefits for GAAP, GAAS, and SSARS research, enhancing efficiency, accuracy, and access to comprehensive resources. Additionally, AI can improve the use of standard office tools like Excel by automating tasks and resolving issues. By leveraging AI responsibly and maintaining a balanced approach between technology and human expertise, CPA firms can maximize the advantages of AI while ensuring compliance with professional standards and protecting client interests. As AI develops, its role in accounting research will only grow, making it crucial that CPAs remain informed about its applications and limitations.