University of Connecticut April 17, 2008

2 Copyright © 2006 Deloitte Development LLC. All rights reserved. Items to discuss… Introduction Deloitte Overview Data Mining and Accounting

3 Copyright © 2006 Deloitte Development LLC. All rights reserved. Introduction & Objective

4 Copyright © 2006 Deloitte Development LLC. All rights reserved. Introduction Mark Malcolm Manager of the Deloitte Data Quality and Integrity Practice 1998 UCONN MIS Grad Previous Work Experience Arthur Andersen Accenture

5 Copyright © 2006 Deloitte Development LLC. All rights reserved. Objective of Today To demonstrate the key role that is played by Data Interrogation Specialists in an ever changing Accounting & Regulatory environment Further demonstrate how the skills (SAS) being taught in this Data Mining course are used every day within that environment

6 Copyright © 2006 Deloitte Development LLC. All rights reserved. Accounting and Regulatory Context Sarbanes Oxley World Comm Financial Statement Fraud Arthur Andersen Audit Enron Controls SAS99 Materiality Selections

7 Copyright © 2006 Deloitte Development LLC. All rights reserved. Data Quality & Integrity (DQI) A team of technical specialists which provides audit support with the use of programming, data analysis & retrieval and skeptical review – Statistical and data analysis skills, including the use of specialized software packages such as SAS, ACL and Monarch – The application of statistical and data analysis methodologies to support the execution of audit activities using standardized tools. – Design and application of mathematical rules and models, and other quantitative methods to complex data sets in order to compute or identify trends and patterns

8 Copyright © 2006 Deloitte Development LLC. All rights reserved.  Journal Entry Testing at a Candle Company  The Profiling Approach at a regional bank  Mining Data from a Report Format using Monarch Recently Executed Examples

9 Copyright © 2006 Deloitte Development LLC. All rights reserved. Statement of Auditing Standard (SAS) no. 99, Consideration of Fraud in a Financial Statement Audit, states “the auditor should design procedures to test the appropriateness of journal entries recorded in the general ledger and other adjustments.” What Is Journal Entry Testing

10 Copyright © 2006 Deloitte Development LLC. All rights reserved. The process: –Obtain the JE Detail population –Using SAS examine the data for data quality: Reconciliation (Test of Completeness) Balanced Journal Entries Existence of key data elements –Run the data through JEDAR (Journal Entry Data Analysis Routines) –SEE READ AND PREP AND JEDAR DELIVERABLE What Is Journal Entry Testing

11 Copyright © 2006 Deloitte Development LLC. All rights reserved. Overview of population statistics Summary of dollar stratification against MP Summary of top line amounts Trending User Authorizations Data Quality Indicators Chart of Accounts maintenance Duplicate line amount to the same account Regular clearing of suspense accounts (optional) Search for related-party transactions (optional) What Is Journal Entry Testing

12 Copyright © 2006 Deloitte Development LLC. All rights reserved. Journal entry approval (optional) Entries to unrelated accounts Entries with blank or little description Entries with key words of audit interest in descriptions Entries with round dollar amount Entries with recurring ending digits Entries posted to seldom used accounts Entries posted to potentially unusual accounts What Is Journal Entry Testing

13 Copyright © 2006 Deloitte Development LLC. All rights reserved. Accounts with significant differences from average posting activity (optional) Unusual postings in the income statement Trends in account balances involving management estimates Entries with long lapse of days between effective date and posted date Entries with line amount significantly different from the average at the account level (optional) Benford Analysis (optional). What Is Journal Entry Testing

14 Copyright © 2006 Deloitte Development LLC. All rights reserved. This AAPMS audit approach is highly effective at providing a focused selection of loans (AAPMS 15.55) The number of loans selected for review is reduced, saving audit time An enhanced understanding of the balance is obtained and the entire loan balance is covered Loans exhibiting items of audit interest are more likely to be selected (i.e. those most likely to be incorrect) Audit teams can rely on Computer Assisted Auditing Techniques and file interrogation procedures to identify transactions of audit interest The Profiling Approach

15 Copyright © 2006 Deloitte Development LLC. All rights reserved. Negative Current Balances Loans with related parties Loans on the watch list Loans over the bank’s loan policy lending limit - $2,500,000 Stratification of Interest Rates- Interest stratification of the items in the population of items as meaningful intervals. Loans with addresses the same as a bank branch address (list of all bank branch addresses provided with de-coding) Accounts with addresses outside of CT/MA Loans on non-accrual status as well amount by status code All remaining accounts Calculation of Weighted Average Interest Rate Calculation of Accrued Interest The Profiling Approach (Scope)

16 Copyright © 2006 Deloitte Development LLC. All rights reserved. The process: –Obtain the Loan and Deposit populations –Using SAS parse data by the Areas of Audit interest Reconciliation (Test of Completeness) Existence of key data elements –SEE PROGRAMS AND RESULTS The Profiling Approach

17 Copyright © 2006 Deloitte Development LLC. All rights reserved. Mining Data with Monarch

18 Copyright © 2006 Deloitte Development LLC. All rights reserved. Mining Data with Monarch cont.

19 Copyright © 2006 Deloitte Development LLC. All rights reserved. Mining Data with Monarch cont.

20 Copyright © 2006 Deloitte Development LLC. All rights reserved. Data Unearned Premium Testing Fraud Detection Conversion Validation Testing OTHER RECENT DELIVERABLS

21 Copyright © 2006 Deloitte Development LLC. All rights reserved. Data Mining is a critical component to the success of Financial Statement Audits Developing Skills in tools such as SAS, ACL, Monarch and MS Access will position you well for opportunities in this field What to Take Away Today

Q uestions

23 Copyright © 2006 Deloitte Development LLC. All rights reserved. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 140 countries. With access to the deep intellectual capital of approximately 150,000 people worldwide, Deloitte delivers services in four professional areas — audit, tax, consulting, and financial advisory services — and serves more than 80 percent of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global companies. Services are not provided by the Deloitte Touche Tohmatsu Verein, and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other related names. In the United States, Deloitte & Touche USA LLP is the U.S. member firm of Deloitte Touche Tohmatsu and services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP, and their subsidiaries), and not by Deloitte & Touche USA LLP. The subsidiaries of the U.S. member firm are among the nation’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through nearly 40,000 people in more than 90 cities. Known as employers of choice for innovative human resources programs, they are dedicated to helping their clients and their people excel. For more information, please visit the U.S. member firm’s Web site at Copyright © 2007 Deloitte Development LLC. All rights reserved.