With this backdrop, you may be interested in a recent survey by The Institute of Internal Auditors (IIA). Hundreds of auditors throughout the Untied States and Canada were surveyed on technology. A key question:

"What software is most likely to increase in importance in the next three years?

There was one clear victor - no other technology came close. The winner? Data Extraction Software.

Are you intrigued? You should be. Both internal auditors and CPA firms can benefit immensely from this powerful software. But here is the problem: It is difficult to learn about this software unless you are a "techie." Most data extraction articles and speeches are geared to those who already speak "the language." In this article we will attempt to explain this technology with practical and easy-to-understand examples.

What is Data Extraction Software?
Let us begin with the ABC's. Data extraction software enables an auditor to take data out of the client's computer system and then analyze it in new and exciting ways. Put another way, your auditor can tap into a client's mainframe (or accounting package) and extract (i.e., suck out) raw data. Once this data is loaded into your auditor's personal computer, it can be analyzed and manipulated in an endless number of ways. The purpose? To improve efficiency, quality, client service, and even generate new revenues.

The two most popular data extraction packages are ACL and IDEA. Other software such as Monarch and Excel perform some of the same functions, but are far less powerful. So in this article, we focus on the two "heavyweights."

Why CPA Firms Are So Excited
We already noted that internal auditors think data extraction software will increase dramatically in importance. In the past year, however, smart CPA firms have already jumped on the bandwagon. These firms are extremely enthusiastic about how ACL or IDEA can help them:

#1 Perform better quality audits.
Auditors currently rely heavily on client-supplied reports to conduct test work. Data extraction software, however, allows auditors to create their own reports from raw data, rather than blindly accepting what the client hands over.

For example, rather than asking the client for a schedule of obsolete inventory, the auditor can create this report in any manner that he prefers (e.g., items that have not turned in 60, 135, or 365 days). By doing this, "data integrity" is improved and audit quality is increased.

As time marches on, tools like ACL and IDEA will be necessary to perform GAAS audits. Statement on Auditing Standards No. 80 states, "it may be difficult or impossible for the auditor to access certain information for inspection, inquiry, or confirmation without using information technology."

Finally, a host of tests can be performed that were previously impractical, like:

• recomputing depreciation expense, inventory extensions, commissions, royalties, or accrued interest for every single item in a population
• comparing subsequent sales prices to inventory values at year-end (for every item in the population)
• computing daily sales and margins during an interim period (and comparing to the prior year)
• testing the effectiveness of certain computer controls
• performing better cut-off test work (e.g., ensuring payables are recorded for inventory purchases
• identifying unusual fluctuations in the unit cost of all inventory items (current year versus prior year)

#2 Perform more efficient audits.
Not only are CPA firms improving quality by leaps and bounds, they are reducing hours and improving profitability, too. Both ACL and IDEA allow auditors to use statistical sampling techniques that lower sample sizes while improving reliability.

Efficiencies can also be gained in other ways, such as:

• stratifying populations and selecting transactions for detailed testing, and then downloading pertinent data into a spreadsheet (e.g., inventory price tests, search for unrecorded liabilities, A-133 compliance tests)
• footing lengthy computer reports
• matching all subsequent cash receipts against year-end receivables

#3 Enhance client service. Pop Quiz: What is a huge trend sweeping the audit profession? Auditors trying to add value.

Yes, clients want their auditors to provide advice and recommendations to help them make more money. Delivering a signed opinion is not enough.

In recent years, many firms have experienced tremendous growth in their consulting departments. Further, many audit managers and partners are increasingly providing consulting service. But by and large, staff auditors (with less than five years of experience) have not participated in the "value-added" revolution.

Data extraction software changes this scenario. Professionals at all levels can generate reports that help management understand and run its business. Examples might include:

• computing gross margin on each product
• identifying duplicate payments to vendors
• comparing shipment to billing dates
• analyzing overtime pay by employee
• identifying operational efficiencies
• reviewing long-distance phone charges

Of course, the real power from data extraction software comes from carefully listening to your clients' needs...and preparing reports that satisfy those yearnings.

#4 Generate new revenues.
CPA firms are using data extraction software to generate new sources of revenues. Pursuing both existing and prospective clients, these firms are performing special projects (at healthy billing rates) and establishing new lines of business. For example, some firms sell:

• due diligence engagements
• fraud audits
• accounts payable audits
• internal audit "outsourcing" engagements
• special consulting projects

Unlike other "new" assurance services, data extraction has a proven track record.

What are the Pitfalls?
Is data extraction too good to be true? There are some stumbling blocks:

Getting the Data. After you get the client's data in your computer, it is fairly easy to produce the reports described earlier. But it is not always easy to get the data.

The reason auditors often struggle can be summed up in three words: lack of training. With good training, this process becomes much easier.

A Small Group of Users. Another common problem: an audit department purchases data extraction software, but only a few persons embrace the tool and use it extensively. The vast majority of auditors avoid the software. As a result, the organization fails to maximize the return on its investment.

Why would people avoid such powerful software? All sorts of reasons. Some are afraid. Others lack interest. Some lack time.

Whatever the reason, this group of people tends to be larger than the folks who enthusiastically utilize the software.

Consequently, many CPA firms are now receiving two types of training. Training for those who actually use the software, and different training for those who will never touch the software, but need to know how it can be used on their audits.

Conclusion
CPA firms of all shapes and sizes are beginning to discover the benefits of data extraction software. We predict that you will hear a lot more about this powerful tool. It is a great way to improve efficiency, quality and client service.