Continuous Audit Definition

Continuous Audit

Investopedia / Paige McLaughlin

What Is a Continuous Audit?

A continuous audit is an internal process that examines accounting practices, risk controls, compliance, information-technology systems, and business procedures on an ongoing basis. Continuous audits are usually technology-driven and designed to automate error checking and data verification in real time.

A continuous-audit–driven system generates alarm triggers that provide notice about anomalies and errors detected by the system.

Key Takeaways

  • Continuous auditing requires the ongoing assessment of accounting practices and risk controls. 
  • This auditing practice helps continually assess the effectiveness of controls. 
  • Continuous audits are most often used when new procedures are implemented as a way to track effectiveness.

Understanding Continuous Audits

An internal auditing department normally has a set schedule to do its work, whether monthly, quarterly, semi-annually, or annually. An individual or team spends time in each area to gather information, review and analyze data, and publish their reports for management and the audit committee of the Board of Directors. A continuous audit is implemented via technology, and these mini logs assist the internal auditor(s) in between their regularly scheduled formal audits.

Continuous Auditing vs. Computer-Aided Auditing

Continuous auditing is not to be confused with computer-aided auditing. In computer-aided auditing, the auditor is simply being assisted by technology, such as spreadsheets to complete a periodic audit. Computer-aided auditing is driven solely by the auditor, while continuous auditing is meant to run automatically at regular tight intervals.

When To Use Continuous Audits

Many internal audits are done months after a business activity has occurred, but these types of audits for certain processes are too delayed to be of real value. Continuous auditing is done to allow for risk assessments and control checks more frequently; they're most often used when a new standard or procedure is being implemented. The continuous nature of the audit allows for more effective and immediate assessments.

Advantages and Disadvantages of Continuous Audits

A continuous audit is beneficial in flagging unusual or noncompliant activity in multiple areas of a firm, and ensuring that established procedures are being followed. For example, in the accounts payable department, the continuous-audit system could stop an unauthorized amount from being sent to a vendor. In the accounting or legal department, it can verify that a required filing to the Securities and Exchange Commission (SEC) is set to be sent before a deadline.

Pros
  • Flagging unusual/noncompliant activity

  • Monitoring for cyberattacks

  • Promoting efficiency

  • Assessing the implementation of new standards and procedures

Cons
  • Costs of initial set-up

  • Risk of overreliance on the system

The continuous-audit function can monitor whether the firm's computer networks have been prepared for potential cyberattacks. These and more tasks of the continuous audit promote efficiency in an organization and minimize or eliminate entirely violations of procedures or processes that could expose it to monetary or legal liability.

Notably, the downsides to a continuous audit are initial set-up costs and, perhaps, an overreliance on the system in some areas of a firm's operations where human intervention would be necessary.

Which Three Key Stakeholders Benefit From a Continuous Audit?

Continuous audit processes benefit key stakeholders, including the board of directors, management, and internal auditors. The board of directors can be assured of internal controls at a company-wide level due to increased detection and monitoring. Management can use up-to-date information to improve their day-to-day responsibilities. The internal audit department can address problems sooner and correct issues prior to an external audit.

What Are the Seven Steps for Continuous Auditing?

According to the Journal of Accountancy, the seven steps to maintain continuous auditing are:

  1. Establish priority areas
  2. Identify audit rules
  3. Determine process frequency
  4. Configure parameters and execute
  5. Manage results and follow up
  6. Report rules
  7. Assess emerging risk and add to register

Does Implementing a Continuous Audit Process Have To Be Expensive?

No, you can start implementing a continuous audit process with simple tools, such as Access or Excel.

The Bottom Line

Continuous auditing can provide managers, boards of directors, and internal auditors with a constant flow of information about a company's financial status and its business and compliance processes in real time. It can be an important safeguard against cyberattacks and expenditures that do not follow company guidelines. It is especially useful when a new standard or procedure is being implemented.

Article Sources
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  1. Journal of Accountancy. "A framework for continuous auditing: Why companies don't need to spend big money." Accessed Aug. 30, 2022.