1

CHAPTER 3

PERFORM TEST PLAN & ANALYZING

THE RESULT

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 CONTENTS 2

1. • Perform test plan

2. • Analyze the result

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 Objectives 3

Understand and distinguish among the four types of Data Analytics in

performing the test plan:
● Descriptive analytics are procedures that summarize existing data to
determine what has happened in the past
● Diagnostic analytics are procedures that explore the current data to
determine why something has happened the way it has, typically
comparing the data to a benchmark
● Predictive analytics are procedures used to generate a model that can
be used to determine what is likely to happen in the future
● Prescriptive analytics are procedures that model data to enable
recommendations for what should be done in the future

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 LOOK BACK 4

Chapter 1 defined Data Analytics and explained that the value of Data
Analytics is in the insights it provides. We described:
 the Data Analytics Process using the IMPACT cycle model; and
 explained how this process is used to address both business and
accounting questions.

Chapter 2 provided a description of how data are prepared, scrubbed, and

made ready to use to answer business questions. We explained how to extract,
transform, and load data and then how to validate and normalize the data.
In addition, we explained how data standards are used to facilitate the
exchange of data between both senders and receivers. We also emphasized
the ethical importance of maintaining privacy in both the collection and use of
data.

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Data Analytics approaches or techniques

These Data Analytics approaches or techniques help to address our business questions and
provide information to support accounting and management decisions

Data Analytics approaches rely on a series of tasks and models that are used
to understand data and gain insight into the underlying cause and effect of
business decisions
Simple calculation (e.g., ratios,
trends, and variance analysis) Data Analytics

Summarize infomation Optimizing business

outcomes
Hindsight
Foresight
Descriptive analytics Prescriptive analytics

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Data Analytics approaches or techniques
Examples:

Lean accounting relies more heavily on data analysis:

- to accurately predict changes in budgets and forecasts
- to minimize disruption to the business.
These models that more accurately predict the future and prescribe a course of
action come at a cost of increasing complexity in terms of manipulating and
calculating appropriate data, and the implications of the results.

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Four main types of Data Analytics

Descriptive Diagnostic Predictive Prescriptive

Analysis Analysis Analysis Analysis
► are procedures that ► are procedures that ► are procedures used to ► areprocedures that work
summarize existing data explore the current data generate a model that to identify the best
to determine what has to determine why can be used to possible options given
happened in the past. something has happened determine what is likely constraints or changing
Example: the way it has, typically to happen in the future. conditions. These
► Summary statistics (e.g., comparing the data to a Examples: typically include
count, min, max, benchmark. ► regression analysis, developing more
average, median, Example, forecasting, advanced machine
standard deviation); ► allow users to drill down ► classification, and
learning and artificial
► Distributions, and in the data and see how intelligence models to
► other predictive
they compare to a recommend a course of
► Proportions modeling.
budget, a competitor, or action, or optimize,
trend based on constraints
and/or changing
conditions

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Four main types of Data Analytics

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Descriptive Analytics Example:

 Summary Statistics describe a set of data in terms of their location

(mean, median), range (standard deviation, minimum, maximum),
shape (quartile), and size (count)

 Data reduction or filtering is used to reduce the amount of

observations to focus on relevant items (that is, highest cost,
highest risk, largest impact, etc.). it does this by taking a large set of
data (perhaps the population) and reducing it to a smaller set that
has the vast majority of the critical information of the larger set

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Diagnostic Analysis Examples:
 Profiling identifies the “typical” behavior of an individual, group, or
population by compiling summary statistics about the data
(including mean, standard deviations, etc.) and comparing
individuals to the populations
 Clustering helps identify groups (or clusters) of individuals (such as
customers) that share common underlying characteristics – in other
words, identifying groups of similar data elements and the
underlying drivers of those groups
 Similarity matching is a grouping technique used to identify similar
individuals based on data known about them
 Co-occurrence grouping discovers associations between
individuals based on common events, such as transactions they
are involved in

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 Predictive Analytics Example:

 Regression based on the slope and intersect of a line

 Classification predicts a class or category for a new observation
based on the manual identification of classes from previous
observations
 Link prediction predicts a relationship between two data items,
such as members of a social media platform

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 Prescriptive Analytics Example:

 Decision support systems are rule-based systems that gather data

and recommend actions based on the input
 Machine learning and artificial intelligence are learning models or
intelligent agents that adapt to new external data to recommend
a course of action

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Q: WHAT IS THE MAIN DIFFERENCE BETWEEN DESCRIPTIVE
AND DIAGNOSTIC METHODS?

● DESCRIPTIVE ANALYTICS, WHICH TELLS YOU WHAT HAPPENED IN THE PAST.

● DIAGNOSTIC ANALYTICS, WHICH HELPS YOU UNDERSTAND WHY SOMETHING
HAPPENED IN THE PAST.
● DESCRIPTIVE - WHAT HAPPENED
● DIAGNOSTIC - WHY IT HAPPENED

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Descriptive Analytics
Help Summarize What Has Happened In The Past
● A financial accountant would sum all the sales transactions within a period to
calculate the value for Sales Revenue that appears on the income statement
● An analyst would count the number of records in a data extract to ensure the
data are complete before running a more complex analysis
● An auditor would filter data to limit the scope to transactions that represent
the highest risk. In all these cases, basic analysis provides an understanding of
what has happened in the past to help decision makers achieve good results and
correct poor

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Descriptive
Analytics
Summary Statistics
● Summary statistics
describe the location,
spread, shape, and
dependance of a set
of observations

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Descriptive Analytics
Data Reduction Involves The Following Steps
● Identify the attribute you would like to reduce or focus on
● Filter the results
● Interpret the results
● Follow up on results

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Descriptive Analytics
Fuzzy Matching Locates Approximate Matches
● Useful for identifying relationships in imperfect data

Q: describe how the data reduction approach could be used to evaluate

employee travel and entertainment expenses
● Filter the amounts have like a threshold to see if someone is expensing a
5000 trip for example
● Or if an employee is supposed to be working and they book a trip

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Diagnostic Analytics
● Diagnostic analytics provide insight into why things happened or
how individual data values relate to the general population

Profiling Compares An Individual to the Population

● Profiling is done primarily using structured data - data that are
stored in a database or spreadsheet and are readily searchable
● Profiling is used to discover patterns of behavior.
Example, the higher the Z-score (farther away from the mean), the
more likely a customer will have a delayed shipment (blue circle)
○ Z score is the idea of “normalization”

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Diagnostic Analytics
● Diagnostic analytics provide insight into why things happened or
how individual data values relate to the general population

Profiling Compares An Individual to the Population

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Profiling Relies on Gathering Summary
Statistics & Identifying Outliers
● Identify the objects or activity you want to profile
● Determine the types of profiling you want to perform
● Set boundaries or thresholds for the activity
● Interpret the results and monitor the activity and/or
generate a list of exceptions
● Follow up on exceptions

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Variance Analysis Is an Example of Data Profiling
● Internal auditors analyze travel and entertainment expenses
for violations of internal controls
● Managers use profiling to compare variances from target
ranges

Benford’s Law is a Diagnostic Analytics that

Compares Actual to Expected Values
● In the continuous audit, an auditor may use Benford’s Law to
evaluate the frequency distribution of the first digits from a large set
of numerical data

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Cluster Analysis Shows Natural Groupings of Data
● Clustering is used to identify groups of similar data elements
and the underlying drivers of those groups
● Clustering algorithms calculate the minimum distance of all
observations and groups those elements

What are example of Clustering

● Internal auditors can use clustering to identify groups of transactions
that may indicate risk or fraud in insurance or other payments

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Hypothesis Testing is used to Identify How
Different Groups Are
● Begin by setting the Null Hyposthesis Ho (no relationship) and
the Alternative Hypothesis Ha (expected relationship)
● Test the p-value for statistical significance

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Q: Name 3 clusters of customers who might shop
at Walmart
● Families
● Students
● Seniors
● You can tell by what they buy (ex. Family - diapers, in the $200+
range; students in the $50-100 range, junk food; seniors - lower
range but buys healthier food than students

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Regression Helps Predict Expected Outcomes

● Identify the variables that might predict an outcome

● Determine the functional form of the relationship
● Identify the parameters of the model
● Dependent variable = f (independent variable)

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Regression Helps Predict Expected Outcomes

What are some examples of Regression

● In managerial accounting, regression may predict employee turnover:
Employee turnover = f (current professional salaries, health of the
economy [GDP], salaries offered by other accounting firms or by
corporate accounting, etc.)
● In auditing, regression may be used to determine the appropriateness
of allowance accounts:
Allowance for loan losses amount = f (current aged loans, loan type,
customer loan history, collections success)

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The Goals of Classification is to Predict Which Class an
Individual Belongs To

● Identify the classes you wish to predict

● Manually classify an existing set of record
● Select a set of classification models
● Divide your data into training and testing sets
● Generate your model
● Interpret the results and select the “best” model

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Classification Begins With Decision Boundaries

● Training data are existing data that have been manually

evaluated and assigned a class
● Test data are existing data used to evaluate the model
● Decision trees are used to divide data into smaller groups
● Decision boundaries mark the split between one class
and another

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What Else Do You Need to Know About
Classification?
● Pruning removes branches from a decision tree to avoid overfitting
the model
● Linear classifiers are useful for ranking items rather than simply
predicting class probability
● These are useful for determining the important values, such as
valuable customers, or which transactions are most likely fraudulent
● Support vector machine is a discriminating classifier that is defined by
a separating hyperplane that works first to find the widest margin (or
biggest pipe) and then works to find the middle line

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What Do We Evaluate Classifiers?

● Try to avoid overfitting, or models that are too accurate. They are
bad at predicting a future observation
● Look for the sweet spot where we maximize the accuracy of the
testing data

Q: If we are trying to predict the extent of employee turnover, do

you believe the health of the economy, as measured using GDP,
will be positively or negatively associated with employee
turnover?

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 What Do We Do Next?
● Once other diagnostic and predictive analyses have been performed, the decision
process can be aided by rules-based decision support systems, machine learning
models, or added to an existing artificial intelligence model to improve future
predictions

Decision Support Systems Use Rules to Guide the Accountant

● The rules are derived from past behavior to help guide the accountant through a
process
● For example, the classification of leases is based on evaluating several rules

Machine Learning Learns From Past Data to Predict Better

Outcomes
● What these all have in common is the use of algorithms and statistical models to
generate a previously unknown model that relies on patterns and inferences
● For most application of artificial intelligence models, most companies will outsource
the underlying system to companies like Microsoft, Amazon, or Google rather than
develop it themselves
● These companies have large datasets to create more accurate prediction and
recommendation engines
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SUMMARY CHAPTER III
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 Thank you

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