Walk Through of Accounting & Audit by Design Framework from 50,000 Feet

This blog post provides a walk through of the Accounting & Audit by Design (A&AD) Framework from 50,000 feet. It shows the moving puzzle pieces.

Financial Reporting Framework

A&AD relates to financial reporting.  And for financial reporting, you need a financial reporting framework. This blog post, Theory of Financial Reporting Framework explains what a financial reporting framework is. For A&AD, the financial reporting framework is provided in digital form.

Here is a working proof of concept financial reporting framework that I have created and will be using for this walk through.  I am providing three versions of this framework which I call my MINI Financial Reporting Framework. Here is a simple, very basic HTML page that shows the financial reporting framework.

Here is a link to a commercial software application that can be used to have a look at the MINI Financial Reporting Framework.


And finally, here is a link to that MINI Financial Reporting Framework on GitHub.

Basically, the MINI Financial Reporting Framework is an example of the metadata used in the A&AD process to create a report.

Documentation

The next moving puzzle piece is documentation.  Documentation is explained by the Theory of Documentation.  In a nutshell, documentation is simply the information contained in and structured within a document. A document is best understood as a structured container of information that memorializes a business event.  An example of documentation is the common document known as a check which is shown below.


Documentation tends to come in the forms.  The first form is basically what amounts to a picture of a document in the form of a JPEG, PNG, or maybe PDF. This is the hardest form to extract information from.  The second form is that of a document structured for presentation in that document.  For example, a PDF or HTML file is structured for information and you can extract information from the document usually using a process known as "scrapping" information from the document.  The third form is a document structured for meaning.  That structure could be a nonstandard format or a standard such as the Universal Business Language (UBL).

Map Documentation to Business Events Journal

The next step is that the information from the documentation is mapped to the business events journal. So for example, the check above is mapped to the business events journal (here is a prototype of a business events journal with two entries).
I am not going to explain the business event journal in detail, metadata used to enter the business event information into the journal.  For more information on that, please see The Future of Accounting and the Data Centric Accounting (DCA) XBRL taxonomy.

Note this matrix which shows the list of business events in the MINI financial reporting scheme and provides a mapping from the DCA core facets to each business event.

Business Events Journal

The business events journal is where all information for all business events lives. Below you see a screen show of a prototype of a business events journal entry. (Click here to go to the actual prototype.)


NOTE: I have not yet completely figured out all the fields needed in the business event journal entry; this is still a work in progress.

NOTE: I am using only general journal entries currently to keep the example simple; but subsidiary journals will be implemented also.  See this: Agents that turn any document into a subledger.

General Journal Entry

The general journal entry is a projection generated from the business events journal entries. Click here to go to a working proof of concept of a general journal with the entries from the above business event.


Working General Ledger Trial Balance

The working general ledger and the working general ledger trial balance are projections of the general journal. Here is a working proof of concept.


NOTE: The working general ledger trial balance above also includes an adjustment that was posted to the working trial balance. Think audit adjustment.

Lead Schedules

Lead schedules provide a mapping from the internal chart of accounts used by a reporting economic entity and the financial statement line item used to report information. The lead schedules are a projection created from general ledger information and a model which provides the mapping from the chart of accounts to the financial statement line items. Click here to see the working proof of concept.

General Ledger Summarized by Business Event

Business events cause changes in "state" of the real accounts which are reported on the balance sheet.  The general ledger information summarized by business event is a projection from the general ledger. Click here to see the working proof of concept.

NOTE: Each business event is a line item of a roll forward of a real account from the balance sheet. The typical accounting system cannot provide this output because the appropriate metadata is not attached to transactions. In this example, the business events journal does capture this metadata and therefore that metadata is available to the general ledger.  Thus these changes in state line items can be provided.

Real Account Roll Forwards

Balance sheet line items report "state".  The income statement, cash flow statement, and statement of changes in equity report "changes in state".  Below is an example of a roll forward of one balance sheet line item (e.g. real account).  In this case we are showing the roll forward of Cash and Cash Equivalents.  Each real account roll forward is a projection from the general ledger. Click here to view the working proof of concept.

Balance Sheet

The balance sheet is a projection of the general ledger, assisted by the lead schedules, and assisted by the report model prepared from the financial reporting framework used for the report. Click here to view a working proof of concept balance sheet projection.


NOTE: Similarly, the income statement, cash flow statement, and statement of changes in equity are likewise projections created in the same way the balance sheet projection shown above was created.

Closing Book

The closing book is all the supporting facts (measurements, observations) and models used to structure or organize those facts.  All structures would be projections from the business events journal information.  Click here to view the working proof of concept closing book.
NOTE: Working proof of concepts have been successfully created using one transaction, 19 transactions of synthetic data, and 2,300 transactions of synthetic data.

NOTE: When information cannot be generated from the business events journal, then information would be created using a semantic spreadsheet. For example, accounting policies that do not flow through the business events journal and qualitative financial disclosures that do not flow through the business events journal would be modeled using a semantic spreadsheet.

NOTE: Audit evidence graph will be added later. See Essence of Audit and Assurance.

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