Data Analytics for

Accounting

Vernon J. Richardson
University of Arkansas,
Xi’an Jiaotong Liverpool University

Ryan A. Teeter
University of Pittsburgh

Katie L. Terrell
University of Arkansas
DATA ANALYTICS FOR ACCOUNTING
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-
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Library of Congress Cataloging-in-Publication Data

Names: Richardson, Vernon J., author. | Teeter, Ryan, author. | Terrell,

Katie, author.
Title: Data analytics for accounting / Vernon Richardson, University of
Arkansas, Xi’an Jiaotong Liverpool University, Ryan Teeter, University of
Pittsburgh, Katie Terrell, University of Arkansas.
Description: First Edition. | Dubuque : McGraw-Hill Education, [2018]
Identifiers: LCCN 2018009171 | ISBN 9781260375190 (alk. paper)
Subjects: LCSH: Accounting—Data processing.
Classification: LCC HF5679 .R534 2018 | DDC 657.0285—dc23
LC record available at https://lccn.loc.gov/2018009171

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Dedications

iii
Preface

iv
Preface v
About the Authors

vi
Acknowledgments

vii
Key Features

viii
Main Text Features
Chapter Maps
These maps provide a guide of
what we’re going to cover in the Chapter 2
chapter as well as a guide of what
we’ve just learned and what’s
Data Preparation and Cleaning
coming next.

Chapter-Opening Vignettes
Because companies are facing the new
and exciting opportunities with their
use of Data Analytics to help with A Look at This Chapter
accounting and business decisions, we This chapter provides an overview of the types of data that are used in the accounting cycle and common data that
are stored in a relational database. The chapter addresses mastering the data, the second step of the IMPACT
detail what they’re doing and why in cycle. We will describe how data are requested and extracted to answer business questions and how to transform
data for use via data preparation, validation, and cleaning. We conclude with an explanation of how to load data into
our chapter-opening vignettes. the appropri- ate tool in preparation for analyzing data to make decisions.

A Look Back
Chapter 1 defined Data Analytics and explained that the value of Data Analytics is in the insights it provides.
We described the Data Analytic Process using the IMPACT cycle model and explained how this process is used
to address both business and accounting questions. We specifically emphasized the importance of identifying
appropri- ate questions that data analytics might be able to address.
We are lucky to live in a world in which data are abundant.
However, even with rich sources of data, when it comes to being
able to analyze data and turn them into useful information A Look Ahead
and insights, very rarely can an analyst hop right into a
dataset and begin analyzing. Datasets almost always need Chapter 3 describes how to go from defining business problems to analyzing data, answering questions, and address-
to be cleaned and validated before they can be used. Not ing business problems. We make the case for three data approaches we argue are most relevant to accountants
knowing how to clean and validate data can, at best, lead to
frustration and poor insights and, at worst, lead to horrible and provide examples of each.
security violations. While this text takes advantage of open
source datasets, these datas- ets have all been scrubbed not
only for accuracy, but also to pro- tect the security and privacy
Shutterstock / Wichy
of any individual or company whose details were in the
original dataset.
In 2015, a pair of researchers named Emil Kirkegaard and
Julius Daugbejerg Bjerrekaer scraped data from OkCupid, a free dating website, and provided the data onto
the “Open Science Framework,” a platform researchers use to obtain and share raw data. While the aim of
the Open Science Framework is to increase transparency, the researchers in this instance took that a step too far—
and a step into illegal territory. Kirkegaard and Bjerrekaer did not obtain permission from OkCupid or from the 70,000
OkCupid users whose identities, ages, genders, religions, personality traits, and other personal details maintained by
the dat- ing site were provided to the public without any work being done to anonymize or sanitize the data. If the
researchers had taken the time to not just validate that the data were complete but also to sanitize them to protect the
individuals’ identities, this would not have been a threat or a news story. On May 13, 2015, the Open Science
Framework removed the OkCupid data from the platform, but the damage of the privacy breach had already
been done.1

OBJECTIVES Learning Objectives

After reading this chapter, you should be able to:

LO 2-1 Understand how data are organized in an accounting information

system
We feature learning objectives at the
LO 2-2
LO 2-3
Understand how data are stored in a relational database
Explain and apply extraction, transformation, and loading (ETL) beginning of each chapter. Having these
learning objec- tives provides students with
techniques

an overview of the concepts to be taught in

the chapter and the labs.

Progress Checks PROGRESS CHECK

1. Referring to Exhibit 2-1, locate the relationship between the Employee and
Periodic progress check questions are posed Purchase Order tables. What is the unique identifier of each table? (The
to the students throughout each chapter. unique identifier attribute is called the primary key—more on how it’s
determined in the next learning objective.) Which table contains the attribute
These checks provoke the student to stop and that creates the relationship? (This attribute is called the foreign key—more
con- sider the concepts presented. on how it’s deter- mined in the next learning objective.)
2. Referring to Exhibit 2-1, review the attributes in the Suppliers table. There is
a foreign key in this table that doesn’t relate to any of the tables in the
diagram. Which table do you think it is? What type of data would be stored in
that table?
ix
End-of-Chapter Materials
Answers to Progress
Checks ANSWERS TO PROGRESS CHECKS
1. The unique identifier of the Employee table is [EmployeeID], and the
Allow students to evaluate if they are on track fier of the Purchase Order table is [PO No.]. The Purchase Order tabl
with their understanding of the materials foreign key.
presented in the chapter. 2. The foreign key attribute that doesn’t appear to belong in the Suppliers
ta Type]. This attribute probably relates to the Supplier Type table. The
data be descriptive, categorical data about the suppliers.
3. The purpose of the primary key is to uniquely identify each record in a
pose of a foreign key is to create a relationship between two tables.
Th descriptive attribute is to provide meaningful information about
each re Descriptive attributes aren’t required for a database to run, but
they are people to gain business information about the data stored in
their databa

Multiple Choice Questions Multiple Choice Questions

Quickly assess student’s knowledge of 1. Mastering the data can also be described
via for:
chapter content.
a. Extract, total, and load data.
b. Enter, transform, and load data.
c. Extract, transform, and load data.
d. Enter, total, and load data.
2. The goal of the ETL process is to:
a. Identify which approach to data analytics s
b. Load the data into a relational database fo
c. Communicate the results an insights foun

Discussion Questions Discussion Questions

Provide questions for group discussion. 1. The advantages of a relational database include limiting the amount of
r that are stored in a database. Why is this an important advantage?
What when redundant data are stored?
2. The advantages of a relational database include integrating business p
is it preferable to integrate business processes in one information syste
store different business process data in separate, isolated databases?
3. Even though it is preferable to store data in a relational database,
stori separate tables can make data analysis cumbersome. Describe
three re worth the trouble to store data in a relational database.
4. Among the advantages of using a relational database is enforcing
busine on your understanding of how the structure of a relational
database help redundancy and other advant es, how does the primar
ey/foreign k
x
 End-of-Chapter Materials xi

Problems Problems
Challenge the student’s ability to see
The following problems correspond to the College
relation- ships in the learning objectives by to answer each question by just looking at the
employing higher-level thinking and DataDictionary.pdf) included in Appendix A, but if y
free to do so (CollegeScorecard_RawData.txt).
analytical skills.
1. Which attributes from the College Scorecard
da attendance across types of institutions
(public, p
2. Which attributes from the College Scorecard d
scores across types of institutions (public,
privat
3. Which attributes from the College Scorecard dat
diversity across types of institutions (public,
priv
4. Which attributes from the College Scorecard
da tion across types of institut public, pri

Labs Lab 2-1 Create a Request for Data Extra

Give students hands-on experience working One of the biggest challenges you face with data analysis is getting the ri
with different types of data and the tools used may have the best questions in the world, but if there are no data available
to ana- lyze them. Students will conduct data to hypothesis, you will have difficulty providing value. Additionally, there
analysis using Excel, Access (including SQL), are which the IT workers may be reluctant to share data with you. They
may sen data, the wrong data, or completely ignore your request. Be
Tableau, IDEA, XBRL, and Weka. persistent, and yo look for creative ways to find insight with an incomplete
picture.

Company summary
Sláinte is a fictional brewery that has recently gone through big changes.
Sláin ferent products. The brewery has only recently expanded its business to
distribu state to nine states, and now its business has begun stabilizing after
the expans
ility es ett . Yo áin

Comprehensive Cases Lab 2-8 Comprehensive Case: Dillard’s

Use a real-life Big Data set based on Dillard’s S Connecting Excel to a SQL
actual company data from 2014 to 2016. This Data
dataset allows students to build their skills and
test their conclusions across concepts covered Company summary
in each chapter. The Comprehensive Cases can Dillard’s is a department store with approximately 33
be followed continuously from the first chapter is in Little Rock, Arkansas. You can learn more
or picked up at any later point in the book; about com (Ticker symbol = DDS) and the
Wikipedia sit William T. Dillard II is an accounting
enough information is provided to ensure grad of the Un College of Business, which may be
students can get right to work. why he shared tran for this lab and labs throughout
this text.

Data
Connect for Data Analytics
for Ac

xii
 Connect for Data Analytics for Accounting xiii

Labs: Select labs are assignable in Connect but will require students to work outside of
Connect to complete the lab. Once completed, students go back into Connect to answer
questions designed to ensure they completed the lab and understood the key skills and
outcomes from their lab work.
Comprehensive Cases: Select comprehensive labs/cases are assignable in Connect but will
require students to work outside of Connect to complete the lab using the Dillard’s real-world
Big Data set. Once students complete the comprehensive lab, they will go back into
Connect to answer questions designed to ensure they completed the lab and understood
the key skills and outcomes from their lab work.
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Brief Table of Contents
Preface iv
Chapter 1 Data Analytics in Accounting and Business 2
Chapter 2 Data Preparation and Cleaning 38
Chapter 3 Modeling and Evaluation: Going from Defining Business Problems and
Data Understanding to Analyzing Data and Answering Questions 92
Chapter 4 Visualization: Using Visualizations and Summaries to Share Results
with Stakeholders 138
Chapter 5 The Modern Audit and Continuous Auditing
190 Chapter 6 Audit Data Analytics
208
Chapter 7 Generating Key Performance Indicators 250
Chapter 8 Financial Statement Analytics 300

GLOSSARY 326

INDEX 330
xvi
Detailed TOC
Chapter 1 Chapter 2
Data Analytics in Accounting and Business 2 Data Preparation and Cleaning 38
A Look at This Chapter 2 A Look at This Chapter 38
A Look Ahead 2 A Look Back 38
Data Analytics 4 A Look Ahead 38
How Data Analytics Affects Business 4 How Data Are Used and Stored in the Accounting
How Data Analytics Affects Accounting 5 Cycle 40
Auditing 5 Data And Relationships in a Relational
Financial Reporting 6 Database 41
Taxes 7 Columns in a Table: Primary Keys, Foreign Keys, and
The Data Analytics Process Using the Descriptive Attributes 41
IMPACT Cycle 8 Data Dictionaries 43
Step 1: Identify the Question (chapter 1) 8 Extraction, Transformation, and Loading (ETL)
Step 2: Master the Data (chapter 2) 8 of Data 44
Step 3: Perform Test Plan (chapter 3) 9 Extraction 44
Step 4: Address and Refine Results (chapter 4) 11 Step 1: Determine the Purpose and Scope of the Data
Steps 5 and 6: Communicate Insights and Track Request 45
Outcomes (chapter 4 and each chapter thereafter)
Step 2: Obtain the Data 45
11 Back to Step 1 12 Transformation 48
Data Analytic Skills Needed by Analytic- Step 3: Validating the Data for Completeness and
Minded Accountants 12 Integrity 48
Hands-On Example of the IMPACT Model 13 Step 4: Cleaning the Data 49
Identify the Question 13
Loading 50
Master the Data 13
Step 5: Loading the Data for Data Analysis 50
Perform Test Plan 15
Summary 50
Address and Refine Results 17
Key Words 51
Communicate Insights 19
Answers to Progress Checks 51
Track Outcomes 19
Multiple Choice Questions 52
Summary 20 Discussion Questions 53
Key Words 20 Problems 54
Answers to Progress Checks 21 Appendix A: College Scorecard Dataset 55
Multiple Choice Questions 23 Answers to Multiple Choice Questions 55
Discussion Questions 24 Lab 2-1 Create a Request for Data Extraction 57
Problems 24 Lab 2-2 Use PivotTables to Denormalize and
Answers to Multiple Choice Questions 26 Analyze the Data 59
Lab 1-0 How to Complete Labs in This Lab 2-3 Resolve Common Data Problems in
Text 27 Excel and Access 67
Lab 1-1 Data Analytics in Financial Lab 2-4 Generate Summary Statistics in
Accounting 28 Excel 71
Lab 1-2 Data Analytics in Managerial Lab 2-5 College Scorecard Extraction and Data
Accounting 31 Preparation 73
Lab 1-3 Data Analytics in Auditing 33 Lab 2-6 Comprehensive Case: Dillard’s Store
Lab 1-4 Comprehensive Case: Dillard’s Store Data: How to Create an Entity-
Data 34 Relationship Diagram 74

xvii
xviii Detailed TOC

Lab 2-7 Comprehensive Case: Dillard’s Store Lab 3-4 Comprehensive Case: Dillard’s Store
Data: How to Preview Data from Tables Data: Data Abstract (SQL) and
in a Query 77 Regression (Part I) 125
Lab 2-8 Comprehensive Case: Dillard’s Store Lab 3-5 Comprehensive Case: Dillard’s Store
Data: Connecting Excel to a SQL Data: Data Abstract (SQL) and
Database 80 Regression (Part II) 134
Lab 2-9 Comprehensive Case: Dillard’s Store
Data: Joining Tables 89 Chapter 4
Visualization: Using Visualizations and Summaries to
Chapter 3 Share Results with Stakeholders 138
Modeling and Evaluation: Going from Defining
Business Problems and Data Understanding to A Look at This Chapter 138
Analyzing Data and Answering Questions 92 A Look Back 138
A Look Ahead 138
A Look at This Chapter 92 Determine the Purpose of Your Data
A Look Back 92 Visualization 140
A Look Ahead 92 Quadrants 1 and 3 versus Quadrants 2 and
Performing the Test Plan: Defining Data 4: Qualitative versus Quantitative 141
Analytics Approaches 94 Quadrants 1 and 2 versus Quadrants 3 and
Profiling 98 4:
Example of Profiling in Management Accounting 99 Declarative versus Exploratory 143
Example of Profiling in an Internal Audit 99 Choosing the Right Chart 144
Example of Profiling in Auditing and Continuous Charts Appropriate for Qualitative Data 144
Auditing 100 Charts Appropriate for Quantitative Data 146
Data Reduction 101 Tools to Help When Picking a Visual 148
Example of Data Reduction in Internal and External Learning to Create a Good Chart by (Bad) Example
Auditing 101 150 Further Refining Your Chart to Communicate
Examples of Data Reduction in Other Accounting Better 155
Areas 102 Data Scale and Increments 156
Regression 102 Color 156
Examples of the Regression Approach in Managerial Communication: More Than Visuals—Using Words
Accounting 103 to Provide Insights 157
Examples of the Regression Approach in Auditing Content and Organization 157
103 Other Examples of the Regression and Audience and Tone 158
Classification Approach in Accounting 104 Revising 158
Classification 104 Summary 159
Classification Terminology 104 Key Words 159
Evaluating Classifiers 106 Answers to Progress Checks 160
Clustering 107 Multiple Choice Questions 161
Example of the Clustering Approach in Auditing Discussion Questions 162
108 Summary 109 Problems 163
Key Words 110 Answers to Multiple Choice Questions 163
Answers to Progress Checks 111 Lab 4-1 Use PivotCharts to Visualize Declarative
Multiple Choice Questions 111 Data 164
Discussion Questions 113 Lab 4-2 Use Tableau to Perform Exploratory
Problems 113 Analysis and Create Dashboards
Answers to Multiple Choice Questions 114 166
Appendix: Setting Up a Classification Analysis Lab 4-3 Comprehensive Case: Dillard’s
114 Lab 3-1 Data Reduction 116 Store Data: Create Geographic Data
Lab 3-2 Regression in Excel 120 Visualizations in Tableau 175
Lab 3-3 Classification 122 Lab 4-4 Comprehensive Case: Dillard’s Store
Data: Visualizing Regression in
Tableau 186
 Detailed TOC xix

Chapter 5 Sequence Check 225

The Modern Audit and Continuous Auditing 190 Stratification and Clustering 225
A Look at This Chapter 190 Creating Advanced Predictive and Prescriptive
A Look Back 190 Analytics 226
A Look Ahead 190 Regression 226
The Modern Audit 192 Classification 226
The Increasing Importance of the Internal Audit Probability 226
192 Sentiment Analysis 226
Auditing Data 193 Applied Statistics 226
Automating the Audit Plan 195 Artificial Intelligence 227
Continous Auditing Techniques 196 Additional Analyses 227
Alarms and Exceptions 197 Summary 227
Working Papers and Audit Workflow Key Words 228
197 Electronic Working Papers and Remote Answers to Progress Checks 228
Audit Work 198 Multiple Choice Questions 229
Summary 199 Discussion Questions 230
Key Words 199 Problems 230
Answers to Progress Checks 199 Answers to Multiple Choice Questions 231
Multiple Choice Questions 200 Lab 6-1 Evaluate the Master Data for Interesting
Discussion Questions 201 Addresses 232
Problems 201 Lab 6-2 Perform Substantive Tests of Account
Answers to Multiple Choice Questions 202 Balances 234
Lab 5-1 Set Up a Cloud Folder 203 Lab 6-3 Finding Duplicate Payments 240
Lab 5-2 Review Changes to Working Papers Lab 6-4 Comprehensive Case: Dillard’s
(OneDrive) 204 Store
Lab 5-3 Identify Audit Data Requirements 205 Data: Hypothesis Testing (Part I) 241
Lab 5-4 Prepare Audit Plan 206 Lab 6-5 Comprehensive Case: Dillard’s Store
Data: Hypothesis Testing (Part II—Data
Visualization) 247
Chapter 6
Audit Data Analytics 208
Chapter 7
A Look at This Chapter 208 Generating Key Performance Indicators 250
A Look Back 208
A Look at This Chapter 250
A Look Ahead 208
A Look Back 250
When to Use Audit Data Analytics 210
A Look Ahead 250
Identify the Problem 210
Identify the Questions 254
Master the Data 210
Master the Data and Perform the Test Plan 257
Perform the Test Plan 212
Address And Refine Results 258
Address and Refine Results 214
Communicate Insights and Track Outcomes 258
Communicate Insights 214
Summary 259
Track Outcomes 214
Key Words 259
Descriptive Analytics 214 Answers to Progress Checks 259
Age Analysis 215
Multiple Choice Questions 260
Sorting 216 Discussion Questions 261
Summary Statistics 217 Problems 262
Sampling 217 Answers to Multiple Choice Questions 263
Diagnostic Analytics and Benford’s Law 219 Lab 7-1 Evaluate Management Requirement
Z-Score 219 and Identify Useful KPIs from a
Benford’s Law 220 List 264
Drill-Down 223 Lab 7-2 Create a Balanced Scorecard Dashboard
Exact and Fuzzy Matching 223 in Tableau 266
xx Detailed TOC

Lab 7-3 Comprehensive Case: Dillard’s Store The Use of Sparklines and Trendlines in
Data: Creating KPIs in Excel (Part I) Ratio Analysis 306
273 Text Mining and Sentiment Analysis
Lab 7-4 Comprehensive Case: Dillard’s Store 307 Summary 309
Data: Creating KPIs in Excel Key Words 309
(Part II) 279 Answers to Progress Checks
Lab 7-5 Comprehensive Case: Dillard’s Store 310 Multiple Choice Questions
Data: Creating KPIs in Excel 310 Discussion Questions 312
(Part III) 287 Problems 312
Lab 7-6 Comprehensive Case: Dillard’s Store Answers to Multiple Choice Questions 313
Data: Creating KPIs in Excel Lab 8-1 Use XBRLAnalyst to Access
(Part IV—Putting It All Together) 295 XBRL
Data 314
Chapter 8 Lab 8-2 Use XBRLAnalyst to Create Dynamic
Financial Statement Analytics 300 Common-Size Financial Statements 317
Lab 8-3 Use XBRL to Access and Analyze
A Look at This Chapter 300 Financial Statement Ratios—The Use
A Look Back 300 of DuPont Ratios 320
XBRL 302 Lab 8-4 Use SQL to Query an
Extensible Reporting in XBRL and Standardized XBRL Database 323
Metrics 303
XBRL, XBRL-GL, and Real-Time Financial
Reporting 303 GLOSSARY 326
Ratio Analysis 305
Classes of Ratios 305
INDEX 330
DuPont Ratio Analysis 306
Data Analytics for
Accounting
 Chapter 1
Data Analytics in Accounting
and Business

A Look at This Chapter

Data Analytics is changing the business world. In this chapter, we define it and explain its impact on business
and the accounting profession, noting that the value of Data Analytics is in the insights it provides. We also
describe how to develop an analytics mindset. We describe the Data Analytic Process using the IMPACT cycle
model and explain how this process is used to address both business and accounting questions. We specifically
emphasize the import- ance of identifying appropriate questions that Data Analytics might be able to address.

A Look Ahead
Chapter 2 provides a description of how data are prepared and scrubbed to be ready for analysis to answer
business questions. We explain how to extract, transform, and load data and then how to validate and normalize
the data. In addition, we explain how data standards are used to facilitate the exchange of data between senders
and receivers.

2
 The Chinese e-commerce company, Alibaba, is perhaps the biggest
online commerce company in the world. Using its three main websites,
Taobao, Tmall, and Alibaba.com, it hosts millions of businesses and hun-
dreds of millions of users with $248 billion in sales last year (more than
eBay and Amazon combined!). With so many transactions and so many
users, Alibaba has worked to capture fraud signals directly from its
exten- sive database of user behaviors and its network, and then
analyzes them in real time using machine learning to accurately sort the
bad users from the good ones. Alibaba has developed five stages of
fraud detection for each user: (1) account check, (2) device check, (3)
activity check, (4) risk strategy, and (5) manual review. These stages all
combine to develop a risk score for each user. This fraud risk prevention
score is so valuable to Alibaba and others, Alibaba shares and sells it
Alibaba.com
to external customers, developing a risk score for each current and
potential customer. What will Data Analytics do next?

Sources: J. Chen, Y. Tao, H. Wang, and T. Chen, “Big Data Based Fraud Risk Management at Alibaba,” The Journal of
Finance and Data Science 1, no. 1 (2015), pp. 1–10; and K. Pal, “How to Combat Financial Fraud by Using Big Data,”
2016, http://www.kdnuggets.com/2016/03/combat-financial-fraud-using-big-data.html.

OBJECTIVES
After reading this chapter, you should be able to:

LO 1-1
LO 1-2 Define Data Analytics

LO 1-3 Understand why Data Analytics matters to business

LO 1-4 Explain why Data Analytics matters to accountants

LO 1-5 Describe the Data Analytics Process using the IMPACT cycle

LO 1-6 Describe the skills needed by accountants

Explain how to translate common business questions into fields
and values

3
4 Chapter 1 Data Analytics in Accounting and Business

LO 1-1 DATA ANALYTICS

Define Data Data surrounds us! By the year 2020, about 1.7 megabytes of new information will be
Analytics cre- ated every second for every human being on the planet. In fact, more data have been
created in the last 2 years than in the entire previous history of the human race.1 With so
much data available about each of us (i.e., how we shop, what we read, what we’ve
bought, what music we listen to, where we travel, whom we trust, etc.), arguably, there is
the potential for ana- lyzing those data in a way that can answer fundamental business
questions and create value. We define Data Analytics as the process of evaluating data
with the purpose of drawing conclusions to address business questions. Indeed, effective
Data Analytics provides a way to search through large structured and unstructured data to
discover unknown patterns or relationships.2 In other words, Data Analytics often
involves the technologies, systems, practices, methodologies, databases, statistics, and
applications used to analyze diverse business data to give organizations the information
they need to make sound and timely business decisions.3 That is, the process of Data
Analytics aims to transform raw data into
knowledge to create value.
Sometimes another term for data analytics is used, called Big Data which refers to
data- sets that are too large and complex for businesses’ existing systems to handle
utilizing their traditional capabilities to capture, store, manage, and analyze these datasets.
Another way to describe Big Data is by use of 3 Vs: its Volume (the sheer size of the
dataset), Velocity (the speed of data processing), and Variety (the number of types of
data). While sometimes Data Analytics and Big Data are terms used interchangeably, we
will use the term Data Analytics throughout and focus on the ability to turn data into
knowledge and knowledge into value.

PROGRESS CHECK
1. How does having more data around us translate into value for a company?
2. Banks know a lot about us, but they have traditionally used externally
generated credit scores to assess creditworthiness when deciding whether to
extend a loan. How would you suggest a bank use Data Analytics to get a
more complete view of its customers’ creditworthiness? Assume the bank has
access to a cus- tomer’s loan history, credit card transactions, deposit history,
and direct deposit registration. How could it assess whether a loan might be
repaid?

LO 1-2
HOW DATA ANALYTICS AFFECTS BUSINESS
Understand why There is little question that the impact of data analytics on business is overwhelming. In
Data Analytics
fact, in PwC’s 18th Annual Global CEO Survey, 86 percent of chief executive officers
matters to
(CEOs) say they find it important to champion digital technologies and emphasize a clear
business
vision of using technology for a competitive advantage, while 85 percent say they put a
high value on Data Analytics. According to the same survey, many CEOs put a high
value on Data Analytics, and 80 percent of them place data mining and analysis as the
second-most important strategic technology for CEOs. In fact, per PwC’s 6th Annual
Digital IQ survey

1
http://www.forbes.com/sites/bernardmarr/2015/09/30/big-data-20-mind-boggling-facts-everyone-must-
read/#2a3289006c1d (accessed November 10, 2016).
2
Roger S. Debreceny and Glen L. Gray, “IT Governance and Process Maturity: A Multinational Field
Study,” Journal of Information Systems 27, no. 1 (Spring 2013), pp. 157–188.
3
H. Chen, R. H. L. Chiang, and V. C. Storey, “Business Intelligence Research,” MIS Quarterly 34, no. 1
Chapter 1 Data Analytics in Accounting and Business 5

of more than 1,400 leaders from digital businesses, the area of investment that tops
CEOs’
list of priorities is business analytics.4
A recent study from McKinsey Global Institute estimates that Data Analytics could
gen- erate up to $3 trillion in value per year in just a subset of the total possible industries
affected.5 Data Analytics could very much transform the manner in which companies run
their businesses in the near future. The real value of data comes from Data Analytics.
With a wealth of data on their hands, companies use Data Analytics to discover the
various buy- ing patterns of their customers, investigate anomalies that were not
predicted, forecast future possibilities, and so on. For example, with insight provided
through Data Analytics, companies could do more directed marketing campaigns based
on patterns observed in their data, giving them a competitive advantage over companies
that do not use this infor- mation to improve their marketing strategies. Patterns
discovered from past archives enable businesses to identify opportunities and risks and
better plan for the future. In addition to producing more value externally, studies show
that Data Analytics affects internal pro- cesses, improving productivity, utilization, and
growth.6

PROGRESS CHECK
3. Let’s assume a brand manager at Samsung identifies that an older
demographic might be concerned with the use of an iPhone and the radiation
impact it might have on the brain. How might Samsung use Data Analytics to
assess if this is a problem?
4. How might Data Analytics assess the higher cost of paying employees to work
overtime? Consider how Data Analytics might be helpful in reducing a compa-
ny’s overtime direct labor costs in a manufacturing setting.

LO 1-3
HOW DATA ANALYTICS AFFECTS ACCOUNTING
Explain why
Data Analytics is expected to have dramatic effects on auditing, financial reporting, and Data Analytics
tax and managerial accounting. We detail how we think this might happen in each of the matters to
following sections. accountants

Auditing
Data Analytics plays an increasingly critical role in the future of audit. In a recent Forbes
Insights/KPMG report, “Audit 2020: A Focus on Change,” the vast majority of survey
respondents believe both that:
1. Audit must better embrace technology.
2. Technology will enhance the quality, transparency, and accuracy of the audit.
Indeed, “As the business landscape for most organizations becomes increasingly
complex and fast-paced, there is a movement toward leveraging advanced business analytic
techniques to

4
“Data Driven: What Students Need to Succeed in a Rapidly Changing Business World,” PwC, http://www
.pwc.com/us/en/faculty-resource/assets/PwC-Data-driven-paper-Feb2015.pdf, February 2015 (accessed
January 9, 2016).
5
“Open Data: Unlocking Innovation and Performance with Liquid Information,” McKinsey Global
Institute,
http://www.mckinsey.com/insights/business_technology/open_data_unlocking_innovation_and_
performance_with_liquid_information, October 2013 (accessed September 7, 2015).
6 Chapter 1 Data Analytics in Accounting and Business

refine the focus on risk and derive deeper insights into an organization.”7 Many auditors
believe
that auditor data analytics will, in fact, lead to deeper insights that will enhance audit
quality. This sentiment of the impact of Data Analytics on the audit has been growing for
several years now and has given many public accounting firms incentives to invest in
technology and person- nel to capture, organize, and analyze financial statement data to
provide enhanced audits, expanded services, and added value to their clients. As a result, Data
Analytics is expected to be the next innovation in the evolution of the audit and professional
accounting industry.
Given the fact that operational data abound and are easier to collect and manage, combined
with CEOs’ desires to utilize these data, the accounting firms may now approach their
engage- ments with a different mindset. No longer will they be simply checking for errors,
material mis- statements, fraud, and risk in financial statements or merely be reporting their
findings at the end of the engagement. Now, audit professionals will be collecting and analyzing
the company’s data similar to the way a business analyst would to help management make better
business decisions. This means that, in many cases, external auditors will stay engaged with
clients beyond the audit. This is a significant paradigm shift. The audit process will be changed
from a traditional process toward a more automated one, which will allow audit professionals
to focus more on the logic and rationale behind data queries and less on the gathering of the
actual data.8 As a result, audits will not only yield important findings from a financial
perspective, but also information that can help companies refine processes, improve
efficiency, and anticipate future problems.

“It’s a massive leap to go from traditional audit approaches to one that fully
integrates big data and analytics in a seamless manner.”9

Data Analytics also expands auditors’ capabilities in services like testing for fraudulent trans-
actions and automating compliance-monitoring activities (like filing financial reports to the SEC
or to the IRS). This is possible because Data Analytics enables auditors to analyze the
complete dataset, rather than the sampling of the financial data done in a traditional audit.
Data Analytics enables auditors to improve its risk assessment in both its substantive and
detailed testing.

Financial Reporting
Data Analytics also potentially has an impact on financial reporting. With the use of so
many estimates and valuations in Financial Accounting, some believe that employing Data
Analytics may substantially improve the quality of the estimates and valuations. Data
from within an enterprise system and external to the company and system might be used to
address many of the questions that face financial reporting. Many financial statement
accounts are just esti- mates and so accountants often ask themselves questions like this to
evaluate those estimates:
1. How much of the accounts receivable balance will ultimately be collected? What
should the allowance for loan losses look like?
2. Is any of our inventory obsolete? Should our inventory be valued at market or cost
(applying the lower-of-cost-or-market rule)? When will it be out of date? Do we need
to offer a discount on it now to get it sold?

7
Deloitte, “Adding Insight to Audit: Transforming Internal Audit through Data Analytics,” http://www2
.deloitte.com/content/dam/Deloitte/ca/Documents/audit/ca-en-audit-adding-insight-to-audit.pdf
(accessed January 10, 2016).
8
PwC, “Data Driven: What Students Need to Succeed in a Rapidly Changing Business World,” http://www
.pwc.com/us/en/faculty-resource/assets/PwC-Data-driven-paper-Feb2015.pdf, posted February 2015
(accessed January 9, 2016).
9
EY, “How Big Data and Analytics Are Transforming the Audit,” https://eyo-iis-pd.ey.com/ARC/documents/
EY-reporting-issue-9.pdf, posted April 2015 (accessed January 27, 2016).
 Chapter 1 Data Analytics in Accounting and Business 7

3. Has our goodwill been impaired due to the reduction in profitability from a recent
merger company? Will it regain value in the near future?
4. How should we value contingent liabilities like warranty claims or litigation? Do
we have the right amount?
Data Analytics may also allow an accountant or auditor to assess the probability of
a goodwill write-down, warranty claims or the collectability of bad debts based on what
customers, investors, and other stakeholders are saying about the company in blogs and
in social media (like Facebook and Twitter). This information might help the firm deter-
mine both its optimal response to the situation and appropriate adjustment to its financial
reporting.
It may be possible to use Data Analytics to scan the environment—that is, scanning
Google searches and social media (such as Instagram and Facebook) to identify potential
risks and opportunities to the firm. For example, in a business intelligence sense, it may
allow a firm to monitor its competitors and its customers to better understand opportuni-
ties and threats around it. For example, are its competitors, customers, or suppliers facing
financial difficulty, etc., that might affect the company’s interactions with them and open
up opportunities that otherwise it wouldn’t have considered?

Taxes
Traditionally, tax work dealt with compliance issues based on data from transactions
that have already taken place. Now, however, tax executives are charged with sophis-
ticated tax planning capabilities that assist the company to minimize its taxes and do
it in such a way as to either avoid or prepare for a potential audit. Arguably, one of
the things that Data Analytics does best is predictive analytics—predicting the future!
This shift in focus makes tax data analytics valuable for its ability to help tax staffs to
predict what will happen rather than reacting to what just did happen. An example of
how tax data analytics might be used is the capability to predict the potential tax conse-
quences of a potential international transaction, R&D investment, or proposed merger
or acquisition.
One of the issues of performing predictive Data Analytics is the efficient organization
and use of data stored across multiple systems on varying platforms that were not
originally designed for the tax department. Organizing tax data into a data warehouse to
be able to consistently model and query the data is an important step toward developing
the capability to perform tax data analytics. This issue is exemplified by the 29 percent of
tax departments that find the biggest challenge in executing an analytics strategy is
integration with the IT department and the available technology tools.10

PROGRESS CHECK
5. How could the use of internal audit data analytics find the pattern that one
accountant enters the majority of the journal entries each quarter? Why might
this be an issue that would need addressing?
6. How specifically will Data Analytics change the way a tax staff does its taxes?

10
Deloitte, “The Power of Tax Data Analytics,” http://www2.deloitte.com/us/en/pages/tax/articles/top-
ten- things-about-tax-data-analytics.html (accessed October 12, 2016).
8 Chapter 1 Data Analytics in Accounting and Business

LO 1-4 THE DATA ANALYTICS PROCESS

Describe the Data USING THE IMPACT CYCLE
Analytics Process
Data Analytics is a process—identifying business questions and problems that can be
using the
IMPACT cycle addressed with data. We start to describe our Data Analytics Process by using an estab-
lished Data Analytics model called the IMPACT cycle, by Isson and Harriott (as shown
in Exhibit 1-1).
We explain the full IMPACT cycle briefly here, but in more detail in later in chapter 1
and then also in chapters 2, 3, and 4. We use its approach throughout this textbook.

EXHIBIT 1-1
The IMPACT Cycle
Source: J. P. Isson and
J. S. Harriott, Win with
Advanced Business Analytics:
Creating Business Value from
Your Data (Hoboken, NJ:
Wiley, 2013).

Step 1: Identify the Questions (chapter 1)

It all begins with understanding a business problem that needs addressing. Questions can
arise from many sources from how to better attract customers, to how to price a product,
to how to find errors or fraud. Having a concrete, specific question that is potentially
answer- able by Data Analytics is an important first step.
Accountants and auditors might be interested in questions like the following:
• Are employees circumventing internal controls over payments?
• Are there any suspicious travel and entertainment expenses?
• How can we increase the amount of add-on sales of additional goods to our
customers?
• Are our customers paying us in a timely manner?
• How can we predict the allowance for loan losses for our bank loans?
• How can we find transactions that are risky in terms of accounting issues?
• Who authorizes checks above $100,000?
• How can errors be identified?

Step 2: Master the Data (chapter 2)

Mastering the data requires one to know what data are available and whether those data
might be able to help address the business problem. We need to know everything about
the data, including how to access, availability, reliability (if there are errors), and what time
peri- ods are covered to make sure the data coincide with the timing of our business
problem, etc.
 Chapter 1 Data Analytics in Accounting and Business 9

In addition, to give us some idea of the data questions, we may want to consider the
following:
• Review data availability in a firm’s internal systems (including those in the
financial reporting system or ERP systems that might occur in its accounting cycles
—financial, procure-to-pay, production, order-to-cash, human resources).
• Review data availability in a firm’s external network, including those that might
already be housed in an existing data warehouse.
• Data dictionaries and other contextual data—to provide details about the data.
• Extraction, transformation, and loading.
• Data validation and completeness—to provide a sense of the reliability of the data.
• Data normalization—to reduce data redundancy and improve data integrity.
• Data preparation and scrubbing—Data Analytics professionals estimate that they spend
between 50 and 90 percent of their time cleaning data so the data can be
analyzed.11

Step 3: Perform Test Plan (chapter 3)

After mastering the data (in step 2) and after the data are ready, we are prepared for
analy- sis. With the data ready for analysis, we need to think of the right approach to the
data to be able to answer the question.
In Data Analytics, we work to extract knowledge from the data to address questions
and problems. We take from all available data and see if we can identify a relationship
between the response or dependent variables and those items that affect the response
(also called predictor, explanatory, or independent variables). To do so, we’ll generally
make a model, a simplified representation of reality to address this purpose.
An example might be helpful here. Let’s say we are trying to predict each of your
class- mates’ performance on their next intermediate accounting exam. The response or
dependent variable will be the score on the next exam. What helps predict the
performance of each exam will be our predictor, explanatory, or dependent variables.
Variables such as study time, score on last exam, IQ, and standardized test scores (ACT,
SAT, etc.), as well as student enjoyment of accounting, might all be considered. Perhaps
given your experience you can name other predictor variables to include in our model
predicting exam performance.
The research question, the model, the data availability, and the expected statistical
infer- ence may all suggest the use of different data approaches. Provost and Fawcett12
detail eight different approaches to data analytics depending on the question. We will
discuss the most applicable ones to accounting more formally in chapter 3 and highlight
accounting ques- tions that they might address. The eight different approaches include the
following:
• Classification—An attempt to assign each unit (or individual) in a population
into a few categories. An example classification might be, of all the loans this
bank has
offered, which are most likely to default? Or which loan applications are expected to
be approved? Or which transactions would a credit card company flag as potentially
being fraudulent and deny payment?
• Regression—An attempt to estimate or predict, for each unit, the numerical value of
some variable using some type of statistical model. An example regression analysis
might be, given a balance of total accounts receivable held by a firm, what is the
appro- priate level of allowance for doubtful accounts for bad debts?

11
“One-Third of BI Pros Spend Up to 90% of Time Cleaning Data,” http://www.eweek.com/database/one-third-
of-bi-pros-spend-up-to-90-of-time-cleaning-data.html, posted June 2015 (accessed March 15, 2016).
12
Foster Provost and Tom Fawcett, Data Science for Business: What You Need to Know about Data
Mining and Data-Analytic Thinking (Sebastopol, CA: O’Reilly Media, Inc.), 2013.
10 Chapter 1 Data Analytics in Accounting and Business

• Similarity matching—An attempt to identify similar individuals based on data known

about them. The opening vignette mentioned Alibaba and its attempt to identify
seller and customer fraud based on various characteristics known about them to see
if they were similar to known fraud cases.
• Clustering—An attempt to divide individuals (like customers) into groups (or
clusters) in a useful or meaningful way. In other words, identifying groups of similar
data ele- ments and the underlying drivers of those groups. For example, clustering
might be used to segment a customer into a small number of groups for additional
analysis and marketing activities.
• Co-occurrence grouping—An attempt to discover associations between individuals based
on transactions involving them. Amazon might use this to sell another item to you by
knowing what items are “frequently bought together” or “Customers who bought this
item also bought . . .” as shown in Exhibit 1-2.

EXHIBIT 1-2
Example of
Co-occurrence
Grouping on
Amazon.com
©Amazon Inc.

• Profiling—An attempt to characterize the “typical” behavior of an individual, group,

or population by generating summary statistics about the data (including mean,
standard deviations, etc.). By understanding the typical behavior, we’ll be able to
more easily identify abnormal behavior. When behavior departs from that typical
behavior—which we’ll call an anomaly—then further investigation is warranted.
Profiling might be used in accounting to identify fraud or just those transactions that
might warrant some additional investigation (e.g., travel expenses that are three
standard deviations above the norm).
• Link prediction—An attempt to predict a relationship between two data items. This
might be used in social media. For example, because an individual might have 22
mutual Facebook friends with me and we both attended Brigham Young University,
is there a chance we would like to be Facebook friends as well? Exhibit 1-3 provides
an example of this used in Facebook. Link prediction in an accounting setting might
work to use social media to look for relationships between related parties that are not
other- wise disclosed.
 Chapter 1 Data Analytics in Accounting and Business 11

EXHIBIT 1-3
Example of Link
Prediction on Facebook
©Facebook Inc.

• Data reduction—A data approach that attempts to reduce the amount of information
that needs to be considered to focus on the most critical items (i.e., highest cost, high-
est risk, largest impact, etc.). It does this by taking a large set of data (perhaps the
population) and reducing it with a smaller set that has the vast majority of the critical
information of the larger set. An example might include the potential to use these tech-
niques in auditing. While auditing has employed various random and stratified
sampling over the years, Data Analytics suggests new ways to highlight which
transactions do not need the same level of vetting as other transactions.

Step 4: Address and Refine Results (chapter 4)

After the data have been analyzed (in step 3 of the IMPACT cycle), the fourth step is to
address and refine results. Data analysis is iterative. We slice and dice the data, find
correlations, ask ourselves further questions, ask colleagues what they think, and revise and
rerun the analysis. But once that is complete, we have the results ready to communicate to
interested stakeholders. Chapter 4 discusses ways to communicate results, including the
use of static reports, digital dashboards, and data visualizations. Data Analytics is
especially interested in report- ing results that help decision makers see the data in an all-
new way to develop insights that help answer business questions. Digital dashboards and
data visualizations are particularly
helpful in communicating results.

Steps 5 and 6: Communicate Insights and Track

Outcomes (chapter 4 and each chapter thereafter)
Once the results have been determined (in step 4 of the IMPACT cycle), insights are
formed by decision makers and are communicated (the “C” in the IMPACT cycle) to
others. Some outcomes will be continuously tracked (the “T” in the IMPACT cycle)
perhaps via monthly reports or a digital dashboard. These portions of the IMPACT cycle
will be covered in the remaining chapters.
12 Chapter 1 Data Analytics in Accounting and Business

Back to Step 1
Of course, the IMPACT cycle is iterative, so once insights are gained and outcomes are
tracked, new questions emerge and the IMPACT cycle begins anew.

PROGRESS CHECK
7. Let’s say we are trying to predict how much money college students spend on
fast food each week. What would be the response, or dependent, variable?
What would be examples of independent variables?
8. How might a data reduction approach be used in auditing to spend time and
effort on the most important items?

LO 1-5 DATA ANALYTIC SKILLS NEEDED BY

Describe the ANALYTIC-MINDED ACCOUNTANTS
skills needed by While we don’t believe that accountants need to become data scientists—they may never
accountants need to build a data repository or do the real, hardcore Data Analytics—they must know
how to do the following:
• Clearly articulate the business problem the company is facing,
• Communicate with the data scientists about specific data needs and understand the
underlying quality of the data.
• Draw appropriate conclusions to the business problem based on the data and make
rec- ommendations on a timely basis.
• Present their results to individual members of management (CEOs, audit
managers, etc.) in an accessible manner to each member.
Consistent with that, in this text, we emphasize seven skills that analytic-minded
accoun- tants should have:
1. Develop an analytics mindset—recognize when and how data analytics can
address business questions.
2. Data scrubbing and data preparation—comprehend the process needed to clean
and prepare the data before analysis.
3. Data quality—recognize what is meant by data quality, be it completeness, reliability,
or validity.
4. Descriptive data analysis—perform basic analysis to understand the quality of the
under- lying data and its ability to address the business question.
5. Data analysis through data manipulation—demonstrate ability to sort, rearrange, merge
and reconfigure data in a manner that allows enhanced analysis.
6. Define and address problems through statistical data analysis—identify and
implement an approach that will use statistical data analysis to draw conclusions and
make recom- mendations on a timely basis.
7. Data visualization and data reporting—report results of analysis in an accessible way
to each varied decision maker and his or her specific needs.
We address these seven skills throughout the first four chapters in the text in hopes
that the analytic-minded accountant will develop and practice these skills to be ready to
address business questions. We then demonstrate these skills in the labs and hands-on
analysis throughout the rest of the book.
Chapter 1 Data Analytics in Accounting and Business 13

HANDS-ON EXAMPLE OF THE IMPACT MODEL LO 1-6

Here we provide a complete, hands-on example of the IMPACT model to show how it Explain how to
could be implemented for a specific situation. translate common
Let’s suppose I am trying to get a loan to pay off some credit card debt and my friend business questions
has told me about a new source of funds that doesn’t involve a bank. In recent years, into fields and
facili- tated by the Internet, peer-to-peer lenders allow individuals to both borrow and values
lend money to each other. While there are other peer-to-peer lenders, in this case, we will
specifically consider the LendingClub.
My question is whether I will be able to get a loan, given my prior loan history (poor),
credit score, and the like. According to our approaches mentioned above, this would be
an example of a classification approach because we are attempting to predict whether a
person applying for a loan will be approved and funded or whether she will be denied a
loan.

Identify the Questions

Stated specifically, our question is, “Given my borrower profile, can I expect the
LendingClub
to extend a loan to me?”

Master the Data

LendingClub is a U.S.-based, peer-to-peer lending company, headquartered in San
Francisco, California. LendingClub facilitates both borrowing and lending by providing a
platform for unsecured personal loans between $1,000 and $35,000. The loan period is for
either 3 or 5 years. There is information available that allows potential investors to search
and browse the loan listings on the LendingClub website and select loans in which they
would like to invest. The available information includes information supplied about the
borrower, amount of the loan, loan grade (and related loan interest rate), and loan
purpose. Investors invest in the loans and make money from interest. LendingClub makes
money by charging borrowers an origination fee and investors a service fee. Since 2007,
hundreds of thousands of borrow- ers have obtained more than $20 billion in loans via
LendingClub.12 EXHIBIT 1-4
Some basic statistics are included on the LendingClub Statistics website (Exhibit 1-4). LendingClub Statistics
Source: https://www
Total loans issuance .lendingclub.com/info/
statistics.action (accessed
2016 October 6, 2016).

201

2014

2013

2012

2011
$20,687,488,911
in loans issued as of 06/30/16
2010

0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 $220
Total loans issued ($)
12
https://www.lendingclub.com/ (accessed September 29, 2016).
14 Chapter 1 Data Analytics in Accounting and Business

Borrowers borrow money for a variety of reasons, including refinancing other debt and
paying off credit cards, as well as borrowing for other purposes (Exhibit 1-5).

EXHIBIT 1-5 Credit Card Payof

LendingClub Statistics (14.96%)
by Reported Loan
Purpose
59.65% of
LendingClub
borrowers report using
their loans to refinance
existing loans or pay Other
off their credit cards as (40.35%)
of 06/30/16.
Source: https://www Refinancing
.lendingclub.com/info/ (44.69%)
statistics.action (accessed
October 6, 2016).

LendingClub actually provides datasets: data on the loans they approved and funded
as well as data for the loans that were declined. In this chapter, we will emphasize the
rejected loans and the reasons they were rejected.
The datasets and the data dictionary are available at
https://www.lendingclub.com/info/ download-data.action.
As we learn about the data, it is important to know what is available to us. To that end,
there is a data dictionary that provides descriptions for all of the data attributes of the
data- set. A cut-out of the data dictionary for the rejected stats file (i.e., the statistics about
those loans rejected) is included in the data files as shown in Exhibit 1-6.

EXHIBIT 1-6
2007–2012
LendingClub Data
Dictionary for Declined
Loan Data
Source: Available at
https://www.lendingclub.com/
info/download-data.action
(accessed October 13, 2016)

We could also take a look at the data files available for both the funded loan data.
However, for our analysis in the rest of the chapter, we use the Excel file “RejectStatsA
Ready,” which has rejected loan statistics from 2007 to 2012. It is a cleaned-up file ready
for analysis. We’ll learn more about data scrubbing in chapter 2.
 Chapter 1 Data Analytics in Accounting and Business 15

Exhibit 1-7 provides a cut-out of the 2007–2012 “Approved Loan” dataset provided.

EXHIBIT 1-7
2007–2012 Declined
Loan Applications
(RejectStatsA)
Dataset
Available at: https://www
.lendingclub.com/info/
download-data.action.
Accessed 10/6/2016

Perform Test Plan

Considering our question, “Will I receive a loan from LendingClub?” and the available
data, we will do three analyses to predict whether we will receive a loan, including:
1. The debt-to-income ratios and number of rejected loans.
2. The length of employment and number of rejected loans.
3. The credit (or risk) score and number of rejected loans.
Because LendingClub collects this information, we believe it will give LendingClub
an idea if the borrower will be able to pay back the loan and give us an idea if our loan
will be approved or rejected.
The first analysis we perform considers the debt-to-income ratio. That is, how big is
the debt compared to the size of the annual income earned?
To consider the debt-to-income ratio in our analysis, three buckets (labeled DTI
bucket) are constructed for each grouping of the debt-to-income ratio. These three
buckets include the following:
1. High (debt is greater than 20 percent of income).
2. Medium (“mid”) (debt is between 10 and 20 percent of income).
3. Low (debt is less than 10 percent of income).
Once those buckets are constructed, we are ready to analyze the breakdown in rejected
loan applications by the debt-to-income ratio.
The Excel PivotTable is an easy way to make comparisons between the different levels
of DTI. When we run a PivotTable analysis, we highlight the loans, which count the
number of loans applied for and rejected, and the DTI bucket (see Exhibit 1-8). The
PivotTable counts the number of loan applications in each of the three DTI buckets: high,
medium (mid), and low. This suggests that because the high DTI bucket has the highest
number of loan appli- cations, perhaps the applicant asked for a loan that was too big
given his or her income. LendingClub might have seen that as too big of a risk and
chosen to not extend the loan to
16 Chapter 1 Data Analytics in Accounting and Business

EXHIBIT 1-8
LendingClub Declined
Loan Applications by
DTI (Debt-to-Income)
DTI bucket includes
high (debt > 20
percent of income),
medium (“mid”) (debt
between 10 and 20
percent of income),
and low (debt < 10
percent of income).
Source: Microsoft Excel 2016

The second analysis was on the length of employment and its relationship with
rejected loans (see Exhibit 1-9). Arguably, the longer the employment, the more stable of
a job and income stream you will have to ultimately repay the loan. LendingClub reports
the number of years for each of the rejected applications. The PivotTable analysis lists the
number of loans by the length of employment. Almost 77 percent (495,109 out of
645,414) out of the total rejected loans had worked at a job for less than 1 year,
suggesting potentially an important reason for rejecting the requested loan. Perhaps some
had worked a week, or just a month, and still want a big loan?

EXHIBIT 1-9
LendingClub Declined
Loan Applications by
DTI (Debt-to-Income)
DTI bucket includes
high (debt > 20
percent of income),
medium (“mid”) (debt
between 10 and 20
percent of income),
and low (debt < 10
percent of income).
Source: Microsoft Excel 2016
 Chapter 1 Data Analytics in Accounting and Business 17

The third analysis we perform is to consider the credit or risk score of the applicant.
As
noted in Exhibit 1-10, risk scores are typically classified in this way with those in the
excel- lent and very good category receiving the lowest possible interest rates and best
terms with a credit score above 750. On the other end of the spectrum are those with very
bad credit (with a credit score less than 600).

EXHIBIT 1-10
Excellent Breakdown of Customer
Credit Scores (or Risk
800–850
Those with excellent and Scores)
very good credit scores are
likely to qualify for almost Source: Cafecredit.com
all loans and receive the Very Good
lowest interest rates.
750–799

Good
700–749
Those with good and fair
credit scores are likely to
qualify for most loans and Fair
receive good interest 650–699
rates.

Poor
600–649

Those with poor and

very bad credit scores Very Bad
are likely to qualify for 300–599
loans only if they have
sufficient collateral.

Another predictor of loan repayment is the credit score that the borrower has. We clas-
sify the sample according to this breakdown into excellent, very good, good, fair, poor,
and very bad credit according to their credit score noted in Exhibit 1-10.

Address and Refine Results

After performing a PivotTable analysis (as seen in Exhibit 1-11), we count the number of
rejected loan applications by credit (risk) score. We’ll note in the rejected loans that
nearly 82 percent [(167,379 + 151,716 + 207,234)/645,414] of the applicants have either
very bad, poor, or fair credit ratings, suggesting this might be a good reason for a loan
rejection. We also note that only 0.3 percent (2,494/645,414) of those rejected loan
applications had excellent credit.
So, if these are the applications that were all rejected, the question is how many of
these that might apply for a loan not only had excellent credit, but also had worked more
than 10 years and had asked for a loan that was less than 10 percent of their income (in
the high DTI bucket)? Use of a PivotTable (as shown in Exhibit 1-12) allows us to
consider this three-way interaction to and the question and suggests an answer of 89 out
of 645414 (0.014 percent of the total). This might suggest that the use of these three
metrics is rea- sonable at predicting loan rejection because the number who have
excellent credit, worked more than 10 years, and requested a loan that was less than 10
18 Chapter 1 Data Analytics in Accounting and Business

EXHIBIT 1-11 The Count of LendingClub Rejected Loan Applications by Credit or Risk Score
Classification Using PivotTable Analysis
Source: Microsoft Excel 2016

EXHIBIT 1-12 The Count of LendingClub Declined Loan Applications by Credit Score, Debt-to-
Income, and Employment Length Using PivotTable Analysis (highlighting added)
Source: Microsoft Excel 2016
 Chapter 1 Data Analytics in Accounting and Business 19

Perhaps those with excellent credit just asked for too big of a loan given their existing
debt and that is why they were rejected. Exhibit 1-13 shows the PivotTable analysis. The
analysis shows those with excellent credit asked for a larger loan (16.2 percent of
income) given the debt they already had as compared to any of the others, suggesting a
reason even those potential borrowers with excellent credit were rejected.

EXHIBIT 1-13 The Average Debt-to-Income Ratio (shown as a percentage) by Credit (Risk)
Score for LendingClub Declined Loan Applications Using PivotTable Analysis
Source: Microsoft Excel 2016

Communicate Insights
Certainly further and more sophisticated analysis could be performed, but at this point we
have a pretty good idea of what LendingClub uses to decide whether to extend a loan.
We can communicate these insights either by showing the PivotTables or stating what
three of the determinants are.

Track Outcomes
There are a wide variety of outcomes that could be tracked. But in this case, it might be
best to see if we could predict future outcomes. For example, the data we analyzed was
from 2007–2012. We could make our predictions for subsequent years based on what we
had found in the past and then test and see how accurate we are with those predictions.
We could also change our prediction model when we learn new insights and additional data
become available. In this chapter, we discussed how businesses and accountants derive
value from Data Analytics. We gave some specific examples of how Data Analytics is
used in business, audit-
ing, managerial accounting, financial accounting, and tax accounting.
We introduced the IMPACT model and explained how it is used. And then talked spe-
cifically about the importance of identifying the question. We walked through the first
few steps of the IMPACT model and introduced eight data approaches. We also discussed
the data analytic skills needed by analytic-minded accountants.
We followed this up by looking at the case of why LendingClub rejected loans for a set
of its customers using the IMPACT model. We performed this analysis using various
filtering
and PivotTable tasks.
20 Chapter 1 Data Analytics in Accounting and Business

PROGRESS CHECK
9. Doing your own analysis, download the rejected loans dataset titled
“RejectStatsA Ready” and perform an Excel PivotTable analysis by state and
figure out the num- ber of rejected applications for the state of California. That
is, count the loans by state and see what percentage of the rejected loans
came from California. How close is that to the relative proportion of the
population of California as com- pared to that of the United States?
10. Doing your own analysis, download the rejected loans dataset titled
“RejectStatsA Ready” and run an Excel PivotTable by risk (or credit) score
classification and DTI bucket to determine the number of rejected loans
requested by those rated as having an excellent credit score.

Summary
■
With data all around us, businesses and accountants are looking to Data Analytics to
extract the value that the data might possess.
■
Data Analytics is changing the audit and the way that accountants look for risk. Now,
auditors can consider 100 percent of the transactions in their audit testing. It is also
help- ful in finding the anomalous or unusual transactions. Data Analytics is also
changing the way financial accounting, managerial accounting, and taxes are done at a
company.
■
The IMPACT cycle is a means of doing Data Analytics that goes all the way from
iden- tifying the question, to mastering the data, to performing data analyses and
communi- cating results. It is recursive in nature, suggesting that as questions are
addressed, new important questions may emerge that can be addressed in a similar
way.
■
Eight data approaches address different ways of testing the data: classification, regres-
sion, similarity matching, clustering, co-occurrence grouping, profiling, link
prediction, and data reduction. These are explained in more detail in chapter 3.
■
Data analytic skills needed by analytic-minded accountants are specified and are
consis- tent with the IMPACT cycle, including the following:
◦ Develop an analytics mindset.
◦ Data scrubbing and data preparation.
◦ Data quality.
◦ Descriptive data analysis.
◦ Data analysis through data manipulation.
◦ Define and address problems through statistical data analysis.
◦ Data visualization and data reporting.

Key Words
Big Data (4) Datasets that are too large and complex for businesses’ existing systems to handle
utilizing their traditional capabilities to capture, store, manage, and analyze these datasets.
classification (9) A data approach that attempts to assign each unit in a population into a few catego-
ries potentially to help with predictions.
clustering (10) A data approach that attempts to divide individuals (like customers) into groups (or
clusters) in a useful or meaningful way.
co-occurrence grouping (10) A data approach that attempts to discover associations between indi-
viduals based on transactions involving them.
Data Analytics (4) The process of evaluating data with the purpose of drawing conclusions to
address business questions. Indeed, effective Data Analytics provides a way to search through large
structured and unstructured data to identify unknown patterns or relationships.
data dictionary (14) Centralized repository of descriptions for all of the data attributes of the dataset.
data reduction (11) A data approach that attempts to reduce the amount of information that needs to
be considered to focus on the most critical items (i.e., highest cost, highest risk, largest impact, etc.).
link prediction (10) A data approach that attempts to predict a relationship between two data items.
profiling (10) A data approach that attempts to characterize the “typical” behavior of an individual,
group, or population by generating summary statistics about the data (including mean, standard devia-
tions, etc.).
predictor (or independent or explanatory) variable (9) A variable that predicts or explains
another variable, typically called a predictor or independent variable.
response (or dependent) variable (9) A variable that responds to, or is dependent on, another.
regression (9) A data approach that attempts to estimate or predict, for each unit, the numerical value
of some variable using some type of statistical model.
similarity matching (10) A data approach that attempts to identify similar individuals based on data
known about them.

ANSWERS TO PROGRESS CHECKS

1. The plethora of data alone does not necessarily translate into value. However, if we
care- fully use the data to help address critical business problems and questions, the
data may create value.
2. Banks could certainly use credit scores from companies like Experian, TransUnion,
and Equifax, but if they have access to all of the banking information of their clients,
arguably they could make more informed decisions. We would know how much
money they have and how they spend it. We would know if they had prior loans and if
they were paid in a timely manner. We would know where they work and their
monthly income via the direct deposits. All of these combined, in addition to a credit
score, might be used to assess creditworthiness to gain a better evaluation of
customers’ creditworthiness when they would like a loan. It might also give us needed
information for a marketing campaign to target potential creditworthy customers.
3. The brand manager at Samsung might use Data Analytics to see what is being said
about its phones on social media websites (such as Snapchat, Instagram, and
Facebook), particularly those that attract an older demographic. This will help them to
assess if there is a problem with the perceptions of its phones.
4. Data Analytics might be used to collect information on the amount of overtime. Who
worked overtime? What were they working on? Do we actually need more full-time
employees to reduce the level of overtime (and its related costs to the company and
to the employees)? All of these questions could be addressed by looking at recent
over- time records.
5. Data Analytics could tabulate the number of journal entries by an accountant to see
who entered the most journal entries. This might be an issue if there was a perception
of a problem in risk, such as segregation of duties in having one person enter so
many jour- nal entries or just how the accounting workload is distributed across
accounting staff.

21
 6. The tax staff would become much more adept at efficiently organizing data stored
across
multiple systems across an organization and performing Data Analytics to help with
tax planning to structure transactions in a way that might minimize taxes.
7. The dependent variable could be the amount of money spent on fast food.
Independent variables could be proximity of the fast food, ability to cook own food,
discretionary income, socioeconomic status, etc.
8. The data reduction approach might help auditors spend more time and effort on the
riskiest transactions or on those that might be anomalous in nature. This will help
them more efficiently spend their time on items that may well be of highest
importance.
9. An analysis of the rejected loans suggests that 85,793 of the total 645,414 rejected
loans were from the state of California. That represents 13.29 percent of the total
rejected loans. This is greater than the relative population of California to the United
States as of the 2010 census, of 12.1 percent (37,253,956/308,745,538).

Source: Microsoft Excel 2016

10. A PivotTable analysis of the rejected loans suggests that more than 30.5 percent
(762/2,494) of those in the excellent risk/credit score range asked for a loan with a
debt- to-income ratio of more than 20 percent.

Source: Microsoft Excel 2016

22
Multiple Choice Questions
1. Big Data is often described by the three Vs, or
a. Volume, velocity, and variability.
b. Volume, velocity, and variety.
c. Volume, volatility, and variability.
d. Variability, velocity, and variety.
2. Which approach to Data Analytics attempts to assign each unit in a population into a
small set of classes where the unit belongs?
a. Classification
b. Regression
c. Similarity matching
d. Co-occurrence grouping
3. Which approach to Data Analytics attempts to identify similar individuals based on
data known about them?
a. Classification
b. Regression
c. Similarity matching
d. Data reduction
4. Which approach to Data Analytics attempts to predict relationship between two data
items?
a. Profiling
b. Classification
c. Link prediction
d. Regression
5. Which of these terms is defined as being a central repository of descriptions for all of
the data attributes of the dataset?
a. Big Data
b. Data warehouse
c. Data dictionary
d. Data Analytics
6. Which skills were not emphasized that analytic-minded accountants should have?
a. Develop an analytics mindset
b. Data scrubbing and data preparation
c. Classification of test approaches
d. Define and address problems through statistical data analysis
7. Which skills were not emphasized that analytic-minded accountants should have?
a. Data quality
b. Descriptive data analysis
c. Data visualization
d. Data and systems analysis and design
8. The IMPACT cycle includes all except the following process:
a. Visualize the data.
b. Identify the questions.
c. Master the data.
d. Track outcomes.

23
 9. The IMPACT cycle includes all except the following process:
a. Communicate insights.
b. Data preparation.
c. Address and refine results.
d. Perform test plan.
10. By the year 2020, about 1.7 megabytes of new information will be created every:
a. Week.
b. Second.
c. Minute.
d. Day.

Discussion Questions
1. Define Data Analytics and explain how a university might use its techniques to recruit
and attract potential students.
2. Give an example of how Data Analytics creates value for businesses.
3. Give an example of how Data Analytics creates value for accounting.
4. How might Data Analytics be used in financial reporting? And how might it be used in
doing tax planning?
5. Describe the IMPACT cycle. Why does its order of the processes and its recursive
nature make sense?
6. Why is identifying the question such a critical first step in the IMPACT process cycle?
7. What is included in mastering the data as part of the IMPACT cycle described in the
chapter?
8. In the chapter, we mentioned eight different data approaches. Which data approach
was used by Alibaba, as mentioned in the chapter-opening vignette?
9. What data approach mentioned in the chapter might be used by Facebook to find
friends?
10. Auditors will frequently use the data reduction approach when considering potentially
risky transactions. Provide an example of why focusing on a portion of the total
number of transactions might be important for auditors to assess risk.
11. Which data approach might be used to assess the appropriate level of the allowance
for doubtful accounts?
12. Why might the debt-to-income attribute included in the declined loans dataset consid-
ered in the chapter be a predictor of declined loans? How about the credit (risk)
score?
13. To address the question “Will I receive a loan from LendingClub?” we had available
data to assess the relationship among (1) the debt-to-income ratios and number of
rejected loans, (2) the length of employment and number of rejected loans, and (3)
the credit (or risk) score and number of rejected loans. What additional data would
you recommend to further assess whether a loan would be offered? Why would it be
helpful?

Problems
1. Download and consider the data dictionary file “LCDataDictionary,” specifically the
LoanStats tab. This represents the data dictionary for the loans that were funded.
Seeing all of the data attributes listed there, which attributes do you think might
predict which loans will go delinquent and which will ultimately be fully repaid? How
could we test that?
24
2. Download and consider the rejected loans dataset of LendingClub data titled
“RejectStatsA Ready.” Given the analysis performed in the chapter, what three items
do you believe would be most useful in predicting loan acceptance or rejection? What
additional data do you think could be solicited either internally or externally that would
help you predict loan acceptance or rejection?
3. Download the rejected loans dataset of LendingClub data titled “RejectStatsA
Ready” from the Connect website and do an Excel PivotTable by state; then figure
out the num- ber of rejected applications for the state of Arkansas. That is, count the
loans by state and compute the percentage of the total rejected loans in the USA that
came from Arkansas. How close is that to the relative proportion of the population of
Arkansas as compared to the overall U.S. population (per 2010 census)?
4. Download the rejected loans dataset of LendingClub data titled “RejectStatsA
Ready” from the Connect website and do an Excel PivotTable by state; then figure
out the num- ber of rejected applications for each state. Reorder these and make a
graph ordering the states and the number of rejected loans from highest to lowest. Is
there a lot of vari- ability among states?
For Problems 5, 6, and 7, we will be cleaning a data file in preparation for subsequent
analysis.
The analysis performed on LendingClub data in the chapter was for the years 2007–
2012. For this and subsequent problems, please download the declined loans table
for 2013–2014 from the Connect website,
https://www.lendingclub.com/info/download- data.action.
5. Consider the 2013 declined loan data from LendingClub titled “RejectStatsB2013”
from the Connect website. Similar to the analysis done in the chapter, let’s scrub the
risk score data. First, because our analysis requires risk scores, debt-to-income data,
and employment length, we need to make sure each of them has valid data.
a. Open the file in Excel.
b. Sort the file based on risk score and remove those observations (the complete
row or record) that have a missing score or a score of zero.
c. Assign each risk score to a risk score bucket similar to the chapter. That is,
classify the sample according to this breakdown into excellent, very good, good,
fair, poor, and very bad credit according to their credit score noted in Exhibit 1-10.
Classify those with a score greater than 850 as “Excellent”. Consider using if-then
state- ments to complete this. Or sort the row and manually input.
d. Run a PivotTable analysis that shows the number of loans in each risk score
bucket. Which group had the most rejected loans (biggest count)? Which group had
the least rejected loans (smallest count)? This is the deliverable. Is it similar to
Exhibit 1-11 performed on years 2007–2012?
6. Consider the 2013 declined loan data from LendingClub titled “RejectStatsB2013.”
Similar to the analysis done in the chapter, let’s scrub the debt-to-income data.
Because our analysis requires risk scores, debt-to-income data, and employment
length, we need to make sure each of them has valid data.
a. Sort the file based on debt-to-income and remove those observations (the
complete row or record) that have a missing score, a score of zero, or a negative
score.
b. Assign each valid debt-to-income ratio into three buckets (labeled DTI bucket) by clas-
sifying each debt-to-income ratio into high (>20 percent), medium (10–20
percent), and low (<10 percent) buckets. Consider using if-then statements to
complete this. Or sort the row and manually input.
c. Run a PivotTable analysis that shows the number of loans in each DTI bucket.
Any interpretation of why these loans were declined based on debt-to-income
ratios?
7. Consider the 2013 declined loan data from LendingClub titled “RejectStatsB2013.”
Similar to the analysis done in the chapter, let’s scrub the employment length.
Because our analysis requires risk scores, debt-to-income data, and employment
length, we need to make sure each of them has valid data.
25
 a. Sort the file based on employment length and remove those observations (the
com-
plete row or record) that have a missing score (“NA”) or a score of zero.
b. Sort the file based on debt-to-income and remove those observations (the
complete row or record) that have a missing score, a score of zero, or a negative
score.
c. Sort the file based on risk score and remove those observations (the complete
row or record) that have a missing score or a score of zero.
d. There should now be 669,993 observations. Any thoughts on what biases are
imposed when we remove observations? Is there another way to do this?
e. Run a PivotTable analysis to show the number of Excellent Risk Scores but High
DTI Bucket loans in each Employment year bucket. Any interpretation of why
these loans were declined based on employment length?

Answers to Multiple Choice Questions

1. B
2. A
3. C
4. C
5. C
6. C
7. D
8. A
9. B
10. B

26
 Lab 1-0 How to Complete Labs in This Text
The labs in this book will provide valuable hands-on experience in generating and analyz-
ing accounting problems. Each lab will provide a company summary with relevant facts,
techniques that you will use to complete your analysis, software that you’ll need, and an
overview of the lab steps.
When you’ve completed your lab, you will submit a lab report showing your thought
process with written responses and validating that you’ve completed specific checkpoints
by taking screenshots along the way. This lab will demonstrate how to use basic lab tools.

In this lab, you will:

Part 1: Create a Word document on OneDrive.

Part 2: Take a screenshot of your document.
Part 3: Add another screenshot and submit your document.
Submit two screenshots.

Part 1: Create a New Word Document on OneDrive

On Office.com

1. Open your web browser and go to www.office.com.

2. Click OneDrive and log in using your university or personal e-mail address and
password.
3. Click + New > Word document. A new window will open with a new blank document.
4. Type “Lab 1-0 Data Analytics Lab Overview [Your name] [Your university email
address]”
in the first line (e.g., Lab 1-0 Data Analytics Lab Overview Ryan Teeter [email protected]).
5. Click File > Save As > Save As and name the document “Lab 1-0 Data Analytics
Lab Overview Ryan Teeter [email protected].” (You can also click the document name
in the
title bar (e.g., Document2) and change it there.
6. Because your document is in the cloud, changes are saved automatically and you
won’t lose your document when you log out of a lab computer.
7. Keep your document open and go to the next part of the lab.

Part 2: Take a Screenshot of Your Document

In Windows

1. Click the Start button and Search for “Snipping Tool.”

2. Click New (Rectangular Snip) and draw a rectangle across your screen that
includes your entire window.
3. A preview window with your screenshot will appear.
4. Press Ctrl + C to copy your screenshot.
5. Go to your Word document and press Ctrl + V to paste the screenshot into your
document.
6. Keep your document open and go the next part of the lab.

On a Mac

1. Press Cmd + Shift + 4 and draw a rectangle across your screen that includes
your entire window.
2. Your screenshot will be saved in your Desktop folder.
3. Drag the screenshot file into your Word document.
4. Keep your document open and go the next part of the lab.
27
 Part 3: Add Another Screenshot and Submit Your
Document
1. Open a new web browser window and go to mhhm.com.
2. Take a screenshot of your results (label it 1-0A) of the page and paste it into your
lab document.
3. Save your document and submit it to your instructor. If you’re using Word Online
on OneDrive, click File > Save As > Download a Copy.

End of Lab

Lab 1-1 Data Analytics in Financial Accounting

Let’s see how we might use financial accounting data to perform some simple Data
Analytics. The purpose of this lab is to help you identify relevant questions that may be
answered using Data Analytics.

Company summary
You were just hired as an analyst for a credit rating agency that evaluates publicly listed
companies in the United States. The company already has some Data Analytics tools that
it uses to evaluate financial statements and determine which companies have higher risk
and which companies are growing quickly. The company uses these analytics to provide
ratings that will allow lenders to set interest rates and determine whether to lend money in
the first place. As a new analyst, you’re determined to make a good first impression.

Technique

• Some experience with spreadsheets and basic formulas is helpful here.

Software needed

• Word processor
• Web browser
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

Part 1: Identify appropriate questions, and develop a hypothesis for each question.
Part 2: Translate questions into target fields and value in a database.
Part 3: Perform a simple analysis.

Part 1: Identify the Questions

Think about ways that you might analyze data from a financial statement. You could use
a horizontal analysis to view trends over time, a vertical analysis to show account propor-
tions, or ratios to analyze relationships.
1. Create a new word processing document and name the file “Lab 1-1 Data Analytics
in Financial Accounting Lab—[Your name] [Your email address].”
2. Use what you know about financial statement analysis (or search the web if you need
a refresher) to generate three different metrics for evaluating financial performance.

28
 For example, if you wanted to evaluate a company’s profit margin from one year to
the
next your question might be, “Has [Company X’s] gross margin increased in the last
three years?” Type your three questions in your document.
3. Next to each question generate a hypothetical answer to the question to help you iden-
tify what your expected output would be. You may use some insight or intuition or
search for industry averages to inform your hypothesis. For example: “Hypothesis:
Apple Inc’s gross margin has increased slightly in the past 3 years.”
4. Save your document.

Part 2: Master the Data

To answer your questions, you’ll need to evaluate specific account values or financial
statement paragraphs. As an analyst, you have access to the Security and Exchange
Commission’s (SEC’s) EDGAR database of XBRL financial statements as well as a list
of XBRL tags from the Financial Accounting Standards Board (FASB). XBRL stands
for eXtensible Business Reporting Language and is used to make the data in financial
statements machine-readable. Public companies have been preparing XBRL reports since
2008. While there are some issues with XBRL data, such data have become a useful
means for comparing and analyzing financial statements. Every value, date, and
paragraph is “tagged” with a label that identifies what each specific value represents,
similar to assign- ing attributes in a database. Because companies tag their financial
statements with XBRL tags, you can use those tags to identify specific data that you need
to answer your ques- tions from Part 1.
Analyze your questions:
5. Evaluate each question from Part 1. There are specific data attributes that will
help you find the answer you’re looking for. For example, if your question was
“Has
[Company X’s] gross margin increased in the last 3 years?” and the expected answer
is “Apple Inc’s gross margin has increased slightly in the past 3 years,” this tells you
what attributes (or fields) to look for: company name, gross margin (sales revenues –
cost of goods sold), year.
6. For each of your questions, identify the account or data attribute you need to
answer your question. Then use FASB’s XBRL taxonomy (see next section for
instructions) to identify the specific XBRL tags that represent those accounts. For
example:
Company name = EntitySectorIndustryClassificationPrimary
Gross margin = GrossProfit
Sales revenues = SalesRevenueNet
Cost of goods sold = CostOfGoodsAndServicesSold
Year = DocumentPeriodEndDate
7. Save your document.
Identify XBRL tags from the FASB’s taxonomy:
8. Open a web browser, and go to xbrlview.fasb.org.
9. Click the + next to US GAAP (2016-01-31).
10. Click the ALL (Main/Entire) option, and then click Open to load the taxonomy.
11. Navigate through the financial statements to determine which accounts you need to
answer your questions from Part 1. The name of the XBRL tag is found in the
proper- ties pane next to “Name.” For example, the tag for Total Assets can be found
by click- ing + Statement of Financial Position [Abstract], + Statement [Table], +
Statement [Line Items], + Assets [Abstract], + Assets, Total, as shown in Exhibit 1-
1A. You may also use the search function.
29
 Note: Be careful when you use the search function. The tag you see in the results
may appear in the wrong statement. Double-click the tag to expand the tree and show
where the account appears.

LAB EXHIBIT 1-1A

Browse the XBRL
Taxonomy for Financial
Fact Tags Needed for
Your Analysis
Source: Google

Part 3: Perform the Analysis

Now that you’ve identified your questions and the data sources, you can build your model
and perform your analysis. Because XBRL data are dynamic, we’ll use a tool that pulls
live data based on your inputs.
12. In your web browser, click on the eBook via Connect to locate the table of
con- tents where you will find Additional Student Resources > Financial
Statement Analysis or Click Here.
13. Log into your Google Account.
14. Click File > Make a Copy. . .
15. In your new document, add your tags from Part 2 under the Financial Facts header,
similar to Exhibit 1-1B.
16. Under the Analysis header, use formulas to create your analysis from Part 1. You
may enhance your output by using conditional formatting or other visualizations
that will be covered in chapter 4.
17. Take a screenshot (label it 1-1A) of your analysis and paste it into your lab
document.
18. Save your document and submit it to your instructor.

30
 LAB EXHIBIT 1-1B
Add Your Tags to
Perform a Simple
Analysis Using XBRL
Data
Source: Google

Lab 1-2 Data Analytics in Managerial g

Accountin
Let’s see how we might use customer data to understand some simple data analytics. The
purpose of this lab is to help you identify relevant questions that may be answered using
data analytics.

Company summary
LendingClub is a U.S.-based, peer-to-peer lending company, headquartered in San
Francisco, California. LendingClub facilitates both borrowing and lending by providing a
platform for unsecured personal loans between $1,000 and $35,000. The loan period is for
either 3 or 5 years. You have been brought in to help managers improve their loan
application process.

Technique

• Some critical and creative thinking is helpful here.

Software needed

• Word processor

In this lab, you will:

Part 1: Identify appropriate questions and develop a hypothesis for each

question. Part 2: Identify fields and values in a database that are relevant to your
questions.

Part 1: Identify the Questions

LendingClub currently assigns a risk score to all loan applicants. This risk score is used
to determine (1) whether a loan is accepted and (2) what interest rate approved loans will
receive. The risk score has been used for the past 5 years, but LendingClub thinks there
may

31
 be better ways to evaluate this given that the number of defaulted loans has increased in
the
past 2 years. It would like you to propose a model that would help it potentially assign a
risk score to loan applicants.
1. Create a new word processing document and name the file “Lab 1-2 Data Analytics
in Managerial Accounting Lab – [Your name] [Your email address].”
2. Use what you know about loan risk (or search the web if you need a refresher) to
identify three different questions that might influence risk. For example, if you
suspect risky customers live in a certain location, your question might be “Where do
the cus- tomers live?” Type your three questions in your document.
3. Next to each question, generate a hypothetical answer to each question to help
you identify what your expected output would be. You may use some insight or
intuition or search the Internet for ideas on how to inform your hypothesis. For
example: “Hypothesis: Risky customers likely live in coastal towns.”
4. Finally, identify the data that you would need to answer each of your questions. For
example, to determine customer location, you might need the city, state, and zip
code. Additionally, if you hypothesize a specific region, you’d need to know which
cities, state, and/or zip codes belong to that region. Add your required data
sources to each question in your document.
5. Save your document.

Part 2: Master the Data

To answer your questions, you’ll need to evaluate specific data that LendingClub collects.
It has provided a listing of fields that it collects in Table 1-2A:
LAB TABLE 1-2A Attribute Description
Names and Descriptions
id Loan identification number
of Selected Data
Attributes Collected by member_id Membership id
LendingClub loan_amnt Requested loan amount
emp_length Employment length
issue_d Date of loan issue
loan_status Fully paid or charged off
pymnt_plan Payment plan: yes or no
purpose Loan purpose: e.g., wedding, medical, debt_consolidation, car
zip_code Zip code
addr_state State
dti Debt-to-income ratio
delinq_2y Late payments within the past two years
earliest_cr_line Oldest credit account
inq_last_6mnths Credit inquiries in the past 6 months
open_acc Number of open credit accounts
revol_bal Total balance of all credit accounts
revol_util Percentage of available credit in use
total_acc Total number of credit accounts
application_type Individual or joint application

32
 6. Evaluate each question from Part 1. Do the data you identified in your questions
exist in the table provided? Write the applicable fields next to each question in
your document.
7. Are there data values you identified that don’t exist in the table? Write where else
you might look to collect the missing data or how you might suggest collecting
those it.
8. Save your document and submit to your instructor.

End of Lab

Lab 1-3 Data Analytics in Auditing

The purpose of this lab is to help you identify relevant questions that may be answered
using data analytics in auditing. Let’s evaluate how we might use master and transaction
data from an enterprise resource planning system to perform some simple data analytics
to assist the financial statement audit.

Company summary
ABC Company is a large retailer that collects its order-to-cash data in a large ERP system
that was recently updated to comply with the AICPA’s audit data standards. ABC
Company currently collects all relevant data in the ERP system and digitizes any
contracts, orders, or receipts that are completed on paper. The credit department reviews
customers who request credit. Sales orders are approved by managers before being sent to
the warehouse for prepa- ration and shipment. Cash receipts are collected by a cashier
and applied to a customer’s outstanding balance by an accounts receivable clerk.
You have been assigned to the audit team that will perform the internal controls audit
of ABC Company.

Technique

• Familiarity with database structure and primary-foreign key relationships may be

helpful.

Software needed

• Word processor
• Web browser
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

Part 1: Identify appropriate questions and develop a hypothesis for each question.
Part 2: Translate questions into target fields and value in a database and perform a
simple analysis.

Part 1: Identify the Questions

Your audit team has been tasked with identifying potential internal control weaknesses
within the order-to-cash processes.

33
 1. Create a new word processing document and name the file “Lab 1-3 Data Analytics
in
Auditing Lab – [Your name] [Your email address].”
2. Use what you know about internal controls over the order-to-cash process (or
search the web if you need a refresher) to identify three different questions that
might indi- cate internal control weakness. For example, if you suspect that a
manager may be delaying approval of shipments sent to customers, your question
might be “Are any shipping managers approving shipments more than 2 days after
they are received?” Type your three questions in your document.
3. Next to each question generate a hypothetical answer to each question to help
you identify what your expected output would be. You may use some insight or
intuition or search the Internet for ideas on how to inform your hypothesis. For
example: “Hypothesis: Only 1 or 2 shipping managers are approving shipments
more than
2 days after they are received.”
4. Finally, identify the data that you would need to answer each of your questions. For
example, to determine the timing of approval and who is involved, you might need
the approver id, the order date, and the approval date. Add your required data
sources to each question in your document.
5. Save your document.

Part 2: Master the Data

To answer your questions, you’ll need to evaluate the data that are available in the audit
data standards.
6. Open your web browser and search for “Audit data standards order to cash.” Follow
the link to the “Audit Data Standards Library—AICPA,” then look for the “Audit
Data Standard—Order to Cash Subledger Standard” PDF document.
7. Quickly scan through the document for fields that relate to each question you
identi- fied in Part 1. For example, if you’re looking for the shipment timing and
approval data, you would need the Shipments_Made_YYYYMMDD_YYYYMMDD
table and Approved_By, Entered_Date, and Approved_Date fields. List the tables and
fields from the audit data standard in your document needed for each question.
8. Identify any data that don’t appear in the audit data standard that might also be
relevant to your questions.
9. Save your document and submit it to your instructor.

End of Lab

Lab 1-4 mprehensive Case: Dillard’s Store Data

Co
The purpose of this lab is to help you identify relevant questions for Dillard’s Inc. based
on its data.

Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its headquar-
ters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at finance
.yahoo.com (ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note
that William T. Dillard II is an accounting grad of the University of Arkansas and the
Walton College of Business, which may be why he shared transaction data with us to
make
 available for this lab and labs throughout this text.

34
Technique
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will be able to help you gain access when it is needed. From
the Walton College website, we note the following:

The Dillard’s Department Store Database contains retail sales information gathered
from store sales transactions. The sale process begins when a customer brings items
intended for purchase (clothing, jewelry, home décor, etc.) to any store register. A
Dillard’s sales associate scans the individual items to be purchased with a barcode
reader. This populates the transaction table (TRANSACT), which will later be used
to generate a sales receipt listing the item, department, and cost information (related
price, sale price, etc.) for the customer. When the customer provides payment for
the items, payment details are recorded in the transaction table, the receipt is
printed, and the transaction is complete. Other tables are used to store information
about stores, products, and departments.

This retail sales information, UA_DILLARDS, was provided to the Walton College of
Business by Dillard’s Stores Inc. The information consists of five tables with more than
128 million rows already populated and ready for use.
This is a gifted dataset that is based on real operational data. Like any real database,
integrity problems may be noted. This can provide a unique opportunity not only to
expose students to real data, but also to illustrate the effects of data integrity problems.
[Source: http://walton.uark.edu/enterprise/dillardshome.php (accessed September 25,
2017).]

Software needed

• Word processor
• Web browser
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)
• Access to the dataset is available at http://walton.uark.edu/enterprise/dillardshome
.php. If you plan on doing additional labs on Dillard’s data, you must receive permis-
sion from the Walton College to access the data before use. Additional access instruc-
tions are available from your instructor or on the Connect website.

In this lab, you will:

Part 1: Identify appropriate questions for a retailer.

Part 2: Translate questions into target tables, fields, and values in the Dillard’s
database.

Part 1: Identify the Questions

1. Create a new word processing document and name the file “Lab 1-4 Comprehensive
Case – Dillard’s Data [Your name] [Your email address].”
2. Assume that Dillard’s wants to improve profitability. Name three questions that
could be asked to assess current profitability levels for each product and how
profitability
could be improved in the near future.
35
 3. Assume that Dillard’s wishes to improve its online sales and profitability on those
sales. What three questions could be asked to see where Dillard’s stands on its
online sales?
4. Save your document.

LAB EXHIBIT 1-4A

Source: http://walton.uark
.edu/enterprise/dillardshome
.php (accessed September 25,
2017).

Part 2: Master the Data

To answer your questions and related questions, access the Data Dictionary and Entity
Relationship Diagram for the Dillard’s Entity Relationship data at http://walton.uark.edu/
enterprise/dillardshome.php or consider the information in Exhibits 1-4A and 1-4B.
5. You’re trying to learn about where Dillard’s stores are located to identify locations
for the next additional store. Consider the STORE table. What questions could be
asked about store location given data availability?
6. What questions would you have regarding data fields in the SKU table that could
be used to help address the cost of shipping? What additional information would
be helpful to address this question?
7. What table and fields could address the question of the profit margin (sales price less
cost) on each product (SKU) available for sale?

36
Metadata LAB EXHIBIT 1-4B
Attribute Description Values Source: http://walton.uark.
edu/enterprise/dillardshome.
AMT Total amount of the transaction charge to the customer 26.25, 44.00, . . . php (accessed September 25,
2017).
BRAND The brand name of the stock item TOMMY HI, MARK ECK, . . .
CITY City where the store is located ST. LOUIS, TAMPA, . . .
CLASSID Stock Item Classification 5305, 4505, 8306, . . .
COLOR The color of the stock item BLACK, KHAKI, . . .
COST The cost of the stock item 9.00, 15.00, . . .
DEPT Department where the stock item belong 800, 801, 1100, . . .
DEPTDESC Description of the department CLINIQUE, LESLIE, . . .
INTERID Internal ID 265005802, 671901998, . . .
MIC Master Item Code 862, 689, . . .
ORGPRICE Original price of the item stock 75.00, 44.00, . . .
PACKSIZE The quantity of item per pack 1, 3, . . .
QUANTITY Item quantity of the transaction 1, 2, 3, . . .
REGISTER Register Number of the current transaction 580, 30, 460, . . .
RETAIL The retail price of the stock item 19.75, 34.00, . . .
SALEDATE Sale price of the item stock 2005-01-20, 2005-06-02, . . .
SEQ Sequence number 298100028, 213500030, . . .
SIZE The size of the stock item L, 070N, 22, . . .
SKU Stock Keeping Unit number of the stock item 4757355, 2128748, . . .
SPRICE Sale price of the item stock 26.25, 65.00, . . .
STATE State where the store is located FL, MO, AR, . . .
STORE Store Number 2, 3, 4, 100, . . .
STYLE The specific style of the stock item 51 MERU08, 9 126NAO, . . .
STYPE Type of the transaction (Return or Purchase) P, R
TRANNUM Transaction Code 09700, 01800, . . .
UPC Universal Product Code for the stock item 000400004087945, . . .
VENDOR The vendor number of the stock item 5511283, 2726341, . . .
ZIP ZIP Code 33710, 63126, . . .

8. If you’re interested in learning which product is sold most often at each store,
what tables and fields would you consider?
9. Save your document and submit it to your instructor.

End of Lab

37
 Chapter 2
Data Preparation and Cleaning

A Look at This Chapter

This chapter provides an overview of the types of data that are used in the accounting cycle and common data
that are stored in a relational database. The chapter addresses mastering the data, the second step of the IMPACT
cycle. We will describe how data are requested and extracted to answer business questions and how to transform data
for use via data preparation, validation, and cleaning. We conclude with an explanation of how to load data into the
appropri- ate tool in preparation for analyzing data to make decisions.

A Look Back
Chapter 1 defined Data Analytics and explained that the value of Data Analytics is in the insights it provides.
We described the Data Analytic Process using the IMPACT cycle model and explained how this process is
used to address both business and accounting questions. We specifically emphasized the importance of identifying
appropri- ate questions that data analytics might be able to address.

A Look Ahead
Chapter 3 describes how to go from defining business problems to analyzing data, answering questions, and address-
ing business problems. We make the case for three data approaches we argue are most relevant to accountants
and provide examples of each.

38
 We are lucky to live in a world in which data are abundant.
However, even with rich sources of data, when it comes to
being able to analyze data and turn them into useful
information and insights, very rarely can an analyst hop right
into a dataset and begin analyzing. Datasets almost always
need to be cleaned and validated before they can be used. Not
knowing how to clean and validate data can, at best, lead to
frustration and poor insights and, at worst, lead to horrible
security violations. While this text takes advantage of open
source datasets, these datas- ets have all been scrubbed not
Shutterstock / Wichy
only for accuracy, but also to pro- tect the security and privacy
of any individual or company whose details were in the original
dataset.
In 2015, a pair of researchers named Emil Kirkegaard and
Julius Daugbejerg Bjerrekaer scraped data from OkCupid, a free dating website, and provided the data onto the
“Open Science Framework,” a platform researchers use to obtain and share raw data. While the aim of the Open
Science Framework is to increase transparency, the researchers in this instance took that a step too far—and a
step into illegal territory. Kirkegaard and Bjerrekaer did not obtain permission from OkCupid or from the 70,000
OkCupid users whose identities, ages, genders, religions, personality traits, and other personal details maintained
by the dat- ing site were provided to the public without any work being done to anonymize or sanitize the data. If
the researchers had taken the time to not just validate that the data were complete but also to sanitize them to
protect the individuals’ identities, this would not have been a threat or a news story. On May 13, 2015, the Open
Science Framework removed the OkCupid data from the platform, but the damage of the privacy breach had
already been done.1

OBJECTIVES
After reading this chapter, you should be able to:

LO 2-1
Understand how data are organized in an accounting information
LO 2-2 system
Understand how data are stored in a relational database
LO 2-3
Explain and apply extraction, transformation, and loading (ETL)
techniques

1
B. Resnick, “Researchers Just Released Profile Data on 70,000 OkCupid Users without Permission,”
2016, http://www.vox.com/2016/5/12/11666116/70000-okcupid-users-data-release (accessed
October 31, 2016).
39
40 Chapter 2 Data Preparation and Cleaning

As you learned in chapter 1, Data Analytics is a process, and we follow an established

data
analytics model called the IMPACT cycle as introduced in chapter 1.2 The IMPACT
cycle begins with identifying business questions and problems that can be, at least
partially, addressed with data (the “I” in the IMPACT model). Once the opportunity or
problem has been identified, the next step is mastering the data (the “M” in the IMPACT
model), which requires you to identify and obtain the data needed for solving the
problem. Mastering the data requires a firm understanding of what data are available to
you and where they are stored, as well as being skilled in the process of extracting,
transforming, and loading (ETL) the data in preparation for data analysis. While the
extraction piece of the ETL process may often be completed by the information systems
team or the database administrator, it is also possible that you will have access to raw
data that you will need to extract out of the source database. Both methods of requesting
data for extraction and of extracting data yourself are covered in this chapter. The
mastering the data step can be described via the ETL process. The ETL process is made
up of the following five steps:
Step 1 Determine the purpose and scope of the data request (extract).
Step 2 Obtain the data (extract).
Step 3 Validate the data for completeness and integrity
(transform). Step 4 Sanitize the data (transform).
Step 5 Load the data in preparation for data analysis (load).
This chapter will provide details for each of these five steps.
LO 2-1
Understand how HOW DATA ARE USED AND STORED IN
data are organized
in an accounting
THE ACCOUNTING CYCLE
information system Before you can identify and obtain the data, you must have a comfortable grasp on what
data are available to you and where such data are stored. A basic understanding of
account- ing processes and its associated data, how those data are organized, and why,
can help you request the right data and facilitate that request so that you know exactly
where each piece of data is held.
The database schema illustrated in Exhibit 2-1 is a Unified Modeling Language
(UML) class diagram. This type of diagram is used to support a relational database,
which is the type of database you are most likely to come across when extracting and
using accounting and financial data. While it is often preferred to analyze data from a flat
file (e.g., in an Excel spreadsheet, in which all the data are stored in one place), when it
comes to storing data and maintaining data integrity, a relational database is preferred
because of its ability to maintain “one version of the truth” across multiple data elements.

EXHIBIT 2-1
Procure-to-Pay
Database Schema
(Simplified)

2
J. P. Isson and J. S. Harriott, Win with Advanced Business Analytics: Creating Business Value from Your
Chapter 2 Data Preparation and Cleaning 41

DATA AND RELATIONSHIPS IN A RELATIONAL LO 2-2

DATABASE Understand how
data are stored
In this text, we will work with data in a variety of forms, but regardless of the tool we use
in a relational
to analyze data, structured data should be stored in a normalized relational database. database
There are occasions for working with data directly in the relational database, but many
times when we work with data analysis, we’ll prefer to export the data from the relational
database and view it in a more user-friendly form. The benefit of storing data in a
normalized database outweighs the downside of having to export, validate, and sanitize
the data every time you need to analyze the information.
Storing data in a normalized, relational database instead of a flat file ensures that data
are complete, not redundant, and that business rules are enforced; it also aids communica-
tion and integration across business processes. Each one of these benefits is detailed here:
• Completeness: Ensures that all data required for a business process are included in
the dataset.
• No redundancy: Storing redundant data is to be avoided for several reasons: It
takes up unnecessary space (which is expensive), it takes up unnecessary
processing to run reports to ensure that there aren’t multiple versions of the truth,
and it increases the
risk of data-entry errors. Storing data in flat files yields a great deal of redundancy,
but normalized relational databases require there to be one version of the truth and
for each element of data to be stored in only one place.
• Business rules are enforced: As will become increasingly evident as we progress
through the material in this text, relational databases can be designed to aid in the
placement and enforcement of internal controls and business rules in ways that flat
files cannot.
• Communication and integration of business processes: Relational databases should be
designed to support business processes across the organization, which results in
improved communication across functional areas and more integrated business
processes.3
It is valuable to spend some time basking in the benefits of storing data in a relational
data- base because it is not necessarily easier to do so when it comes to building the data
model or understanding the structure. It is arguably more complex to normalize your data
than it is to throw redundant data without business rules or internal controls into a
spreadsheet.

Columns in a Table: Primary Keys, Foreign Keys, and

Descriptive Attributes
When requesting data, it is critical to understand how the tables in a relational database
are related. This is a brief overview of the different types of attributes in a table and how
these attributes support the relationships between tables. It is certainly not a comprehensive
take on relational data modeling, but it should be adequate in aiding your knowledge for data
requests. Every column in a table must be both unique and relevant to the purpose of the
table.
There are three types of columns: primary keys, foreign keys, and descriptive attributes.
Each table must have a primary key. The primary key is typically made up of one col-
umn, but it can occasionally be made up of a combination of columns. The purpose of the
primary key is to ensure that each row in the table is unique, so it is often referred to as
a “unique identifier.” It is rarely truly descriptive; instead, a collection of letters of simply
42 Chapter 2 Data Preparation and Cleaning

are stored as a unique record in the university’s data model! Other examples of unique
identifiers that you are familiar with would be check numbers and driver’s license
numbers. One of the biggest differences between a flat file and a relational database is
simply how many tables there are—when you request your data into a flat file, you’ll receive
one big table with a lot of redundancy. While this is ideal for analyzing data, when the
data are stored in the database, each group of information is stored in a separate table.
Then, the tables that are related to one another are identified (e.g., Supplier and
Purchase Order are related; it’s important to know which Supplier the Purchase Order is
from). The relationship is created by placing a foreign key in one of the two tables that
are related. The foreign key is another type of attribute, and its function is to create the
relationship between two tables.
Whenever two tables are related, one of those tables must contain a foreign key to create
the relationship.
The other columns in a table are descriptive attributes. For example, Supplier Name
is a critical piece of data when it comes to understanding the business process, but it is
not necessary to build the data model. Primary and foreign keys facilitate the structure of
a relational database, and the descriptive attributes provide actual business information.
Refer to Exhibit 2-1, the data schema for a typical procure-to-pay process. Each table
has an attribute with the letters “PK” next to them—these are the primary keys for each
table. The primary key for Materials is “Item No.,” the primary key for Purchase Order is
“PO No.,” and so on. Several of the tables also have attributes with the letters “FK” next
to them—these are the foreign keys that create the relationship between pairs of tables.
For example, look at the relationship between Supplier and Purchase Order. The primary
key in the supplier table is “Supplier ID.” The line between the two tables links the
primary key to a foreign key in the Purchase Order table, also named “Supplier ID.”
The line items table in Table 2-1 has so much detail in it that it requires two attributes
to combine as a primary key. This is a special case of a primary key often referred to as a
composite primary key, in which the two foreign keys from the tables that it is linking
com- bine to make up a unique identifier. The theory and details that support the necessity
of this linking table are beyond the scope of this text—if you can identify the primary and
foreign keys, you’ll be able to identify the data that you need to request. Table 2-2 shows
a subset of the data that are represented by the Purchase Order and Supplier tables. You
can see that each of the attributes listed in the class diagram appears as a column, and the
data for each purchase order and each supplier are accounted for in the rows.

TABLE 2-1 Purchase Order Table

Line Items Table: PO No. Date Created By Approved By Supplier ID
Purchase Order Table
1787 11/1/2017 1001 1010 1
1788 11/1/2017 1005 1010 2
1789 11/8/2017 1002 1010 1
1790 11/15/2017 1005 1010 1

TABLE 2-2 Supplier Table

Line Items Table: Supplier ID Supplier Name Supplier Address Supplier Type
Supplier Table 1 Northern Brewery Homebrew Supply 6021 Lyndale Ave. S 1
2 Hops Direct LLC 686 Green Valley Road 1
3 The Home Brewery 455 E. Township St. 1
4 The Payroll Company 408 N. Walton Blvd. 2
 Chapter 2 Data Preparation and Cleaning 43

PROGRESS CHECK
1. Referring to Exhibit 2-1, locate the relationship between the Employee and
Purchase Order tables. What is the unique identifier of each table? (The
unique identifier attribute is called the primary key—more on how it’s
determined in the next learning objective.) Which table contains the attribute
that creates the relationship? (This attribute is called the foreign key—more on
how it’s deter- mined in the next learning objective.)
2. Referring to Exhibit 2-1, review the attributes in the Suppliers table. There is a
foreign key in this table that doesn’t relate to any of the tables in the diagram.
Which table do you think it is? What type of data would be stored in that table?

DATA DICTIONARIES
In the previous section, you learned about how data are stored by focusing on the
procure- to-pay database schema. Viewing schemas and processes in isolation clarifies
each indi- vidual process, but it can also distort reality—these schemas do not represent
their own separate databases. Rather, each process-specific database schema is a piece of
a greater whole, all combining to form one integrated database.
As you can imagine, once these processes come together to be supported in one data-
base, the amount of data can be massive. Understanding the processes and the basics of
how data are stored is critical, but even with a sound foundation, it would be nearly
impos- sible for an individual to remember where each piece of data is stored, or what
each piece of data represents.
Creating and using a data dictionary is paramount in helping database administrators
maintain databases and analysts identify the data they need to use. In chapter 1, you were
introduced to the data dictionary for the LendingClub. The same cut-out of the
LendingClub data dictionary is provided in Exhibit 2-2 as a reminder.

RejectStats File Description EXHIBIT 2-2

Amount Requested Total requested loan amount 2007–2012
LendingClub Data
Application Date Date of borrower application Dictionary for Declined
Loan Title Loan title Load Data
Risk_Score Borrower risk (FICO) score Available at https://www
.lendingclub.com/info/
Ratio of borrower total monthly debt payments download-data.action
Dept-To-Income Ratio
divided by monthly income. (accessed October 13, 2016).

Zip Code The first 3 numbers of the borrower zip code

provided from loan application.
State Two digit State Abbreviation provided from
loan application.
Employment Length Employment length in years, where 0 is less
than 1 and 10 is greater than 10.
Policy Code policy_code=1 if publicly available.
policy_code=2 if not publicly available
44 Chapter 2 Data Preparation and Cleaning

Because the LendingClub data are provided in a flat file, the only two attributes
neces-
sary to describe the data are the attribute name (e.g., Amount Requested) and a descrip-
tion of that attribute. The description ensures that the data in each attribute are used and
analyzed in the appropriate way—it’s always important to remember that technology will
do exactly what you tell it to, so you must be smarter than the computer! If you run
analysis on an attribute thinking it means one thing, when it actually means another, you
could make some big mistakes and bad decisions even when you’re working with great
data. It’s critical to get to know the data through database schemas and data dictionaries
thoroughly before attempting to do any data analysis.
When you are working with data stored in a relational database, you will have more
attributes to keep track of in the data dictionary. Table 2-3 provides an example of a data
dictionary for a generic Supplier table:

Primary or
Foreign Key? Requir d Attribute Name Description Data Type Default Value Field Size Notes
PK Y Supplier ID Unique Identifier Number n/a 10
for Each Supplier
N Supplier Name First and Last Name Short Text n/a 30
FK N Supplier Type Type Code for Number Null 10 1: Vendor
Different Supplier 2: Misc
Categories

TABLE 2-3 Supplier Data Dictionary

PROGRESS CHECK
3. What is the purpose of the primary key? A foreign key? A non-key attribute?
4. How do data dictionaries help you understand the data from a database or flat
file?

LO 2-3 EXTRACTION, TRANSFORMATION, AND

Explain and LOADING (ETL) OF DATA
apply extraction, Once you have familiarized yourself with the data via data dictionaries and schemas, you
transformation, are prepared to extract the data from the database manager or extract the data yourself.
and loading (ETL)
The ETL process begins with identifying which data you need and is completed when the
techniques
clean data are loaded in the appropriate format into the tool to be used for analysis.

EXTRACTION
Requesting data is often an iterative practice, but the more prepared you are when
request- ing data in the first place, the more time you will save for yourself and the
database admin- istrators in the long run. Determine exactly what data you need in order
to answer your business questions.
Requesting the data involves the first two steps of the ETL extraction process. Each
step
 Chapter 2 Data Preparation and Cleaning 45

Step 1: Determine the Purpose and Scope of the

Data Request
• What is the purpose of the data request? What do you need the data to solve?
What business problem will they address?
• What risk exists in data integrity (e.g., reliability, usefulness)? What is the mitigation
plan?
• What other information will impact the nature, timing, and extent of the data analysis?
Once the purpose of the data request is determined and scoped, as well as any risks and
assump- tions documented, the next step is to determine whom to ask and specifically what is
needed.

Step 2: Obtain the Data

• How will data be requested and/or obtained? Do you have access to the data
yourself, or do you need to request a database administrator or the information
systems depart- ment to provide the data for you?
• If you need to request the data, is there a standard data request form that you
should use? From whom do you request the data?
• Where are the data located in the financial or other related systems?
• What specific data are needed (tables and fields)?
• What tools will be used to perform data analytic tests or procedures and why?

Obtaining the Data via a Data Request

Determining not only what data are needed, but also which tool will be used to test and
process the data will aid the database administrator in providing the data to you in the
most accessible format.
It is also necessary to specify the format in which you would like to receive the data; it
is often preferred to receive data in a flat file (i.e., if the data you requested reside in
multiple tables or different databases, they should be combined into one file without any
hierarchy or relationships built in), with the first row containing column headings (names
of the fields requested), and each subsequent row containing data that correspond with the
column head- ings. Subtotals, breaks, and subheadings complicate data cleaning and should
not be included.4 In a later chapter, you will be provided a deep dive into the audit data
standards (ADSs) developed by the American Institute of Certified Public Accountants
(AICPA).5 The aim of the ADSs is to alleviate some of the headaches associated with
requesting data for audits by providing a guide to standardize audit data requests and the
format in which the data are
provided from the company being audited to the auditor. These include the following:
1. Order-to-Cash subledger standards.
2. Procure-to-Pay subledger standards.
3. Inventory subledger standards.
4. General Ledger standards.
While the ADSs provide an opportunity for standardization, they are voluntary.
Regardless of whether your request for data will conform to the standards, a data request
form template can make communication easier between data requestor and provider.

4
T. Singleton, “What Every IT Auditor Should Know about Data Analytics,” n.d., from http://www.isaca
.org/Journal/archives/2013/Volume-6/Pages/What-Every-IT-Auditor-Should-Know-About-Data-Analytics
.aspx#2.
5
For a description of the audit data standards, please see this website: https://www.aicpa.org/interestareas/
frc/assuranceadvisoryservices/pages/assuranceandadvisory.aspx.
46 Chapter 2 Data Preparation and Cleaning

Example Standard Data Request Form:6

Requestor Name:

Requestor Contact Number:

Requestor Email Address:

Please provide a description of the information needed (indicate which tables and which fields you require):

What will the information be used for?

Frequency (circle one) One-Off Annually Termly Other:

Format you wish the data to be Spreadsheet Text File

delivered in (circle one): Word Document Other:

Request Date:

Required Date:

Intended Audience:
Customer (if not requestor):

Once the data are received, you can move on to the transformation phase of the ETL
process. The next step is to ensure that the data that have been extracted are complete and
correct.
Obtaining the Data Yourself
If you have direct access to the database or information system that holds all the data you
need, you may not need to go through a formal data request process, and you can simply
extract the data yourself.
After identifying the goal of the data analysis project in the first step of the IMPACT
cycle, you can follow a similar process to how you would request the data if you are
going to extract it yourself:
1. Identify the tables that contain the information you need. You can do this by
looking through the data dictionary or the relationship model.
2. Identify which attributes, specifically, hold the information you need in each table.
3. Identify how those tables are related to each other.

6
R&M Data Request Form—Template, Gloucestershire, n.d. Retrieved October 31, 2016, from http://www
.gloucestershire.gov.uk/media/word/n/t/datarequestform.doc.
 Chapter 2 Data Preparation and Cleaning 47

Once you have identified the data you need, you can start gathering the information.
There are a variety of methods that you could take to retrieve the data. Two will be
explained briefly here—SQL and Excel—and there will be a deep dive into these methods
in Labs 2-1 and 2-2 at the end of the chapter using Sláinte data.
1. SQL: “Structured Query Language” (SQL, pronounced sequel) can be used to create,
update, and delete records and tables in databases, but we will focus on using SQL
to extract data—that is, to select the precise attributes and records that fit the criteria
of our data analysis goal. Using SQL, we can combine data from one or more tables
and organize it in a way that is more intuitive than the way it is stored in the
relational database. A firm understanding of the data—the tables, how they are
related, and their respective primary and foreign keys—is integral to extracting the
data.
Typically, data should be stored in the database and analyzed in another tool such
as Excel or Tableau. However, you can choose to extract only the portion of the data
that you wish to analyze via SQL instead of extracting full tables and transforming the
data in Excel or Tableau.
One of the most useful ways to extract data from more than one table in SQL is by
using a type of join clause. Joins rely on the structure of normalized relational data-
bases that have tables related through primary keys and foreign keys. If you intend
to extract data from two tables that are related, you simply have to identify the two
fields that the tables have in common, and create the join based on that relationship.
Referencing Exhibit 2-1, the Sláinte Procure-to-Pay Database Schema, if you
intended to extract data from both the FGI_Product table and the Sales_Subset table,
you would create your join based on the common fields of Product_Code in each
table. The code would be written as follows:
FROM FGI_Product
INNER JOIN Sales_Subset
ON FGI_Product.Product_Code = Sales_Subset.Product_Code

By inserting the FROM, INNER JOIN, and ON clauses into a SQL query in the
pattern described above, you can add any fields that you wish to view from either of
the tables to the SELECT clause. The generic pattern of the FROM, INNER JOIN,
and ON clauses is as follows:
FROM table1
INNER JOIN table2
ON table1.primarykey = table2.foreignkey

There is more description about writing queries and a chance to practice creating joins
in Lab 2-2.
Excel: The tables that contain the data you need can also be extracted in whole into
Excel and worked with directly in a spreadsheet. The advantage of this is that further
analy- sis will almost certainly be done in Excel, so it could be beneficial to have all the
data read- ily available for further questions to drill down into once the initial question is
answered. Understanding the primary key and foreign key relationships is also integral to
working with the data directly in Excel.
Sometimes, your data are stored directly in Excel instead of a database. In this case,
you can also use Excel functions and formulas to combine data from multiple Excel
tables into one table, similar to how you can join data with SQL in Access or another
relational database. One of Excel’s most useful tools for looking up data from two
separate tables
and matching them based on a matching primary key/foreign key relationship is the
48 Chapter 2 Data Preparation and Cleaning

VLookup function. There are a variety of ways that the VLookup function can be used,
but for extracting and transforming data it is best used to add a column to a table. Using
a similar example from the SQL Join explanation above, assume that your data for the
three tables (FGI_Product, Sales_Subset, and Customer_Table) exist in three different
spreadsheets of the same Excel workbook. If you wished to view the actual Product_
Description associated with each Product_Code in the Sales_Subset table, you could use
VLookup to match the foreign key of Product_Code in the Sales_Subset table to the pri-
mary key, Product_Code, in the FGI_Product table, and have the corresponding Product_
Description returned.
When you type the VLookup formula into Excel, the arguments are
=VLOOKUP(lookup value, table_array, col_index_num, [range lookup]). In our
example, this function would be typed into the spreadsheet holding the Sales_Subset
information, and it would be used to look up and return the Product_Description
associated with each Product_Code in the Sales_Subset table.
• The lookup_value is the foreign key you wish to look up; in our example, you
would reference the Product_Code in the Sales_Subset table. This is a single-cell
reference.
• The table_array is the table that contains the corresponding primary key; in this
instance, it is the FGI_Product table. VLookup will always look in the first column
of this table_array to find a value that matches the foreign key selected in the
lookup_ value argument. This works well when data are well-organized with a
primary key situ- ated in the first column of a table. In this example, you would
select the entire set of data in the FGI_Product table.
• Col_Index_Num refers to the column in your selected table_array that contains the
data you wish to view. In other words, if you were to manually match Product_Codes
between the two tables, you would look at the foreign key in the Sales_Subset table,
navigate to the FGI_Product table to find its match, then run your eyes across the
same row to locate the corresponding Product_Description. VLookup will do the very
same thing—the first two arguments represent the match, and this argument indicates
that you would like the function to return the Product_Description.
Product_Description
is located in the second column of the FGI_Product table, so you would enter a
number 2.
• [range_lookup] has two options, either FALSE or TRUE. The default is TRUE, so
whenever you want to match data based on an exact match (not an approximate or
near match), you need to type in FALSE.

TRANSFORMATION
Step 3: Validating the Data for Completeness and
Integrity
Anytime data are moved from one location to another, it is possible that some of the data
could have been lost during the extraction. It is critical to ensure that the extracted data
are complete (that the data you wish to analyze were extracted fully) and that the integrity
of the data remains (that none of the data have been manipulated or tampered with during
the extraction). Being able to validate the data successfully requires you to not only have
the technical skill to perform the task, but also to know your data well. If you know what
to reasonably expect from the data in the extraction (How many records should have been
extracted? What are some checksums you can rely on to ensure the data is complete and
hasn’t been tampered with?), then you have a higher likelihood of identifying any errors
 Chapter 2 Data Preparation and Cleaning 49

or issues from the extraction. The following four steps should be completed to validate
the
data after extraction:
1. Compare the number of records that were extracted to the number of records in the
source database. This will give you a quick snapshot into whether any data were
skipped or didn’t extract properly due to an error or datatype mismatch. This is a
critical first step, but it will not provide information about the data themselves other
than ensuring that the record counts match.
2. Compare descriptive statistics for numeric fields: Calculating the minimums,
maxi- mums, averages, and medians will help ensure that the numeric data were
extracted completely.
3. Validate Date/Time fields in the same way as numeric fields by converting the
datatype to numeric and running descriptive statistic comparisons.
4. Compare string limits for text fields: Text fields are unlikely to cause an issue if
you extracted your data into Excel because Excel allows a maximum character
number of 32,767 characters. However, if you extracted your data into a tool that
does limit the number of characters in a string, you will want to compare these
limits to the source database’s limits per field to ensure that you haven’t cut off any
characters.
If an error is found, depending on the size of the dataset, you may be able to easily
find the missing or erroneous data by scanning the information with your eyes. However,
if the dataset is large, or if the error is difficult to find, it may be easiest to go back to the
extrac- tion and examine how the data were extracted, fix any errors in the SQL code, and
re-run the extraction.

Step 4: Cleaning the Data

Once the data have been validated, the data will likely need to be cleaned. The following
four items are some of the more common ways that data will need to be cleaned after
extrac- tion and validation:
1. Remove headings or subtotals: Depending on the extraction technique used and the
file type of the extraction, it is possible that your data could contain headings or
subtotals that are not useful for analysis. Of course, these issues could be overcome in
the extrac- tion steps of the ETL process if you are careful to request the data in the
correct format or to only extract exactly the data you need.
2. Clean leading zeroes and nonprintable characters: Sometimes data will contain
leading zeroes or “phantom” (nonprintable) characters. This will happen particularly
when numbers or dates were stored as text in the source database but need to be
analyzed as numbers. Nonprintable characters can be white spaces, page breaks, line
breaks, tabs, etc., and can be summarized as characters that our human eyes can’t
see, but that the computer interprets as a part of the string. These can cause trouble
when joining data because, while two strings may look identical to our eyes, the
computer will read the nonprintable characters and won’t find a match.
3. Format negative numbers: If there are negative numbers in your dataset, ensure that
the formatting will work for your analysis. If your data contain negative numbers
formatted in parentheses and you would prefer this formatting to be as a negative
sign, this needs to be corrected and consistent.
4. Correct inconsistencies across data, in general: If the source database did not
enforce certain rules around data entry, it is possible that there are inconsistencies
across the data—for example, if there is a state field, Arkansas could be formatted as
“AR,” “Ark,” “Ar.,” etc. These will need to be replaced with a common value before
you begin your
analysis if you are interested in grouping data geographically.
50 Chapter 2 Data Preparation and Cleaning

LOADING
Step 5: Loading the Data for Data Analysis
If the extraction and transformation steps have been done well by the time you reach this
step, the loading part of the ETL process should be the simplest step. It is so simple, in
fact, that if your goal is to do your analysis in Excel and you have already transformed and
cleaned your data in Excel, you are finished. There should be no additional loading
necessary.
However, it is possible that Excel is not the last step for analysis. The data analysis
tech- nique you plan to implement, the subject matter of the business questions you
intend to answer, and the way in which you wish to communicate results will all drive the
choice of which tool you use to perform your analysis.
Throughout the text, you will be introduced to a variety of different tools to use for
analyzing data beyond Access and Excel. These will include Tableau, Weka, and IDEA.
As these tools are introduced to you, you will learn how to load data into them.

PROGRESS CHECK
5. Describe two different methods for obtaining data for analysis.
6. What are four common issues with data that must be fixed before analysis can
take place?

Summary
The first step in the IMPACT cycle is to identify the questions that you intend to
■

answer through your data analysis project. Once a data analysis problem or question
has been identified, the next step in the IMPACT cycle is mastering the data, which
can be broken down to mean obtaining the data needed and preparing it for analysis.
In order to obtain the right data, it is important to have a firm grasp of what data are
■

available to you and how that information is stored.

◦ Data are often stored in a relational database, which helps to ensure that an
organiza- tion’s data are complete and to avoid redundancy. Relational databases
are made up of tables with uniquely identified records (this is done through primary
keys) and are
related through the usage of foreign keys.
To obtain the data, you will either have access to extract the data yourself or you will
■

need to request the data from a database administrator or the information systems
team. If the latter is the case, you will complete a data request form, indicating exactly
which data you need and why.
Once you have the data, they will need to be validated for completeness and integrity
■

— that is, you will need to ensure that all of the data you need were extracted and that
all data are correct. Sometimes when data are extracted, some formatting or sometimes
even entire records will get lost, resulting in inaccuracies. Correcting the errors and
cleaning the data is an integral step in mastering the data.
Finally, after the data have been cleaned, there may be one last step of mastering the
■

data, which is to load them into the tool that will be used for analysis. Often, the
cleaning and
correcting of data occur in Excel and the analysis will also be done in Excel. In this
case,
there is no need to load the data elsewhere. However, if you intend to do more
 rigorous
statistical analysis than Excel provides, or if you intend to do more robust data
visualiza- tion than can be done in Excel, it may be necessary to load the data into
another tool following the transformation process.

Key Words
composite primary key (42) A special case of a primary key that exists in linking tables. The
compos- ite primary key is made up of the two primary keys in the table that it is linking.
data dictionary (43) Centralized repository of descriptions for all of the data attributes of a dataset.
data request form (45) A method for obtaining data if you do not have access to obtain the data
directly yourself.
descriptive attributes (42) Attributes that exist in relational databases that are neither primary
nor foreign keys. These attributes provide business information, but are not required to build a
database. An example would be “Company Name” or “Employee Address.”
ETL (44) The extract, transform, and load process that is integral to mastering the data.
flat file (41) A means of storing data in one place, such as in an Excel spreadsheet, as opposed to stor-
ing the data in multiple tables, such as in a relational database.
foreign key (42) An attribute that exists in relational databases in order to carry out the relationship
between two tables. This does not serve as the “unique identifier” for each record in a table. These must
be identified when mastering the data from a relational database in order to extract the data correctly
from more than one table.
mastering the data (40) The second step in the IMPACT cycle; it involves identifying and obtaining
the data needed for solving the data analysis problem, as well as cleaning and preparing the data for
analysis.
primary key (41) An attribute that is required to exist in each table of a relational database and serves
as the “unique identifier” for each record in a table.
relational database (41) A means of storing data in order to ensure that the data are complete, not
redundant, and to help enforce business rules. Relational databases also aid in communication and
integra- tion of business processes across an organization.

ANSWERS TO PROGRESS CHECKS

1. The unique identifier of the Employee table is [EmployeeID], and the unique identi-
fier of the Purchase Order table is [PO No.]. The Purchase Order table contains the
foreign key.
2. The foreign key attribute that doesn’t appear to belong in the Suppliers table is
[Supplier Type]. This attribute probably relates to the Supplier Type table. The data in
this table will be descriptive, categorical data about the suppliers.
3. The purpose of the primary key is to uniquely identify each record in a table. The pur-
pose of a foreign key is to create a relationship between two tables. The purpose of a
descriptive attribute is to provide meaningful information about each record in a table.
Descriptive attributes aren’t required for a database to run, but they are necessary for
people to gain business information about the data stored in their databases.
4. Data dictionaries provide descriptions of the function and data contained in each col-
umn (attribute) of a database. Data dictionaries are especially important when
databases contain several different tables and many different attributes in order to
help analysts identify the information they need to perform their analysis.

51
 5. Depending on the level of security afforded to a business analyst, she can either
obtain
data directly from the database herself or she can request the data. When obtaining
data herself, the analyst must have access to the raw data in the database and a firm
knowledge of SQL and data extraction techniques. When requesting the data, the
ana- lyst doesn’t need the same level of extraction skills, but she still needs to be
familiar with the data enough in order to identify which tables and attributes contain
the information she requires.
6. Four common issues that must be fixed are removing headings or subtotals, cleaning
leading zeroes or nonprintable characters, formatting negative numbers, and
correcting inconsistencies across the data.

Multiple Choice Questions

1. Mastering the data can also be described via the ETL process. The ETL process
stands for:
a. Extract, total, and load data.
b. Enter, transform, and load data.
c. Extract, transform, and load data.
d. Enter, total, and load data.
2. The goal of the ETL process is to:
a. Identify which approach to data analytics should be used.
b. Load the data into a relational database for storage.
c. Communicate the results and insights found through the analysis.
d. Identify and obtain the data needed for solving the problem.
3. The advantages of storing data in a relational database include which of the
following?
a. Help in enforcing business rules.
b. Increased information redundancy.
c. Integrating business processes.
d. All of the above are advantages of a relational database.
e. Only A and B.
f. Only B and C.
g. Only A and C.
4. The purpose of transforming data is:
a. To validate the data for completeness and integrity.
b. To load the data into the appropriate tool for analysis.
c. To obtain the data from the appropriate source.
d. To identify which data are necessary to complete the analysis.
5. Which attribute is required to exist in each table of a relational database and serves
as the “unique identifier” for each record in a table?
a. Foreign key
b. Unique identifier
c. Primary key

52
 6. The metadata that describes each attribute in a database is which of the following?
a. Composite primary key
b. Data dictionary
c. Descriptive attributes
d. Flat file
7. As mentioned in the chapter, which of the following is not a common way that data
will need to be cleaned after extraction and validation?
a. Remove headings and subtotals.
b. Format negative numbers.
c. Clean up trailing zeroes.
d. Correct inconsistencies across data.
8. Why is Supplier ID considered to be a primary key for a Supplier table?
a. It contains a unique identifier for each supplier.
b. It is a 10-digit number.
c. It can either be for a vendor or miscellaneous provider.
d. It is used to identify different supplier categories.
9. What are attributes that exist in a relational database that are neither primary nor
foreign keys?
a. Nondescript attributes
b. Descriptive attributes
c. Composite key
d. Relational table attributes
10. Which of these is not included in the five steps of the ETL process?
a. Determine the purpose and scope of the data request.
b. Obtain the data.
c. Validate the data for completeness and integrity.
d. Scrub the data.

Discussion Questions
1. The advantages of a relational database include limiting the amount of redundant
data that are stored in a database. Why is this an important advantage? What can go
wrong when redundant data are stored?
2. The advantages of a relational database include integrating business processes. Why
is it preferable to integrate business processes in one information system, rather than
store different business process data in separate, isolated databases?
3. Even though it is preferable to store data in a relational database, storing data across
separate tables can make data analysis cumbersome. Describe three reasons why it
is worth the trouble to store data in a relational database.
4. Among the advantages of using a relational database is enforcing business rules.
Based on your understanding of how the structure of a relational database helps
prevent data redundancy and other advantages, how does the primary key/foreign
key relationship structure help enforce a business rule that indicates that a company
shouldn’t process any purchase orders from suppliers who don’t exist in the
database?
5. What is the purpose of a data dictionary? Identify four different attributes that could
be stored in a data dictionary, and describe the purpose of each.
6. In the ETL process, the first step is extracting the data. When you are obtaining the
data yourself, what are the steps to identifying the data that you need to extract?

53
 7. In the ETL process, if the analyst does not have the security permissions to access
the
data directly, then he or she will need to fill out a data request form. While this doesn’t
necessarily require the analyst to know extraction techniques, why does the analyst
still need to understand the raw data very well in order to complete the data request?
8. In the ETL process, when an analyst is completing the data request form, there are a
number of fields that the analyst is required to complete. Why do you think it is impor-
tant for the analyst to indicate the frequency of the report? How do you think that
would affect what the database administrator does in the extraction?
9. Regarding the data request form, why do you think it is important to the database
administrator to know the purpose of the request? What would be the importance of
the “To be used in” and “intended audience” fields?
10. In the ETL process, one important step to process when transforming the data is to
work with NULL, N/A, and zero values in the dataset. If you have a field of
quantitative data (e.g., number of years each individual in the table has held a full-
time job), what would be the effect of the following?
a. Transforming NULL and N/A values into blanks
b. Transforming NULL and N/A values into zeroes
c. Deleting records that have NULL and N/A values from your dataset
(Hint: Think about the impact on different aggregate functions, such as COUNT and
AVERAGE.)

Problems

The following problems correspond to the College Scorecard data. You should be
able to answer each question by just looking at the data dictionary (CollegeScorecard_
DataDictionary.pdf) included in Appendix A, but if you would like to use the raw data, feel
free to do so (CollegeScorecard_RawData.txt).
1. Which attributes from the College Scorecard data would you need to compare cost of
attendance across types of institutions (public, private non-profit, or private for-
profit)??
2. Which attributes from the College Scorecard data would you need to compare SAT
scores across types of institutions (public, private non-profit, or private for-profit)?
3. Which attributes from the College Scorecard data would you need to compare levels
of diversity across types of institutions (public, private non-profit, or private for-profit)?
4. Which attributes from the College Scorecard data would you need to compare
comple- tion rate across types of institutions (public, private non-profit, or private for-
profit)?
5. Which attributes from the College Scorecard data would you need to compare the
per- centage of students who receive federal loans at universities above and below the
median cost of attendance across all institutions (public, private non-profit, or private
for-profit)?
6. Which attributes from the College Scorecard data would you need to determine if
differ- ent regions of the country have significantly different costs of attendance?
7. Use the College Scorecard data to determine if different regions of the country have
signif- icantly different costs of attendance (same as Problem 6 above) and fill out a data
request form in order to extract the appropriate data. Use the template from the chapter
as a guide.
8. If you were analyzing the levels of diversity across public and private institutions
using the College Scorecard data, how would you define diversity in terms of the data
pro- vided? Would it be beneficial to combine fields?
9. If you were conducting a data analysis in order to compare the percentage of stu-

54
Answers to Multiple Choice Questions
1. C
2. D
3. G
4. A
5. C
6. B
7. C
8. A
9. B
10. D

Appendix A
CollegeScorecard Dataset
Description of Variables/Attributes
UNITID—a unique identifier for the institution INSTNM
—institution name
CITY—city STABBR—
state postcode
CONTROL—1 = Public. 2 = Private nonprofit. 3 = Private for-
profit CCBASIC—Carnegie Classification, basic:
−2 Not applicable
0 (Not classified)
1 Associate’s Colleges: High Transfer-High Traditional
2 Associate’s Colleges: High Transfer-Mixed Traditional/Nontraditional
3 Associate’s Colleges: High Transfer-High Nontraditional
4 Associate’s Colleges: Mixed Transfer/Vocational & Technical-High Traditional
5 Associate’s Colleges: Mixed Transfer/Vocational & Technical-Mixed
Traditional/ Nontraditional
6 Associate’s Colleges: Mixed Transfer/Vocational & Technical-High Nontraditional
7 Associate’s Colleges: High Vocational & Technical-High Traditional
8 Associate’s Colleges: High Vocational & Technical-Mixed
Traditional/ Nontraditional
9 Associate’s Colleges: High Vocational & Technical-High Nontraditional
10 Special Focus Two-Year: Health Professions
11 Special Focus Two-Year: Technical Professions
12 Special Focus Two-Year: Arts & Design
13 Special Focus Two-Year: Other Fields
14 Baccalaureate/Associate’s Colleges: Associate’s Dominant
15 Doctoral Universities: Highest Research Activity
16 Doctoral Universities: Higher Research Activity
17 Doctoral Universities: Moderate Research Activity

55
 18 Master’s Colleges & Universities: Larger Programs
19 Master’s Colleges & Universities: Medium Programs
20 Master’s Colleges & Universities: Small Programs
21 Baccalaureate Colleges: Arts & Sciences Focus
22 Baccalaureate Colleges: Diverse Fields
23 Baccalaureate/Associate’s Colleges: Mixed Baccalaureate/Associate’s
24 Special Focus Four-Year: Faith-Related Institutions
25 Special Focus Four-Year: Medical Schools & Centers
26 Special Focus Four-Year: Other Health Professions Schools
27 Special Focus Four-Year: Engineering Schools
28 Special Focus Four-Year: Other Technology-Related Schools
29 Special Focus Four-Year: Business & Management Schools
30 Special Focus Four-Year: Arts, Music & Design Schools
31 Special Focus Four-Year: Law Schools
32 Special Focus Four-Year: Other Special Focus Institutions
33 Tribal Colleges
ADM_RATE – admission
rate
SAT_AVG – average equivalent SAT of students admitted
UGDS – enrollment of undergraduate certificate/degree-seeking students
UGDS_WHITE – total share of enrollment of undergraduates who are white
UGDS_BLACK – total share of enrollment of undergraduates who are black
UGDS_HISP – total share of enrollment of undergraduates who are Hispanic
UGDS_ASIAN – total share of enrollment of undergraduates who are Asian
UGDS_AIAN – total share of enrollment of undergraduates who are American Indian/
Alaska Native
UGDS_NHPI – total share of enrollment of undergraduates who are Native Hawaiian/
Pacific Islander
UGDS_2MOR – total share of enrollment of undergraduates who are two or more
races
UGDS_NRA – total share of enrollment of undergraduates who are non-resident
aliens UGDS_UNKN – total share of enrollment of undergraduates whose race is
unknown PPTUG_EF – share of undergraduate degree/certificate-seeking students
who are
part-time
NPT4_PUB – Average net price for Title IV institutions (public)
NPT4_PRIV – Average net price for Title IV institutions (private for-profit and
nonprofit)
COSTT4_A – Average cost of attendance
TUITFTE – Net tuition revenue per full-time equivalent student
INEXPFTE – Instructional expenditures per full-time equivalent student
PFTFAC – Proportion of faculty that is full-time
PCTPELL – Percentage of undergraduates who receive a Pell Grant
C150_4 – Completion rate for first-time, full-time students at four-year institutions (6
year) PFTFTUG1_EF – Share of undergraduate students who are first-time, full-time,
degree seeking undergraduates
RET_FT4 – First-time, full-time student retention rate at four-year institutions
PCTFLOAN – Percent of all federal undergraduates receiving a federal student loan
56
 Lab 2-1 Create a Request for Data Extraction
One of the biggest challenges you face with data analysis is getting the right data. You
may have the best questions in the world, but if there are no data available to support your
hypothesis, you will have difficulty providing value. Additionally, there are instances in
which the IT workers may be reluctant to share data with you. They may send incomplete
data, the wrong data, or completely ignore your request. Be persistent, and you may have
to look for creative ways to find insight with an incomplete picture.

Company summary
Sláinte is a fictional brewery that has recently gone through big changes. Sláinte sells six
dif- ferent products. The brewery has only recently expanded its business to distributing
from one state to nine states, and now its business has begun stabilizing after the
expansion. With that stability comes a need for better analysis. You have been hired by
Sláinte to help manage- ment better understand the company’s sales data and provide input
for its strategic decisions.

Data
• Data request form
• Sláinte dataset

Technique
• Some experience with spreadsheets and PivotTables is useful for this lab.

Software needed
• Word processor
• Excel
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

Part 1: Identify appropriate questions and develop a hypothesis for each
question. Part 2: Generate a request for data.
Part 3: Analyze the data you receive.

Part 1: Identify the Questions

One of Sláinte’s first priorities is to identify its areas of success as well as areas of
potential improvement. Your manager has asked you to focus specifically on sales data at
this point. This includes data related to sales orders, products, and customers.
Q1. Given that you are new and trying to get a grasp on Sláinte’s operations,
list three questions related to sales that would help you begin your analysis.
For example, how many products were sold in each state?
Q2. Now hypothesize the answers to each of the questions. Remember, your
answers don’t have to be correct at this point. They will help you understand
what type of data you are looking for. For example: 500 in Missouri, 6,000 in
Pennsylvania, 4,000 in New York, etc.
Q3. Finally, for each question, identify the specific tables and attributes that are
needed to answer your questions. For example, to answer the question about
state sales, you would need the [State] attribute that is most likely located in
the [Customer] master table as well as a [Quantity Sold] attribute in a [Sales]
table. If you had access to store or distribution center location data, you may
also look for a [State] field there as well.

57
 Part 2: Generate a Request for Data
Now that you’ve identified the data you need for your analysis, complete a data request
form.
1. Open the Data Request Form.
2. Enter your contact information.
3. In the description field, identify the tables that you’d like to analyze, along with the
time periods (e.g., past month, past year, etc.). Note: It’s almost always better to ask
for complete tables rather than limit your request to specific attributes; there may be
use- ful information that you’ll want later.
4. Select a frequency. In this case, this is a “One-off request.”
5. Enter a request date (today) and a required date (one week from today).
6. Choose a format (spreadsheet).
7. Indicate what the information will be used for in the appropriate box
(internal analysis).
8. Take a screenshot (label it 2-1A) of your completed form.

Part 3: Perform an Analysis of the Data

After a few days, Rachel, an IT worker, responds to your request. She gives you the
follow- ing tables and attributes:

LAB EXHIBIT 2-1A Sales_Subset Table

Attribute Description of Attribute
Sales_Order_ID (PK) Unique identifier for each sales order
Sales_Order_Date The date of the sales order, regardless of the date the order is entered
Sales_Employee_ID (FK) Unique identifier (from Employee_Listing table) for person who created the
record
Customer_ID (FK) Unique identifier (from Customer_Master_Listing table) of the customer who
placed the order
Product_Code (FK) Unique identifier (from Finished_Good_Products table) for each sales product
Sales_Order_Quantity_Sold Sales order line quantity
Product_Sale_Price Sales order line price per unit

FGI_Product Table
Attribute Description of Attribute
Product_Code (PK) Unique identifier for each product
Product_Description Product description (plain English) to indicate the name or other identifying charac-
teristics of the product
Product_Sale_Price Price per unit of the associated product

Customer Table
Attribute Description of Attribute
Customer_ID (PK) Unique identifier for each customer
Business_Name The name of the customer
Customer_Address The physical street address of the customer
Customer_City The physical city where the customer is located
Customer_St The physical state where the customer is located
Customer_Zip The zip code of the city where the customer is physically located

58
 You may notice that while there are a few attributes that may be useful in your sales
analysis, the list may be incomplete and be missing several values. This is normal with
data requests.
Q4. Take a moment and identify any attributes that you are missing from your
origi- nal request.
Q5. Evaluate your original questions and responses. How do the data alter the ques-
tions? Can you get a similar answer using the data provided by Rachel?

End of Lab

Lab 2-2 Use PivotTables to Denormalize and alyze

An the Data

Efficient relational databases contain normalized data. That is, each table contains only
data that are relevant to the object, and tables’ relationships are defined with primary key/
foreign key pairs. For example, each record in a customer table is assigned a unique ID
(e.g., customer 152883), and the remaining attributes (e.g., customer address) describe
that customer. In a sales order table, the only customer data you find is a foreign key
pointing to the customer (e.g., customer 152883) we are selling merchandise to. The
foreign key value connects the sales order record to the customer record and allows any
or all of the linked attributes to appear on the sales order form or report.
With Data Analytics, efficient databases are not as helpful. Rather, we would like to
“denormalize” the data or combine all of the related data into one large file that can be
eas- ily evaluated for summary statistics or be used to create meaningful PivotTables.
Excel calls this the Internal Data Model. In Access, we create a query. This lab will take
you through this process. This lab will help you recognize how to create relationships
between related spreadsheets in Excel using Excel’s Internal Data Model. The Internal
Data Model is avail- able in Excel for PC versions from 2013 onward. This lab is in
preparation for using the Internal Data Model in future labs to transform data, as well as
to aid in understanding of primary and foreign key relationships.

Company summary
Sláinte is a fictional brewery that has recently gone through big changes. Sláinte sells six
different products. The brewery has only recently expanded its business to distributing from
one state to nine states, and now its business has begun stabilizing after the expansion.
With that stability comes a need for better analysis. One of Sláinte’s first priorities is to
identify its areas of success, as well as areas of potential improvement.

Data
• Sláinte dataset

Technique
• Some experience with relational databases, spreadsheets, and PivotTables is useful for
this lab.
Software needed
• Excel
• Access
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

59
 In this lab, you will:

Part 1: Identify appropriate questions and develop a hypothesis for each

question. Part 2: Master your data and prepare it for analysis in Excel.
Part 3: Perform an analysis using PivotTables.
Part 4: Address and refine your results.
Part 5: Communicate your findings.

Part 1: Identify the Questions

Sláinte has brought you in to help determine potential areas for sales growth in the next
year. Additionally, management has noticed that the company’s margins aren’t as high as
they had budgeted and would like you to help identify some areas where they could
improve their pricing, marketing, or strategy. Specifically, they would like to know how
many of each product were sold.
Q1. Given Sláinte’s request, identify the data attributes and tables needed to
answer the question.

Part 2: Master the Data: Prepare Data for

Analysis in Excel
The requested Sláinte data are available in the Slainte_Subset.xlsx file and include the
fol- lowing tables and fields, presented in a UML diagram:

LAB EXHIBIT 2-2A

Depending on your desired analysis, there are a few alternative approaches that you
could use to prepare the data for analysis.

Alternative 1: Do nothing.
If you are simply trying to calculate statistics or make comparisons using attributes within
a single table, there is no need to transform the tables. Simply load the table, make sure
the data are clean, and proceed to analysis.
For example, to find the total number of each item sold, you would need only the
[Sales_ Subset] table and its attributes [Product_Code] and [Sales_Order_Quantity_Sold].
Q2. When would it be a good idea to use a single table?

Alternative 2: Use the Excel Internal Data Model.

For analyses that require two or more tables, you need to define the relationships in
Excel before you can proceed with your analysis.
For example, if you want to find the total number of each item sold and show the prod-
uct name instead of just the code, you would need [Sales_Order_Quantity_Sold] from the
[Sales_Subset] table and [Product_Description] from the [FGI_Product] table. These two
tables are joined together on the [Product_Code] primary/foreign key.
1. Open the Slainte_Subset.xlsx file.
2. Click the Data tab on the ribbon.
3. Click the Relationships button in the Data Tools section.
4. In the Manage Relationships window, click New. . .

60
 LAB EXHIBIT 2-2B
Define the Primary
Key/Foreign Key
Relationships in Excel
Source: Microsoft Excel 2016

5. Create a relationship between [Sales_Subset] and [FGI_Product] as shown in Exhibit 2-2C.

Start with the table that contains the foreign key, then choose the related table that
contains the primary key. In this case:
a. Table: [Sales_Subset]
b. Related Table: [FGI_Product]
c. Column (Foreign): [Product_Code]
d. Related Column (Primary): [Product_Code]
6. Click OK to save the relationship. The window will close, and you will return to the
Manage Relationships window. Click New. . .
7. Now create a relationship between [Sales_Subset] and [Customer]. In this case:
a. Table: [Sales_Subset]
b. Related Table: [Customer]
c. Column (Foreign): [Customer_ID]
d. Related Column (Primary): [Customer_ID]
8. Click OK to save the relationship.
9. Take a screenshot (label it 2-2A) of the Manage Relationships window with both
relationships created.

LAB EXHIBIT 2-2C

Complete Relationships
between Sales_Subset,
FGI_Product, and
Customer_Table
Source: Microsoft Excel 2016

10. Click Close in the Manage Relationships window to return to the spreadsheets.
While the spreadsheets do not appear to have changed with the new relationships,
we have created a powerful engine for analyzing our data. We will have access to
any of the records and related fields in any of the tables without additional work,
such as Find and Replace or VLookup.

61
 11. Save your workbook as Slainte_Relationships.xlsx.
Q3. How comfortable are you with identifying primary key/foreign key relationships?

Alternative 3: Merging the data into a single table using Excel Query Editor.
While relationships are incredibly useful when dealing with multiple tables, there are
times when it is useful to have all of the data together in one table. Both queries and
PivotTables are much more straightforward when you don’t have to continually define
the relationships. The downside to working with a single table is that you must work with
a larger file size and there are a lot of redundant data.
1. Create a new blank spreadsheet in Excel.
2. Click the Data tab on the ribbon.
3. Click the Get Data menu in the Get & Transform Data section.
4. Choose From File > From Workbook.
5. Locate the Slainte_Subset.xlsx file on your computer, and click Open.
6. In the Navigator, check Select multiple items, then check the three tables to
import, shown in Exhibit 2-2D:
a. [Customer]
b. [FGI_Product]
c. [Sales_Subset]

LAB EXHIBIT 2-2D

Select Multiple Tables
to Join
Source: Microsoft Excel 2016

7. Click Load. The three tables will appear as queries in the Queries & Connections
pane on the right side of the screen.
8. Double-click the [Sales_Subset] query to open the Query Wizard.
9. To merge the tables click the Home tab, then choose Merge Queries from the
Combine
section. A new Merge window will appear.

62
 LAB EXHIBIT 2-2E
Select the Primary
and Foreign Keys in
the Merge Window to
Create a Large Table in
Excel’s Query Editor
Source: Microsoft Excel 2016

11. To join the [Sales_Subset] and [Customer] queries, do the following:

a. Select the [Customer] query from the middle drop-down list.
b. Click the [Customer_ID] column in both the [Sales_Subset] and [Customer]
queries.
c. From the Join Kind drop-down list, choose Left Outer (all from first, matching from
second). This means [Sales_Subset].[Customer_ID] will be identified as the
foreign key.
d. Click OK to return to the Query Editor.
e. Double-click the newly added [NewColumn] attribute title and rename it
[Customer].
f. Finally, click the opposing arrows icon next to the [Customer] column title.
Select Expand and click OK. The customer attributes have now been added to the
[Sales_ Subset] query.
12. To join the [Sales_Subset] and [FGI_Product] queries, do the following:
a. Select the [FGI_Product] query from the middle drop-down list.
b. Click the [Product_Code] column in both the [Sales_Subset] and [FGI_Product]
queries.
c. From the Join Kind drop-down list, choose Left Outer (all from first, matching from
second). This means [Sales_Subset].[Product_Code] will be identified as the foreign
key.
d. Click OK to return to the Query Editor.
e. Double-click the newly added [NewColumn] attribute title and rename it
[Product].
f. Finally, click the opposing arrows icon next to the [Product] column title.
Select Expand and click OK. The product attributes have now been added to
the [Sales_ Subset] query.
13. Maximize the Query Editor window, and take a screenshot (label it 2-2B).
14. Click Close & Load to return to Excel.
15. In the Queries & Connections pane on the right, right-click [Sales_Subset] and choose
Load To. . .
16. In the Import Data window that appears, choose Table and click OK. Your

63
 17. Rename [Sheet1] to [Sales_Order_Merge].
Note: You can also directly load your merged table into a PivotTable if that is the
analysis you’re going to perform.
18. Save your workbook as Slainte_Merge.xlsx.
Q4. Have you used the Query Editor in Excel before? Double-click the [Sales_
Subset] query and click through the tabs on the ribbon. Which options do
you think will be useful in the future?

Alternative 4: Use SQL queries in Access.

If you’re familiar with how to write SQL queries, they can be very efficient. There are
also instances where datasets will be too large for Excel, and Access or another query
tool will be the only way to analyze the data effectively.

Analytics Tool: SQL Queries

SQL can be used to create tables, delete records, or edit databases, but we will pri-
marily use SQL to query the database—that is, not to edit or manipulate the data,
but to create different views of the data to help us answer business questions.
There are four key phrases that are used in every query: SELECT fields, FROM
table, WHERE criteria, GROUP BY aggregate.
• SELECT indicates which attributes you wish to view. These can be columns
that already exist in a table (such as Product_Code), or they can be math-
ematical expressions that already exist, such as the sum of the quantity
sold. Use AS to give your expression a friendly name. For expressions, you
write equations similar to an Excel function:
SUM(Sales_Order_Quantity_Sold). When you select more than one
column, put a comma between them.
For example:
SELECT Product_Code, SUM(Sales_Order_Quantity_Sold)
SELECT Product_Code, Sales_Order_Quantity_Sold*Product_Sale_Price
AS Order_Total
• FROM indicates which table you are pulling the fields in from. If you need
to retrieve data from more than one table, you will use another SQL phrase:
table JOIN table ON (foreignkey= primarykey).
For example:
FROM Sales_Subset;
FROM Sales_Subset JOIN Customer ON (Customer_ID=Customer_ID)
• WHERE is used to filter your results on a specific value or range.
Commonly, you will compare a field to a specific number (e.g., WHERE
Customer_ ID=2056) or text value in quotes (e.g., WHERE
Product_Description=”Pale Ale”). You can also filter on ranges such as
dates (e.g., WHERE Sales_Order_ Date BETWEEN #1/1/2019# AND
#12/31/2019#). Use AND or OR to com-
bine multiple filters
For example:
WHERE Customer_ID=2056 AND Sales_Order_Date BETWEEN #1/1/2019#
AND #12/31/2019#

64
 • GROUP BY is used anytime you have an aggregate in your SELECT
column; this will indicate how you want to categorize, or group, your data. In
our example, we intend to group our aggregate by Product_Code. Without
the GROUP BY command, you will see duplicate records in the query
results.
For example:
GROUP BY Product_Code
1. Open the Slainte_Subset.accdb file.
2. Open the SQL editor by navigating to the Create tab on the ribbon.
3. Click Query Design to open the SQL Designer.
4. Click Close on the Show Table window.
5. In the top left corner, click SQL to open the SQL Editor.
6. The 3 lines of code in the examples of the SQL Key Word Tutorial 1 are the
three lines that we will use to execute our report in SQL. In the SQL Editor,
type the following lines of code:
SELECT Sales_Subset.*, FGI_Product.*, Customer.*
FROM Customer RIGHT JOIN (FGI_Product RIGHT JOIN Sales_Subset
ON FGI_Product.Product_Code = Sales_Subset.Product_Code) ON
Customer.Customer_ID = Sales_Subset.Customer_ID;
7. Click Run from the Query Tools > Design tab on the Ribbon to view your
combined query output.
8. Take a screenshot (label it 2-2C).
9. Save your query as Slainte_Merge. From here you can either click External Data
> Excel in Access to export your query as an Excel file OR close your
database, open Excel and choose Data > Get Data > From Database >
From Microsoft Access Database, then navigate to your database and
import the query.

Part 3: Perform an Analysis Using PivotTables and

Queries
Now that the data have been organized, you’re ready for some basic analysis. Given the
sales data, management has asked you to prepare a report showing the total number of
each item sold each month between January and April 2020. This means that we should
create a PivotTable with a column for each month, a row for each product, and the sum of
the quantity sold where the two intersect.

Analytics Tool: Excel PivotTables

PivotTables allow you to quickly summarize large amounts of data. In Excel, click
Insert > PivotTable, choose your data source, then click the checkmark next to or
drag your fields to the appropriate boxes in the PivotTable Fields pane to identify
filters, columns, rows, or values. You can easily move attributes from one pane to
another to quickly “pivot” your data. Here is a brief description of each section:
• Rows: Show the main item of interest. You usually want master data here,
such as customers, products, or accounts.
• Columns: Slice the data into categories or buckets. Most commonly,
columns are used for time (e.g., years, quarters, months, dates).

65
 • Values: This area represents the meat of your data. Any measure that you would
like to count, sum, average, or otherwise aggregate should be placed here.
The aggregated values will combine all records that match a given row and
column.
• Filters: Placing a field in the Filters area will allow you to filter the data
based on that field, but it will not show that field in the data. For example, if
you wanted to filter based on a date, but didn’t care to view a particular
date, you could use this area of the field list. With more recent versions of
Excel, there are improved methods for filtering, but this legacy feature is still
functional.

1. From any of the files you created in Part 2, click the Insert tab on the ribbon.
2. Click PivotTable in the Tables section.
3. In the Create PivotTable window click Use this workbook’s Data Model. Note: If
you have only one table, choose Select a table or range and choose your sheet.
4. Click OK to create the PivotTable. A PivotTable Fields pane appears on the right. Note: If at
any point while working with your PivotTable, your PivotTable Fields list disappears, you
can make it reappear by ensuring that your active cell is within the PivotTable itself. If the
Field List still doesn’t reappear, navigate to the Analyze tab in the Ribbon, and select
Field List.
5. Click the arrow toggle next to each table to show the available fields. If you don’t
see your three tables, click the All option directly below the PivotTable Fields pane
title.
6. Take a screenshot (label it 2-2D).
7. Because you defined relationships or merged the tables in Part 2, you can drag any
of the attributes from your list of fields to their respective Filters, Columns, Rows,
or Values. Do that now:
a. Columns: [Sales_Order_Date] (Month) from [Sales_Subset]. Note: When you add a
date, Excel will automatically try to group the data by Year, Quarter, etc. For
now, remove the other options.
b. Rows: [Product_Description] from [FGI_Products].
c. Values: [Sales_Order_Quantity_Sold] from [Sales_Subset].
d. Filters: None.
8. Finally, to show only the four months from January to April, click the drop-
down arrow next to Column Labels and uncheck Nov and Dec.
9. Optional step: Clean up your PivotTable. Rename labels and the title of the report
to something more useful.
10. Take a screenshot (label it 2-2E).
11. Save a copy of your workbook as Slainte_Pivot.xlsx.
To perform a similar, but less flexible analysis in Access, do the following:
1. Open your Slainte_Subset.accdb file from Part 2.
2. Click Create > Query Design. Close the window that appears.
3. Click SQL View in the top-left corner.
4. Enter the following query:
SELECT Product_Description, Sum(Sales_Order_Quantity_Sold) AS
Total_Sales
FROM Slainte_Merge
WHERE Sales_Order_Date Between #1/1/2020# And #4/30/2020#
GROUP BY Product_Description;
5. Click Run to show the results.
6. Take a screenshot (label it 2-2F).
7. Save your query as Total_Sales_By_Product and close your database.
66
Part 4: Address and Refine Your Results
Now that you’ve completed a basic analysis to answer management’s question, take a
moment to think about how you could improve the report and anticipate questions your
manager might have.
Q5. If the owner of Sláinte wishes to identify which product sold the most,
how would you make this report more useful?
Q6. If you wanted to provide more detail, what other attributes would be useful
to add as additional rows or columns to your report, or what other reports
would you create?

Part 5: Communicate Your Findings

Let’s make this easy for others to understand using visualization and explanations.
Q7. Write a brief paragraph about how you would interpret the results of your
analy- sis in plain English. For example, which data points stand out?
Q8. In chapter 4, we’ll discuss some visualization techniques. Describe a way
you could present these data as a chart or graph.

End of Lab

Lab 2-3 Resolve Common Data Problems in l and

Exce Access

There are several issues with this dataset that we’ll need to resolve before we can process
the data. This will require some cleaning, reformatting, and other techniques.

Company summary
LendingClub is a peer-to-peer marketplace where borrowers and investors are matched
together. The goal of LendingClub is to reduce the costs associated with these bank-
ing transactions and make borrowing less expensive and investment more engaging.
LendingClub provides data on loans that have been approved and rejected since 2007,
including the assigned interest rate and type of loan. This provides several opportunities
for data analysis.

Data
• LendingClub datasets: ApproveStats

Technique
• Some experience with Excel is useful for this lab.

Software needed
• Excel
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd +Shift + 4)

In this lab, you will:

• Understand and clean the data to enable analysis for various problems.

67
 Part 1: Identify the Questions
You’ve already identified some analysis questions for LendingClub in chapter 1. Here,
you’ll focus on data quality. Think about some of the common issues with data you
receive from other people. For example, is the date field in the proper format? Do number
fields contain text or vice versa?
Q1. What do you expect will be major data quality issues with LendingClub’s data?

Part 2: Master the Data

For this lab, you should download the lending data from LendingClub and prepare the
data for some more advanced analysis in chapter 3. The LendingClub data contain two
different file types, including LoanStats for approved loans and RejectStats for rejected
loans. There are significantly more data available for LoanStats. There are 107 different
attributes. To save some time, we’ve identified 19 of the most interesting in Lab Exhibit
2-3A.
LAB EXHIBIT 2-3A Attribute Description
LoanStatsXXXX.csv id Loan identification number
member_id Membership ID
loan_amnt Requested loan amount
emp_length Employment length
issue_d Date of loan issue
loan_status Fully paid or charged off
pymnt_plan Payment plan: yes or no
purpose Loan purpose: e.g., wedding, medical, debt_consolidation, car
zip_code The first three digits of the applicant’s zip code
addr_state State
dti Debt-to-income ratio
delinq_2y Late payments within the past 2 years
earliest_cr_line Oldest credit account
inq_last_6mnths Credit inquiries in the past 6 months
open_acc Number of open credit accounts
revol_bal Total balance of all credit accounts
revol_util Percentage of available credit in use
total_acc Total number of credit accounts
application_type Individual or joint application

Q2. Given this list of attributes, what concerns do you have with the data’s ability
to predict answers to the questions you identified in chapter 1?
Take a moment and familiarize yourself with the data.
1. Open your web browser and go to: https://www.lendingclub.com/info/download-data
.action [TRA1].
2. In the Download Loan Data section, choose “2014” from the drop-down list, then click
Download.
3. Locate your downloaded zip files on your computer, and extract the csv files to a
con- venient location (e.g., desktop or Documents).
4. Open the LoanStats3c.csv file in Excel. There should be 235,629 records (ignoring
the first two header rows). Note: Calculating summary statistics, such as the total
number
of records, is an important step in data validation. We’ll cover that in Lab 2.4.

68
 5. Take a moment and explore the data.
Q3. Is there anything in the data that you think will make analysis difficult? For
example, are there any special symbols, nonstandard data, or numbers that
look out of place?
Q4. What would you do to clean the data in this
file? Let’s identify some issues with the data.
• There are many attributes without any data, and that may not be necessary.
• The [int_rate] values are written in ##.##%, but analysis will require #.####.
• The [term] values include the word “months,” which should be removed for
numerical analysis.
• The [emp_length] values include “n/a”, “<”, “+”, “year”, and “years”—all of
which should be removed for numerical analysis.
• Dates, including [issue_d], can be more useful if we expand them to show the day,
month, and year as separate attributes. Dates cause issues in general because
different systems use different date formats (e.g., 1/9/2009, Jan-2009, 9/1/2009 for
European dates, etc.), so typically some conversion is necessary.
First, remove the unwanted data:
6. Save your file as “Loans2007-2011.xlsx” to take advantage of some of Excel’s features.
7. Delete the first row that says “Notes offered by prospectus. . .”.
8. Delete the last four rows that include “Total amount funded. . .”.
9. Delete columns that have no values, including [id], [member_id], and [url].
10. Repeat for any other blank columns or unwanted
attributes. Next, fix your numbers:
11. Select the [int_rate] column.
12. In the Home tab, go to the Number section and change the number type from
Percentage to General using the drop-down menu.
13. Repeat for any other attributes with percentages.
14. Take a screenshot (label it 2-3A) of your partially cleaned data
file. Then, remove any words from numerical values:
15. Select the [term] column.
16. Use Find & Replace (Ctrl+H or Home > Editing > Find & Select > Find &
Replace) to find the words “months” and “month” and replace them with a null/blank
value “”. Important: Be sure to include the space before the words and go from the
longest varia- tion of the word to the shortest. In this case, if you replaced “month”
first, you would end up with a lot of values that still had the letter “s” from “months”.
17. Now select the [emp_length] column and find and replace the following values:

Original Value New Value

na or n/a 0
< 1 year 0
1 year 1
2 years 2
3 years 3
4 years 4
5 years 5
6 years 6

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 Original Value New Value
7 years 7
8 years 8
9 years 9
10+ years 10
, (comma) (blank)

18. Take a screenshot (label it 2-5B) of your partially cleaned data file, showing the
[term] column.

Analytics Tool: Python

Note: Finding and replacing 13 values by hand may be tedious, but it is efficient for
a one-off analysis and a small file. If you plan to re-perform this analysis multiple
times or find and replace dozens of items or you have a file that is larger than Excel
can handle, you’re better off using a scripting language, such as Python. You can
down- load Python free from python.org, and a quick search on Google will help you
find tutorials to start with the basics.
Here’s what the script would look like for the find and replace function where you
would list the original value as item and the replacement value as replacement:
import csv

ifile = open(`file', `rb')

reader = csv.reader(ifile,delimiter=`\t')
ofile = open(`file', `wb')
writer = csv.writer(ofile, delimiter=`\t')

s = ifile.read()
for item, replacement in zip(findlist, replacelist):
s = s.replace(item, replacement)
s = s.replace(item, replacement)
ofile.write(s)

ifile.close()
ofile.close()

Finally, transform those dates:

19. Right-click the column to the right or the [issue_d] column, and choose Insert to
add a blank column.
20. Name the new column [issue_month].
21. Use the =MONTH([column address for issue_d]) formula to extract the month from
the date in your new column and copy your formula to the bottom of the sheet. You
should see a month number value in each cell. If it still has a date format, change
the number format to General in the Home tab.

70
22. Now convert the formulas to data values. Select the new [issue_month] column that
contains your formula.
23. Copy [Ctrl+C] and Paste Special [Ctrl+Alt+V]. Choose Values [V], then click OK.
24. Save your file.
25. Add another blank column and name it [issue_year].
26. Use the =YEAR([column address for issue_d]) formula to extract the month from
the date in your new column and copy your formula to the bottom of the sheet. You
should see a month number value in each cell. If it still has a date format, change
the number format to General in the Home tab.
27. Select the new [issue_month] column that contains your formula, then Copy [Ctrl+C]
and Paste Special [Ctrl+Alt+V]. Choose Values [V]. Click OK.
28. Save your file.
29. Take a screenshot (label it 2-5C) of your cleaned data file, showing the new
date columns.

Q5. Why do you think it is useful to reformat and extract parts of the dates
before you conduct your analysis? What do you think would happen if you
didn’t?
Q6. Did you run into any major issues when you attempted to clean the data?
How would you resolve those?

End of Lab

Lab 2-4 Generate Summary Statistics in Excel

When you’re working with a new or unknown set of data, validating the data is very
impor- tant. When you make a data request, the IT manager who fills the request should
also provide some summary statistics that include the total number of records and
mathematical sums to ensure nothing has been lost in the transmission. This lab will help
you calculate summary statistics in Excel.

Company summary
LendingClub is a peer-to-peer marketplace where borrowers and investors are matched
together. The goal of LendingClub is to reduce the costs associated with these banking trans-
actions and make borrowing less expensive and investment more engaging.
LendingClub provides data on loans that have been approved and rejected since 2007,
including the assigned interest rate and type of loan. This provides several opportunities
for data analysis.

Data
• LendingClub dataset: ApproveStats2014

Technique
• Some experience with Excel is useful for this lab.

Software needed
• Excel
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

• Calculate summary statistics using Excel.

71
 Calculate Summary Statistics in Excel
For basic validation, we’ll use Excel. Remember, there is a limitation on the number
of records that Excel can handle, so this is best for smaller- to medium-sized files.
Excel’s toolbar at the bottom of the window provides quick access to a summary of any
selected values.
Note: If you’ve already downloaded LendingClub data from 2014, you can skip to step
5.
1. Open your web browser and go to: https://www.lendingclub.com/info/download-data
.action.
2. In the Download Loan Data section, choose “2014” from the drop-down list, then click
Download.
3. Locate your downloaded zip files on your computer, and extract the .csv files to a
con- venient location (e.g., desktop or Documents).
4. Open the LoanStats3c.csv file in Excel.
5. Select the [loan_amnt] column. At the bottom of the window, you will see the
Average, Count, and Sum calculations, shown in LAB Exhibit 2-4A. Compare
those to the vali- dation given by LendingClub:
Funded loans: $3,503,840,175
Number of approved loans: 235,629

LAB EXHIBIT 2-4A

Summary Statistics
Provided by the Excel
Toolbar at the Bottom
Showing Average,
Count, and Sum
Source: Microsoft Excel 2016

Q1. Do your numbers match the numbers provided by LendingClub? What

explains the discrepancy, if any?
6. Right-click on the summary toolbar and choose Numerical Count from the list.
You should now see four values in the bar.
Q2. Does the Numerical Count provide a more useful/accurate value for
validating your data? Why or why not do you think that is the case?
Q3. What other summary values might be useful for validating your data?
7. Take a screenshot (label it 2-4A) showing your expanded summary toolbar with
four (or more) values.
End of Lab
72
 Lab 2-5 College Scorecard Extraction and Data Preparation
This lab will help you learn how to extract data from a text file in preparation for analysis
in Excel. This lab is in preparation for future labs in chapter 3 that will analyze college
scorecard data.

Data summary
The data used are a subset of the College Scorecard dataset that is provided by the U.S.
Department of Education. These data provide federal financial aid and earnings informa-
tion, insights into the performance of schools eligible to receive federal financial aid, and
the outcomes of students at those schools. You can learn more about how the data are
used and view the raw data yourself at https://collegescorecard.ed.gov/data/. However,
for this lab, you should use the text file provided to you.

Data
• CollegeScorecard Datasets: CollegeScorecard_RawData

Technique
• Some experience with Excel is useful for this lab.

Software needed
• Text Editor (Windows: Notepad; Mac: TextEdit)
• Excel
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

• Extract data into a text editor and transform it into structured, ready-to-analyze data
in Excel.

Part 1: Identify the Questions

Because this lab is focused on mastering the data, the question has been identified for
you. We will begin with a simple question with two variables, SAT average and
completion rate for first-time, full-time students at four-year institutions.

Part 2: Master the Data

1. Open the text file CollegeScoreCardRawData.txt.
2. Select all of the data in the text file and copy them.
3. Open a new Excel workbook. With the active cell as A1, paste the text data.
4. Take a screenshot (label it 2-5A).
5. The data defaulted to pasting into only column A. To view each attribute in its
own column, you will need to parse the data using the Text to Columns feature in
Excel. Navigate to the Data tab in Excel’s ribbon.
6. Make sure that the all of the data in column A are selected (not just the first row
of data), then click the Text to Columns button to open up a wizard to guide your
data transformation.
7. The wizard provides two options: delimited and fixed width. Delimited means
sepa- rated, and in Excel (and other applications), it references a character that
separates (or delimits) data.
Q1. By looking through the data in the text file, what do you think the delimiter is?

73
 8. Leaving delimited checked (as is the default), click Next in the wizard, and select the
appropriate delimiter. Make sure to un-check the default option, tab.
9. Click Finish in the wizard.
10. Take a screenshot (label it 2-5B).
11. To ensure that you captured all of the data through the extraction from the txt file,
we need to validate it. Validate the following checksums:
• You should have 7,704 records (rows).
• Compare the attribute names (column headers) to the attributes listed in the data
dictionary. Are you missing any, or do you have any extras?
• The average SAT score should be 1,059.07 (this is leaving NULL values as NULL).

Q2. In the checksums, you validated that the average SAT score for all of the
records is 1,059.07. When we work with the data more rigorously, several tests
will require us to transform NULL values. If you were to transform the NULL
SAT values into 0, what would happen to the average (would it stay the same,
decrease, or increase)? How would that change to the average affect the way
you would interpret the data? Do you think it’s a good idea to replace NULL
values with 0s in this case?

12. Now that the data have been validated, you can clean the data. How you clean the
data is determined by the question you intend to answer. In this case, we’re
preparing our data to run a regression test using the two attributes SAT_AVG and
C150_4. As you’ll learn in chapter 3, a regression test won’t run with non-numeric
values (i.e., we can’t leave the NULL values in, and we can’t transform them to
blanks). Earlier you discussed the cons of replacing NULL values with 0s.
To avoid the issues with NULL, blanks, and 0s, we will remove all of the
records that contain NULL values in either SAT_AVG or C150_4. Do so.
13. Perform a =COUNT() to verify the number of records that remain after removing
all records associated with NULL values in SAT_AVG or C150_4. 1,271 records
should remain.
14. Take a screenshot (label it 2-5C).
Your data is now ready for the test plan. This lab will continue in chapter 3.

Lab 2-6 mprehensive Case: Dillard’s Store Data: How to

eate an Entity-Relationship Diagram
Co
Cr
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo
.com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that
William T. Dillard II is an accounting grad of the University of Arkansas and the Walton
College of Business, which may be why he shared transaction data with us to make
available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on Connect. The 2016 Dillard’s data cover all
 transactions over the period 1/1/2014 to 10/17/2016.

74
Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)

In this lab, you will:

• Create an ERD (entity-relationship diagram), which provides some quick
information on the data that’s provided in the database. In one diagram, you can
view all tables to see the entire database, or you can pick just the two you’re
working with to focus on those attributes.

Part 1: Identify the Questions

Dillard’s is trying to figure out when its customers spend more on individual
transactions. We ask questions regarding how Dillard’s sells its products.
Q1. How would a view of the entire database or certain tables out of that
database allow us to get a feel for the data?
Q2. What types of data would you guess that Dillard’s, a retail store, gathers that
might be useful? How could Dillard’s suppliers use these data to predict
future purchases?

Part 2: Master the Data and Part 3: Perform an Analysis

of the Data
For this lab, we will create an ERD (entity-relationship diagram) to view the structure of
the database.
1. Log on to Remote Desktop at the University of Arkansas.
2. Open Microsoft SQL Server Management Studio to access the UA_Dillards_2016 data.
3. Input the Server Name in the Connect to Server window that you were
provided through the Walton.uark.edu/enterprise website.

LAB EXHIBIT 2-6A

Source: Microsoft SQL Server
Management Studio

75
 4. Leave the default for authentication to Windows Authentication, and click Connect.
5. Expand the Databases folder in the Object Explorer window.

LAB EXHIBIT 2-6B

Source: Microsoft SQL Server
Management Studio

6. Scroll down to the UA_Dillards_2016 database and expand it.

7. Right-click Database Diagrams to reveal the below window.

LAB EXHIBIT 2-6C

Source: Microsoft SQL Server
Management Studio

8. Select New Database Diagram.

9. A window indicating that you cannot create tables will appear, click OK. Because
we do not need to create or edit any tables, viewing them is sufficient.

LAB EXHIBIT 2-6D

Source: Microsoft SQL Server
Management Studio

76
10. Select the tables you would like to view. For this lab, select all of them.
11. Take a screenshot (label it 2-6A).

Part 4: Address and Refine Results

Q3. What is the primary key for the TRANSACT table? What is the primary key
for the SKU table?
Q4. How do we connect the SKU database to the TRANSACT table? How do
we join tables from two different related tables?

End of Lab

Lab 2-7 Comprehensive Case: Dillard’s Store ta: How to

Da Preview Data from Tables in a
Query
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo. com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll
quickly note that William T. Dillard II is an accounting grad of the University of
Arkansas and the Walton College of Business, which may be why he shared transaction
data with us to make available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on Connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)

In this lab, you will:

• Learn how to get a snippet of the data to better understand the data fields, what they
contain, and what their data structure looks like to inform additional queries and
data- base analysis.

Part 1: Identify the Questions

Data Analytics requires a lot of give and take. Where you learn a bit, modify the search,
modify the analysis, and try again. All the while, you are asking yourself questions, trying
to make your search efficient and effective. Questions like these:
Q1. How would a view of the entire database or certain tables out of that
database allow us to get a feel for the data?
Q2. What types of data would you guess that Dillard’s, a retail store, gathers that
might be useful? How could Dillard’s suppliers use these data to predict
future purchases?
77
LAB EXHIBIT 2-7A
Source: Microsoft SQL Server
Management Studio

LAB EXHIBIT 2-7B

Source: Microsoft SQL Server M

LAB EXHIBIT 2-7C

Source: Microsoft SQL Server
Management Studio

78
 7. Because this dataset is massive, it can take a very long time for the system to return
the complete set of data for some of the bigger tables (such as TRANSACT). If you
would like to view just the top few rows of a dataset to get the feel for what type of
data is in the table, you can do so with a query.
In the SELECT line, you can type TOP # before the columns you would like to
see. Any type of filtering, aggregating, and ordering will still work through the rest
of the query, but selecting the top few will help the query run faster by returning a
subset of the result.
8. To view the top 10 rows in the TRANSACT table, type the following query into
the query window:
SELECT TOP 10 *
FROM TRANSACT
In SQL, SELECT indicates the columns you would like to view. * is a shortcut
to indicate that you’d like to view all of the columns. The TOP command limits
the amount of rows that are returned.
FROM indicates the tables that contains the data you’d like to view.
9. To see the result of the query, click Execute. F5 also works to run queries as a PC
shortcut.
LAB EXHIBIT 2-7D
Source: Microsoft SQL Server
Management Studio

10. Take a screenshot of your results (label it 2-7A).

11. When you look at these results, you may wonder what some of the attributes
repre- sent. For example, TRAN_TYPE only returns values with P. To view other
types of values, you could filter out any record that has a TRAN_TYPE of P.
To filter in SQL, use WHERE. The WHERE line follows FROM:
SELECT TOP 10 *
FROM TRANSACT
WHERE TRAN_TYPE [[<>]] `P'
The WHERE code has three parts:
• The attribute that you are filtering on (in this case, TRAN_TYPE).
• The way you are filtering—a few to start with are:
◦ = if you want to see only rows that correspond with a certain value.
◦ <> if you want to exclude rows that correspond with a certain value.
◦ > for all values greater than a certain value, < for all values less than a certain
value.
• The value that you are filtering based on. In this case, ‘P’.
12. Execute the query.

Part 4: Address and Refine Results

Q3. What do you think ‘P’ and ‘R’ represent in the TRAN_TYPE table? How
might transactions differ if they are represented by ‘P’ or ‘R’?
Q4. What benefit can you gain from selecting only the top few rows of your
data, particularly from a large dataset?

79
 Lab 2-8 Comprehensive Case: Dillard’s Store Data:
Connecting Excel to a SQL Database
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo. com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll
quickly note that William T. Dillard II is an accounting grad of the University of
Arkansas and the Walton College of Business, which may be why he shared transaction
data with us to make available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on Connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)
• Excel 2016 (available on the Remote Desktop at the University of Arkansas)

In this lab, you will:

• Learn how to access databases, run queries, and perform analyses in Excel.

Part 1: Identify the Questions

Because, as accountants, we are most familiar with Microsoft Excel, we’d like to learn
how to access the data and run queries in excel. But the question is still why use Excel?
Q1. What can you do in Excel that is much more difficult to do in other data
man- agement programs?
Q2. Because most accountants are familiar with Excel, name three data manage-
ment functions you can do easier in Excel than any other program. How
does that familiarity help you with your analysis?

Part 2: Master the Data and Part 3: Perform an Analysis

of the Data
1. Log on to Remote Desktop at the University of Arkansas.
2. Open Microsoft SQL Server Management Studio to access the UA_Dillards_2016
data.

Connecting Excel to a SQL Server Database

While executing queries in SQL Server is a great method for viewing data, if you want to
eventually load data into Excel for additional analysis or visualization, it is easiest to
write the queries directly in Excel. This puts the entire ETL process in one tool, Excel.
3. Open a new Excel workbook.
4. From the Data tab, click New Query > From Database > From SQL Server Database.

80
 LAB EXHIBIT 2-8A
Source: Microsoft Excel 2016

5. In the Microsoft SQL database pop-up window, input the server name that you
were provided through the Walton.uark.edu/enterprise website. The database name
is UA_Dillards_2016.

LAB EXHIBIT 2-8B

Source: Microsoft SQL Server
Management Studio

6. Click OK.
7. On the next window, keep the default to use your current credentials, and then click
Connect.

LAB EXHIBIT 2-8C

Source: Microsoft SQL Server
Management Studio

81
 8. Click OK in the Encryption Support pop-up window.
9. The tables in the UA_Dillards_2016 database are available for you to select in the
Navigator window. Click once on STORE to preview the data.

LAB EXHIBIT 2-8D

Source: Microsoft SQL Server
Management Studio

10. The data will preview on the right side of the Navigator window. Click Load to
load the data into a table in Excel.
As long as the dataset that you have loaded is under the Excel row limit of
1,048,576, the entire table will be available for you to work with in Excel. You can
ana- lyze the data using Excel’s formulas, functions, and statistical tools, as well as
create PivotTables and charts.
11. Create a PivotTable for this set of data by selecting all of the data from the Store
table and then clicking PivotTable on the Insert tab of the Excel ribbon.

LAB EXHIBIT 2-8E

Source: Microsoft Excel 2016

12. We can quickly view a count of how many stores are in each state. Drag and drop
STATE into the ROWS section of the PivotTable Fields window and STORE into
the
VALUES section.
82
 LAB EXHIBIT 2-8F
Source: Microsoft Excel 2016

13. It is likely that the PivotTable assumed you wanted to SUM the Store ID, which
provides nonsense data. We need to change that aggregate to a COUNT instead.
Click the drop-down next to Sum of STORE in the VALUES section of the
PivotTable Fields window and select Value Field Settings.
83
LAB EXHIBIT 2-8G
Source: Microsoft Excel 2016

14. Select Count to change the way the data for number of stores per state are
summarized.

LAB EXHIBIT 2-8H

Source: Microsoft Excel 2016

15. Take a screenshot (label it 2-8A) of the PivotTable.

Q3. Reference your PivotTable and find which state has the highest number of
Dillard’s stores. Which states have the fewest? How many stores are there
across the country?
Q4. Counting the number of stores per state is one example of how the data that
have been loaded from SQL Server into Excel can become useful information
through a PivotTable. What are other ways that you could organize the
STORE data in a PivotTable to come up with meaningful information?
84
Writing Queries Directly in Excel
While executing queries in SQL Server is a great method for viewing data, if you want to
eventually load data into Excel for analysis or visualization, it is easiest to write the
queries directly in Excel. This puts the entire ETL process in one tool, Excel.
1. Open a new Excel workbook.
2. From the Data tab, click New Query > From Database > From SQL Server Database.

LAB EXHIBIT 2-8I

Source: Microsoft Excel 2016

3. In the Microsoft SQL database pop-up window, input the server information
that you received when accessing the UA_Dillards_2016 data. The Database
name is UA_Dillards_2016.

LAB EXHIBIT 2-8J

Source: Microsoft SQL Server
Management Studio

Important Note: If you just worked through the first part of this lab (connecting to
data), this step is where the process begins to be different. Instead of clicking OK, you
will click SQL statement (optional).

LAB EXHIBIT 2-8K

Source: Microsoft SQL Server
Management Studio

85
 4. For this query, we will pull in enough data to answer a variety of questions about
trans-
action line items in each state. We’ll select all of the columns from the TRANSACT
table and the STATE column from the STORE table. In order to do that, we’ll join
the two tables together in our query.
Q5. Joins are made based on their primary key/foreign key relationship. Looking
at the ERD or the dataset, which two columns form the relationship between
the TRANSACT and STORE tables?
5. Type this query into the SQL statement box:
SELECT TRANSACT.*, STATE
FROM TRANSACT
INNER JOIN STORE
ON TRANSACT.STORE = STORE.STORE
WHERE TRAN_DATE BETWEEN '20160901' AND '20160915'

LAB EXHIBIT 2-8L

Source: Microsoft SQL Server
Management Studio

6. Click OK to continue.
7. Click Connect using your current credentials in the next window.
8. Click OK on the Encryption Support window.
9. Excel will provide you a preview of your data before loading it. If the query loads
suc- cessfully (i.e., if you see the preview, instead of an error), click Close & Load
to load the data into an Excel table.
86
 LAB EXHIBIT 2-8M
Source: Microsoft SQL Server
Management Studio

LAB EXHIBIT 2-8N

Source: Microsoft Excel 2016

10. It may take a few minutes to load. Even though the query we ran was only for 15
days of transactions, there are still more than 1 million transactions (or rows) to
return.

Part 4: Calculate Summary Statistics

Calculating summary statistics such as mean, median, and mode for quantitative data can
be helpful to get a quick feeling for the components of a large dataset.
11. While you can calculate these statistics by hand, you can also have Excel calculate
them automatically through the Data Analysis ToolPak. If you haven’t added this com-
ponent into Excel yet, follow this menu path: File > Options > Add-ins. From this
win- dow, select the Go. . . button, and then place a check mark in the box next to
Analysis ToolPak. Once you click OK, you will be able to access the ToolPak from
the Data tab on the Excel ribbon.
12. We will calculate descriptive statistics for the attributes ORIG_PRICE,
SALE_ PRICE, TRAN_AMT.
Q6. Looking at the first several rows of data, compare the amounts in ORIG_
PRICE, SALE_PRICE, TRAN_AMT. What do you think
TRANS_AMT represents?
87
 13. Click the Data Analysis button from the Data tab on the Excel ribbon and select
Descriptive Statistics.

LAB EXHIBIT 2-8O

Source: Microsoft Excel 2016

14. For the Input Range, select the three columns associated with the three attributes
that we are measuring. Leave the default to columns, and place a check-mark in
Labels in First Row.
15. Place a check mark next to Summary Statistics, then press OK.

LAB EXHIBIT 2-8P

Source: Microsoft Excel 2016

It may take awhile for the statistics to run because you’re working with so many
rows. Q7. What are the means for each of the attributes?
Q8. The mean from TRAN_AMT is lower than the means for both ORIG_PRICE
and SALE_PRICE, why do you think that is? (Hint: It is not an error).

88
Part 5: Address and Refine Results
Q9. How does doing a query within Excel allow quicker and more efficient
access and analysis of the data?
Q10. Is 15 days of data sufficient to capture the statistical relationship among and
between different variables? What will Excel do if you have more than 1 million
rows? There are statistical programs such as SAS and SPSS that allow for
trans- formation and statistical analysis of bigger datasets.

End of Lab

Lab 2-9 Comprehensive Case: Dillard’s Store ta:

Da Joining Tables

Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo. com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll
quickly note that William T. Dillard II is an accounting grad of the University of
Arkansas and the Walton College of Business, which may be why he shared transaction
data with us to make available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on Connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Technique
• This lab is most easily performed if Labs 2-6 and 2-7 have already been completed.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)

In this lab, you will:

• Learn how to do a table join, joining two tables all on your own and running an
analysis of the data.

Part 1: Identify the Questions

1. Consult the entity-relationship diagram to view the variables available in the
TRANSACT table and the CUSTOMER table. Consult Lab 2-5 to access the ERD or
http://walton.uark.edu/enterprise/.
Q1. If we wanted to join the TRANSACT and the CUSTOMER tables, what
fields (or variables) would we use to join them?
Q2. Because most accountants are familiar with Excel, name three data manage-
ment functions you can do easier in Excel than any other program. How
does that familiarity help you with your analysis?

89
LAB EXHIBIT 2-9A
Source: Microsoft SQL Server
Management Studio

LAB EXHIBIT 2-9B

Source: Microsoft SQL Server M

LAB EXHIBIT 2-9C

Source: Microsoft SQL Server
Management Studio

90
 8. Given the description in the text and in Labs 2-6 and 2-7, you have the tools you
need
to join two tables, TRANSACT and CUSTOMER and run a query on customer state
(note this is where the customer lives and not where the store is located). Input a
query that will show how many customers have shopped at Dillard’s, grouped by
their respective states. Run the query for the entire dataset; do not filter based on a
limited set of days.
9. This query may take a few minutes to run. Once the results have returned, you can
check your results by looking at how many customers have shopped at Dillard’s
from Arkansas (AR): 2673089.
Q3. How many different states are listed?
Q4. Why are there so many more states listed than 50?
Q5. What do you assume the Other, XX, blank, and Null states represent? If you
were to analyze these data to learn more about the number of customers
from different places have shopped at Dillard’s, what would you do with
these data: group them, leave them out, leave them alone? Why?

End of Lab

91
 Chapter 3
Modeling and Evaluation:
Going from Defining Business
Problems and Data Understanding
to Analyzing Data and Answering
Questions

A Look at This Chapter

Understanding various models and techniques used for data analytics is an increasingly important skill for
accoun- tants. In this chapter, we evaluate several different approaches and models and identify when to use
them and how to interpret the results. We also provide specific accounting-related examples of when each of
these specific data approaches and models is appropriate to address our particular question.

A Look Back
Chapter 2 provided a description of how data are prepared and scrubbed to be 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.

A Look Ahead
Chapter 4 will demonstrate various techniques that can be used to effectively communicate the results of
your analyses. Additionally, we discuss how to refine your results and translate your findings into useful
information for decision makers.

92
 Liang Zhao Zhang, a San Francisco–based janitor, made more
than $275,000 in 2015. The average janitor in the area earns
just $26,180 a year. Zhang, a Bay Area Rapid Transit (BART)
janitor, has a base pay of $57,945 and $162,050 in overtime
pay. With benefits, the total was $276,121. While some call his
compensation “outrageous and irresponsible,” Zhang signed
up for every available overtime slot that became available. To
be sure, Zhang worked more than 4,000 hours last year and
received overtime pay. Can BART predict who might take
advan- tage of overtime pay? Should it set a policy restricting
overtime pay? Would it be better for BART to hire more regular,
kurhan/123RF full-time employees instead of offering so much overtime?
Can Data Analytics help with these questions?
Using a profiling data analytics approach detailed in this chapter, BART could generate summary statistics of its
workers and their overtime pay to see the extent that overtime is required and taken advantage of.
Using regression and classification approaches to Data Analytics would help to classify which employees are
most likely to exceed normal bounds and why. BART, for example, has a policy of offering overtime by seniority. So
do the most senior employees sign up first and leave little overtime to others? Will a senior employee get paid
more for overtime than more junior-level employees? If so, is that the best policy for the company and its
employees?

Source: http://www.cnbc.com/2016/11/04/how-one-bay-area-janitor-made-276000-last-year.html.

OBJECTIVES
After reading this chapter, you should be able to:

LO 3-1
LO 3-2 Define Data Analytics approaches

LO 3-3 Explain the profiling approach to Data Analytics

LO 3-4 Describe the data reduction approach to Data Analytics

LO 3-5 Understand the regression approach to Data Analytics

Understand the classification approach to Data
LO 3-6
Analytics Understand the clustering approach to Data
Analytics
93
94 Chapter 3 Modeling and Evaluation

LO 3-1 PERFORMING THE TEST PLAN: DEFINING DATA

Define Data ANALYTICS APPROACHES
Analytics Using the IMPACT cycle model, in chapter 1 we listed various approaches that business
approaches analysts use to address business questions. In chapter 1, we mentioned the process of
identifying the questions, the “I” in the IMPACT cycle model. In chapter 2, we discussed
the techniques and processes of mastering the data, the “M” in the IMPACT cycle model.
The third step of the IMPACT cycle model, or the “P,” is “performing test plan.” That is,
how are we going to test or analyze the data to answer the question before us? Which
Data Analytics approaches or techniques are appropriate to address our business
questions?
Before we discuss these approaches, we need to bring you up to speed on some data-
specific terms:
• A target is an expected attribute or value that we want to evaluate. For example, if we
are trying to predict whether a transaction is fraudulent, the target might be a specific
“fraud score.” If we’re trying to predict an interest rate, the target would be “interest
rate.”
• A class is a manually assigned category applied to a record based on an event. For
example, if the credit department has rejected a credit line for a customer, the credit
department assigns the class “Rejected” to the customer’s master record. Likewise,
if the internal auditors have confirmed that fraud has occurred, they would assign
the class “fraud” to that transaction.
There are numerous models to choose from when evaluating a given set of data. The
choice of model depends on the desired outcome of the business question. If you don’t
have a specific question and are simply exploring the data for potential patterns of
interest, you would use an unsupervised approach. For example, consider the question:
“Do our vendors form natural groups based on similar attributes?” In this case, there
isn’t a specific target because you don’t yet know what similarities our vendors have.
You may use clustering to evaluate the vendor attributes and see which ones are closely
EXHIBIT 3-1 related, shown in Exhibit 3-1.
Clustering
Clustering is an
unsupervised method
that is used to find
natural groupings
within the data. In this
case, we have three
natural clusters of
vendors.

Distance

You could also use co-occurrence grouping to match vendors by geographic region;
data reduction to simplify vendors into obvious categories, such as wholesale or retail or
based on overall volume of orders; or profiling to evaluate vendors with similar on-time
delivery behavior, shown in Exhibit 3-2. In any of these cases, the data drive the
decision, and you evaluate the output to see if it matches our intuition. These exploratory
exercises may help to define better questions, but are generally less useful for making
decisions.
On the other hand, we may ask questions with specific outcomes, such as: “Will a new
 vendor ship a large order on time?” When you are performing analysis that uses historical
data to predict a future outcome, you will use a supervised approach. We use historical data
 Chapter 3 Modeling and Evaluation 95

−3 −2 −1 0 +1 +2 +3
Days to ship (Z-score)

EXHIBIT 3-2 Profiling Profiling is an unsupervised method that is used to discover patterns
of behavior. In this case, the higher the Z-score (farther away from the mean), the more likely a
vendor will have a delayed shipment (green circle). We use profiling to explore the attributes of
that vendor that we may want to avoid in the future.

to create the new model. Using a classification model, you can predict whether a new
vendor belongs to one class or another based on the behavior of the others, shown in
Exhibit 3-3. You might also use regression to predict a specific value to answer a question
such as, “How many days do we predict it will take a new vendor to ship an order?”
Again, the prediction is based on the activity we have observed from other vendors,
shown in Exhibit 3-4. Causal modeling, similarity matching, and link prediction are
additional supervised approaches
Volume

Distance

EXHIBIT 3-3 Classification Classification is a supervised method that can be used to predict
the class of a new observation. In this case, blue circles represent “on-time” vendors. Green
squares represent “delayed” vendors. The gold star represents a new vendor with no history.
Volume

Days to ship

EXHIBIT 3-4 Regression Regression is a supervised method used to predict specific values. In
this case, the number of days to ship is dependent on the number of items in the order. Therefore,
we
can use regression to predict the “days to ship” of the gold star based on the volume in the order.
96 Chapter 3 Modeling and Evaluation

Casual modeling
Identify your Classification
(Event Influences
question (Whether or
other)
not)

Yes Yes

Do you have Yes Supervised

Data reduction Are you
too much
(Aggregate data) Method predicting Do you have Regression
data?
(Training data an event No lots of money? No (How much?)
exist) or class?
No

Can you Yes Similarity matching

identify obvious (Natural grouping)
groups? Are you
Unsupervised Are you No Clustering
No looking for
Method trying to (Undiscovered
(Exploratory) rank your common
No groups)
data? events?

Are you
looking Yes Yes
Yes
for hidden Link prediction
links? (Social networks)
Profiling Co-occurrence grouping
No (Typical (Events that
behavior) happen together)

Do you
have a specific Yes
target in
mind?

No

EXHIBIT 3-5 Flowchart to Help Choose an Appropriate Data Model

where you attempt to identify causation (which can be expensive), identify a series of
char- acteristics that predict a model, or attempt to identify other relationships,
respectively.
Ultimately, the model you use comes down to the questions you are trying to answer.
The flowchart in Exhibit 3-5 shows several decisions that will help you select an
appropriate model, or data approach. By evaluating your data, the question that needs to
be addressed as well as the desired outcomes, an appropriate data approach can be
determined. Once you’ve selected an approach, then your analysis can begin.
We highlighted the data analytics approaches in chapter 1 and provide them again here
for reference:
• Classification: A data approach used to assign each unit (or individual) in a
population into a few categories. An example classification might be, of all of the
loans this bank has offered, which are most likely to default? Or which loan
applications are expected to be approved? In this case, classification would classify
loan requests as either approved or denied. A second example would be a credit card
company flagging a trans- action as being approved or potentially being fraudulent
and denying payment.
• Regression: A data approach used to estimate or predict, for each unit, the
numerical value of some variable using some type of statistical model. An example
of regression analysis might be, given a balance of total accounts receivable held by
a firm, what is the appropriate level of allowance for doubtful accounts for bad
debts?
 Chapter 3 Modeling and Evaluation 97

• Similarity matching: A data approach used to identify similar individuals based on

data known about them. The opening vignette in chapter 1 mentioned Alibaba and its
attempt to identify seller and customer fraud based on various characteristics known
about them to see if they were similar to known fraud cases.
• Clustering: A data approach used to divide individuals (like customers) into groups (or
clusters) in a useful or meaningful way. In other words, identifying groups of similar
data elements and the underlying drivers of those groups. For example, clustering might
be used to segment a customer into a small number of groups for additional analysis and
mar- keting activities. In a like way, transactions might also be put into clusters to analyze
them.
• Co-occurrence grouping: A data approach used to discover associations between
indi- viduals based on transactions involving them. Amazon might use this to sell
another item to you by knowing what items are “frequently bought together” or
“Customers who bought this item also bought . . .” as shown in chapter 1.
• Profiling: A data approach used to characterize the “typical” behavior of an
individual, group, or population by generating summary statistics about the data
(including mean, standard deviations, etc.). By understanding the typical behavior,
we’ll be able to identify abnormal behavior more easily. When behavior departs from
that typical behavior, which we’ll call an anomaly, then further investigation is
warranted. Profiling might be used in accounting to identify fraud or just those
transactions that might warrant some additional investigation (e.g., travel expenses that
are three standard deviations above the norm).
• Link prediction: A data approach used to predict a relationship between two data
items. This might be used in social media. For example, if two individuals have
mutual friends on social media and both attended the same university, it is likely that
they know each other and the site may make a recommendation for them to connect.
Chapter 1 pro- vides an example of this used in Facebook. Link prediction in an
accounting setting might work to use social media to look for relationships between
related parties that are not otherwise disclosed to identify related party transactions.
• Data reduction: A data approach used to reduce the amount of information that needs to
be considered to focus on the most critical items (i.e., highest cost, highest risk, largest
impact, etc.). It does this by taking a large set of data (perhaps the population) and
reducing it with a smaller set that has the vast majority of the critical information of the
larger set. An example might include the potential to use these techniques in auditing. While
auditing has employed various random and stratified sampling over the years, Data Analytics
suggests new ways to highlight which transactions do not need the same level of vetting as
other transactions.
While these are all important and applicable data approaches, in the rest of the chapter
we highlight the five approaches that are used most frequently in accounting and
auditing: profiling, data reduction, regression, classification, and clustering data
approaches. You’ll find that these data approaches are not mutually exclusive and that
actual analysis may involve parts of several approaches to arrive at the intended test of
the data and result.

PROGRESS CHECK
1. Using the flowchart in Exhibit 3-5, identify the appropriate approach for the fol-
lowing questions:
a. Will a customer purchase item X if given incentive A?
b. Which item (X, Y, or none) will a customer likely purchase given incentive A?
c. How many items will the customer purchase?
2. What is the main difference between supervised and unsupervised methods?
3. Evaluate the model shown in Exhibit 3-3. Which class would you predict the
new vendor belongs to?
98 Chapter 3 Modeling and Evaluation

LO 3-2 PROFILING
Explain the As you recall, profiling involves gaining an understanding of a typical behavior of an individual,
profiling approach group, or population (or sample). Profiling is done primarily using structured data—that is,
to Data Analytics data that are stored in a database or spreadsheet and are readily searchable. Using these data,
analysts can use common summary statistics to describe the individual, group, or population,
including knowing its mean, standard deviation, sum, etc. Profiling is generally performed
on data that are readily available, so the data have already been gathered and are ready for
further analysis.
Data profiling can be as simple as calculating summary statistics on transactional data,
such as the average number of days to ship a product, the typical amount we pay for a
prod- uct, or the number of hours an employee is expected to work. On the other hand,
profiling can be used to develop complex models to predict potential fraud. For example,
you might create a profile for each employee in a company that may include a
combination of salary, hours worked, and travel and entertainment purchasing behavior.
Sudden deviations from an employee’s past behavior may represent risk and warrant
follow-up by the internal auditors. Similar to evaluating behavior, data profiling is
typically used to assess data quality and internal controls. For example, data profiling
may identify customers with incomplete or
erroneous master data or mistyped transactions.
Data profiling typically involves the following steps:
1. Identify the objects or activity you want to profile. What data do you want to
evaluate? Sales transactions? Customer data? Credit limits? Imagine a manager wants
to track sales volume for each store in a retail chain. She might evaluate total sales
dollars, asset turnover, use of promotions and discounts, and/or employee incentives.
2. Determine the types of profiling you want to perform. What is your goal? Do you want
to set a benchmark for minimum activity, such as monthly sales? Have you set a
budget that you wish to follow? Are you trying to reduce fraud risk? In the retail store
scenario, the manager would likely want to compare each store to the others to
identify which ones are underperforming or overperforming.
3. Set boundaries or thresholds for the activity. This is a benchmark that may be
manually set, such as a budgeted value, or automatically set, such as a statistical
mean, quartile, or percentile. The retail chain manager may define underperforming
stores as those whose sales activity falls below the 20th percentile of the group and
overperforming stores as those whose sales activity is above the 80th percentile.
These thresholds are automati- cally calculated based on the total activity of the
stores, so the benchmark is dynamic.
4. Interpret the results and monitor the activity and/or generate a list of exceptions.
Here is where dashboards come into play. Management can use dashboards to
quickly see multiple sets of profiled data and make decisions that would affect
behavior. As you evaluate the results, try to understand what a deviation from the
defined boundary represents. Is it a risk? Is it fraud? Is it just something to keep an
eye on? To evalu- ate her stores, the retail chain manager may review a summary of
the sales indicators and quickly identify under- and overperforming stores. She is
likely to be more con- cerned with underperforming stores as they represent major
challenges for the chain. Overperforming stores may provide insight into marketing
efforts or customer base.
5. Follow up on exceptions. Once a deviation has been identified, management should
have a plan to take a course of action to validate, correct, or identify the causes of the
abnor- mal behavior. When the retail chain manager notices a store that is
underperforming compared to its peers, she may follow up with the individual store
 Chapter 3 Modeling and Evaluation 99

Example of Profiling in Management Accounting

Advanced Environmental Recycling Technologies (ticker symbol AERT) makes wood-plastic
composite for decking that doesn’t rot and keeps its form, color, and shape indefinitely
(Exhibit 3-6). It has developed a recipe and knows the standards of how much wood,
plas- tic, and coloring goes into each foot of decking. AERT has developed standard costs
and constantly calculates the means and standard deviations of the use of wood, plastic,
color- ing, and labor for each foot of decking. As the company profiles each production
batch, it knows that when significant variances from the standard cost occur, those
variances need to be investigated further. This is an example of how profiling might be
used in manage- ment accounting.

EXHIBIT 3-6 Example of Price and Volume Variance Profiling Note that there are multiple
benchmarks. The blue line is the standard behavior; the green area contains favorable variances; the
orange area shows unfavorable variances.

Example of Profiling in an Internal Audit

Profiling might also be used by internal auditors to evaluate travel and entertainment
(T&E) expenses. In some organizations, total annual T&E expenses are second only
to payroll and so represent a major expense for the organization. By profiling the T&E
expenses, we can understand the average amount and range of expenditures and then
compare and contrast with prior period’s mean and range to help identify changing trends
and potential risk areas for audit and potentially for tax purposes. This will help indicate
areas where there is a lack of controls, changes in procedures, or individuals more willing
to spend excessively in potential types of T&E expenses, etc., which might be associated
with higher risk.
The use of profiling in internal audits might unearth when employees misuse company
funds, like in the case of Tom Coughlin, an executive at Walmart, who misused
“company funds to pay for CDs, beer, an all-terrain vehicle, a customized dog kennel,
even a com- puter as his son’s graduation gift—all the while describing the purchases as
routine busi- ness expenses.”1

1
http://www.washingtonpost.com/wp-dyn/content/article/2005/07/14/AR2005071402055.html (accessed
August 2, 2017).
100 Chapter 3 Modeling and Evaluation

Example of Profiling in Auditing

and Continuous Auditing
Profiling is also useful in continuous auditing. If we consider the dollar amount of each
transaction, we can develop a Z-score by knowing the mean and standard deviation.
Using our statistics knowledge and assuming a normal distribution, any transaction that
has a Z-score of 3 or above would represent abnormal transactions that might be
associated with higher risk. We can investigate further seeing if those transactions had
appropriate approv- als and authorization.
An analysis of Benford’s law could also be used to assess a set of transactions.
Benford’s law is an observation about the frequency of leading digits in many real-life
sets of numeri- cal data. The law states that in many naturally occurring collections of
numbers, the signifi- cant lending digit is likely to be small. If the distribution of
transactions for an account like “sales revenue” is substantially different than Benford’s
law would predict, then we would investigate the sales revenue account further and see if
we can explain why there are differ- ences from Benford’s law. Exhibit 3-7 shows an
illustration of Benford’s law using the first digit of a company’s gross domestic product
(GDP) in U.S. dollars. We will show additional applications of Benford’s law in chapter
6.
35%

30%

25%

20%

15%

10%

5%

0%
1 2 3 4 5 6 7 8 9
Real GDP 2016 Benford’s Predicted

EXHIBIT 3-7 Benford’s Law Benford’s law predicts the distribution of first digits. In
this example, the GDP is given (in U.S. dollars) for countries around the world from 2016;
note its departure from what we would expect given Benford’s law.
Source: data.worldbank.org

PROGRESS CHECK
4. Profiling is also used in law enforcement, such as offender or criminal profiling.
Offender profiling is a tool used by law enforcement to identify likely suspects
and analyzing data patterns to help predict future offenses by criminals and
identify potential victims. Compare and contrast this type of profiling with the
profiling data approach used in accounting (mentioned earlier in this section).
5. Identify a reason the sales amount of any single product may or may not follow
Benford’s law.
 Chapter 3 Modeling and Evaluation 101

DATA REDUCTION LO 3-3

As you recall, the data reduction approach attempts to reduce the amount of detailed Describe the
informa- tion considered to focus on the most critical, interesting, or abnormal items (i.e., data reduction
highest cost, highest risk, largest impact, etc.). It does this by filtering through a large set approach to
of data (perhaps the total population) and reducing it to a smaller set that has the vast Data Analytics
majority of the critical information of the larger set. The data reduction approach is done
primarily using structured data—that is, data that are stored in a database or spreadsheet
and are readily searchable.
Data reduction involves the following steps:
1. Identify the attribute you would like to reduce or focus on. For example, an employee may
commit fraud by creating a fictitious vendor and submitting fake invoices. Rather than
evaluate every employee, an auditor may be interested only in employee records that
have addresses that match vendor addresses.
2. Filter the results. This could be as simple as using filters in Excel, queries with a
WHERE phrase. It may also involve a more complicated calculation. For example,
employees who create fictitious vendors will often use addresses that are similar, but
not exactly the same, as their own address to foil basic SQL queries. Here the auditor
should use a tool that allows fuzzy matching, which uses probability to identify likely
similar addresses.
3. Interpret the results. Once you have eliminated irrelevant data, take a moment to
see if the results make sense. Calculate the summary statistics. Have you
eliminated any
obvious entries? Looking at the list of matching employees, the auditor might tweak
the probability in the fuzzy match to be more or less precise to narrow or broaden the
num- ber of employees who appear.
4. Follow up on results. At this point, you will continue to build a model or use the
results as a targeted sample for follow-up. The auditor should review company
policy and fol- low up with each employee who appears in the reduced list as it
represents risk.

Example of Data Reduction in

Internal and External Auditing
An example might include the potential to use the data reduction approach in auditing.
While auditing has employed various random and stratified sampling over the years, Data
Analytics suggests new ways to highlight transactions that do not need the same level of
vet- ting or further analysis as other transactions. One example might be to filter the travel
and entertainment (T&E) transactions to find specific values, including whole-dollar
amounts of T&E expenses. Whole-dollar amounts have a greater likelihood of being
made up or fraudulent (as illustrated in Exhibit 3-8).
Another filter might be to consider only those transactions being paid to Square
Payments because anyone can create a Square Payments account. If there are vendors that EXHIBIT 3-8
Data Reduction
accept pay- ment via Square Payments, there is a higher potential for the existence of a
Data reduction is used
fictitious vendor. to focus on data of
interest—in this case,
filtering on whole
numbers.
102 Chapter 3 Modeling and Evaluation

The data reduction approach allows us to focus more time and effort on those vendors
and
transactions that might require additional analysis to make sure they are legitimate.
An example of the data reduction approach might be to do gap detection, such as look-
ing for a missing check number in a sequence of checks. Finding out why certain check
numbers were skipped and not recorded requires additional analysis and consideration.
Another application of the data reduction approach is to filter all the transactions
between known related party transactions. Focusing specifically on related party
transactions allows the auditor to focus on those transactions that might potentially be
sensitive and/or risky.
Another example might be the comparison between the address of vendors and the
address of employees to ensure that employees are not siphoning funds to themselves.
Such a filter might require the use of a computer-assisted technique, called fuzzy match,
to match addresses that do not perfectly match 100 percent. Use of fuzzy match looks for
correspondences between portions, or segments, of the text of each potential match. Once
potential matches between vendors and employees are found, additional analysis must be
conducted to figure out if funds have been, or potentially could be, siphoned.

Examples of Data Reduction in Other Accounting Areas

Data reduction approaches are also used in operational audit settings. For example, filter-
ing the data to find cases where there are duplicate invoice payments might be an
efficient way to find errors or fraud. Once duplicate invoice payments are found,
additional work can be done to identify the reasons this has occurred. It may also be a
way to reduce costs when duplicate payments are found and procedures are set in place to
mitigate duplicate payments from occurring in the future.
Data reduction approaches may also be useful in a financial statement analysis setting, per-
haps performed by financial analysts, pension funds, or individual investors. Among other uses,
XBRL (eXtensible Business Reporting Language) is used to facilitate the exchange of
financial reporting information between the company and the Securities and Exchange
Commission (SEC). The SEC then makes it available to all interested parties, including
suppliers, com- petitors, investors, and financial analysts. XBRL requires that the data be
tagged according to the XBRL taxonomy. Using these tagged data, financial analysts, loan
officers, and investors develop models to access all the relevant financial or nonfinancial
data to help interpret the financial data to predict future earnings, forecast solvency or liquidity,
and analyze profitability. The use of XBRL and the modeling by financial data takes all the
details of the financial state- ments, footnotes, and other financial and nonfinancial data and
summarizes them in models of future earnings, solvency, liquidity, and profitability. We’ll
explore XBRL further in chapter 8.

PROGRESS CHECK
6. Describe how the data reduction approach is used to consider T&E expenses.
7. Explain how XBRL might be used to focus on specific areas of interest by lenders.

LO 3-4
Understand
REGRESSION
the regression Regressions allow the accountant to develop models to predict expected outcomes. These
approach to Data expected outcomes might be to predict the level of the allowance of doubtful accounts
Analytics needed for a given accounts receivable balance.
Regression analysis involves the following process:
1. Identify the variables that might predict an outcome. The inputs are called independent
Chapter 3 Modeling and Evaluation 103

2. Determine the functional form of the relationship. Is it a linear relationship where each
input plots to another? Are you trying to divide the records into different groups or
classes?
3. Identify the parameters of the model. What are the relative weights of each variable
or the thresholds of each branch in a classification?
The following discussion primarily identifies the structure of the model—that is, the relation-
ship between the dependent variable and the plausible independent variables—in this way:
Dependent variable = f(independent variables)
The dependent variable might be the amount that should be considered in an allowance
for doubtful accounts; the independent variables that might predict the level needed to
reserve it may be current aged loans, loan type, customer loan history, and collections
suc- cess. We develop this further later.
We provide a multitude of examples in this next section.

Examples of the Regression Approach in

Managerial Accounting
Accounting firms experience a great amount of employee turnover each year (between
15 and 25 percent each year). 2 Understanding and predicting employee turnover is a par-
ticularly important determination for accounting firms. Each year, they must predict how
many new employees might be needed to accommodate growth, to supply needed areas
of expertise, and to replace employees who have left. Accounting firms might predict
employee turnover by predicting the following regression model in this way:
Employee turnover = f(current professional salaries, health of the economy
[GDP], salaries offered by other accounting firms or by corporate accounting, etc.)
Using such a model, accounting firms could then begin to collect the necessary data to
test their model and predict the level of employee turnover.

Examples of the Regression Approach in Auditing

One of the key tasks of auditors of a bank is to consider the amount of the allowance for
loan losses or for nonbanks to consider the allowance for doubtful accounts (i.e., those
receivables that may never be collected). These allowances are often subject to manipula-
tion to help manage earnings.3 The Financial Accounting Standards Board (FASB)
recently issued Accounting Standards Update 2016-13, which requires that banks provide
an esti- mate of expected credit losses (ECLs) by considering historical collection rates,
current information, and reasonable and supportable forecasts, including estimates of
prepay- ments.4 Using these historical and industry data, auditors may work to test a
model to estab- lish a loan loss reserve in this way:
Allowance for loan loses amount = f(current aged loans, loan type,
customer loan history, collections success)

2
http://www.cpafma.org/articles/inside-public-accounting-releases-2015-national-benchmarking-report/
(accessed November 9, 2016).
3
A. S. Ahmed, C. Takeda, and S. Thomas, “Bank Loan Loss Provisions: A Reexamination of Capital
Management, Earnings Management and Signaling Effects,” Journal of Accounting and Economics
28, no. 1 (1999), pp. 1–25.
4
http://www.pwc.com/us/en/cfodirect/publications/in-brief/fasb-new-impairment-guidance-financial-
instruments.html (accessed November 9, 2016).
104 Chapter 3 Modeling and Evaluation

Other Examples of the Regression and

Classification Approach in Accounting
For example, in chapter 1, we worked to understand why LendingClub rejected certain
loan applications. As we considered all of the possible explanations, we found that there
were at least three possible indicators that a loan might be rejected, including the debt-to-
income ratios, length of employment, and credit (risk) scores, suggesting a model that:
Loan rejection = f(debt-to-income ratio, length of employment,
credit [risk] score)
Another example of the regression and classification approach might be the approval of indi-
vidual credit card transactions. Assume you go on a trip; in the morning you are in Pittsburgh
and by the very next day, you are in Shanghai. Will your credit card transaction in Shanghai
automati- cally be rejected? Credit card companies establish models to predict fraud and
decide whether to accept or reject a proposed credit card transaction. A potential model may
be the following:
Transaction approval = f(location of current transaction, location of last
transaction, amount of current transaction, prior history of travel of credit card
holder, etc.)
LO 3-5
Understand the
classification
CLASSIFICATION
approach to Data The goal of classification is to predict whether an individual we know very little about
Analytics. will belong to one class or another. For example, will a customer have his or her balance
written off? The key here is that we are predicting whether the write-off will occur or not
(in other words, there are two classes: “Write-Off” and “Good”).
Classification is a little more involved as we are now dealing with machine learning
and complex probabilistic models. Here are the general steps:
1. Identify the classes you wish to predict.
2. Manually classify an existing set of records.
3. Select a set of classification models.
4. Divide your data into training and testing sets.
5. Generate your model.
6. Interpret the results and select the “best” model.

Classification Terminology
First, a bit of terminology to prepare us for our discussion.
Training data are existing data that have been manually evaluated and assigned a
class. We know that some customer accounts have been written off, so those accounts are
assigned the class “Write-Off.” We will train our model to learn what it is that those
customers have in common so we can predict whether a new customer will default or not.
Test data are existing data used to evaluate the model. The classification algorithm
will try to predict the class of the test data and then compare its prediction to the
previously assigned class. This comparison is used to evaluate the accuracy of the model,
or the prob- ability that the model will assign the correct class.
Decision trees are used to divide data into smaller groups. Decision boundaries mark
the split between one class and another.
Exhibit 3-9 provides an illustration of both decision trees and decision boundaries.
Decision trees split the data at each branch into two or more groups. In this example, the
first branch divides the vendor data by geographic distance and inserts a decision
dor volume. Note that the decision boundaries are different for each grouping.
 Chapter 3 Modeling and Evaluation 105

1 EXHIBIT 3-9
Example of Decision
Trees and Decision
1
Boundaries
2

Volume
2 3
3

Distance

Pruning removes branches from a decision tree to avoid overfitting the model. Pre-
pruning occurs during the model generation. The model stops creating new branches
when the information usefulness of an additional branch is low. Post-pruning evaluates
the com- plete model and discards branches after the fact. Exhibit 3-10 provides an
illustration of how pruning might work in a decision tree.

1
EXHIBIT 3-10
Illustration of Pruning
a Decision Tree
2 3

Linear classifiers are useful for ranking items rather than simply predicting class prob-
ability. These classifiers are used to identify a decision boundary. Exhibit 3-11 shows an
illustration of linear classifiers segregating the two classes. Note the error observation
that shows that this linear classifier is not perfect in segregating the two classes.

3 EXHIBIT 3-11
Illustration of Linear
2 1
Classifiers
Volume

Error
2
1 3

Distance
106 Chapter 3 Modeling and Evaluation

EXHIBIT 3-12
Support Vector
Machines
With support vector

Volume

Volume
machines, first find the
widest margin (biggest
pipe); then find the
middle line.

EXHIBIT 3-13
Support Vector
Machine Decision
Boundaries Volume
SVMs have two
decision boundaries at
the edges of the pipes.
 Chapter 3 Modeling and Evaluation 107

EXHIBIT 3-14
Illustration of
Underfitting and
Overfitting the Data
with a Predictive Model

Underfitting Good Overfitting

Training data EXHIBIT 3-15

1.0 Illustration of the
.9 Trade-Off between
the Complexity of
Accuracy

.8 Sweet spot the

.7 Model and the Accuracy
of the Classification
.6
.5 Testing data

Complexity of model

PROGRESS CHECK
8. 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?
9. If we are trying to predict whether a loan will be rejected, would you expect
credit score to be positively or negatively associated with loan rejection by a
bank such as LendingClub?

CLUSTERING LO 3-6
The clustering data approach works to identify groups of similar data elements and the Understand
underlying drivers of those groups. More specifically, clustering techniques are used to the clustering
group data/observations in a few segments so that data within any segment are similar, approach to Data
while data across segments are different. Analytics
As an example, Walmart may want to understand the types of customers who shop
at its stores. Because Walmart has good reason to believe there are different market seg-
ments of people, it may consider changing the design of the store or the types of products
to accommodate the different types of customers, emphasizing the ones that are most
profitable to Walmart. To learn about the different types of customers, managers may
ask whether customers agree with the following statements using a scale of 1–7 (on a
Likert scale):
Statement 1: I enjoy shopping.
Statement 2: I try to avoid shopping because it is bad for the budget.
Statement 3: I like to combine my shopping with eating out.
108 Chapter 3 Modeling and Evaluation

Statement 4: I use coupons when I shop.

Statement 5: I care more about the quality of the products than I do about the price.
Statement 6: I don’t care about shopping.
Statement 7: You can save a lot of money by comparing prices between various
stores. Income: The household income of the respondent (in dollars).
Shopping at Walmart: How many times a month do you visit Walmart?
The answers to these various questions may help cluster the various customers into
dif- ferent clusters and help Walmart to cater to its various customer clusters better
through superior insights.
Heat maps are another example of cluster analysis, showing a high concentration of
cus- tomers who purchase a particular product by the region in which they live. This
might help us to determine the appropriate region to focus sales resources.

Example of the Clustering Approach in Auditing

The clustering data approach may also be used in an auditing setting. Imagine a group
insurance setting where fraudulent claims associated with payment were previously found
by internal auditors through happenstance and/or through hotline tips. Based on current
internal audit tests, payments are the major concern of the business unit. Specifically,
the types of related risks identified are duplicate payments, fictitious names, improper/
incorrect information entered into the systems, and suspicious payment amounts.
Clustering is useful for anomaly detection in payments to insurance beneficiaries,
suppliers, etc. as shown in Figure 3-16. By identifying transactions with similar char-
acteristics, transactions are grouped together into clusters. Those clusters that
consist of few transactions or small populations are then flagged for investigation by the
auditors as they represent groups of outliers. Examples of these flagged clusters include
transactions include transactions with large payment amounts, a long delay in processing
the payment.
The dimensions used in clustering may be simple correlations between variables, such
as payment amount and time to pay, or more complex combinations of variables, such as
ratios or weighted equations. As they explore the data, auditors develop attributes that the
think will be relevant through intuition or data exploration. Figure 3-16 illustrates
clustering base on the following attributes:
1. Payment amount: The value of the payment for routine transactions.
2. Days to Pay: The number of days from the original recorded transaction to
the payment date.
The data are normalized to reduce the distortion of the data and other outliers are
removed. They are then plotted with the number of days to pay on the y axis and the pay-
ment amount on the x axis. Of the eight clusters identified, three clusters highlight
potential anomalies that may require further investigation as part of an internal or external
audit.
• Cluster 6 payments (purple) have a long duration between the processing
to payment dates.
• Cluster 7 payments (pink) have high payment amounts.
• Cluster 8 payments (brown) have high payment amounts and a long duration
between the processing date and the payment date.
 Chapter 3 Modeling and Evaluation 109

EXHIBIT 3-16
Example of Cluster
Analysis of Group
Insurance Claim
Payments
Source: Thiprungsri S., and
M.A. Vasarhelyi, 2011, page 79.

PROGRESS CHECK
10. Name three clusters of customers who might shop at Walmart.
11. Cluster 1 of the group insurance highlighted claims have a long period from
death to payment dates. Why would that cluster be of interest to internal
auditors?

Summary
■
In this chapter, we addressed the third step of the IMPACT cycle model: the “P” for
“performing test plan.” That is, how are we going to test or analyze the data to address
a problem we are facing?
■
Based on our problem and the data available, we provided a flowchart that helps the
analyst to choose the most appropriate model, noting the differences when we use a
supervised versus an unsupervised approach.
■
Specifically, we addressed five data analytics approaches or techniques are most com-
mon to address our accounting questions: profiling, data reduction, regression, classifi-
cation, and clustering. We also provided examples of accounting and auditing
problems addressed by these data approaches.
■
We introduced the concepts of Benford’s law and fuzzy match, which we will use in
sub- sequent chapters.
 ■
We presented some classification terminology—including test and training data,
decision
trees and boundaries, linear classifiers, and support vector machines—and talked about
the perils of under- and overfitting the training data and their consequences in predic-
tions using the test data.

Key Words
Benford’s law (100) An observation about the frequency of leading digits in many real-life sets of
numerical data. The law states that in many naturally occurring collections of numbers, the significant
lending digit is likely to be small.
causal modeling (95) A data approach similar to regression, but used when the relationship between
independent and dependent variables where it is hypothesized that the independent variables cause or are
associated with the dependent variable.
classification (95) A data approach used to assign each unit in a population into a few categories
potentially to help with predictions.
clustering (94) A data approach used to divide individuals (like customers) into groups (or clusters)
in a useful or meaningful way.
co-occurrence grouping (94) A data approach used to discover associations between individuals
based on transactions involving them.
data reduction (94) A data approach used to reduce the amount of information that needs to be con-
sidered to focus on the most critical items (i.e., highest cost, highest risk, largest impact, etc.).
decision boundaries (104) Technique used to mark the split between one class and another.
decision tree (104) Tool used to divide data into smaller groups.
fuzzy match (102) A computer-assisted technique of finding matches that are less than 100 percent
per- fect by finding correspondencies between portions of the text of each potential match.
link prediction (95) A data approach used to predict a relationship between two data items.
profiling (94) A data approach used to characterize the “typical” behavior of an individual, group, or
population by generating summary statistics about the data (including mean, standard deviations, etc.).
regression (95) A data approach used to estimate or predict, for each unit, the numerical value of
some variable using some type of statistical model.
similarity matching (95) A data approach used to identify similar individuals based on data known
about them.
structured data (98) Data that are organized and reside in a fixed field with a record or a file. Such
data are generally contained in a relational database or spreadsheet and are readily searchable by search
algorithms.
supervised approach/method (94) Approach used to learn more about the basic relationships
between independent and dependent variables that are hypothesized to exist.
support vector machine (106) A discriminating classifier that is defined by a separating
hyperplane that works first to find the widest margin (or biggest pipe).
training data (104) Existing data that have been manually evaluated and assigned a class, which
assists in classifying the test data.
test data (104) A set of data used to assess the degree and strength of a predicted relationship estab-
lished by the analysis of training data.
unsupervised approach/method (94) Approach used for data exploration looking for potential pat-
terns of interest.
XBRL (102) (eXtensible Business Reporting Language) A global standard for exchanging financial
reporting information that uses XML.

110
 ANSWERS TO PROGRESS CHECKS
1. a. Link prediction
b. Classification
c. Regression
2. In supervised learning, there is some idea of the basic relationships either because
of theory or because we have learned from our training data. In unsupervised
learning, we are primarily exploring the data for potential patterns that might exist
which may ulti- mately turn into supervised learning.
3. Exhibit 3-3 suggests that the new observation would likely belong to the “delayed
ven- dors” instead of the “on-time vendors” based on the volume shipped and the
distance and where it appears relative to the other observations.
4. In some sense, profiling techniques to find criminals and accounting anomalies are
very similar. Profiling to find criminals often looks to the physical characteristics (race,
sex, mental state, etc.) to predict whether the person has or is likely to commit a crime
(and is illegal to use in some jurisdictions). Accounting looks to other, nonphysical
characteristics such as the amounts, totals, and types of expenditures to identify
potential anomalies.
5. A dollar store might have everything for exactly $1.00. In that case, the use of
Benford’s law for any single project or even for every product would not follow
Benford’s law!
6. Data reduction may be used to filter out ordinary travel and entertainment expenses
so an auditor can focus on those that are potentially erroneous or fraudulent.
7. The XBRL tagging allows an analyst or decision maker to focus on one or a category
of expenses of most interest to a lender. For example, lenders might be most
interested in monitoring the amount of long-term debt, interest payments, and
dividends paid to assess if the borrower will be able to repay the loan. Using the
capabilities of XBRL, lend- ers could focus on just those individual accounts for further
analysis.
8. We certainly could let the data speak and address this question directly. In general,
when the health of the economy is stronger, there are fewer layoffs and fewer people
out look- ing for a job, which means less turnover.
9. Chapter 1 illustrated that LendingClub collects the credit score data and the initial
analysis there suggested the higher the credit score the less likely to be rejected. Given
this evidence, we would predict a negative relationship between credit score and loans
that are rejected.
10. Three clusters of customers who might consider Walmart could include thrifty
shoppers (looking for the lowest price), shoppers looking to shop for all of their
household needs (both grocery and non-grocery items) in one place, and those
customers who live close to the store (good location).
11. The longer time between the death and payment dates begs one to ask why it has
taken so long for payment to occur and if the interest required to be paid is likely
large. Because of these issues, there might be a possibility that the claim is
fraudulent or at least deserves a more thorough review to explain why there was such
a long delay.

Multiple Choice Questions

1. is a set of data used to assess the degree and strength of a predicted
relationship.
a. Training data b. Unstructured data
c. Structured data d. Test data

111
2. Data that are organized and reside in a fixed field with a record or a file. Such data
are
generally contained in a relational database or spreadsheet and are readily
searchable by search algorithms. The term matching this definition is:
a. Training data.
b. Unstructured data.
c. Structured data.
d. Test data.
3. The observation that the frequency of leading digits in many real-life sets of numeri-
cal data is called:
a. Leading digits hypothesis.
b. Moore’s law.
c. Benford’s law.
d. Clustering.
4. Which approach to data analytics attempts to predict a relationship between two data
items?
a. Similarity matching
b. Classification
c. Link prediction
d. Co-occurrence grouping
5. In general, the more complex the model, the greater the chance of:
a. Overfitting the data.
b. Underfitting the data.
c. Pruning the data.
d. The need to reduce the amount of data considered.
6. In general, the simpler the model, the greater the chance of:
a. Overfitting the data.
b. Underfitting the data.
c. Pruning the data.
d. The need to reduce the amount of data considered.
7. 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.
a. Linear classifier
b. Support vector machine
c. Decision tree
d. Multiple regression
8. mark (marks) the split between one class and another.
a. Decision trees
b. identified questions
c. Decision boundaries
d. Linear classifiers
9. Models associated with regression and classification data approaches have all except
this important part:
a. Identifying which variables (we’ll call these independent variables) might help pre-
dict an outcome (we’ll call this the dependent variable).
b. The functional form of the relationship (linear, nonlinear, etc.).
c. The numeric parameters of the model (detailing the relative weights of each of the
variables associated with the prediction).
d. Test data.
112
10. Which approach to data analytics attempts to assign each unit in a population into a
small set of classes where the unit belongs?
a. Classification
b. Regression
c. Similarity matching
d. Co-occurrence grouping

Discussion Questions
1. What is the difference between a target and a class?
2. What is the difference between a supervised and an unsupervised approach?
3. What is the difference between training datasets and test (or testing) datasets?
4. Using Exhibit 3-5 as a guide, what are three data approaches associated with the
super- vised approach?
5. Using Exhibit 3-5 as a guide, what are three data approaches associated with the
unsu- pervised approach?
6. How might the data reduction approach be used in auditing?
7. How might classification be used in approving or denying a potential fraudulent credit
card transaction?
8. How is similarity matching different from clustering?
9. How does fuzzy match work? Give an accounting situation where it might be most
useful.
10. Compare and contrast the profiling data approach and the development of standard
cost for a unit of production at a manufacturing company. Are they substantially the
same, or do they have differences?
11. Exhibits 3-1, 3-2, 3-3, and 3-4 suggest that volume and distance are the best
predictors of “days to ship” for a wholesale company. Any other variables that would
also be useful in predicting the number of “days to ship”?

Problems
1. How could the fuzzy match be used to find undisclosed related party transactions that
might need to be disclosed?
2. An auditor is trying to figure out if the inventory at an electronics store chain is obso-
lete. What characteristics might be used to help establish a model predicting
inventory obsolescence?
3. An auditor is trying to figure out if the goodwill its client recognized when it purchased
a factory has become impaired. What characteristics might be used to help establish
a model predicting goodwill impairment?
4. How might clustering be used to explain customers that owe us money (accounts
receivable)?
5. Why would the use of data reduction be useful to highlight related party transac-
tions (e.g., CEO has her own separate company that the main company does
business with)?
6. How could an investor use XBRL to do an analysis of the industry’s inventory
turnover?
7. Name three accounts that would be appropriate and interesting to apply Benford’s
law in auditing those accounts. Why would an auditor choose those three accounts?
When would a departure from Benford’s law encourage the auditor to investigate
further?

113
 Answers to Multiple Choice Questions
1. D 2. C 3. C 4. C 5. A 6. B 7. B 8. C 9. D 10. A

Appendix: Setting Up a Classification Analysis

To answer the question “Will a new vendor ship a large order on time?” using
classification, you should clearly identify your variables, define the scope of your data,
and assign classes. This is related to “master the data” in the IMPACT model.
Identify Your Variables
As the question is related to vendors and order shipments, take a moment to think about
attributes that might be predictive. Would the total number of order items potentially
cause a delay? Would the types of items? How about the overall shipping weight? Does
the ven- dor’s physical distance from your warehouse matter? How about the age of
vendor relation- ship or number of vendor employees? What else?

Define the Scope

Because you are looking at vendor shipments, you would need—at the basic level—data
related to the original purchase order (order date, number of items), shipping data (ship-
ping date, weight), and vendor master data (location, age, size). This will help you narrow
down your data request and make it more likely that you’ll get the data you request more
quickly. As you’re preparing your data, you’ll want to join these tables so that each
record represents an order. You’ll also want to calculate any figures of merit, such as the
number of days (Ship date – Order date), volume (total number of items on the order or
physical size) or distance (Vendor address – Warehouse address*) (see Table 3-1).

TABLE 3-1 Distance

Vendor Shipments (mi): (V
Total Days to Coordinates
Items: Order Ship Ship: (Ship – WH Weight
PO# Sum(Qty) Date Date Date – Vendor Coordinates)* (lb)
Order Date
123456 15 7/30/2020 8/2/2020 3 ABC 45 160
Company
*Software such as Tableau can calculate distances, but it requires a little more work. See http://www.vizwiz.com/2012/01/tableau-tip-
calculating-distance.html to learn how.

Distance Formula
(Use first number 3959 for miles or 6371 for kilometers)
3959 * ACOS
(
SIN(RADIANS([Lat])) * SIN(RADIANS([Lat2])) + COS(RADIANS([Lat])) *
COS(RADIANS([Lat2])) * COS(RADIANS([Long2]) – RADIANS([Long]))
)

Assign Classes
Take a moment to define your classes. You are trying to predict whether a given order
ship- ment will either be “On-time” or “Delayed” based on the number of days it takes
from the order date to the shipping date. What does “on-time” mean? Let’s define “on-time”
as an order that ships in 5 days or less and a “delayed” order as one that ships later than 5
days. You’ll use this rule to add the class as a new attribute to each of your historical

114
 On-time = (Days to ship ≤ 5)
Delayed = (Days to ship > 5)

Distance TABLE 3-2

Total Days to (mi): (V Shipment Class
Items: ship: (Ship Coordinates
Sum Order Date – – WH Weight
PO# (Qty) Date Ship Date Order Date) Vendor Coordinates)* (lb) Class
123456 15 7/30/2020 8/2/2020 3 ABC 45 160 On-time
Company
123457 20 7/30/2020 8/5/2020 6 XYZ 120 800 Delayed
Company

CHAPTER 3 LABS

115
 Lab 3-1 Data Reduction
Auditors use data reduction to focus their efforts on testing internal controls and limiting
their scope. For example, they may want to look only at transactions for a given year. In
this lab, you will learn to use filters in Excel and perform some fuzzy matches on vendor
and employee records, a common auditor analysis.

Company summary
These data are for a generic manufacturing company. You have been asked to see if there
are any potentially fictitious vendors or employees who may have created fake companies
in an effort to commit fraud.

Data
• Fuzzy.xlsx—contains employee and vendor data

Technique
• Some Excel experience is handy here. You will use tables, filters, and the Fuzzy
Lookup add-in.

Software needed
• Excel
• Fuzzy Lookup add-in: https://www.microsoft.com/en-us/download/details.aspx?id=15011

In this lab, you will:

Part 1: Identify a problem that will require data reduction techniques.
Part 2: Master the data and prepare for analysis.
Part 3: Perform data reduction.

Part 1: Identify the Problem

Fictitious vendors represent risk to a company. One way employees can embezzle funds
from a company is to create a fictitious vendor and then submit an invoice for services
that were never performed. Where there are poor internal controls, the employee receives
the payment and deposits the check.
Q1. What data do you think might exist to show that a vendor is related to
an employee? Which attributes would you focus on?
Q2. How might you attempt to detect these connections between vendors
and employees?
Q3. If you were the employee committing fraud, what would you try to do with
the data to evade detection?

Part 2: Master the Data and Prepare for Analysis

You have requested the employee and vendor master data tables to aid in your analysis.
The IT supervisor has sent you an Excel sheet with the following tables and attributes:

Employees
EmployeeID
EmployeeFirstName
EmployeeLastName

116
 EmployeeGender
EmployeeHireDate
EmployeeStreetAddress
EmployeeCity
EmployeeState
EmployeeZip
EmployeePhone

Vendors
VendorID
VendorName
VendorType
VendorSince
VendorContact
VendorBillingAddress
VendorBillingCity
VendorBillingState
VendorBillingZip
VendorBillingPhone
Your first step is to understand the data and prepare it in Excel to perform some
matching.
1. Open Fuzzy.xlsx in Excel.
2. Quickly browse through the worksheets to ensure that they are complete.
3. Go to the Employees tab and click any data element.
4. Select the entire data table (Ctrl + A).
5. Go to the Home tab, Styles section, and click Format as Table. Any style will do.
6. In the Format As Table box that appears, make sure the My table has headers box
is checked, and click OK.
7. In the Table Tools > Design tab, under Properties, change the table name from
Table1 to Employees.
8. Now go to the Vendors tab and click any data element. Repeat steps 4–7 and name
the new table “Vendors”.
9. Take a screenshot of either table (label it 3-1A).
10. Save your file as Fuzzy-Tables.xlsx.

Part 3: Perform Data Reduction

Now you’re ready to find those fictitious vendors. There are many different approaches
for working with the data to narrow your focus. These can be used with other data
sources as well.

Tool: Filtering
Excel Filters allow you to quickly find data with common attributes and help to limit the
scope of your analysis. Assume that the auditors have analyzed all vendors prior to 2019
and have resolved any outstanding issues. By analyzing only the vendors from 2019, you
avoid unnecessary analysis and reduce the time it will take for the computer to run the
analysis.
11. Open Fuzzy-Tables.xlsx and click the Vendors worksheet.
12. Click the drop-down arrow next to VendorSince to show filtering options,
shown below.
117
 13. To select only 2019 records, uncheck Select All and then check the box next to 2019.

LAB EXHIBIT 3-1A

Source: Microsoft Excel 2016

14. Select the table and headers (Ctrl + A twice) and copy the values (Ctrl + C).
15. Create a new worksheet tab called “Vendors2019” and paste the filtered values there.
16. Select your new table and format it as a table called “Vendors2019”.
17. Take a screenshot (label it 3-1B).
18. Save your file as Fuzzy-Tables-2019.xlsx.

Tool: Fuzzy Match

SQL queries and PivotTables require exact matches between two data points to identify
related data. Foreign keys must match primary keys exactly in databases or else a
relation- ship doesn’t exist. Names and addresses, as well as other manually entered text
values are more prone to errors and manipulation. Think about your questions from Part 1
of this lab. Wouldn’t one way to avoid detection be to change something subtle in the
address—for example “Street” to “St.” or “Center Ave” to “Center”? A human could
understand that these are the same thing, but a computer cannot without some help.
Fuzzy Lookup is a plugin for Excel that enables these mostly similar matches and
finds things that might otherwise evade detection by a computer system.
19. Download and enable Fuzzy Lookup for Excel if you haven’t already.
20. Open Fuzzy-Tables-2019.xlsx if you haven’t already.
21. In the ribbon, click Fuzzy Lookup > Fuzzy Lookup. A panel will appear on the
right showing the tables you defined in Part 2 of this lab.

118
119
 30. Format the output as a table named FuzzyMatch, then filter out any records with
0.0000 Similarity.
Q4. How many vendors have similar addresses to employees?
Q5. What do you notice about the street vendor and employee street
addresses? Q6. Are there any false positives (fuzzy matches that aren’t
really matches)?
31. Take a screenshot (label it 3-1C).

End of Lab

Lab 3-2 egression in Excel

R
Company summary
The data used are a subset of the College Scorecard dataset that is provided by the U.S.
Department of Education. These data provide federal financial aid and earnings informa-
tion, insights into the performance of schools eligible to receive federal financial aid, and
the outcomes of students at those schools. You can learn more about how the data are
used and view the raw data yourself at https://collegescorecard.ed.gov/data/. However,
for this lab, you should use the text file provided to you.

Data
• CollegeScorecard Datasets: CollegeScorecard_CleanedData from Lab 2-5

Technique
• Some experience with Excel is useful for this lab.

Software needed
• Excel
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

Part 1: Identify the questions.
Part 2: Load the data.
Part 3: Perform a regression analysis in Excel.

Part 1: Identify the Questions

This lab relies upon the steps completed in Lab 2-5 in which the data were prepared.
We will begin with a simple regression with two variables, SAT average and
completion rate for first-time, full-time students at four-year institutions.
Q1. Would you expect SAT average and completion rate to be correlated? If
so, would you expect the correlation to be positive or negative?
Q2. When determining relationships between variables, one of the criteria for a
potential causal relationship is that the cause must happen before the effect.
Regarding SAT average and completion rate, which would you determine to
be the potential cause? Which would be the effect?
Q3. Identifying the cause and effect as you did in Q2 can help you determine the
explanatory and response variables. Which variable, SAT average or
completion rate, is the explanatory variable?
120
Part 2: Master the Data
These steps were performed in Lab 2-5. You can either use the already prepared data in
the file Lab 3-3, College Scorecard Data (Cleaned post-Lab 2-5).xlsx, or you can use the
file that you saved after completing Lab 2-5.

Part 3: Perform an Analysis of the Data

1. To perform a regression test in Excel, you need to first download the Data Analysis
ToolPak. To do so, Follow this menu path: File > Options > Add-ins. From this
win- dow, select the Go. . . button, and then place a checkmark in the box next to
Analysis ToolPak. Once you click OK, you will be able to access the ToolPak from
the Data tab on the Excel ribbon.
2. Click the Data Analysis button from the Data tab on the Excel ribbon and select
Regression.
3. A window will pop up for you to input the Y range and the X range.

LAB EXHIBIT 3-2A

Source: Microsoft Excel 2016

4. Select the entire set of data that is associated with the response variable for the Y
range, then select the entire set of data that is associated with the explanatory
variable for the X range.
5. If you selected the labels in your ranges, place a checkmark in the box next to
Labels.
6. Click OK. This will run the regression test and place the output on a new
spreadsheet in your Excel workbook.
7. Take a screenshot of your regression output (label it 3-2A).
End of Lab
121
 Lab 3-3 Classification
Company summary
LendingClub is a peer-to-peer marketplace where borrowers and investors are matched
together. The goal of LendingClub is to reduce the costs associated with these bank-
ing transactions and make borrowing less expensive and investment more engaging.
LendingClub provides data on loans that have been approved and rejected since 2007,
including the assigned interest rate and type of loan. This provides several opportunities
for data analysis.

Data
• LendingClub datasets: LendingClub-Classification

Software needed
• Excel
• Weka—available at www.cs.waikato.ac.nz/ml/weka
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

• Analyze the data using various classification models.

Part 1: Identify the Questions

Thinking about LendingClub’s function as a marketplace for investors and borrowers,
what might stakeholders want to know? Has LendingClub’s model changed over the
years? If we understood what affected an interest rate decision, could we game the system
to our advan- tage? Take a moment and come up with some general questions that could
be answered through data analysis.
Q1. Thinking about loan applicants in general, how would you expect them to
fall into different groups?
Q2. When evaluating previous loan data, what would you expect your target
variable to be?
Q3. What factors do you think would affect whether a loan will be accepted
or rejected?
Q4. Identify the data you would need to answer your questions and validate
your hypothesis.

Part 2: Master the Data

For this lab, you should download the lending data from LendingClub and prepare it for
some more advanced analysis in chapter 3. The LendingClub data contains two differ-
ent file types including LoanStats for approved loans and RejectStats for rejected loans.
There are significantly more data available for LoanStats. There are 107 different attri-
butes. To save some time, we’ve identified 19 of the most interesting in Lab Tables 3-3A
and 3-3B.
Q5. Given this list of attributes, what concerns do you have with the data’s ability
to predict answers to the questions you identified before?
Between the two groups of data files, we notice that there are some attributes in com-
mon, though not very many (see Lab Table 3-3C).

122
 Attribute Description LAB TABLE 3-3A
LoanStatsXXXX.csv
id Loan identification number
member_id Membership id
loan_amnt Requested loan amount
emp_length Employment length
issue_d Date of loan issue
loan_status Fully paid or charged off
pymnt_plan Payment plan: yes or no
purpose Loan purpose: e.g., wedding, medical, debt_consolidation, car
zip_code The first three digits of the applicant’s zip code
addr_state State
dti Debt-to-income ratio
delinq_2y Late payments within the past two years
earliest_cr_line Oldest credit account
inq_last_6mnths Credit inquiries in the past 6 months
open_acc Number of open credit accounts
revol_bal Total balance of all credit accounts
revol_util Percentage of available credit in use
total_acc Total number of credit accounts
application_type Individual or joint application

Attribute Description
LAB TABLE 3-3B
Amount Requested Requested loan amount RejectStats.csv
Application Date Date of loan application
Loan Title Brief description of loan purpose
Risk_Score LendingClub’s calculated value
Debt-To-Income Ratio Debt-to-income ratio
Zip Code The first three digits of the applicant’s zip code
State State
Employment Length Employment length
Policy Code Internal number

Common RejectStats ApproveStats

AmountRequested Amount Requested loan_amount LAB TABLE 3-3C
Month =MONTH(“Application Date”) =MONTH(“issue_d”)
Common Attributes
Purpose Loan Title purpose
DebtToIncome Debt-to-Income dti
State State addr_state
YearsOfEmployment Employment (Find/Replace) emp_length (Find/Replace)
Class “REJECT” “APPROVE”

Q6. What does the lack of attributes in the RejectData files tell us about the
data that LendingClub retains on rejected loans?
Q7. How will that affect a classification analysis?
We will need to convert the data into a useful format before we can perform any analysis.
We need to generate two sets of data, one for classification and one for regression and
clustering.

123
 Cleaning the Data for Classification
Goal: Combine approved and rejected data for a given year, assign a class to each record.

Issues
• Approved and rejected loans contain different data attributes.
• Date data values are recorded in different formats (1/9/2009 vs. Jan-2009).
• Years of employment contain text values and should be numbers.

In Excel
1. Select a year you would like to analyze between 2007 and 2012.
2. Create a new spreadsheet.
3. Type the common attributes from Table 3-3C into the first row.
4. Open the LoanStats and RejectStats for your chosen year.
5. Delete all columns that don’t match those listed in Table 3-3C.
6. Use the =MONTH formula to extract the month from the date.
7. Copy the Month column and Paste Special > Values into the Date column.
8. Add a new column for the class and add REJECT to the rejected loans and
APPROVE
to the approved loans.
9. Copy and paste the values for your chosen year from each .csv file into your
new spreadsheet.
10. Find and replace the employment values using Lab Table 3-3D.
LAB TABLE 3-3D Original Value New Value
na 0
< 1 year 0
1 year 1
2 years 2
3 years 3
4 years 4
5 years 5
6 years 6
7 years 7
8 years 8
9 years 9
10+ years 10
, (comma) (blank)

11. Save your file as LoanClassificationXXXX.csv, replacing XXXX with your year. Be sure
to choose .csv as the file type.
12. Take a screenshot (label it 3-3A).

Part 3: Perform an Analysis of the Data

We will try multiple classification models and compare their results using Weka.
13. Open Weka > Explorer.
14. Open file. . . > Locate your LoanClassificationXXXX.csv file.
15. Click Visualize All.

124
17. Click Classify.
18. Run each of the following classification models:
a. Weka > Trees > Random Forest.
b. Weka > Meta > AdaBoostM1.
c. Weka > Functions > Logistic.
d. Weka > Bayes > BayesNet.
Q8. Which model has the highest accuracy? How do you know?

Part 4: Address and Refine Results

Q9. How useful is your classification model in predicting which applicants will
be approved or rejected? How do you know?
Q10. How would you interpret the results of your analysis in plain English?

End of Lab

Lab 3-4 Comprehensive Case: Dillard’s Store Da ta:

Data Abstract (SQL) and Regression t I)
(Par
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo
.com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that
William T. Dillard II is an accounting grad of the University of Arkansas and the Walton
College of Business, which may be why he shared transaction data with us to make
available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)
• Excel 2016 (available on the Remote Desktop at the University of Arkansas)

In this lab, you will:

• Conduct analysis on three important questions that help us understand when customers
spend more on individual transactions.

Part 1: Identify the Questions

Dillard’s is trying to figure out when its customers spend more on individual
transactions. We ask questions regarding how Dillard’s sells its products.
Q1. Customers in which states had the highest transaction balances over the
entire sample period?
125
 Q2. Do customers in the state with the highest transaction balances have a signifi-
cantly higher transaction balance from September 1, 2016, to September 15,
2016, than all other states?
Q3. Are online transaction amounts statistically greater than or lesser than non-
online transactions during the time period September 1, 2016, to September
15, 2016?

Part 2: Master the Data

For this lab, you should access the TRANSACT and the STORE tables from the
Dillard’s 2016 dataset from the University of Arkansas. You may have learned how to do
so from past labs, or feel free to ask your instructor for access.
As you recall the entity-relationship diagram looks like the one given in Lab Exhibit 3-
4A.

LAB EXHIBIT 3-4A Common Attributes from the STORE and TRANSACT Tables of 2016
Dillard’s Data (http://walton.uark.edu/enterprise/dillardshome.php)
Source: http://walton.uark.edu/enterprise/dillardshome.php
126
Attribute Description Values
SKU Stock Keeping Unit number of the stock item 4757355, 2128748, . . .
Store Store Number 2, 3, 4, 100
Register Register Number of the Current Transaction 580, 30, 460, . . .
TranCode Transaction Code 09700, 018000
(or Trannum)
Saledate Sale date of the Item Stock 2005-01-20, 2005-06-02, . . .
Seq Sequence Number 298100028, 213500030, . . .
Interid Internal ID 265005802, 671901998, . . .
Stype Type of Transaction (Return or Purchase) P, R
Quantity Item Quantity of the Transaction 1, 2, 3, 4, . . .
OrgPrice Original price of the item stock 75.00, 44.00, . . .
SPrice Sale price of the item stock 26.25, 65.00, . . .
Amt Total amount of the transaction charge to the 26.25, 44.00, . . .
customer
Mic Master Item Code 862, 689, . . .
City City where the store is located St. Louis, Tampa, . . .
State State where the store is located FL, MO, AR, . . .
Zip Zip code 33710, 63126, . . .

1. Run the following SQL query on Microsoft SQL Server Management Studio
to address the question regarding which state had the highest transaction
balance. (Recall that transaction is defined for each individual item
purchased.)
SELECT STATE, AVG(TRAN_AMT) AS Average
FROM TRANSACT
INNER JOIN STORE
ON TRANSACT.STORE = STORE.STORE
GROUP BY STATE
The output should look like this:
AL 27.992390 MS 28.338400
AR 41.379066 MT 28.941823
AZ 27.845655 NC 25.576096
CA 28.315362 NE 26.904771
CO 27.297332 NM 28.826383
FL 28.760791 NV 30.021116
GA 27.270740 NY 21.757447
IA 24.879376 OH 26.432211
ID 29.408952 OK 29.088865
IL 24.787586 SC 28.241007
IN 26.066528 TN 29.178345
KS 27.771021 TX 29.477805
KY 28.206677 UT 25.254111
LA 30.282367 VA 26.500511
MO 25.546692 WY 26.429770

127
 Part 3: Perform an Analysis of the Data
2. Take a screenshot of your results (label it 3-4A).
Noting that Arkansas (State =‘AR’) has the highest transaction balance, let’s
address our second question: “Do customers in the state with the highest transaction
balances have a significantly higher transaction balance from September 1, 2016, to
September 15, 2016, than all other states?”
3. To address Q2, run the following SQL query to extract the data needed for
additional analysis. You can do this analysis in SQL Server or you can do it in
Excel:
SELECT TRANSACT.*, STORE.STATE
FROM TRANSACT
INNER JOIN STORE
ON TRANSACT.STORE = STORE.STORE
WHERE TRAN_DATE BETWEEN '20160901' AND '20160915'
ORDER BY TRAN_DATE

4. If you choose to do the SQL query in Excel, here are the steps:
Create query through Excel 2016
4.1 Data tab > New Query > From Database > From SQL Server Database

Source: Microsoft Excel 2016

128
 4.2 Enter the Server (essql1.walton.uark.edu) and the Database
(UA_Dillards_2016) – not case-sensitive
Click Advanced options to input the query text:
SELECT TRANSACT.*, STORE.STATE
FROM TRANSACT
INNER JOIN STORE
ON TRANSACT.STORE = STORE.STORE
WHERE TRAN_DATE BETWEEN '20160901' AND '20160915'
ORDER BY TRAN_DATE

Source: Microsoft Excel 2016

4.3 Click OK.

4.4 If the query did not have typos or errors, a preview of your data will show
the following: If the query runs correctly, you can hit the Load button and
load it directly into Excel ready for analysis.

129
 Source: Microsoft Excel 2016

(If you have an error, click Edit to return to your query and resolve the
error.) Example of error text:

Source: Microsoft Excel 2016

(This error indicates that there is a typo in the State column name).
4.5 From the Data preview screen, you can click Load to immediately load the
dataset into your Excel workbook.

130
 5. Once the data are in Excel, you’ll need to transform the State data to perform regres-
sion analysis on the state of Arkansas to address Q2. To do so, make a new column
just right of the existing dataset and label it Arkansas-dummy in column 1. Write the
formula “(=IF([@STATE]=“AR”,1,0) in each row. It will assign a value of 1 to trans-
actions at stores in Arkansas and a value of 0 for transactions at stores outside of the
Arkansas. Copy this formula all the way down to cover each row.

Source: Microsoft Excel 2016

6. Perform a regression analysis by performing the following steps.

6.1 Click on Data Analysis button. Make sure your Data Analysis Toolpak is added
by doing the following steps:
6.1.1 Click the File tab, click Options, and then click the Add-Ins.
6.1.2 In the Manage box, select Excel Add-ins and then click Go.
6.1.3 In the Add-Ins box, check the Analysis ToolPak check box, and
then click OK.
6.2 Click Regression (as shown below).

Source: Microsoft Excel 2016

6.3 Reference the cells that contain the Tran_AMT in the Input Y Range and
Arkansas-dummy in the Input X Range and then click OK.

131
 Source: Microsoft Excel 2016

6.4 Your output should look like the screenshot below. The t Stat greater than
2.0 suggests that the transaction amount (Tran_Amt) is statistically greater in
Arkansas than in all other states.

Source: Microsoft Excel 2016

7. Take a screenshot of your results (label it 3-4B).

We are now ready to address our third question: Are online transaction amounts
statistically greater than or lesser than non-online transactions during the time period

132
 September 1, 2016, to September 15, 2016? Because we found that transactions in
Arkansas are statistically higher than all other states, we will include that finding
in our analysis as well, making this a multivariate regression.
8. To address this question we need to transform the Online variable into an online-
dummy variable. The Online variable carries values of “Y” for online and “N” for Not
online. To do our analysis, we will transform this into a dummy variable that allows
statistical analysis. Dummy variables carry the value of “1” or “0”. We transform it
in the following way:

Source: Microsoft Excel 2016

Once this is complete, copy the calculation for all cells in the column.
We’re now ready for regression analysis. Reference the cells that contain the
Tran_AMT in the Input Y Range and Arkansas-dummy and reference Online-dummy in
the Input X Range and click OK.

Source: Microsoft Excel 2016

133
 The results of the regression analysis suggesting that both Transactions in
Arkansas and Transactions done online are associated with greater transaction
amounts are below.

Source: Microsoft Excel 2016

9. Take a screenshot of your results (label it 3-4C).

Part 4: Address and Refine Results

Q4. How would you interpret the results of your analysis of Q1 in plain
English? Why do you think the state of Arkansas had the highest
transaction volume?
Q5. The analysis of Q2 addressed whether Arkansas had a statistically higher
trans- action volume than other states. How did the regression tests show or
not show a statistical difference? Does this have any implications for the
marketing for Dillard’s? Do you think it is because Arkansas is the home
base for Dillard’s?
Q6. The regression analysis suggests that online sales are associated with
greater transactions amounts. Why do you think that is so?

End of Lab

Lab 3-5 mprehensive Case: Dillard’s Store Data:

ta Abstract (SQL) and Regression (Part II)
Co
Da
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo
 .com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that

134
135
LAB EXHIBIT 3-5B
Source: Microsoft Excel 2016

136
 Q3. Why did we also include Arkansas state sales and online sales as other explan-
atory variables (X- or independent variables) in this regression analysis? Are
these results still significant after the inclusion of the use of the Dillard’s
credit card?
Q4. Are there any other data from the TRANSACT table that might help us
predict the transaction amount?
Q5. If we had any other data to predict transaction amount, what would you use?
Brainstorm freely to come up with what could explain these different levels
of transaction amounts!

End of Lab

137
 Chapter 4
Visualization: Using Visualizations
and Summaries to Share Results
with Stakeholders

A Look at This Chapter

This chapter wraps up the introduction to the IMPACT model by explaining how to communicate your results
through data visualization and through written reports. Creating a chart takes more skill and practice than simply
adding in a bar chart through the Excel chart wizard, and this chapter will help you identify the purpose for your
data visualization so that you can choose the best chart for your dataset and your purpose. We will also help you
learn how to refine your chart so that it communicates as efficiently and effectively as possible. The chapter
concludes by describing how to provide a written report tailored to specific audiences who will be interested in
the results of your data analysis project.

A Look Back
In chapter 3, we considered various models and techniques used for data analytics and discussed when to use
them and how to interpret the results. We also provide specific accounting-related examples of when each of these
specific data approaches and models is appropriate to address our particular question.

A Look Ahead
Because most of the focus of data analytics in accounting is on auditing, chapter 5 considers how both internal
and external auditors are using technology in general—and audit analytics specifically—to evaluate firm data and
generate support for management assertions. We emphasize audit working papers, audit planning, continuous
monitoring, and continuous data assurance.

138
Before the 2016 presidential election, almost all polls predicted a Hillary Clinton win. But many of those polls
assumed that Hillary Clinton would receive the same support and passion from Obama’s 2012 supporters, which
turned out not to be the case.
Exhibit 4-1 shows the 2016 election results relative to the polling predictions prior to the election. This one
graph pretty much encapsulates why Donald Trump won and Hillary Clinton lost. And that is the focus of the
chapter: how we capture and communicate information to better understand a good or a bad decision. As noted in
the chapter, data are important, and Data Analytics are effective, but they are only as important and effective as
we can communi- cate and make the data understandable.

Source: http://fivethirtyeight.com/features/why-fivethirtyeight-gave-trump-a-better-chance-than-almost-anyone-else/
(accessed August 3, 2017).

©Justin Sullivan/Getty Images

EXHIBIT 4-1

OBJECTIVES
After reading this chapter, you should be able to:

LO 4-1
LO 4-2 Determine the purpose of your data visualization

LO 4-3 Choose the best chart for your dataset

LO 4-4 Refine your chart to communicate efficiently and effectively

Communicate your results in a written report

139
140 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

Data are important, and Data Analytics are effective, but they are only as important and effec-
tive as we can communicate and make the data understandable. One of the authors often
asks her students what they would do if they were interns and their boss asked them to
supply infor- mation regarding in which states all of the customers her organization served
were located. Would they simply point their boss to the Customers table in the sales
database? Would they go a step further and isolate the attributes to the Company Name
and the State? Perhaps they could go a step further and run a quick query or PivotTable to
perform a count on the number of customers in each different state that the company
serves. If they were to give their boss what she actually wanted, however, they should
provide a short written summary of the answer to the research question, as well as an
organized chart to visualize the results. Data visualization isn’t just for people who are
“visual” learners. When the results of data analysis are visualized appropriately, the results
are made easier and quicker to interpret for everybody. Whether the data you are analyzing
are “small” data or “big” data, they still merit synthesis and visualization to help your
stakeholders interpret the results with ease and efficiency.
Think back to some of the first data visualizations and categorizations you were
exposed to (the food guide pyramid/food plate, the animal kingdom, the periodic table)
and, more modernly, how frequently infographics are applied to break down a series of
complicated information on social media. These charts and infographics make it easier
for people to understand difficult concepts by breaking them down into categories and
visual components.
LO 4-1
Determine the DETERMINE THE PURPOSE OF YOUR
purpose of your
data visualization DATA VISUALIZATION
As with selecting and refining your analytical model, communicating results is more art
than science. Once you are familiar with the tools that are available, your goal should
always be to share critical information with stakeholders in a clear, concise manner. This
could involve a chart or graph, a callout box, or a few key statistics. Visualizations have
become very popular over the past three decades. Managers use dashboards to quickly
evaluate key performance indicators (KPIs) and quickly adjust operational tasks; analysts
use graphs to plot stock price and financial performance over time to select portfolios that
meet expected performance goals.
In any project that will result in a visual representation of data, the first charge is
ensur- ing that the data are reliable and that the content necessitates a visual. In our case,
however, ensuring that the data are reliable and useful has already been done through the
first three steps of the IMPACT model.
At this stage in the IMPACT model, determining the method for communicating your
results requires the answers to two questions:
1. Are you explaining the results of previously done analysis, or are you exploring the
data through the visualization? (Is your purpose declarative or exploratory?)
2. What type of data is being visualized (conceptual, qualitative data or data-driven,
quan- titative data)?
Scott Berinato, senior editor at Harvard Business Review, summarizes the possible
answers to these questions1 in a chart shown in Exhibit 4.2. The majority of the work that
we will do with the results of data analysis projects will reside in quadrant 2 of Exhibit 4-
2, the declarative, data-driven quadrant. We will also do a bit of work in Exhibit 4-2’s
quadrant 4, the data-driven, exploratory quadrant. There isn’t as much qualitative work to
be done,
Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 141

although we will work with categorical qualitative data occasionally. When we do work
with
qualitative data, it will most frequently be visualized using the tools in quadrant 1, the
declarative, conceptual quadrant.

EXHIBIT 4-2
Declarative The Four Chart Types
S. Berinato, Good Charts:
The HBR Guide to Making
Smarter, More Persuasive
Data Visualizations (Boston:
1 2 Harvard Business Review
Press, 2016).

Conceptual Data-driven
(Qualitative) (Quantitative)

3 4

Exploratory

Once you know the answers to the two key questions and have determined which
quad- rant you’re working in, you can determine the best tool for the job. Is a written
report with a simple chart sufficient? If so, Word or Excel will suffice. Will an interactive
dashboard and repeatable report be required? If so, Tableau may be a better tool. Later in
the chapter, we will discuss these two tools in more depth, along with when they should
be used.

Quadrants 1 and 3 versus Quadrants 2 and 4:

Qualitative versus Quantitative
Qualitative data are categorical data. All you can do with these data is count them and
group them, and in some cases, you can rank them. Qualitative data can be further defined
in two ways, nominal data and ordinal data. Nominal data are the simplest form of data.
Examples of nominal data are hair color, gender, and ethnic groups. If you have a set of
data on peo- ple with different hair color, you can count the number of individuals who fit
into the same hair color category, but you cannot rank it (brown hair isn’t better than red
hair), nor can you take an average or do any other further calculations beyond counting
(you can’t take an average of “blonde”). Increasing in complexity, but still categorized as
qualitative data, are ordinal data. Ordinal data can also be counted and categorized like
nominal data but can go a step further—the categories can also be ranked. Examples of
ordinal data include gold, silver, and bronze medals, 1–5 rating scales on teacher
evaluations, and letter grades. If you have a set of data of students and the letter grades
they have earned in a given course, you can count the number of instances of A, B, C, and
so on, and you can categorize them, just like with nominal data. You can also sort the
data meaningfully—an A is better than a B, which is better than a C, and so on. But that’s
as far as you can take your calculations—as long as the grades remain as letters (and
aren’t transformed into the corresponding numeri- cal grade for each individual), you
cannot calculate an average, standard deviation, or any other more complex calculation.
Beyond counting and possibly sorting (if you have ordinal data), the primary statistic
142 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

number of items in a particular category, then dividing that number by the total number
of
observations. For example, if I had a dataset of 150 people and had each individual’s cor-
responding hair color with 25 people in my dataset having red hair, I could calculate the
proportion of red-haired people in my dataset by dividing 25 (the number of people with
red hair) by 150 (the total number of observations in my dataset). The proportion of red-
haired people, then, would be 16.7 percent.
Qualitative data (both nominal and ordinal) can also be referred to as “conceptual”
data because such data are text-driven and represent concepts instead of numbers.
Quantitative data are more complex than qualitative data because not only can they
be counted and grouped just like qualitative data, but the differences between each data
point are meaningful—when you subtract 4 from 5, the difference is a numerical measure
that can be compared to subtracting 3 from 5. Quantitative data are made up of
observations that are numerical and can be counted and ranked, just like ordinal
qualitative data, but that can also be averaged. A standard deviation can be calculated,
and datasets can be easily compared when standardized (if applicable). Chapter 3
mentions the concept of the normal distribution in the context of profiling in continuous
auditing. The normal distribution is a phenomenon that many naturally occurring datasets
in our world follow, such as SAT scores and heights and weights of newborn babies. For
a distribution of data to be consid- ered normal, the data should have equal median, mean,
and mode, with half of the observa- tions falling below the mean and the other half falling
above the mean. If you are comparing two datasets that follow the normal distribution,
even if the two datasets have very different means, you can still compare them by
standardizing the distributions with Z-scores. By using a formula, you can transform
every normal distribution into a special case of the nor- mal distribution called the
standard normal distribution, which has 0 for its mean (and thus, for its mode and median,
as well) and 1 for its standard deviation. The benefit of standard- izing your data when
comparing is no longer comparing wildly different numbers and trying to eyeball how one
observation differs from the other—if you standardize both datasets, you can place both
distributions on the same chart and more swiftly come to your insights.
Similar to qualitative data, quantitative data can be categorized into two different
types: interval and ratio. However, there is some dispute among the analytics community
on whether the difference between the two datasets is meaningful, and for the sake of the
ana- lytics and calculations you will be performing, the difference is not pertinent. Ratio
data are considered the most sophisticated type of data, and the simplest way to express
the differ- ence between interval and ratio data is that ratio data have a meaningful 0 and
interval data do not. In other words, for ratio data, when a dataset approaches 0, 0 means
“the absence of.” Consider money as ratio data—we can have 5 dollars, 72 dollars, or
8,967 dollars, but as soon as we reach 0, we have “the absence of” 0.
The other scale for quantitative data is interval data, which are not as sophisticated
as ratio data. Interval data do not have a meaningful 0; in other words, in interval data,
0 does not mean “the absence of” but is simply another number. An example of interval
data is the Fahrenheit scale of temperature measurement, where 90 degrees is hotter than
70 degrees, which is hotter than 0 degrees, but 0 degrees does not represent “the absence
of” temperature—it’s just another number on the scale.
Quantitative data can be further categorized as either discrete or continuous data.
Discrete data are data that are represented by whole numbers. An example of discrete
data is points in a basketball game—you can earn 2 points, 3 points, or 157 points, but
you cannot earn
3.5 points. On the other hand, continuous data are data that can take on any value within
a range. An example of continuous data is height: you can be 4.7 feet, 5 feet, or 6.27345
feet. The difference between discrete and continuous data can be blurry sometimes
because you can express a discrete variable as continuous—for example, the number of
children a person
can have is discrete (a woman can’t have 2.7 children, but she could have 2 or 3), but if
you
 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 143

are researching the average number of children that women aged 25–40 have in the
United
States, the average would be a continuous variable. Whether your data are discrete or
con- tinuous can also help you determine the type of chart you create because continuous
data lend themselves more to a line chart than do discrete data.

Quadrants 1 and 2 versus Quadrants 3 and 4:

Declarative versus Exploratory
In the context of the labs and tools we’re providing through this textbook, the majority
of your data visualizations created in step C of the IMPACT model will be created with
a declarative purpose. Declarative visualizations are the product of wanting to “declare”
or present your findings to an audience. The data analysis projects begin with a question,
proceed through analysis, and end with communicating those findings. This means that
while the visualization may prompt conversation and debate, the information provided in
the charts should be solid. Even if your analysis in the previous steps of the IMPACT
model had been exploratory, by the time you have arrived to communicate your results,
you are declaring what you have found.
On the other hand, you will sometimes use data visualizations to satisfy an
exploratory visualization purpose. When this is done, the lines between steps P
(perform test plan), A (address and refine results), and C (communicate results) are not
as clearly divided. Exploratory data visualization will align with performing the test plan
within visualization software—for example, Tableau—and gaining insights while you are
interacting with the data. Often the presenting of exploratory data will be done in an
interactive setting, and the answers to the questions from step I (identify the questions)
won’t have already been answered before working with the data in the visualization
software.
Exhibit 4-3 is similar to the first four chart types presented to you in Exhibit 4-2, but
Exhibit 4-3 has more detail to help you determine what to do once you’ve answered the
first two questions. Remember that the quadrant represents two main questions:
1. Are you explaining the results of the previously done analysis, or are you exploring
the data through the visualization? (Is your purpose declarative or exploratory?)
2. What type of data is being visualized (conceptual qualitative data or data-driven
quanti- tative data)?
Once you have determined the answers to the first two questions, you are ready to begin
deter- mining which type of visualization will be the most appropriate for your purpose and
dataset. EXHIBIT 4-3
The Four Chart Types
Quadrant with Detail
Declarative
S. Berinato, Good Charts:
The HBR Guide to Making
Smarter, More Persuasive
• Conventional • Conventional Data Visualizations (Boston:
Charts Charts Harvard Business Review
• Metaphorical • Static Press, 2016).

• Static
Conceptual Data-driven
(Qualitative) (Quantitative)
• Interactive • Interactive
Charts Charts
• Working • Working
Sessions Sessions
144 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

PROGRESS CHECK
1. What are two ways that complicated concepts were explained to you via
catego- rization and data visualization as you were growing up?
2. Using the Internet or other resources (other textbooks, a newspaper, or a
maga- zine), identify an example of a data visualization for each possible
quadrant.
3. Identify which type of data scale the following variables are measured on
(quali- tative nominal, qualitative ordinal, or quantitative):
a. Instructor evaluations in which students select excellent, good, average, or
poor.
b. Weekly closing price of gold throughout a year.
c. Names of companies listed on the Dow Jones Industrial Average.
d. Fahrenheit scale for measuring temperature.

LO 4-2 CHOOSING THE RIGHT CHART

Choose the best Once you have determined the type of data you’re working with and the purpose of your
chart for your data visualization, the next questions have to do with the design of the visualization—
dataset color, font, graphics—and most importantly, type of chart/graph. The visual should speak
for itself as much as necessary, without needing too much explanation for what’s being
represented. Aim for simplicity over bells and whistles that “look cool,” but end up being
distracting.

Charts Appropriate for Qualitative Data

Because qualitative and quantitative data have such different levels of complexity and
sophistication, there are some charts that are not appropriate for qualitative data that do
work for quantitative data.
When it comes to visually representing qualitative data, the charts most frequently
con- sidered for depicting qualitative data are:
• Bar charts.
• Pie charts.
• Stacked bar chart.
The pie chart is probably the most famous (some would say infamous) data
visualization for qualitative data. It shows the parts of the whole; in other words, it
represents the propor- tion of each category as it corresponds to the whole dataset.
Similarly, a bar chart also shows the proportions of each category as compared to each
of the others.
In most cases, a bar chart is more easily interpreted than a pie chart because our eyes
are more skilled at comparing the height of columns (or the lengths of horizontal bars,
depend- ing on the orientation of your chart) than they are at comparing sizes of pie,
especially if the proportions are relatively similar.
Consider the two different charts from the Sláinte dataset in Exhibit 4-4. Each
compares the proportion of each beer type sold by the brewery.
The magnitude of the difference between the Imperial Stout and the IPA is almost
impos- sible to see in the pie chart. This difference is easier to digest in the bar chart.
Of course, we could improve the pie chart by adding in the percentages associated
with each proportion, but it is much quicker for us to see the difference in proportions by
glanc-
Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 145

30%
EXHIBIT 4-4
Imperial Pie Charts and Column
25%
Stout Chart Show Different
20% Ways to Visualize
IPA
15% Proportions
Stout 10%
Pale Ale 5%
Wheat 0%
Imperial IPA Stout Pale Ale Wheat Imperial
Imperial Stout IPA
IPA

7% EXHIBIT 4-5
11% Imperial Stout
28% IPA
12% Stout
Pale Ale
17% Wheat
26%
Imperial IPA

The same set of data could also be represented in a stacked bar chart or a 100 percent
stacked bar chart (Exhibit 4-6). This chart is not a default option in Excel, but it does
work in another data visualization tool that we introduce later in this chapter, Tableau.
The first figure in Exhibit 4-6 is a stacked bar chart, which shows the proportion of each
type of beer sold expressed in the number of beers sold for each product, while the lat-
ter shows the proportion expressed in terms of percentage of the whole in a 100 percent
stacked bar chart.
While bar charts and pie charts are among the most common charts used for
qualitative data, there are several other charts that function well for showing proportions:
• Tree maps and heat maps: These are similar types of visualizations, and they both
use size and color to show proportional size of values. While tree maps show
proportions using physical space, heat maps use color to highlight the scale of the
values. However, both are heavily visual, so they are imperfect for situations where
precision of the num- bers or proportions represented is necessary.
• Symbol maps: Symbol maps are geographic maps, so they should be used
when expressing qualitative data proportions across geographic areas such as
states or countries.
• Word clouds: If you are working with text data instead of categorical data, you can
repre- sent them in a word cloud. Word clouds are formed by counting the frequency
of each word mentioned in a dataset; the higher the frequency (proportion) of a given
word, the larger and bolder the font will be for that word in the word cloud. Consider
analyzing the results of an open-ended response question on a survey; a word cloud
would be a great way to quickly spot the most commonly used words to tell if there is
a positive or negative feeling toward what’s being surveyed. There are also settings
that you can put into place when creating the word cloud to leave out the most
commonly used English words—such as the, an, and a—in order to not skew the data.
Exhibit 4-7 is an example of a word cloud for the text of chapter 2 from this textbook.
146 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

EXHIBIT 4-6 150 100%

140
90%
130

120 80%

110
70%
100

% of Total Number of Records

90 60%

Number of Records 80
50%
70

40%
60

50
30%
Product Description
40
Imperial Stout
20%
30 IPA
Stout
20
10% Pale Ale

10 Wheat

0% Imperial IPA
0

EXHIBIT 4-7
Word Cloud Example
from chapter 2
Text

Charts Appropriate for Quantitative Data

The data visualization and chart possibilities for charting quantitative data are similar to
how quantitative data have the same characteristics of qualitative data (you can group and
count it), but they have even more sophistication. You can use pie charts (with the same
varying level of success) and bar charts with quantitative data, but you can also use a lot
more.
 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 147

There are many different methods for visualizing quantitative data. With the exception
of
the word cloud, all of the methods mentioned in the previous section for qualitative data
can work for depicting quantitative data, but the following charts can depict more complex
data:
• Line charts: Show similar information to what a bar chart shows, but line charts are
good for showing data changes or trend lines over time. Line charts are useful for
con- tinuous data, while bar charts are often used for discrete data. For that reason,
line charts are not recommended for qualitative data, which by nature of being
categorical, can never be continuous.
• Box and whisker plots: Useful for when quartiles, median, and outliers are required
for analysis and insights.
• Scatter plots: Useful for identifying the correlation between two variables or for
identify- ing a trend line or line of best fit.
• Filled geographic maps: As opposed to symbol maps, a filled geographic map is
used to illustrate data ranges for quantitative data across different geographic areas
such as states or countries.
A summary of the chart types just described appears in Exhibit 4-8. Each chart option
works equally well for exploratory and declarative data visualizations. The chart types are
categorized based on when they will be best used (e.g., when comparing qualitative vari-
ables, a bar chart is an optimal choice), but this figure shouldn’t be used to stifle creativity
— bar charts can also be used to show comparisons among quantitative variables, just as
many of the charts in the listed categories can work well with other datatypes and
purposes than their primary categorization below.
EXHIBIT 4-8
Summary of chart
Conceptual Data-Driven types. RT
(Qualitative) (Quantitative)
Comparison:
Bar chart
Pie chart Outlier detection:
Box and whisker
Stacked bar chart
Tree map plot
Heat map
Relationship between two variables:
Geographic data: Scatter plot
Symbol map

Trend over time:

Text data: Line chart
Word cloud

Geographic data:
Filled map

As with selecting and refining your analytical model, communicating results is more
art than science. Once you are familiar with the tools that are available, your goal should
always be to share critical information with stakeholders in a clear, concise manner.
While visualizations can be incredibly impactful, they can become a distraction if you’re
not careful. For example, bar charts can be manipulated to show a bias and, while novel,
148 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

Tools to Help When Picking a Visual

There are many tools available for data visualization and exploratory data analysis.
Gartner annually assesses a collection of these tools and creates the “magic quadrant” for
business intelligence, depicted in Exhibit 4-9. The magic quadrant can provide insight
into which tools you should consider using.

EXHIBIT 4-9
Gartner Magic
Quadrant for Business
Intelligence and
Analytics Platforms
Source: R. L. Sallam,
C. Howson, C. J.
Idoine, T. W. Oestreich,
J. L. Richardson, and
J. Tapadinhas, “Magic
Quadrant for Business
Intelligence and Analytics
Platforms,” Gartner RAS
Core Research Notes,
Gartner, Stamford,
CT (2017).

Based on Gartner’s quadrant, it is easy to see that Tableau and Microsoft are two of
the best and most popular options available, and these are the two tools that we will focus
on as well. The Microsoft tool that Gartner analyzed and compared with the other
products is not just Excel, it includes the entire Microsoft BI suite, of which Excel is only
a part. We will focus on Excel as the main driver of the Microsoft toolkit in this text.
Tableau is ranked slightly higher than Microsoft on its ability to execute, while Microsoft
is ranked slightly higher than Tableau in completeness of vision. This distinction makes
sense because Tableau is a newer product and has placed the majority of its focus on data
visualization, while Microsoft Excel has a much more robust platform for data analysis.
Excel’s biggest advantage over Tableau (and over any other data visualization software in
the market) is its ubiquity. Excel has been on the market longer than any of its
competitors, and it is rare to find a business or university that doesn’t have a version of
Excel on every computer. If your data analysis project is more declarative than exploratory, it
is more likely that you will perform your data visualization to communicate results in Excel,
simply because it is likely that you
 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 149

performed steps 2 through 4 in Excel, and it is convenient to create your charts in the
same
tool that you performed your analysis.
Tableau earns high praise for being intuitive and easy to use, which makes it ideal
for exploratory data analysis. You may even find that you would prefer to immediately load
your data from Excel or Access (or wherever your data are stored) into Tableau during the
sec- ond step of the IMPACT model and work on your analysis inside the tool, instead of
wait- ing for step 5 to just communicate your results through Tableau. If your question
isn’t fully defined or specific, exploring your dataset in Tableau and changing your
visualization type to discover different insights is as much a part of performing data
analysis as crafting your communication. One of the biggest disadvantages to Tableau is
its cost, but fortunately, Tableau is a tremendous supporter of education, and as a student,
you can download a free academic license to use Tableau on your PC or Mac. The link to
download your free license of Tableau is: https://www.tableau.com/academic/students.
Once you have downloaded your license, we recommend opening the Superstore sample
workbook provided. You will find it at the bottom of the start screen under “Sample
workbooks” (Exhibit 4-10).
Once you open the workbook, you will see a variety of tabs at the bottom of the
workbook that you can page through and see different ways that the same dataset can be
analyzed and visu- alized. When you perform exploratory analysis in Tableau, or even if you
have already performed EXHIBIT 4-10
©Tableau Software, Inc.
All rights reserved.
150 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

your analysis and you have uploaded the dataset into Tableau to communicate insights, we
rec-
ommend trying several different types of charts to see which one makes your insights stand
out the most effectively. In the top right corner of the Tableau workbook, you will see the Show
Me window, which provides different options for visualizing your dataset (Exhibit 4-11).
EXHIBIT 4-11
©Tableau Software, Inc.
All rights reserved.

In the Show Me tab, only the visualizations that will work for your particular dataset
will appear in full color.

Learning to Create a Good Chart by (Bad) Example

Other than getting practice by looking at good visualizations and modifying the way you
visualize your dataset in Tableau to see how different insights are showcased, one of the
best ways to learn how to create a good visualization is to look at some problematic
visualizations.
 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 151

In this chart, the Daily Mail, a UK-based newspaper, tries to emphasize an upgrade
in the estimated growth of British economy. The estimate from the Office of National
Statistics indicated that Q4 growth would be 0.7 percent instead of 0.6 percent (a rela-
tively small increase of about 15 percent). Yet the visualization makes it appear as if this
is a 200 percent increase because of the scale the newspaper chose. The other obvious
issue is that some time has passed between the estimates, and we don’t see that disclosed
here (Exhibit 4-12).

2016 Q4 Growth Upgraded EXHIBIT 4-12

This bar chart distorts
the data comparison by
Second using an inappropriate
0.70% scale.
estimate

First
estimate 0.60%

0.55% 0.60% 0.65% 0.70% 0.75%

If we reworked the data points to show the correct scale (starting at 0 instead of 0.55)
and the change over time (plotting the data along the horizontal axis), we’d see some-
thing like Exhibit 4-13. If we wanted to emphasize growth, we might choose a chart like
Exhibit 4-14. Notice that both new graphs show an increase that is less dramatic and
confusing.

2016 Q4 Growth EXHIBIT 4-13

0.8% This bar chart uses
an appropraite scale
0.7%
for a less biased
0.6% comparison.
0.5%

0.4%

0.3%

0.2%

0.1%

0%
First Second
estimate estimate

See Exhibit 4-15. Is a pie chart really the best way to present these data?
152 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

EXHIBIT 4-14 2016 Q4 Growth

An alternative stacked
0.8
bar chart showing
growth. 0.7
New
estimate
0.6

0.5

0.4
Old
0.3
estimate
0.2

0.1

EXHIBIT 4-15 Zachery;

Yareli; Alanna; 3
This pie chart is 2 Ann; 1
difficult to interpret. 3
Aubrie; 1
Willie; 1
Source: http://viz.wtf/
post/155727224217/the- Steve; 2
authors-explain-furthermore-
we-present-the. Sophie; 2 Azul; 8

Sloane; 2

Rose; 3
Bryan; 1
Molly; 1 Efrain; 3
Marisol; 2 Assistant
Jan; 3
Luna; 3 Researcher
Kinley; 2
Lia; 3 Leroy; 1 Administrator

If you want to emphasize users, consider a rank-ordered bar chart like Exhibit 4-16.
To emphasize the category, a comparison like that in Exhibit 4-17 may be helpful. Or to
show proportion, maybe a stacked bar (Exhibit 4-18). In any case, there are much better
ways to clearly communicate.
EXHIBIT 4-16
This rank-ordered 9
Assistant
bar chart is more clear. 8
Researcher
7
Administrator
6
Attacks

5
4
3
2
1
0
Efrain
Azul

Lia
Luna
Rose

Marisol
Yareli
Alanna

Sloane
Sophie
Steve
Kinley

Zachery
Jan

Aubrie
Ann

Willie
Bryan
Leroy
Molly
 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 153

30 EXHIBIT 4-17
This bar chart
25 emphasizes attacks
by job function.
20

Attacks
15

10

0
Assistant Researcher Administrator

50 EXHIBIT 4-18
45
This stacked bar
chart emphasizes
40 proportion of attacks
35 by job function.
Assistant
30
Attacks

25
20
15 Researcher

10
5 Administrator
0

PROGRESS CHECK
4. The following two charts represent the exact same data—the quantity of beer
sold on each day in the Sláinte Sales Subset dataset. Which chart is more
appro- priate for working with dates, the column chart or the line chart? Which
do you prefer? Why?
a.

Source: Microsoft Excel 2016

154 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

b.

Source: Microsoft Excel 2016

5. The same dataset was consolidated into quarters. This chart was made with
the chart wizard feature in Excel, which made the creation of it easy, but
something went wrong. Can you identify what went wrong with this chart?

Source: Microsoft Excel 2016

6. The following four charts represent the exact same data quantity of each
beer sold. Which do you prefer, the line chart or the column chart? Whichever
you chose, line or column, which of the pair do you think is the easiest to
digest?
a.

Source: Microsoft Excel 2016

 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 155

b.

Source: Microsoft Excel 2016

c.

Source: Microsoft Excel 2016

d.

Source: Microsoft Excel 2016

FURTHER REFINING YOUR CHART LO 4-3

TO COMMUNICATE BETTER Refine your chart
After identifying the purpose of your visualization and which type of visual will be most to communicate
effective in communicating your results, you will need to further refine your chart to pick efficiently and
the right data scale, color, and format. effectively
156 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

Data Scale and Increments

As tools such as Excel and Tableau become more intuitive and more powerful,
considering your data scale and increments is less of a concern because both tools will
generally come up with scales and increments that make sense for your dataset. With that
being said, there are still four main questions to consider when creating your data scale
and increments:
1. How much data do you need to share in the visual to avoid being misleading, yet also
avoid being distracting? (For example, do you need to display the past four years, or
will the past two quarters suffice? When you consider leaving out some data, is it to
show only the insights that are meaningful, or is it an attempt to skew the data or to
hide poor performance? Be careful to not hide data that are meaningful just because
they don’t align with your expectations.
2. If your data contain outliers, should they be displayed, or will they distort your
scale to the extent that you can leave them out? If the purpose of your chart is to
call atten-
tion to the outliers, then they need to remain (and you need to ensure that they are not
errors, but this should have been done in step 2 of the IMPACT model when you mas-
tered the data). If the purpose of your chart is to display the middle pack of the data,
the outliers may not be relevant to the insights, and they could be left out.
3. Other than determining how much data you need to share, what scale should you
place those data on? Typically, charts should begin with a baseline of 0, but if 0 is
meaning- less to your dataset, you could find a different baseline that makes sense.
Be careful to not overexaggerate the height or the baseline so that your trendline or
bar chart is over- or underemphasized; your trend line should take up two-thirds of
the chart. Once you decide on a data scale, the increments for your data scale should
be “natural” such as 1s, 2s, 5s, 100s, etc. (e.g., not 3s or 0.02s).
4. Do you need to provide context or reference points to make the scale meaningful?
For example, if you were provided with a stock price of $100, would you immedi-
ately be able to tell if that is a high number or a low number? Not necessarily; with-
out context of the company’s stock price over time, the company’s industry and its
competitors’ stock prices, or some other piece of context, certain numbers are not
altogether useful.

Color
Similar to how Excel and Tableau have become stronger tools at picking appropriate data
scales and increments, both Excel and Tableau will have default color themes when you
begin creating your data visualizations. You may choose to customize the theme.
However, if you do, here are a few points to consider:
• When should you use multiple colors? Using multiple colors to differentiate types
of data is effective. Using a different color to highlight a focal point is also
effective.
However, don’t use multiple colors to represent the same type of data. Be careful to
not use color to make the chart look pretty—the point of the visualization is to
showcase insights from your data, not to make art.
• We are trained to understand the differences among red, yellow, and green, with red
meaning something negative that we would want to “stop” and green being something
positive that we would want to “continue,” just like with traffic lights. For that reason,
use red and green only for those reasons. Using red to show something positive or
green to show something negative is counterintuitive and will make your chart harder
to understand. You may also want to consider a color-blind audience. If you are
concerned
that someone reading your visuals may be color blind, avoid a red/green scale and
 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders 157

consider using orange/blue. Tableau has begun defaulting to orange/blue color scales
instead of red/green for this reason.
• Once your chart has been created, convert it to grayscale to ensure that the contrast
still exists—this is both to ensure your color-blind audience can interpret your visuals and
also to ensure that the contrast, in general, is stark enough with the color pallet you have
chosen.

PROGRESS CHECK
7. Often, external consultants will use a firm’s color scheme for a data
visualization or will use a firm’s logo for points on a scatter plot. While this
might be a great approach to support a corporate culture, it is often not the
most effective way to create a chart. Why would these methods harm a chart’s
effectiveness?

COMMUNICATION: MORE THAN VISUALS— LO 4-4

USING WORDS TO PROVIDE INSIGHTS Communicate your

results in a written
As a student, the majority of the writing you do is for your professors. You likely write report
e-mails to your professors, which should carry a respectful tone, or essays for your Comp
1 or literature professors, where you may have been encouraged to use descriptive
language and an elevated tone; you might even have had the opportunity to write a
business brief or report for your business professors. All the while, though, you were still
aware that you were writing for a professor. When you enter the professional world, your
writing will need to take on a different tone. If you are accustomed to writing with an
academic tone, transition- ing to writing for your colleagues in a business setting requires
some practice. As Justin Zobel says in Writing for Computer Science, “good style for
science is ultimately, nothing more than writing that is easy to understand. [It should be]
clear, unambiguous, correct, interesting, and direct.”2 As an author team, we have
tremendous respect for literature and the different styles of writing to be found, but for
communicating your results of a data analysis project, you need to write directly to your
audience, with only the necessary points included, and as little descriptive style as
possible. The point is, get to the point.

Content and Organization

Each step of the IMPACT model should be communicated in your write-up, as noted
here:
I: Explain what was being researched. Even if your audience is the people who
requested the research, you should still restate the purpose of the project. Include any
relevant history as well. If your project is part of a larger program or if it’s a continued
effort to explain an issue or help a decision come to fruition, then include the
background.
M: Depending on your audience, you may not cover too much of what your process
was in the “master the data” step of the IMPACT model, but an overview of the data
source and which pieces of data are included in the analysis should be present. If your
audience is technical and interested, you may go into detail on your ETL process, but
it is more likely that you will leave out that piece.
P and A: Similar to how you write about mastering the data, you may not need to
include a thorough description of your test plan or your process for refining your
results depending on what your audience is interested in and what they need to know,
but including an overview of the type of analysis performed and any limitations that
158 Chapter 4 Visualization: Using Visualizations and Summaries to Share Results with Stakeholders

C: If you are including a data visualization with your write-up, you need to explain
how to use the visual. If there are certain aspects that you expect to stand out from the
analysis and the accompanying visual, you should describe what those components are
—the visual should speak for itself, but the write-up can provide confirmation that the
important pieces are gleaned.
T: Discuss what’s next in your analysis. Will the visual or the report result in a
weekly or quarterly report? What trends or outliers should be paid attention to over
time?

Audience and Tone

Carefully considering your audience is critical to ensuring your communication is effective. If
you have three messages to write—one letting your mom know that you are coming home
this weekend and you’ll need to do laundry, one to your professor letting her know that
you will miss class on Friday, and one to your best friend asking if he wants to join you for
Chipotle— efficiency would suggest that you type it all into one e-mail and click send.
That would defi- nitely be the quickest way to get out the message. But is it a good idea?
Certainly not. Your mom does not need to know that you’re not going to class on Friday,
and you probably don’t want your professor to show up at Chipotle to have lunch with
you and your friend. Instead of sending the same message to all three people, you tailor the
delivery—that is, you consider the audience. You include all of the information that they
need to know and nothing else.
You should do the same thing when crafting your communication regarding your data
analysis. If you have several different people to communicate results to, you may
consider crafting several different versions: one that contains all of the extraction,
transformation, and loading (ETL) details for the programmers and database
administrators, one that is light on ETL but heavy on interpretation of the visual and
results for your managers, and so on. Consider the knowledge and skill of your audience
—don’t talk down to them, but don’t overwhelm a nontechnical crowd with technical
jargon. Explain the basics when you should, and don’t when you shouldn’t.

Revising
Just as you addressed and refined your results in the fourth step of the IMPACT model,
you should refine your writing. Until you get plenty of practice (and even once you
consider yourself an expert), you should ask other people to read through your writing to
make sure that you are communicating clearly. Justin Zobel suggests that revising your
writing requires you to “be egoless—ready to dislike anything you have previously
written. If someone
dislikes something you have written, remember that it is the readers you need to please,
not yourself.”3 Always placing your audience as the focus of your writing will help you
maintain an appropriate tone, provide the right content, and avoid too much detail.

PROGRESS CHECK
Progress Checks 5 and 6 display different charts depicting the quantity of beer sold
on each day in the Sláinte Sales Subset dataset. If you had created those visuals,
starting with the data request form and the ETL process all the way through data
analysis, how would you tailor the written report for the following two roles?
8. For the CEO of the brewery who is interested in how well the different products
are performing.
9. For the programmers who will be in charge of creating a report that contains
the same information that needs to be sent to the CEO on a monthly basis.

3
Ibid.
Summary
■
This chapter focused on the fifth step of the IMPACT model, or the “C,” to discuss
how to communicate the results of your data analysis projects. Communication can be
done through a variety of data visualizations and written reports, depending on your
audience and the data you are exhibiting.
■
In order to select the right chart, you must first determine the purpose of your data
visu- alization. This can be done by answering two key questions:
◦ Are you explaining the results of a previously done analysis, or are you exploring
the data through the visualization? (Is your purpose declarative or exploratory?)
◦ What type of data is being visualized (conceptual qualitative data or data-driven
quan- titative data)?
■
The differences between each type of data (declarative and exploratory, qualitative and
quantitative) are explained, as well as how each datatype impacts both the tool you’re
likely to use (generally either Excel or Tableau) and the chart you should create.
■
After selecting the right chart based on your purpose and datatype, your chart will
need to be further refined. Selecting the appropriate data scale, scale increments, and
color for your visualization is explained through the answers to the following
questions:
◦ How much data do you need to share in the visual to avoid being misleading, yet
also avoid being distracting?
◦ If your data contain outliers, should they be displayed, or will they distort your
scale to the extent that you can leave them out?
◦ Other than how much data you need to share, what scale should you place those data
on?
◦ Do you need to provide context or reference points to make the scale meaningful?
◦ When should you use multiple colors?
■
Finally, this chapter discusses how to provide a written report to describe your data
anal-
ysis project. Each step of the IMPACT model should be communicated in your write-
up, and the report should be tailored to the specific audience to whom it is being
delivered.

Key Words
continuous data (142) One way to categorize quantitative data, as opposed to discrete data.
Continuous data can take on any value within a range. An example of continuous data is height.
declarative visualizations (143) Made when the aim of your project is to “declare” or present your
findings to an audience. Charts that are declarative are typically made after the data analysis has been
completed and are meant to exhibit what was found in the analysis steps.
discrete data (142) One way to categorize quantitative data, as opposed to continuous data. Discrete
data are represented by whole numbers. An example of discrete data is points in a basketball game.
exploratory visualizations (143) Made when the lines between steps P (perform test plan),
A (address and refine results), and C (communicate results) are not as clearly divided as they are in a
declarative visualization project. Often when you are exploring the data with visualizations, you are
per- forming the test plan directly in visualization software such as Tableau instead of creating the
chart after the analysis has been done.
interval data (142) The third most sophisticated type of data on the scale of nominal, ordinal, inter-
val, and ratio; a type of quantitative data. Interval data can be counted and grouped like qualitative
data, and the differences between each data point are meaningful. However, interval data do not have a
mean- ingful 0. In interval data, 0 does not mean “the absence of” but is simply another number. An
example of interval data is the Fahrenheit scale of temperature measurement.
nominal data (141) The least sophisticated type of data on the scale of nominal, ordinal, interval,
and ratio; a type of qualitative data. The only thing you can do with nominal data is count, group, and
take a proportion. Examples of nominal data are hair color, gender, and ethnic groups.
159
 normal distribution (142) A type of distribution in which the median, mean, and mode are all equal, so
half of all the observations fall below the mean and the other half fall above the mean. This phenomenon
is naturally occurring in many datasets in our world, such as SAT scores and heights and weights of
newborn babies. When datasets follow a normal distribution, they can be standardized and compared for
easier analysis.
ordinal data (141) The second most sophisticated type of data on the scale of nominal, ordinal, inter-
val, and ratio; a type of qualitative data. Ordinal can be counted and categorized like nominal data and
the categories can also be ranked. Examples of ordinal data include gold, silver, and bronze medals.
proportion (141) The primary statistic used with quantitative data. Proportion is calculated by
counting the number of items in a particular category, then dividing that number by the total number of
observations.
qualitative data (141) Categorical data. All you can do with these data are count and group, and in
some cases, you can rank the data. Qualitative data can be further defined in two ways: nominal data and
ordinal data. There are not as many options for charting qualitative data because they are not as sophisti-
cated as quantitative data.
quantitative data (142) More complex than qualitative data. Quantitative data can be further defined
in two ways: interval and ratio. In all quantitative data, the intervals between data points are meaningful,
allowing the data to be not just counted, grouped, and ranked, but also to have more complex operations
performed on them such as mean, median, and standard deviation.
ratio data (142) The most sophisticated type of data on the scale of nominal, ordinal, interval, and
ratio; a type of quantitative data. They can be counted and grouped just like qualitative data, and the
differences between each data point are meaningful like with interval data. Additionally, ratio data have a
meaningful 0. In other words, once a dataset approaches 0, 0 means “the absence of.” An example of ratio
data is currency.
standard normal distribution (142) A special case of the normal distribution used for
standardizing data. The standard normal distribution has 0 for its mean (and thus, for its mode and
median, as well), and 1 for its standard deviation.
standardization (142) The method used for comparing two datasets that follow the normal distribu-
tion. By using a formula, every normal distribution can be transformed into the standard normal distribu-
tion. If you standardize both datasets, you can place both distributions on the same chart and more
swiftly come to your insights.

ANSWER
S TO PROGRESS CHECKS
1. Certainly, answers will vary given our own individual experiences. But we can note
that complex topics can be explained and understood by linking them to
categorizations or pictures.
2. Answers will vary.
3. a. Qualitative ordinal
b. Quantitative (ratio data)
c. Qualitative nominal
d. Quantitative (interval data)
4. While this question does ask for your preference, it is likely that you prefer image b
because time series data are continuous and can be well represented with a line
chart instead of bars.
5. Notice that the quarters are out of order (1, 2, then 4); this looks like quarter 3 has
been skipped, but quarter 4 is actually the last quarter of 2019 instead of the last
quarter of 2020, while quarters 1 and 2 are in 2020. Excel defaulted to simply ordering
the quarters numerically instead of recognizing the order of the years in the underlying

160
6. Answers will vary. Possible answers include: Quantity of beer sold is a discrete value, so
it
is likely better modeled with a bar chart than a line chart. Between the two line charts,
the second one is easier to interpret because it is in order of highest sales to lowest.
Between the two bar charts, it depends on what is important to convey to your
audience—are the numbers critical? If so, the second chart is better. Is it most
important to simply show which beers are performing better than others? If so, the first
chart is better. There is no reason to provide more data than necessary because they
will just clutter up the visual.
7. Color in a chart should be used purposefully; it is possible that a firm’s color scheme
may be counterproductive to interpreting the chart. The icons as points in a scatter plot
might be distracting, which could make it take longer for a reader to gain insights from
the chart.
8. Answers will vary. Possible answers include: Explain to the CEO how to read the
visual, call out the important insights in the chart, tell the range of data that is
included (is it one quarter, one year, all time?).
9. Answers will vary. Possible answers include: Explain the ETL process, exactly what
data are extracted to create the visual, which tool the data were loaded into, and how
the data were analyzed. Explain the mechanics of the visual. The particular insights
of this visual are not pertinent to the programmer because the insights will potentially
change over time. The mechanics of creating the report are most important.

Multiple Choice Questions

1. Gold, silver, and bronze medals would be examples of:
a. Nominal data.
b. Ordinal data.
c. Structured data.
d. Test data.
2. In the late 1960s, Ed Altman developed a model to predict if a company was at
severe risk of going bankrupt. He called his statistic Altman’s Z-score, now a widely
used score in finance. Based on the name of the statistic, which statistical distribution
would you guess this came from?
a. Normal distribution
b. Poisson distribution
c. Standardized normal distribution
d. Uniform distribution
3. Justin Zobel suggests that revising your writing requires you to “be egoless—ready to
dislike anything you have previously written,” suggesting that it is you
need to please:
a. Yourself
b. The reader
c. The customer
d. Your boss
4. Which of the following is not a typical example of nominal data?
a. Gender
b. SAT scores
c. Hair color
d. Ethnic group
161
 5. The Fahrenheit scale of temperature measurement would best be described as an
example of:
a. Interval data.
b. Discrete data.
c. Nominal data.
d. Continuous data.
6. data would be considered the least sophisticated type of data.
a. Ratio
b. Interval
c. Ordinal
d. Nominal
7. data would be considered the most sophisticated type of data.
a. Ratio
b. Interval
c. Ordinal
d. Nominal
8. Line charts are not recommended for what type of data?
a. Normalized data
b. Qualitative data
c. Continuous data
d. Trend lines
9. Exhibit 4-8 gives chart suggestions for what data you’d like to portray. Those options
include all of the following except:
a. Relationship.
b. Comparison.
c. Distribution.
d. Normalization.
10. What is the most appropriate chart when showing a relationship between two
variables (according to Exhibit 4-8)?
a. Scatter chart
b. Bar chart
c. Pie graph
d. Histogram

Discussion Questions
1. Explain Exhibit 4-2 and why these four dimensions are helpful in describing
information to be communicated? Exhibit 4-2 lists conceptual and data-driven as
being on two ends of the continuum. Does that make sense, or can you think of a
better way to organize and differentiate the different chart types?
2. According to Exhibit 4-8, which is the best chart for showing a distribution of a single
variable, like height? How about hair color? Major in college?
3. Box and whisker plots (or box plots) are particularly adept at showing extreme
observa- tions and outliers. In what situations would it be important to communicate
these data to a reader? Any particular accounts on the balance sheet or income
statement?
4. Based on the data from datavizcatalogue.com, a line graph is best at showing
compari- sons, relationships, compositions, or distributions? Name the best two.

162
 5. Based on the data from datavizcatalogue.com, what are some major flaws of using
word clouds to communicate the frequency of words in a document?
6. Based on the data from datavizcatalogue.com, how does a box and whisker plot
show if the data are symmetrical?
7. What would be the best chart to use to illustrate earnings per share for one company
over the past five years?
8. The text mentions, “If your data analysis project is more declarative than
exploratory, it is more likely that you will perform your data visualization to
communicate results in Excel.” In your opinion, why is this true?
9. According to the text and your own experience, why is Tableau ideal for exploratory
data analysis?

Problems
1. Why was the graphic associated with the opening vignette regarding the 2016 presi-
dential election an effective way to communicate the voter outcome for 50 states?
What else could have been used to communicate this, and would it have been more
or less effective in your opinion?
2. Evaluate the use of multiple colors in the graphic associated with the opening vignette
regarding the 2016 presidential election. Would you consider its use effective or inef-
fective? Why? Can you think of a better way to communicate the extent to which poll-
sters incorrectly predicted the outcome in many of the states and in the country
overall?
3. According to Exhibit 4-8, which is the best chart for comparisons of earnings per
share over many periods? How about for only a few periods?
4. According to Exhibit 4-8, which is the best chart for static composition of a data item
of the Accounts Receivable balance at the end of the year? Which is best for showing
a change in composition of Accounts Receivable over two or more periods?
5. The Big 4 accounting firms (Deloitte, EY, KPMG, and PwC) dominate the audit and
tax market in the United States. What chart would you use to show which accounting
firm dominates in each state in terms of audit revenues? Any there other interesting
ways you could use to find opportunities within the audit market?
6. Datavizcatalogue.com lists seven types of maps in its listing of charts. Which one
would you use to assess geographic customer concentration by number? How could
you show if some customers buy more than other customers on such a map? Would
you use the same chart or a different one?
7. In your opinion, is the primary reason that analysts use inappropriate scales for their
charts primarily due to an error related to naiveté (or ineffective training), or are the
inappropriate scales used so the analyst can sway the audience one way or the
other?

Answers to Multiple Choice Questions

1. B
2. C
3. B
4. B
5. A
6. D
7. A
8. B
9. D
10. A
163
Lab 4-1 Use PivotCharts to Visualize Declarative Data
This lab relies upon the steps completed in Lab 2-2 concerning the Sláinte brewery and
the PivotTable report you prepared showing the total number of each item sold each
month between January and April 2020.
When working with a data analysis project that is declarative in nature, the analysis
will likely be done in Excel, and the data visualization will be done after the analysis has
been completed as a means to communicate results.

Company summary
Sláinte is a fictional brewery that has recently gone through big change. Sláinte sells six
dif- ferent products. The brewery has only recently expanded its business to distributing
from one state to distributing to nine states, and now the business has begun stabilizing
after the expansion. With that stability comes a need for better analysis. One of Sláinte’s
first priori- ties is to identify its areas of success, as well as areas of potential
improvement.

Data
• Sláinte dataset

Technique
• Some experience with spreadsheets and PivotTables is useful for this lab.

Software needed
• Excel
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

Parts 1–4 of the IMPACT Model

These steps were performed in Lab 2-2. You can either use the already prepared data in
the file Lab 4-1 Slainte_Pivot.xlsx, or you can use the file that you saved after
completing Lab 4-1, which should have been saved to your computer as
Slainte_Pivot.xlsx.

Part 5: Communicate Your Findings

We demonstrate two alternate ways of communicating findings. Please work through
both alternatives.

Alternative 1: Create a PivotChart

1. Ensuring that the active cell in your workbook is somewhere in the PivotTable,
navi- gate to the Analyze tab in the ribbon.
2. If you are working with a PC, you should see a button for PivotChart. If you are
work- ing with a Mac, you can insert a regular chart from the Insert tab on the
ribbon. Some of the functionality of this lab will be limited on a Mac, so you may
opt to use a virtual PC lab environment to complete this lab.
3. Once you click into PivotChart, a window for Insert Chart appears, along with a
list of options for how you can visualize your PivotTable. It defaults to column
chart. Another good option is the bar chart, which displays your data in horizontal
bars instead of columns. Create either a bar chart or a column chart by selecting the
chart you prefer and clicking OK.
4. Take a screenshot that shows the PivotTable and the PivotChart (label it 4-1A).
164
 5. The advantage of working with PivotCharts over regular charts is that you can slice
and filter your data in the PivotTable and the PivotChart at the same time. If you are
presenting your findings to a live audience and you anticipate questions about
specific months or specific products, using Excel’s slicer tool is a great way to filter
your data in a way that is interactive and transparent. On the Analyze tab on the
ribbon, you can select Insert Slicer.
6. In the window that pops up, select Product Description. This will create an
interactive filter so that you can drill down into different product descriptions as
they perform over the months.
7. Create a second slicer for Sales_Order_Date (Month).
8. Take a screenshot that includes your PivotChart, PivotTable, and both slicers
(label it 4-1B).

Q1. Spend a few minutes filtering the data with the slicers. Name three
important insights that were easy to identify through this visualization.
Q2. What does the data visualization and the interactivity of the slicer provide
your audience that the original PivotTable does not?

Alternative 2: Visualize the PivotTable with Conditional Formatting and Sparklines

Conditional formatting and sparklines are quick ways to visualize and compare data and
trends when a full-fledged chart isn’t necessary.
9. To quickly visualize how each product’s total quantity sold over time compares
across all six of Sláinte’s projects, we can apply conditional formatting to the Grand
Total col- umn. Select the data in the Grand Total column of your PivotTable, and
navigate to the Home tab on the ribbon.

LAB EXHIBIT 4-1A

Source: Microsoft Excel 2016

10. From the Home tab, select the Conditional Formatting button, and a menu with
the different types of formatting available will appear.
11. Select Data Bars and pick the first option for blue gradient fill bars.
12. This conditional formatting is helpful because it allows us to compare grand totals of
each product. However, if we would like to see how each product’s month-over-
month sales compare to one another, we can display mini line charts next to each
row with a sparkline. To do so, select all of the “meat” of your PivotTable—that is,
don’t select any of the product labels (such as Imperial IPA), month labels, or grand
totals.
13. Navigate to the Insert tab on the ribbon, and select Line in the Sparklines category.
14. A window will appear specifying the data range you just selected and awaiting
input for the Location Range. We’d like to see the trend lines to the immediate
right of our PivotTable, so you can select the cells in the first empty column after
your Grand Totals.
165
LAB EXHIBIT 4-1B
Source: Microsoft Excel 2016

LAB EXHIBIT 4-1C

Source: Microsoft Excel 2016

15. Click OK, and your sparklines will be created.

16. You will notice that there are gaps in the lines, though. If you’d rather see a
continu- ous line to represent zero values for the blank cells, you can change this
option. Ensure that one of the cells with the sparkline in it is active, and navigate
to the Sparkline Tools tab on the ribbon.
17. Click the bottom half of the Edit Data button to make a menu appear.
18. From the menu, select Hidden & Empty Cells. . .
19. Select the option to show empty cells as zero, and click OK.
20. Take a screenshot to show the conditional formatting and the sparklines (label it 4-1C).
Q3. When do you think a sparkline and/or conditional formatting would be
prefer- able over creating a PivotChart?
Q4. What other visualizations would be useful to interpret these data? If you were
to create a report to be run monthly, what are two visualizations that should
be included?
Q5. Provide a written report discussing the data analysis project and the
insights that should be gained from this visualization.

End of Lab

Lab 4-2 Use Tableau to Perform Exploratory

anAnalysis d Create Dashboards
When working with a data analysis project that is exploratory in nature, the analysis can
be done in Tableau. You will likely enter the data analysis project with an overarching
ques- tion in mind, but as you answer that question, your exploratory analysis will lead to
ongoing questions. The data visualization will help explore the data, as well as ultimately
be used as a means to communicate results.

166
Company summary
Sláinte is a fictional brewery that has recently gone through big change. Sláinte sells six
dif- ferent products. The brewery has only recently expanded its business to distributing
from one state to distributing to nine states, and now the business has begun stabilizing
after the expansion. With that stability comes a need for better analysis. One of Sláinte’s
first priori- ties is to identify its areas of success, as well as areas of potential
improvement.

Data
• Sláinte dataset

Software needed
• Tableau. Visit with your instructor for instructions or follow this link to download
Tableau, https://www.tableau.com/academic/students, and click Get Tableau for Free to
register for a free student license. Your student license will last one year.
• Screen capture tool (Windows: Snipping Tool; Mac: Cmd + Shift + 4)

In this lab, you will:

Part 1: Identify appropriate questions.
Part 2: Complete the ETL process to load the data in Tableau for analysis.
Part 3: Analyze the data you receive with data visualization.
Part 4: Communicate the data you receive with a digital dashboard.

Part 1: Identify the Questions

If you completed Lab 2-1 or 2-2, you became familiar with the Sláinte dataset and
identified questions regarding Sláinte.
In particular, we worked with this scenario: Sláinte has brought you in to help
determine potential areas for sales growth in the next year. Additionally, the company has
noticed that its margins aren’t as high as it had budgeted and would like you to help
identify some areas where it could improve its pricing, marketing, or strategy. Specifically,
Sláinte would like to know how many of each product was sold.
We’ll start with the same question—identifying the amount of each product sold,
overall. The Sláinte data include the following tables and fields, presented in a UML
diagram:
LAB EXHIBIT 4-2A

Q1. Using the UML diagram, identify which table(s) and attributes you will need
to answer your initial question regarding amount of products sold.

Part 2: Master the Data

To complete the ETL process, we will need to extract the data from Access and transform
167
 1. Open Tableau.
2. Select Access from the Connect to a file options.

©Tableau Software, Inc. All rights reserved.

3. Browse to the Slainte_Subset.accdb file and click Open. This will extract the data.

©Tableau Software, Inc. All rights reserved.

4. The Data Source tab will open, with three tables for you to select from. We can begin
by just exploring the Sales data. Double-click on the Sales_Subset table to load it into
Tableau.

©Tableau Software, Inc. All rights reserved.

168
169
 10. Add labels to the bars: To the left of your data viz, there is the Marks window. It has
a variety of ways that you can enhance the way you’re viewing the data. Click Labels,
then place a check mark in the box next to Show mark labels.

©Tableau Software, Inc. All rights reserved.

11. Instead of showing Product Code, show the Product Description; this will require you
to join in another table. Click back into the Data Source tab in the bottom left.
12. Double-click on the FGI_Product table to load the product data into Tableau. You
will see the FGI_Product data populate, as well as a Venn diagram joining the two
datasets. Click on the Venn diagram to ensure the data are joined properly. You
want to ensure that the primary key of FGI_Product is matched with the
corresponding foreign key in the Sales_Subset data (the same way the two tables
are joined in the UML diagram).

©Tableau Software, Inc. All rights reserved.

13. Return to Sheet 1 to work with the new data.

14. Double-click on the dimension Product Description to add this detail to your
data visualization.
15. Now that you have added the description to the visualization, you can remove the
Product Code dimension. Remove Product Code from the data visualization by
drag- ging and dropping the Product Code pill out of the Columns shelf. After
removing the Product Code pill, you will need to sort your data again by using
the same sort
descending icon that you clicked in step 9.

170
16. Take a screenshot (label it 4-2B).
17. Sometimes when you’re performing exploratory data analysis, you’ll want to save
the visualization you just made, while also giving yourself the opportunity to drill
down into the data. We’ll name this sheet after the analysis you just did, then
duplicate the data to work with it further. Right-click Sheet 1 and select Rename
Sheet. Type Total Products Sold as the sheet’s name.

©Tableau Software, Inc. All rights reserved.

18. Right-click the sheet tab that you just renamed and select Duplicate Sheet.

©Tableau Software, Inc. All rights reserved.

171
©Tableau Software, Inc. All rights

172
25. Select Geographic Role, and then select State/Province.

©Tableau Software, Inc. All rights reserved.

26. Create a new sheet (do not duplicate any of the previous sheets) by clicking the
first icon to the right of the Total Products Sold by Year tab.

©Tableau Software, Inc. All rights reserved.

27. This time, we will create a report that shows total products sold by state. Double-
click the measure Customer St. Tableau automatically populates a map with a dot
in each state that’s listed in the Customer table.
28. Double-click on the measure Sales Order Quantity Sold. The dots have changed to
vary in size, which is proportional to the amount of sales in each state.
29. We can make the results easier to interpret by changing the visualization type. If
the Show Me window isn’t showing in the upper right corner, click Show Me, then
select the Filled Map.

©Tableau Software, Inc. All rights reserved.

173
 30. Rename this sheet Total Products Sold by State.
31. Take a screenshot (label it 4-2D).

Part 4: Communicate Results

Now that you have created three simple, but meaningful data visualizations, you can
create a dashboard to communicate the results. Tableau makes it easy to place all of these
visual- izations on one interactive pane.
32. Select the icon for New Dashboard, which is to the right of the New Worksheet icon.

©Tableau Software, Inc. All rights reserved.

33. In the Dashboard view, instead of seeing the various dimensions and measures to
drag and drop, you see the three sheets that you have created. You can drag and drop
them into the area that says Drop Sheets Here, and you can arrange them any way
you wish. Replicate this arrangement:

©Tableau Software, Inc. All rights reserved.

34. You can also use each sheet as a filter. Click the Total Products Sold section of
your dashboard. There are three small icons in the top right of the sheet when the
sheet is active. Clicking the middle one (which looks like a funnel) will allow you
to use the bars as filters for the entire dashboard. Click to do so.

174
©Tableau Software, Inc. All rights reserved.

35. Follow the same process to make the states work as filters for the dashboard by
click- ing Use as Filter in the Total Products Sold by State sheet.
Now, you can click any of the bars in the Total Products Sold chart or any of the states
in the Total Products Sold by State, and the data in each of the three sheets will shift to
focus on just those products and/or states.
36. Filter by either a state or a product, and take a screenshot (label it 4-2E).
Q5. After creating these sheets and the dashboard, what additional data would you
recommend that Sláinte analyze? What is another data visualization that
would be helpful for Sláinte’s decision making?

End of Lab

Lab 4-3 Comprehensive Case: Dillard’s Store ta: Create

Da Geographic Data Visualizations in au
Table
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo
.com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that
William T. Dillard II is an accounting grad of the University of Arkansas and the Walton
College of Business, which may be why he shared transaction data with us to make
available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on Connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio and Microsoft Excel (available on
the Remote Desktop at the University of Arkansas)
• Tableau (available on the Remote Desktop at the University of Arkansas)

In this lab, you will:

• Learn how to prepare data visualization in Tableau.
175
 Part 1: Identify the Questions
Question 2 of Lab 3-4 was as follows: Do customers in the state with the highest
transaction balances have a significantly higher transaction balance during the period
September 1, 2016, to September 15, 2016, than all other states?
In this lab, we will work to visualize these transaction data in a way that helps users
grasp the information needed to make decisions.
Q1. How would this information, average transaction balance by state, help a
man- ager make decisions?
Q2. How would you think managers would like to visualize transaction balance by
state?
What would be the most (and less) effective ways to visualize these transactions?

Part 2: Master the Data

Load the data into Tableau.
1. Open a new Tableau workbook and connect to Microsoft SQL Server.

©Tableau Software, Inc. All rights reserved.

176
 2. Input the Server and Database information that you received from the
Walton.uark.edu/
enterprise page for the Dillard’s data, and then click Sign In.

Source: Microsoft SQL Server Management Studio

3. Wait for the connection to process, and then you have two options: If you are
certain that you will only want to visualize one specific set of query results, you
can input a query from the Connections page. Alternatively, you can connect to
entire tables if you want the option to drill down into the data and answer more
than one question.

Inputting a Custom Query into the Tableau Connections Page

4. Double-click New Custom SQL.

Source: Microsoft SQL Server Management Studio

177
 5. Input your SQL query into the Edit Custom SQL window, and then click OK.
SELECT state, avg(tran_amt) AS Average
FROM transact
INNER JOIN store
ON transact.store = store.store
GROUP BY state

Source: Microsoft SQL Server Management Studio

6. It may take a couple minutes for the results to populate. Once they do, we’ll
preview the data.
The data should load without a problem, but because Tableau is automatically
interpret- ing the data, it is a good idea to look through the data to ensure that we don’t
need to transform them in any way. In Tableau, you should always check which datatype
has been assigned to each attribute. The datatype is denoted by a little icon that is an Abc
for a string of text, a number sign for numerical data, a calendar for dates, or a globe for
geographic data.
The two attributes of state are denoted with an Abc and a number sign:

©Tableau Software, Inc. All rights reserved.

7. Of particular concern is the way the state data were imported. The Abc above the
state column indicates that they were imported into Tableau as plain text instead of
as a geographic attribute.

©Tableau Software, Inc. All rights reserved.

178
8. For us to view these data more meaningfully, we’ll want to change the type of data
that
state is designated as. Click the Abc, then Geographic Role, and select State/Province.

©Tableau Software, Inc. All rights reserved.

9. Once Tableau has processed the change, click Sheet 1 on the bottom of the
Tableau window to begin working with the data.

©Tableau Software, Inc. All rights reserved.

179
10. Double-click on state in Dimensions.

©Tableau Software, Inc. All

rights reserved.

You will see that Tableau immediately populates a map with a blue dot in each state
that has a Dillard’s store.
11. To make these data even more meaningful, we’ll add average to this view. Double-
click
Average in Measures.

©Tableau Software, Inc. All rights reserved.

12. Tableau might have defaulted to a symbol map. The difference in averages is easier
to interpret with a filled map. Click Show Me in the top right corner of Tableau if
your Show Me window isn’t already available, then click Filled Map.

©Tableau Software, Inc. All rights reserved.

End of this process

Joining Tables into the Tableau Connections Page

This option will produce the same visualization that the steps above just created, but it will
also provide more flexibility for digging into the data because more data will be loaded into
Tableau.
13. Drag the Transact table to the Drag tables here portion of the Tableau window.
14. Drag the Store table to the Drag tables here portion of the Tableau window.
15. Tableau will likely default to joining the tables on the appropriate attributes, but
double-check that it did by clicking the visual representation of the join (it looks like
a Venn diagram).

©Tableau Software, Inc. All rights reserved.

180
16. The join should indicate that it is an inner join based on the transact.store and store
.store attributes. If it says something different, modify the join.

©Tableau Software, Inc. All rights reserved.

17. Check that the attributes pulled in as the appropriate datatypes. For example, City
and Zip Code pulled in as geographic datatypes, but state did not. Click the Abc
above the State attribute to change the datatype.

©Tableau Software, Inc. All rights reserved.

18. Click Geographic Role, then State/Province.

©Tableau Software, Inc. All rights reserved.

19. Click Sheet 1 in the bottom left corner of the Tableau screen to begin working
with the data.

181
 20. Double-click State from Dimensions.

©Tableau Software, Inc. All rights reserved.

Tableau immediately populates a map with a blue dot in each state that has a
Dillard’s store.
21. To make these data even more meaningful, we’ll add average transaction amount
to this view. Start by double-clicking on Tran Amt from the Measures.

©Tableau Software, Inc. All rights reserved.

22. It may take a couple minutes for Tableau to populate the data, but the size of the
blue dots will adjust to show how the amounts vary across states. The default value
for this measure is SUM, though, so we need to edit it to be average.
23. Hover over SUM(Tran Amt) in the Marks window to make available an arrow for
a drop-down window.

©Tableau Software, Inc. All rights reserved.

182
24. Click the drop-down, then click Measure (Sum) to change the measure to Average.

©Tableau Software, Inc. All rights reserved.

25. Tableau might have defaulted to a symbol map. The difference in averages is easier
to interpret with a filled map. Click Show Me in the top right corner of Tableau if
your Show Me window isn’t already available, then click Filled Map.
26. Take a screenshot of your results (label it 4-3A).

©Tableau Software, Inc. All rights reserved.

End of this process

183
 Part 3: Perform an Analysis of the Data
Visualizing data often makes it easier to see the answers to your questions, which then
leads to more questions. In this case, Arkansas clearly has a higher average transaction
amount than the other states. This may lead you to want to drill down into the data to see
if the performance is the same across all of the stores in Arkansas, or if there is a stand-
out store.
27. If you click Arkansas, Tableau will give you the option to filter out all of the
other states so that you can drill down into this data point. Click Keep Only.

©Tableau Software, Inc. All rights reserved.

28. From the dimensions, double-click City.

29. Tableau doesn’t recognize city lines, so it will change from a filled map to a
symbol map. This may be easier to read as a bar chart, though, so click the
Horizontal Bars icon in the Show Me window.

©Tableau Software, Inc. All rights reserved.

Q3. Which city has the highest average transaction amount? (It can be easier to
answer this question if you sort the data. Clicking the “sort” button will re-
order the bars so that the city with the highest average transaction amount will
be the first bar listed.)

©Tableau Software, Inc. All rights reserved.

Q4. How would you think managers would like to see transaction balance by state?
Q5. What are further questions that would be meaningful to drill down into with
this same dataset, given what you have seen so far?

184
 To dig deeper into the data, we can drill down into which types of items are being sold
the most in Maumelle. To do so, we need to join in two more tables. Joining in the SKU
table will provide description of the items being sold, and joining in the DEPARTMENT
table will provide categorical information for each individual item.
30. Click Data Source in the bottom left corner of the Tableau application.

©Tableau Software, Inc. All rights reserved.

31. Join in the SKU and DEPARTMENT tables.

©Tableau Software, Inc. All rights reserved.

32. Return to your Tableau sheet with the horizontal bar chart, and click Keep Only for
Maumelle.

©Tableau Software, Inc. All rights reserved.

The DEPARTMENT and SKU data are hierarchical, with an item belonging to a
depart- ment, which groups into a deptdec (decade) through a deptcent (century).
33. Begin by viewing the Maumelle store data by the highest level of the hierarchy,
the department century. The description attribute will be the most useful to inter-
pret, so double-click on the Deptcent Desc attribute from the DEPARTMENT
dimensions.
34. To drill down further into the data, add the department decade data to the chart.
Double-click on Deptdec Desc to add another level of detail.
35. You can also add drill-down capabilities by creating the hierarchy in Tableau. Drag
and drop Deptdec Desc on top of Deptcent Cent in the Dimensions window:

©Tableau Software, Inc. All rights reserved.

185
 36. Click OK on the window to create the hierarchy.

©Tableau Software, Inc. All rights reserved.

37. Notice that the Deptcent Desc pill in the Rows shelf changed to include a minus sign
— this indicates that the hierarchy has been expanded. Click the minus sign to
collapse the hierarchy.

©Tableau Software, Inc. All rights reserved.

38. Take a screenshot of your results (label it 4-3B).

Part 4: Address and Refine Results

With this much data loaded into Tableau, there is a tremendous amount of analysis and
visualization that you can do.
Q6. Based on what you have seen of the average transaction amounts for
different departments and products in the Maumelle store, what would you
recommend to the Maumelle store manager who is trying to maximize
profits? Advertise certain products more? Advertise certain products less?
Open an additional store nearby? Close this store, etc.?

Lab 4-4 mprehensive Case: Dillard’s Store Data:

sualizing Regression in Tableau
Co
Vi
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking at
finance.yahoo
.com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that
William T. Dillard II is an accounting grad of the University of Arkansas and the Walton
College of Business, which may be why he shared transaction data with us to make
available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on Connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.
Specifically, you will need the Excel file that you created and saved in Lab 3-2, Lab
3-2Dummy.xlsx. Completing Labs 3-2 and 3-5 and saving the associated Excel file are pre-
 requisites for this lab.

186
Software needed
• Microsoft SQL Server Management Studio and Microsoft Excel (available on
the Remote Desktop at the University of Arkansas)
• Tableau

In this lab, you will:

• Learn how to get visualize regressions in Tableau.

Part 1: Identify the Questions

In chapter 3, you ran a variety of regression and other analyses addressing the following
questions:
• Do customers in the state with the highest transaction balances have a
significantly higher transaction balance during September 2016 than all other
states?
• Are online transaction amounts statistically greater than or lesser than non-online
trans- actions during the period September 1, 2016, to September 15, 2016?
• Do customers who charge their purchases to a Dillard’s credit card spend more on
each transaction during the time period September 1, 2016, to September 15, 2016?
In this lab, we will work to visualize these data in a way that helps users grasp the
infor- mation needed to make decisions.

Part 2: Master the Data

To complete the ETL process, we will need to extract the data from the Excel spread-
sheet that you saved in the chapter 3 comprehensive labs and transform and load it
into Tableau.
1. Open a new Tableau workbook and connect to Microsoft Excel.

©Tableau Software, Inc. All rights reserved.

187
2. Browse to the Excel output you created with the dummy variables from Lab 3-2 to
Tableau and click Open. This will extract the data.
3. When running a regression in Tableau, you will want to place your explanatory vari-
ables on the columns and your dependent variables on the rows. To do so, drag and
drop the Arkansas-dummy measure to the Columns shelf and the Tran Amt Measure
to the Rows shelf.

©Tableau Software, Inc. All rights reserved.

4. Tableau defaults to aggregating the measures, but we are interested in each

individual observation. To disaggregate the variables, navigate to the Analysis tab
and click Aggregate Measures to disaggregate the values.

©Tableau Software, Inc. All rights reserved.

5. It may take some time for the data to disaggregate. Once they do, navigate back to
the
Analysis tab and click Lines, and then select Show All Trend Lines.

©Tableau Software, Inc. All rights reserved.

Part 3: Perform an Analysis of the Data

6. Hover over the trend line to see the regression formula and the p-value.
7. Each variable can be meaningful in explaining the total spent on each transac-
tion (or Tran Amt), but when working with data visualization, it can be even more
meaningful to compare models. Compare models by adding the Online-dummy
and DLRD-dummy variables (where DLRD represents the use of a Dillard’s credit
card
188
 in the transaction) to the columns. Note these are univariate analyses in that they
compare only Arkansas, online, and the use of a Dillard’s credit card one-by-one
and not altogether.

©Tableau Software, Inc. All rights reserved.

Part 4: Address and Refine Results

Q1. Which of these three variables has a noticeable trend as compared to the
others, suggesting greater explanatory power?
Q2. Which of these three variables best explains the average transaction amount?
(Hint: Consider the r-squared in each or the p-values among the three
models.)
Q3. The coefficient on the DLRD-dummy is negative here. What does that
suggest?
Is that consistent with the results of Lab 3-2?
Q4. In the trend line looking at the Arkansas-dummy, what is the base level of
Transaction Amount (the y-intercept) before considering the Arkansas-
dummy?
Q5. Let’s suppose we could capture the net worth of each Dillard’s customer.
Would you expect that to have higher explanatory variable than either of the
transaction took place in Arkansas, was an online purchase, or was paid for
using a Dillard’s credit card? Why or why not?

189
 Chapter 5
The Modern Audit
and Continuous Auditing

A Look at This Chapter

Most of the focus of Data Analytics in accounting is focused on auditing. This is partly due to the demand for
high-quality data and the need for enhancing trust in the assurance process. In this chapter, we look at how both
internal and external auditors are using technology in general, and audit analytics specifically, to evaluate firm
data and generate support for management assertions. We also introduce how Data Analytics helps facilitate
continuous auditing.

A Look Back
Chapter 4 completed our discussion of the IMPACT model by explaining how to communicate your results
through data visualization and through written reports. We discussed how to choose the best chart for your dataset
and your purpose. We also helped you learn how to refine your chart so that it communicates as efficiently and
effectively as possible. The chapter wrapped up by describing how to provide a written report tailored to specific
audiences who will be interested in the results of your data analysis project.

A Look Ahead
In chapter 6, you will learn how to use audit software to perform substantive audit tests, including when and how
to select samples and how to confirm account balances. Specifically, we discuss the use of different types of
descriptive, diagnostic, predictive, and prescriptive analytics as they are used to generate computer-assisted auditing
techniques.

190
The large public accounting firms offer a variety of analytical tools to their customers. Take PwC’s Halo, for
example, shown in Exhibit 5-1. This tool allows auditors to interrogate a client’s data and identify patterns and
relationships within the data in a user-friendly dashboard. By mapping the data, auditors and managers can
identify inefficiencies in business processes, discover areas of risk exposure, and correct data quality issues by
drilling down into the indi- vidual users, dates and times, and amounts of the entries. Tools like Halo allow auditors
to develop their audit plan by narrowing their focus and audit scope to unusual and infrequent issues that
represent high audit risk.

©Shutterstock/Nonwarit

EXHIBIT 5-1
Source: http://halo.pwc.com

OBJECTIVES
After reading this chapter, you should be able to:

LO 5-1
LO 5-2 Understand modern auditing techniques

LO 5-3 Evaluate an audit plan

LO 5-4 Understand the nature, extent, and timing of audit tests

LO 5-5 Select appropriate audit tasks and approaches

Evaluate audit alarms as part of continuous auditing
LO 5-6
Understand working paper platforms
191
192 Chapter 5 The Modern Audit and Continuous Auditing

LO 5-1 THE MODERN AUDIT

Understand You’ll recall from your auditing course that assurance services are crucial to building and
modern auditing maintaining trust within the capital markets. In response to increasing regulation in the United
techniques States, the European Union, and other jurisdictions, both internal and external auditors
have been tasked with providing enhanced assurance while also attempting to reduce (or
at least maintain) the audit fees. This has spurred demand for more audit automation
along with an increased reliance on auditors to use their judgment and decision-making
skills to effectively interpret and support their audit findings with managers, shareholders, and
other stakeholders. Auditors have been applying simple Data Analytics for decades in
evaluating risk within companies. Think about how an evaluation of inventory turnover
can spur a discussion on inventory obsolescence or how working capital ratios are used to
identify significant issues with a firm’s liquidity. From an internal audit perspective,
evaluating cost variances can
help identify operational inefficiencies or unfavorable contracts with suppliers.
The audit concepts of professional skepticism and reasonable assurance are as much a
part of the modern audit as in the past. There has been a shift, however, of simply provid-
ing reasonable assurance on the processes to the additional assurance of the robots that
are performing a lot of the menial audit work. Where, before, an auditor may have looked
at samples and gathered evidence to make inferences to the population, now that same
auditor must understand the controls and parameters that have been programmed into the
robot. In other words, as these automated bots do more of the routine analytics, auditors
will be free to exercise more judgment to interpret the alarms and data while refocusing
their effort on testing the parameters used by the robots.
Auditors use Data Analytics to improve audit quality by more accurately assessing risk
and selecting better substantive procedures and tests of controls. While the exercises the
auditors conduct are fairly routine, the models can be complex and require auditor judg-
ment and interpretation. For example, if an auditor receives 1,000 notifications of a
control violation during the day, does that mean there is a control weakness or that the
settings on the automated control are too precise? Are all those notifications actual
control violations that require immediate attention, or are most of them false positives—
transactions that are flagged as exceptions but are normal and acceptable?
The auditors’ role is to make sure that the appropriate analytics are used and that the
output of those analytics—whether a dashboard, notifications of exceptions, or accuracy
of predictive models—correspond to management’s expectations and assertions.

The Increasing Importance of the Internal Audit

If you look at the assurance market, there are many trends that are affecting the
profession. First, the major applications of Data Analytics in auditing are not solely
focused on the financial statements as evaluated by public accounting firms. Rather, these
tend to focus on data quality, internal controls, and the complex information systems that
support the busi- ness process—areas typically reserved for the internal audit department
at a firm. Second, the risk and advisory practices of the public accounting firms are
experiencing greater growth, in large part due to firms’ outsourcing or co-sourcing of the
internal audit function. Third, external auditors are permitted to rely on the work of
internal auditors to provide support for their opinion of financial statements.
For these reasons, most of the innovations in Data Analytics have originated in
internal audit departments, where there is constant pressure to enhance business value
while mini- mizing costs. In the recent past, many companies’ experience with Data
Analytics in the internal audit department have come from internal auditors who have
investigated Data Analytics on their own. These individuals then find a champion with
encouraged to continue their work. Under the guidance of the chief audit executive (CAE)
 Chapter 5 The Modern Audit and Continuous Auditing 193

or another manager, these individuals build teams to develop and implement analytical
techniques to aid the following audits:
1. Process efficiency and effectiveness.
2. Governance, risk, and compliance, including internal controls effectiveness.
3. Information technology and information systems audits.
4. Forensic audits in the case of fraud.
5. Support for the financial statement audit.
Internal auditors are also more likely to have working knowledge of the various enter-
prise resource planning systems that are in use at their companies. They are familiar with
how the general journals from a product like JD Edwards actually reconcile to the general
ledger in SAP. Because implementation of these systems varies across organizations (and
even within organizations), internal auditors can understand how analytics are not simply
a one-size-fits-all type of strategy.

PROGRESS CHECK
1. How do auditors use Data Analytics in their audit testing?
2. Make the case for why an internal audit is increasingly important in the modern
audit. Why is it also important for external auditors and the scope of their
work?

Auditing Data LO 5-2

While organizations have become more data-centric as they have adopted ERP systems Evaluate an audit
over the past few decades, these systems can vary greatly among organizations. Some plan
companies will take a homogeneous systems approach by ensuring that all of its divisions
and subsidiar- ies use a uniform installation of SAP. This approach allows management to
consolidate the information from various locations and roll them up into the financial
statements. Other companies that grow through acquisition, take a heterogeneous
systems approach, where they attempt to integrate the existing systems of companies that
they acquire and use a series of translators to convert the output of those systems (such as
PeopleSoft, JD Edwards, and others) into usable financial information. Systems
translator software attempts to map the various tables and fields from these varied ERP
systems and create a data warehouse, where all of the data can be analyzed centrally, as
shown in Exhibit 5-2.
One of the primary obstacles auditors face is access to appropriate data. As noted
in chapter 2, auditors typically request flat files or extracts from an IT manager. In some
cases, these files may be incomplete, unrelated, limited in scope, or delayed when they
are not considered a priority by IT managers. Ideally, auditors will have read-only access
to the data warehouse that pulls in not only transaction data, such as purchases and sales,
but also the related master data, such as employees and vendors. Thus, they can analyze
multiple relationships and explore other patterns in a more meaningful way. In either
case, the auditors will work with duplicated data, rather than querying the production or
live systems directly.
The AICPA’s audit data standards (ADSs) define common tables and fields that are
needed by auditors to perform common audit tasks. They make recommendations to ERP
vendors to standardize the output of common data that auditors are likely to use. The goal
of the standards is to reduce efforts of the auditors with loading and transforming the data
so they can work with the analytics more quickly and have support for more real-time or
continuous analytics through access to data warehouses. These standards are voluntary,
audit specific company functions.
194 Chapter 5 The Modern Audit and Continuous Auditing

EXHIBIT 5-2 Homogeneous ERP System Heterogeneous ERP System

Homogeneous Systems,
Heterogeneous
Systems, and Software
SAP SAP SAP SAP Oracle JDE
Translators

Translator
Data
Warehouse

Data
Audit
Warehouse
Program

Audit
Program

The current set of audit data standards defines the following standards:
• The Base Standard defines the format for files and fields as well as some master data
for users and business units.
• The General Ledger Standard adds the chart of accounts, source listings, trial
balance, and GL (journal entry) detail.
• The Order to Cash Subledger Standard focuses on sales orders, accounts receivable,
ship- ments, invoices, cash receipts and adjustments to accounts, shown in Exhibit 5-3.

EXHIBIT 5-3
Audit Data Standards
The audit data
standards define
common elements
needed to audit the
order-to-cash or sales
process.
Source: https://www.aicpa
.org/InterestAreas/FRC/
AssuranceAdvisoryServices/
DownloadableDocuments/
AuditDataStandards/
AuditDataStandards.O2C.
July2015.pdf
 Chapter 5 The Modern Audit and Continuous Auditing 195

• The Procure to Pay Subledger Standard identifies data needed for purchase orders,
goods
received, invoices, payments, and adjustments to accounts.
• The Inventory Subledger Standard defines product master data, location data,
inventory on hand data, and inventory movement.
With standard data elements in place, not only will auditors streamline their access to
data, but they also will be able to build analytical tools that they can share with others
within their company or professional organizations. This can foster greater collaboration
among auditors and increased use of Data Analytics across organizations. These data
elements will be useful when performing substantive testing in chapter 6.

PROGRESS CHECK
3. What are the advantages of the use of homogeneous systems? Would a
merger target be more attractive if it used a similar financial reporting system
as the potential parent company?
4. How does the use of audit data standards facilitate data transfer between
auditors and companies? How does it save time for both parties?

AUTOMATING THE AUDIT PLAN LO 5-3

So far, we’ve discussed many of the tools available to auditors as well as the changing Understand the
audit environment. The main impact of automation and Data Analytics on the audit nature, extent,
profession comes through optimization of the audit plan. When beginning an engagement and timing of audit
—whether to audit the financial statements, certify the enterprise resource planning tests
system, or make a recommendation to improve a business process—auditors generally
follow a standardized audit plan. The benefit of a standardized audit plan is that newer
members of the audit team can jump into an audit and contribute. They also identify the LO 5-4
priorities of the audit. Select appropriate
An audit plan consists of the one or more of the following elements: audit tasks and
approaches
• A methodology that directs that audit work.
• The scope of the audit, defining the time period, level of materiality, and expected
time for the audit.
• Potential risk within the area being audited.
• Procedures and specific tasks that the audit team will execute to collect and analyze
evi- dence. These typically include tests of controls and substantive tests of transaction
details.
• Formal evaluation by the auditor and supervisors.
Because audit plans are formalized and standardized, they lend themselves to the use
of Data Analytics and, consequently, automation. For example,
• The methodology may be framed by specific standards, such as the Public Company
Accounting Oversight Board’s (PCAOB) auditing standards, the Committee of
Sponsoring Organizations’s (COSO) Enterprise Risk Management framework, or the
Information Systems Audit and Control Association’s (ISACA) Control Objectives for
Information and Related Technologies (COBIT) framework. Data Analytics may be used
to analyze the standards and determine which requirements apply to the organization
being audited.
• The scope of the audit defines parameters that will be used to filter the records or
trans- actions being evaluated.
• Simple to complex Data Analytics can be applied to a client’s data during the
196 Chapter 5 The Modern Audit and Continuous Auditing

• Audit procedures themselves typically identify data, locations, and attributes that the
auditors will evaluate. These are the variables that will provide the input for many of
the substantive analytical procedures discussed in chapter 6.
• The evaluation of audit data may be distilled into a risk score. This may be a
function of the volume of exceptional records or level of exposure for the functional
area. If the judgment and decision making is easily defined, a rule-based analytic
could automati- cally assign a score for the auditor to review. For more complex
judgment, the increas- ing prevalence of artificial intelligence and machine learning
discussed in chapter 3 may be of assistance. After all, if we have enough
observations of the scores auditors assign to specific cases and outcomes, we can
create models that will provide accurate enough classification for these tasks.
Typical internal audit organizations that have adopted Data Analytics to enhance their
audit have done so when an individual on the team has begun tinkering with Data
Analytics. They convince their managers that there is value in using the data to direct the
audit and get a champion in the process. Once they show the value proposition of Data
Analytics, they are given more resources to build the program and adapt the existing audit
program to include more data-centric evaluation where appropriate.
Because of the potential disruption to the organization, it is more likely that an auditor
will adapt an existing audit plan than develop a new system from scratch. Automating the
audit plan and incorporating data analytics involve the following steps, which are similar
to the IMPACT model:
1. Identify the questions or requirements in the existing audit plan.
2. Master the data by identifying attributes and elements that are automatable.
3. Perform the test plan, in this case by developing analytics (in the form of rules
or models) for those attributes identified in step 2.
4. Address and refine results. List expected exceptions to these analytics and
expected remedial action by the auditor, if any.
5. Communicate insight by testing the rules and comparing the output of the analytics
to manual audit procedures.
6. Track outcomes by following up on alarms and refining the models as needed.
Let’s assume that an internal auditor has been tasked with implementing data analytics
to automate the evaluation of a segregation of duties control within SAP. The auditor
evaluates the audit plan and identifies a procedure for testing this control. The audit plan
identifies which tables and fields contain relevant data, such as an authorization matrix,
and the spe- cific roles or permissions that would be incompatible. The auditor would use
that information to build a model that would search for users with incompatible roles and
notify the auditors.

LO 5-5
CONTINOUS AUDITING TECHNIQUES
Evaluate audit
Data Analytics and audit automation allow auditors to continuously monitor and
alarms as part
of continuous
audit the systems and processes within their companies. Whereas a traditional audit may
auditing have the internal auditors perform a routine audit plan once every 12 to 36 months or
so, the continuous audit evaluates data in a form that matches the pulse of the business.
For example, purchase orders can be monitored for unauthorized activity in real time,
while month-end adjusting entries would be evaluated once a month. When exceptions
occur—for example, a purchase order is created with a customer whose address matches
an employee’s—the auditors are alerted immediately and given the option to respond
right away to resolve the issue.
Chapter 5 The Modern Audit and Continuous Auditing 197

Continuous auditing is a process that provides real-time assurance over business pro-
cesses and systems. It involves the application of rules or analytics that perform a
continu- ous monitoring function that constantly evaluates internal controls and
transactions. It also generates continuous reporting on the status of the system so that an
auditor can know at any given time whether the system is operating within the parameters
set by management or not.
Implementing continuous auditing procedures is similar to automating an audit plan
with the additional step of scheduling the automated procedures to match the timing and
fre- quency of the data being evaluated and notifying the auditor when exceptions occur.

Alarms and Exceptions

Whenever an automated or continuous auditing rule is violated, an exception occurs. The
record is flagged and systems generate an exception report that typically identifies the
record and the date of the exception.
Alarms are essentially a classification problem. A data value is sent through a simple
decision tree based on a series of rules and classified as a positive event (alarm) or a
nega- tive event (no alarm). Remember we talked about accuracy of models in chapter 3:
These alarms will not always be correct.
Once the notification of the alarm or exception arrives, auditors follow a set of proce-
dures to resolve the issue. First, they must determine whether the alarm represents a true
positive, a transaction that is problematic, such as an error or fraud, or a false positive,
where a normal transaction is classified as problematic. When too many alarms are false
positive, auditors face information overload, where there are too many incorrect alarms
that distract them from adequately evaluating the system. Because auditors are mostly
concerned with true positives, they should attempt to train or refine the models to
minimize the potential flood of alarms that occurs when too many alarms are false
positives. This is summarized in Table 5-1.

Normal Event Abnormal Event

TABLE 5.1
Four Types of Alarms
Alarm False positive True positive That an Auditor
No Alarm True negative False negative Must Evaluate

WORKING PAPERS AND AUDIT WORKFLOW LO 5-6

As audit procedures become increasingly technical, documentation continues to be
Understand
essential as a way for auditors to increase their reliance on automated controls and working paper
procedures. The idea of a black-box audit is no longer sufficient; rather, auditors must have a platforms
better understanding of the tools they use and the output of those tools. This is where
working papers come into play. Working papers are essential to audit planning,
performance, and evaluation. They provide the documentation for the procedures the
auditors follow, evidence they collect, and communication with the audit client. As they
relate to Data Analytics, working papers
should contain the following items:
• Work programs used to document the audit procedures to collect, manipulate,
model, and evaluate data.
• IT-related documentation, including flowchart and process maps that provide
system understanding.
198 Chapter 5 The Modern Audit and Continuous Auditing

• Database maps (such as UML diagrams) and data dictionaries that define the location
and types of data auditors will analyze.
• Documentation about existing automated controls, including parameters and
variables used for analysis.
• Evidence, including data extracts, transformed data, and model output, that
provides support for the functioning controls and management assertions.
Policies and procedures that help provide consistent quality work are essential to
maintaining a complete and consistent audit. The audit firm or chief audit executive is
responsible for providing guidance and standardization so that different auditors and
audit teams produce clear results. These standardizations include consistent use of sym-
bols or tick marks and a uniform mechanism for cross-referencing output to source docu-
ments or data.

Electronic Working Papers and Remote Audit Work

As audit teams embrace a variety of information and communication technologies to
enable collaboration from different locations, audit firms have done so, as well.
Increasingly, inter- nal and external audit teams consist of more specialized onsite
auditors who interact with a team of experts and data scientists remotely at locations
around the world. Many of the routine tasks are offloaded to the remote or seasonal
workers, freeing up onsite auditors to use more professional judgment and expertise
during the engagement. This results in cost savings for the firm through increased
efficiency at the firm level.
The glue that holds the audit team together is the electronic workpaper platform as
well as other collaboration tools, such as Microsoft Teams or Slack. The electronic
workpaper platforms, such as TeamMate or Xero, automate the workflow of evidence
collection, evalu- ation, and opinion generation on the part of the audit teams. The large
accounting firms have proprietary systems that accomplish a similar purpose. For
example, PwC uses three systems to automate its audit process. Aura is used to direct the
audit by identifying which evidence to collect and analyze, Halo performs Data Analytics
on the collected evidence, and Connect provides the workflow process that allows
managers and partners to review and sign off on the work. Most of these platforms are
hosted in the cloud, so members of the audit team can participate in the various functions
from any location. Smaller audit shops can build ad hoc workpaper repositories using
OneDrive with Office 365, though there are fewer controls over the documents.

PROGRESS CHECK
5. Continuous audit uses alarms to identify exceptions that might indicate an
audit issue and require additional investigation. If there are too many alarms
and exceptions based on the parameters of the continuous audit system, will
continuous auditing actually help or hurt the overall audit effectiveness?
6. PwC uses three systems to automate its audit process. Aura is used to direct
the audit by identifying which evidence to collect and analyze, Halo performs
Data Analytics on the collected evidence, and Connect provides the workflow
pro- cess that allows managers and partners to review and sign off on the
work. How does that line up with the steps of the IMPACT model we’ve
discussed through- out the text?
Summary
As auditing has evolved over the past few decades, Data Analytics has driven many of
the changes. The ability to increase coverage of the audit using data has made it less
likely that key elements are missed. Data Analytics has improved auditors’ ability to assess
risk, inform their opinions, and improve assurance over the processes and controls in their
organizations.

Key Words
audit data standards (ADSs) (193) The audit data standards define common tables and fields
that are needed by auditors to perform common audit tasks. The AICPA developed these standards.
data warehouse (193) A data warehouse is a repository of data accumulated from internal and
exter- nal data sources, including financial data, to help management decision making.
flat file (193) A flat file is a single table of data with user-defined attributes that is stored
separately from any application.
homogeneous systems approach (193) Homogeneous systems represent one single installation or
instance of a system. It would be considered the opposite of a heterogeneous system.
heterogeneous systems approach (193) Heterogeneous systems represent multiple installations or
instances of a system. It would be considered the opposite of a homogeneous system.
production or live systems (193) Production (or live systems) are those active systems that collect
and report and are directly affected by current transactions.
systems translator software (193) Systems translator software maps the various tables and fields
from varied ERP systems into a consistent format.

ANSWERS TO PROGRESS CHECKS

1. Auditors use Data Analytics to improve audit quality by more accurately assessing
risk and selecting better substantive procedures and tests of controls.
2. There are many reasons for this trend, with perhaps the most important being that
exter- nal auditors are permitted to rely on the work of internal auditors to provide
support for their opinion of financial statements.
3. A homogeneous system allows effortless transmission of accounting and auditing
data across company units and international borders. It also allows company
executives (including the chief executive officer, chief financial officer, and chief
information officer), accounting staff, and the internal audit team to intimately know
two systems.
4. The use of audit data standards allows an efficient data transfer of data in a format
that auditors can use in their audit testing programs. It can also save the company
time and effort in providing its transaction data in a usable fashion to auditors.
5. If there are too many alarms and exceptions, particularly with false negatives and
false positives, continuous auditing becomes more of a burden than a blessing. Work
must be done to ensure more true positives and negatives to be valuable to the
auditor.
6. PwC’s Aura system would help identify the questions and master the data, the first
two steps of the IMPACT model. PwC’s Halo system would help perform the test plan
and address and refine results, the middle two steps of the IMPACT model. Finally,
PwC’s Connect system would help communicate insights and track outcomes, the
final two steps of the IMPACT model.
199
 Multiple Choice Questions
1. Under the guidance of the chief audit executive (CAE) or another manager, these
indi- viduals build teams to develop and implement analytical techniques to aid all of
the following audits except:
a. Process efficiency and effectiveness.
b. Governance, risk, and compliance, including internal controls effectiveness.
c. Tax compliance.
d. Support for the financial statement audit.
2. Which audit data standards ledger defines product master data, location data, inventory
on hand data, and inventory movement?
a. Order to Cash Subledger
b. Procure to Pay Subledger
c. Inventory Subledger
d. Base Subledger
3. Which audit data standards ledger identifies data needed for purchase orders, goods
received, invoices, payments, and adjustments to accounts?
a. Order to Cash Subledger
b. Procure to Pay Subledger
c. Inventory Subledger
d. Base Subledger
4. A company has two divisions, one in the United States and the other in China. One
uses Oracle and the other uses SAP for its basic accounting system. What would we
call this?
a. Homogeneous systems
b. Heterogeneous systems
c. Dual data warehouse systems
d. Dual lingo accounting systems
5. Which of the following defines the time period, the level of materiality, and the
expected time for an audit?
a. Audit scope
b. Potential risk
c. Methodology
d. Procedures and specific tasks
6. All of the following may serve as standards for the audit methodology except:
a. PCAOB’s auditing standards
b. COSO’s ERM framework
c. ISACA’s COBIT framework
d. FASB’s accounting standards
7. When there is an alarm in a continuous audit, but it is associated with a normal event,
we would call that a:
a. False negative.
b. True negative.
c. True positive.
d. False positive.

200
 8. When there is no alarm in a continuous audit, but there is an abnormal event, we
would
call that a:
a. False negative.
b. True negative.
c. True positive.
d. False positive.
9. If purchase orders are monitored for unauthorized activity in real time while month-
end adjusting entries are evaluated once a month, those transactions monitored in
real time would be an example of a:
a. Traditional audit.
b. Periodic test of internal controls.
c. Continuous audit.
d. Continuous monitoring.
10. Who is most likely to have a working knowledge of the various ERP systems that are
in use in the company?
a. Chief executive officer
b. External auditor
c. Internal auditor
d. IT staff

Discussion Questions
1. Why has most innovation in Data Analytics originated more in an internal audit than
an external audit? Or if not, why not?
2. Is it possible for a firm to have general journals from a product like JD Edwards
actually reconcile to the general ledger in SAP? Why or why not?
3. Is it possible for multinational firms to have many different financial reporting systems
and ERP packages all in use at the same time?
4. How does the systems translator software work? How does it store the merged data
into a data warehouse?
5. Why is it better to extract data from a data warehouse than a production or live
system directly?
6. Would an auditor view heterogeneous systems as an audit risk? Why or why not?
7. Why would audit firms prefer to use proprietary workpapers rather than just storing
working papers on the cloud?

Problems
1. What are the advantages of the use of homogeneous systems? Would a merger
target be more attractive if it used a similar financial reporting system as the potential
parent company?
2. Consider Exhibit 5-3. Looking at the audit data standards order-to-cash process, what
function is there for the AR_Adjustments transaction table—that is, adjustments to the
Accounts Receivable? Why is this an audit data standard, and why is it important for
an auditor to see?
3. Who developed the audit data standards? In your opinion, why is it the right group to
develop and maintain them rather than, say, the Big 4 firms or a small practitioner?

201
 4. Simple to complex Data Analytics can be applied to a client’s data during the
planning
stage of the audit to identify which areas the auditor should focus on. Which types of
techniques or tests might be used in this stage?
5. What approach should a company make if its continuous audit system has too many
alarms that are false positives? How would that approach change if there are too
many missed abnormal events (such as false negatives)?
6. Implementing continuous auditing procedures is similar to automating an audit plan
with the additional step of scheduling the automated procedures to match the timing
and frequency of the data being evaluated and the notification to the auditor when
exceptions occur. In your opinion, will the traditional audit be replaced by continuous
auditing?

Answers to Multiple Choice Questions

1. C
2. C
3. B
4. B
5. A
6. D
7. D
8. A
9. C
10. C

202
 Lab 5-1 Set Up a Cloud Folder
Auditors collect evidence in electronic workpapers that include a permanent file with
infor- mation about policies and procedures and a temporary file with evidence related to
the cur- rent audit. These files could be stored locally on a laptop, but the increased use of
remote communication makes collaboration through the cloud more necessary. There are
a num- ber of commercial workpaper applications, but we can simulate some of those
features with consumer cloud platforms, like Microsoft OneDrive.

Company summary
You have rotated into the internal audit department at a mid-sized manufacturing
company. Your team is still using company e-mail to send evidence back and forth, usually
in the form of documents and spreadsheets. There is a lot of duplication of these files, and
no one is quite sure which version is the latest. You see an opportunity to streamline this
process using OneDrive.

Technique
• Gather documents, explore document history and revisions

Software needed
• A modern web browser
In this lab, you will:
Part 1: Create a shared folder.
Part 2: Upload files.
Part 3: Review revisions.

Part 1: Create a Shared Folder

Note: These instructions are specific to the free consumer version of Microsoft OneDrive.
The approach is similar for competing products, such as Box, Dropbox, Google Drive, or
other commercial products.
1. Go to OneDrive.com.
2. Click Sign in in the top right corner.
3. Sign in with your Microsoft account. (If your organization subscribes to Office
365, use your school or work account here.)
4. On the main OneDrive screen, click New > Folder.
5. Name your folder DA Audit Working Papers.
6. Open your new folder and click Share from the bar at the top of the screen.
7. Add the e-mail address of one of your classmates or your instructor, as directed.
Choose Allow editing from the drop-down box next to the addresses, then click
Share.
8. Take a screenshot (label it 5-1A).
Q1. What advantage is there to sharing files in one location rather than e-
mailing copies back and forth?

Part 2: Upload Files

Now that you have folders, you can upload some documents that will be useful for labs in
this chapter and the next.
9. From Connect, download the Audit Analytics Lab Files 1, as directed by your instructor.
10. Unzip the file you downloaded to your computer. You should see two folders:
Master Audit File and Current Audit File.
203
 11. Return to your OneDrive DA Audit Working Papers folder, and upload the two
folders:
a. Click Upload > Folders in OneDrive and navigate to the folder where you
unzipped the lab files.
b. Or drag and drop the two folders from your desktop to the OneDrive window
in your browser.
12. You should see two new folders in your OneDrive. Because you added them to
a shared folder, the people you shared the folder with can now see these as
well.
13. Take a screenshot (label it 5-1B).
Q2. Explore the two folders you just uploaded. What kinds of documents and
files do you see?
Q3. How do you think these files can be used for data analysis?

End of Lab

Lab 5-2 eview Changes to Working Papers (OneDrive)

R
See Lab 5-1 for background information on this lab. The goal of a shared folder is that
other members of the audit team can contribute and edit the documents. Commercial soft-
ware provides an approval workflow and additional internal controls over the documents
to reduce manipulation of audit evidence, for example. For consumer cloud platforms,
one control appears in the versioning of documents. As revisions are made, old copies of
the documents are kept so that they can be reverted to, if needed.
In this lab, you will:
Part 1: Upload revised documents.
Part 2: Review document revision history.

Part 1: Upload Revised Documents

Let’s start by making changes to files in your DA Working Papers.
1. From Connect, download Audit Analytics Lab Files 2, as directed by your instructor.
2. Unzip the file you downloaded to your computer. You should see two files: Audit
Plan
and Employee File.
3. Return to your OneDrive DA Audit Working Papers folder, and upload the Audit
Plan into your Master Audit File and the User_Listing into your Current Audit File.
You will be prompted to Replace or Keep Both files. Click Replace for each.
4. Take a screenshot (label it 5-2A).

Part 2: Review Document Revision History

Now let’s look at the history of the document.
5. Right-click on one of the newly uploaded files, and choose Version history from the
menu that appears. The document will open with a version pane appearing on the
left.
6. Click the older version of the file from the Older Versions list.
7. Take a screenshot (label it 5-2B).
8. Move between the old version of the file and the current version by clicking the
time stamp in the panel on the left.
Q1. What has changed between these two versions?
 End of Lab

204
 Lab 5-3 Identify Audit Data Requirements
As the new member of the internal audit team, you have introduced your team to the
shared folder and are in the process of modernizing the internal audit at your firm. The chief
audit exec- utive is interested in using Data Analytics to make the audit more efficient. Your
internal audit manager agrees and has tasked you with reviewing the audit plan. She has
provided three “audit action sheets” with procedures that they have been using for the past
three years to evaluate the procure-to-pay (purchasing) process and is interested in your
thoughts for modernizing them.

Technique
• Review the audit plan, look for procedures involving data, and identify the locations
of the data.
Software needed
• A modern web browser

In this lab, you will:

Part 1: Look for audit procedures that evaluate data.
Part 2: Identify the location of the data.

Part 1: Look for Audit Procedures That Evaluate Data

1. Open your DA Audit Working Papers folder on OneDrive.
2. Look inside the Master Audit File for the document titled Audit Action Sheets
and open it to edit it.
3. Use the Yellow highlighter to identify any master or transaction tables, such
as “Vendors” or “Purchase Orders.”
4. Use the Green highlighter to identify any fields or attributes, such as “Name”
or “Date.”
5. Use the Blue highlighter to identify any specific values or rules, such as
“TRUE,” “January 1st,” “Greater than . . .”
6. Create a new spreadsheet called Audit Automation Summary in your Master Audit File
and summarize your highlighted data elements from the three audit action sheets.
Use the following headers:
AAS# Table Attributes Values/Rules Step(s) Notes

7. Take a screenshot (label it 5-3A).

Q1. Read the first audit action sheet. What other data elements that are not listed in
the procedures do you think would be useful in analyzing this account?

Pa t 2: Identify the Location of the Data

r that you have analyzed the action sheets, look through the systems n
Now documentatio ere those elements exist. to
see In the Master Audit File, open the UML System Diagram and Data Dictionary
wh files Using the data elements you identified in your Audit Automation Summary .
8. file, loca the actual names of tables and attributes and acceptable data values. Add te
9. them in three new columns in your summary:
Database Table Database Attribute Acceptable Values

205
206 Chapter 5 The Modern Audit and Continuous Auditing

10. Take a screenshot (label it 5-3B).

Q2. Which attributes were difficult to locate or in unexpected places in
the database?
11. Save and close your file.
End of Lab

Lab 5-4 Prepare Audit Plan

With the data elements identified, you can formalize your internal audit plan. In the past,
your internal audit department performed each of the three action sheets once every
24 months. You have shared how increasing the frequency of some of the tests would
pro- vide a better control for the process and allow the auditor to respond quickly to the
excep- tions. Your internal audit manager has asked you to propose a new schedule for
the three audit action sheets.

Technique
• Review the audit plan, identify procedures that must be completed manually, and
identify those that can be automated and scheduled.
• Also determine when the procedures should occur.

Software needed
• A modern web browser

In this lab, you will:

• Evaluate the timing and scheduling of audit procedures.
1. Open your Audit Automation Summary spreadsheet in OneDrive.
2. Add two new columns:
Auto/Manual Frequency

3. For each element and rule, determine whether it requires manual review or can be
performed automatically and alter auditors when exceptions occur. Add either
“Auto” or “Manual” to that column.
4. Finally, determine how frequently the data should be evaluated. Indicate “Daily,”
“Weekly,” “Monthly,” “Annually,” or “During Audit.” Think about when the data
are being generated. For example, transactions occur every day, but new
employees are added every few months.
5. Take a screenshot (label it 5-4A).
6. Save and close your file.

End of Lab
 Chapter 6
Audit Data Analytics

A Look at This Chapter

In this chapter, we focus on substantive testing within the audit setting. We highlight discussion of the audit plan,
dis- cuss when population testing is appropriate, and attempt to understand simple audit analyses. We also discuss
the use of clustering to detect outliers and the use of Benford’s analysis.

A Look Back
In chapter 5, we introduced Data Analytics in auditing by considering how both internal and external auditors are
using technology in general, and audit analytics specifically, to evaluate firm data and generate support for
manage- ment assertions. We emphasized audit planning, audit data standards, continuous auditing, and audit
working papers.

A Look Ahead
Chapter 7 explains how to apply Data Analytics to measure performance. By measuring past performance and
com- paring it to targeted goals, we are able to assess how well a company is working toward a goal. Also, we can
determine required adjustments to how decisions are made or how business processes are run, if any.

208
 Internal auditors at Hewlett-Packard Co. (HP) understand
how data analytics can improve processes and controls.
Management identified abnormal behavior with manual journal
entries, and the internal audit department responded by work-
ing with various governance and compliance teams to develop
dashboards that would allow them to monitor accounting activ-
ity. The dashboard made it easier for management and the
audi- tors to follow trends, identify spikes in activity, and drill
down to identify the individuals posting entries. Leveraging
accounting data allows the internal audit function to focus on
the risks fac- ing HP and act on data in real time by
©Anatolii Babii/Alamy
implementing better con- trols. Audit data analytics provides
an enhanced level of control that is missing from a traditional

OBJECTIVES
After reading this chapter, you should be able to:

LO 6-1 Understand different types of analysis for auditing and when to

use them
LO 6-2 Understand basic descriptive audit analyses
LO 6-3 Understand more complex statistical analyses, including Benford’s law
LO 6-4 Understand advanced predictive and prescriptive analytics

209
210 Chapter 6 Audit Data Analytics

LO 6-1 WHEN TO USE AUDIT DATA ANALYTICS

Understand As discussed in chapter 5, Data Analytics can be applied to the auditing function to
different types increase coverage of the audit, while reducing the time the auditor dedicates to the audit
of analysis for tasks. Think about the nature, extent, and timing of audit procedures. Nature represents
auditing and when why we perform audit procedures. In other words, nature helps determine the objectives
to use them of the audit and the outputs generated by the business processes. Extent indicates how
much we can test. The prevalence of data has expanded the extent of audit testing. Finally,
timing tells us how often the procedure should be run. All three of these elements help us
identify when to apply Data Analytics to the audit process.
Auditors should evaluate current capabilities within their department and identify the
goal of Data Analytics. Does it add value? Does it enhance the process? Does it help
the auditor be more efficient and effective? Applying Data Analytics, in theory, should
add value. In reality, it is easy to overpromise on the expected benefits of Data Analytics
and underdeliver with the results. Without clear objectives and expected outcomes, audit
departments will fail with their use of Data Analytics. Here we refer once again to the
IMPACT model.

Identify the Problem

What is the audit department trying to achieve using data analytics? Do you need to
analyze the segregation of duties to test whether internal controls are operating
effectively? Are you looking for operational inefficiencies, such as duplicate payments of
invoices? Are you try- ing to identify phantom employees or vendors? Are you trying to
collect evidence that you are complying with specific regulations? Are you trying to test
account balances to tie them to the financial statements?
These activities support the functional areas of compliance, fraud detection and inves-
tigation, operational performance, and internal controls for internal audit departments as
well as the financial reporting and risk assessment functions of external audit.

Master the Data

In theory, auditors should have read-only access to enterprise data through a
nonproduction data warehouse. In practice, they make multiple requests for flat files or
data extractions from the IT manager that they then analyze with a software tool, such as
Excel or Tableau. Most audit data are provided in structured or tabular form, such as a
spreadsheet file.
Regardless of the source or type, the audit data standards provide a general overview
of the basic data that auditors will evaluate. For example, consider the Sales_Orders table
from the standards shown in Table 6-1. An auditor interested in user activity would want
to focus on the Sales_Order_ID, Sales_Order_Date, Entered_By, Entered_Date, Entered_
Time, Approved_By, Approved_Date, Approved_Time, and
Sales_Order_Amount_Local attributes. These may give insight into transactions on
unusual dates, such as weekends, or unusually high volume by specific users.
There are also many pieces of data that have traditionally evaded scrutiny, including
handwritten logs, manuals and handbooks, and other paper or text-heavy documentation.
Essentially, manual tasks including observation and inspection are generally areas where
Data Analytics may not apply. While there have been significant advancements in
artificial intelligence, there is still a need for auditors to exercise their judgment, and data
cannot always supersede the auditor’s reading of human behavior or a sense that
something may not be quite right even when the data say it is. At least not yet.
 Chapter 6 Audit Data Analytics 211

Field Name Description TABLE 6-1

Elements in the
Sales_Order_ID Unique identifier for each sales order. This ID may need to be created by Sales_ Order Table
concatenating fields (e.g., document number, document type, and year) to
from the Audit Data
uniquely identify each sales order.
Standards
Sales_Order_Document_ID Identification number or code on the sales order.
Sales_Order_Date The date of the sales order, regardless of the date the order is entered.
Sales_Order_Fiscal_Year Fiscal year in which the Sales_Order_Date occurs: YYYY for delimited,
CCYYMMDD fiscal year-end (ISO 8601) for XBRL-GL.
Sales_Order_Period Fiscal period in which the Sales_Order_Date occurs. Examples include
W1–W53 for weekly periods, M1–M12 for monthly periods, and Q1–Q4
for quarterly periods.
Business_Unit_Code Used to identify the business unit, region, branch, and so on at the level
that financial statements are being audited. Must match a Business_Unit_
Code in the Business_Unit_Listing file.
Customer_Account_ID Identifier of the customer from whom payment is expected or to whom
unused credits have been applied. Must match a Customer_Account_ID
in the Customer_Master_Listing_YYYYMMDD file.
Entered_By User_ID (from User_Listing file) for person who created the record.
Entered_Date Date the order was entered into the system. This is sometimes referred
to as the creation date. This should be a system-generated date (rather
than user-entered date), when possible. This date does not necessarily
correspond with the date of the transaction itself.
Entered_Time The time this transaction was entered into the system. ISO 8601
representing time in 24-hour time (hhmm) (e.g., 1:00 p.m. = 1300).
Approved_By User ID (from User_Listing file) for person who approved customer
master additions or changes.
Approved_Date Date the entry was approved.
Approved_Time The time the entry was approved. ISO 8601 representing time in 24-hour
time (hhmm) (e.g., 1:00 p.m. = 1300).
Last_Modified_By User_ID (from User_Listing file) for the last person modifying this entry.
Last_Modified_Date The date the entry was last modified.
Last_Modified_Time The time the entry was last modified. ISO 8601 representing time
in 24-hour time (hhmm) (e.g., 1:00 p.m. = 1300).
Sales_Order_Amount_Local Sales monetary amount recorded in the local currency.
Sales_Order_Local_Currency The currency for local reporting requirements. See ISO 4217 coding.
Segment01 Reserved segment field that can be used for profit center, division, fund,
program, branch, project, and so on.
Segment02 See above.
Segment03 See above.
Segment04 See above.
Segment05 See above.

(Adapted from https://www.aicpa.org/content/dam/aicpa/interestareas/frc/assuranceadvisoryservices/downloadabledocuments/

auditdatastandards/auditdatastandards.o2c.july2015.pdf, accessed January 1, 2018)

Data may also be found in unlikely places. An auditor may be tasked with determining
whether the steps of a process are being followed. Traditional evaluation would involve
the auditor observing or interviewing the employee performing the work. Now that most
pro- cesses are handled through online systems, an auditor can perform Data Analytics on
the time stamps of the tasks and determine the sequence of approvals in a workflow
along with
212 Chapter 6 Audit Data Analytics

the amount of time spent on each task. This form of process mining enables insight into
areas where greater efficiency can be applied. Likewise, data stored in paper documents,
such as invoices received from vendors, can be scanned and converted to tabular data
using specialized software. These new pieces of data can be joined to other transactional
data to enable new, thoughtful analytics.
There is an increasing opportunity to work with unstructured Big Data to provide
addi- tional insight into the economic events being evaluated by the auditors, such as
surveillance video or text from e-mail, but those are still outside the scope of current Data
Analytics that an auditor would develop.

Perform the Test Plan

While there are many different tests or models that auditors can incorporate into their
audit procedures, Data Analytics procedures in auditing traditionally are found in
computer-assisted audit techniques (CAATs). CAATs are automated scripts that can
be used to validate data, test controls, and enable substantive testing of transaction details
or account balances and generate supporting evidence for the audit. They are especially
useful for re-performing calculations, identifying high-risk samples, and performing other
analyti- cal reviews to identify unusual patterns of behavior or unusual items.
Most CAATs are designed to summarize and describe the data being evaluated based
on a predetermined expected outcome. For example, an auditor evaluating an incentive
plan that gives employees bonuses for opening new accounts would evaluate the number
of new accounts by employee and the amount of bonus paid to see if they were aligned.
The audi- tor could look for a count of new accounts by account type, count the number
of custom- ers, evaluate the opening date, and sort the data by employee to show the top-
performing employees. These descriptive analytics summarize activity or master data
elements based on certain attributes. The auditor may select a sample of the accounts to
verify that they were opened and the documentation exists.
Once an auditor has a basic understanding of the data, he or she can then perform
diagnostic analytics, which look for correlations or patterns of interest in the data. For
example, the auditor may look for commonalities between the customers’ demographic
data and the employees’ data to see if employees are creating new accounts for fake cus-
tomers to inflate their performance numbers. They may also focus on customers who
have common attributes like location or account age. Outliers may warrant further
investigation by the auditor as they represent increased risk and/or exposure.
An auditor then performs predictive analytics, where he or she attempts to find
hidden patterns or variables that are linked to abnormal behavior. The auditor uses the
variables to build models that can be used to predict a likely value or classification. In
our example, the predictive model might flag an employee or customer with similar
characteristics to other high-risk employees or customers whenever a new account is
opened.
Finally, the auditor may generate prescriptive analytics that identify a course of
action for him or her to take based on the actions taken in similar situations in the past.
These analytics can assist future auditors who encounter similar behavior. Using artificial
intel- ligence and machine learning, these analytics become decision support tools for
auditors who may lack experience to find potential audit issues. For example, when a
new account is created for a customer who has been inactive for more than 12 months, a
prescriptive analytic would allow an auditor to ask questions about the transaction to
learn whether this new account is potentially fake, whether the employee is likely to
create other fake accounts, and whether the account and/or employee should be
suspended or not. The auditor would take the output, apply judgment, and proceed with
what he or she felt was the appropriate action.
 Chapter 6 Audit Data Analytics 213

Most auditors will perform descriptive and diagnostic analytics as part of their audit
plan. On rare occasions, they may experiment with predictive and prescriptive analytics
directly. More likely, they may identify opportunities for the latter analytics and work
with data scientists to build those for future use.
Some examples of CAATs and audit procedures related to the descriptive, diagnostic,
predictive, and prescriptive analytics can be found in Table 6-2.

TABLE 6-2 Analytic Type Example CAATs Example Audit Procedure

Examples of Audit Data Analytics
Descriptive—summarizes activity Age analysis—groups balances by Analysis of new accounts
or masters data based on certain date opened and employee bonuses
attributes Sorting—identifies largest or by employee and location.
smallest values
Summary statistics—mean,
median, min, max, count, sum
Sampling—random and monetary
unit
Diagnostic—detects correlations Z-score—outlier detection Analysis of new accounts reveals
and patterns of interest Benford’s law—identifies that Jane Doe has an unusual
transactions or users with non- number of new accounts opened
typical activity based on the for customers who have been
distribution of first digits inactive for more than 12 months.
Drill-down—explores the details
behind the values
Exact and fuzzy matching—joins
tables and identifies plausible
relationships
Sequence check—detects gaps in
records and duplicates entries
Stratification—groups data by
categories
Clustering—groups records by non-
obvious similarities
Predictive—identifies common Regression—predicts specific Analysis of new accounts opened
attributes or patterns that may be dependent values based on for customers who have been
used to identify similar activity independent variable inputs inactive for more than 12 months
Classification—predicts a category collects data that are common
for a record to new account opening, such as
Probability—uses a rank score account type, demographics,
to evaluate the strength of and employee incentives.
classification
Sentiment analysis—evaluates text
for positive or negative sentiment
to predict positive or negative
outcomes
Prescriptive—recommends action What-if analysis—decision support Analysis determines procedures
based on previously observed systems to follow when new accounts are
actions Applied statistics—predicts a specific opened for inactive customers,
outcome or class such as requiring approval.
Artificial intelligence—uses
observations of past actions to
predict future actions for similar
events
214 Chapter 6 Audit Data Analytics

While many of these analyses can be performed using Excel, most CAATs are built on
generalized audit software (GAS), such as IDEA, ACL, or TeamMate Analytics. The
GAS software has two main advantages over traditional spreadsheet software. First, it
enables analysis of very large datasets. Second, it automates several common analytical
routines, so an auditor can click a few buttons to get to the results rather than writing a
complex set of formulas. GAS is also scriptable and enables auditors to record or
program common analy- ses that may be reused on future engagements.

Address and Refine Results

The models selected by the auditors will generate various results. A sample selection may
give auditors a list of high-risk transactions to evaluate. A segregation of duties analysis
may spit out a list of users with too much access. In every case, the auditors should
develop pro- cedures in the audit plan for handling these lists, exceptions, and anomalies.
The process may be to evaluate documentation related to the sample, review employees
engaging in risky activity, or simply notify the audit committee of irregular behavior.

Communicate Insights
Many analytics can be adapted to create an audit dashboard, particularly if the firm has
adopted continuous auditing. The primary output of CAATs is evidence used to validate
assertions about the processes and data. This evidence should be included in the audit
workpapers.

Track Outcomes
The detection and resolution of audit exceptions may be a valuable measure of the effi-
ciency and effectiveness of the internal audit function itself. Additional analytics may
track the number of exceptions over time and the time taken to report and resolve the
issues. For the CAATs involved, a periodic validation process should occur to ensure that
they continue to function as expected.

PROGRESS CHECK
1. Using Table 6-2 as a guide, compare and contrast descriptive and diagnostic
analytics. How might these be used in an audit?
2. In a continuous audit, how would a dashboard help to communicate audit find-
ings and spur a response?

LO 6-2 DESCRIPTIVE ANALYTICS

Understand basic Now that you’ve been given an overview of the types of CAATs and analytics that are
descriptive audit commonly used in an audit, we’ll dive a little deeper into how these analytics work and
analyses what they generate. Remember that descriptive analytics are useful for sorting and sum-
marizing data to create a baseline for more advanced analytics. These analytics enable
auditors to set a baseline or point of reference for their evaluation. For example, if an
auditor can identify the median value of a series of transactions, he or she can make a
judgment as to how much higher the larger transactions are and whether they represent
outliers or exceptions.
 Chapter 6 Audit Data Analytics 215

In this and the next few sections, we’ll present some examples of procedures that audi-
tors commonly use to evaluate enterprise data. In these examples, we show the basic pro-
cess for Excel, including formulas, and IDEA. Note that in the Excel formulas, we
identify data elements in [brackets]. To use these formulas, replace the bracketed [data
element] with a value or range of values as appropriate. For example, [Aging date] would
be replaced with C3 if the data are in column C, row 3.

Age Analysis
Aging of accounts receivable and accounts payable help determine the likelihood that a
bal- ance will be paid. This substantive test of account balances evaluates the date of an
order and groups it into buckets based on how old it is, typically in 0–30, 31–60, 61–90,
and >90
days, or similar. See Table 6-3 for an example. Extremely old accounts that haven’t been
resolved or written off should be flagged for follow-up by the auditor. It could mean that
(1) the data are bad, (2) a process is broken, (3) there’s a reason someone is holding that
account open, or (4) it was simply never resolved.

0–30 31–60 61–90 >90 TABLE 6-3

Aging of Accounts
Total 154,322 74,539 42,220 16,900 Receivable

There are many ways to calculate aging in Excel, including using pivot tables. If you
have a simple list of accounts and balances, you can calculate a simple age of accounts in
Excel using the following procedure.

Data
• Customer/vendor name
• Unpaid order number
• Order date
• Amount

In Excel
1. Open your worksheet.
2. Add a cell with the aging date.
3. Add a calculated column for the days outstanding: =[Aging date]–[Order date].
4. Add four new calculated columns for the buckets:
a. 0–30 days: =IF([Aging date]–[Order date]<=30,[Amount],0).
b. 31–60 days: =IF(AND([Aging date]–[Order date]<=60, [Aging date]–
[Order date]>30),[Amount],0).
c. 61–90 days: =IF(AND([Aging date]–[Order date]<=90, [Aging date]–
[Order date]>60),[Amount],0).
d. >90 days: =IF([Aging date]–[Order date]>90),[Amount],0).
5. Copy the formulas for all records.
6. Add a total to the bottom of each bucket: =SUM([bucket column]).

In IDEA
1. Open your worksheet.
2. Go to Analysis > Categorize > Aging.
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Source: CaseWare IDEA

3. Select aging date, field containing transaction date, and amount for the field to
total amount.
4. Click OK.

Sorting
Sometimes, simply viewing the largest or smallest values can provide meaningful insight.
Sorting in ascending order shows the smallest number values first. Sorting in descending
order shows the largest values first.

Data
• Any numerical, date, or text data of interest

In Excel
1. Open your worksheet.
2. Select the data you wish to sort.
3. Go to Home > Format as Table.
4. Click the drop-down arrow next to the header or the column you want to sort.
5. Click Sort A to Z for ascending order or Sort Z to A for descending order.
 Chapter 6 Audit Data Analytics 217

In IDEA
1. Open your data table.
2. Go to Data > Order > Sort.
3. Choose your fields and direction, Ascending or Descending.
4. Click OK.

Summary Statistics
Summary statistics provide insight into the relative size of a number compared with the
population. The mean indicates the average value, while the median produces the middle
value, where all the transactions lined up in a row. The min shows the smallest value,
while the max shows the largest. Finally, a count tells how many records exist, where the
sum adds up the values to find a total. Once summary statistics are calculated, you have a
refer- ence point for an individual record. Is the amount above or below average? What
percent- age of the total does a group of transactions make up?

Data
• Any numerical data, such as a dollar amount or quantity

In Excel
1. Open your workbook.
2. Add the following calculated values:
• Mean: =AVERAGE([range]).
• Median: =MEDIAN([range]).
• Minimum: =MIN([range]).
• Maximum: =MAX([range]).
• Count: =COUNT([range]).
• Sum: =SUM([range]).
3. Alternatively, format your data as a table and show the total row at the bottom:
a. Select your data.
b. Go to Home > Styles > Format as Table.
c. Select a table style and click OK.
d. Go to Table Tools > Design > Table Style Options and click the Total Row box.
e. Click the drop-down arrow next to the column total value that appears, and choose
an appropriate statistic.

In IDEA
1. Open your worksheet.
2. In the Properties pane on the right, click Field Statistics.
3. Allow IDEA to calculate all uncalculated fields, if prompted.
4. In the output screen, you can click any blue number to locate those transactions.

Sampling
Sampling is useful when you have manual audit procedures, such as testing transaction details
or evaluating source documents. The idea is that if the sample is an appropriate size, the
features of the sample can be confidently generalized to the population. So, if the sample
has no errors (misstatement), then the population is unlikely to have errors as well. Of
course, sampling has its limitations. The confidence level is not a guarantee that you won’t
miss some- thing critical like fraud. But it does limit the scope of the work the auditor
must perform.
218 Chapter 6 Audit Data Analytics

There are three determinants for sample size: confidence level, tolerable misstatement,
and estimated misstatement.

Data
• Any list of transactions or master data

In Excel
1. Enable Analysis ToolPak:
a. Go to File > Options > Add-ins > Excel Add-ins > Go.
b. Check the box next to Analysis ToolPak, and click OK.
2. Go to Data > Analysis > Data Analysis.
3. Click Sampling, then OK.
a. Select your input range, usually the transaction number.
b. Choose Random, and input the number of samples.
c. Click OK.
4. A new worksheet will appear with a list of your randomly selected transactions.

In IDEA
1. Open your worksheet.
2. Go to Analysis > Sample > Random.
a. Input number of records to select for your sample size.
b. Change other values as needed.
c. Click OK.
3. A new worksheet will be created with your random sample.
Monetary unit sampling (MUS) allows auditors to evaluate account balances. MUS
is more likely to pull accounts with large balances (higher risk and exposure) because it
focuses on dollars, not account numbers.

Data
• The book value of the financial accounts you’re evaluating
• The sample size

In Excel
1. Find the sampling interval. Divide the book value by sample size.
a. 1,000,000/132 = 7,575 <- Sampling interval
2. Sort the financial accounts in some type of sequence, and calculate a
cumulative balance.
a. Alphabetically by name.
b. Numerically by number.
c. By date.
3. Pick a random number between 1 and your sampling interval.
a. This will be the starting value. For example, 1,243.
4. Go down the list of cumulative balances until you pass your random number.
a. For example, test the first account that passes 1,243.
5. Continue down the list of cumulative balances until you pass the next sampling
interval.
a. For example, test the second account that passes 1,243 + 7,575 = 8,818.
6. Repeat step 5 until you run out of accounts.
a. 8,818 + 7,575 = 16,393; 16,393 + 7,575 = 23,968 . . .
 Chapter 6 Audit Data Analytics 219

In IDEA
1. Open your data table.
2. Go to Analysis > Sample > Monetary Unit > Plan.
a. Choose your monetary value field.
b. Set your confidence level, tolerable error, and expected error.
c. Click Estimate to calculate your sample size.
d. Adjust other values as needed, then click Accept.
e. Click OK.
3. A new worksheet will appear with your sample transactions.

PROGRESS CHECK
3. What type of descriptive analytics would you use to find negative numbers that
were entered in error?
4. How does monetary unit sampling help you isolate the items of greatest poten-
tial significance to an auditor in evaluating materiality?

DIAGNOSTIC ANALYTICS AND BENFORD’S LAW LO 6-3

Diagnostic analytics provide more details into not just the records, but also records or Understand more
groups of records that have some standout features. They may be significantly larger than complex statistical
other values, may not match a pattern within the population, or may be a little too similar analyses, including
to other records for an auditor’s liking. Here we’ll identify some common diagnostic Benford’s law
analytics and how to use them.

Z-Score
A standard score or Z-score is a concept from statistics that assigns a value to a number
based on how many standard deviations it stands from the mean, shown in Exhibit 6-1.
By setting the mean to 0, you can see how far a point of interest is above or below it. For
example, a point with a Z-score of 2.5 is two-and-a-half standard deviations above the
mean. Because most values that come from a large population tend to be normally
distributed (frequently skewed toward smaller values in the case of financial
transactions), nearly all (98 percent) of the values should be within plus-or-minus three
standard deviations. If a value has a Z-score of 3.9, it is very likely an outlier that
warrants scrutiny.

The Z table will Point EXHIBIT 6-1

provide the of Z-Scores
Interest
percentage of data The Z-score shows the
points that will fall to Mean relative position of a
the left of our point of In this case, our point point of interest to the
interest (shaded area of interest is 2 population.
under the curve) standard deviations
away from the mean, http://www.dmaictools.com/
so Z = 2 wp-content/uploads/2012/02/
In this case, Z z-definition.jpg
= 1.2, and the
area to the left
of Z is 0.88, or
88% of all Z Scale
theoretical −3cr −2cr −1cr 0cr 1cr 2cr 3cr
data
points
220 Chapter 6 Audit Data Analytics

In Excel
1. Calculate the average: =AVERAGE([range]).
2. Calculate the standard deviation: =STDEVPA([range]).
3. Add a new column called “Z-score” next to your number range.
4. Calculate the Z-score: =STANDARDIZE([value],[mean],[standard deviation])
a. Alternatively: =([value]–[mean])/[standard deviation].
5. Sort your values by Z-score in descending order.

In IDEA
• Z-score calculation is not a default feature of IDEA.

Benford’s Law
Benford’s law states that when you have a large set of naturally occurring numbers, the
lead- ing significant digit will likely be small. The economic intuition behind it is that
people are more likely to make $10, $100, or $1,000 purchases than $90, $900, or $9,000
purchases. This law has been shown in many settings, such as the amount of electricity
bills, street addresses, and GDP figures from around the world (as shown in Exhibit 6-2).

EXHIBIT 6-2 35%

Benford’s Law
Benford’s law predicts
30%
the distribution of
first digits.
25%

20%

15%

10%

5%

0%
1 2 3 4 5 6 7 8 9
Purchases GDP 2016 Benford’s Predicted

In auditing, we can use Benford’s law to identify transactions or users with nontypical
activity based on the distribution of the first digit of the number. For example, assume
that purchases over $500 require manager approval. A cunning employee might try to
make large purchases that are just under the approval limit to avoid suspicion. She will
even be clever and make the numbers look random: $495, $463, $488, etc. What she
doesn’t real- ize is that the frequency of the leading digit 4 is going to be much higher
than it should be, shown in Exhibit 6-3. Benford’s law can also detect random computer-
generated numbers because those will have equally distributed first digits.
We show an illustration of how to evaluate data and their frequency with respect to
Benford’s law in both Excel and IDEA.
 Chapter 6 Audit Data Analytics 221

35%
EXHIBIT 6-3
Using Benford’s Law
30%
Structured
purchases may look
25% normal, but they
alter the distribution
20% under Benford’s
law.

15%

10%

5%

0%
1 2 3 4 5 6 7 8 9
Purchases Benford’s Predicted

Data
• Large set of numerical data, such as monetary amounts or quantities

In Excel
1. Open your spreadsheet.
2. Add a new column and extract the leading digit: =LEFT([Amount],1).
3. Create a frequency distribution:
a. Create a list on your sheet using values from as shown in Table 6-4 below.

Digit Actual Count Actual % Expected % TABLE 6-4

Illustration of Benford’s Law
1 =COUNTIF([Range],[Digit]) (=[Actual Count]/SUM[Actual Count]) 30.1%
2 ... ... 17.6%
3 ... ... 12.5%
4 ... ... 9.6%
5 ... ... 7.9%
6 ... ... 6.7%
7 ... ... 5.8%
8 ... ... 5.1%
9 ... ... 4.6%
=SUM([Actual Count]) =SUM([Actual %]) =SUM([Expected %])

4. Create a combo chart to plot your actual and expected

percentages:
a. Highlight the Actual % and Expected % columns.
b. Go to Insert > Charts > Recommended Charts.
c. Click the All Charts tab.
d. Choose Combo from the list on the left.
e. Click Custom Combination.
222 Chapter 6 Audit Data Analytics

f. For the Actual %, choose Clustered Column.

g. For the Expected %, choose Scatter.
h. Click OK.
i. Adjust and format your chart as needed.

In IDEA
1. Open your worksheet.
2. Go to Analysis > Explore > Benford’s Law.
a. Choose the numerical field to analyze.
b. Only check First digit. Uncheck everything else.
c. Click OK.
3. A graph will appear with the Benford’s expected amount and the actual frequency
of the dataset.
4. Click any digits that are significantly above the bounds and choose Extract Records.
Bonus: Use the average expected Benford’s law value to identify specific employees
with abnormally large transactions. In this case, a user with lots of transactions should
have an average expected Benford’s law percentage of 11.1 percent or above. Employees
whose average purchases are closer to 8 or 5 percent have a lot of 7, 8, and 9 values that
are skew- ing their average.

In Excel
1. Open your spreadsheet with financial data that contain an employee name and
transac- tion amount.
2. Add a new column and extract the leading digit:
=NUMBERVALUE(LEFT([Amount],1))
3. Add the expected Benford’s law percentages to your sheet similar to Table 6.5 below:

TABLE 6-5
Digit Benford Expected %
Expected Benford’s
Law Percentages 1 30.1%
2 17.6%
3 12.5%
4 9.6%
5 7.9%
6 6.7%
7 5.8%
8 5.1%
9 4.6%

4. Add a new column next to your data to look up the expected Benford’s law percentage
for your value: =INDEX([Benford Expected %], MATCH([Value],[Digit],0)).
5. Create a PivotTable to see the average % by user:
a. Select your data.
b. Go to Insert > Tables > PivotTable.
c. Click OK to add the PivotTable to a new sheet.
 Chapter 6 Audit Data Analytics 223

d. Drag [Employee Name] to Rows.

e. Drag [Benford Expected] to Values.
f. Click Sum of [Benford Expected] and choose Value Field Settings.
g. Change the summarize value field by to Average, and click OK.
h. Select the [Average of Benford Expected] column in your PivotTable, and sort it
in ascending order: Go to Data > Sort & Filter > Sort Smallest to Largest.

In IDEA
• This is not possible by built-in tool.

Drill Down
The most modern Data Analytics software allows auditors to drill down into specific
values by simply double-clicking a value. This lets you see the underlying transactions
that gave you the summary amount. For example, you might click the total sales amount
in an income statement to see the sales general ledger summarizing the daily totals. Click
a daily amount to see the individual transactions from that day.

Exact and Fuzzy Matching

Matching in CAAT is used to link records, join tables, and find potential issues. Auditors
use exact matching to join database tables with a foreign key from one table to the
primary key of another. In cases where the data are inconsistent or contain user-generated
informa- tion, such as addresses, exact matches may not be sufficient. For example, “234
Second Avenue” and “234 Second Ave” are not the same value. To join tables on these
values auditors will use a fuzzy match based on the similarity of the values. The auditor
defines a threshold, such as 50 percent, and if the values share enough common
characters, they will be matched. The threshold can be higher to reduce the number of
potential matches or lower to increase the likelihood of a match.
Note that not all matches are the same. Using queries and other database management
tools, auditors may want only certain records, such as those that match or those that don’t
match. These matches require the use of certain join types. Inner Join will show only the
records from both tables that match and exclude everything that doesn’t match. Left Join
will show all records from the first table and only records from the second table that
match. Right Join will show all records from the second table and records from the first
table that match. Outer Join will show all records, including nonmatching ones. Fuzzy
matching finds matches that may be less than 100 percent matching by finding
correspondences between portions of the text or other entries.

Data needed
• Two tables/sheets with a common attribute, such as a primary key/foreign key, name,
or address

In Excel
1. Search the Internet for Fuzzy Lookup Add-In for Excel, then download and install it
to your computer.
2. Open your spreadsheet with two sheets you’d like to join using a fuzzy match. For
exam- ple, employees and vendors.
3. Go to Fuzzy Lookup > Fuzzy Lookup (Go to File > Options > Add-ins > COM Add-ins
> Go. . . and check Fuzzy Lookup Add-in For Excel if you don’t see the bar).
224 Chapter 6 Audit Data Analytics

Source: Microsoft Excel 2016

 Chapter 6 Audit Data Analytics 225

a. Select the sheet you want for the Left Table and a sheet that has similar values
for the Right Table.
b. Choose the columns that you expect to find matching values in the Left and
Right Columns pane. Note: For addresses, choose Address AND Zip Code for
more likely matches.
c. Select your output columns, if needed.
d. Adjust the similarity threshold, if needed.
e. Open a new worksheet.
f. Click Go.
4. Evaluate the similarity.

In IDEA
1. Fuzzy matching isn’t available by default in IDEA.

Sequence Check
Another substantive procedure is the sequence check. This is used to validate data integ-
rity and test the completeness assertion, making sure that all relevant transactions are
accounted for. Simply put, sequence checks are useful for finding gaps, such as a missing
check in the cash disbursements journal, or duplicate transactions, such as duplicate pay-
ments to vendors. This is a fairly simple procedure that can be deployed quickly and
easily with great success.

In Excel

=IF([second value]–[first value]=1,"","Missing")

OR
= SMALL(IF(ISNA(MATCH(ROW([range]),
[range],0)),ROW([range])),ROW([First value in range))

Stratification and Clustering

There are several approaches to grouping transactions or individuals. In most cases, the
items can be grouped by similar characteristics or strata. With stratification, the auditor
identifies specific groups, such as geographic location or functional area, that can be used
to simplify their analysis. When similarities are less obvious, such as personal preference
or expressed behavior, clustering may be used to infer these groupings. Both stratification
and clustering are generally used for data exploration, rather than substantive testing. The
iden- tification of these groupings, whether obvious or not, help narrow the scope of the
audit and focus on risk. Clustering is discussed in depth in chapter 3.

PROGRESS CHECK
5. A sequence check will help us to see if there is a duplicate payment to
vendors. Why is that important for the auditor to find?
6. Let’s say a company has nine divisions, and each division has a different
check number based on its division—so one starts with “1,” another with “2,”
etc. Would Benford’s law work in this situation?
226 Chapter 6 Audit Data Analytics

LO 6-4 CREATING ADVANCED PREDICTIVE AND

Understand PRESCRIPTIVE ANALYTICS
advanced
Predictive and prescriptive analytics provide less deterministic output than the previous
predictive and
prescriptive analytics. This is because we’re moving away from deterministic values to more probabi-
analytics listic models, judging things like likelihood and possibility. Here we’ll briefly discuss
some application of these different concepts, but we refer you back to chapter 3 for
background information.

Regression
Regression allows an auditor to predict a specific dependent value based on independent
variable inputs. In other words, what would we expect behavior to be given some inputs
and does that match reality? In auditing, we could evaluate overtime booked for workers
against productivity or the value of inventory shrinkage given environmental factors.

Classification
Classification in auditing is going to be mainly focused on risk assessment. The predicted
classes may be low risk or high risk, where an individual transaction is classified in either
group. In the case of known fraud, auditors would classify those cases or transactions as
fraud/not fraud and develop a classification model that could predict whether similar
trans- actions might also be potentially fraudulent.
There is a longstanding classification method used to predict whether a company is
expected to go bankrupt or not. Altman’s Z is a calculated score that helps predict bank-
ruptcy and might be useful for auditors to evaluate a company’s ability to continue as a
going concern.
When using classification models, it is important to remember that large training sets
are needed to generate relatively accurate models. Initially, this requires significant manual
classi- fication by the auditors or business process owner so that the model can be useful for
the audit.

Probability
When talking about classification, the strength of the class can be important to the
auditor, especially when trying to limit the scope (e.g., evaluate only the 10 riskiest
transactions). Classifiers that use a rank score can identify the strength of classification
by measuring the distance from the mean. That rank order focuses the auditor’s efforts on
the items of poten- tially greatest significance.

Sentiment Analysis
Evaluate text (e.g., 10-K or annual report) for positive or negative sentiment to predict
posi- tive or negative outcomes or to look for potential bias on management’s part. There
is more discussion on sentiment analysis in chapter 8.

Applied Statistics
Additional mixed distributions and nontraditional statistics may also provide insight to
the auditor. For example, an audit of inventory may reveal errors in the amount recorded
in the system. The difference between the error amounts and the actual amounts may
provide some valuable insight into how significant or material the problem may be.
Auditors can plot the frequency distribution of errors and use Z-scores to hone in the
cause of the most significant or outlier errors.
 Chapter 6 Audit Data Analytics 227

Artificial Intelligence
As the audit team generates more data and takes specific action, the action itself can
be modeled in a way that allows an algorithm to predict expected behavior. Artificial
intelligence is designed around the idea that computers can learn about action or behav-
ior from the past and predict the course of action for the future. Assume that an expe-
rienced auditor questions management about the estimate of allowance for doubtful
accounts. The human auditor evaluates a number of inputs, such as the estimate calcula-
tion, market factors, and the possibility of income smoothing by management. Given
these inputs, the auditor decides to challenge management’s estimate. If the auditor
consistently takes this action and it is recorded by the computer, the computer learns
from this action and makes a recommendation when a new inexperienced auditor faces
a similar situation.
Decision support systems that accountants have relied upon for years (e.g., TurboTax)
are based on a formal set of rules and then updated based on what the user decides given
several choices. Artificial intelligence can be used as a helpful assistant to auditors and
may potentially be called upon to make judgment decisions itself.

Additional Analyses
The list of Data Analytics presented in this chapter is not exhaustive by any means. There
are many other approaches to identifying interesting patterns and anomalies in enterprise
data. Many ingenious auditors have developed automated scripts that can simplify several
of the audit tasks presented here. Excel add-ins like TeamMate Analytics provide many
different techniques that apply specifically to the audit of fixed assets, inventory, sales
and purchase transactions, etc. Auditors will combine these tools with other techniques,
such as periodically testing the effectiveness of automated tools by adding erroneous or
fraudulent transactions, to enhance their audit process.

PROGRESS CHECK
7. Why would a bankruptcy prediction be considered classification? And why
would it be useful to auditors?
8. If sentiment analysis is used on a product advertisement, would you guess the
overall sentiment would be positive or negative?

Summary
This chapter discusses a number of analytical techniques that auditors use to gather
insight about controls and transaction data. These include descriptive analytics that are
used to summarize and gain insight into the data, diagnostic analytics that identify
patterns in the data that may not be immediately obvious, predictive analytics that look
for common attributes of problematic data to help identify similar events in the future,
and prescriptive analytics that provide decision support to auditors as they work to
resolve issues with the processes and controls.
Key Words
computer-assisted audit techniques (CAATs) (212) Computer-assisted audit techniques
(CAATs) are automated scripts that can be used to validate data, test controls, and enable substantive
testing of transaction details or account balances and generate supporting evidence for the audit.
descriptive analytics (212) Descriptive analytics summarize activity or master data elements
based on certain attributes.
diagnostic analytics (212) Diagnostic analytics looks for correlations or patterns of interest in the data.
fuzzy matching (213) Fuzzy matching finds matches that may be less than 100 percent matching by
finding correspondences between portions of the text or other entries.
monetary unit sampling (MUS) (218) Monetary unit sampling allows auditors to evaluate account
balances. MUS is more likely to pull accounts with large balances (higher risk and exposure) because it
focuses on dollars, not account numbers.
predictive analytics (212) Predictive analytics attempt to find hidden patterns or variables that are
linked to abnormal behavior.
prescriptive analytics (212) Prescriptive analytics use machine learning and artificial intelligence for
auditors as decision support to assist future auditors in finding potential issues in the audit.

ANSWERS TO PROGRESS CHECKS

1. Descriptive activity summarizes activity by computing basic descriptive statistics like
means, medians, minimums, maximums, and standard deviations. Diagnostic analytics
compares variables or data items to each other and tries to find co-occurrence or cor-
relation to find patterns of interest.
2. Use of a dashboard to highlight and communicate findings will help identify alarms for
issues that are occurring on a real-time basis. This will allow issues to be addressed
immediately.
3. By computing minimum values or by sorting, you can find the lowest reported value
and, thus, potential negative numbers that might have been entered erroneously into
the sys- tem and require further investigation.
4. Monetary unit sampling is more likely to pull accounts with large balances (higher risk
and exposure) because it focuses on the amount of the transaction rather than giving
each transaction an equal chance. The larger dollar value of the transaction, the
more likely it is to affect materiality thresholds.
5. Duplicate payments to vendors suggest that there is a gap in the internal controls
around payments. After the first payment was made, why did the accounting system
allow a sec- ond payment? Were both transactions authorized? Who signed the
checks or authorized payments? How can we prevent this from happening in the
future?
6. Benford’s law works best on naturally occurring numbers. If the company dictates the
first number of its check sequence, Benford’s law will not work the same way and
thus would not be effective in finding potential issues with the check numbers.
7. Bankruptcy prediction predicts two conditions for a company: bankrupt or not
bankrupt. Thus, it would be considered a classification activity. Auditors are required to
assess a cli- ent’s ability to continue as a going concern and the bankruptcy prediction
helps with that.
8. Most product advertisements are very positive in nature and would have positive sentiment.
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Multiple Choice Questions
1. Which items would be currently out of scope for Data Analytics?
a. Direct observation of processes
b. Evaluation of time stamps to evaluate workflow
c. Evaluation of phantom vendors
d. Duplicate payment of invoices
2. What would be the sampling interval if we are using a manual approach to monetary
unit sampling for a book value of $2,000,000 and a sample size of 200?
a. 10,000
b. 1,000
c. 100,000
d. Cannot be determined
3. Monetary unit sampling is more likely to:
a. Sample accounts with smaller balances.
b. Sample accounts with less risk.
c. Sample accounts with larger balances.
d. Sample accounts with more risk.
4. The determinants for sample size include all of the following except:
a. Confidence level.
b. Tolerable misstatement.
c. Potential risk of account.
d. Estimated misstatement.
5. CAATs are automated scripts that can be used to validate data, test controls, and
enable substantive testing of transaction details or account balances and generate
supporting evidence for the audit. What does CAAT stand for?
a. Computer-aided audit techniques
b. Computer-assisted audit techniques
c. Computerized audit and accounting techniques
d. Computerized audit aids and tests
6. Which type of audit analytics might be used to find hidden patterns or variables linked
to abnormal behavior?
a. Prescriptive analytics
b. Predictive analytics
c. Diagnostic analytics
d. Descriptive analytics
7. What describes finding correspondences between at least two types of text or entries
that may not match perfectly?
a. Incomplete linkages
b. Algorithmic matching
c. Fuzzy matching
d. Incomplete matching

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 8. Which testing approach would be used to predict whether certain cases should be
eval- uated as having fraud or no fraud?
a. Classification
b. Probability
c. Sentiment analysis
d. Artificial intelligence
9. Which testing approach would be useful in assessing the value of inventory
shrinkage given multiple environmental factors?
a. Probability
b. Sentiment analysis
c. Regression
d. Applied statistics
10. What type of analysis would help auditors find missing checks?
a. Sequence check
b. Benford’s law analysis
c. Fuzzy matching
d. Decision support systems

Discussion Questions
1. How do nature, extent, and timing of audit procedures help us identify when to apply
Data Analytics to the audit process?
2. When do you believe that Data Analytics will add value to the audit process? How
can it most help?
3. Using Table 6-2 as a guide, compare and contrast predictive and prescriptive
analytics. How might these be used in an audit? Or a continuous audit?
4. An example of prescriptive analytics is when an action is recommended based on
previ- ously observed actions. For example, an analysis might help determine
procedures to follow when new accounts are opened for inactive customers, such as
requiring super- visor approval. How might this help address a potential audit issue?
5. One type of descriptive analytics is simply sorting data. Why is seeing extreme
values helpful (minimums, maximums, counts, etc.) in evaluating accuracy and
completeness and in potentially finding errors and fraud and the like?

Problems
1. One type of descriptive analytics is age analysis. Why are auditors particularly inter-
ested in the aging of accounts receivable and accounts payable? How does this
analy- sis help evaluate management judgment on collectability of receivables and
potential payment of payables? Would a dashboard item reflecting this aging be
useful in a con- tinuous audit?
2. One of the benefits of Data Analytics is the ability to see and test the full population.
In that case, why is sampling (even monetary sampling) still used, and how is it
useful?
3. What does a Z-score greater than three (or minus three) suggest? How is that useful
in finding extreme values? What type of analysis should we do when we find extreme
or outlier values?
4. What are some patterns that could be found using diagnostic analysis? Between
which types of variables?

230
 5. In a certain company, one accountant records most of the adjusting journal entries at
the end of the month. What type of analysis could be used to identify that this
happens and the cumulative size of the transactions that the one accountant
records? Is this a problem or if not, when would it be?
6. Which distributions would you recommend be tested using Benford’s law? What
would a Benford’s law evaluation of sales transaction amounts potentially show?
What would a test of vendor numbers or employee numbers show? Anything different
from a test of invoice or check numbers? Any cases where Benford’s law wouldn’t
work?
7. How could artificial intelligence be used to help with the evaluation of the estimate for
the allowance for doubtful accounts? Could past allowances be tested for their
predic- tive ability that might be able to help set allowances in the current period?
8. How do you think sentiment analysis of the 10-K might assess the level of bias
(positive or negative) of the annual reports? If management is too positive about the
results of the company, can that be viewed as being neutral or impartial?

Answers to Multiple Choice Questions

1. A
2. A
3. C
4. C
5. B
6. B
7. C
8. A
9. C
10. A

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 Lab 6-1 Evaluate the Master Data for Interesting Addresses
You’re starting to make a name for yourself in the internal audit department. Your
manager liked your analysis of the audit plan and now would like you to see what other
ways data analytics could be applied beyond the existing audit action sheets.
As you’ve been reading about risk and fraud, you learned that one common risk is that
employees may be tempted to create fictitious suppliers that they use to embezzle money.
The premise is simple enough. An employee with access to create master data adds a sup-
plier record for a spouse. She then submits an invoice for “cleaning services” that were
never performed and is promptly paid, assuming there isn’t good follow-up from the
accounts pay- able department. The employee is smart enough to know that an exact
address would raise red flags, so she alters it slightly to avoid detection. Other suspicious
addresses may include PO Box addresses because they can obscure the identity of a
fictitious supplier.
You know that one way to detect this issue is to look for fuzzy matches, and you’re
eager to show your manager what you know. Refer to Lab 3-2 for another example. This
lab assumes you have completed Lab 5-1.
Techniques
• Data preparation
• Filtering
• Fuzzy matching
Software needed
• Excel
In this lab, you will:
Part 1: Identify the questions.
Part 2: Master the employee and vendor data.
Part 3: Perform the analysis.
Part 4: Address the results.

Part 1: Identify the Questions

Q1. Given what you know about vendor addresses, what types of addresses would
be the most suspicious?
Q2. How could a vendor be added to an enterprise system with a suspicious address?

Part 2: Master the Employee and Vendor Data

In Excel
1. Open OneDrive and navigate to your Current Audit File folder.
2. Create a new Excel workbook and call it User-Supplier Match.
3. Rename the Sheet1 to Users and add a new sheet called Suppliers.
4. Return to your OneDrive tab and open the User_Listing and Supplier_Listing files.
5. Copy the data from the User_Listing file to the Users sheet in your new spreadsheet.
6. Copy the data from the Supplier_Listing file to the Suppliers sheet in your new spreadsheet.
7. From your User-Supplier Match spreadsheet, click Open in Excel to load it in the
desk- top version of Excel.
8. Take a screenshot (label it 6-1A).

In IDEA
1. Download the P2P IDEA Audit Data from Connect, as directed.
2. Unzip the file on your computer.

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 3. Open IDEA and go to Home > Projects > Select.
4. Click the External Projects tab, then navigate to your downloaded P2P IDEA Audit
Data project folder.
5. Click OK.
6. Take a screenshot (label it 6-1B).

Part 3: Perform the Analysis

In Excel
There are a couple ways to look for suspicious addresses. You could look for specific
values or use tools to help you link records.
1. Begin by narrowing down addresses with the word “box.” This should include
“PO Box,” “P.O. Box,” and “Box.”
a. Select the data in the Supplier sheet, and format it as a table of your
choosing (Home > Styles > Format as Table).
b. Click the drop-down arrow next to the Supplier_Physical_Street_Address1 field to
show the sort and filter menu.
c. Choose Text Filters > Contains. . .
d. Enter box and click OK.
2. Take a screenshot (label it 6-1C).

In IDEA
1. Open your Supplier_Listing table.
2. Go to Data > Search > Search.
a. Text to find: box
b. Fields to look in: Supplier_Physical_Street_Address1
c. Click OK.
3. Take a screenshot (label it 6-1D).

Q3. How many PO Box addresses appear?

Q4. Why should you follow up on PO Box addresses?
Now let’s look for fuzzy matches.

In Excel
1. Click the drop-down arrow next to the Address field, and choose Clear Filter
From “Supplier_Physical_Street_Address1”.
2. Perform a fuzzy match on the Supplier_Physical_Street_Address1, and Supplier_
Physical_ZipPostalCode from the Suppliers sheet and the User_Physical_Street_
Address1 and User_Physical_Street_ZipPostalCode from the Users sheet. Refer to the
example in chapter 6 or Lab 3-2 for specific step-by-step instructions.
3. Take a screenshot (label it 6-1E).

In IDEA
IDEA doesn’t support fuzzy matching directly, but this works with a few steps by
merging the supplier and user tables, and then looking for fuzzy duplicate records. The
resulting table will show duplicate records that will match despite not being exact.
1. Open the Supplier_Listing table.
2. Click Data > Append.
a. Field name: Type
b. Field type: Virtual Character
c Length: 20

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 d. Parameter: “Supplier”
e. Click OK.
3. Open the User_Listing table.
4. Click Data > Append.
a. Field name: Type
b. Field type: Virtual Character
c. Length: 20
d. Parameter: “Employee”
e. Click OK.
5. Go to Analysis > Relate > Append.
a. Double-click Supplier_Listing.
b. Click OK.
6. Go to Data > Append.
a. Field name: Combo_Address
b. Field type: Virtual Character
c. Length: 100
d. Parameter: = Supplier_Physical_Street_Address1 +
User_Physical_Street_Address1
e. Click OK.
7. In your new Append Databases table, click Analysis > Explore > Duplicate Key > Fuzzy.
a. Output: Fuzzy matches
b. Similarity degree (%): Adjust as needed
c. Key: Combo_Address
d. Click OK.
8. Take a screenshot (label it 6-1F).
Q5. How many fuzzy matches appeared?
Q6. Which of the matches are
suspicious? Q7. Which of the
matches are normal?

Part 4: Address the Results

Q8. Are there any limitations to the way you just evaluated addresses?
Q9. What other data values would indicate that there may be fictitious suppliers
in the system?

End of Lab

Lab 6-2 Perform Substantive Tests of Account Balances

Account balances do not exist in databases. Rather, they are the combination of data ele-
ments that are added together to come up with a total through queries and formulas. The
balance for accounts payable, for example is the combination of invoices received, cash
disbursements, and debit memos.
As an internal auditor, you have been tasked with validating the balance in accounts
receiv- able. Your audit manager has given you a list of receivables for comparison.
Additionally, company policy states that accounts receivables should be collected within 60
days of the sale. To test this policy, you have been asked to perform an aging of
outstanding accounts.
Techniques
• Use Excel tools to calculate account balances
• Use Excel tools to group accounts by age
234
Software
• Access
In this lab, you will:
Part 1: Identify the questions
Part 2: Master the purchase order and payment data
Part 3: Perform the analysis

Part 1: Identify the questions

Q1. What data do you need to calculate the account balances?
Q2. What is the formula needed to compute the balance in accounts
payable? Q3. How would you compute and group the age of each receivable?

Part 2: Master the Data

1. To address the question of the data needed, we will compute the accounts
receivable for each customer. That is, as of 9/30/2019 how many customers have
yet to pay the amount they owe?
2. Open the File SlainteAging-Sept.xlsx.
3. Create a PivotTable using the Sales_Order data. Ensure that the PivotTable will
use the Internal Data Model so that you can retrieve fields from both of the tables
in the spreadsheet by placing a check mark next to Add this data to the Data
Model in the Create PivotTable window.

Source: Microsoft Excel 2016.

4. In the PivotTable Fields window, click All to view both tables in the workbook.

Source: Microsoft Excel 2016.

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 5. Create a PivotTable that shows the Sales_Order_Total and the Receipt_Total for
each Sales_Order_ID.

Source: Microsoft Excel 2016.

6. The data will look odd at first, and you will be prompted to create relationships.
You can allow Excel to auto-detect the relationships, and it will identify the
relationship between the Primary and Foreign Keys that exist between the two
tables.
Q4. What are the primary and foreign keys that relate the two tables in this workbook?

7. After creating the relationships, the top few records of your PivotTable output
should look like the following:

Source: Microsoft Excel 2016.

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 8. Copy the data in the PivotTable to a new spreadsheet to convert the PivotTable data to
a range. Doing so will allow us to be able to identify which of the invoices have yet
to be paid in full yet. You can ensure that you’re copying only the range by selecting
and copy- ing all of the data in the PivotTable, except for the last row containing the
Grand Total.
9. Add a column to your new range, and calculate the difference between the
Sales_ Order_Total and the Receipt_Amount.
10. Add a filter to the Difference column, and filter out all values that appear as 0’s.
This will allow you to view all of the invoices that haven’t been paid in full yet.

Source: Microsoft Excel 2016.

11. This data can be made more interesting by identifying how late the payments
are. Return to the Cash_Received spreadsheet in your workbook.
12. Add a new column to the Cash_Received table called Sales_Order_Date. This will
allow you to easily compare the date of the original Sales Order to the date of the
payment.
13. Use a False VLookup formula to look up the date that corresponds with the
Sales_ Order_ID that each cash receipt corresponds to.

Source: Microsoft Excel 2016.

14. Now that you have the Sales_Order_Date easily accessible, you can create another
col- umn to calculate the difference between the dates. Create a new column labeled
Age, and subtract the Sales_Order_Date from the Cash_Receipt_Date.
15. Your next step is to create a True VLookup formula to assign each cash receipt to an
aging bucket. Create an aging table with the following information somewhere on your
spreadsheet:

0 0–30
30 31–60
60 61–90
90 >90
237
 16. Add another new column to the Cash_Received table labeled Bucket, and create
a True VLookup formula to identify the bucket for each invoice.

Source: Microsoft Excel 2016.

17. We can quickly create a summary of how many invoices fall into each bucket
using Excel’s COUNTIF function. In the column to the right of your aging table,
create a column labeled Count.
18. In the cell to the right of your 0–30 bucket, type the COUNTIF function.
COUNTIF requires two arguments, range and criteria. The range in this case is the
Buckets column. The criteria is 0–30. COUNTIF will count every instance of 0–30 in the
buckets column.

Source: Microsoft Excel 2016.

19. Repeat the steps for the remaining three buckets. The top two records in the
Count column should return the following data:

Source: Microsoft Excel 2016.

20. Return to your PivotTable, and refresh the data so that you can pull in your new
fields for further analysis. You can refresh your data by clicking the Refresh button
in the Analyze tab from the ribbon.

Source: Microsoft Excel 2016.

21. You should now be able to add the Buckets field to the PivotTable. Do so.

238
 Source: Microsoft Excel 2016.

22. Collapse the fields so that you do not see the detail of each invoice within the
buckets, but only the totals. The top two records of the PivotTable will appear as the
following:

Source: Microsoft Excel 2016.

23. Save your
file.
Q5. Of the not yet collected balances in each of the four buckets, which bucket
is least likely to be collected? Which bucket is most likely to be collected?
How wouid this help us come up with an allowance for doubtful accounts?
24. Now, let’s assume that three more months have passed. Open up the spreadsheet
SlainteAging-Dec.xlsx.
Q6. Based on what you have viewed with the September data, what do you expect to
find as far as outstanding balances now that the year has finished at the end of
December?

239
 25. Repeat the same steps as you did above in the new dataset.
a. Create a PivotTable that shows the Sales_Order_Total and Receipt_Amount
for each Sales_Order_ID.
i. Remember to use the Internal Data Model and to build relationships so that the
data in your PivotTable is accurate.
b. Create a range from your PivotTable data and calculate the difference between
the Sales_Order_Total and the Receipt_Amount. Filter the Difference column to
show only the invoices that haven’t been paid in full yet.
c. Return to the Cash_Received table and create the additional columns so that
you can identify the aging bucket for each invoice.
d. Create a PivotTable to identify which invoices fall into each bucket.
26. Save your file as Lab6-2December.xslx, ensuring that the PivotTable with buckets
is included in your final spreadsheet.

End of Lab

Lab 6-3 Finding Duplicate Payments

Companies will occasionally make duplicate payments to suppliers. This is partly due to
a lack of internal controls and partly due to an error that has been made. Duplicate
payments also have the potential to be fraudulent.

Technique
• Search for duplicates

Software needed
• Excel or IDEA

In this lab, you will:

Part 1: Identify the questions.
Part 2: Master the purchase order and payment data.
Part 3: Perform the analysis.

Part 1: Identify the Questions

Q1. Before computerization or Data Analytics, how would companies find that
they had made duplicate payments?

Part 2: Master the Data

Q2. What data items do you need to be able to find duplicate payments? Would
the date of the duplicate payments usually be the same or different?

Part 3: Perform the Analysis

In Excel
1. Open OneDrive and go to the Current Audit Data folder.
2. Open the Payments_Made spreadsheet.
3. Click Open in Excel to load it in the desktop version of Excel.
4. Select the Invoice_Reference column and choose Home > Styles > Conditional
Formatting > Highlight Cell Rules > Duplicate Values. . . and click OK.

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 5. Select all of the data, choose Home > Styles > Format as Table, and pick a light,
non- banded theme.
6. Click the drop-down next to Invoice_Reference, choose Filter by color. . . , and
select the highlight color used in step 4.
7. Take a screenshot (label it 6-3A).
8. Remove the filter on Invoice_Reference and repeat steps 4–6 on the Payment_Amount
column.

In IDEA
1. Open the P2P IDEA Audit Data project in IDEA.
2. Open the Payments_Made table.
3. Go to Analysis > Explore > Duplicate Key > Detection.
a. Click Output duplicate records.
b. Key: Invoice_Reference.
c. Click OK.
4. Take a screenshot (label it 6-3B).
5. Repeat steps 2–3 on the Payment_Amount
column. Q3. How many duplicate records did you
locate? Q4. What course of action would you
recommend?

End of Lab

Lab 6-4 Comprehensive Case: Dillard’s Store

Data: Hypothesis Testing (Part I)
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking
at finance.yahoo. com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll
quickly note that William T. Dillard II is an accounting grad of the University of
Arkansas and the Walton College of Business, which may be why he shared transaction
data with us to make available for this lab and labs throughout this text.
Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on connect. The 2016 Dillard’s data covers
all transactions over the period 1/1/2014 to 10/17/2016.
Software needed
• Microsoft SQL Server Management Studio (available on the Remote Destkop at
the University of Arkansas)
• Excel 2016 (available on the Remote Destkop at the University of Arkansas)
• PowerPivot add-in for Excel (available on the Remote Destkop at the University of
Arkansas). If you do not see the PowerPivot tab on the Excel ribbon, you will need to
enable the add-in.
In this lab, you will:
• Test a hypothesis in Excel. Specifically, we will see if the returns in January are
greater than the rest of the year.

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 Part 1: Identify the Questions
January sales are associated with Christmas. Most retail establishments have fairly
generous return policies in case a gift received was the wrong size or just not the desired
item. Do retail companies have the same generous policies throughout the year, and do
customers apply them throughout the year?
Therefore, our specific question that we hope to test is whether there a significant
differ- ence in the amount of returns in January compared to the rest of the year.

Part 2: Master the Data

1. Extract data from SQL Server into Excel using Excel’s Get & Transform functionality
using the following query:
Select Tran_Date, Tran_Type, SUM(Tran_Amt) AS Amount
From Transact
Group By Tran_Date, Tran_Type
Order By Tran_Date
This query will load all of the transactional history for both sales and refunds, grouped
by day, as well as transactional type. The way the data are organized, all of the dollar
amounts for sales and for refunds are in the same attribute, Tran_Amt, and the transaction
type (i.e., Sale or Return) is differentiated with the attribute Tran_Type. In order to create a
measure based on sales and refunds as separate values, we need to split the Tran_Amt
data into two columns, one dedicated to sales, and one for the refund amounts. To do so,
we will use the Query Editor to transform the data by “pivoting” the Tran_Type column.
2. From the Query Editor tool, select the Tran_Type column and click Pivot Column from
the Transform tab.

Source: Microsoft Excel 2016.

3. Change the Values Column drop-down to Amount in the Pivot Column window,
then click OK.

Source: Microsoft Excel 2016.

4. Now that the data have been transformed, you can load them into Excel. Click
Close & Load from the Home tab. It will take a moment for all of the data (1,014
rows) to load into Excel.

242
 5. Create a PivotTable by clicking PivotTable from the Insert tab on the Excel ribbon.
6. Even though you have loaded the data into Excel, you have not added it to Excel’s
Internal Data Model. To do so, place a check mark in the box next to Add this data
to the Data Model in the Create PivotTable window.

Source: Microsoft Excel 2016.

7. To create a measure for Refunds over Purchases, select Measures > New Measure. . .
from the PowerPivot tab in the Excel ribbon.

Source: Microsoft Excel 2016.

8. The new measure’s name defaults to Measure 1, which isn’t very descriptive.
Because we’ll be measuring average Transaction amount, we’ll change the name to
R/P. Type R/P over the default text.

Source: Microsoft Excel 2016.

9. The formula will auto-populate as you type; begin typing SUM, then fill in the
remain- der of the measure to divide the purchasing transactions by the refund
transactions:
=sum(Query1[R])/SUM(Query1[P]).
10. At the bottom of the Measure window is an option to select a category. The
Category has no bearing on how the measure or the KPI will work. For this
measure, we’ll leave it on the default of General. Click OK to create the measure.

243
 Source: Microsoft Excel 2016.

11. Now that the measure is created, it has been added to the PivotTable Fields
window. Create a PivotTable to view only the January dates (place
Tran_Date(Month) in the filter) and days along the rows. Use the new measure
you created, R/P, as the value.

Source: Microsoft Excel 2016.

244
 Parsing out month and day will require placing Tran_Date in the rows column
first, then removing the Year and Quarter attributes that automatically populate.
Drag and Drop Tran_Date(month) to the filter, and keep the Tran_Date attribute in
the rows.
This PivotTable will provide the data we need for one part of our hypothesis test
— the values from all January dates in the database. Now we need to separate the
values from all non-January dates in the database. We’ll do this by copying the
PivotTable you just created, and modifying the filter.
12. Select the entire PivotTable (including the Filter cells), and copy the selection.

Source: Microsoft Excel 2016.

13. Place your cursor in cell D1, and paste the PivotTable there.
14. Now you can modify the filter. Place a check mark in the box next to Select
Multiple Items, then scroll to the top of the filter options to select All. Finally,
scroll down to take the check mark out of the box next to January. This will
provide the data for all transactions, except for the items that are from January.
15. Take a screenshot of your results (label it 6-4A).
16. To clarify the difference between the two PivotTables, you can rename the labels
that say sum of R/P in each table. Place your cursor inside the cell with the sum of
R/P label, and type in January and Rest of the Year in its place:

Source: Microsoft Excel 2016.

Part 3: Perform an Analysis of the Data

To run a hypothesis test in Excel, you need to first enable the Data Analysis ToolPak
add-in. To do so, follow this menu path: File > Options > Add-ins. From this window,
select the Go. . . button, and then place a check mark in the box next to Analysis
ToolPak. Once you click OK you will be able to access the ToolPak from the Data tab
on the Excel ribbon.
17. Click the Data Analysis button from the Excel ribbon and select t-Test: Two-
Sample Assuming Unequal Variances. This will allow us to run a hypothesis test to
see if there are significant differences between the January transactions and the
rest of the year.
18. In the t-Test window, you will need to input your variable ranges. For Variable 1
Range, select all of the values that correspond with the January PivotTable (just the
values— you do not need to select the corresponding dates).

245
Source: Microsoft Excel 2016.

19. Follow the same pattern for Variable 2 by selecting all of the data that
correspond with the second PivotTable’s values.

Source: Microsoft Excel 2016.

20. Place a check mark in the box next to Labels to ensure that the labels for the
data (January and Rest of the Year) show up in the resulting output, and click
OK.

Source: Microsoft Excel 2016.

246
Part 4: Address and Refine the Results
Q1. Using the p-values (or the t-statistic and critical values), are the returns as a
percentage of sales in January greater, less than, or the same as the returns as
a percentage of sales for the rest of the year?
Q2. What can we conclude about returns?
Q3. Do you think most Christmas sales are returned in January, or do they
also occur in early January? How would you modify your tests to take
this into account?

Part 5: Communicate Insights and Track Outcomes

In chapter 7, we’ll learn more about dashboards and ways to communicate these results to
management.
Q4. Do you think knowing the level of returns is important to management?
Q5. Assuming management want returns information, do you think they need this
information on a daily, weekly, or monthly basis? Due to information
overload, they can’t track everything on a daily basis, but some information
is important to disclose frequently.

End of Lab

Lab 6-5 Comprehensive Case: Dillard’s Store Data:

Hypothesis Testing (Part II—Data
Visualization)
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking
at finance.yahoo. com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll
quickly note that William T. Dillard II is an accounting grad of the University of
Arkansas and the Walton College of Business, which may be why he shared transaction
data with us to make available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on connect. The 2016 Dillard’s data covers
all transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Destkop at
the University of Arkansas)
• Excel 2016 (available on the Remote Destkop at the University of Arkansas)
• Tableau (available on the Remote Destkop at the University of Arkansas)

In this lab, you will:

• Develop a dashboard to display returns percentages across months and across states.

247
 Prerequisite
• Lab 6-4. This lab requires some of the skills covered in Lab 6-4 for steps 1–4. If
you haven’t completed Lab 6-4, then you can still read through the steps in that lab
to see the screenshots of the ETL process in Excel.
• Lab 4-2. Some Tableau skills from Lab 4-2 are also expected. If you haven’t
completed Lab 4-2, you can still read through the steps in that lab to learn the basics
of how to build a map and a dashboard in Tableau.

Part 1: Identify the Questions

After performing a hypothesis test to determine that there is a significant difference
between January’s returns percentage and the rest of the months in a given year, you
would like to dig further into the data to visualize that difference across months, and also
across stores and in comparison to sales data.

Part 2: Master the Data

1. Loading the data into Tableau from the original SQL Server database first requires
some transformation in Excel. Extract and load the transactional and store data
into Excel’s Query Editor using the following query:
Select Tran_Date, Tran_Type, State, Store.Store, SUM(Tran_amt) AS Amount
From Transact
Inner Join Store
On Transact.Store = Store.Store
Group By Tran_Date, Tran_Type, State, Store.Store
Order by Tran_Date
2. Pivot the Tran_Type column on the Tran_Amt values in the Query Editor window.
3. Close and load the data into Excel.
4. Once the data have loaded (297,705 rows), save the spreadsheet as Lab 6-6.xlsx.
5. Open Tableau, and connect to an Excel Data source. Browse and open the file you
just saved. Now that the data are loaded into their final destination for analysis,
Tableau, you have one more step to prepare the data. You need to create the
Returns Percentage measure, just like it had to be created in Lab 6-4 in Excel.
6. On Sheet 1, create a Calculated Field. Right-click in the Measures, and select
New Calculated Field.

Source: Microsoft Excel 2016.

248
 7. Name your new field R/P, and create the calculation SUM([R])/SUM([P]), then click OK.

Source: Microsoft Excel 2016.

Part 3: Perform the Analysis

8. We will create three data visualizations to display on a returns dashboard. First,
we will create a map displaying the sales dollars per state.
9. Drag and drop the state dimension into the middle of the Tableau drawing to start your map.
10. Double-click the P measure to display customer purchases. Tableau will default to
a symbol map, so change this to a filled map using the Show Me window.
11. Name the sheet Sales by State and take a screenshot (label it 6-5A).
12. Right-click your new Sales by State sheet, and click Duplicate to start a new sheet
with this map as a base.
13. In the new sheet, drag the P measure out of the Marks window, and replace it with
the calculated measure that you created, R/P.
14. Name the sheet Returns Percentage by State and take a screenshot (label it 6-5B).
15. Open a new sheet. Drag Tran_Date to the rows. It will default to Years, but you
can expand the pill twice to see Quarters, then Months. Remove the Years and
Quarters pills so that only the Months remains.
16. Double-click R/P so that it appears in the Marks.
17. In the Show Me tab, replace the tabular data that Tableau defaults to with a
highlight table. This may have caused Tableau to change your Months pill from the
Rows to the Columns. You can just drag the Months pill back down to Rows.
18. Create a new dashboard. Arrange the three visualizations in whichever way you
find most visually pleasing and easiest to read and take a screenshot (label it 6-
5C).
19. Using the small filter button in the top right of the Returns Percentage by State
visual on the dashboard, designate that visual as a filter for the entire dashboard.
Now, you can click any of the states on that map to focus on that state in the sales
map, as well as to see how the Returns Percentages differ monthly for that
particular state.
20. Take a screenshot (label it 6-5D).

Part 4: Address and Refine the Results

Q1. What does getting the detail data (or drilled-down data) allow you to test
and see? Which of these detail data would be most useful for management?
Q2. Why would it be useful to get return data by product code or product category?
Would that cause the company to change its return policy for certain items?
Q3. What other data visualizations would be meaningful to drill down into these data?

End of Lab

249
 Chapter 7
Generating Key Performance
Indicators

A Look at This Chapter

This chapter explains how to apply Data Analytics to measure performance. By measuring past performance and
comparing it to targeted goals, we are able to assess how well a company is working toward a goal. Also, we can
determine required adjustments to how decisions are made or how business processes are run, if any.

A Look Back
In chapter 6, we focused on substantive testing within the audit setting. We highlighted discussion of the audit plan,
and account balances were checked. We also highlighted the use of statistical analysis to find errors or fraud in the
audit setting. We also discussed the use of clustering to detect outliers and the use of Benford’s analysis.

A Look Ahead
In chapter 8, we will focus on how to access and analyze financial statement data. The data are accessed via
XBRL in a quick and efficient manner. We also discuss how ratios are used to analyze financial performance,
and how sparklines help users visualize trends in the data. Finally, we discuss the use of text mining to analyze
the sentiment in financial reporting data.

250
For years, Kenya Red Cross had attempted to refine its strategy and align its daily activities with its overall
strategic goals. It had annual strategic planning meetings with external consultants that always resulted in the
consultants presenting a new strategy to the organization that the Red Cross didn’t have a particularly strong buy-
in to, and the Red Cross never felt confident in what was developed or what it would mean for its future. When
Kenya Red Cross went through a Data Analytics–backed Balanced Scorecard planning process for the first time,
though, it immediately felt like its organization’s mission and vision was involved in the strategic planning and that
“strategy” was no longer so vague. The Balanced Scorecard approach helped the Kenya Red Cross align its
goals into measurable metrics. The organization prided itself on being “first in and last out” but hadn’t actively
measured its success in that goal, nor had the organization fully analyzed how being the first in and last out of
disaster scenarios affected other goals and areas of its organization. Using Data Analytics to refine its strategy and
assign measurable performance metrics to its goals, Kenya Red Cross felt confident that its everyday activities
were linked to measurable goals that would help the organization reach its goals and maintain a strong positive
reputation and impact through its service. Exhibit 7-1 gives an illustration of the Balanced Scorecard at the Kenyan
Red Cross.

EXHIBIT 7-1 The Kenya Red Cross Balanced Scorecard

Source: Reprinted with permission from Balanced Scorecard Institute, a Strategy Management Group company. Copyright 2008–2017.

OBJECTIVES
After reading this chapter, you should be able to:

LO 7-1 Evaluate management requirements and identify useful KPIs from a list
LO 7-2 Evaluate underlying data quality used for KPI
LO 7-3 Create a dashboard using KPIs

251
252 Chapter 7 Generating Key Performance Indicators

In the past six chapters, you learned how to apply the IMPACT model to data analysis
projects in general and, specifically, to internal and external auditing and financial state-
ment analysis. The same accounting information used in internal and external auditing
and financial statement analysis can also be used to determine how closely an
organization is meeting its strategic objectives. In order to better determine the gaps in
actual company performance and targeted strategic objectives, data should be condensed
into easily digest- ible and useful digital dashboards, providing precisely the information
needed to help make operational decisions that support a company’s strategic direction.
This chapter brings us to how to apply Data Analytics to measuring performance.
More specifically, we measure past performance and compare it to targeted goals to
assess how well a company is working toward a goal. In addition, we can determine
required adjust- ments to how decisions are made or how business processes are run, if
any.
Because data are increasingly available and affordable for companies to access and
store, and because the growth in technology has created robust and affordable business
intelli- gence tools, data and information are becoming the key components for decision
making, replacing gut response. Specifically, various measures and metrics are defined,
compiled from the data, and used for decision making. Performance metrics are, rather
simply, any number used to measure performance at a company. The amount of
inventory on hand is a metric, and that metric gains meaning when compared to a
baseline (e.g., how much inven- tory was on hand yesterday?). A specific type of
performance metric is key performance indicators (KPIs). Just like any performance
metric, a KPI should help managers keep track of performance and strategic objectives,
but the KPIs are performance metrics that stand out as the most important—that is, “key”
metrics that influence decision making and strategy. Nearly every organization can use
data to create the same performance metrics (although, of course, with different results),
but it is dependent upon each organization’s particular strategy which performance
metrics that organization would deem to be a KPI.
As you will recall from chapter 4, the most effective way to communicate the results
of any data analysis project is through data visualization. A project in which you are
determin- ing the right KPIs and communicating them to the appropriate stakeholders is
no differ- ent. One of the most common ways to communicate a variety of KPIs is
through a digital dashboard. A digital dashboard is an interactive report showing the
most important met- rics to help users understand how a company or an organization is
performing. There are many public digital dashboards available; for example, the Walton
College of Business at the University of Arkansas has an interactive dashboard to
showcase enrollment, where students are from, where students study abroad, student
retention and graduation rates, and where alumni work after graduation
(https://walton.uark.edu/osie/reports/data-dashboard. php). The public dashboard
detailing student diversity at the Walton College can be used by prospective students to
learn more about the university and by the university itself to assess how it is doing in
meeting goals. If the university has a goal of increasing gender bal- ance in enrollment,
for example, then monitoring the “Diverse Walton” metrics, pictured in Exhibit 7-2, can
help the university understand how it is doing at reaching that goal.
Digital dashboards provide interesting information, but their value is maximized when
the metrics provided on the dashboard are used to affect decision making and action. One
iteration of a digital dashboard is the Balanced Scorecard. The Balanced Scorecard was
cre- ated by Robert S. Kaplan and David P. Porter in 1996 to help companies turn their
strategic goals into action by identifying the most important metrics to measure, as well
as identify- ing target goals to compare metrics against.
The Balanced Scorecard is comprised of four components: financial (or stewardship),
customer (or stakeholder), internal process, and organizational capacity (or learning and
growth). As depicted in Exhibit 7-3, the measures in each category affect other
categories, and all four should be directly related to the strategic objectives of an
organization.
Chapter 7 Generating Key Performance Indicators 253

EXHIBIT 7-2
Walton College Digital
Dashboard—Diverse
Walton

EXHIBIT 7-3
Components of
the Balanced
Scorecard
Reprinted with permission
from Balanced Scorecard
Institute, a Strategy
Management Group Company.
Copyright 2008-2017.
254 Chapter 7 Generating Key Performance Indicators

For each of the four components, objectives, measures, targets, and initiatives are
iden- tified. Objectives should be aligned with strategic goals of the organization,
measures are the KPIs that show how well the organization is doing at meeting its
objective, and targets should be achievable goals toward which to move the metric.
Initiatives should be the actions that an organization can take to move its specified metrics
in the direction of their stated target goal. Exhibit 7-4 is an example of different objectives
that an organization might iden- tify for each component. You can see how certain
objectives relate to other objectives—for example, if the organization increases process
efficiency (in the internal process component row), that should help with the objective of
lowering cost in the financial component row.

EXHIBIT 7-4
An Example of a
Balanced Scorecard
Reprinted with permission
from Balanced Scorecard
Institute, a Strategy
Management Group Company.
Copyright 2008-2017.

Understanding how the four components interact to answer different types of

questions and meet different strategic goals is critical when it comes to identifying the
right measures to include in the dashboard, as well as using those measures to help with
decision making. Creating a Balanced Scorecard or any type of digital dashboard to
present KPIs for decision making follows the IMPACT model.
Bernard Marr identified 75 KPIs to measure performance in the different components
that he considers the most important for decision makers to know, and these 75 KPIs are
compiled in Exhibit 7-5. In a Balanced Scorecard, each component should focus on 3 or
4 KPIs. Including all 75 of these metrics in a given dashboard would be overwhelming
and difficult to manage, but depending on the strategy of the company and the initiatives
that are chosen as focal points, any of the KPIs in Exhibit 7-5 may be optimal for
measuring (and ultimately improving) performance.

LO 7-1 IDENTIFY THE QUESTIONS

Evaluate The Balanced Scorecard is based around a company’s strategy. A well-defined mission,
management vision, and set of values are integral in creating and maintaining a successful culture. In
requirements and many cases, when tradition appears to stifle an organization, the two concepts of culture
identify useful and tradition must be separated. An established sense of purpose and a robust tradition
KPIs from a list of service can serve as a catalyst to facilitate successful organizational changes. A proper
strategy for growth considers what a firm does well and how it achieves it. With a proper
strategy, an organization is less likely to be hamstrung by a “this is how we’ve always
done it” mentality.
 Chapter 7 Generating Key Performance Indicators 255

EXHIBIT 7-5 Financial Performance KPIs 1. Net Profit

Suggested KPIs That Every Manager Needs to Know1 2. Net Profit Margin
3. Gross Profit Margin
4. Operating Profit Margin
5. EBITDA
6. Revenue Growth Rate
7. Total Shareholder Return (TSR)
8. Economic Value Added (EVA)
9. Return on Investment (ROI)
10. Return on Capital Employed (ROCE)
11. Return on Assets (ROA)
12. Return on Equity (ROE)
13. Debt-to-Equity (D/E) Ratio
14. Cash Conversion Cycle (CCC)
15. Working Capital Ratio
16. Operating Expense Ratio (OER)
17. CAPEX to Sales Ratio
18. Price-to-Earnings Ratio (P/E Ratio)
Customer KPIs 19. Net Promoter Score (NPS)
20. Customer Retention Rate
21. Customer Satisfaction Index
22. Customer Profitability Score
23. Customer Lifetime Value
24. Customer Turnover Rate
25. Customer Engagement
26. Customer Complaints
Marketing KPIs 27. Market Growth Rate
28. Market Share
29. Brand Equity
30. Cost per Lead
31. Conversion Rate
32. Search Engine Rankings (by keyword) and Click-Through Rate
33. Page Views and Bounce Rate
34. Customer Online Engagement Level
35. Online Share of Voice (OSOV)
36. Social Networking Footprint
37. Klout Score
Operational KPIs 38. Six Sigma Level
39. Capacity Utilization Rate (CUR)
40. Process Waste Level
41. Order Fulfilment Cycle Time
42. Delivery in Full, on Time (DIFOT) Rate
43. Inventory Shrinkage Rate (ISR)
44. Project Schedule Variance (PSV)
45. Project Cost Variance (PCV)
46. Earned Value (EV) Metric
(Continued)
47. Innovation Pipeline Strength (IPS)
1
https://www.linkedin.com/pulse/20130905053105-64875646-the-75-kpis-every-manager-needs-to-know.
256 Chapter 7 Generating Key Performance Indicators

EXHIBIT 7-5
48. Return on Innovation Investment (ROI2)
(Continued)
49. Time to Market
50. First-Pass Yield (FPY)
51. Rework Level
52. Quality Index
53. Overall Equipment Effectiveness (OEE)
54. Process or Machine Downtime Level
55. First Contact Resolution (FCR)
Employee Performance KPIs 56. Human Capital Value Added (HCVA)
57. Revenue per Employee
58. Employee Satisfaction Index
59. Employee Engagement Level
60. Staff Advocacy Score
61. Employee Churn Rate
62. Average Employee Tenure
63. Absenteeism Bradford Factor
64. 360-Degree Feedback Score
65. Salary Competitiveness Ratio (SCR)
66. Time to Hire
67. Training Return on Investment
Environmental and Social 68. Carbon Footprint
Sustainability KPIs 69. Water Footprint
70. Energy Consumption
71. Saving Levels Due to Conservation and Improvement Efforts
72. Supply Chain Miles
73. Waste Reduction Rate
74. Waste Recycling Rate
75. Product Recycling Rate

If a strategy is already developed, or after the strategy has been fully defined, it needs
to be broken down into goals that can be measured. Identifying the pieces of the strategy
that can be measured is critical. Without tracking performance and measuring results, the
strategy is only symbolic. The adage “what gets measured, gets done” shows the motiva-
tion behind aligning strategy statements with KPIs—people are more inclined to focus
their work and their projects on initiatives that are being paid attention to and measured.
Of course, simply measuring something doesn’t imply that anything will be done to
improve the measure—the attainable initiative attached to a metric indicating how it can be
improved is a key piece to ensuring that people will work to improve the measure.

PROGRESS CHECK
1. To illustrate what KPIs emphasize in “what gets measured, gets done,”
Walmart has a goal of a “zero waste future.”2 How does reporting Walmart’s
waste recy- cling rate help the organization figure out if it is getting closer to its
goal? Do you believe it helps the organization accomplish its goals?
2. How can management identify useful KPIs? How could Data Analytics help
with that?

2
http://corporate.walmart.com/2016grr/enhancing-sustainability/moving-toward-a-zero-waste-future
(accessed August 2017).
 Chapter 7 Generating Key Performance Indicators 257

MASTER THE DATA AND PERFORM LO 7-2

THE TEST PLAN Evaluate
Once the measures have been determined, the data that are necessary to showcase those underlying data
quality used for
measures need to be identified. You were first introduced to how to identify and obtain
KPI
nec- essary data in chapter 2 through the ETL (extract, transform, and load) process. In
addition to working through the same data request process that is detailed in chapter 2,
there are two other questions to consider when obtaining data and evaluating their
quality:
1. How often do the data get updated in the system? This will help you be aware of
how up-to-date your metrics are so that you interpret the changes over time
appropriately.
2. Additionally, how often do you need to see updated data? If the data in the system
are updated on a near-real-time basis, it may not be necessary for you to have new
updates pushed to your scorecard as frequently. For example, if your team will assess
their progress only in a once-a-week meeting, there is no need to have a constantly
updating scorecard.
While the data for calculating KPIs are likely stored in the company’s ERP or
account- ing information system, the digital dashboard containing the KPIs for data
analysis should be created in a data visualization tool, such as Excel or Tableau. Loading
the data into these tools should be done with precision and should be validated to ensure
the data imported were complete and accurate.
Designing data visualizations and selecting the right way to express data (as whole
numbers, percentages, or absolute values, etc.) was discussed in chapter 4. Specifically
for digital dashboards, the format of your dashboard can follow the pattern of a Balanced
Scorecard with a strategy map, or it can take on a different format. Exhibit 7-6 shows a
template for building out the objectives, measures, targets, and initiatives into a Balanced
Scorecard format.

EXHIBIT 7-6
Balanced Scorecard
Strategy Map Template
with Measures,
Targets, and Initiatives

If not following the strategy map template, the most important KPIs should be placed
in the top left corner, as our eyes are most naturally drawn to that part of any page that
we are reading.
258 Chapter 7 Generating Key Performance Indicators

PROGRESS CHECK
3. How often would you need to see the KPI of Waste Recycling Rate to know if
you are making progress? Any different for the KPI of ROA?
4. Why do you think that the most important KPIs should be shown in the top left
corner of a digital dashboard?

LO 7-3 ADDRESS AND REFINE RESULTS

Create a Once the dashboard is in use, an active communication plan should be implemented to
dashboard using ensure that the dashboard’s metrics are meeting the needs of the business and the users. If
KPIs there are multiple audiences who use dashboards, then either different dashboards should
be created, or the dashboard should provide different views and ways to filter the
informa- tion so users can customize their experience and see exactly the metrics they
need for deci- sion making and monitoring. Because dashboards tend to be monitored on
a daily (or even more frequent) basis, then communication with all of the users is
imperative to ensure that the identified metrics are appropriate and useful.
Some questions that would be helpful in determining how the dashboard could be
refined are the following:
1. Which metric are you using most frequently to help you make decisions?
2. Are you downloading the data to do any additional analysis after working with the
dash- board, and if so, can the dashboard be improved to save those extra steps?
3. Are there any metrics that you do not use? If so, why aren’t they helpful?
4. Are there any metrics that should be available on the dashboard to help you with
deci- sion making?
Checking in with the users will help to address any potential issues of missing or
unnec- essary data and refine the dashboard so that it is meeting the needs of the
organization and the users appropriately.

COMMUNICATE INSIGHTS AND TRACK

OUTCOMES
After the results have been refined and each user of the dashboard is receiving the right
infor- mation for decision making, the dashboard should enter regular use across the
organization. Recall that the purpose of creating a digital dashboard is to communicate
how the organiza- tion is performing so decision makers can improve their judgment and
decisions and so work- ers can understand where to place their priority in their day-to-day
jobs and projects. Ensuring that all of the appropriate stakeholders continue to be involved
in using the dashboard and continually improving it is key to the success of the
dashboard. The creation of a Balanced Scorecard or any type of digital dashboard is iterative
—just as the entire IMPACT cycle should be iterative throughout any data analysis project—
so it will be imperative to continually check in with the users of the dashboard to learn
how to continually improve it and its usefulness.

PROGRESS CHECK
5. Why are digital dashboards for KPIs an effective way to address and refine
results, as well as communicate insights and track outcomes?
6. Consider the opening vignette of the Kenya Red Cross. How do KPIs help the
organization prepare and carry out its goal of being the “first in and last out”?
Summary
■
In order to better determine the gaps in actual company performance and targeted stra-
tegic objectives, data should be condensed into easily digestible and useful digital
dash- boards providing precisely the information needed to help make operational
decisions that support a company’s strategic direction.
■
Because data are increasingly available and affordable for companies to access and
store, and because the growth in technology has created robust and affordable business
intel- ligence tools, data and information are becoming the key components for
decision mak- ing, replacing gut response.
■
Performance metrics are defined, compiled from the data, and used for decision
making. A specific type of performance metrics, key performance indicators—or
“key” metrics that influence decision making and strategy—is the most important.
■
One of the most common ways to communicate a variety of KPIs is through a digital
dash- board. A digital dashboard is an interactive report showing the most important metrics
to help users understand how a company or an organization is performing. Their value is
maximized when the metrics provided on the dashboard are used to affect decision making
and action.
■
One iteration of a digital dashboard is the Balanced Scorecard, which is used to help
companies turn their strategic goals into action by identifying the most important
metrics to measure, as well as identifying target goals to compare metrics against. The
Balanced Scorecard is comprised of four components: financial (or stewardship),
customer (or stakeholder), internal process, and organizational capacity (or learning
and growth).
■
For each of the four components, objectives, measures, targets, and initiatives are
identified. Objectives should be aligned with strategic goals of the organization, measures
are the KPIs that show how well the organization is doing at meeting its objective, and
targets should be achievable goals toward which to move the metric. Initiatives should
be the actions that an organization can take to move its specified metrics in the direction
of its stated target goal.
■
Regardless of whether you are creating a Balanced Scorecard or another type of digital
dashboard to showcase performance metrics and KPIs, the IMPACT model should be
used to complete the project.

Key Words
Balanced Scorecard (252) A particular type of digital dashboard that is made up of strategic objec-
tives, as well as KPIs, target measures, and initiatives, to help the organization reach its target measures
in line with strategic goals.
digital dashboard (252) An interactive report showing the most important metrics to help users
understand how a company or an organization is performing. Often created using Excel or Tableau.
key performance indicator (KPI) (252) A particular type of performance metric that an
organization deems the most important and influential on decision making.
performance metric (252) Any calculation measuring how an organization is performing,
particularly when that measure is compared to a baseline.

ANSWERS TO PROGRESS CHECKS

1. If waste reduction is an important goal for Walmart, having a KPI and, potentially, a digital
dashboard that reports how well the organization is doing will likely be useful in
helping it accomplish its goal. Using a digital dashboard helps an organization to see if,
indeed, it is making progress.
259
 2. The KPIs that are the most helpful are those that are consistent with the company
strat- egy and measure how well the company is doing in meeting its goals. Data
Analytics will help gather and report the necessary data to report on the KPIs. The
Data Analytics IMPACT model introduced in chapter 1—from identifying the question
to tracking outcomes—will be helpful in getting the necessary data.
3. The frequency of updating KPIs is always a good question. One determinant will be
how often the data get updated in the system, and the second determinant is how
often the data will be considered by those looking at the data. Whichever of those two
determi- nants takes longer is probably correct frequency for updating KPIs.
4. Because our eyes are most naturally drawn to that part of any page that we are
reading, the most important KPIs should be placed in the top left corner.
5. By identifying the KPIs that are most important to corporate strategy and finding the
necessary data to support them and then reporting on them in a digital dashboard,
decision makers will have the necessary information to make effective decisions and
track outcomes.
6. As noted in the opening vignette, using Data Analytics to refine its strategy and
assign measurable performance metrics to its goals, Kenya Red Cross felt confident
that its everyday activities were linked to measurable goals that would help the
organization reach its goals and maintain a strong positive reputation and impact
through its service.

Multiple Choice Questions

1. What would you consider to be Financial Performance KPIs?
a. Total Shareholder Return
b. Customer Profitability Score
c. Market Growth Rate
d. Klout Score
2. What would you consider to be an Operational KPI?
a. Inventory Shrinkage Rate
b. Brand Equity
c. CAPEX to Sales Ratio
d. Revenue per Employee
3. What does KPI stand for?
a. Key performance index
b. Key performance indicator
c. Key paired index
d. Key paired indicator
4. The most important KPIs should be placed in the corner of the
page even if we are not following a strategy map template.
a. Bottom right
b. Bottom left
c. Top left
d. Top right

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5. According to the text, which of these are not helpful in refining a dashboard?
a. Which metric are you using most frequently to help you make decisions?
b. Are you downloading the data to do any additional analysis after working with the
dashboard, and if so, can the dashboard be improved to save those extra steps?
c. Are there any metrics that you do not use? If so, why aren’t they helpful?
d. Which data are the easiest to access or least costly to collect?
6. On a Balanced Scorecard, which is not included as a component?
a. Financial Performance
b. Customer/Stakeholder
c. Internal Process
d. Employee Capacity
7. On a Balanced Scorecard, which is not included as a component?
a. Financial Performance
b. Customer/Stakeholder
c. Order Process
d. Organizational Capacity
8. What is defined as an interactive report showing the most important metrics to help
users understand how a company or an organization is performing?
a. KPI
b. Performance metric
c. Digital dashboard
d. Balanced Scorecard
9. What is defined as any calculation measuring how an organization is performing, par-
ticularly when that measure is compared to a baseline?
a. KPI
b. Performance metric
c. Digital dashboard
d. Balanced Scorecard
10. What would you consider to be Marketing KPIs?
a. Conversion Rate
b. Six Sigma Level
c. Employee Churn Rate
d. Customer Engagement

Discussion Questions
1. We know that a Balanced Scorecard is comprised of four components: financial (or
stewardship), customer (or stakeholder), internal process, and organizational
capacity (or learning and growth). What would you include in a dashboard for the
financial and customer components?
2. We know that a Balanced Scorecard is comprised of four components: financial (or
stewardship), customer (or stakeholder), internal process, and organizational
capacity (or learning and growth). What would you include in a dashboard for the
internal pro- cess and organizational capacity components? How do digital
dashboards make KPIs easier to track?
3. Amazon, in the author’s opinion, has cared less about profitability in the short run
but has cared about gaining market share. Arguably Amazon gains market share by

261
 taking care of the customer. Given the “Suggested 75 KPIs That Every Manager
Needs to Know” from Exhibit 7-5, what would be a natural KPI for the customer
aspect for Amazon? How do digital dashboards make KPIs easier to track?
4. For an accounting firm like PwC, how would the Balanced Scorecard help balance
the desire to be profitable for its partners with keeping the focus on its customers?
5. For a company like Walmart, how would the Balanced Scorecard help balance the
desire to be profitable for its shareholders with continuing to develop organizational
capacity to compete with Amazon (and other online retailers)?
6. Why is Customer Retention Rate a great KPI for understanding your Tesla customers?
7. If the data underlying your digital dashboard are updated in real time, why would you
want to update your digital dashboard in real time? Are there situations when you
would not want to update your digital dashboard in real time? Why or why not?
8. In which of the four components of a Balanced Scorecard would you put the Walton
College’s diversity initiative? Why do you think this is important for a public institution
of higher learning?

Problems
1. From Exhibit 7-5, choose 5 Financial Performance KPIs to answer the following three
questions. This URL (https://www.linkedin.com/pulse/20130905053105-64875646-the-
75-kpis-every-manager-needs-to-know) provides links with background information
for each individual KPI that may be helpful in understanding the individual KPIs and
answering the questions.
a. Identify the equation/relationship/data needed to calculate the KPI. If you need
data, how frequently would the data need to be incorporated to be most useful?
b. Describe a simple visualization that would help a manager track the KPI.
c. Identify a benchmark for the KPI from the Internet. Choose an industry and find
the average, if possible. This is for context only.
2. From Exhibit 7-5, choose 10 Employee Performance KPIs to answer the following
three questions. This URL (https://www.linkedin.com/pulse/20130905053105-
64875646-the- 75-kpis-every-manager-needs-to-know) provides links with
background information for each individual KPI that may be helpful in understanding
the individual KPIs and answering the questions.
a. Identify the equation/relationship/data needed to calculate the KPI. How frequently
would it need to be incorporated to be most useful?
b. Describe a simple visualization that would help a manager track the KPI.
c. Identify a benchmark for the KPI from the Internet. Choose an industry and find
the average, if possible. This is for context only.
3. From Exhibit 7-5, choose 10 Marketing KPIs to answer the following three questions.
This URL (https://www.linkedin.com/pulse/20130905053105-64875646-the-75-kpis-
every- manager-needs-to-know) provides links with background information for each
individ- ual KPI that may be helpful in understanding the individual KPIs and
answering the questions.
a. Identify the equation/relationship/data needed to calculate the KPI. How frequently
would it need to be incorporated to be most useful?
b. Describe a simple visualization that would help a manager track the KPI.
c. Identify a benchmark for the KPI from the Internet. Choose an industry and find
the average, if possible. This is for context only.
4. How does Data Analytics help facilitate the use of the Balanced Scorecard and track-
ing KPIs? Does it make the data more timely? Are you able to access more
information easier or faster, or what capabilities does it give?

262
 5. If ROA is considered a key KPI for a company, what would be an appropriate bench-
mark? The industry’s ROA? The average ROA for the company for the past five
years? The competitors’ ROA?
a. How will you know if the company is making progress?
b. How might Data Analytics help with this?
c. How often would you need a measure of ROA? Monthly? Quarterly? Annually?
6. If Time to Market is considered a key KPI for a company, what would be an
appropriate benchmark? The industry’s Time to Market? The average Time to Market
for the com- pany for the past five years? The competitors’ Time to Market?
a. How will you know if the company is making progress?
b. How might Data Analytics help with this?
c. How often would you need a measure of Time to Market? Monthly? Quarterly?
Annually?
7. Why is Order Fulfillment Cycle Time an appropriate KPI for a company like Wayfair
(which sells furniture online)? How long does Wayfair think customers will be ready
to wait if Amazon Prime promises items delivered to its customers in two business
days? Might this be an important basis for competition?

Answers to Multiple Choice Questions

1. A
2. A
3. B
4. C
5. D
6. D
7. C
8. C
9. B
10. A

263
 Lab 7-1 Evaluate Management Requirement and
Identify Useful KPIs from a List
Key performance indicators help managers keep track of performance and strategic
objectives.
Bernard Marr came up with a list of 75 KPIs that he believes every manager needs to
know.3

In this lab, you will:

• Learn about many of the key performance indicators.
• Evaluate which KPIs best work for Tesla.
• Consider the data needed and the desired frequency to provide each of these KPIs.

Q1. Imagine you work for Tesla. Choose 20 KPIs that you believe are most
impor- tant to Tesla’s management (include 5 from each category).

The 75 KPIs Every Manager Needs to Know (Bernard Marr)

To measure financial performance: 1. Net Profit

2. Net Profit Margin
3. Gross Profit Margin
4. Operating Profit Margin
5. EBITDA
6. Revenue Growth Rate
7. Total Shareholder Return (TSR)
8. Economic Value Added (EVA)
9. Return on Investment (ROI)
10. Return on Capital Employed (ROCE)
11. Return on Assets (ROA)
12. Return on Equity (ROE)
13. Debt-to-Equity (D/E) Ratio
14. Cash Conversion Cycle (CCC)
15. Working Capital Ratio
16. Operating Expense Ratio (OER)
17. CAPEX to Sales Ratio
18. Price-to-Earnings Ratio (P/E Ratio)
To understand your customers: 19. Net Promoter Score (NPS)
20. Customer Retention Rate
21. Customer Satisfaction Index
22. Customer Profitability Score
23. Customer Lifetime Value
24. Customer Turnover Rate
25. Customer Engagement
26. Customer Complaints

3
https://www.linkedin.com/pulse/20130905053105-64875646-the-75-kpis-every-manager-needs-to-
know/ (accessed 10/13/2017).

264
To gauge your market 27. Market Growth Rate
and marketing efforts: 28. Market Share
29. Brand Equity
30. Cost per Lead
31. Conversion Rate
32. Search Engine Rankings (by keyword) and Click-Through Rate
33. Page Views and Bounce Rate
34. Customer Online Engagement Level
35. Online Share of Voice (OSOV)
36. Social Networking Footprint
37. Klout Score
To measure your operational 38. Six Sigma Level
performance: 39. Capacity Utilisation Rate (CUR)
40. Process Waste Level
41. Order Fulfilment Cycle Time
42. Delivery in Full, on Time (DIFOT) Rate
43. Inventory Shrinkage Rate (ISR)
44. Project Schedule Variance (PSV)
45. Project Cost Variance (PCV)
46. Earned Value (EV) Metric
47. Innovation Pipeline Strength (IPS)
48. Return on Innovation Investment (ROI2)
49. Time to Market
50. First-Pass Yield (FPY)
51. Rework Level
52. Quality Index
53. Overall Equipment Effectiveness (OEE)
54. Process or Machine Downtime Level
55. First Contact Resolution (FCR)
To understand your employees and their 56. Human Capital Value Added (HCVA)
performance: 57. Revenue per Employee
58. Employee Satisfaction Index
59. Employee Engagement Level
60. Staff Advocacy Score
61. Employee Churn Rate
62. Average Employee Tenure
63. Absenteeism Bradford Factor
64. 360-Degree Feedback Score
65. Salary Competitiveness Ratio (SCR)
66. Time to Hire
67. Training Return on Investment
To measure your environmental and 68. Carbon Footprint
social sustainability performance: 69. Water Footprint
70. Energy Consumption
71. Saving Levels Due to Conservation and Improvement Efforts
72. Supply Chain Miles
73. Waste Reduction Rate
74. Waste Recycling Rate
75. Product Recycling Rate

265
 Part 1: Identify the Questions
For each of these 20 KPIs:
Q2. Identify the specific equation/relationship/data needed to calculate the KPI.
If you need frequent data, how frequent?
Q3. Describe a simple visualization or dashboard that would help a manager track
the KPI. Is it red, yellow, and green indicators, or do you have something else
in mind that would be better?

Part 2: Master the Data

Q4. Identify a benchmark for five of these KPIs for Tesla. How would you set it?
Would you base it on averages for Tesla or on performance from the prior
week, month or year? For the car industry or a different industry?

End of Lab

Lab 7-2 Create a Balanced Scorecard Dashboard in Tableau

Superstore has brought you in to help it develop some metrics to evaluate performance
across different dimensions of its business, including finance, customers, process, and
employee growth.

Company summary
Superstore is a large seller of retail and wholesale office supplies, furniture, and
technology. It operates in the United States and has divided its sales regions into North,
South, East, and West. Each region has a regional sales representative who interacts with
the customers to take orders and deal with returns.

Data
Sales order data are available from 2013 to 2016, including demographic data about the
customers, as well as main categories and subcategories of products.

Technique
• In this lab, you will use Tableau to generate a dashboard to evaluate four
key performance indicators.

Software needed
• Tableau

In this lab, you will:

• Generate some key performance indicators.
• Evaluate the data.
• Perform analyses and generate visualizations.

Part 1: Identify the Questions

Your understanding of key performance indicators has given you some insight into how
management at Superstore might measure and evaluate performance across different
aspects of the business. They depend on your expertise to do just that.

266
 Assuming you’ll have access to sales order and returns data, as well as the sales
represen- tatives involved, think about different ways you could measure performance.
Q1. What KPIs would you consider using to evaluate sales financial
performance? Q2. What KPIs would you consider using to evaluate customer
relationships?
Q3. What KPIs would you consider using to evaluate process
efficiency? Q4. What KPIs would you consider using to evaluate
employee growth?
Q5. For each KPI, identify a benchmark value or KPI goal that you think
manage- ment might use.

Part 2: Generate a Request for Data

The following data are available:

Orders Returns People LAB EXHIBIT 7-2A

Row ID Order ID Person
Order ID Region
Order Date
Ship Date
Ship Mode
Customer ID
Customer Name
Segment
Country City
State
Postal Code
Region Product ID
Category
Subcategory
Product Name
Sales
Quantity
Discount
Profit

Q6. Using the available fields, identify some calculations or relationships that
would support your KPIs from Q1 to Q4.
Q7. Are there any KPIs you selected that don’t have supporting data fields?

Part 3: Perform an Analysis of the Data

Now you’ll use Tableau to generate some analytics that will provide visualizations for
man- agement to quickly evaluate some of the KPIs. To simplify the process, here are
four KPIs that management has identified as high priorities:
Finance: Which product categories provide the highest amount of profit? The goal
is 13 percent return on sales. Use Profit ratio = Total profit/Total sales.
267
 Process: How long does it take to ship our product to each state on average?
Management would like to see four days or less. Use Delivery time in days = Ship date
– Order date.
Customers: Which regions have the highest return rates? Management says
only 10 percent of sales orders should be returned normally. Return rate =
Number of returned/Number of orders.
Employees: Who are our top-performing employees by sales each month? Rank the
total number of sales by employee.

Now it’s your turn to build a Balanced Scorecard dashboard in Tableau for each of
these metrics. First, you’ll create four individual worksheets; then you’ll combine them
into a dashboard for quick review.
Note: To compare actual performance to management’s goals, you’ll need to set some
parameters and create some additional calculated fields.

1. Open Tableau, and create a new Tableau book.

2. Click Data > New Data Source > Excel.
3. Navigate to Documents > My Tableau Repository > Datasources > XX.X > en_US-US
> Sample – Superstore.xls or choose Sample – Superstore from the saved data
sources on the open data screen.
4. Click Open.
5. In Data Source, drag Orders and People to the top pane to inner join them. Then drag
Returns to the whitespace and create a left join.
6. Create your parameters for management goals. To create parameters, in the left
pane, click the down-arrow next to Dimensions and choose Create Parameter. . .
a. Name: KPI Target—Return on Sales
i. Datatype: Float
ii. Current value: 0.13 <- This is management’s 13 percent return on sales goal.
iii. Display format: Percentage, 0 decimals
iv. Allowable values: Range
v. Minimum: 0.01
vi. Maximum: 1
vii. Step size: 0.01
b. Name: KPI Target—Delivery Days
i. Datatype: Float
ii. Current value: 4 <- This is management’s four-day shipping goal.
iii. Display format: Automatic
iv. Allowable values: Range
v. Minimum: 1
vi. Maximum: 10
vii. Step size: 0.5
c. Name: Return Rate
i. Datatype: Float
ii. Current value: 0.1 <- This is management’s 10 percent order return rate goal.
iii. Display format: Percentage, 0 decimals
iv. Allowable values: Range
v. Minimum: 0
vi. Maximum: 1
vii. Step size: 0.05

268
 d. Name: Top Salespeople
i. Datatype: Integer
ii. Current value: 1 <- This shows the number of top employees management wants
to recognize.
iii. Display format: Number (standard)
iv. Allowable values: Range
v. Minimum: 0
vi. Maximum: 3
vii. Step size: 1
7. Create the four worksheets. For simplicity, full instructions are provided for the first
sheet. For subsequent sheets, drag the attributes to the appropriate places.
a. Create a new worksheet called Finance.
i. Create calculated fields—click the down-arrow next to Dimensions in the left
pane and choose Create Calculated Field. Enter the name of the new field,
then type the expression in the box below.
1. Profit Ratio: SUM([Profit])/SUM([Sales]).
2. Actual vs Target – Return on Sales: [Profit Ratio] > [KPI Target –
Return on Sales].
ii. Drag the following attribute to the Columns pane: Profit Ratio ->
becomes AGG(Profit Ratio).
iii. Drag the following attributes to the Rows pane: Category, Sub-Category.
iv. Drag the following attribute to the Filters pane: Product Name. Double-click the
value and select Custom Value List in the window that appears. Then click OK.
v. Drag the following attribute to the Marks pane: Actual vs Target – Return
on Sales becomes AGG (Actual vs Target – Return on Sales). Click the icon
next to it and select Color from the list.
vi. Click the Analytics tab in the left pane. In the Custom section, drag
Reference Line onto the Finance table. In the window that appears, choose
the following options:
1. Entire Table
2. Value: KPI Target – Return on Sales
vii. Click OK and save your project.
viii. Take a screenshot (label it 7-2A).

©Tableau Software, Inc. All rights reserved.

269
 b. Create a new worksheet called Process.
i. Create calculated fields:
1. Delivery Time Days: ROUND(FLOAT(DATEDIFF(‘day’, [Order
Date], [Ship Date])),2)
2. Actual vs Target – Delivery: AVG([Delivery Time Days]) < [KPI Target –
Delivery Days]
ii. Columns: Longitude (generated)
iii. Rows: Latitude (generated)
iv. Type: Filled Map
v. Marks:
1. Delivery Time Days > Average > Color
2. Country > Detail
3. State > Detail
vi. Double-click AVG(Delivery Time Days) color scale:
1. Red-Green Diverging
2. Reversed
3. Advanced: Center: 4
vii. Take a screenshot (label it 7-2B).

©Tableau Software, Inc. All rights reserved.

c. Create a new worksheet called Customer.

i. Create calculated fields:
1. Return Rate: COUNT([Returned])/COUNT([Order ID])
2. Actual vs Target – Return Rate: [Return Rate] < [Parameters][Return Rate]
ii. Columns: YEAR(Order Date)
iii. Rows: AGG(Return Rate)
iv. Type: Line
v. Marks:
1. AGG(Actual vs Target – Return Rate) > Color
2. Region > Label
vi. Take a screenshot (label it 7-2C).
270
 ©Tableau Software, Inc. All rights reserved.

d. Create a new worksheet called Growth.

i. Create calculated fields:
1. Rank: Index()
2. Actual vs Target – Seller: [Rank] <= [Top Salespeople]
ii. Columns: SUM(Sales)
iii. Rows: Person
iv. Type: Bar
v. Marks:
1. Actual vs Target – Seller > Color
2. SUM(Sales) > Label
vi. Pages: MONTH(Order Date) <- This will allow you to select a month to see
the top-performing seller for a given month.
vii Take a screenshot (label it 7-2D).

©Tableau Software, Inc. All rights reserved.

271
 8. Finally, create a new dashboard called Balanced Scorecard.
a. Drag Finance, Customer, Process, and Growth to main body of your dashboard.
b. To enable management to adjust its goals (and corresponding reference
lines), add the parameters to the dashboard along the top. Click Show/Hide
Cards >
Parameters, and add the parameters to the dashboard, then drag them along the top.

©Tableau Software, Inc. All rights reserved.

Part 4: Address and Refine Results

Now that you’ve created the dashboard, take a moment to interpret the results.
Q8. Which product categories have fallen below the profit goal of 13
percent? Q9. Which states are taking significantly more than four days to ship
to?
Q10. Which region(s) has (have) experienced a higher than 10 percent return rate
from customers?
Q11. Which sales representative is leading the rest for the most recent month?

End of Lab
272
 Lab 7-3 Comprehensive Case: Dillard’s Store Data: Creating
KPIs in Excel (Part I)
Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking
at finance.yahoo
.com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that
William T. Dillard II is an accounting grad of the University of Arkansas and the Walton
College of Business, which may be why he shared transaction data with us to make
available for this lab and labs throughout this text.

Data
If you completed comprehensive Labs 3-4 and Labs 3-5, you can use the same Excel file
that you created and saved in Lab 3-5.
If you did not complete those labs, you will need to extract those data and load them
into Excel using the following query. If you need to review how to extract data from SQL
Server and load them into Excel, see Part 3 of Comprehensive Labs 3-4. Steps 4.1–4.5
are the same steps necessary to load the data into Excel.
Select Transact.*, Store.STATE
From Transact
Inner Join Store
On Transact.Store = Store.STORE
Where TRAN_DATE BETWEEN '20160901' and '20160915'
Order By Tran_Date

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)
• Excel 2016 (available on the Remote Desktop at the University of Arkansas)
• Power Pivot Excel add-in. To create a date table, we’ll extract and load the data
through Power Pivot instead of through the Get & Transform tab. If you don’t see
Power Pivot as a tab in the Excel ribbon, you will need to activate the add-in.

In this lab, you will:

• Learn to build a KPI. In this case, we are trying to assess whether we are
improving sales over the same date a year earlier.
• Specifically, create a baseline measure in Excel and set a target value. These two
mea- sures will be used to create a KPI to compare sales data across two different
periods.

273
 a. From the File tab on the ribbon, open Options.

Source: Microsoft Excel 2016.

b. Select Add-ins from the left side of the Excel Options window.

Source: Microsoft Excel 2016.

274
 c. From the drop-down window at the bottom of the Add-ins screen, select COM add-
ins, then click Go. . .

Source: Microsoft Excel 2016.

d. Place a check mark in the box next to Microsoft Power Pivot for Excel,
then click OK.

Source: Microsoft Excel 2016.

Part 1: Identify the Questions

Our question for this lab is whether sales from September 1 to September 15, 2016, are
dif- ferent (better, worse, approximately the same) than the average sales from the same
time period in 2015.
Q1. Why would comparing current year sales to prior year sales be useful?

Part 2: Mastering the Data and Performing the Analysis

While you loaded the data into the spreadsheet originally with a query from an external
data source, that didn’t automatically load it into Excel’s Internal Data Model. Excel has
a way to super-charge its conditional formatting by creating KPIs in Power Pivot. Power
Pivot is a plug-in to Excel 2013 and 2010 and compares pre-prepared as an add-in to
Excel 2016. Because you’ll be using Excel in Walton College’s virtual lab, you’ll have
access to Excel 2016. To create KPIs in Excel, the data must be added to the Internal
Data Model.
• Identify a base performance metric, and create a measure. Measures can be implicit
or explicit.
◦ Implicit measures are measures created in a PivotTable—anytime you drag and
drop a field into the values section of the PivotTable, it becomes an implicit
measure. Implicit measures are restricted to the value field settings’ standard
aggregations (SUM, COUNT, MIN, MAX, DISTINCTCOUNT, or AVG).
These implicit measures cannot be used to create KPIs.
◦ Explicit measures can be created in the Power Pivot Data Model window or in
the Excel main window Form the Measure dialog box in the Power Pivot tab
on the Excel ribbon.
• Identify a target value to compare the measure to the baseline.
• Create a KPI to signal performance of the measure in comparison to the baseline.

275
 1. From the Insert tab on the ribbon, click PivotTable.

Source: Microsoft Excel 2016.

2. In the Create PivotTable window, make sure to place a check mark in the box next to
Add this data to the Data Model. Then click OK.

Source: Microsoft Excel 2016.

3. Once the PivotTable has been created (this may take a few moments as the data
are loaded into the data model), you can create a measure and a KPI. Navigate to
the Power Pivot tab in the ribbon.
Click Measures, then select New Measure. . .

Source: Microsoft Excel 2016.

4. The new measure’s name defaults to Measure 1, which isn’t very descriptive.
Because we’ll be measuring average Transaction amount, we’ll change the name to
AVG(Tran_ Amt). Type AVG(Tran_Amt) over the default text.

276
 Source: Microsoft Excel 2016.

5. The formula will auto-populate as you type. Begin typing average, and then begin
typ- ing the field Tran_Amt to fill in the formula.

Source: Microsoft Excel 2016.

6. The category has no bearing on how the measure or the KPI will work. For this
mea- sure, we’ll leave it on the default of General. Click OK to create the
measure.

Source: Microsoft Excel 2016.

7. If you scroll down on the PivotTable Fields window, you will see that the explicit
mea- sure has been added to the bottom of the field list.

Source: Microsoft Excel 2016.

277
 8. Now we will create the KPI. In the Power Pivot tab of the ribbon, click KPIs
and select New KPI. . .

Source: Microsoft Excel 2016.

9. Because you have only one measure added to this spreadsheet for now, the base
field defaults to your newly created measure. If you had more than one measure,
you would use the drop-down to select the measure you wanted to use for your base
field. The target value can be defined by another measure or by an absolute value.
For this first KPI, we’ll define it by an Absolute Value. Let’s assume that Dillard’s
has a goal of averaging at least $28 per Transaction.
Input 28 as the Absolute value for the target
value. Leave the default for the status
thresholds.

Source: Microsoft Excel 2016.

278
 Q2. Why might you want to edit the status thresholds? Does 22.4 seem low for
the upper limit?
10. Now that you have your KPI created, you can see each of them in the
PivotTable Fields list.
Occasionally, if the KPI status was automatically added to your PivotTable, the
stoplight signals show as −1, 0, and 1. If you remove the status field from the field list
and put it back in, this will correct the issue and the stoplight icons will show.
If you expand the KPI fields, you see three options:
◦ The Value (2016 Sales) will show the actual sale totals associated with the year 2016
(or sliced by month or day, depending on the other values you drill into in the
PivotTable).
◦ The Goal will show 2015 sales totals—this is the measure that you are using to
compare 2016 sales against. The Goal is for the sales to be at least 2 percent higher
than the pre- vious year’s sales.
◦ The Status will show stoplight icons indicating red, yellow, or green circles based on
the thresholds you selected when setting the KPI.
11. Create a PivotTable that shows the KPI status for average Transaction by each of
the 15 days in your data range.
12. Take a screenshot (label 7-3A).
Q3. How did Dillard’s perform in September 2016 compared to September
2015? Do you think the target is set too high or too low? Which day(s)
performed the worst, compared to the same date(s) in the previous period?
Why do you think that is?

End of Lab

Lab 7-4 Comprehensive Case: Dillard’s Store Data: Creating

KPIs in Excel (Part II)

Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking
at finance.yahoo
.com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that
William T. Dillard II is an accounting grad of the University of Arkansas and the Walton
College of Business, which may be why he shared transaction data with us to make
available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)
• Excel 2016 (available on the Remote Desktop at the University of Arkansas)

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 In this lab, you will:
• Compare total sales across all Dillard’s stores year over year, month over month,
and day over day and develop it as a KPI.

Part 1: Identify the Questions

Compare 2014, 2015, and 2016 sales data in parallel periods.

Part 2: Master the Data

1. Before we can create measures and KPIs to analyze the data, we need to extract
the data from SQL Server and load them into Excel. To do so, click New Query
from the Data tab, and follow the path to select From Database and From SQL
Server Database.

Source: Microsoft Excel 2016.

2. Enter the Server name and the Database name as provided to you through the
walton.uark.edu/enterprise site, and then click Advanced options to input the
query text:
Select year(Tran_Date) as year, month(Tran_Date) as month, day(Tran_Date)
as day, sum(Tran_Amt) as amount
From TRANSACT
Where TRAN_TYPE = 'P'
Group By year(Tran_Date), month(Tran_Date), day(Tran_Date)
Order By year(Tran_Date), month(Tran_Date), day(Tran_Date)

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 Source: Microsoft Excel 2016.

3. Click OK.
4. A preview of your data will load. Instead of immediately loading these data into
Excel, you need to transform them in the Query Editor. Click Edit.

Source: Microsoft Excel 2016.

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 The data have been fully extracted from SQL Server into Excel’s Internal Data Model,
but they need to be transformed so that we can more easily compare daily sales
amounts year over year. Instead of seeing a separate record for each day, beginning with
January
1, 2014, and ending with October 17, 2016, we would prefer to see only 365 records—one
record for each day in a calendar year, but with separate columns for each year (2014, 2015,
and 2016), each with the transaction amount associated with that year’s month and day.
5. Select the year column.
6. Select Pivot Column from the Transform tab on the Query Editor ribbon.

Source: Microsoft Excel 2016.

7. Select Amount from the drop-down for the Values column and click OK.

Source: Microsoft Excel 2016.

8. Now that the data have been transformed, we’re ready to load them into Excel.
From the Home button on the Query Editor’s ribbon, click Close and Load.
9. Excel has a way to super-charge its conditional formatting by creating KPIs in
Power Pivot. In the Create PivotTable window, make sure to place a check mark
in the box next to Add this data to the Data Model. Then click OK.

Source: Microsoft Excel 2016.

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 Once the PivotTable has been created (this may take a few moments as the data
are loaded into the data model), you can create a measure and a KPI. KPIs require
three decisions:
• Identify a base performance metric, and create a measure. Measures can be implicit
or explicit.
◦ Implicit measures are measures created in a PivotTable—anytime you drag and
drop a field into the values section of the PivotTable, it becomes an implicit
measure. Implicit measures are restricted to the value field settings’ standard
aggregations (SUM, COUNT, MIN, MAX, DISTINCTCOUNT, or AVG).
These implicit measures cannot be used to create KPIs.
◦ Explicit measures can be created in the Power Pivot Data Model window or
in the Excel main window from the Measure dialog box in the Power Pivot
tab on the Excel ribbon.
• Identify a target value to compare the measure to.
• Create a KPI to signal performance of the measure in comparison to the baseline,
and determine the range of values that indicate poor performance, good
performance, and great performance.
We will need to create three measures, the sums of each of the year’s sales Transactions.
10. Navigate to the Power Pivot tab in the ribbon. Click Measures, then Select
New Measure. . .

Source: Microsoft Excel 2016.

11. The new measure’s name defaults to Measure 1, which isn’t very descriptive.
Because we’ll be measuring average transaction amount, we’ll change the first
KPI’s name to 2014 Sales. Type 2014 Sales over the default text.

Source: Microsoft Excel 2016.

12. The formula will auto-populate as you type, begin typing SUM, then fill in the
paren- theses with the column name 2014.
13. At the bottom of the Measure window is an option to select a category. The
Category has no bearing on how the measure or the KPI will work. For this
measure, we’ll leave it on the default of General. Click OK to create the measure.

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 Source: Microsoft Excel 2016.

14. Repeat the same steps used to create the measure for 2014 sales to create measures
for 2015 sales and 2016 sales.
15. Now we will create the KPIs to compare 2015 sales to 2014, and 2016 sales to 2015.
In the Power Pivot tab of the ribbon, click KPIs and select New KPI. . .

Source: Microsoft Excel 2016

16. The first KPI we will create is comparing 2016 sales to the previous year’s sales.
Use the drop-down to select 2016 Sales for your base field. The target value can be
defined by another measure or by an absolute value. We have already defined the
measure to compare 2016 sales to, so select 2015 Sales for the target value Measure.
We will define excellent performance as a 2 percent improvement over last year’s
sales, so move the upper range of the target slider to 102%. Poor performance will be
defined as a 2 percent decline from last year’s sales. Move the lower range of the
target slider to 98%.
Q1. Do you think +/− 2 percent is the right benchmark to set? Would you propose
a different percentage change to track here?
Once all of your settings are correct, click OK to create the KPI.

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 Source: Microsoft Excel 2016.

17. Create the KPI comparing 2015 sales to 2014 sales using the same thresholds for
mea- suring performance.
18. Now that you have your two KPIs created, you can see each of them in the
PivotTable Fields list.

Source: Microsoft Excel 2016.

285
 Occasionally, if the KPI status is automatically added to your PivotTable, the stoplight
signals show as −1, 0, and 1. If you remove the status field from the fields list and put
it back in, this will correct the issue and the stoplight icons will show.
If you expand the KPI fields, you see three options:

Source: Microsoft Excel 2016.

• The Value (2016 Sales) will show the actual sale totals associated with the year 2016
(or sliced by month or day, depending on the other values you drill into in the
PivotTable).
• The Goal will show 2015 sales totals—this is the measure that you are using to
compare 2016 sales against. The Goal is for the sales to be at least 2 percent higher
than the pre- vious year’s sales.
• The Status will show stoplight icons indicating red, yellow, or green circles based on
the thresholds you selected when setting the KPI.
19. Create a PivotTable that shows the KPI status of 2015 and 2016 sales by month.
To do so, drag and drop Months into the Rows and Status for both KPIs into the Values.

Source: Microsoft Excel 2016.

286
 If you just place a check mark in the box next to the month field, you will notice that
the PivotTable defaults to reading Month values as numerical data instead of calendar data,
so it places it as a value and sums the month numbers. You just need to drag and drop it
outside of Values and into Rows.
20. Take a Screenshot (label it 7-4A).
21. To provide some drill-down capabilities, add the Day field to the Rows (beneath
Month).
Q2. Do you notice a pattern with how frequently the “bad” (red icon) days appear
in 2016 in relation to 2015?
Q3. What do you think is the potential problem with comparing days (e.g.,
compar- ing September 1, 2016 to September 1, 2015)? How could this be
improved?

End of Lab

Lab 7-5 Comprehensive Case: Dillard’s Store Data: Creating

KPIs in Excel (Part III)

Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking
at finance.yahoo. com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll
quickly note that William T. Dillard II is an accounting grad of the University of
Arkansas and the Walton College of Business, which may be why he shared transaction
data with us to make available for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)
• Excel 2016 (available on the Remote Desktop at the University of Arkansas)
• Power Pivot Excel add-in. To create a date table, we’ll extract and load the data
through Power Pivot instead of through the Get & Transform tab. If you don’t see
Power Pivot as a tab in the Excel ribbon, you will need to activate the add-in.

287
 a. From the File tab on the ribbon, open Options.

Source: Microsoft Excel 2016.

b. Select Add-ins from the left side of the Excel Options window.

Source: Microsoft Excel 2016.

288
 c. From the drop-down window at the bottom of the Add-ins screen, select
COM add-ins, then click Go. . .

Source: Microsoft Excel 2016.

d. Place a check mark in the box next to Microsoft Power Pivot for Excel, then click OK.

Source: Microsoft Excel 2016.

Part 1: Identify the Questions

How do we line up sales periods to be in parallel periods, by day of week in one period
with day of week with previous period?

Part 2: Master the Data

1. To extract and load the data into Power Pivot, click Manage on the Power Pivot tab
in the Excel ribbon.

Source: Microsoft Excel 2016.

2. In the Power Pivot for Excel window, click Get External Data from the Home tab,
then navigate through From Database and From SQL Server.

Source: Microsoft Excel 2016.

289
 3. The Table Import Wizard window will open. Input the SQL Server name and
the Database name that you received from Walton.uark.edu/enterprise, then click
Next.

Source: Microsoft Excel 2016.

4. We will import the data with a query, so select the radio button next to Write a
query that will specify the data to import.

Source: Microsoft Excel 2016.

290
 5. We need to bring in only two attributes. In Lab 7-2, we had to parse out the different
date parts in order to group our data by month and year, instead of just by day. In
this lab, we will use Excel’s Power Pivot tool to create a Date table. The tool will be
able to parse out the date parts for us, instead of us having to do so with our query.
This will also allow us to view more interesting date parts, such as the day of the
week (not just the date).
Input the following query into the Table Import Wizard window to extract the total
amount of Transactions for each day in the database:
Select Tran_Date, SUM(Tran_Amt) AS Sales
From Transact
Group By Tran_Date

After entering the SQL text, click Validate to ensure the query will run, and then
click Finish.

Source: Microsoft Excel 2016.

The table will import. This may take a few moments.

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 6. Once the data are loaded, you can close the Table Import Wizard window. Click Close.

Source: Microsoft Excel 2016.

7. After closing the Table Import Wizard, you will see your data loaded into Power
Pivot. This does not mean the data have been loaded into Excel yet, so you can
transform the data within the Power Pivot tool first. Creating the date table takes
three steps: Select the Tran_Date column, click Date Table from the Design tab on
the ribbon, then click New.

Source: Microsoft Excel 2016.

You have created a Date table. Now it’s time to load the transformed data into Excel.

292
8. Return to the Home tab on the Power Pivot ribbon, and select PivotTable.

Source: Microsoft Excel 2016.

9. Select OK to create the PivotTable in a New Worksheet.

Source: Microsoft Excel 2016.

The PivotTable Fields list contains two tables, Calendar and Query. The Calendar
table contains the Date Hierarchy for drilling down, but it also contains attributes
beneath the More Fields title. These contain the same attributes in the hierarchy, as
well as different ways of viewing the data, such as Day of Week. The Query table con-
tains the data that you extracted with your SQL query. The valuable field from the
query table is Sales, which you will use as a value (or an implicit measure).

Source: Microsoft Excel 2016.

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 Part 3: Perform an Analysis of the Data
10. Create a PivotTable to compare sales performance on different weekdays of each
month, year over year. To do so, drag and drop year (from the Calendar > More
fields drop-down) into Columns, Month and DayofWeek into Rows, and Sales into
Values). The Sales data will be transformed into a measure, Sum of Sales,
automatically.
11. Take a screenshot (label it 7-5A).
Q1. Something should seem a bit off with your numbers. There are some big
dispari- ties month over month for some weekdays. Look back over our query
and the ER Diagram (and if you completed Lab 7-2, compare the query you
executed in this lab to the query from that lab). What did we leave out of this
query? How could it cause us to make poor decisions?

Part 4: Analyze and Refine the Results

The query can be improved by not simply importing all of the transaction amount data,
but by bringing in only the sales data. The way the data are organized, all of the dollar
amounts for sales and for refunds are in the same attribute, Tran_Amt, and the transaction
type is dif- ferentiated with the attribute Tran_Type. If we filter out any record that holds
return data, we can load only the data that hold sales transactions into Excel.
12. To edit our original query, click Manage in the Power Pivot tab in the Excel ribbon.
13. In the Power Pivot tool, click Table Properties from the Design tab.

Source: Microsoft Excel 2016.

14. Add in a WHERE clause to the query, validate the new query, and save it.
Select Tran_Date, SUM(Tran_Amt) AS Sales
From Transact
Where Tran_Type = 'p'
Group By Tran_Date

Source: Microsoft Excel 2016.

294
15. The data will be automatically refreshed in the Power Pivot tool and in the Excel
work- sheet with the PivotTable. Close the Power Pivot tool.

Part 5: Communicate Results

The refreshed data in the PivotTable is better for making decisions with, but it still isn’t
easy to read at a glance. Adding some data visualization or conditional formatting can
make these data more meaningful and easier to interpret.
Q2. What would be the best way to visualize these data to ease decision making
and insight?

End of Lab

Lab 7-6 Comprehensive Case: Dillard’s Store Data: Creating

KPIs in Excel (Part IV—Putting It All Together)

Company summary
Dillard’s is a department store with approximately 330 stores in 29 states. Its
headquarters is in Little Rock, Arkansas. You can learn more about Dillard’s by looking
at finance.yahoo
.com (Ticker symbol = DDS) and the Wikipedia site for DDS. You’ll quickly note that
William T. Dillard II is an accounting grad of the University of Arkansas and the Walton
College of Business, which may be why he shared Transaction data with us to make
avail- able for this lab and labs throughout this text.

Data
The data for this lab and other all Dillard’s labs are available at http://walton.uark.edu/
enterprise/. Your instructor will either give you specific instructions on how to access the
data, or there will be information available on connect. The 2016 Dillard’s data cover all
transactions over the period 1/1/2014 to 10/17/2016.

Software needed
• Microsoft SQL Server Management Studio (available on the Remote Desktop at
the University of Arkansas)
• Excel 2016 (available on the Remote Desktop at the University of Arkansas)
• Power Pivot Excel add-in. To create a date table, we’ll extract and load the data
through Power Pivot instead of through the Get & Transform tab. If you don’t see
Power Pivot as a tab in the Excel ribbon, you will need to activate the add-in.

In this lab, you will:

• Develop a dashboard to display a variety of KPIs that you can drill into for state
and store details.

Prerequisite
• Labs 7-4 and 7-5. If you haven’t completed these labs, then you can still read
through the steps in Labs 7-4 and 7-5 to see the screenshots of the ETL process in
Excel (Lab 7-5) and the KPI creation process (Lab 7-4) to be ready for this lab.

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 Part 1: Identify the Questions
In Lab 7-4, you created KPIs for comparing 2015 sales to 2014 sales, but the date was
parsed out from the original Tran_Date attribute. In Lab 7-5, you created a date table so
that the date fields were more descriptive in the Excel report, but you didn’t create any
KPIs. In this lab, we will combine those two skills to create a descriptive report with
KPIs. We will also expand the reports capabilities by extracting and loading state and
store data in addition to date and transaction data.

Part 2: Master the Data

1. Loading the data into Tableau from the original SQL Server database requires
some transformation in Excel’s Power Pivot tool. Extract and load Dillard’s
transactional and store data into Power Pivot using the following query:
Select Tran_Date, State, Store.Store, SUM(Tran_Amt) AS Amount
From Transact
Inner Join Store
On Transact.Store = Store.Store
Where Tran_Type = 'p'
Group By Tran_Date, State, Store.Store
Order By Tran_Date
2. It will take a few minutes for these data to load. Once they do (297,702 rows), close
the Table Import Wizard window. Locate the Tran_Date attribute and use it to create
a Date Table (Hint: Look in the Design tab.)
3. Now that you have two tables in your data model, return to the Home tab to create a
PivotTable in Excel, and close the Power Pivot tool.
4. In the Power Pivot tab in the Excel ribbon, create a new measure for
Sum(amount). You can call this measure Current Year. This measure will be used
as a base measure to compare to previous year’s sales data.
5. Open the window to create a new measure to calculate the previous year’s sales.
To create this measure, you will use Microsoft’s Data Analysis Expressions
language (DAX), which is a formula language for creating custom calculations
and measures. The function you will use is the =CALCULATE function, which
allows you to not only create a calculation, but also filter it.
Enter the following expression in the formula box:
=CALCULATE([Sum of Amount],SAMEPERIODLASTYEAR('Calendar'[Date]))

You can name this measure Last Year.

6. Create a new KPI, setting Current Year as the Base Measure and Last Year as
the Target Measure. Change the Status Thresholds to the following:
◦ Anything below 98 percent of last year’s sales (the target) should be red.
◦ Anything between 98 percent and 102 percent of the target should be yellow.
◦ Anything above 102 percent of the target should be green.
7. This KPI will function only with the Date Hierarchy (not with the date parts).
Create a PivotTable with the Date Hierarchy on the rows and the KPI Status as the
values (if the KPI status is showing −1, 0, and 1 instead of the stoplight icons,
remove the KPI status from the value fields and then place it back in).
Create another KPI, this time to compare any month with the month that precedes
it (so instead of comparing September 2016 to September 2015, you will compare
September 2016 to August 2016).
8. Even though the calculation for current month is technically the same as the
calcula- tion for current year (Sum(Amount)), we have to create a new measure to
use as the

296
 KPI’s base. Each base measure can only have one KPI assigned to it. Create a new
measure called Current Month to calculate sales (this will be the exact same as how
you created Current Year in step 4, but with a different Measure Name).
9. Create a new measure to use as the monthly target measure. The DAX expression
for calculating last month’s sales is:
=CALCULATE([Sum of Amount],PREVIOUSMONTH('Calendar'[Date]))
You can name this measure Previous Month.
10. Create a new KPI comparing current sales (your base measure) to previous month
as your target measure. Create the same status thresholds as the KPI comparing
years (<98%, 98%–102%, >102%).
11. Add this KPI status to your PivotTable.
12. Take a screenshot (label it 7-6A).

Part 3: Address and Refine the Results

This report may be useful at a very high level, but for state-level and store-level analysis,
the level is too high. Next, we will add in two slicers to help filter the data based on state
and store.
13. From the PivotTable Analyze tab in the Excel ribbon, click Slicer to insert an
interac- tive filter.

Source: Microsoft Excel 2016.

14. Place a check mark in the boxes next to State and Store to create the slicers.

Source: Microsoft Excel 2016.

297
 15. Notice what happens as you select different states: Not only do the data change to
reflect the KPI status for the state that you selected, but the stores that are
associated with that state shift to the top of the store slicer, making it easier to drill
down.
16. Take a screenshot (label it 7-6B).
We can ease drill-down capabilities even more by creating a hierarchy between state
and store.
17. Open the Power Pivot tool by clicking Manage from the Power Pivot tab in the Excel ribbon.
18. From the Power Pivot Home tab, switch to Diagram View.

Source: Microsoft Excel 2016.

19. Select both the State and the Store attributes from the Query table, then right-
click one of the attributes to create a hierarchy.

Source: Microsoft Excel 2016.

20. You can change the name of the Hierarchy to Store and State Hierarchy.
21. Close the Power Pivot tool. The PivotTable will have refreshed automatically.
22. You will see that the hierarchy has been added to your PivotTable Fields list. Drag
and drop the hierarchy to the Rows (above the Date hierarchy).

298
23. Take a screenshot (label it 7-6C).

Source: Microsoft Excel 2016.

Now you can drill down from State to Store directly in the PivotTable, or you can
filter it via the slicer.
Q1. How does the ability to drill down into the state and store data give manage-
ment critical information and help them to identify issues that are occurring
or opportunities that might be available?
Q2. What would you get sales changes of certain products (SKUs) or product cat-
egories from one month to the next? Having this type of information will
help you do what to help plan future promotions or future purchases?

End of Lab

299
 Chapter 8
Financial Statement Analytics

A Look at This Chapter

In this chapter, we focus on how to access and analyze financial statement data. We highlight the use of XBRL to
quickly and efficiently gain computer access to financial statement data. Next, we discuss how ratios are used to
ana- lyze financial performance. We also discuss the use of sparklines to help users visualize trends in the data.
Finally, we discuss the use of text mining to analyze the sentiment in financial reporting data.

A Look Back
Chapter 7 focused on generating and evaluating key performance metrics that are used primarily in managerial
accounting. By measuring past performance and comparing it to targeted goals, we are able to assess how well a
company is working toward a goal. Also, we can determine required adjustments to how decisions are made or
how business processes are run, if any.

300
 Sometimes the future is now. The StockSnips app uses sentiment analysis,
machine learning, and artificial intelligence to aggregate and analyze news
related to publicly traded companies on Nasdaq and the New York Stock
Exchange to “gain stock insights and track a company’s financial and
business operations.” The use of Data Analytics helps classify the news to
help predict revenue, earnings, and cash flows and uses those data to help
predict stock price performance that is most relevant to predicting company
performance. What will Data Analytics do next?

©S Narayan/Dinodia Photo/agefotostock

EXHIBIT 8-1

OBJECTIVES
After reading this chapter, you should be able to:

LO 8-1
LO 8-2 Describe how XBRL tags financial reporting data
Understand how different types of ratio analysis can be facilitated by
LO 8-3 XBRL
Explain how to create and read visualizations of financial statement
data
LO 8-4
Describe the value of text mining and sentiment analysis of financial
reporting

301
302 Chapter 8 Financial Statement Analytics

LO 8-1 XBRL
Describe how XBRL is a global standard for Internet communication among businesses. XBRL stands
XBRL tags financial for eXtensible Business Reporting Language and is a type of XML (extensible markup
reporting data lan- guage) used for organizing and defining financial elements. By each company
providing tags for each piece of its financial data, XBRL data can be computer readable
and immedi- ately available for each type of financial statement user, be they financial
analysts, investors, or lenders, for their own specific use.
As of June 2011, the Securities and Exchange Commission requires all public
company filers to file financial statements prepared in accordance with U.S. GAAP (generally
accepted accounting principles), including smaller reporting companies, and all foreign
private issuers to prepare their financial statements in accordance with IFRS. This includes
tagging the five basic financial statements:
• Balance sheet
• Income statement
• Statement of comprehensive income
• Statement of cash flows
• Statement of stockholders’ equity
In addition, detailed tagging of the numbers included in the footnotes by use of XBRL
tags is also required. This means that numbers in the footnotes (e.g., facts, figures, years,
and percentages) are also tagged, as well as the text disclosure of the major footnotes.
XBRL uses a taxonomy to help define and describe each key data element (like cash
or accounts payable). The XBRL taxonomy also defines the relationships between each
element—such as cash being a component of current assets and current assets being a
com- ponent of total assets or accounts payable being a component of current liabilities
and cur- rent liabilities, in turn, being a component of total liabilities.
The 2017 U.S. GAAP Financial Reporting Taxonomy is found at this website: https://
xbrl.us/xbrl-taxonomy/2017-us-gaap/. It defines more than 19,000 elements. Using such a
taxonomy, each unique financial data item is tagged to an element within the taxonomy.
For example, the XBRL tag for cash is labeled “Cash” and is defined as follows:

Amount of currency on hand as well as demand deposits with banks or financial

institutions. Includes other kinds of accounts that have the general characteristics
of demand deposits. Excludes cash and cash equivalents within disposal group and
discontinued operation.1

The XBRL tag for cash and cash equivalents footnote disclosure is labeled as
“CashAndCashEquivalentsDisclosureTextBlock” and is defined as follows:

The entire disclosure for cash and cash equivalent footnotes, which may include the types
of deposits and money market instruments, applicable carrying amounts, restricted amounts
and compensating balance arrangements. Cash and equivalents include: (1) currency on
hand
(2) demand deposits with banks or financial institutions (3) other kinds of accounts that
have the general characteristics of demand deposits (4) short-term, highly liquid
investments that are both readily convertible to known amounts of cash and so near their
maturity that they present insignificant risk of changes in value because of changes in
interest rates. Generally, only investments maturing within three months from the date of
1
acquisition qualify.2
https://xbrl.us/xbrl-taxonomy/2017-us-gaap/
2
https://xbrl.us/xbrl-taxonomy/2017-us-gaap/
 Chapter 8 Financial Statement Analytics 303

The use of tags allows data to be quickly transmitted and received, and the tags serve
as
an input for financial analysts valuing a company, an auditor finding areas where an error
might occur, or regulators seeing if firms are in compliance with various regulations and
laws (like the SEC or IRS).

Extensible Reporting in XBRL and Standardized Metrics

The next thing to note is that the X in XBRL stands for “extensible,” which means firms
can make their own tags if they feel their financial data item does not fit within the
existing framework. Between having some 19,000 financial elements to choose from and
the abil- ity of firms to make their own tags, sometimes the comparability of quite similar
financial data items have unique tags, making direct comparisons between companies
difficult if not impossible. Sometimes outside data vendors create standardized metrics to
make the com- pany reported XBRL data more comparable. For example, Calcbench, a
data vendor that eases financial analysis for XBRL uses, makes standardized metrics,
noting:

IBM labels revenue as “Total revenue” and uses the tag “Revenues”, whereas
Apple, labels their revenue as “Net sales” and uses the tag “SalesRevenueNet”.
This is a relatively simple case, because both companies used tags from the FASB
taxonomy.

Users are typically not interested in the subtle differences of how companies tag or
label information. In the previous example, most users would want Apple and
IBM’s revenue, regardless of how it was tagged. To that end, we create standardized
metrics.3

Different data vendors such as XBRLAnalyst and Calcbench both provide a trace
func- tion that allows you to trace the standardized metric back to the original source to
see which XBRL tags are referenced or used to make up the standardized metric. 4
Exhibit 8-2 shows what a report using standardized metrics looks like for Boeing’s
bal- ance sheet. Note the standardized tags used for Boeing could be used for any of the
SEC filers to gather their balance sheet and other financial statements.

XBRL, XBRL-GL, and Real-Time Financial Reporting

Instead of waiting weeks or months to get the financial statements, some suggest real-
time financial reporting. That is, the moment a transaction is recorded in the accounting
books, it can be put into the financial statements and sent to any interested user. Many
financial reporting systems within enterprise systems such as Oracle and SAP have a
general ledger that is consistent with XBRL, called XBRL-GL (XBRL-General Ledger).
That means once the numbers are input into a financial system, they are already tagged
and able to be trans- mitted in real time to interested users.
Of course, there is a multitude of reasons this information is not transmitted in real
time. For example, the accounting information has not yet been audited, and it may
contain errors. Other information such as goodwill or long-term debt will likely not
change on a minute-by-minute basis, so there would be no use for it on a real-time basis.
But as systems advance and continuous, real-time auditing becomes more prevalent, and
with our under- standing of how and exactly what type of real-time information might be
used, there may be a chance of providing real-time accounting information in the relative
short term by use of XBRL-GL.

3
https://knowledge.calcbench.com/hc/en-us/articles/230017408-What-is-a-standardized-metric
(accessed August 2017).
4
https://knowledge.calcbench.com/hc/en-us/articles/230017408-What-is-a-standardized-metric.
304 Chapter 8 Financial Statement Analytics

Exhibit 8-2
Balance Sheet from
XBRL Data

Note the XBRL tag

names in the far left
column.
Source: https://www
.calcbench.com/xbrl_to_excel

PROGRESS CHECK
1. How does XBRL facilitate Data Analytics by analysts?
2. How might standardized XBRL metrics be useful in comparing the financial
state- ments of General Motors, Alphabet, and Alibaba?
3. Assuming XBRL-GL is able to disseminate real-time financial reports, which
real- time financial elements (account names) might be most useful to decision
mak- ers? And which information might not be useful?
 Chapter 8 Financial Statement Analytics 305

RATIO ANALYSIS LO 8-2

Financial statement analysis is used by investors, analysts, auditors, and other interested Understand how
stakeholders to review and evaluate a company’s financial statements and financial per- different types of
formance. Such analysis allows the stakeholder to gain an understanding of the financial ratio analysis can
health of the company to allow more insightful and, hopefully, more effective decision be facilitated by
mak- ing. A major component of financial statement analysis is the use of ratio analysis. XBRL
Ratio analysis is a tool used to evaluate relationships among different financial statement
items to help understand a company’s financial and operating performance.
Financial ratio analysis is a key tool used by accounting, auditing, and finance profes-
sionals to assess the financial health of a business organization, to assess the reasonable-
ness of reported financial results, and to predict future performance. Analytical
procedures, including ratio analysis, are recognized as an essential component of both
planning an audit and carrying out substantive testing. AU Section 329.02 states, “A basic
premise underly- ing the application of analytical procedures is that plausible
relationships among data may reasonably be expected to exist and continue in the absence
of known conditions to the con- trary.”5 In addition, knowledge of financial statement
analysis using ratios is a component of several professional certifications, including the
CPA (Certified Public Accountant), CMA (Certified Management Accountant), and CFA
(Chartered Financial Analyst) certi- fications, so clearly critical for any accountant.
Auditors will use ratio analysis to pinpoint potential audit issues by considering how a
company’s financial statements depart from industry performance, a close competitor, or
even the same company’s prior-year performance. Competitors might use ratio analysis to
understand the vulnerabilities of a competitor. Bond investors might use ratio analysis to
see if a bond covenant is violated (e.g., some bond contracts require a borrower to
maintain a current ratio above 1.0 to help ensure the loan can be paid off). So, you can
quickly see how ratios might be used.
These ratios include the current ratio, the receivables turnover ratio, inventory turnover
ratio, asset turnover ratio, profit margin ratio, debt-to-equity ratio, return on assets, and
return on equity ratios.

Classes of Ratios
There are basically four types of ratios: liquidity, activity, solvency (or financing), and
profitability.
Liquidity is the ability to satisfy the company’s short-term obligations using assets that
can be most readily converted into cash. Liquidity ratios help measure the liquidity of a
company. Liquidity ratios include the current ratio and the acid-test ratio.
Activity ratios are a computation of a firm’s operating efficiency. Company activity is
often measured by use of turnover ratios reflect the number of times assets flow into and
out of the company during the period and serve as a gauge of the efficiency of putting
assets to work. Receivables, inventory, and total asset turnover are all examples of
activity ratios.
We use solvency (or sometimes called financing) ratios to help assess a company’s
abil- ity to pay its debts and stay in business. In other words, we assess the company’s
financial risk—that is, the risk resulting from a company’s choice of financing the business
using debt or equity. Debt-to-equity, long-term debt-to-equity, and times interest earned
ratios are also useful in assessing the level of solvency.
Profitability ratios are a common calculation when assessing a company. They are
used to provide information on the profitability of a company and its prospects for the
future.
5
AICPA, AU section 329, http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/
306 Chapter 8 Financial Statement Analytics

DuPont Ratio Analysis

A popular method to analyze performance and ratios is the use of the DuPont ratio. The
DuPont ratio was developed by the DuPont Corporation to measure performance as a
decomposition of the return on equity ratio in this way.

Return on equity (ROE) = Profit margin × Operating leverage (or Asset turnover) ×
Financial leverage
= (Net profit/Sales) × (Net profit/Sales)(Sales/Average total
assets) × (Average total assets/Average equity)

It decomposes return on equity into three different types of ratios: profitability (profit
mar- gin), activity (operating leverage or asset turnover), and solvency (financial leverage)
ratios. We illustrate it in Exhibit 8-3 by considering a calculation from some standard
XBRL data.

Exhibit 8-3
DuPont Analysis Using
XBRL Data
Source: https://www
.calcbench.com/xbrl_to_excel.

You’ll note for the Quarter 2 analysis in 2009, for DuPont (Ticker Symbol = DD), if
you take its profit margin, 0.294, multiplied by asset turnover of 20.1 percent multiplied
by the financial leverage of 471.7 percent, you get a return on equity of 27.8 percent.
LO 8-3
The Use of Sparklines and Trendlines in Ratio Analysis
Explain how to
By using sparklines and trendlines, financial statement users can easily see the data
create and read
visually and give meaning to the underlying financial data. We define sparklines as a
visualizations of
financial statement small trend- line of graphic that efficiently summarizes numbers or statistics in a graph
data without axes. Because they generally can fit in a single cell within a spreadsheet, they can
easily add to the data without detracting from the tabular results.
For what types of reports or spreadsheets should sparklines be used? It usually
depends on the type of reporting that is selected. For example, if used in a digital
dashboard that already has many charts and dials, additional sparklines might clutter up
the overall appear- ance. However, if used to show trends where it replaces or
complements lots of numbers, it might be used as a very effective visualization. The nice
thing about sparklines is they are generally small and just show simple trends rather than
all the details regarding the horizon- tal and vertical axes that you would expect on a
normal graph.
Exhibit 8-4 provides an example of the use of sparklines in a DuPont analysis for
Chapter 8 Financial Statement Analytics 307

Exhibit 8-4
Illustration of the Use
of Sparklines to Show
Trends in the DuPont
Ratio Analysis for
Walmart

PROGRESS CHECK
4. How might standardized XBRL metrics be useful in comparing the financial
state- ments of General Motors, Alphabet, and Alibaba?
5. How might sparklines be used to enhance the analysis of Exhibit 8-3 regard-
ing the DuPont analysis? Would you show the sparklines for each component
of the DuPont ROE disaggregation, or would you propose it be shown only for
the total?
6. Using Exhibit 8-4 as the source of data and using the raw accounts, show the
components of profit margin, operating leverage and financial leverage and
how they are combined to equal ROE for Q2 2009 for DuPont (Ticker = DD).

TEXT MINING AND SENTIMENT ANALYSIS LO 8-4

Some data analysis is used to determine the sentiment included in text. For example, Describe the value
Uber might use text mining and sentiment analysis to read all of the words used in social of text mining and
media associated with its driving or the quality of its smartphone app and its services. The sentiment analysis
company can analyze the words for sentiment to see how the social media participants of financial
feel about its services and new innovations, as well as perform similar analysis on its reporting
competitors (like Lyft or traditional cab services).
Similar analysis might be done to learn more about financial reports, Securities and
Exchange Commission submissions, analyst reports, and other related documents based
on the words that are used. They might provide a gauge of the overall tone of the
financial reports. This tone might help us to understand management expectations of past
or future
308 Chapter 8 Financial Statement Analytics

To provide an illustration of the use and predictive ability of text mining and
sentiment
analysis, Loughran and McDonald6 use text mining and sentiment analysis to predict the
stock market reaction to the issuance of a 10-K form by examining the proportion of
nega- tive words used in a 10-K report. Exhibit 8-5 comes from their research suggesting
that the stock market reaction is related to the proportion of negative words (or inversely,
the pro- portion of positive words). They call this method overlap. Thus, using this
method to define the tone of the article, they indeed find a direct association, or
relationship, between the proportion of negative words and the stock market reaction to
the disclosure of 10-K reports.

Exhibit 8-5 The Stock Market Reaction (Excess Return) of Companies Sorted by the Proportion
of Negative Words.
The lines represent the words from a financial dictionary (Fin-Neg) and a standard English
dictionary (H4N-INF).
Source: Tim Loughran and Bill McDonald, "When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10–Ks,"
Journal of Finance 66, no. 1 (2011), pp. 35–65.

They measure proportion first by developing a dictionary of 2,337 negative words in

the financial context and then counting how many of those words are used as compared
to the total words used (called Fin-Neg in Exhibit 8-5). One of their arguments is that
a financial dictionary is better than a dictionary created from standard English usage.
For that reason, they differentiate their financial dictionary (Fin-Neg) from the negative
words used in normal English usage (as shown in Exhibit 8-5 as H4N-Inf). Whereas cost,
expense, or liability might be viewed as negative in normal English, they are not
considered to be negative words in the financial dictionary. The most frequent negative
words in the financial dictionary include words like loss, claims, impairment, adverse,
restructuring and litigation.

6
Tim Loughran and Bill McDonald, “When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and
10-Ks,” Journal of Finance 66, no. 1 (2011), pp. 35–65.
 PROGRESS CHECK
7. Which would you predict would have more positive sentiment in a 10-K, the
footnotes to the financial statements or the MD&A (management discussion
and analysis) of the financial statements?
8. Why would you guess the results between the proportion of negative words
and the stock market reaction to the 10-K issuance diverge the Fin-Neg and
the H4N-Inf dictionary?

Summary
Data Analytics extends to the financial accounting and financial reporting space.
■
By tagging financial elements in a computer readable manner, XBRL facilitates the
accu- rate and timely transmission of financial reporting to all interested stakeholders.
■
The XBRL taxonomy provides tags for 19,000 financial elements and allows for the
use of company-defined tags when the normal XBRL tags are not suitable.
■
XBRL and Data Analytics allow timely analysis of the financial statements and the
computation of financial ratios. We illustrated its usage by showing the DuPont ratio
framework.
■
We introduced and discussed the use of sparklines and trendlines as ways to efficiently
and effectively visualize firm performance.
■
We concluded the chapter by explaining how sentiment analysis could be used with
financial statements, other financial reports, and other financially related information.

Key Words
DuPont ratio analysis (306) Developed by the DuPont Corporation to decompose performance
(par- ticularly return on equity [ROE]) into its component parts.
financial statement analysis (305) Used by investors, analysts, auditors, and other interested
stake- holders to review and evaluate a company’s financial statements and financial performance.
ratio analysis (305) A tool used to evaluate relationships among different financial statement items
to help understand a company’s financial and operating performance.
sparkline (306) A small trendline or graphic that efficiently summarizes numbers or statistics in a
graph without axes.
standardized metrics (303) Metrics used by data vendors to allow easier comparison of company
reported XBRL data.
XBRL (302) A global standard for exchanging financial reporting information that uses XML; a global
standard for Internet communication among businesses.
XBRL-GL (303) Stands for XBRL-General Ledger; relates to the ability of enterprise system to tag
financial elements within the firm’s financial reporting system.
XBRL taxonomy (302) Defines and describes each key data element (like cash or accounts
payable). The taxonomy also defines the relationships between each element (like inventory is a
component of cur- rent assets and current assets is a component of total assets).

309
 ANSWERS TO PROGRESS CHECKS
1. By each company providing tags for each piece of its financial data as computer
read- able, XBRL allows immediate access to each type of financial statement user,
be they financial analysts, investors, lenders, for their own specific use.
2. Standardized metrics allow for comparison of different companies by using similar
titles for similar financial elements. While these standardized metrics are determined by
a data vendor such as Calcbench or XBRLAnalyst (among others), they greatly
facilitate the use and value of financial reporting provided by XBRL.
3. When journal entries and transactions are made in an XBRL-GL system, there is the
pos- sibility of real-time financial reporting. In the author’s opinion, income statement
infor- mation (including sales, cost of goods sold, and SG&A expenditures) would be
useful to financial users on a real-time basis. Any information that does not change
frequently would not be as useful. Examples include real-time financial elements,
including good- will, long-term debt, and property, plant, and equipment.
4. Standardized metrics are useful for comparing companies because they allow for
similar accounts to have the same title regardless of the account names used by the
various companies. They allow for ease of comparison across multiple companies.
5. Answers may vary on how to visualize the data. It might depend on the type of
reporting that is selected. For example, is it solely a digital dashboard, or is it a report
with many facts and figures where more sparklines might clutter up the overall
appearance? The nice thing about sparklines is they are generally small and just show
simple trends rather than details about the horizontal and vertical axes.
6. Profit margin = (Revenues – Cost of revenue)/Revenues = ($7.088B – $5.007B)/
$7.088B = 29.4%
Operating leverage = Sales/Assets = ($7.088B / $35.258B) = 20.1%
Financial leverage = Assets/Equity = $35.258B / $7.474B = 471.7%
ROE = Profit margin × Operating leverage (or Asset turnover) × Financial leverage =
0.294 × 0.201 × 4.717 = 0.278
7. The MD&A section of the 10-K has management reporting on what happened in the
most recent period and what they expect will happen in the coming year. They are
usu- ally upbeat and generally optimistic about the future. The footnotes are generally
back- ground looking and would be much more factual-based, careful, and
conservative. We would expect the MD&A section to be much more optimistic than
the footnotes.
8. Accounting has its own lingo. Words that might seem negative for the English
language are not necessarily negative for financial reports. For this reason, the
results diverge based on whether the standard English usage dictionary (H4N-inf) or
the financial dic- tionary (Fin-Neg) is used. The relationship between the excess stock
market return and the financial dictionary is what we would expect.

Multiple Choice Questions

1. The DuPont analysis of return on equity (ROE) includes all of the following
component ratios except:
a. Asset turnover.
b. Inventory turnover.
c. Financial leverage.
d. Profit margin.

310
2. XBRL stands for:
a. Extensible Business Reporting Language.
b. Extensive Business Reporting Language.
c. XML Business Reporting Language.
d. Excel Business Reporting Language.
3. Which term defines and describes each XBRL financial element?
a. Data dictionary
b. Descriptive statistics
c. XBRL-GL
d. Taxonomy
4. Which stage of the IMPACT model (introduced in chapter 1) would the use of spark-
lines fit?
a. Track outcomes
b. Communicate insights
c. Address and refine results
d. Perform test plan
5. What is the name of the output from data vendors to help compare companies using
different XBRL tags for revenue?
a. XBRL taxonomy
b. Data assimilation
c. Consonant tagging
d. Standardized metrics
6. What is the term used to describe the process of assigning XBRL tags internally within
a financial reporting/enterprise system?
a. XBRL tagging
b. XBRL taxonomy
c. XBRL-GL
d. XBRL dictionary
7. What computerized technique would be used to perform sentiment analysis on an
annual accounting report?
a. Text mining
b. Sentiment mining
c. Textual analysis
d. Decision trees
8. What type of ratios measure a firm’s operating efficiency?
a. DuPont ratios
b. Liquidity ratios
c. Activity ratios
d. Solvency ratios
9. What type of ratios measure a firm’s ability to pay its debts and stay in business?
a. DuPont ratios
b. Liquidity ratios
c. Activity ratios
d. Solvency ratios

311
10. What is considered an essential component of planning an audit and carrying out
sub-
stantive testing that involves ratio analysis?
a. Environmental analysis
b. Competitive analysis
c. Management integrity analysis
d. Analytical procedures

Discussion Questions
1. Which would you predict would have more positive sentiment in a 10-K, the financial
statements or the MD&A (management discussion and analysis) of the financial
state- ments? More positive sentiment in the footnotes or MD&A? Why?
2. Would you recommend the Securities and Exchange Commission require the use of
sparklines on the face of the financial statements? Why or why not?
3. Why do audit firms perform analytical procedures to identify risk? Which type of ratios
(liquidity, solvency, activity, and profitability ratios) would you use to evaluate the
com- pany’s ability to continue as a going concern?
4. Go to https://xbrl.us/data-rule/dqc_0015-lepr/ and find the XBRL element name for
Interest Expense and Sales, General, and Administrative expense.
5. Go to https://xbrl.us/data-rule/dqc_0015-lepr/ and find the XBRL element name for
Other NonOperating Income and indicate whether XBRL says that should normally be
a debit or credit entry.
6. Go to finance.yahoo.com and type in the ticker symbol for Apple (AAPL) and click on
the statistics tab. Which of those variables would be useful in assessing profitability?
7. Can you think of any other settings, besides financial reports, where tagged data
might be useful for fast, accurate analysis generally completed by computers? How
could it be used in a hospital setting? Or at your university?
8. Can you think of how sentiment analysis might be used in a marketing setting? How
could it be used in a hospital setting? Or at your university? When would it be
especially good to measure the sentiment?

Problems
1. Can you think of situations where sentiment analysis might be helpful to analyze
press releases or earnings announcements? What additional information might it
provide that is not directly in the overall announcement? Would it be useful to have
sentiment analy- sis automated to just get a basic sentiment measure versus the
base level of sentiment expected in a press announcement or earnings
announcement?
2. We noted in the text that negative words in the financial dictionary include words like
loss, claims, impairment, adverse, restructuring, and litigation. What are other
negative words might you add to that list? What are your thoughts on positive words
that would be included in the financial dictionary, particularly those that might be
different than standard English dictionary usage?
3. You’re asked to figure out how the stock market responded to Amazon’s announce-
ment on June 16, 2017, that it would purchase Whole Foods—arguably a
transforma- tional change for Amazon, Walmart, and the whole retail industry.
Required:
a. Go to finance.yahoo.com, type in the ticker symbol for Amazon (AMZN), click on
his- torical data, and input the dates around June 16, 2017. Specifically, see how
much the stock price changed on June 16.
b. Do the same analysis for Walmart (WMT) over the same dates, which was
arguably
most directly affected, and see what happened to its stock price.
312
 4. The preceding question asked you to figure out how the stock market responded to
Amazon’s announcement that it would purchase Whole Foods. The question now is
if the stock market for Amazon had higher trade volume on that day than the average
of the month before.
Required:
a. Go to finance.yahoo.com, type in the ticker symbol for Amazon (AMZN), click on
historical data, and input the dates from May 15, 2017, to June 16, 2017.
Download the data, calculate the average volume for the month prior to June 16,
and compare it to the trading volume on June 16. Any effect on trading volume of
the Whole Foods announcement by Amazon?
b. Do the same analysis for Walmart (WMT) over the same dates and see what hap-
pened to its trading volume. Any effect on trading volume of the Whole Foods
announcement by Amazon?
5. Go to Loughran and McDonald’s sentiment word lists at https://www3.nd.edu/~mcdonald/
Word_Lists.html and download the Master Dictionary. These are what they’ve used to
assess sentiment in financial statements and related financial reports. Give five words
that are considered to be “negative” and five words that are considered to be “con-
straining.” How would you use this in your analysis of sentiment of an accounting
report?
6. Go to Loughran and McDonald’s sentiment word lists at https://www3.nd.edu/~mcdonald/
Word_Lists.html and download the Master Dictionary. These are what they’ve used to
assess sentiment in financial statements and related financial reports. Give five words
that are considered to be “litigious” and five words that are considered to be
“positive.”

Answers to Multiple Choice Questions

1. B
2. A
3. D
4. B
5. D
6. C
7. A
8. C
9. D
10. D

313
 Lab 8-1 Use XBRLAnalyst to Access XBRL Data
Company summary
This lab will pull in XBRL data from Fortune 100 companies listed with the SEC. You
have the option to analyze a pair of companies of your choice based on your own interest
level. This lab will have you compare other companies as well.

Data
The data used in this analysis are XBRL-tagged data from Fortune 100 companies. The
data are pulled from FinDynamics, which in turn pulls the data from the SEC.

Technique
• You will use a combination of spreadsheet formulas and live XBRL data to generate
a spreadsheet that is adaptable and dynamic. In other words, you will create a
template that can be used to answer several financial statement analysis questions.

Software needed
• Google Sheets (sheets.google.com)
• iXBRLAnalyst script (https://findynamics.com/gsheets/ixbrlanalyst.gs)

In this lab, you will:

Part 1: Identify questions related to the income statement.
Part 2: Analyze a list of calculated financial ratios for a selection of companies.
Part 3: Create a dynamic spreadsheet that pulls in XBRL data.
Part 4: Create formulas to identify the companies based on the ratios.

Part 1: Identify the Questions

Financial statement analysis frequently involves identifying relationships between
specific pieces of data. We may want to see how financial data have changed over time or
how the composition has changed.
Q1. Select a Fortune 100 company, such as Apple (AAPL) or Nike (NKE), and
iden- tify three questions you might want to know about that company’s
income over the past three years. For example, “What is the trend of operating
costs?”
Q2. Form a hypothesis for each of your questions. For example, “I expect
Nike’s operating costs have gone up.”

Part 2: Generate a Request for Data

To create a dynamic spreadsheet, you must first connect your sheet to a data source on
the Internet. In this case, you will use Google Sheets because it is hosted online and then
add the iXBRLAnalyst script to connect it to FinDynamics so you can use formulas to
query financial statement elements.
1. Log into Google Sheets (sheets.google.com), and create a new, blank sheet called
XBRL Common.
2. Click Tools > Script Editor from the menu.
3. In a new window, go to findynamics.com/gsheets/ixbrlanalyst.gs.
4. Copy and paste the entire script from the FinDynamics page into the Script Editor
window, replacing any existing text.

314
 5. Click Save and name the project XBRL.
6. Close the Script Editor window and return to your Google Sheet.
7. Reload/refresh the page. If you see a new iXBRLAnalyst menu appear, you are
now connected to the XBRL data.
8. Test your connection by typing in the following formula anywhere on your sheet:
=XBRLFact("AAPL","AssetsCurrent","2017"). If your connection is good, it should
return the value 128645000000 for Apple Inc.’s 2017 balance in current assets.
9. Delete the formula and continue to the next step.
Note: Once you’ve added the iXBRLAnalyst script to a Google Sheet, you can simply
open that sheet, then go to File > Make a copy . . . , and the script will automatically be
copied to the new sheet.
The basic formulas available with the iXBRLAnalyst script are:
=FinValue(company, tag, year, period, member, scale)
=XBRLFact(company, tag, year, period, member, scale, true)
=SharePriceStats(company, date, duration, request)
where:
company = ticker symbol (e.g., “AAPL” for Apple Inc.)
tag = XBRL tag or normalized tag (e.g., “NetIncomeLoss” or “[Net Income]”)
year = reporting year (e.g., “2017”)
period = fiscal period (e.g., “Q1” for 1st Quarter or “Y” for year)
scale = rounding (e.g., “k,” “thousands,” or “1000” for thousands) [Note: There is an
error with rounding, so it is suggested to simply divide the formula by the scale instead,
e.g.
=XBRLFact(c,t,y,p)/scale.]
Because companies frequently use different tags to represents similar concepts (such
as the tags ProfitLoss or NetIncomeLoss to identify Net Income), it is important to make
sure you’re using the correct values. FinDynamics attempts to coordinate the diversity of
tags by using normalized tags that use formulas and relationships instead of direct tags.
Normalized tags must be contained within brackets []. Some examples are given in Lab
Table 8-1A.
If you’re looking for specific XBRL tags, you can explore the current XBRL
taxonomy at xbrlview.fasb.org.
Balance Sheet Income Statement Statement of Cash Flows
[Cash, Cash Equivalents and Short-Term [Revenue] [Cash From Ope rations (CFO)]
Investments] [Cost of Revenue] [Changes in Working Capital]
[Short-Term Investments] [Gross Profit] [Changes in Acc unts Receivables]
[Accounts Receivable, [Selling, General & Administrative [Changes in o ilities]
Current] [Inventory] Expense] [Changes in Liabentories]
[Other Current Assets] [Research & Development [AdjustmentsInv Non-Cash Items, CF]
[Current Assets] Expense] [Depreciation (& [Provision F of ubtful Accounts]
[Net of Property, Plant & Equipment] Amortization), IS] [Non-Interest [Depreciationor DoAmortization), CF]
[Long-Term Investments] Expense] [Stock-Based (& pensation]
[Intangible Assets, Net] [Other Operating Expenses] [Pension and Com her Retirement Benefits]
[Goodwill] [Operating Expenses] [Interest PaidOt
[Other Noncurrent Assets] [Operating Income] [Other CFO] ]
[Noncurrent Assets] [Other Operating Income] [Cash from ting (CFI)]
[Assets] [Non-Operating Income (Expense)] [Capital ExpeInvestures]
[Accounts Payable and Accrued Liabilities, [Interest Expense] [Payments to ndi uire Investments]
Current] [Costs and Expenses] [Proceeds fr Acq Investments]
[Short-Term Borrowing] [Earnings Before [Other CFI] om
[Long-Term Debt, Current] Taxes] [Income Taxes] [Cash From ncing (CFF)]
[Other Current Liabilities] [Income from Continuing Operations] [Payment of Fina dends]
Divi

Lab Table 8-1A Normalized Accounts Created by FinDynamics for XBRLAnalyst

315
 Balance Sheet Income Statement Statement of Cash Flows
[Current Liabilities] [Income from Discontinued [Proceeds from Sale of Equity]
[Other Noncurrent Liabil ities ] Operations, Net of Taxes] [Repurchase of Equity]
[Noncurrent Liabilities] [Extraordinary Items, Gain (Loss)] [Net Borrowing]
[Liabilities] [Net Income] [Other CFF]
[Preferred Stock] [Net Income Attributable to Parent] [Effect of Exchange Rate
[Common Stock] [Net Income Attributable to Changes] [Total Cash, Change]
[Additional Paid-in Capital] Noncontrolling Interest] [Net Cash, Continuing Operations]
[Retained Earnings (Accumul ated Deficit)] [Preferred Stock Dividends and Other [Net CFO, Continuing Operations]
[Equity Attributable to Parent ] Adjustments] [Net CFI, Continuing Operations]
[Equity Attributable to Nonco ntrolling Interest] [Comprehensive Income (Loss)] [Net CFF, Continuing Operations]
[Stockholders’ Equity] [Other Comprehensive Income (Loss)] [Net Cash, DO]
[Liabilities & Equity] [Comprehensive Income (Loss) [Net CFO, DO]
Attributable to Parent] [Net CFI, DO]
[Comprehensive Income (Loss) [Net CFF, DO]
Attributable to Noncontrolling
Interest]

Lab Table 8-1A ntinued)

(Co

Part 3: Perform an Analysis of the Data

We will begin by creating a common-size income statement for one company over a
three- year period.

10. In your Google Sheet, begin by entering the values for the tags, as shown:

A B
LAB EXHIBIT 8-1A
1 Company AAPL
2 Year 2016
3 Period Y
4 Scale 1000000

11. Then set up your financial statement using the following normalized tags and
periods. Note: Because we already identified the most current year in A2, we’ll use a
formula to find the three most recent years.

A B C D
LAB EXHIBIT 8-1B
6 =$B2 =B6-1 =C6-1
7 [Revenue]
8 [Cost of Revenue]
9 [Gross Profit]
10 [Selling, General & Administrative Expense]
11 [Research & Development Expense]
12 [Other Operating Expenses]
13 [Operating Expenses]
14 [Operating Income]
15 [Depreciation (& Amortization), CF]
16 [Interest Income]

316
 A B C D
17 [Earnings before Taxes]
18 [Income Taxes]
19 [Net Income]

12. Now enter the =XBRLFact() formula to pull in the correct values, using relative
refer- ences (e.g., $A$1) as necessary. For example, the formula in B7 should be
=XBRLFact($B$1,$A7,B$6,$B$3)/$B$4.
13. If you’ve used relative references correctly, you can either drag the formula down
and across columns B, C, and D, or copy and paste the cell (not the formula itself)
into the rest of the table.
14. Use the formatting tools to clean up your spreadsheet, then take a screenshot
(label it 8-1A).
Next, you can begin editing your dynamic data and expanding your analysis,
identifying trends and ratios.
15. In your Google Sheet, use a sparkline to show the change in income
statement accounts:
a. In cell E7, type: =SPARKLINE(B7:D7).
b. Note: The line is trending toward the left.
16. Now perform a vertical analysis in the columns to the right showing each value as
a percentage of revenue:
a. Copy cells B6:D6 into F6:H6.
b. In F7, type =B7/B$7.
c. Drag the formula to fill in F7:H19.
d. Format the numbers as a percentage.
e. Add a sparkline in Column I.
17. Take a screenshot (label it 8-1B).

Part 4: Address and Refine Results

Now that you have a common-size income statement, replace the company ticker in cell
B1 with your selected company’s ticker and press Enter. The data on the spreadsheet will
update.
Q3. Look at the trends and composition of the income statement, then answer
your three questions from Q1.
Q4. How did the actual results compare with your hypothesis?
Q5. Replace the company ticker with a competitor of your company (e.g., MSFT
vs AAPL). How do their trends compare with your initial company?
Q6. How could you expand this spreadsheet to include multiple competitors’
data on the same sheet for quick analysis?

End of Lab

Lab 8-2 Use XBRLAnalyst to Create

Dynamic Common-Size Financial
Statements
XBRLAnalyst allows us to easily create common-size financial statements. Using the
skills learned in Lab 8-1, now extend the analysis to identify some companies based on
their
317
 financial performance. The Fortune 100 companies listed in Lab Exhibit 8-2A operate in
a
variety of industries. Their FY2016 revenue and assets appear below:

LAB EXHIBIT 8-2A Revenue (millions) Assets (millions)

Background Information Company FY2016 FY2016
on Selected Fortune BANK OF AMERICA (BAC), through its subsidiaries, provides $80,104 $2,187,702
100 Companies various banking and financial products and services for individual
consumers, small- and middle-market businesses, institutional
investors, corporations, and governments in the United States and
internationally.
WALMART (WMT) operates retail stores in various formats $482,130 $199,581
worldwide. The company operates in three segments: Walmart
U.S., Walmart International, and Sam’s Club.
CISCO (CSCO) designs, manufactures, and sells Internet protocol $49,247 $121,652
(IP)–based networking and other products related to the commu-
nications and information technology industries worldwide.
COCA-COLA (KO) is a beverage company engaging in the manu- $41,863 $87,270
facture, marketing, and sale of nonalcoholic beverages worldwide.
BOEING (BA) engages in the design, development, manufacture, $94,571 $89,997
sale, and support of commercial jetliners, military aircraft, satel-
lites, missile defense, human space flight, and launch systems and
services worldwide.
EBAY (EBAY) provides online platforms, tools, and services to $8,979 $23,847
help individuals and merchants in online and mobile commerce
and payments in the United States and internationally.
AMAZON (AMZN) operates as an online retailer in North $135,987 $83,402
America and internationally.
MERCK (MRK) provides various health solutions through its $39,807 $95,377
pre- scription medicines, vaccines, biologic therapies, animal
health, and consumer care products worldwide.
WALT DISNEY COMPANY (DIS) is an entertainment company $55,632 $92,033
that operates television and movie studios as well as theme parks.
MONDELEZ (MDLZ) produces consumer food products, such as $25,923 $61,538
Oreo cookies.

In Lab Exhibit 8-2B, you’ll find the common-size ratios for each Lab Exhibit 8-2A
company’s income statement (as a percentage of revenue) and balance sheet (as a
percentage of assets).

A B C D E F G H I J
As a Percentage of Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 64.9% 37.1% 74.9% 22.4% 9.6% 34.9% 60.9% 4.5% 39.3% 85.4%
Gross Profit 35.1% 62.9% 25.1% 77.6% 90.4% 65.1% 39.1% 95.5% 60.7% 14.6%
Research & Development 0.0% 12.8% 0.0% 12.4% 0.0% 25.4% 0.0% 0.0% 0.0% 4.9%
Selling, General and Adm inistrative 7.1% 23.2% 20.1% 36.4% 15.7% 24.5% 25.2% 53.8% 36.5% 3.8%
Expenses
Other Operating Expenses 89.8% 0.5% 0.0% 3.0% –4.3% 1.6% 3.3% 0.0% 0.0% 0.0%
Total Operating Expenses 96.9% 37.2% 20.1% 51.8% 16.0% 51.6% 29.2% 54.7% 36.5% 8.7%
Operating Income/Loss 3.1% 25.7% 5.0% 25.9% 84.0% 13.5% 9.9% 47.7% 20.6% 6.2%

LAB EXHIBIT 8-2B Mystery Ratios

318
 A B C D E F G H I J
As a Percentage of Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total Other Income/Expenses Net –0.2% 0.5% 0.0% 0.0% 0.0% –1.8% –4.3% 0.6% –1.4% 0.0%
Interest Expense 0.4% 1.4% 0.5% 0.0% –0.5% 0.0% 0.0% 12.4% 1.8% 0.3%
Income before Tax 2.8% 26.2% 4.5% 40.7% 26.7% 11.7% 5.6% 31.4% 19.4% 5.9%
Income Tax Expense 1.0% 4.4% 1.4% –40.5% 9.1% 1.8% 0.5% 9.0% 3.8% 0.7%
Minority Interest 0.0% 0.0% 0.1% 0.0% 0.7% 0.1% 0.0% 0.0% 0.1% 0.0%
Net Income 1.7% 21.8% 3.1% 80.9% 17.6% 9.9% 6.4% 22.4% 15.6% 5.2%
As a Percentage of Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Current Assets 54.9% 64.7% 30.2% 37.2% 18.4% 32.1% 13.8% 0.0% 39.0% 69.4%
Cash 23.2% 6.3% 4.4% 7.6% 5.0% 6.8% 0.0% 6.8% 9.8% 9.8%
Investments 8.0% 47.8% 0.0% 22.4% 0.0% 8.2% 0.0% 8.2% 15.6% 1.4%
Receivables 10.0% 4.8% 2.8% 2.5% 9.8% 7.4% 4.2% 40.9% 4.4% 9.8%
Inventory 13.7% 1.0% 22.3% 0.0% 1.5% 5.1% 4.0% 0.0% 3.1% 48.0%
Other Current Assets 8.0% 52.6% 4.9% 27.1% 6.9% 12.8% 2.7% 0.0% 21.7% 11.5%
Total Current Assets 54.9% 64.7% 30.2% 37.2% 18.4% 32.1% 13.8% 0.0% 39.0% 69.4%
Long-Term Investments 0.0% 3.4% 0.0% 16.6% 4.7% 12.0% 9.1% 13.4% 18.6% 1.5%
Property, Plant and Equipment 34.9% 2.9% 55.2% 6.4% 29.7% 12.6% 13.4% 0.4% 12.2% 14.2%
Goodwill 4.5% 21.9% 8.4% 18.9% 30.2% 19.0% 32.9% 3.2% 12.2% 5.9%
Intangible Assets 0.0% 2.1% 0.0% 0.4% 7.6% 18.1% 29.4% 0.1% 11.2% 2.8%
Amortization 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other Assets 5.7% 5.0% 6.3% 20.5% 9.4% 6.1% 1.4% 0.0% 6.8% 6.1%
Long-Term Assets 45.1% 35.3% 69.8% 62.8% 81.6% 67.9% 86.2% 85.0% 61.0% 30.6%
Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Liabilities 76.9% 47.7% 58.1% 55.8% 48.6% 57.7% 59.0% 87.8% 73.4% 99.0%
Current Liabilities 52.5% 20.5% 32.4% 16.1% 18.3% 18.0% 23.4% 0.0% 30.4% 55.7%
Accounts Payable 30.3% 3.7% 29.4% 1.6% 9.9% 6.7% 12.7% 0.0% 10.9% 28.8%
Current Portion of Long-Term Debt 0.0% 0.0% 1.7% 0.0% 4.0% 0.0% 2.4% 7.8% 4.0% 0.0%
Other Current Liabilities 22.2% 13.3% 0.0% 8.4% 4.4% 10.8% 4.3% 57.6% 15.5% 26.5%
Long-Term Debt 9.2% 20.1% 19.1% 31.5% 17.9% 25.5% 0.0% 0.0% 34.0% 0.0%
Other Liabilities 15.1% 6.4% 2.9% 8.2% 12.4% 14.2% 14.1% 0.0% 9.0% 32.7%
Minority Interest 0.0% 0.0% 1.5% 0.0% 4.4% 0.2% 0.1% 0.0% 0.2% 0.1%
Total Liabilities 76.9% 47.7% 58.1% 55.8% 48.6% 57.7% 59.0% 87.8% 73.4% 99.0%
Total Stockholders’ Equity 23.1% 52.3% 41.9% 44.2% 51.4% 42.3% 41.0% 12.2% 26.6% 1.0%
Total Liabilities and Stockholders’ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Equity

LAB EXHIBIT 8-2B (Continued)

1. Use a Google Sheet with the iXBRLAnalyst script as well as the normalized
accounts in Lab Exhibit 8-2B (or search for XBRL tags in the FASB taxonomy if
normalized accounts aren’t available) to recreate the ratios above.
2. Take a screenshot (label it 8-2A) of your completed worksheet.
Q1. Using the skills learned from your prior financial accounting classes, your
abil- ity to extract information from XBRL, and your knowledge of common-
size financial statements, match the company names in Lab Exhibit 8-2A
with their corresponding ratios in each column of Lab Exhibit 8-2B?

319
 • Column A = which company?
• Column B =
• Column C =
• Column D =
• Column E =
• Column F =
• Column G =
• Column H =
• Column I =
• Column J =

End of Lab

Lab 8-3 Use XBRL to Access and Analyze Financial

Statement Ratios—The Use of DuPont Ratios
Financial analysts, investors, lenders, auditors, and many others perform ratio analysis
to help review and evaluate a company’s financial statements and financial performance.
This analysis allows the stakeholder to gain an understanding of the financial health of
the company and gives insights to allow more insightful and, hopefully, more effective
decision making.
In this lab, you will access XBRL data to complete data analysis and generate finan-
cial ratios to compare the financial performance of several companies. Financial ratios
can more easily be calculated using spreadsheets and XBRL. You will (1) select an
industry to analyze, (2) create a copy of a spreadsheet template, (3) input ticker symbols
from three
U.S. public companies, and (4) calculate financial ratios and make observations about the
state of the companies using these financial ratios.

Data
• Financial Elements from XBRL from SEC Filings

Software needed
• Google Account
• Google Sheets
• Browser connected to Internet

Specifically, you will:

Part 1: Analyze financial changes over a three-year period for a single company.
Part 2: Compare financial metrics across competing companies within one industry
for a single period.
Part 3: Identify potential flaws or shortcomings in the data.
Part 4: Understand how XBRL facilitates complex financial analyses.

Part 1: Identify the Problem

Interested stakeholders of the firm need access to real-time, accurate financial data. Since
2011, stakeholders have used XBRL data to meet this need.

320
 Q1. How does XBRL fulfill the need for real-time, accurate financial data?
Q2. Why is it useful to compare multiple companies at once?

Part 2: Master the Data and Prepare for Analysis

To master the data and prepare for analysis, we need to pick which industry and which
companies to analyze.
1. Below is a list of 15 Fortune 100 companies in five different industries. Each of
these companies has attributes and strategies that are similar to and different from
its competitors. Choose one industry to analyze.
Retail: Walmart (WMT), Target (TGT), Costco (Cost)
Technology: Microsoft (MSFT), Apple (AAPL), Facebook (FB)
Pharmaceutical: Johnson & Johnson (JNJ), Merck (MRK), Bristol-Myers Squibb
(BMY)
Finance: Citigroup (C), Wells-Fargo (WFC), JPMorgan Chase (JPM)
Energy: ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP)
Create a copy of a spreadsheet template in the following way:
2. Open a web browser and go to drive.google.com.
3. If you haven’t done so already, sign in to your Google account.
4. Go to http://tinyurl.com/xbrlratios. You will see a spreadsheet similar to
Lab Exhibit 8-3A.
5. Click File > Make a copy. . . as shown in Lab Exhibit 8-3A.
6. Rename your spreadsheet if desired and click OK to save a copy to your Drive. A
new tab will open with your copy of the spreadsheet. You may now edit the values
and formulas.

LAB EXHIBIT 8-3A

XBRL Financial Ratios
in Google Sheets
Source: Microsoft Excel 2016

321
 Part 3: Input Ticker Symbols
Refer to Lab Exhibit 8-3B for your industry’s ticker symbols.

LAB EXHIBIT 8-3B Retail Technology Pharmaceutical Finance Energy

Input Ticker Symbols
WMT MSFT JNJ C XOM
TGT AAPL MRK WFC CVS
KR FB BMY JPM PSX

7. Referring to Lab Exhibit 8-3B for your industry’s ticker symbols, in the Main Company
Ticker field, input the ticker of the company you would like to focus your analysis
on and press Enter. In a moment, the value on the spreadsheet will change to
Loading. . . and then show your company’s financial figures.
8. In the Most Recent Year field, enter the most recent reporting year. It may be the
cur- rent year or the previous year.
9. In the Period field, enter either FY for a fiscal year or Q1 for 1st quarter, etc.
10. In the Round to field, choose the rounding amount. 1,000 will round to thousands
of dollars; 1,000,000 will round to millions of dollars.
11. In the Comparable 1 Ticker field, input the ticker of a second company you would
like to compare with your first company.
12. In the Comparable 2 Ticker field, input the ticker of a third company you would like
to compare with your first company.
13. Take a screenshot (label it 8-3A) of your figure with the financial statements of
your chosen companies.

Part 4: Analyze the Financial Ratios

First, review the Facts sheet (or tab) to determine whether there are any values missing
for the companies you are analyzing. Describe what impact (if any) the missing data have
on the ratios. Once you have determined whether any data are missing, you have a chance
to find some interesting trends and comparisons in the data. You will click through the
sheets at the bottom to review the ratios. To aid in this analysis, the template also includes
sparklines that provide a mini-graph to help you quickly visualize any significant values
or trends.
Q3. Review the 14 financial ratios and make some conclusions or judgments
about the values, trends, or comparisons with the other companies. For
example, if one company has a significantly higher debt-to-equity ratio than
the other two, what might be driving this?
Q4. Has the company you are analyzing seen any major changes in its ratios in
the past three years? Which of the three companies is most liquid in the most
cur- rent year?
Q5. How has your company managed short-term liabilities over the last
three years?
Q6. Analyze liquidity, profitability, financing (leverage), and activity for your
com- pany. Where is it strong?
Q7. Consider the DuPont framework to interpret the results and make sure you
make a judgment about your company’s financial position based upon the
data.

End of Lab

322
 Lab 8-4 Use SQL to Query an XBRL Database
Company summary
As the chapter mentioned, there are 19,000 tags in the XBRL taxonomy, which doesn’t
even include the custom tags that organizations have created for themselves. The normal-
ized tags XBRLAnalyst provides can be helpful, but sometimes you will need to find a
more specific tag. One way that you can do this is by using SQL to query an XBRL
database for all tags that are similar to the normalized tag you are working with.

Data
We have provided a subset of the XBRL database in the Access database file
XBRL.accdb. We have used the Arelle open-source XBRL platform to build our subset,
which in turn pulls the data from the SEC.

Technique
• You will use SQL to query the database.

Software needed
• Microsoft Access

In this lab, you will:

Part 1: Identify questions related to XBRL tags and
taxonomy. Part 2: Analyze tags and then do more in-depth
querying.

Part 1: Identify the Questions

One of the aspects that querying the XBRL database can be most helpful for is quickly
viewing a list of tags that are similar or for quickly viewing a list of companies that have
something in common over the years or even during a specific filing period.
Q1. Identify three questions that would be interesting regarding finding
common- alities in XBRL tags or in filtering the data to view a subset
based on similar criteria.
Q2. If you didn’t know how to use SQL to query an XBRL database, how would
you go about trying to answer the three questions you identified in Q1?
The questions we will answer are the following:
1. To see another way of working with the data to filter down to only seeing
companies that meet a certain type of criteria, what large accelerated filers filed
last March?
2. To help us identify how many different iterations there are within one type of
financial statement data element, we will create a query to show us all of the XBRL
tags that contain “cash” in their description.

Part 2: Master the Data

The XBRL database in full is a very large database. Our subset is a bit easier to manage.
Lab Exhibit 8-4A is a database schema of the tables, attributes, and relationships in the
Access database that you will work with in this lab. The database schema in full can be
found at this URL:
http://arelle.org/wordpress/wp-content/uploads/2014/07/sql_diagram.png if you are
interested.
Lab Exhibit 8-4B, describes the most common table functions.
323
 LAB EXHIBIT 8-4A X

LAB EXHIBIT 8-4B Table Name Description

Table Explanations
Entity Information on the entity that submitted the filing
Filing Information about individual filings
Report Link from the information about the filing to the information in the filing
Period Date information
Unit To what degree any observation was recorded

324
Part 5: Address and Refine Results
Based on the massive amount of tags that contain the word cash in them, we may decide
to be more specific with the query.
7. This time, refine the query to show only the tags that begin with the word Cash.
8. Take a screenshot (label it 8-4C) that includes the first rows that are in your output,
as well as the bottom corner that indicates how many total rows were in the query
results.

Q4. How would you further drill down into the first question about the large filers?
Q5. Do you think the number of outputs you got for the different types of tags
with the word Cash is reasonable? What recommendation would you have
regarding the numerous elements in the taxonomy?

End of Lab

325
Glossary
A continuous data (142) One way to categorize quantitative
data, as opposed to discrete data. Continuous data can take
Audit Data Standards (ADS) (193) The Audit Data
on any value within a range. An example of continuous
Standards define common tables and fields that are needed
data is height.
by auditors to perform common audit tasks. The AICPA
developed these standards.
D
B Data Analytics (4) The process of evaluating data with the
Balanced Scorecard (252) A particular type of digital purpose of drawing conclusions to address business ques-
dash- board that is made up of strategic objectives, as well tions. Indeed, effective Data Analytics provides a way to
as KPIs, target measures, and initiatives, to help the search through large structured and unstructured data to
organization reach its target measures in line with strategic identify unknown patterns or relationships.
goals. data dictionary (14, 43) Centralized repository of descrip-
Benford’s law (100) An observation about the frequency tions for all of the data attributes of the dataset.
of leading digits in many real-life sets of numerical data. The data reduction (11, 94) A data approach used to reduce
law states that in many naturally occurring collections of the amount of information that needs to be considered to
numbers, the leading significant digit is likely to be small. focus on the most critical items (i.e., highest cost, highest
big data (4) Datasets that are too large and complex for risk, larg- est impact, etc.).
businesses’ existing systems to handle utilizing their tradi- data request form (45) A method for obtaining data if you
tional capabilities to capture, store, manage, and analyze do not have access to obtain the data directly yourself.
these datasets. data warehouse (193) A data warehouse is a repository of
data accumulated from internal and external data sources,
including financial data, to help management decision
C making.
causal modeling (95) A data approach similar to decision boundaries (104) Technique used to mark the
regression, but used when the relationship between split between one class and another.
independent and depen- dent variables where it is decision tree (104) Tool used to divide data into smaller groups.
hypothesized that the independent variables cause or are
associated with the dependent variable. declarative visualizations (143) Made when the aim of
your project is to "declare" or present your findings to an
classification (9, 95) A data approach used to assign audi- ence. Charts that are declarative are typically made
each unit in a population into a few categories potentially after the data analysis has been completed and are meant to
to help with predictions. exhibit what was found in the analysis steps.
clustering (10, 94) A data approach used to divide descriptive analytics (212) Descriptive analytics
individu- als (like customers) into groups (or clusters) in a summarize activity or master data elements based on certain
useful or meaningful way. attributes.
co-occurrence grouping (10, 94) A data approach used to descriptive attributes (42) Attributes that exist in relational
discover associations between individuals based on transac- databases that are neither primary nor foreign keys. These
tions involving them. attributes provide business information, but are not required
composite primary key (42) A special case of a to build a database. An example would be “Company Name”
primary key that exists in linking tables. The composite or “Employee Address.”
primary key is made up of the two primary keys in the diagnostic analytics (212) Diagnostic analytics looks for
table that it is linking. correlations or patterns of interest in the data.
computer-assisted audit techniques (CAATs) (212) Computer- digital dashboard (252) An interactive report showing the
assisted audit techniques (CAATs) are automated scripts most important metrics to help users understand how a
that can be used to validate data, test controls, and enable company or an organization is performing. Often created
substan- tive testing of transaction details or account using Excel or Tableau.
balances and generate supporting evidence for the audit.
326
 Glossary 327

discrete data (142) One way to categorize quantitative

data, as opposed to continuous data. Discrete data are I
represented by whole numbers. An example of discrete data interval data (142) The third most sophisticated type of
is points in a basketball game. data on the scale of nominal, ordinal, interval, and ratio; a
DuPont ratio analysis (306) Developed by the DuPont type of quantitative data. Interval data can be counted and
Corporation to decompose performance (particularly return grouped like qualitative data, and the differences between
on equity [ROE]) into its component parts. each data point are meaningful. However, interval data do
not have a meaningful 0. In interval data, 0 does not mean
“the absence of” but is simply another number. An example
E of interval data is the Fahrenheit scale of temperature
measurement.
ETL (44) The extract, transform, and load process that is
integral to mastering the data.
exploratory visualizations (143) Made when the lines K
between steps P (perform test plan), A (address and refine
results), key performance indicator (KPI) (252) A particular type
and C (communicate results) are not as clearly divided as they of performance metric that an organization deems the most
are in a declarative visualization project. Often when you are important and influential on decision making.
exploring the data with visualizations, you are performing the
test plan directly in visualization software such as Tableau
instead of creating the chart after the analysis has been done. L
link prediction (10, 95) A data approach used to predict a
F relationship between two data items.
financial statement analysis (305) Used by investors,
ana- lysts, auditors, and other interested stakeholders to
review and evaluate a company’s financial statements and
M
financial performance. mastering the data (40) The second step in the IMPACT
flat file (41, 193) A means of storing data in one place, cycle; it involves identifying and obtaining the data needed
such as in an Excel spreadsheet, as opposed to storing the for solving the data analysis problem, as well as cleaning and
data in multiple tables, such as in a relational database. preparing the data for analysis.
foreign key (42) An attribute that exists in relational data- monetary unit sampling (MUS) (213) Monetary unit sam-
bases in order to carry out the relationship between two pling allows auditors to evaluate account balances. MUS is
tables. This does not serve as the “unique identifier” for more likely to pull accounts with large balances (higher risk
each record in a table. These must be identified when and exposure) because it focuses on dollars, not account
mastering the data from a relational database in order to numbers.
extract the data correctly from more than one table.
fuzzy match (102) A computer-assisted technique of
finding matches that are less than 100 percent perfect by N
finding cor- respondencies between portions of the text of nominal data (141) The least sophisticated type of
each potential match. data on the scale of nominal, ordinal, interval, and ratio;
fuzzy matching (218) Fuzzy matching finds matches that a type of qualitative data. The only thing you can do with
may be less than 100 percent matching by finding nominal data is count, group, and take a proportion.
correspon- dences between portions of the text or other Examples of nominal data are hair color, gender, and
entries. ethnic groups.
normal distribution (142) A type of distribution in
which the median, mean, and mode are all equal, so half of
H all of the observations fall below the mean and the other
heterogeneous systems approach (193) Heterogeneous systems half fall above the mean. This phenomenon is naturally
represent multiple installations or instances of a system. It occurring in many datasets in our world, such as SAT
would be considered opposite of a homogenous system. scores and heights and weights of newborn babies. When
datasets follow a nor- mal distribution, they can be
homogenous systems approach (193) Homogenous systems
standardized and compared for easier analysis.
represent one single installation or instance of a system. It
would be considered opposite of a heterogeneous system.
328 Glossary

O between data points are meaningful, allowing the data to be

not just counted, grouped, and ranked, but also to have more
ordinal data (141) The second most sophisticated type of
complex operations performed on it such as mean, median,
data on the scale of nominal, ordinal, interval, and ratio;
and standard deviation.
a type of qualitative data. Ordinal can be counted and cat-
egorized like nominal data and the categories can also be
ranked. Examples of ordinal data include gold, silver, and
bronze medals.
R
ratio analysis (305) Tool used to evaluate relationships
among different financial statement items to help
P understand a company’s financial and operating
performance.
performance metric (252) Any calculation measuring
how an organization is performing, particularly when that ratio data (142) The most sophisticated type of data on
measure is compared to a baseline. the scale of nominal, ordinal, interval, and ratio; a type of
quan- titative data. Such data can be counted and grouped
predictive analytics (212) Predictive analytics attempt to just like qualitative data, and the differences between each
find hidden patterns or variables that are linked to abnormal data point are meaningful like with interval data.
behavior. Additionally, ratio data have a meaningful 0; in other words,
predictor (or independent or explanatory) variable (9) once a dataset approaches 0, 0 means “the absence of.” An
A variable that predicts or explains another variable, example of ratio data is currency.
typically called a predictor or dependent variable. regression (9) A data approach that attempts to estimate or
prescriptive analytics (212) Prescriptive analytics use predict, for each unit, the numerical value of some variable
machine learning and artificial intelligence for auditors as using some type of statistical model.
decision support to assist future auditors find potential issues regression (95) A data approach used to estimate or pre-
in the audit. dict, for each unit, the numerical value of some variable
primary key (41) An attribute that is required to exist in using some type of statistical model.
each table of a relational database and serves as the “unique relational database (41) A means of storing data in order
identifier” for each record in a table. to ensure that the data are complete, not redundant, and to
production or live systems (193) Production (or live sys- help enforce business rules. Relational databases also aid in
tems) are those active systems that collect and report and are communication and integration of business processes across
directly affected by current transactions. an organization.
profiling (10, 94) A data approach used to characterize response (or dependent) variable (9) A variable that
the “typical” behavior of an individual, group or population responds to, or is dependent, on another.
by generating summary statistics about the data (including
mean, standard deviations, etc.).
proportion (141) The primary statistic used with S
quantitative data. Proportion is calculated by counting the similarity matching (10) A data approach that attempts to
number of items in a particular category, then dividing that identify similar individuals based on data known about
number by the total number of observations. them.
similarity matching (95) A data approach used to
identify similar individuals based on data known about
Q them.
qualitative data (141) Categorical data. All you can do sparklines (306) A small trendline or graphic that efficiently
with such data is count and group; in some cases, you can summarizes numbers or statistics in a graph without axes.
rank the data. Qualitative data can be further defined in two standard normal distribution (142) A special case of the
ways: nominal data and ordinal data. There are not as many normal distribution used for standardizing data. The stan-
options for charting qualitative data because they are not as dard normal distribution has 0 for its mean (and thus, for its
sophisticated as quantitative data. mode and median, as well), and 1 for its standard deviation.
quantitative data (142) More complex than qualitative standardization (142) The method used for comparing two
data. Quantitative data can be further defined in two ways: datasets that follow the normal distribution. By using a for-
interval and ratio. In all quantitative data, the intervals mula, every normal distribution can be transformed into the
standard normal distribution. If you standardize both datas-
ets, you can place both distributions on the same chart and
more swiftly come to your insights.
 Glossary 329

standardized metrics (303) Metrics used by data vendors to training data (104) Existing data that have been manually
allow easier comparison of company reported XBRL data. evaluated and assigned a class, which assists in classifying
structured data (98) Data that are organized and reside in the test data.
a fixed field with a record or a file. Such data are generally
con- tained in a relational database or spreadsheet and are U
readily searchable by search algorithms.
unsupervised approach/method (94) Approach used for data
supervised approach/method (94) Approach used to
exploration looking for potential patterns of interest.
learn more about the basic relationships between
independent and dependent variables that are hypothesized
to exist. X
support vector machines (106) A discriminating classifier XBRL (eXtensible Business Reporting Language) (102, 302)
that is defined by a separating hyperplane that works first to A global standard for exchanging financial reporting informa-
find the widest margin (or biggest pipe). tion that uses XML; a global standard for Internet communi-
Systems translator software (193) Systems translator soft- cation among businesses.
ware maps the various tables and fields from varied ERP XBRL taxonomy (302) Defines and describes each key
systems into a consistent format. data element (like cash or accounts payable). The taxonomy
also defines the relationships between each element (like
inven- tory is a component of current assets and current
T assets is a component of total assets).
test data (104) A set of data used to assess the degree XBRL-GL (303) Stands for XBRL general ledger;
and strength of a predicted relationship established by the relates to the ability of enterprise system to tag financial
analy- sis of training data. elements within the firm’s financial reporting system.
Index
Note: Page numbers followed by n indicate source notes or Lab 6-5: Comprehensive Case: Dillard’s Store Data/
footnotes. Hypothesis Testing (Part II—Data Visualization),
249
Lab 7-2: Create a Balanced Scorecard Dashboard in
A
Tableau, 272
Access. See Microsoft Access
Lab 7-5: Comprehensive Case: Dillard’s Store Data/
Account balance tests
Creating KPIs in Excel (Part III), 294–295
Lab 6-2: Perform Substantive Tests of Account Balances,
Lab 7-6: Comprehensive Case: Dillard’s Store Data/
234–240
Creating KPIs in Excel (Part IV—Putting It All
Lab 6-3: Finding Duplicate Payments, 240–241
Together), 297–299
Accounting. See also Auditing; Financial accounting;
Lab 8-1: Use XBRLAnalyst to Access XBRL Data, 317
Managerial accounting
Lab 8-4: Use SQL to Query an XBRL Database, 325
Data Analytics skills needed in,
Address evaluation
12 impact of Data Analytics on,
data reduction and, 102
5–7 tax data analytics, 7
Lab 6-1: Evaluate the Master Data for Interesting
Accounting cycle
Addresses, 232–234
data use and storage in, 40
Advanced Environmental Recycling Technologies, profiling
Unified Modeling Language (UML) diagram,
in managerial accounting, 99
40 ACL, 214
Age analysis, in audit data analytics, 213, 215–216
Activity ratios, 305
Ahmed, A. S., 103n
Address and Refine Results stage. See also
Alarms, in automating the audit plan, 197
Data visualization
Alibaba, 3, 10, 24, 304, 307
in audit data analytics, 214
Alphabet, 304, 307
in Balanced Scorecard,
Amazon, 3, 10, 261–262, 263, 312–313, 318
258 described, 11
American Institute of Certified Public Accountants (AICPA),
in LendingClub example, 17–19
Audit Data Standards (ADSs), 45, 193–195, 199,
Lab 2-2: Use PivotTables to Denormalize and Analyze
210, 211
the Data, 67
Analytics mindset, 12
Lab 2-6: Comprehensive Case: Dillard’s Store Data/How
Analytics Tools
to Create an Entity-Relationship Diagram, 77
Python, 70
Lab 2-7: Comprehensive Case: Dillard’s Store Data/How
SQL queries, 64–65
to Preview Data from Tables in a Query, 79
Apple Inc., 29, 312, 315, 321–322
Lab 2-8: Comprehensive Case: Dillard’s Store Data/
Applied statistics, 213, 226
Connecting Excel to a SQL Database, 89
Artificial intelligence, 213, 227
Lab 3-3: Classification, 125
Assurance services, 192. See also Auditing
Lab 3-4: Comprehensive Case: Dillard’s Store
Audience, in Communicate Insights stage,
Data/Data Abstract (SQL) and Regression (Part
158 Audit data analytics, 208–249
1), 134
automating the audit plan, 195–196,
Lab 3-5: Comprehensive Case: Dillard’s Store
197 in continuous auditing, 196–197
Data/Data Abstract (SQL) and Regression (Part
descriptive analytics, 212, 213, 214–
II), 136–137
219
Lab 4-3: Comprehensive Case: Dillard’s Store Data/
diagnostic analytics, 212, 213, 219–225
Create Geographic Data Visualizations in
examples of, 213
Tableau, 186
IMPACT model in, 210–214
Lab 4-4: Comprehensive Case: Dillard’s Store Data/
Visualizing Regression in Tableau, 189 impact of auditing on business, 5–6
Lab 6-1: Evaluate the Master Data for Interesting in internal audits, 99, 101, 192–193, 196
Addresses, 234 predictive analytics, 212, 213, 226, 228
Lab 6-4: Comprehensive Case: Dillard’s Store Data/ prescriptive analytics, 212, 213, 226, 227, 228
Hypothesis Testing (Part I), 247 when to use, 210–214
330
 Index 331

Lab 1-3—Data Analytics in Auditing, 33–34

Bank of America, 318
Lab 6-1: Evaluate the Master Data for Interesting
Bar charts, 144, 151, 152, 153, 154, 155
Addresses, 232–234
Base Standard (Audit Data Standards), 194
Lab 6-2: Perform Substantive Tests of Account
Bay Area Rapid Transit (BART), 93
Balances, 234–240
Benford’s law, 100, 110, 213, 220–223
Lab 6-3: Finding Duplicate Payments, 240–241
Berinato, Scott, 140–141
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
Big Data, 4, 20
Hypothesis Testing (Part I), 241–247
Bjerrekaer, Julius Daugbejerg, 39
Lab 6-5: Comprehensive Case: Dillard’s Store Data/
Boeing, 303, 318
Hypothesis Testing (Part II—Data Visualization),
Box and whisker plots, 147
247–249
Bristol-Myers Squibb, 321–322
Audit Data Standards (ADSs), 45, 193–195, 199, 210, 211
Auditing, 190–206. See also Audit data analytics
Audit Data Standards (ADSs), 45, 193–195, 199, C
210, 211 CAATs (computer-assisted audit techniques), 212, 228
audit workflow, 197–198 Calcbench, 303, 310
automating the audit plan, 195–196, 197, 206 Causal modeling
continuous auditing, 100, 196–197 defined, 95, 110
example of clustering in, 108–109 in Perform the Analysis/Test Plan stage, 95
example of data reduction in, 101– CFA (Chartered Financial Analyst), 305
102 example of profiling in, 100 Charts. See Data visualization
example of regression in, 103 Chen, H., 4n
impact on business, 5–6 Chen, J., 3n
internal audits, 99, 101, 192–193, 196 Chen, T., 3n
nature of modern audit, 192–195 Chevron, 321–322
professional skepticism concept, 192 Chiang, R. H. L., 4n
reasonable assurance concept, 192 Chief audit executive (CAE), 192–193
remote, 198 Cisco, 318
working papers, 197–198, 204 Citigroup, 321–322
Lab 5-1: Set Up a Cloud Folder, 203–204 Class, defined, 94
Lab 5-2: Review Changes to Working Papers Classification
(OneDrive), 204 in audit data analytics, 213, 226
Lab 5-3: Identify Audit Data Requirements, 205– defined, 9, 20, 95, 96, 110
206 Lab 5-4: Prepare Audit Plan, 206 evaluating classifiers, 106–107
Audit plan example of, 95
Data Analytics and automation of, 195–196, 197 other examples in accounting, 104
elements of, 195 in Perform the Analysis/Test Plan stage, 9, 94–95, 96,
Lab 5-4: Prepare Audit Plan, 206 104–107, 114–115, 122–125
Aura (PwC), 198 setting up classification analysis, 114–
Automating the audit plan, 195–196 115 steps in, 104
alarms and exceptions, 197 terminology, 104–106
Data Analytics in, 195–196, 197 Lab 3-3: Classification, 122–125
elements of, 197 Cleaning data
in ETL process, 49
steps in, 49
B
Lab 2-2: Use PivotTables to Denormalize and Analyze the
Balanced Scorecard, 251, 252–258
Data, 59–67
components of, 253
Lab 2-3: Resolve Common Data Problems in Excel and
defined, 252, 259
Access, 67–71
example of, 254
Clinton, Hillary, 139
Lab 7-2: Create a Balanced Scorecard Dashboard in Cloud
Tableau, 266–272 electronic working papers, 198
Lab 7-3: Comprehensive Case: Dillard’s Store Data/ remote audit work, 198
Creating KPIs in Excel (Part I), 273–279 Lab 5-1: Set Up a Cloud Folder, 203–204
332 Index

Clustering, 107–109
Costco, 321–322
defined, 10, 94, 97, 110, 213, 225
Coughlin, Tom, 99
example in auditing, 108–109
CPA (Certified Public Accountant), 305
in Perform the Analysis/Test Plan stage, 10, 94, 97, Credit or risk score
107–109, 110 in LendingClub example, 15, 17–19, 25–26, 31–32, 43,
by Walmart, 107–108 104, 123
CMA (Chartered Management Analyst), Z-scores, 95, 100, 213, 219–220, 226
305 Coca-Cola, 318 Customer key performance indicators (KPIs), 255
College Scorecard
example dataset, 55–56
Lab 2-5: College Scorecard Extraction and Data
D
Preparation, 73–74
Daily Mail, 151
Lab 3-2: Regression in Excel, 120–
Data Analytics. See also Audit data analytics; Financial
121 Color, in data visualization, 156–
statement analysis; IMPACT model and specific steps
157 Column charts, 145
in IMPACT model
Committee of Sponsoring Organizations (COSO) Enterprise
defined, 4, 21
Risk Management Framework, 195
environmental scanning with, 7
Common-size financial statements, Lab 8-2: Use
impact on accounting, 5–7
XBRLAnalyst to Create Dynamic Common-Size
impact on business, 4–5
Financial Statements, 317–320
Labs. See Labs
Communicate Insights stage, 157–158. See also Data
overview, 8–12
visualization audience and tone, 158
skills needed by accountants,
in audit data analytics, 214
12 value and size of, 5
in Balanced Scorecard, 258
Database maps,
content and organization, 157–
198 Data
158 described, 11
dictionaries
in LendingClub example, 19
auditing and, 198
revising, 158
creating and using, 43–
Lab 2-2: Use PivotTables to Denormalize and Analyze the
44 defined, 14, 21, 43,
Data, 67
51
Lab 4-1: Using PivotCharts to Visualize Declarative Data,
in LendingClub example, 14, 43–44
164–166
Data extraction. See also Master the Data stage
Lab 4-2: Use Tableau to Perform Exploratory Analysis
in ETL process, 44–48
and Create Dashboards, 174–175
Lab 2-1: Create a Request for Data Extraction, 57–59
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
Lab 2-5: College Scorecard Extraction and Data
Hypothesis Testing (Part I), 247
Preparation, 54–56 (dataset), 73–74
Lab 7-5: Comprehensive Case: Dillard’s Store Data/
Data preparation and cleaning, 12, 38–91. See also Master
Creating KPIs in Excel (Part III), 295
the Data stage
Composite primary key, 42, 51
data dictionaries. See Data dictionaries
Comprehensive case. See Dillard’s Department
ETL (extraction, transformation, and loading) process,
Store (comprehensive case)
44–50
Computer-assisted audit techniques (CAATs), 212, 228
relationships in relational database, 41–43
Connect (PwC), 198
Lab 2-1: Create a Request for Data Extraction, 57–59
ConocoPhillips, 321–322
Lab 2-2: Use PivotTables to Denormalize and Analyze
Content, in Communicate Insights stage, 157–158
the Data, 59–67
Continuous auditing
Lab 2-3: Resolve Common Data Problems in Excel
alarms and exceptions, 197
and Access, 67–71
defined, 197
Lab 2-4: Generate Summary Statistics in Excel, 71–72
example of profiling in, 100
Lab 2-5: College Scorecard Extraction and Data
techniques in, 196–197
Preparation, 54–56 (dataset), 73–74
Continuous data, 142–143, 159
Lab 2-6: Comprehensive Case: Dillard’s Store Data/How
Co-occurrence grouping
to Create an Entity-Relationship Diagram,
defined, 10, 21, 97, 110
74–77
example of, 10
Lab 2-7: Comprehensive Case: Dillard’s Store Data/How
in Perform the Analysis/Test Plan stage, 10, 94, 97
to Preview Data from Tables in a Query, 77–79
Lab 2-8: Comprehensive Case: Dillard’s Store Data/
Connecting Excel to a SQL Database, 80–89
 Index 333

Lab 2-9: Comprehensive Case: Dillard’s Store Data/

Deloitte, 6n, 7n
Joining Tables, 89–91
Dependent variable. See Response (dependent) variable
Data quality, 12
Descriptive analytics, 214–219
Data reduction
age analysis, 213, 215–216
defined, 11, 21, 94, 97, 110
defined, 212, 228
example in financial statement analysis, 102
examples, 213
example in operational auditing, 102
sampling, 213, 217–219
examples in internal and external auditing, 101–102
sorting, 213, 216–217
in Perform the Analysis/Test Plan stage, 11, 94,
summary statistics, 213, 217
97,
Descriptive attributes, 42, 51
101–102, 117–120
Descriptive data analysis, 12
steps in, 101
Descriptive statistics, for numeric fields,
Lab 3-1: Data Reduction, 116–120
49 Diagnostic analytics, 219–225
Data reporting, 12
Benford’s law, 100, 110, 213, 220–223
Data requests. See also Master the Data stage
clustering, 213, 225
data request form, 45, 46, 51
defined, 212, 228
determining purpose and scope of data request, 45
drill-down, 213, 223
obtaining data yourself, 46–48
exact and fuzzy matching, 213, 223–225
Lab 2-1: Create a Request for Data Extraction, 57–59
examples, 213
Data scrubbing, 12
sequence check, 213, 225
Data visualization, 12, 138–189
stratification, 213, 225
charts for qualitative data, 144–146
Z-score, 95, 100, 213, 219–220
charts for quantitative data, 146–147
Digital dashboards, 257, 258
color, 156–157
defined, 252, 259
data scale and increments, 156
Lab 4-2: Use Tableau to Perform Exploratory Analysis
declarative visualizations, 143, 159, 164–
and Create Dashboards, 166–175
166 determining purpose of, 140–144
Lab 7-2: Create a Balanced Scorecard Dashboard in
exploratory visualizations, 143, 159
Tableau, 266–272
good charts via bad examples, 150–155
Dillard’s Department Store (comprehensive case)
refining charts to improve communication, 155–157
Lab 1-4: Dillard’s Store Data, 34–37
summary of data types, 141–144
Lab 2-6: How to Create an Entity-Relationship Diagram,
tools to help when picking visuals, 148–150
74–77
Lab 4-1: Using PivotCharts to Visualize Declarative
Lab 2-7: How to Preview Data from Tables in a Query,
Data, 164–166
77–79
Lab 4-2: Use Tableau to Perform Exploratory Analysis
Lab 2-8: Connecting Excel to a SQL Database,
and Create Dashboards, 166–175
80–89
Lab 4-3: Comprehensive Case: Dillard’s Store Data/
Lab 2-9: Joining Tables, 89–91
Create Geographic Data Visualizations in
Lab 3-4: Data Abstract (SQL) and Regression (Part 1),
Tableau, 175–186
125–134
Lab 4-4: Comprehensive Case: Dillard’s Store Data/
Lab 3-5: Data Abstract (SQL) and Regression (Part II),
Visualizing Regression in Tableau, 186–189
134–137
Lab 6-5: Comprehensive Case: Dillard’s Store Data/
Lab 4-3: Create Geographic Data Visualizations in
Hypothesis Testing (Part II—Data Visualization),
Tableau, 175–186
247–249
Lab 4-4: Visualizing Regression in Tableau, 186–189
Data warehouse, 193, 199
Lab 6-4: Hypothesis Testing (Part I), 241–247
Date validation, in data transformation, 49
Lab 6-5: Hypothesis Testing (Part II—Data
Debreceny, Roger S., 4n
Visualization), 247–249
Debt-to-income ratio, in LendingClub example, 14,
Lab 7-3: Creating KPIs in Excel (Part I), 273–279
15–16, 19
Lab 7-4: Creating KPIs in Excel (Part II), 279–287
Decision boundaries, 104,
Lab 7-5:Creating KPIs in Excel (Part III), 287–295
110 Decision support
Lab 7-6: Creating KPIs in Excel (Part IV—Putting It All
systems, 227 Decision trees,
Together), 295–299
104, 110 Declarative
Discrete data, 142–143, 159
visualizations
Drill-down, 213, 223
defined, 143, 159
DuPont Corporation, 306
Lab 4-1: Using PivotCharts to Visualize Declarative
Data, 164–166
334 Index

DuPont ratio
Financial statement analysis, 300–
analysis defined,
325 data reduction and, 102
306, 309
defined, 305, 309
sparklines in, 307
ratio analysis, 305–307, 309, 320–323
Lab 8-3: Use XBRL to Access and Analyze
sentiment analysis, 213, 226, 307–308
Financial Statement Ratios—The Use of
text mining, 307–308
DuPont Ratios, 320–323
XBRL in, 302–304
Lab 8-1: Use XBRLAnalyst to Access XBRL Data, 314–
317
E
Lab 8-2: Use XBRLAnalyst to Create Dynamic
eBay, 3, 318
Common- Size Financial Statements, 317–320
Employee performance key performance indicators
Lab 8-3: Use XBRL to Access and Analyze
(KPIs), 256
Financial Statement Ratios—The Use of
Employee turnover, regression and,
DuPont Ratios, 320–323
103 Entity-Relationship Diagram
Lab 8-4: Use SQL to Query an XBRL Database, 323–
Lab 1-4—Dillard’s Store Data, 36
325
Lab 2-6: Dillard’s Store Data/How to Create an Entity- Financing ratios, 305
Relationship Diagram, 74–77
FinDynamics, Lab 8-1: Use XBRLAnalyst to Access XBRL
Environmental and social sustainability key performance
Data, 314–317
indicators (KPIs), 256
Flat files
Environmental scanning, 7
defined, 41, 51, 193, 199
Equifax, 21
LendingClub example, 43–44
ERP systems, 9, 33, 193–194, 257
relational database versus, 41–42, 193
ETL (extract, transform, and load), 44–50
Flood of alarms, 197
defined, 44, 51
Forbes Insights/KPMG report, 5–
extraction phase, 44–48
6 Foreign key (FK), 42, 51
transformation phase, 48–49 Fraudulent insurance claims, 108–109
loading phase, 50 Fuzzy match
overview, 40 audit data analytics, 213, 223–225
Exact match, in audit data analytics, 213, 223– defined, 102, 110, 228
225 Excel. See entries beginning with “Microsoft in Perform the Analysis/Test plan stage,
Excel” Exception report, 197 102 Lab 3-1: Data Reduction, 118–120
Exceptions, in automating the audit plan, 197
Expected credit losses (ECLs), regression and, 103
Experian, 21
G
Explanatory variable. See Predictor (independent)
Gap detection, data reduction and, 102
variable
Gartner, 148
Exploratory visualizations, 143, 159
Generalized audit software (GAS), 214
External auditing. See Auditing
General Ledger Standard (Audit Data Standards), 194
ExxonMobil, 321–322
General Motors, 304, 307
Geographic data
filled geographic maps, 147
F
Lab 4-3: Comprehensive Case: Dillard’s Store Data/
Facebook, 7, 10, 11, 321–322
Create Geographic Data Visualizations in
Fawcett, Tom, 9, 9n
Tableau, 175–186
Filled geographic maps, 147 Google, 7
Financial accounting. See also Financial statement Google Sheets
analysis CFA (Chartered Financial Analyst), 305 Lab 8-1: Use XBRLAnalyst to Access XBRL Data, 314–
CPA (Certified Public Accountant), 305 317
Data Analytics impact on financial reporting, 6–7 Lab 8-2: Use XBRLAnalyst to Create Dynamic
Lab 1-1 Data Analytics in Financial Accounting, 28– Common- Size Financial Statements, 317–320
31 Financial Accounting Standards Board (FASB) Lab 8-3: Use XBRL to Access and Analyze
Accounting Standards Update 2016-13, 103 Financial Statement Ratios—The Use of
XBRL taxonomy, 29–30, 302, 309 DuPont Ratios, 320–323
Financial performance key performance indicators Gray, Glen L., 4n
(KPIs), 255
 Index 335

H
Lab 3-2: Regression in Excel, 120
Halo (PwC), 191, 198
Lab 3-3: Classification, 122
Harriott, J. S., 8, 8n, 40n
Lab 3-4: Comprehensive Case: Dillard’s Store Data/Data
Harvard Business Review, 140–141
Abstract (SQL) and Regression (Part 1), 125–126
Headings, removing in data cleaning, 49
Lab 3-5: Comprehensive Case: Dillard’s Store Data/Data
Heat maps, 145
Abstract (SQL) and Regression (Part II), 135
Heterogeneous systems approach, 193, 194, 199
Lab 4-2: Use Tableau to Perform Exploratory Analysis
Hewlett-Packard Co., 209
and Create Dashboards, 167
Homogeneous systems approach, 193, 194, 199
Lab 4-3: Comprehensive Case: Dillard’s Store Data/Create
Howson, C., 148
Geographic Data Visualizations in Tableau, 176
Hypothesis testing
Lab 4-4: Comprehensive Case: Dillard’s Store Data/
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
Visualizing Regression in Tableau, 187
Hypothesis Testing (Part I), 241–247
Lab 6-1: Evaluate the Master Data for Interesting
Lab 6-5: Comprehensive Case: Dillard’s Store Data/
Addresses, 232
Hypothesis Testing (Part II—Data Visualization),
Lab 6-2: Perform Substantive Tests of Account
247–249
Balances, 235
Lab 6-3: Finding Duplicate Payments, 240
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
I Hypothesis Testing (Part I), 242
IBM, 303 Lab 6-5: Comprehensive Case: Dillard’s Store Data/
IDEA, 50, 214, 215 Hypothesis Testing (Part II—Data Visualization),
in audit data analytics, 220, 221–222, 223 248
age analysis, 215–216 Lab 7-1: Evaluate Management Requirement and Identify
sampling, 218, 219 Useful KPIs from a List, 266
sorting, 217 Lab 7-2: Create a Balanced Scorecard Dashboard in
summary statistics, 217 Tableau, 266–267
Lab 6-1: Evaluate the Master Data for Interesting Lab 7-3: Comprehensive Case: Dillard’s Store Data/
Addresses, 233–234 Creating KPIs in Excel (Part I), 275
Identify the Questions/Problem Lab 7-4: Comprehensive Case: Dillard’s Store Data/
stage in audit data analytics, 210 Creating KPIs in Excel (Part II), 280
in Balanced Scorecard, 254– Lab 7-5: Comprehensive Case: Dillard’s Store Data/
256 described, 8 Creating KPIs in Excel (Part III), 289
in ETL (extraction, transformation, loading) process, 45 Lab 7-6: Comprehensive Case: Dillard’s Store Data/
in LendingClub example, 13, 31–32 Creating KPIs in Excel (Part IV—Putting It All
Lab 1-1—Data Analytics in Financial Accounting, 28–29 Together), 296
Lab 1-2—Data Analytics in Managerial Accounting, 31–32 Lab 8-1: Use XBRLAnalyst to Access XBRL Data, 314
Lab 1-3—Data Analytics in Auditing, 33–34 Lab 8-3: Use XBRL to Access and Analyze Financial
Lab 1-4—Dillard’s Store Data (comprehensive case), 35– Statement Ratios—The Use of DuPont Ratios,
36 320–321
Lab 2-1—Create a Request for Data Extraction, 57 Lab 8-4: Use SQL to Query an XBRL Database, 323
Lab 2-2—Use PivotTables to Denormalize and Analyze the Idoine, C J., 148n
Data, 60 IMPACT model, 8–12. See also entries for specific steps in
Lab 2-3: Resolve Common Data Problems in Excel and IMPACT model
Access, 68 in audit data analytics, 210–214
Lab 2-5: College Scorecard Extraction and Data in automating the audit plan, 196
Preparation, 73 with Balanced Scorecard, 252, 254–258
Lab 2-6: Comprehensive Case: Dillard’s Store Data/How iterative nature of, 12
to Create an Entity-Relationship Diagram, 75 LendingClub example, 13–20, 24–26, 67–71
Lab 2-7: Comprehensive Case: Dillard’s Store Data/How Step 1: Identify the Questions/Problem, 8
to Preview Data from Tables in a Query, 77 Step 2: Master the Data, 8–9
Lab 2-8: Comprehensive Case: Dillard’s Store Data/ Step 3: Perform Analysis/Test Plan, 9–11
Connecting Excel to a SQL Database, 80 Step 4: Address and Refine Results, 11
Lab 2-9: Comprehensive Case: Dillard’s Store Data/ Step 5: Communicate Insights, 11
Joining Tables, 89 Step 6: Track Outcomes, 11
Lab 3-1: Data Reduction, 116 Inconsistencies across data, correcting in data cleaning, 49
Independent (predictor) variable, defined, 9, 21
336 Index

Information Systems Audit and Control Association

1-2: Data Analytics in Managerial Accounting, 31–33
(IASCA) Control Objectives for Information and
1-3: Data Analytics in Auditing, 33–34
Related Technologies, 195
1-4: Comprehensive Case: Dillard’s Store Data, 34–
Instagram, 7 37 2-1: Create a Request for Data Extraction, 57–59
Internal auditing
2-2: Use PivotTables to Denormalize and Analyze
automating the audit plan, 196 the Data, 59–67
example of data reduction in, 101
2-3: Resolve Common Data Problems in Excel
example of profiling in, 99
and Access, 67–71
importance of, 192–193
2-4: Generate Summary Statistics in Excel, 71–72
International Financial Reporting Standards (IFRS), 302
2-5: College Scorecard Extraction and Data
Interval data, 142, 159
Preparation, 54–56 (dataset), 73–74
Inventory Subledger Standard (Audit Data Standards), 195
2-6: Comprehensive Case: Dillard’s Store Data/How
Isson, J. P., 8, 8n, 40n
to Create an Entity-Relationship Diagram, 74–
77
2-7 : Comprehensive Case: Dillard’s Store
J
Data/How to Preview Data from Tables in a
JD Edwards, 193
Query, 77–79
Johnson & Johnson, 321–322
2-8: Comprehensive Case: Dillard’s Store Data/
JPMorgan Chase, 321–322
Connecting Excel to a SQL Database, 80–
89
2-9: Comprehensive Case: Dillard’s Store Data/Joining
K
Tables, 89–91
Kaplan, Robert S., 252
3-1: Data Reduction, 116–120
Kennedy, Joseph, 5n
3-2: Regression in Excel, 120–121
Kenya Red Cross, 251,
3-3: Classification, 122–125
260
3-4: Comprehensive Case: Dillard’s Store Data/Data
Key performance indicators (KPIs), 250–299
Abstract (SQL) and Regression (Part 1), 125–
customer, 255
134
defined, 252, 259
3-5: Comprehensive Case: Dillard’s Store Data/Data
employee performance, 256
Abstract (SQL) and Regression (Part II), 134–
environmental and social sustainability, 256
137
financial performance, 255
4-1: Using PivotCharts to Visualize Declarative Data,
list of, 255–256
164–166
marketing, 255
4-2: Use Tableau to Perform Exploratory Analysis
operational, 255–256
and Create Dashboards, 166–175
Lab 7-1: Evaluate Management Requirement and
4-3: Comprehensive Case: Dillard’s Store
Identify Useful KPIs from a List, 264–266
Data/Create Geographic Data Visualizations
Lab 7-2: Create a Balanced Scorecard Dashboard in in Tableau, 175–186
Tableau, 266–272 4-4: Comprehensive Case: Dillard’s Store
Lab 7-3: Comprehensive Case: Dillard’s Store Data/ Data/Visualizing Regression in Tableau, 186–189
Creating KPIs in Excel (Part I), 273–279
5-1: Set Up a Cloud Folder, 203–204
Lab 7-4: Comprehensive Case: Dillard’s Store Data/
5-2: Review Changes to Working Papers (OneDrive),
Creating KPIs in Excel (Part II), 279–287
204 5-3: Identify Audit Data Requirements, 205–206
Lab 7-5: Comprehensive Case: Dillard’s Store Data/
5-4: Prepare Audit Plan, 206
Creating KPIs in Excel (Part III), 287–295
6-1: Evaluate the Master Data for Interesting
Lab 7-6: Comprehensive Case: Dillard’s Store Data/
Addresses, 232–234
Creating KPIs in Excel (Part IV—Putting It All
6-2: Perform Substantive Tests of Account
Together), 295–299
Balances, 234–240
Kirkegaard, Emil, 39
6-3: Finding Duplicate Payments, 240–241
KPIs. See Key performance indicators (KPIs)
6-4: Comprehensive Case: Dillard’s Store
Data/ Hypothesis Testing (Part I), 241–
247
L 6-5: Comprehensive Case: Dillard’s Store Data/
Labs Hypothesis Testing (Part II—Data
1-0: How to Complete Labs in This Text, 27–28 Visualization), 247–249
1-1: Data Analytics in Financial Accounting, 28–31 7-1: Evaluate Management Requirement and Identify
Useful KPIs from a List, 264–266
7-2: Create a Balanced Scorecard Dashboard in
Tableau, 266–272
7-3: Comprehensive Case: Dillard’s Store
Data/Creating KPIs in Excel (Part
I), 273–279
 Index 337

7-4: Comprehensive Case: Dillard’s Store Data/Creating

defined, 40, 51
KPIs in Excel (Part II), 279–287
described, 8–9
7-5: Comprehensive Case: Dillard’s Store Data/Creating
ETL (extraction, transformation, loading) process,
KPIs in Excel (Part III), 287–295
44–50
7-6: Comprehensive Case: Dillard’s Store Data/Creating
in LendingClub example, 13–14, 32–33, 68–71
KPIs in Excel (Part IV—Putting It All
relational database data and relationships, 41–43
Together), 295–299
setting up classification analysis, 114–115
8-1: Use XBRLAnalyst to Access XBRL Data, 314–317
Lab 1-1—Data Analytics in Financial Accounting, 29–30
8-2: Use XBRLAnalyst to Create Dynamic Common-
Lab 1-2—Data Analytics in Managerial Accounting, 32–
Size Financial Statements, 317–320
33 Lab 1-3—Data Analytics in Auditing, 34
8-3: Use XBRL to Access and Analyze Financial
Lab 1-4—Dillard’s Store Data (comprehensive case),
Statement Ratios—The Use of DuPont
36–37
Ratios, 320–323
Lab 2-1: Create a Request for Data Extraction, 58
8-4: Use SQL to Query an XBRL Database, 323–325
Lab 2-2: Use PivotTables to Denormalize and Analyze the
Lab 3-5: Comprehensive Case: Dillard’s Store
Data, 60–65
Data/Data
Lab 2-3: Resolve Common Data Problems in Excel and
Abstract (SQL) and Regression (Part II), 134–137
Access, 68–71
Leading digits
Lab 2-5: College Scorecard Extraction and Data
Benford’s law and, 100, 110
Preparation, 73–74
removing zeroes in data cleaning,
Lab 2-6: Comprehensive Case: Dillard’s Store Data/How
49
to Create an Entity-Relationship Diagram, 75–77
LendingClub, 19
Lab 2-7: Comprehensive Case: Dillard’s Store Data/How
basic statistics, 13–14
to Preview Data from Tables in a Query, 78–79
data dictionary, 14, 43–44
Lab 2-8: Comprehensive Case: Dillard’s Store Data/
example of regression and classification, 104 Connecting Excel to a SQL Database, 80–87
IMPACT model example, 13–20, 24–26, 67–71 Lab 2-9: Comprehensive Case: Dillard’s Store Data/
loan rejections, 17, 104, 111 Joining Tables, 90–91
transaction approval, 104 Lab 3-1: Data Reduction, 116–117
Lab 1-2: Data Analytics in Managerial Accounting, 31–33 Lab 3-2: Regression in Excel, 121
Lab 2-3: Resolve Common Data Problems in Excel and Lab 3-3: Classification, 122–124
Access, 67–71
Lab 3-4: Comprehensive Case: Dillard’s Store Data/Data
Lab 2-4: Generate Summary Statistics in Excel, 71–72 Abstract (SQL) and Regression (Part 1), 126–127
Lab 3-3: Classification, 122–125
Lab 3-5: Comprehensive Case: Dillard’s Store Data/Data
Line charts, 147, 154, 155 Abstract (SQL) and Regression (Part II), 135
Link prediction
Lab 4-2: Use Tableau to Perform Exploratory Analysis
defined, 10, 21, 97, 110 and Create Dashboards, 167–169
example of, 11 Lab 4-3: Comprehensive Case: Dillard’s Store Data/
in Perform the Analysis/Test Plan stage, 10, 95, 97 Create Geographic Data Visualizations in
Liquidity ratios, 305 Tableau, 176–183
Live (production) systems, 193, 199 Lab 4-4: Comprehensive Case: Dillard’s Store Data/
Loading data, in ETL process, 50 Visualizing Regression in Tableau, 187–188
Loughran, Tim, 308, 308n, 313 Lab 6-1: Evaluate the Master Data for Interesting
Lyft, 307 Addresses, 232–233
Lab 6-2: Perform Substantive Tests of Account Balances,
235–240
M Lab 6-3: Finding Duplicate Payments, 240
Managerial accounting Lab 6-4: Comprehensive Case: Dillard’s Store Data/
CMA (Certified Management Accountant), 305 Hypothesis Testing (Part I), 242–245
example of profiling in, 99 Lab 6-5: Comprehensive Case: Dillard’s Store Data/
example of regression in, 103 Hypothesis Testing (Part II—Data Visualization),
Lab 1-2—Data Analytics in Managerial Accounting, 31–33 248–249
Marketing key performance indicators (KPIs), 255 Lab 7-1: Evaluate Management Requirement and Identify
Marr, Bernard, 254, 255–256, 264 Useful KPIs from a List, 266
Master the Data stage Lab 7-2: Create a Balanced Scorecard Dashboard in
in audit data analytics, 210–212 Tableau, 267
in Balanced Scorecard, 257
data dictionaries, 14, 21, 43–44, 51
338 Index

Lab 7-3: Comprehensive Case: Dillard’s Store Data/

Internal Data Model, Lab 2-2: Use PivotTables
Creating KPIs in Excel (Part I), 275–279
to Denormalize and Analyze the Data,
Lab 7-4: Comprehensive Case: Dillard’s Store Data/ 59–67
Creating KPIs in Excel (Part II), 280–287
loading data, 50
Lab 7-5: Comprehensive Case: Dillard’s Store Data/
PivotCharts, Lab 4-1: Using PivotCharts to Visualize
Creating KPIs in Excel (Part III), 289–293
Declarative Data, 164–166
Lab 7-6: Comprehensive Case: Dillard’s Store Data/
PivotTables
Creating KPIs in Excel (Part IV—Putting It All
analytics tool, 65–66
Together), 296–297
in LendingClub example, 15–16, 18
Lab 8-1: Use XBRLAnalyst to Access XBRL
Lab 2-2: Use PivotTables to Denormalize and Analyze
Data, 314–316
the Data, 65–66
Lab 8-3: Use XBRL to Access and Analyze
PowerPivot Add-In
Financial Statement Ratios—The Use of
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
DuPont Ratios, 321–322
Hypothesis Testing (Part I), 241–247
Lab 8-4: Use SQL to Query an XBRL Database, 323–
Lab 7-3: Comprehensive Case: Dillard’s Store Data/
324 Matching, in audit data analytics, 213, 223–225
Creating KPIs in Excel (Part I), 273–279
McDonald, Bill, 308, 308n, 313
Lab 7-5: Comprehensive Case: Dillard’s Store Data/
McKinsey Global Institute, 5
Creating KPIs in Excel (Part III), 287–295
Merck, 318, 321–322
Lab 7-6: Comprehensive Case: Dillard’s Store Data/
Metadata, Lab 1-4—Dillard’s Store Data
Creating KPIs in Excel (Part IV—Putting It All
(comprehensive case), 37
Together), 295–299
Microsoft, 321–322
Query Editor
Microsoft Access. See also SQL (Structured
Lab 2-2: Use PivotTables to Denormalize and Analyze
Query Language)
the Data, 62–64
SQL queries, 64–65, 66
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
Lab 2-3: Resolve Common Data Problems in Excel and
Hypothesis Testing (Part I), 241–247
Access, 67–71
TeamMate Analytics add-in, 198, 214, 227
Lab 8-4: Use SQL to Query an XBRL Database,
visuals and, 148–149
323–325
writing queries directly in, 85–87
Microsoft BI suite, 148–149
XBRLAnalyst, 303, 310
Microsoft Excel
Lab 8-1: Use XBRLAnalyst to Access XBRL Data,
in audit data analytics
314–317
age analysis, 215
Lab 8-2: Use XBRLAnalyst to Create Dynamic
Benford’s law, 221–223
Common-Size Financial Statements, 317–320
sampling, 218
Lab 2-3: Resolve Common Data Problems in Excel
sequence check, 225
and Access, 67–71
sorting, 216
Lab 2-4: Generate Summary Statistics in Excel, 71–72
summary statistics, 217
Lab 2-8: Comprehensive Case: Dillard’s Store Data/
Z-score, 220
Connecting Excel to a SQL Database, 80–89
Lab 6-1: Evaluate the Master Data for Interesting Lab 3-1: Data Reduction, 116–120
Addresses, 232–233
Lab 3-2: Regression in Excel, 120–121
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
Lab 3-3: Classification, 122–125
Hypothesis Testing (Part I), 241–247
Lab 3-4: Comprehensive Case: Dillard’s Store Data/Data
color, 156–157
Abstract (SQL) and Regression (Part 1), 125–134
connecting to SQL Server Database, 80–89
Lab 3-5: Data Abstract (SQL) and Regression (Part
in data extraction, 47–48
II), 134–137
(range_lookup), 48
Lab 6-2: Perform Substantive Tests of Account Balances, 234–
Col_Index_Num, 48 240
lookup_value, 48 Lab 6-3: Finding Duplicate Payments, 240–241
table_array, 48 Lab 6-5: Comprehensive Case: Dillard’s Store Data/
VLookup function, 47–48 Hypothesis Testing (Part II—Data
data scale and increments, Visualization), 247–249
156 Lab 7-3: Comprehensive Case: Dillard’s Store Data/
Filters, Lab 3-1: Data Reduction, 117–118 Creating KPIs in Excel (Part I), 273–279
Fuzzy Lookup Add-In, 223–225 Lab 7-4: Comprehensive Case: Dillard’s Store Data/
Lab 3-1: Data Reduction, 118–120 Creating KPIs in Excel (Part II), 279–287
 Index 339

Lab 7-5: Comprehensive Case: Dillard’s Store Data/

Nominal data, 141, 159
Creating KPIs in Excel (Part III), 287–295
Nonprintable characters, removing in data cleaning, 49
Lab 7-6: Comprehensive Case: Dillard’s Store Data/
Normal distribution, 142, 160
Creating KPIs in Excel (Part IV—Putting It All
Together), 295–299
Microsoft OneDrive, 27–28 O
Lab 5-1: Set Up a Cloud Folder, 203–204 Oestreich, T. W., 148n
Lab 5-2: Review Changes to Working Papers OkCupid, 39
(OneDrive), 204 OneDrive. See Microsoft OneDrive
Lab 5-3: Identify Audit Data Requirements, 205– Open Science Framework, 39
206 Lab 5-4: Prepare Audit Plan, 206 Operational auditing, data reduction and, 102
Microsoft SQL Server Management Studio. See also SQL Operational key performance indicators (KPIs), 255–
(Structured Query Language) 256 Oracle, 303
connecting Excel to, 80–89 Order to Cash Subledger Standard (Audit Data Standards),
writing queries directly in Excel, 85–87 194
Lab 2-6: Comprehensive Case: Dillard’s Store Data/How Ordinal data, 141, 160
to Create an Entity-Relationship Diagram, 74–77 Organization, in Communicate Insights stage, 157–158
Lab 2-7: Comprehensive Case: Dillard’s Store Data/How Overfitting classifiers, 106–107
to Preview Data from Tables in a Query, 77–79 Overlap method, 308
Lab 2-8: Comprehensive Case: Dillard’s Store Data/
Connecting Excel to a SQL Database, 80–89
Lab 2-9: Comprehensive Case: Dillard’s Store Data/ P
Joining Tables, 89–91 Pal, K., 3n
Lab 3-4: Comprehensive Case: Dillard’s Store Payments
Data/Data Abstract (SQL) and Regression (Part Lab 6-2: Perform Substantive Tests of Account Balances,
1), 125–134 234–240
Lab 3-5: Comprehensive Case: Dillard’s Store Lab 6-3: Finding Duplicate Payments, 239–240
Data/Data Abstract (SQL) and Regression (Part PeopleSoft, 193
II), 134–137 Performance metrics, 252, 259
Lab 4-3: Comprehensive Case: Dillard’s Store Data/ Perform the Analysis/Test Plan stage
Create Geographic Data Visualizations in in audit data analytics, 212–214
Tableau, 175–186 in Balanced Scorecard, 257
Lab 4-4: Comprehensive Case: Dillard’s Store Data/ classification, 9, 94–95, 96, 104–107, 114–115, 122–125
Visualizing Regression in Tableau, 186–189
clustering, 10, 94, 97, 107–109, 110
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
co-occurrence grouping, 10, 94, 97
Hypothesis Testing (Part I), 241–247
data reduction, 11, 94, 97, 101–102, 117–120
Lab 6-5: Comprehensive Case: Dillard’s Store Data/
defining data analytics approaches, 94–97
Hypothesis Testing (Part II—Data Visualization),
described, 9–11
247–249
in LendingClub example, 15–17
Lab 7-3: Comprehensive Case: Dillard’s Store Data/
profiling, 10, 21, 94, 95, 97, 98–100
Creating KPIs in Excel (Part I), 273–279
regression, 9, 95, 96, 102–104, 120–121, 125–137
Lab 7-4: Comprehensive Case: Dillard’s Store Data/
supervised approach/method, 94–96, 110, 111
Creating KPIs in Excel (Part II), 279–287
unsupervised approach/method, 94, 110, 111
Lab 7-5: Comprehensive Case: Dillard’s Store Data/
Lab 1-1—Data Analytics in Financial Accounting, 30–31
Creating KPIs in Excel (Part III), 287–295
Lab 2-1—Create a Request for Data Extraction, 58–59
Lab 7-6: Comprehensive Case: Dillard’s Store Data/
Lab 2-2—Use PivotTables to Denormalize and Analyze
Creating KPIs in Excel (Part IV—Putting It All
the
Together), 295–299
Data, 65–66
Microsoft Teams, 198
Lab 2-7: Comprehensive Case: Dillard’s Store Data/How
Mondelez, 318
to Preview Data from Tables in a Query, 78–79
Monetary unit sampling (MUS), 218–219, 228
Lab 2-8: Comprehensive Case: Dillard’s Store Data/
Connecting Excel to a SQL Database, 87–88
Lab 2-9: Comprehensive Case: Dillard’s Store Data/
N
Joining Tables, 90–91
Nasdaq, 301
Lab 3-1: Data Reduction, 116–117
Negative numbers, formatting in data cleaning, 49
Lab 3-2: Regression in Excel, 120–121
New York Stock Exchange, 301
340 Index

Lab 3-3: Classification, 124–125

Price and volume variance profiling,
Lab 3-4: Comprehensive Case: Dillard’s Store 99 Primary key (PK), 41–42, 51
Data/Data Abstract (SQL) and Regression (Part Probability, in audit data analytics, 213, 226
1), 128–134 Procure to Pay Subledger Standard (Audit Data
Lab 3-5: Comprehensive Case: Dillard’s Store Standards), 195
Data/Data Abstract (SQL) and Regression (Part
Production (live) systems, 193, 199
II), 135–136
Profiling
Lab 4-2: Use Tableau to Perform Exploratory Analysis
defined, 10, 21, 95, 97, 110
and Create Dashboards, 169–174
example in auditing, 100
Lab 4-3: Comprehensive Case: Dillard’s Store Data/
example in internal audit, 99
Create Geographic Data Visualizations in
example in managerial accounting, 99
Tableau, 184–186
in Perform the Analysis/Test Plan stage, 10, 21, 94, 95, 97,
Lab 4-4: Comprehensive Case: Dillard’s Store Data/
98–100
Visualizing Regression in Tableau, 188–189
steps in, 98
Lab 6-1: Evaluate the Master Data for Interesting
Profitability ratios, 305
Addresses, 233–234
Proportion, 141–142, 160
Lab 6-3: Finding Duplicate Payments, 240–241
Provost, Foster, 9, 9n
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
Pruning, 105
Hypothesis Testing (Part I), 245–246
Public Company Accounting Oversight Board (PCAOB), 195
Lab 6-5: Comprehensive Case: Dillard’s Store Data/
Purchase orders, Lab 6-2: Perform Substantive Tests of
Hypothesis Testing (Part II—Data Visualization),
Account Balances, 234–240
249
PwC, 4–5, 262
Lab 7-2: Create a Balanced Scorecard Dashboard in
Aura, 198
Tableau, 267–272
Connect, 198
Lab 7-3: Comprehensive Case: Dillard’s Store Data/
Halo, 191, 198
Creating KPIs in Excel (Part I), 275–279
Python, analytics tool, 70
Lab 7-5: Comprehensive Case: Dillard’s Store Data/
Creating KPIs in Excel (Part III), 294
Lab 8-1: Use XBRLAnalyst to Access XBRL
Q
Data, 316–317
Qualitative data
Lab 8-3: Use XBRL to Access and Analyze Financial
charts appropriate for, 144–146
Statement Ratios—The Use of DuPont Ratios, 322
defined, 141–142, 160
Lab 8-4: Use SQL to Query an XBRL Database, 324
Quantitative data
Pie charts, 144, 145, 152
charts appropriate for, 146–147
Porter, David P.,
defined, 142–143, 160
252 Post-pruning,
105 Predictive
analytics
classification, 213, 226 R
defined, 212, 228 Ratio analysis, 305–307
examples, 213 classes of ratios,
305 defined, 305,
probability, 213, 226
309
regression, 213, 226
Dupont ratio analysis, 306, 307, 309, 320–323
sentiment analysis, 213, 226
professional certifications, 305
Predictor (independent) variable
sparklines in, 306, 307
defined, 9, 21
trendlines in, 306, 307
in regression, 103
Lab 8-3: Use XBRL to Access and Analyze
Pre-pruning, 105
Financial Statement Ratios—The Use of
Prescriptive analytics
DuPont Ratios, 320–323
applied statistics, 213, 226
Ratio data, 142, 160
artificial intelligence, 213, 227
Records, number of, 49
defined, 212, 228
Red Cross, 251
examples, 213
Regression
what-if analysis, 213
in audit data analytics, 213, 226
Previewing data, Lab 2-7: Comprehensive Case:
defined, 9, 21, 95, 96, 110
Dillard’s Store Data/How to Preview Data from
example of, 95
Tables in a Query, 77–79
 Index 341

examples in auditing, 103

Slack, 198
examples in managerial accounting, 103
Sláinte example, 47
other examples in accounting, 104
data visualization, 144, 145, 153
in Perform the Analysis/Test Plan stage, 9, 95, 96,
Lab 2-1: Create a Request for Data Extraction, 57–59
102–104, 120–121, 125–137
Lab 2-2: Use PivotTables to Denormalize and Analyze the
steps in, 102–103
Data, 59–67
Lab 3-2: Regression in Excel, 120–121
Lab 4-1: Using PivotCharts to Visualize Declarative Data,
Lab 3-4: Comprehensive Case: Dillard’s Store 164–166
Data/Data Abstract (SQL) and Regression (Part Lab 4-2: Use Tableau to Perform Exploratory Analysis
1), and Create Dashboards, 166–175
125–134 Lab 6-2: Perform Substantive Tests of Account
Lab 4-4: Comprehensive Case: Dillard’s Store Data/ Balances, 234–240
Visualizing Regression in Tableau, 186–189 Solvency ratios, 305
Rejected loans, in LendingClub example, 16–17, Sorting, in audit data analytics, 213, 216–217
18 Related party transactions, data reduction and, Sparklines
102 Relational database, 41–43 defined, 306, 309
benefits of, 41
PivotTable, 165–166
composite primary key, 42, 51
in ratio analysis, 306–307
defined, 41, 51
SQL (Structured Query Language). See also Microsoft
descriptive attributes, 42, 51 SQL Server Management Studio
flat file versus, 41–42, 193 analytics tool, 64–65
foreign key (FK), 42, 51 in data extraction,
primary key (PK), 41–42, 51 47 described, 47
Remote auditing, 198 Lab 2-2: Use PivotTables to Denormalize and Analyze the
Resnick, B., 39n Data, 64–65, 66
Response (dependent) variable Lab 2-6: Comprehensive Case: Dillard’s Store Data/How
defined, 9, 21 to Create an Entity-Relationship Diagram, 75–77
in regression, 103 Lab 2-7: Comprehensive Case: Dillard’s Store Data/How
Revising, in Communicate Insights stage, 158 to Preview Data from Tables in a Query, 77–79
Richardson, J. L., 148n Lab 2-8: Comprehensive Case: Dillard’s Store Data/
Risk scores Connecting Excel to a SQL Database, 80–89
audit data, 196 Lab 2-9: Comprehensive Case: Dillard’s Store Data/
Z-scores, 95, 100, 213, 219–220, 226 Joining Tables, 90–91
Lab 8-4: Use SQL to Query an XBRL Database,
323–325
S Stacked bar charts, 145, 152, 153
Sallam, R. L., 148n Standardization, 142, 160
Sampling Standardized metrics, 303, 309
in audit data analytics, 213, 217–219 Standard normal distribution, 142, 160
monetary unit sampling (MUS), 218–219, 228 Statistical data analysis, 12
Samsung, 5, 21 Storey, V. C., 4n
SAP, 193, 194, 196, 303 Strategy maps,
Scatter plots, 147 257
Screen capture tool Stratification, 213, 225
Lab 3-2: Regression in Excel, 120–121 Structured data, 98, 110
Lab 3-3: Classification, 122–125 Subtotals, removing in data cleaning,
Lab 4-1: Using PivotCharts to Visualize Declarative 49 Summary statistics
Data, 164–166 in audit data analytics, 213, 217
Screenshots, 27–28 Lab 2-4: Generate Summary Statistics in Excel,
Sentiment analysis, 213, 226, 307–308 71–72
Sequence check, in audit data analytics, 213, 225 Lab 2-8: Comprehensive Case: Dillard’s Store Data/
Similarity matching Connecting Excel to a SQL Database, 87–88
defined, 10, 21, 97, 110 Supervised approach/method, 94–96, 110, 111
in Perform the Analysis/Test Plan stage, 10, 95, 97 Support vector machines, 106, 110
Simsion, G. C., 41n Symbol maps, 145
Singleton T., 45n Systems translator software, 193, 199
342 Index

T
U
Tableau, 50 Underfitting classifiers, 106–107
color, 156–157 Unified Modeling Language (UML), 40, 198
creating good charts through bad examples, 150– Lab 5-3: Identify Audit Data Requirements, 205–206
155 data scale and increments, 156
U.S .GAAP Financial Reporting Taxonomy, 29–30, 302, 309
inputting custom query into Connections Page,
U.S .Securities and Exchange Commission (SEC), 312, 314
177–180
EDGAR database, 29
joining tables into Connections Page, 180–
generally accepted accounting principles (GAAP), 29–30,
183 visuals and, 149–155
302, 309
Lab 4-2: Use Tableau to Perform Exploratory Analysis
text mining and, 307–308
and Create Dashboards, 166–175
University of Arkansas, Walton College of Business, 252,
Lab 4-3: Comprehensive Case: Dillard’s Store Data/
253, 262
Create Geographic Data Visualizations in
Unsupervised approach/method, 94, 110, 111
Tableau, 175–186
Lab 4-4: Comprehensive Case: Dillard’s Store Data/
Visualizing Regression in Tableau, 186–189
V
Lab 7-2: Create a Balanced Scorecard Dashboard in
Validating data, in ETL process, 48–49
Tableau, 266–272
Vasarhelyi, M. A., 108, 108n, 109n
Tables, joining
Visualization. See Data visualization
into Tableau Connections page, 180–183
Lab 2-9: Comprehensive Case: Dillard’s Store Data/
Joining Tables, 89–91
W
Takeda, C., 103n
Walmart, 99, 107–108, 111, 256, 259, 262, 306, 307, 312–313,
Tao, Y., 3n
318, 321–322
Target, 94, 321–322
Walt Disney Company, 318
Tax data analytics, 7
Walton College of Business, University of Arkansas, 252,
TeamMate Analytics, 198, 214, 227
253, 262
Tesla, 262
Wang, H.,
Lab 7-1: Evaluate Management Requirement and Identify
3n Wayfair,
Useful KPIs from a List, 264–266
263
Test data, 104, 110
Weka, 50
Text mining, 307–308
Lab 3-3: Classification, 124–125
Thiprungsri, S., 108, 108n, 109n
Wells-Fargo, 321–322
Thomas, S., 103n
What-if analysis, 213
Time validation, in data transformation, 49
Whole Foods, 312–313
Tone, in Communicate Insights stage, 158
Witt, G. C., 41n
Track Outcomes stage
Word clouds, 145, 146
in audit data analytics, 214
Workflow, in auditing, 197–198
in Balanced Scorecard,
Working papers
258 described, 11
in auditing, 197–198
in LendingClub example, 19
electronic, 198
Lab 6-4: Comprehensive Case: Dillard’s Store Data/
Lab 5-2: Review Changes to Working Papers (OneDrive),
Hypothesis Testing (Part I), 247
204
Training data, 104,
Writing for Computer Science (Zobel), 157–158
110 Transformation
in ETL process, 48–49
steps in, 49
X
TransUnion, 21
XBRL (eXtensible Business Reporting Language), 302–304
Travel and entertainment (T&E)
adding tags, 30–31, 302–303
data reduction in internal auditing, 101
in data reduction, 102
profiling in internal auditing, 99
defined, 102, 110, 302, 309
Tree maps, 145
DuPont analysis using, 306, 307
Trendlines, in ratio analysis, 306, 307
extensible reporting in, 303
Trump, Donald, 139
Financial Accounting Standards Board (FASB) XBRL
taxonomy, 29–30, 302, 309
 Index 343

real-time financial reporting and, 303– XBRL-GL (eXtensible Business Reporting Language—
304 standardized metrics and, 303, 309 General Ledger), 303–304, 309
Lab 8-1: Use XBRLAnalyst to Access XBRL XBRL (eXtensible Business Reporting Language) taxonomy,
Data, 314–317 29–30, 302, 309
Lab 8-2: Use XBRLAnalyst to Create Dynamic Common- Xero, 198
Size Financial Statements, 317–320
Lab 8-3: Use XBRL to Access and Analyze
Financial Statement Ratios—The Use of Z
DuPont Ratios, 320–323 Zhang, Liang Zhao, 93
Lab 8-4: Use SQL to Query an XBRL Database, 323– Zobel, Justin, 157–158
325 XBRLAnalyst. See under Microsoft Excel Z-scores, 95, 100, 213, 219–220, 226