European Journal of Economics, Finance and Administrative Sciences

ISSN 1450-2275 Issue 47 (2012)

© EuroJournals, Inc. 2012
http://www.eurojournals.com/EJEFAS.htm

The Possibility of using Artificial Neural Networks in

Auditing -Theoretical Analytical Paper

Reem Okab Hussein Taha

Al, Balqa Applied University, Jordan, Al-Huson College
E-mail: Medoheart2000@yahoo.com

Abstract
This paper is intended to study and evaluate the feasibility of using artificial neural
networks in auditing as research examines the concept of artificial neural networks, the
most important types and the advantages and disadvantages. It shows the most important
differences between expert systems and artificial neural networks. It also examines reasons
why auditing requires to use artificial neural networks and the most important current
models of artificial neural networks applications in auditing.
Most importantly, this paper has found that Fuzzy Neural Network model is better
than conventional statistical methods in planning of auditing process and accomplishment
of auditing task. The neural networks can guide the external auditor to the financial
statements that contains potential substantial errors, in which, therefore, additional auditing
tests should be applied. Fuzzy Neural Network model also assists the external auditor in
predicting the companies whose statements free from manipulation, this helps the external
auditor to give correct opinion on financial statements.

Keywords: Audit. Artificial Neural Networks In Audit

1. Introduction
The spread of using computers in many business units in economic activity has significantly developed
in recent years. Such a development is due to the recent changes occurred in business units , industrial
firms, information technology, computer technology, and the changes in vocational, governmental, and
economic institutions surrounding the firms (Mubarak, Salah al-Din Rifai, Lotfi, 1996, p 3) the most
significant developments in recent years so-called artificial intelligence and its applications in
computers and auditing in particular.
Artificial intelligence is defined as a use of computer in the simulation of human intelligence
via human information (experience)-based computer programs through which a decision can be
reached similar to human decision. However, Decision-Making cannot be based on information only.
Artificial Neural Network is a artificial intelligence application that have begun an interesting topic
since fifties as scientists have tried to make programs that stimulate neural networks function in the
human brain and linked them together in order to make a certain learning process, but they were unable
to do so because the hardware at that time was not capable to process enough quantity of neural
networks to reach something stimulates human intelligence and the brain function was unknown at that
time (. Zain Abdul-Hadi, 2000, p 21),
The interest in artificial neural networks has renewed in late eighties due to the need to process
data in a manner that stimulates human mind, the progress in computer technology and neurology that
resulted in greater understanding of human brain structure (Turban et al., 2001, p. 607). Recently, the
accounting research has tended to use artificial neural networks in dealing with various accounting
44 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

problems in the light of the recent allegations that artificial neural networks- based methods are better
than conventional statistical methods such as regression analysis and differentiation analysis (Haefke
and Helmenstein, 1996, P. 239; Trigueiros and Taffler, 1996, P. 347). As conventional statistical
methods need data with assumptions or certain conditions such as (normally-distributed data and equal
variance and covariance matrixes of that data). Actually, these assumptions rarely exist in data, as a
result, some researchers (Zmijweski, 1984, P. 60; Siegel et al., 1998, P. 266) have questioned these
methods reliability while artificial neural networks models do not need such assumptions existence that
created using examples of solutions to problems in a specific practical field, which has led to rapid
spread of such models and has become generally-accepted by researchers (Wu, 1997j, PP. 291-292;
Siegel etal., 1998, P.. 266). As a result of IT spread, auditing had to benefit this progress in providing
auditing services. In this paper, I will discuss the concept and types of artificial neural networks and
advantages and disadvantages of usage of neural networks and the most important applications in
auditing.

2. Research Objectives
The general objective is to explain the possibility of using artificial neural networks in auditing that can
be accomplished by achieving the following sub-objectives:
 Demonstrate the scientific concept of framework of artificial neural networks.
 Identify the most important applications of artificial neural networks in auditing.

3. Research Problem
This paper seeks to examine and evaluate the suitability of using artificial neural networks in different
auditing processes through addressing the following questions:
 What is the concept of artificial neural networks?
 What are the types of artificial neural networks?
 What are the advantages and disadvantages of artificial neural networks?
 What is the difference between expert systems and artificial neural networks?
 What are the challenges that limit use and application of artificial neural networks in
auditing?
 What are the most important artificial neural networks in auditing?

4. Research Hypotheses
The following hypotheses shall be tested through this research.
1. There are deficiencies and difficulties in the area of auditing as a profession.
2. The external auditing requires up-to-date techniques and methods to address the
deficiencies and difficulties occurred.
3. The applications of artificial neural networks contribute in accomplishing some auditing
tasks.

5. Research Methodology
when selecting the research methodology, there was a high proportion of probability that artificial
neural networks are not applied in auditing offices in the Hashemite Kingdom of Jordan. So the
researcher has selected to depend on theoretical approach to induct the most significant publications of
science books and journals dealt with the research subject to collect, review, discuss, and analyze
related topics in accounting literature in order to address the previous issues in auditing and achieve the
research purpose
45 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

6. Udit and Artificial Neural Networks

This research consists of six sections in addition to introduction and references. Section I: shows the
concept of artificial neural networks, Section II: argues the types of artificial neural networks, Section
III: shows the advantages and disadvantages of artificial neural networks, Section IV: analyzes the
difference between expert systems and artificial neural networks, Section V: discusses reasons behind
using artificial neural networks in auditing, Section VI: shows the most important applications of
artificial neural networks in auditing, and the last Section shows the research conclusion and
recommendations.

Section I: The Concept of Artificial Neural Networks

Artificial neural networks are computer programs or methods that stimulate the human brain modus
operandi, and consist of a large number of artificial neural cells and processing elements which are
highly linked to each other (Etheridge et al., 2000, P. 536; lin et al., 2003, P. 659). Network artificial
neural cells are assembled in several layers: Input Layer consists of artificial neural cells that receive
inputs, Output Layer consists of artificial neural cells that send outputs. Layers located between input
layer and output layer (whether one or more) are defined as Hidden or Intermediate Layers that give
the network ability to deal with data in non-linear manner (Lachtermacher and Fuller, 1995, P. 382;
Koskivaara, 2000, P. 1062).
Input Layer consists of four artificial neural cells, Intermediate Layer consists of three cells and
Output Layer consists of two cells. Each neuron is connected with other neurons in next layer by links
of specific weights.
Artificial neural networks can be measured by two ways that one is a number of artificial neural
cells, the other is a number of links. It is noted that it is easy to increase the number of artificial neural
cells but consequently resulted in an increase in the number of links too quickly. For example, four
neurons lead to 6 potential links, in general, if there is N number of cells, it leads to 2/(N-1) N potential
links (Post and Anderson, 2003, PP. 341-342).
The number of artificial neural cells (processing elements) depend on the model variables, each
artificial neuron processes data received from its input links, and then, gives signal to other processing
elements through its output links (Siegel et al., 1998, P. 267). The processing element in each layer is
connected with the processing element in preceded and followed layers and sometimes with processing
element in the same layer. The connection strength is expressed between every two processing
elements in the network by a specific weight ranging between 1 and -1. If a processing element
connects with more than other element, these links weights are stored in vector form called weight
vectors of adaptive coefficients of a processing element, these weights at learning network (Etheridege
et al., 2000, p. 536).
Network is learned by using training cases that are examples of solutions to problems in certain
area, every case consists of input and output data arranged in it, through enough network training on
various cases, the relationship between input and output variables are learned, consequently, it can give
accurate output or results (Wu 1997, PP. 291-292). The relationship between input and output variables
is governed a group of functions that include addition function, transfer function and learning base as
addition function collects input data values for each processing element multiplied in its weights,
transfer function specifies each processing element output based on addition results and adjusted these
output values to be in range of zero to integer one. Without transfer function processing element
outputs value became very big, especially if there were many layers of processing elements, learning
base specifies adjustment method coefficients of processing elements “weights” either based on input
values or feedback data values of transfer function (Siegel. et al, 1998, PP. 267-268; Turban et al.,
2001, PP. 611-613).
The improvement in learning network has been controlled through observing the change in
error square as the objective is to reduce it to a minimum level, the error is presented in the result
predicted by network and actual result. For example, if there are many training cases to learning
46 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

network, error occurs when network outputs values for certain case (such as failure prediction or
financial non-failure) do not match the case actual value (whether the company failed or not) once the
network learned it became prepared to be tested using Holdout Sample, Tirgueirous and Taffler (1996,
P. 355) has defined some concepts used in artificial neural networks literature by refereeing to the
corresponding statistical concepts. Inputs are independent variables, outputs are predicted values or
dependent variables, network building means description of network model in terms of number of
processing elements and layers, weights or links means model coefficients, while learning means an
estimate of model coefficients and patterns means the sample observations.
The researcher concludes that artificial neural network is a technology for processing data that
depends on the computer inspired by the study of human brain, and consists of a great number of
artificial neural cells or processing elements which connected with each other organized in layers that
is input layer, output layer and in middle intermediate layer or more than processing elements. The
communication strength between each couple of processing elements is expressed by weight or a
certain coefficient adjusted in learning network. Network action is controlled by a set of mathematical
functions, namely, addition function, transfer function and learning threshold. As addition function
calculates potential total for each input processing element, transfer function specifies output
processing elements based on the addition function result, and learning threshold determines the
adjustment method processing element coefficients.

Section II: Types of Artificial Neural Networks

There are many types of neural network models, the most important (Siegel et al., 1998, P. 269;
Etheridge et al., 2000, PP. 538-539) are as follows:
1. “Back-Propagation Artificial Neural Network” consists of three layers: input layer,
intermediate layer and output layer. Each input processing element linked with
intermediate processing elements and each processing element in intermediate layer linked
with output processing elements. Number of processing elements in intermediate layer as
per trial and error method. Such a network type – error correction threshold to adjust
weights, consequently, correct errors, the author in this network type “Learning Rate”.
This type is widely used.
2. “Conjugate Gradient Descent ANN” is similar to “Back-Propagation Artificial Neural
Network” except that learning rate is automatically determined by network.
3. “Categorical Learning Network” consists of four layers : input layer, layer makes input
vector data follows “Normalization Layer”, categorization layer, and output layer, transfer
layer helps input data to follow normal distribution and categorization layer determines
accurate categorization for input vector data. It is significant that number of processing
elements in input layer equals a number of processing elements in output layer.
4. “Probabilistic ANN” consists of five layers: input layer, a layer makes input vector data
that follows normal distribution, categorization layer, addition layer, and output layer. It
depends on the statistical method of Bisen in categorization. Addition layer assists in
categorization process and output layer or categorization layer uses signal received to
determine the accurate categorization.
The researcher thinks that there are different types of networks, at selecting network, type of
problem should be defined to be solved, and the appropriate network to solve the problem, while
selecting improper network could lead to undependable results. Some argue (Etheridge et al., 2000, P.
538) that Back-Propagation Artificial Neural Network suits prediction-related problems, but
Categorical Learning Network and Probabilistic ANN are more suitable for solving problems required
data categorization in separate groups.
In auditing area I can outline the application aspects as follows:
 Back-Propagation Artificial Neural Network: in evaluating the company capability in
sustainability in terms of failure or bankruptcy predictions
47 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

 Categorical Learning Network and Probabilistic ANN: help in guiding the external auditor
to financial statements that have potential substantial errors.

Section III: Advantages & Disadvantages of Artificial Neural Networks

The most important advantages of Artificial Neural Networks (Siegel et al., 1998, P. 266; Etheridge et
al., 2000, P. 535; Turban et al., 2001, P. 635) as follows:
 Artificial neural network is characterized with ability to solve new kind of difficult
problems, this has opened new field to decision support applications that was difficult or
impossible to be programmed in computer.
 Artificial neural network is characterized with high speed in processing as it consists of a
large number of processing elements which are highly communicated with each other and
processed in a parallel manner in the same problem.
 Artificial neural network has ability to deal with incomplete, confused or not well-
determined data, it is able to deal with unexpected conditions (as human brain works) and
it has ability to deal with a large amount of data to create models in case that no certain
known rules, gives accurate results as long as accurately-built.
 Artificial neural network is characterized with flexibility and maintenance easiness as it
adapts itself with changes in environment and has ability to learn by experience and
realize the relationship between variables and improve its performance.
 Artificial neural network does not sufficiently test research hypotheses, and gives no
important input variables, which makes results interpretation difficult and doubtful and
needs a long time to be learned.
 Artificial neural network uses past data patterns for future predictions, this means that it
supposes the future will be as the past, in case that change occurs in environment and
surrounding circumstances, the networks patterns will not be better than statistical
conventional patterns in predicting unless it is re-learned.
The researcher concludes that artificial neural networks are characterized by:
 Ability to solve difficult problems;
 Ability to deal with inaccurate data;
 Speed of processing and ability to adapt with changes in environment and surrounding
circumstances through re-learning, however, it lacks the ability to interpret the results
reached.

Section IV: The Difference between Expert Systems & Artificial Neural Networks
The expert systems and artificial neural networks are considered as Artificial Intelligence Applications,
however, there are substantial differences between them (Foltib and Garceau, 1996, pp26-28; Turban at
al, 2001, pp636-637) as follows:
1) Expert systems depend on the deductive logical thinking as knowledge included in rules
system, results are reached at applying these rules. For example, the premises in expert
system may be as follows:
A If lease term is at least 75% of estimated economic life of a leased asset, the lease will
be capital.
B The lease term A equals 80% of estimated economic life of a leased asset.
The result is that lease contract A is a capital lease contract, in contrast, artificial neural
networks depend on deductive thinking as knowledge included in network in a form of examples or
certain cases. The network builds on these examples to derive general outcomes. For examples, the
premises in the previous example in artificial neural networks system as follows:
A Cases from A to N are lease contracts their terms equal or exceed 75% of estimated
economic life of a leased asset.
48 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

B Cases from A to N are categorized as capital lease contracts, consequently, resulted in

categorizing lease contracts as capital lease contracts as long as lease tem equals or
exceed 75% of estimated economic life of a leased asset.
2) Expert system is characterized with flexibility, apply a set of conditions predetermined by
system to enter data, and use specified clear logic, artificial neural networks are
characterized with flexibility and no pre-conditions restrict networks action and use fuzzy
logic consequently, it can be used in area in which knowledge is unavailable and facts and
borders are unspecified.
3) In expert systems, analysts get knowledge from human expert, at processing expert
systems that repeat human logic using well specified rules to reach a solution of certain
problem, while artificial neural networks try to repeat human brain activities in taking
certain decisions as network can determine function relations between input and output.
Thus it can reach certain results at date entry.
4) Expert systems contains series of rules determined by expert and analyst, while artificial
neural networks depend on examples to determine the function relations between input
and output, when network learning process is accomplished, it will be able to reach certain
decisions.
5) Expert system process sequentially, then, the system takes rule compared with its rule,
continue in this sequence until reach to final result, but artificial neural networks process
in a parallel manner as all processing elements evaluate multi different outcome at the
same time to predict output data.
6) Expert systems have a system to explain and demonstrate how can reach a particular
decision, it is therefore required when the decision needs to be interpreted to increase a
trust level used, but artificial neural networks have no ability to explain or demonstrate the
reasons why reaching such a certain decision.
7) Expert systems are built using a set of facts, rules and procedures that determine the
process of taking a certain decision, this data is stored in knowledge base, but artificial
neural networks do not contain knowledge base in which data saved, as the network stores
in its neurons data described the main forms of data which will be evaluated.
It has been noted that artificial neural networks in many applications that used expert systems,
and they are more effective than expert systems in dealing with unspecified problems or using
inaccurate data. They can be used in taking decision in problems that proved difficult and expensive in
using expert systems. In these applications in financial reports, the capabilities of artificial neural
networks exceed expert systems in these areas due to the capability of network in learning. It can
respond to changing work needs. However, it does not mean that artificial neural networks can be used
to develop these systems. Through artificial neural networks human expert can be dispensed at
building knowledge bases in expert systems especially if the proposed expert system is large and
impractically, needs many knowledge bases, and it is highly-expensive that all rules are determined by
the personal interviews with experts (Foltin and Garceau, 1996, p29.)
In the light of the above-mentioned, I say that artificial neural networks differ from experts
systems that networks are able to produce new knowledge and characterized with flexibility, they also
used deductive logic, in which data processed in a parallel manner. Artificial neural networks can be
utilized in developing expert systems through using artificial neural networks in determining
knowledge especially, if the available data has unspecified problem, or the proposed expert system
needs many of knowledge bases.

Section V: The Reasons of Using Artificial Neural Networks in Auditing

Specifically, there are three urgent problems affect the performance quality in auditing, it leads
therefore to an increase of auditing costs in present time. These problems are:
49 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

Complexity of Tasks: complexity of auditing tasks negatively affect on the auditor

performance quality, that a need therefore to “decision assistant” and to change of “training programs”
to improve the auditor’s performance, judgment and evaluation.
Need for Expert: There is a difference between expert auditor conduct and novice auditor one,
if a less- skilled novice auditor is assigned complex task is at risk and increases the negative impact of
task complexity on performance quality, consequently, the dire need to skills and experiences in
implementing the auditing task.
Scarce of Expertise: The complexity tasks of auditing affect negatively on learning, i.e.
improving judgment and evaluation performance over time and the need to” longer time” or “more
practice” to learn and gain experience in taking complex tasks, as in most auditing tasks which in turn
affect on “rarity” or “scarce” special expertise available to make auditing tasks in present time. So, the
artificial neural networks can play a major role to help in overcoming these problems, consequently,
helping in achieving the two objectives that the companies and auditing office seek, i.e. “cost reduction
and increase of auditing quality”.
To understand the artificial neural networks application in auditing, it should first tab the
auditing tasks, the research author has classified auditing tasks in order to determine the useable tasks
for using artificial neural networks as follows:
 Determine service nature required (auditing financial statements, making financial
statements and accounts confirming)
 Planning auditing process;
 Executing auditing process that includes (preliminary check up of internal control
systems, making compliance test, final assessment of internal control systems, auditing
documentary cash transactions, critical auditing of cash transactions, critical and
documentary auditing of future transactions, critical and documentary auditing of assets
and liabilities, achieving elements of business statements, and getting evidentiary proof);
 Next events and predictions in the company sustainability subject of auditing.
Based on the auditing tasks, the researcher think that the possibility of neural networks utility in
tax evasion related problems, in addition that the study of the client financial position and accept or
reject it, solve the problems related to planning auditing process, and sustainability evaluation
problems. In next section, some current models of artificial neural networks applications in auditing.

Section VI: The Current Models of Artificial Neural Networks Applications in Auditing
In fact, there are various applications of artificial neural networks, it is noted that most of these
applications have not been investigated in accounting literature because they are systems owned by
companies that designed and developed them, some companies use them in predicting future sales and
prices and expenses planning. They are also used in investment companies to manage tender note
portfolios and taking decisions of sales, purchases or keeping shares. Some banks use them in
evaluating the credit position of potential borrowers (Brown et al, 1995, pp51-53.), other applications
of artificial neural networks are presented by accounting literature, the most important applications of
artificial neural networks in auditing as follows:
 Using artificial neural networks for tax auditing purposes;
 Predicting bankruptcy (non sustainability);
 Using artificial neural networks in making auditing in assessing financial position of the
client subject of auditing, in auditing process planning, and in estimating manipulation
risks in financial statement.
Study and analysis of each application as follows:

Predicting Bankruptcy (Non Sustainability)

Research studies have begun on using artificial neural networks in predicting bankruptcy in nineties
(see for example: Altman et al, 1994, pp505-529; Yang et al, 1999,pp67-74) one of the most important
50 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

studies is Wilson and Sharda (1990. 557-545), that targeted using artificial neural network model
(Back-Propagation Artificial Neural Network) in predicting in companies bankruptcy, comparing the
prediction power to differentiation analysis method. For achieving this objective, five financial rates
are determined and represented the company inputs, accordingly, the company model consists of five
neurons in input layer (as per number of financial rates), one neuron in output layer that gives the final
categorization related to whether the certain company input data refers to potential bankruptcy or not.
Data necessary is collected for the study from 129 American companies from 1975 to 1982, these
companies are divided into training group and testing group. The training group consists of 74
companies from which 38 companies bankrupt, and 36 companies financially-sound. The testing group
consists of 55 companies from which 27 companies bankrupt and 28 companies financially-sound.
The financial rates have been calculated for training sample and stored in the company input
file, and stored also in another file of differentiation analysis program.
After neural networks model is tested, the two researchers have found that the network model
was able to predict accurately 22 companies situation from 27 companies are bankrupt, while
differentiation analysis model predicts properly 16 companies position only. By error analysis of both
models of networks and differentiation analysis. It has been shown that differentiation analysis model
has classified five bankrupt companies as financially-sound, and classified five financially-sound
companies within the bankrupt companies. While networks model has not made these mistakes. It
means that neural networks are better from differentiation analysis model in predicting bankruptcy.
 A group of researchers (Sriran et al as cited in the Siegel et al, 1998, pp265-276) has tested and
compared the predictive capacity in bankruptcy to three types of networks: Back-Propagation
Artificial Neural Network, Conjugate Gradient Descent ANN and Probabilistic ANN.
This study data consists of a set of financial rates calculated from financial statements
composed from 1139 American banks from 1986 to 1988. This sample has been divided into training
sample composed from 911 banks (from which 120 insolvent banks), the testing sample composed
from 228 banks (from which 25 insolvent banks), the training sample was used to learn all types of
networks and after learning each type, the networks have classified the banks into insolvent and
financially-sound banks.
By calculating error rates in classification of each type of artificial neural networks, the study
has found that the model of Probabilistic ANN was more accurate than other networks in predicting in
insolvent banks in 1986, but Back-Propagation Artificial Neural Network and Conjugate Gradient
Descent ANN more accurate than Probabilistic ANN in predicting bankruptcy in 1988 (it is the year
prior to bankruptcy), it means that the Probabilistic ANN model is more capable of predicting long
term bankruptcy, but Back-Propagation Artificial Neural Network and Conjugate Gradient Descent
ANN are more capable of predicting short term bankruptcy.
Atiya (pp929-935, 2001) has also studied using of artificial neural networks (Back-Propagation
Artificial Neural Network) in predicting bankruptcy, as he proposes new indexes of network models its
capability exceeds predicting bankruptcy. These indexes depend on the stock prices such as change in
stock prices, price rate to cash flows. To test the impact of these indexes in the predictive capacity of
artificial neural networks two types of networks have been put, the first depends on financial rates only
and the second depends on financial rates and corporation indexes of stock prices, the researcher had
about 120 indexes based on financial rates and stock prices as inputs of network models, he has
separately tested the best predictive capacity-based indexes and attachment matrix between indexes
and each other.
The researcher has tested five financial rates as inputs of network models based on financial
rates i.e. the book value to total assets, cash flows to total assets, change rate in cash flows for share,
total operating income to total assets and revenues to assets, for the networks models based on
financial rates in addition to stock indexes the first three rates in the former model have been selected
in addition to the price percentage to cash flows and change rate in share and fluctuation in stock price
as inputs of network models.
51 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

To test the predictive capacity of each network model, historical data has been collected from
617 American companies capable to meet their financial commitments, and 195 companies are not
capable to settle their debts. The data has been collected from 36 months before bankruptcy for
insolvent company, from the same period for the financially-sound companies. The researcher has
trained and tested both network models and he has found that predictive capacity of network model
based only on financial rates is about 48,5% .
This paper author has concluded that using stock exchange indexes related to stock prices as
inputs of neural network models improve these companies capacity in predicting bankruptcy due to
these indexes reflect descriptive factors are not reflected by historical data in financial position the
financial rates depend on, some of these factors are internal data that reached the market and the extent
of economic position as a whole. Consequently, the auditor has evaluated the company insolvent.

Using Artificial Neural Network for Tax Auditing Purposes

Wu(1997, pp. 291-301) has studied the extent of possibility of using artificial neural network in
determining companies that highly probably avoid taxes, thus, it is necessary to make additional test to
the financial statements. The study sample consists of a group of cases (180 cases) have been collected
from customers files expert in general revenues in Taiwan divided into training sample and testing
sample each sample consists of 45 cases required additional revision and one case does not required
additional revision.
The network inputs presented in 15 indexes on tax evasion includes: sales as seems from
external appearances compared to sales contained in reports in comparison with sales revenues, other
stock compared to sales provided in financial reports, percentage of net income compared to typical
percentages and industrial percentage average, as well as percentage of total profit compared to typical
percentages and industrial percentage average. The company outputs are presented in the auditing
decision, (no need for additional revision or additional revision is required). Two network models are
built and trained: Back-Propagation Artificial Neural Network that consists of three layers: input layer,
intermediate layer and output layers and simple network model that consists of two layers: input layer
and output layer, the two models were evaluated by using predictive capacity standards i.e. the
percentage of cases number properly classified by the network in testing sample. The study has found
that the artificial neural network models have ability to predict the companies required additional test
as a result of an increase of tax evasion probabilities, the 3 layer network models are more capable than
2 layer network models in finding tax evasion cases.
The researcher think that it is a result of that the relationships between tax evasion indexes
(network inputs) is a linear relationship, consequently, the 3 layer networks are more capable to predict
the companies required extra audit for their books and financial statements than 2 layer networks
because the intermediate layer gives the network ability to deal with non-linear data.

Using Artificial Neural Network in Auditing Processes

The accounting literature indicates that the artificial neural networks are used in decision process in
evaluating the customer financial position subject of auditing, the planning auditing process, the
estimating manipulation risk in financial reports, the discussion of each one as follows:

1. Using of Artificial Neural Networks in Evaluating Customer Financial Position Subject of

Auditing
Etheridge et al (2000, PP. 531-550) has conducted a study aims to compare the performance of three
types of artificial neural networks at evaluating the customer financial position subject of auditing,
future sustainability extent. These three types are presented in Back-Propagation Artificial Neural
Network, Categorical Learning Network and Probabilistic ANN. To achieve the study objective,
financial rates related data was collected from 1139 banks (financially failed or sound) of the biggest
six U.S. companies from 1986 to 1988. The banks sample was divided into two groups: training group,
52 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

testing group. Each group consists of number of financially-sound banks, and other number of failed
banks for every year of the study.
The researchers have demonstrated that how using the financial rates as inputs of network to
evaluate the customer financial position. As the financial rates are of failed and sound companies
composed the training sample, the network is learned during the training the relations between
independent variables (financial rates), the dependent rates (failed or sound companies). Through the
company training the financial rates weights have been determined and linked with the financially
failed and sound companies, and by continual adjustment in weights the network learning improves,
and starts to produce the output related to whether the company financially failed or sound based on
given inputs (financial rates). Once learned the company has been tested using the testing sample as the
network uses the financial rates of companies required to be classified in order to include it the
financially failed or sound companies group. In comparison of predicted categorizations with actual
categorizations it can determine the network performance and error rates.
The study has found that both Back-Propagation Artificial Neural Network and Probabilistic
ANN are more capable to categorize accurately of financially sound banks, while Categorical Learning
Network is more capable to categorize accurately the financially failed companies.
The study has investigated Back-Propagation Artificial Neural Network, Probabilistic ANN and
Categorical Learning Network suitability extent in evaluating the customer financial position taking
into consideration the categorization error costs- the potential increase of auditors legal liabilities if
error occurs in evaluating the soundness of the customer financial position- the study has demonstrated
that the incorrect classification of failed banks as if financially sound is more costly than the incorrect
classification of sound banks as if financially failed.
The study has found that Categorical Learning Network is better than other network models in
evaluating the customer financial position taking into account error costs in categorization reached
minimum level possible at using Categorical Learning Network followed by Back-Propagation
Artificial Neural Network, then Probabilistic ANN.
The study has indicated that the sample composition might have affected the results, the sample
consists of financially sound banks more then failed ones, the study data was collected from one sector
i.e. bank sector, and for three years only, it has used other network models.
Based on above-mentioned, The researcher has found that Categorical Learning Network model
is more suitable in evaluating the customer financial position because it is more capable in classifying
the failed companies in an appropriate manner, and it lessens to a minimum level possible the incorrect
evaluation costs of the customer.

Using Artificial Neural Network in Planning Auditing Process

Koskivaara (2000, pp. 1060-1069) has conducted a study aims to investigate the possibility of using
artificial neural networks in analytic investigation process necessary for planning auditing process,
through building network models predict the relation between monthly financial balance accounts, and
observe if there is unusual fluctuation in these accounts.
The researcher has specified the accounts important for a client to enter them in network model
in order to predict its value, i.e. net sales and items added to them the change in stock, employees costs
, administrative costs, total of indirect costs, operation profits, debt accounts, credit accounts, and the
total investment limit.
The researcher has used in his research the actual data of 72 monthly income statements- from
January 1990 to December 1995 for a medium size Finnish industrial company as the network training
sample consists of balance account first 60 months, while the network testing sample consists of the
last 12 months balance accounts.
Two models of multi layer-artificial neural network, the first model uses last two months
balance sheet to predict the third month balance account, the second model uses last four months
balance accounts to predict the fifth month balance account. The network has been trained to
53 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

understand the relation between different balance accounts, it therefore becomes capable to predict
future values based on the last values.
In learning network, the researcher has changed the number of neurons in each network layer
until he has reached the model lessens at minimum level possible error square average as predicted
balance accounts (outputs) very close to actual values (targeted) of those accounts, consequently, it
became possible to test the network.
In testing the network model predictive capacity (the model that uses last two months balance
accounts to predict the third month accounts, and the model that uses the last four months balance
accounts to predict the fifth month balance accounts) the research has found that both models were
well capable to predict the balances of most accounts, however, the second model is relatively better
than the first one.
To determine the suitability of artificial neural network model for approving the decision of
financial accounts revision, the network model has been tested (that uses four months data to predict
the fifth month balances) to find the significant errors, it was made by putting untrue sales in the fifth
month. It has been found that the network model has found the error as average of error square rises
after untrue sales added, the difference between targeted values and network output values became at
unallowable limits, it is an index to the auditor to investigate the reason of the difference between
targeted values and network predicted output values. The researcher has indicated that the possibility of
conducting other studies using data of more companies and other balance accounts as input for the
model.
Based on above mentioned- The researcher concludes that artificial neural network model can
be used to predict the balance accounts subject of auditing, through comparing predicted values to
actual values incorrect balance accounts can be found that accounts the difference between predicted
values (network output) and actual values (targeted values) at unallowable limits, it is an index to the
auditor to give extra investigation to those accounts.

Using Artificial Neural Network in Estimating Manipulation Risk in Financial Reports

Some researchers Lin et al. (2003, pp. 657-665) have conducted a study aims to assess Fuzzy Neural
Network in finding manipulation in financial reports, the study has indicated that the external auditor
finds difficult to discover the manipulation in the customer financial statements, because this
manipulation has often been hidden by changing accounting registers and documents of financial
transactions, so the auditor strategy to this problem is to estimate manipulation risk in the financial
reports, this risk estimate affects the auditing tests design, the researchers have indicated to the
possibility of using Fuzzy Neural Network to reduce the personal prejudice or error related to giving
inaccurate weights to auditing risk elements, this contributes in improving the accuracy of auditor
estimate in manipulation risks in accounts.
Fuzzy Neural Network is a group of artificial intelligence systems that incorporates Fuzzy
Logic with artificial neural network predictions as Fuzzy Logic provide us with framework to deal with
inaccuracy in data available.
To estimate manipulation risk in financial reports, this study focuses on variables of accounting
estimating and connected to revenues achieving rule. These variables are presented in the percentage of
change in provision of doubtful debts as a percentage of debt accounts, debt accounts as a percentage
of total assets, percentage of total investment margin to net sales, net sales value, debt balance
accounts, balance provision doubtful debts. The change percentage has been measured in these rates
and balances by comparing the financial rates and balance accounts in the year manipulation first
occurred in accounts in financial rate and balance accounts in the year preceded manipulation.
The study sample consists of 200 American companies divided into training sample and testing
sample, each sample consists of 2o companies whose financial statements have manipulation and
distortion (according to U.S. Stock Market Committee), and 80 companies whose financial statements
are free from manipulation. The training sample was used in network building, and testing sample was
used in comparing network performance in statistical conventional ways (such as regression model)
54 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

The study findings has shown that Fuzzy Neural Network model is more accurate than
statistical conventional methods in predicting companies whose financial reports have manipulation (as
accuracy level reaches 35% at using Fuzzy Neural Network compared to level 5% at using statistical
conventional methods), and both neutral network models and statistical conventional methods are
capable to classify companies whose financial reports free from manipulation and distortion.
Based on the above mentioned, the researcher concludes that Fuzzy Neural Network model is
better than statistical conventional methods in guiding the external auditor to financial statement
contain substantial potential errors, subsequently, the additional revision tests must be applied, it helps
the auditor to give correct opinion in financial statements.

The Research Findings & Recommendations

This research is intended to study and assess the feasibility of using artificial neural networks in
auditing as the research investigates the concept of artificial neural networks, the most important types,
advantages and disadvantages, it also shows the most important differences between expert systems,
the research investigates the reasons why accounting auditing required using artificial neural networks
and the most important current applications of artificial neural networks in auditing. The research has
concluded as follows:
 Artificial neural network is computer programs consist of a set of neurons (processing
elements) that connected with each other in various links, these cells are assembled in a form of
layers: input layer, output layer, and between preceded two layers intermediate layer or more
that gives the network capacity to deal with non-linear data. The network action governed by a
group of mathematical functions: addition, transfer, and learning.
 There are many types of neural networks that differ in building design, layers number, and
mathematical functions used as these differences affect the extent of suitability for different
uses.
 The most important advantages of artificial neural networks are: high speed in operation,
flexibility, maintenance easiness, capability in dealing with incomplete fuzzy data, ability to
design the model even under complex relations between independent variables. The most
significant disadvantages are that they require long time to be learned, and also do not
sufficiently test the research hypotheses.
 The most important differences between expert systems and artificial neural networks are that
expert systems depend on the deductive logical thinking, but artificial neural network depend
on inductive thinking. Expert systems are not characterized with flexibility, on contrary,
artificial neural networks are characterized with flexibility as there are no pre-conditions restrict
network action. In addition that expert systems have series of rules specified by the expert,
while artificial neural networks depend on examples to determine the functions relations
between input and output, expert systems process data successively, but artificial neural
networks process data in a parallel manner. In addition that expert systems have a function to
explain and interpret the reasons of reaching certain decision, while the networks have no such
ability. Furthermore, expert systems contain knowledge base in which data saved and stored,
but artificial neural networks do not contain knowledge base and the data is saved and stored in
neural cells.
 Artificial Neural Networks are more capable than statistical conventional models (such as
differentiation analysis) to predict bankruptcy, as Probabilistic ANN is more capable to predict
long term bankruptcy, while Back Propagation Artificial Neural Networks and Conjugate
Gradient Descent ANN are more capable to predict short term bankruptcy.
 Artificial neural networks are more accurate than statistical conventional models to predict
companies whose financial reports contain manipulation.
 3 layer artificial neural networks are more capable than 2 layer artificial neural networks in
finding tax evasion cases, guiding the auditor to companies require an additional test.
55 European Journal of Economics, Finance and Administrative Sciences - Issue 47 (2012)

 Artificial neural networks can be used in analytic test process necessary to planning auditing
through predicting balance accounts subject of auditing.
 The auditor must use Categorical Learning Network at evaluating the customer financial
position and future sustainability because it is more capable to categorize the financially failed
companies in a correct manner, this reduces to minimum level incorrect estimation costs to the
customer financial position.

Recommendations
In the light of above mentioned, the researcher recommends the following:
1. Using artificial neural networks in building knowledge bases of expert systems as neural
learning networks through examples and act in a parallel manner, consequently, can process
data quickly, and determine the bases required by expert systems.
2. It is necessary to determine network type suitable to solve the problem of subject of study, as
well as determine network input accurately because inaccuracy leads to reduction in network
performance.

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