Internal audits are a necessary part of any business. They can still be stressful, however, and they don’t always fit smoothly into your risk and compliance program. Rather than designing a risk management system around these audits, many companies are beginning to design the audits around their risk management needs.
Risk-based internal auditing has become increasingly popular in recent years. Companies see that this strategy can help them better safeguard against risk and prioritize the threats most pressing to their organization. If your company wants to embrace risk-based internal auditing, keep reading to learn more about how you can integrate your auditing process into your risk management program.
What Is Risk-Based Internal Auditing?
Traditional internal audit plans tend to focus on controls already in place and whether or not they’re functioning correctly. Risk-based internal audits start by examining the inherent risks your company faces (as identified by your management and board of directors); and then seek to correct and reframe your controls according to what risks are the most urgent and have the most potential for loss.
This technique is more in line with an enterprise risk management (ERM) approach, as it examines the organization as a whole rather than by department.
Put more simply, “RBIAs” give auditors a larger role in your risk reduction program. Beyond simply diagnosing the problems, they participate in creating effective controls and maintaining risk management efforts over time.
The Chartered Institute of Internal Auditors (CIIA) stresses the importance of a strong risk management program before engaging in this kind of audit. An RBIA approach can require more frequent updates than a traditional audit, but the results will be more nuanced and specific to your company’s exact risk universe at any given time.
Benefits of Risk-Based Internal Auditing
Risk-based internal auditing has a number of benefits over a more traditional audit approach.
Developing a consistent and comprehensive approach to risk management makes it easier for an organization to adapt to changing conditions. Adjusting your audit schedule to your risk management framework will also help you switch tactics quickly when your business objectives need to change.
A risk-based approach to audits enables the internal auditors to identify risks correctly and allows management to put the right internal controls in place for the best performance. This provides you with a better understanding of the risks and enables your organization to better manage them.
Ranking and mapping your risks with RBIA allows you to allocate activities and funds to the areas that need the most attention, creating a unique risk management program rather than relying on external frameworks and recommendations. While compliance frameworks are necessary for many industries, they don’t account for every potential risk you could face; relying on those requirements alone could result in risks going unnoticed and unattended.
Risk-Based Internal Audits Process
One of the benefits of a risk-based audit is that it can be altered and adjusted to match your company’s risk management process and particular needs. Here are some steps you can take to help you create and execute a successful audit.
Understand your risk universe
A risk-based internal audit requires that internal auditors understand the company’s strategies, goals, and objectives. Your auditors or audit committee must have deep knowledge of the business, including its strengths, weaknesses, and challenges, so the auditors can focus their audits on the most critical risk areas. Defining and classifying your organization’s risk universe will help you schedule RBIAs appropriately and give you an idea of what key risks require the most attention.
After the risk identification process is completed, auditors need to assess those risks to determine the likelihood that they will occur, the effect on the organization should they occur, and what risk mitigation efforts are already in place. This information should be compiled in your company’s risk register so it can be easily shared and distributed.
Get management involved
Internal auditors should work closely with senior management to align business strategy and risks with their auditing and monitoring program. This enables management to assist the internal auditors with conducting an accurate risk assessment of various business areas. It also helps the internal auditors understand the company’s risk tolerance and thresholds.
Management involvement is one of the factors that sets risk-based auditing apart from a more traditional approach. No one knows your company’s business risk better than your team, and using their knowledge can help you develop an auditing system that works for everyone.
Determine your risk maturity
Risk appetite is the amount of risk exposure that a company is willing to accept. Risk tolerance is the degree to which a company is able to deviate from its established risk appetite. Your risk maturity is defined by your comprehension of these two aspects of your business. Stakeholders must understand both of these concepts and set risk thresholds so they can identify when and where they need to implement internal controls. (Learn more about risk appetite versus risk tolerance.)
Internal auditors have to identify and understand the risk management policies in place, along with the risk appetite at the individual and organizational process levels. The internal auditors then need to determine the risk tolerance of the management and board to establish a starting point for independent risk assessments.
What Is an Internal Audit Risk Assessment?
Internal audit risk assessment helps an organization’s internal audit department identify, evaluate, and prioritize risk factors within its immediate landscape. This helps to determine the risks that could potentially prevent an organization from achieving its objectives and to assure stakeholders and management these risks are being effectively managed.
A standard internal audit risk assessment involves the following steps:
- Risk identification. Identifying and understanding risks from various sources such as operational processes, financial transactions, regulatory compliance, information technology, and strategic initiatives.
- Risk evaluation. Assessing the likelihood and potential impact of identified risks to determine their significance and required attention level.
- Risk prioritization. Prioritizing risks based on the evaluation to focus on the most critical ones.
- Risk mitigation. Developing and implementing risk mitigation strategies with management, which may include implementing controls, modifying existing processes, or developing new procedures.
- Risk monitoring and reporting. Continuously monitoring and assessing the effectiveness of controls and regularly reporting to management and stakeholders to provide assurance of adequate risk management and timely identification of emerging risks.
Considerations When Assessing Risk for an Internal Audit
Below are some important considerations to keep in mind when conducting an internal audit risk assessment.
When assessing risk for an internal audit, internal auditors should consider the following aspects related to background information:
- Organizational context. Understanding the organization’s mission, objectives, and strategies enables streamlined and accurate risk assessment. It helps auditors align their process with the organization’s goals and accordingly identify potential risks that may hinder achieving these objectives.
- Industry and regulatory environment. Being aware of the industry in which your business operates along with the associated regulatory requirements makes it easier for auditors to identify industry-specific risks and comply with applicable laws and regulations.
- Organizational structure and culture. Assessing risk requires a deep understanding of an organization’s structure, including its reporting lines, governance framework, and accountability. Auditors should also evaluate the organization’s culture, ethics, and values to influence risk management practices.
When evaluating risk in relation to system architecture, internal auditors should consider:
- IT infrastructure. It’s crucial that auditors understand your organization’s IT infrastructure, including hardware, software, networks, and databases. This will help them identify vulnerabilities and potential risks associated with the organization’s technology systems.
- Data management. Auditors should assess how data is collected, processed, stored, and protected within the organization. In addition, they should consider the adequacy of data governance, data quality controls, and data privacy and security measures.
- System controls. Examining access controls, segregation of duties, change management processes, and system monitoring is crucial to identify potential risks and weaknesses in the system architecture.
Previous audit results
Previous audit results provide valuable insights for assessing risk. Auditors should pay attention to:
- Identified weaknesses. Reviewing findings from previous audits helps identify recurring issues or unresolved control weaknesses. These weaknesses may indicate ongoing risks that need to be addressed.
- Follow-up actions. Internal auditors have to determine whether management has taken appropriate actions to address previously identified risks and control deficiencies. This knowledge will help them understand the effectiveness of your risk management efforts.
- Changes since the last audit. Inform auditors about any significant changes in your organization’s operations, processes, or systems since the last audit. These changes may introduce new risks or alter the risk landscape, requiring a reassessment of the organization’s risk profile.
When assessing risk related to financial information, auditors should consider the following:
- Financial reporting processes. Auditors should evaluate the integrity and accuracy of financial information, including the reliability of accounting systems, reconciliation processes, and internal and external financial reporting requirements.
- Fraud and misappropriation. To expose any vulnerabilities within the organization’s financial operations, auditors scrutinize the design and efficacy of anti-fraud controls, duty segregation, and the presence of robust whistleblower mechanisms.
- Financial performance and indicators. Analyzing financial performance indicators like liquidity, solvency, profitability, and cash flow helps auditors uncover risks that may potentially harm the organization’s financial health.
- Regulatory compliance. Auditors must review the organization’s adherence to pertinent financial regulations and reporting standards. Scrutinizing compliance with accounting principles, tax regulations, and industry-specific financial requirements stands as a crucial responsibility in the risk assessment process.
In each of these areas, auditors should gather sufficient information, conduct appropriate analysis, and consider the specific risks and controls relevant to the organization under audit.
Prepare for Risk-Based Audits with the RiskOptics ROAR Platform
Risk-based internal audits can seem intimidating without a robust risk management system in place. If you’re moving towards a risk-based auditing system, you’ll first need to be sure that you’re appropriately managing risk throughout your company.
The RiskOptics ROAR Platform is easy-to-use and can streamline your risk and compliance efforts. By providing a single source of truth for your risk management program, ROAR helps you track any potential risks and provide transparency for your management, staff, and auditors.
Get a demo to learn how the RiskOptics ROAR Platform can help you create a successful risk management program.