Internal audits are a necessary part of 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 audits (RBIA) are an approach to auditing that has gained popularity in recent years. Companies are discovering that this strategy can help them better safeguard against risk and prioritize the threats most pressing to their organization. If your company is considering an RBIA, 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 audit plans tend to focus on the controls you already have 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 keeping with an enterprise risk management (ERM) approach, as it examines the organization as a whole rather than by department, as in a traditional audit methodology.
Put more simply, RBIAs give auditors a larger role in your risk reduction program. Beyond simply diagnosing the problems, they are also a part of the creation of 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 will allow you to allocate activity 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 has taken place, auditors will need to assess those risks to determine the likelihood that they will occur, the impact on the organization should they occur, and the risk mitigation efforts that 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 to conduct an accurate risk assessment of various business areas. It also helps the internal auditors to 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.
Internal auditors have to identify and understand the risk management policies that are 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.
Prepare for Risk-Based Audits with ZenGRC
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.
ZenGRC is an easy-to-use software platform that can help you streamline your risk and compliance efforts. By providing a single source of truth for your risk management program, ZenGRC will help you track any potential risks and provide transparency for your management, staff, and auditors. Schedule a demo to learn how ZenGRC can help you create a successful risk management program.