Risk-based internal audit is an approach used by internal audit functions to focus on areas of highest risk within an organization. This approach recognizes that resources are limited and should be directed toward those areas that have the greatest potential impact on an organization’s objectives. Here’s an overview of risk-based internal audit:
1. Identifying Risk : This is the foundational step in the risk-based internal audit process. It involves identifying and evaluating risks that could affect the achievement of an organization’s objectives. Risks can be related to financial matters, operational processes, reputational matters, compliance with regulations, information technology, etc.
2. Risk Ranking and Prioritization: Once risks are identified, they are typically ranked or prioritized based on risk factors involved such as their potential impact and frequency. The risk can be categorized as Low level, Medium level and High level, having considering impact on various aspect of entity. This helps internal auditors determine where they should place their focus.
3. Audit Planning: After categorizing risks, the internal audit team develops an audit plan that outlines which areas or processes will be audited and in what order. The plan reflects the relative importance and urgency of addressing specific risks.
4. Scoping and Objectives: For each audit engagement, the internal auditors define the scope and objectives. The scope outlines the specific processes, functions, or activities that will be reviewed, while the objectives specify what the audit aims to achieve. Auditor must be very specific to agreed audit scope.
5. Audit Procedures: The internal audit team designs and executes audit procedures based on the identified risks and audit objectives. These procedures could include testing controls, IFC, TOD, TOE, reviewing documents, interviewing personnel, etc.
6. Testing and Evaluation: During the audit, internal auditors assess the effectiveness of controls and processes in place to manage identified risks. They gather evidence and evaluate whether controls are operating effectively.
7. Findings and Recommendations: Audit findings are the observations noticed by the auditor which are basically deviations from established controls or best practices that could lead to increased risks. Based on these findings, internal auditors provide potential business impact and recommendations for improvements to enhance controls and mitigate risks.
8. Reporting: The results of the audit, including findings and recommendations, are communicated in a formal audit report. This report is typically shared with top level management, the board of directors, and sometimes external stakeholders like regulators upon finalizations only.
9. Follow-up: After the audit report is issued, internal auditors monitor the progress of management’s implementation of the recommended actions to address the identified deficiencies.
10. Advisory Role: In addition to assessing controls, risk-based internal audit may also offer advisory services to help management enhance their risk management and control processes. This process happens in form of business recommendation.
11. Alignment with Strategy: The risk-based approach ensures that internal audit efforts are aligned with the organization’s strategic objectives, supporting decision-making and value creation.
12. Flexibility: The approach allows internal auditors to adapt their efforts to changes in the organization’s risk profile, regulatory environment, and business landscape.
13. Governance and Oversight: The audit committee of the board of directors often provides oversight and guidance for the risk-based internal audit process.
Conclusion: Risk-based internal auditing isn’t just an approach; it’s a paradigm shift. By honing in on the most crucial areas and offering a blend of assessment and advice, it ensures that organizations are not just risk-averse but also poised for growth and innovation.
Author Bio
