Planning an internal audit risk assessment is a crucial step in the internal auditing process. It helps businesses identify, prioritise, and handle inherent risks that may have an impact on financial stability, operational efficiency, or compliance. Organisations can conduct successful risk assessments that result in better decision-making and risk mitigation strategies by considering a variety of risk variables such as industry trends, financial data, operational procedures, and compliance requirements, as well as using the right tools and methodologies.
The internal audit team must strike a delicate balance between independence and impartiality while still adding value to the business.
To conduct an effective internal audit risk assessment, follow these important steps:
Define the purpose and objectives of the assessment.
Define the audit’s aims and scope clearly so that everyone understands why it is being undertaken. Internal audit goals may include preventing or detecting fraud, improving operational efficiency, strengthening the internal control environment, or providing recommendations based on best practices.
Meet with stakeholder groups.
Before developing a work plan, the internal audit team should interact with a variety of stakeholders, including management, the audit committee, human resources, and information technology (IT). Furthermore, it may be useful to compile the results of any self-assessments undertaken by different departments.
This communication allows the internal audit team to listen to desired objectives, set expectations for results, and identify areas where the audit might provide value.
Develop a risk-rating methodology.
The internal audit team will identify a number of potential dangers during the annual risk assessment. such, how can they consistently assess such risks such that the most important hazards get to the top?
Creating risk ratings allows auditors to categorise threats and objectively assess their importance. For example, the audit team may base their assessments on the potential financial losses produced by a negative event, such as fraud losses or compliance penalties. The grading system may include other qualitative concerns, such as reputational damage.
The risk rating approach does not need to be perfect; instead, concentrate on the end goal, which is to prioritise important concerns and develop risk-based audit procedures.
Determine the frequency of audits.
Things change throughout time, both inside the company and in the external regulatory environment. As a consequence, businesses should do internal audits of their compliance processes on a regular basis.
This avoids compliance issues from being uncovered by third-party auditors. It is also vital for a business to regularly assess (and, if necessary, update) its auditing program methods to account for any regulatory changes that have occurred since the previous audit.
Teach departments about auditing requirements.
Typically, departments should be notified well in advance of an upcoming audit. They should also be aware of the information and papers that will be required during the audit. This prepares them for the actual audit date.
The sole exception is if the audit is intended to investigate purposeful illegal or immoral activity by an employee or workers. Then, plainly, it is preferable not to reveal advance notice of an audit in order to prevent a potential offender from hiding their violation.
Conduct fieldwork and interviews with team members.
The audit has two primary components. The first phase is to conduct interviews with members of the teams under audit. Auditors should question employees to explain what they do and why they do it that way, and then compare their responses to the company’s written standards on file. This allows you to evaluate employee proficiency and determine if (and what kind of) refresher or further training is necessary.
The second component assesses internal controls and business procedures to verify that they meet company goals and expectations. Auditors at a financial institution, for example, may want to set up a phishing scam or money laundering scheme to see whether protocols are adequate—and if workers understand how to use them—to solve the issue.
Document and report results.
The auditing team should capture both employee testimony and trial results, noting any deviations from official policy or company norms. These should then be compiled into a summary report that upper management may see. The goal is to make management aware of noncompliance concerns so they may design solutions.
Carry out the recommended corrective actions.
The report should also provide suggestions on how to remedy any discovered compliance concerns. Based on these recommendations, senior management should develop clear and practical plans to improve areas of the firm where compliance is inadequate.
Conduct the audit.
Finally, internal auditors should document how easy it was for them to perform the audit and any problems they experienced. This might assist management realise how thorough and objective the auditing team’s findings and recommendations are. Problems here may indicate that certain teams or departments should enhance their audit preparation or conduct themselves differently.
Third-party risk management and compliance auditors will most likely look at these features. They will try to figure out how autonomous an internal auditing team is from the rest of the company’s operations.
Key Takeaways
Remember that a good internal audit risk assessment is more than just a compliance requirement; it is a strategic tool that can propel an organization’s success and secure its sustainability. Organisations may increase their overall resilience by empowering their internal audit departments and using this proactive method.