6 reasons why you should take a risk-based audit approach
Strong corporate governance is underpinned by continual risk management, and in an unpredictable climate, never has this been brought into sharper focus. If you haven’t yet considered a risk-based audit approach, now is the ideal time to discover the benefits.
With growing pressures on organizations to identify and manage their business risks, having effective controls in place is the best way to prevent undesirable effects and leverage opportunities for improvement.
Though the onus for scoping and tackling risks is largely on the senior management team, internal audit plays an integral role in providing assurance that those risks have been well handled. This activity, however, must be carried out within the context of a robust risk management framework. Having this in place makes an organization ready for the next step: risk-based internal auditing (RBIA).
What is risk-based internal auditing and how does it differ from the traditional approach?
The widely accepted definition from the Chartered Institute of Internal Auditors (CIIA) states that RBIA is: “A methodology that links internal auditing to an organization’s overall risk framework. RBIA allows internal audit to provide assurance to the board that risk management processes are managing risks effectively, in relation to the risk appetite.”
In a nutshell, risk-based auditing puts the risk universe at the centre of the auditing strategy to address the highest priority risks. Throughout the audit lifecycle, the risks are addressed accordingly and then reported on to provide insights back to the senior management team so that they can make well-informed decisions on the next steps.
Unlike traditional internal auditing, where audit plans are carried out within a strict time frame and may not necessarily cover the most important risks, risk-based internal auditing is driven by the most recent risk assessments, with the top threats being covered first and far more frequently.
From a control perspective, the focus shifts from deficiencies in all internal controls and cases of non-compliance with policies and procedures, to the control of risks specifically.
Whilst risk-based auditing is still a relatively new and evolving process, the benefits are far-reaching. Here, we outline the top six:
The top benefits of risk-based internal auditing
1. Greater risk compliance
Due to the frequent nature of risk-based audits, they can help to fill knowledge gaps and educate members of staff who manage risk controls day-to-day. Plus, regular reporting keeps risk compliance at the forefront of everyone’s minds, as opposed to it being an annual tick box exercise that is quickly forgotten about.
2. Enhanced understanding of risk levels
By scoping audits in the context of a risk management framework, it is far easier to identify the priority of risks based on indicators such as risk velocity and severity. This enables businesses to understand the consequences of their actions in relation to each risk, and where opportunities for advancement may lie to mitigate any future risks.
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3. Improved resilience in the face of uncertainty
Nothing has challenged the economy more in recent times than the COVID-19 pandemic, where organizations had to quickly pivot and adjust without warning. Risk-based audits are invaluable at a time of uncertainty, as they allow businesses to adapt more easily to changing conditions through a consistent and comprehensive approach to risk management. The risk-based audit methodology also forces organizations to look beyond the here and now to the emerging risks that will inevitably need to be tackled.
4. Better use of audit resources
Contrary to traditional internal auditing methods, risk-based internal audits drive the allocation of resources in a far more targeted way since the wider audit plan is determined by the severity and volume of risks of which senior management requires assurance. Where the high-risk areas emerge, that is where the audit team channels their efforts.
5. More buy-in from senior management
Risk-based auditing involves a much more inclusive approach, where awareness about the risk and audit process is raised across the organization through activities such as workshops and self-assessments. With senior management also closer to this process and understanding how audit’s recommendations support their business objectives, they are more likely to appreciate the true value of internal audit and take greater ownership of risk.
6. Higher likelihood of achieving business objectives
Further to the previous point, a risk-based auditing approach combines all aspects of the risk and audit universe which include objectives, risks, controls, processes, evaluations and reports. The relevance of any one aspect can be clearly viewed in relation to the entire risk management framework, such as the significance of a defective control or the risk that the control has been put in place to manage. This approach also means that it is apparent when a key objective is being threatened so that measures can be quickly established to mitigate the risk before it impacts the organization’s ability to achieve that objective.
How technology can help
Without a robust system in place, it is virtually impossible to conduct audits on every potential risk that your organization is exposed to.
However, by automating the complete audit lifecycle with risk-based audit management software, you can systematically define and assess specific risks and controls using features such as heat maps, risk exposure and control coverage to ensure nothing slips through the net.
An added benefit is that you can address and resolve issues in real-time, as opposed to running post-mortems after the damage has been done. Plus, with comprehensive data analytics and quick reporting, you are able to communicate valuable insights to senior management as and when they need them.
Align your internal audit plan with evolving risk priorities
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