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6 compelling reasons to take a risk-based audit approach

22 March 2021

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6 compelling reasons to take a risk-based audit approach

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Strong corporate governance is underpinned by continual risk management, and in the current unpredictable climate, never has this been brought into sharper focus. If you haven’t yet considered a risk-based audit approach, now might be the ideal time to discover its benefits.

With growing pressures on organisations today to identify their business risks and how they manage them, having effective controls in place is the surest 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 - only when this is in place is an organisation ready for 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 organisation’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 management’s 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 an organisation’s policies and procedures, to the way in which risks specifically are being controlled.

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

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 in the box exercise that is quickly forgotten about after the fact.

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.

Improved resilience in the face of uncertainty

Nothing has challenged the economy more in recent times than the COVID-19 pandemic, where organisations have 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 organisations to look beyond the here and now to the emerging risks that will inevitably need to be tackled.

Better use of audit resources

Contrary to traditional internal auditing methods, where audits may be limited to the available resources, 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.

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 organisation 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.

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 organisation’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 organisation 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.

Discover how your internal audit department can take a proactive, risk-based audit approach and elevate its status within the IIA audit maturity model in our latest whitepaper - Level Up: Risk-Based Auditing.

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Written by

Alexandria Claypole

As Content Marketing Executive at Ideagen, Alex delivers insightful and actionable content to help organisations worldwide better understand the intricacies of the auditing, risk and compliance world. With strong roots in the technology sector, Alex is committed to advocating software solutions that support businesses in both achieving and exceeding their objectives.

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