4 Crucial Considerations for Risk-Based Audit Scheduling
One of the priorities of an internal auditor is often to strengthen risk awareness in an organisation. Although the management is responsible for sufficient risk identification and control, internal auditors also play a pivotal supporting role by evaluating business processes to ensure risks control are in place and ensure the risks being controlled effectively.
Continuous risk-based audit scheduling is also essential to ensure adequate audit resources have been allocated. This enables auditors to identify risks, frauds, errors, and areas for improvement. If the internal auditors of an organisation don’t have the time and resources to conduct effective audits that highlight risks, it is time to update the audit programs.
Here are some considerations that help internal auditors improve the quality of their audits.
1. Understand the Objectives and Risks of a Business
The risk-based auditing approach has a broader scope than traditional auditing and requires a thorough understanding of organisational goals, strategies, and objectives. Its scope is more expansive than conventional checklist-based auditing, which only focused on evaluating compliance with a specific set of requirements. To plan and conduct audits that focus on the most critical risk areas, auditors must first undertake an assessment of the areas of risk, using a tool such as a SWOT analysis.
The first step towards this can be to identify key business objectives and associated risks. This makes it easier to prioritise and schedule audit engagements and provides insights on where controls are adequate concerning the risks and when they are not. Auditors must consider risks across the organisation be it legal, compliance, IT, or technology risks.
Another key area to evaluate is the organisation’s readiness to deal with the unexpected. The auditors must determine if well-defined steps or controls are in place to manage potentially significant changes that could impact the overall control system.
2. Consult the Management
While designing a risk-based auditing and monitoring program, internal auditors can benefit from working closely with senior leadership and management teams to align business strategy and risks and issues with the audit mission. Regular communication allows auditors to utilise management’s assistance in conducting a risk assessment of various business areas along with understanding risk tolerance and threshold.
Senior leadership should participate in and agree on high-risk priorities for the audit plan. They are likely to have already identified emerging risks that could threaten the organisation. Transparency and communication are essential to ensure that audits are designed to focus on the most critical threats.
3. Determine Risk Tolerance and Appetite of Management
Risk appetite is the amount of risk exposure that a business is willing to accept or has the ability, capacity and resources to deal with. Stakeholders, together with management, must set the risk threshold to identify when and where controls need to be enforced. This process helps distinguish controls that enhance risk management and controls that are necessary to protect business functions.
Auditors can start with identifying and understanding the risk management policies and procedures in place as well as the risk appetite at the organisational and individual process levels. Then, determine the risk tolerance of the management, and use them as the starting point for independent risk assessment.
When auditors understand the risk tolerance of the management, they can effectively identify a control gap that can breach the risk tolerance threshold and raise it as a critical issue for reporting.
4. Assess Risk Impact
Once the key risks, risk appetite, tolerance, and threshold are ascertained, they need to be evaluated to determine their impact on the organisation and the management’s ability to mitigate these risks. Internal audits assess the effectiveness of business processes and determine if the management is appropriately addressing the most significant risks. The results can be used for audit planning.
Every organisation has a different approach towards handling risks, and the risk assessment parameters should hence be defined based on the needs of each organisation. However, a generalised approach can include the following steps:
- Define risk impact using qualitative and quantitative methods
- Establish the range of values or level of categories when defining risk likelihood.
- Ensure to include all aspects of risk for a business area and examine critical points when conducting a risk assessment.
- Ensure that control tests cover all potential concerns, and the results are well documented with evidence.
- Be prepared to present and verify conclusions, audit findings, reports, corrective and preventive action plans to the management.
Internal audits are aimed at enhancing operational efficiency and compliance of an organisation along with driving better business performance. Automating the process of conducting internal audits can add to the quality of these audits to help businesses comply with regulations and grow as per the management’s expectations. Compliance audit management systems help auditors plan and conduct risk-based audits, document results and evidence, and generate robust reports.
Mobiom is the compliance management system suitable for all audit types of an organisation. Contact Mobiom today for more details on how it can help your business with risk-based audits.