One of the top priorities of internal audits is to strengthen risk awareness, which means to provide more timely insights of risks. Risk identification is usually management’s responsibility, but internal audits have an essential supporting role by evaluating the organisational controls and processes in order to highlight critical risks which might get in the way of the achievement of your business objectives. Also, internal audits provide assurance that both emerging and already existing risks are properly monitored and controlled.
In order to achieve these objectives, a constant risk based audit program is essential, as it will allow auditors to identify potential fraud, risks, errors and areas of improvement.
Now, let’s take a look at some key points to consider when conducting risk based internal audits:
- First of all, you must understand the business, its objectives and its risks
A risk based audit usually has a wider scope, unlike a checklist based audit, and requires a thorough understanding of all organizational strategies, objectives and goals. All auditors must have deep knowledge of the business, its strengths, as well as its weaknesses and challenges, in order to plan their audits and focus on the most serious risk areas.
- Afterwards you should get management involved
When designing a monitoring and auditing program, internal auditors should work closely with the management team and senior leadership in order to bring into line the business strategy, different issues and risks. Good communication will allow auditors to use the management’s assistance and conduct a real risk assessment of different business areas, as well as thoroughly understand thresholds and risk tolerance.
Auditors should work closely with management, and senior leadership must participate as well and agree on high risk priorities for the audit program.
- Management’s risk tolerance must be determined
Risk tolerance is actually the risk exposure which a business is ready to accept. All of the stakeholders have to set risk thresholds in order to identify where and when controls need to be applied. This process is crucial in differentiating the controls which are simply nice to have and those which are essential in order to protect business functions.
The first step for auditors is to identify and comprehend the risk management policies, as well as determine the risk tolerance of the board and the management, and then use this information as a starting point for an independent risk assessment.
- Calculate risk likelihood and its impact
After key risks are identified, they need to be calculated in order to determine their likelihood to happen and their impact on the business, as well as the management’s capability to alleviate these risks. Internal audits should calculate efficiency of defined processes and determine if the management is addressing the most significant risks properly.
To sum up, every organization will have different approach towards risks. Hence, risk assessment parameters should be determined based on the organization’s needs. If you have any questions, or need help with risk based internal audits, do not hesitate and give Latitude 12 a call, as they can help you find smart business solutions and manage your business in the best possible way.