Risk-based internal auditing (RBIA) is an internal methodology that focuses on the inherent risk in the activities or system and provides assurance that risk is managed by management within the defined risk appetite level. It is the management risk management framework, and it seeks to reinforce the responsibility of management and the BOD (Board of Directors) for risk management at every stage.
Internal auditing that is risk-based is a method of conducting internal audits that focuses on identifying and assessing risks within an organization and aligning audit activities accordingly. The goal of risk-based internal audit is to provide management and the board of directors with assurance that risks are effectively managed and controlled.
The internal audit department conducts risk-based internal audits to assist the company’s risk management function by providing assurance about risk mitigation. RBIA enables internal audit to provide assurance to the board that risk management processes are effectively managing risks in relation to risk appetite.
Here are the key components and steps involved in risk-based internal audit:
- Risk Assessment: The first step is to conduct a thorough risk assessment of the organization. This entails identifying and assessing risks in a variety of areas, including operations, finance, compliance, information technology, and strategic objectives. Interviews, documentation reviews, data analysis, and other techniques can be used to identify risks.
- Audit Planning: Once the risks have been identified, the internal audit team creates an audit plan based on the risks. The audit plan specifies the objectives, scope, and approach for the audits to be performed. Higher-risk areas receive more audit attention and resources.
- Audit Execution: The internal audit team conducts fieldwork in accordance with the audit plan. Gathering evidence, testing controls, and assessing the effectiveness of risk management practices are all part of the process. Financial processes, operational activities, compliance with laws and regulations, and adherence to internal policies and procedures can all be audited.
- Reporting and Communication: The internal audit team prepares audit reports summarizing the findings and recommendations after completing the audit fieldwork. The reports are distributed to management, highlighting areas of noncompliance, control flaws, and opportunities for improvement. Communication of audit results must be clear and concise in order to drive corrective actions.
- Follow-up and Monitoring: Once the audit findings are communicated, it is important to track the implementation of management’s corrective actions. The internal audit function may conduct follow-up audits to verify that the identified issues have been resolved and that the recommended improvements have been implemented effectively.
Risk capacity
Is the maximum amount of risk that an entity can accept in relation to capital, liquid assets, borrowing capacity, and so on. The maximum amount of risk that an entity can tolerate.
Risk appetite
It is the amount of risk that an entity (on a broad scale) is willing to accept within the confines of its overall Capacity. It defines the acceptable risk level, and determining risk appetite is a continuous process; it cannot be set once and then forgotten. Risk appetite is developed based on the risk level of the company; for example, a risk hungry company may develop a high risk appetite, whereas a risk averse company may develop a low risk appetite level.
Benefits of risk-based internal audit include:
- Focus on Significant Risks: The approach ensures that the internal audit resources are allocated to areas where the greatest risks reside, providing assurance that critical risks are being addressed.
- Enhanced Risk Management: By systematically identifying and assessing risks, the organization gains a better understanding of its risk landscape and can make informed decisions to mitigate risks more effectively.
- Alignment with Business Objectives: Risk-based internal audit helps align audit activities with the organization’s strategic objectives, ensuring that audits are targeted towards supporting the achievement of business goals.
- Efficient Resource Allocation: By prioritizing audits based on risks, internal audit resources are utilized more efficiently, optimizing the use of time, effort, and budget.
