What Are The Steps In A Risk-Based Internal Audit Approach?
The traditional audit method involves performing tests to express an opinion on the fairness of an entity’s financial statements. Compared to traditional auditing, risk-based auditing focuses entirely on risks. It is a method that links an organization’s risk criteria with the internal audit method. This risk-based audit approach not only identifies the risk profiles of an organization but also helps to improve business efficiency and focuses on the key needs of the organization. This particular method looks at and assesses the company as a whole and manages the risks associated with the company. Internal auditors need to address these risks and make a variety of recommendations in order to make effective decisions. Risks with the highest priority should be addressed and audited first. This approach ensures that the company’s objectives and targets are prioritized while maintaining a sound risk-based audit approach.
In the case study, the Greek banks adopted internal audit functions based on a traditional audit approach. Branches and accounts were examined and it was concluded that traditional internal audit did not provide accurate results and did not meet appropriate risk coverage standards. To avoid this situation, the company should follow a risk-based internal audit approach with the following measures:
The first step in the long process of a risk-based internal audit is to understand and identify the risks. The auditor should have a thorough knowledge and understanding of the company’s environment and the way it does business. The auditor should be familiar with the risk framework followed by the company and understand the company’s internal controls. This information can be obtained through an analytical process that includes appropriate observation, testing, evaluation, and documentation of the entity. This process can be somewhat tedious for the auditor, but it is the very first step and an important step in the risk-based internal audit methodology.
The next step involves risk assessment, in which the auditor assesses the organizational risks associated with the entity. By acquiring the knowledge and appropriate skills, the auditor can pinpoint the sector of the company where the risk is highest and can detect it. After assessing the risks, it is the auditor’s responsibility to understand the nature of those risks and their potential impact on the entity. The risk assessment is part of the development of the internal audit plan, as the revised plan may identify new risks related to the entity. In assessing and classifying risks, the auditor is expected to use analytical and professional judgment to determine whether it is a high risk that could have a significant impact on the entity. This step helps the auditor distinguish between high-risk and low-risk sectors.
The third step involves conducting a risk-based audit. This step involves the process of actually auditing risk-based internal factors. After all the risk assessment procedures have been carried out, it is at this stage that the audit plan is developed. All areas are audited and a proper risk management structure is maintained. More time is spent on high-risk areas, while less time is spent on lower-risk areas. And they report on the weaknesses identified, according to their observations.
The final step in the risk-based internal audit approach involves taking stock of changes in risks and following up on them. This audit approach requires continuous attention and close monitoring by the auditor. The risks associated with an entity change according to the changing needs and dynamic environment of the organization. It is therefore the auditor’s responsibility to keep abreast of any fluctuations or changes that may occur during the risk-based internal audit strategy procedure. The internal auditor should also follow up on observations made after the audit and make sure that the deficiencies identified are corrected in a timely manner.
The risk-based internal audit approach has several benefits for the company to make it effective and resourceful. Using this risk-based approach, auditors will choose the best possible strategy to ensure the success of the company.
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