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    Risk-Based Internal Audit
    Risk-Based Internal Audit
    Risk-Based Internal Audit
    Ebook145 pages1 hour

    Risk-Based Internal Audit

    By Jason Lee Mefford

    4.5/5

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    About this ebook

    Internal auditors are told they need to develop a risk-based audit plan, but many internal audit activities simply risk rank their audit universe and believe that is risk-based auditing.

    Risk-based internal auditing is about aligning the annual audit plan, and corresponding audit projects and efforts, with the objectives of the organization. This book takes a unique approach to risk-based auditing by incorporating risk management and internal audit concepts to create a new Risk-Based Internal Audit Framework, while still being consistent with internal auditing standards.

    The risk-based internal auditing framework includes seven related components: Understand, Identify, Assess, Plan, Perform, Report, and Monitor. The focus of this book is to explain how to approach the Understand, Identify and Assess components of the framework in an innovative way, improving the overall value internal audit can provide to its organization, instead of testing the same internal controls over and over again.

    The principles outlined in this book are applicable to internal audit activities in any organization.

    This book provides answers and practical how-to information to help internal audit activities take that next step in the evolution of the internal audit profession. It is a must read for any internal auditor.
    LanguageEnglish
    PublisherBookBaby
    Release dateOct 14, 2014
    ISBN9781631922626
    Risk-Based Internal Audit

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    Reviews for Risk-Based Internal Audit

    4.5/5

    20 ratings7 reviews

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    Review must be at least 10 words

    • 5/5
      It gave me an overview of the three risk management frameworks.
    • 4/5
      Informative yet relatively simplistic. Explains terms used by auditors in general and more. Loved it!
    • 1/5
      Too much theory, less practical. Lead to understanding, not wisdom. Suitable for basic IA
    • 5/5
      This book help me to prepare annual audit plan and understand risk based audit.
    • 5/5
      Simple and informative, with a welcome focus on alignment business objectives
    • 5/5
      good book for internal auditors for planning and executing risk based audit.
    • 4/5
      EXCELLENT PRESENTATION,CLEARLY AND VERY EASY TO UNDERSTAND
      THANK YOU !

    Book preview

    Risk-Based Internal Audit - Jason Lee Mefford

    www.grc-certifications.com

    PART I: INTRODUCTION

    Chapter 1:

    Introduction

    Introduction

    As internal auditors, we are told to use a risk-based approach in developing an annual audit plan. In fact, professional standards specifically require this (IPPF Standard 2010). Most internal audit departments I talk with are doing some form of a risk-based audit plan but struggle in knowing how to incorporate a risk-based approach into their activities. This book provides you with answers and how-to information to help you take that next step in the evolution of your audit department. It is intended to be a summary and overview of the topic.

    The 2013 State of the Internal Audit Profession Study¹ by PriceWaterhouseCoopers (PwC) showed a large disconnect between what value board members and internal auditors believe internal audit brings to an organization versus the value perceived by management. In fact only 44% of executive management surveyed believe internal audit contributes significant value to their organizations. I believe one of the reasons for this disconnect is internal audit often focuses on auditing areas of the business that do not directly relate to helping the organization meet its objectives. They focus too much time on detailed internal controls (the trees) while forgetting to concentrate on the organization’s objectives (the forest).

    What I am proposing is a way for internal auditors to provide assurance on the performance, risk, and compliance aspects of an organization while focusing on business objectives instead of internal controls. Only considering and auditing to see if internal controls are working does not provide assurance on whether the organization is meeting, or is on target to meet, its objectives.

    Risk based internal auditing is focused on objectives rather than controls. For many seasoned auditors, this will sound like blaspheme seeming to ignore internal controls, but bear with me and you will see how this focus is much more in line with what our organizations want from internal auditors. It is not only more in line with what they want, it also helps us provide much better assurance on what the governance group and management is really concerned about - meeting the organization’s objectives.

    Our insistence on making everything about internal controls has cheapened and diminished our effectiveness as internal auditors. As a quick illustration, there are four different ways to respond to risks, and only one of them includes creating internal controls. So why do so many internal auditors insist management must respond to every risk with an internal control? Likely because they do not really understand risk management.

    The principles outlined in this book are applicable to all internal audit activities, regardless of geographic location, industry, or type of organization. They can be used in the private or public sector, for profit or non-profit, large or small organizations. The concepts you will learn in this book can be used to improve the audit quality in any organization and ensure the internal audit activity is adding value by focusing on helping the organization meet its objectives, not just adding and testing internal controls.

    Why have I chosen to use the term Risk Based Internal Audit instead of something else? Risk based internal auditing is required by the IIA standards and is a term that auditors are talking about now. It is something that is getting attention. It is something I feel most internal auditors are only doing half-heartedly.

    Internal auditors may consider risk when doing the annual audit plan, but then they tend to go right back to auditing internal controls where they are more comfortable. They audit internal controls instead of focusing on the biggest threats, and corresponding risks, to the organization meeting its objectives. Risk based internal auditing is also a lot shorter than: Internal Auditing of Business Objectives in the Areas of Performance, Risk and Compliance. At times during this book, risk based internal auditing will also be abbreviated to RBIA.

    Before we get too far ahead of ourselves, though, it is important to remember the reason organizations exist. Understanding and reminding ourselves of the big picture of business will be a constant theme in this book and a tool to use in developing and implementing risk-based auditing. It is the reason why we are even concerned with risk management and providing independent, objective assurance.

    ¹http://www.pwc.com/us/en/risk-assurance-services/publications/pwc-2013-state-of-profession.jhtml

    Chapter 2:

    The Big Picture of Business and Principled Performance

    The Big Picture of Business and Principled Performance

    Organizations are created to meet specific objectives or meet identified needs. For many organizations a major objective is to earn money and make a profit for its owners and investors. Even public sector and nonprofit entities are concerned about staying within financial budgets and providing a net contribution, after expenses, the organization can use for providing those services. Other objectives often relate to strategic, operational, customer, or processes. We will discuss objectives in more detail later in the book.

    Regardless of the type of organization, a group of concerned individuals came together seeing some opportunities or needs in the marketplace. They created a business model to meet those objectives. Business models include strategy, processes, technology and infrastructure that help organizations meet their objectives.

    Along the road to meeting objectives, uncertainty happens; uncertainty that invariably has an impact on whether or not the organization will meet its objectives. This uncertainty comes in the form of opportunities and threats, which we will discuss in more detail later in the book. This uncertainty creates obstacles the organization must navigate around on the way to meeting its objectives.

    In addition to navigating around the obstacles, an organization must also stay within certain mandatory and voluntary boundaries. Mandatory boundaries include those requirements imposed on an organization by an external party: for example, laws and regulations. Voluntary boundaries are values, policies, procedures, processes, contracts and promises the organization has voluntarily chosen to follow. Often these voluntary promises are made in public statements expressed to its stakeholders or are in the form of agreements with its business partners.

    A stakeholder is a person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives, and policies. This is a very broad definition, but in today’s inter-connected world it means almost anyone can be a stakeholder of your organization.

    To summarize, organizations are trying to achieve certain objectives, while navigating around obstacles and staying within boundaries. Principled Performance² is the reliable achievement of objectives while addressing uncertainty and acting with integrity. In order for an organization to reliably achieve its objectives, it must ensure it addresses opportunities, threats and requirements.

    We can put all of these concepts together into a graphical representation like this:

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