Internal Audit and Risk Management: What’s The Difference?

In the world of auditing, one principle reigns supreme: understanding precedes evaluation. It is worth noting that auditors also benefit greatly from understanding the basics behind risk management since their role is to scrutinize these protocols and their elements.

As a result, we shall look at some basic principles of internal audit and risk management. This knowledge is necessary for those who have just begun their professional path in this area but plan to develop quickly, taking into account the changes that are taking place in it.

What is Internal Audit?

The concept of internal audit is about the systematic and autonomous assessment undertaken by an organization to measure its actions, its ability for control, as well as governance practices. The essential role of internal audit is to guarantee that top executives are secure with risk management, control, and governance processes due to their efficiency and effectiveness goals.

The scope of the work of internal auditors includes examining many areas in an organization, such as financial records, operational procedures, adherence to legal and regulatory guidelines, and fulfillment of internal rules and regulations. In fact, the integration of risk in internal audit unveils strategies to bolster organizational resilience.

Internal Vs. External Audits: The Main Differences

As the names indicate, an internal audit requires the staff to conduct it internally within the company or organization, whereas an external audit is performed by an independent audit firm. They also differ in their focus, so basically, external audits are performed to provide assurance to shareholders, regulators, creditors, and other stakeholders, while internal audits focus primarily on evaluating and improving risk and internal audit.

When one clearly understands the difference between internal audit and risk management, the organization or the financial institution can allocate resources effectively to address both risk-related challenges and compliance. In other words, the difference between internal audit and risk management actually lies in their focus or perspective, and this difference is critical to optimizing your business strategies.

The 5 Cs of an Internal Audit

• Criteria: Internal audits establish criteria against which performance can be assessed and evaluated, ensuring alignment with organizational goals and objectives.
• Condition: Internal audits evaluate the current state or condition of processes, controls, and operations to identify areas of strength and weakness.
• Cause: Internal audits seek to identify the root causes of issues or deficiencies within the organization, enabling targeted corrective actions.
• Consequence: Internal audits assess the potential consequences or impacts of identified risks or deficiencies on the organization's objectives, operations, and stakeholders.
• Corrective Action: Internal audits recommend and facilitate corrective actions to address identified deficiencies, mitigate risks, and improve organizational performance.

Key Responsibilities of Internal Audits

Internal compliance auditors' responsibility is to assess how the institution is adherent to laws, regulations, and internal policies. Throughout the process, they review financial records, transactions, and also reporting. they do so while identifying areas that need improvement. they are also responsible for assessing the achievements of the organizational objectives and the effectiveness of performance management systems.

What is Risk Management?

Risk management is a process for identifying, assessing, responding to, and monitoring risks to achieve objectives effectively.

Risk Management Key Components

1. Risk Identification

As mentioned above, internal auditors identify potential internal and external risks that could affect the achievements of organizational objectives. These risks are not restricted only to regulatory risks but also include operational risks, financial risks, and reputational risks. Internal auditors use various techniques to achieve a comprehensive audit, like brainstorming sessions, risk registers, and historical data analysis.

2. Risk Assessment

After identifying the potential risks, risk assessment comes into place. At this stage, internal auditors analyze the severity of risks and their likelihood of occurrence to be able to know what to prioritize for further action. Also, it is at this stage that auditors utilize qualitative and quantitative methods like risk matrices, scenario analysis, and probability assessments.

3. Risk Response

Now it is time to take action regarding these risks. Based on the assessment, the audit team starts developing strategies to be able to handle the identified risks. They take into consideration the nature of the risk, and it is up to the organization to avoid, reduce, transfer, or accept the risk. Sometimes accepting the risk might maximize opportunities, whilst other times, reducing the risk aims at minimizing the potential negative impact.

4. Risk Monitoring and Review

After deciding the strategy to approach these risks, the team keeps monitoring the risks to test the effectiveness of their risk response strategies. They track the internal and external environment to see the impact on the institution’s risk profile.

Read more: Compliance Vs Risk Management: Differences & Similarities

Risk Management Vs. Internal Audit

This table provides a concise comparison of key aspects of risk management and internal audit, highlighting their differences and complementary roles within organizations.

Internal Audit vs Risk Management Table

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The Intersection of Internal Audit and Risk Management

The functions of the risk management and internal audit departments intersect in many ways, and these two departments work closely together to reduce risks and boost the institution's overall performance.

Internal audit provides independent checks on the effectiveness of internal controls and risk management processes, while risk management focuses on finding, assessing, and handling risks to meet organizational goals.  Both departments collaboratively use risk management insights to guide audit planning and response strategies.

If your business or financial institution is looking for sustainable growth, there will be a need for powerful internal audit compliance and risk management frameworks. As these effective internal audit compliance and risk management practices contribute greatly to the efficiency of your business operations.

Best practices for successful integration:

• Establishing clear roles and responsibilities: Clearly defining the roles and responsibilities of internal audit and risk management teams fosters collaboration and eliminates ambiguity.
• Promoting open communication: Encouraging regular communication and information sharing between internal audit and risk management facilitates the exchange of insights and best practices.
• Aligning objectives: Ensuring alignment between internal audit and risk management objectives with organizational goals enhances effectiveness and promotes synergy.
• Leveraging technology: Implementing integrated audit risk management software platforms streamlines processes, improves data analysis, and enhances collaboration. Utilizing audit and risk management solutions is a great way to comply with the least amount of errors, time consumed, and energy.

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A Step-by-Step Guide to Internal Audit and Risk Management

Performing risk management in internal audits is essential for organizations to ensure adherence to regulations and mitigate potential risks effectively. Here's a comprehensive guide on how to conduct such an audit:

1. Establish Criteria for the Audit

• Determine the reasons behind conducting the audit to define its scope and objectives clearly.
• This helps plan and conduct the audit more effectively.

2. Plan and Develop an Audit Program

• Identify specific areas, departments, and controls to be audited.
• Define the audit's objectives, whether it's to improve efficiency, reduce risk, ensure compliance, or a combination of these.
• Design fieldwork tests to be conducted during the audit, considering input and approval from management.

3. Determine Audit Frequency

• Schedule regular internal audits to keep up with changing regulatory environments.
• Review and modify auditing procedures periodically to align with regulatory changes.

4. Notify Departments and Provide Necessary Information

• Inform departments well in advance of upcoming audits.
• Communicate the required information and documentation for the audit, ensuring preparedness.

5. Perform Field Work and Interview Team Members

• Interview employees in the audited teams to understand their processes and adherence to policies.
• Test internal controls and procedures to evaluate audit risk management effectiveness in meeting company goals and compliance requirements.

6. Record Results and Report Findings

• Document employee testimonies and trial results, noting deviations from policies and expectations.
• Synthesize findings into a summary report for senior management review, raising awareness of compliance risks.

7. Implement Recommended Corrective Actions

• Develop specific action plans based on audit recommendations to address compliance deficiencies.
• Ensure senior management's involvement in developing practical strategies to improve compliance areas.

8. Audit the Audit

• Evaluate the ease of conducting the audit and identify any obstacles faced.
• Assess the independence of the internal auditing team and the thoroughness of findings and recommendations.

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Conclusion

In conclusion, embracing the symbiotic relationship between internal audit and risk management unveils a transformative paradigm. It's not merely about compliance and risk mitigation, it's a journey towards holistic organizational empowerment, where every audit becomes an opportunity for strategic advancement and sustainable value creation. Audit and risk management solutions empower you and your team to first comply and also reduce any potential risk.

Also, new professionals entering the field of internal audit and risk management should prioritize ongoing learning and skill development. One should embrace opportunities for mentorship, seek diverse experiences across different audit areas, and stay abreast of industry trends and best practices.

Additionally, cultivate strong communication and interpersonal skills, as effective collaboration is often key to success in this field. Finally, maintain a curious and critical mindset, always questioning assumptions and seeking innovative solutions to address emerging risks and challenges.