Companies and businesses face various risks that dictate how they operate. Identifying and managing these risks is a critical function that companies perform. Usually, the audit committee and internal auditors are responsible for risk management. This process became more relevant due to some high-profile corporate failures in the past.
The Turnbull Report on corporate governance further emphasized risk management for companies. On top of that, several standards provide a benchmark for companies to use to establish risk management. These may come in the form of COSO guidelines. Risk is also crucial for auditors during their audit engagements. One technique that can help with that is the risk-based approach audit.
What is a Risk-Based Approach Audit?
A risk-based approach audit begins with an audit plan that focuses on risks. In this approach, auditors aim to address a company’s highest priority risks first. Traditional audit plans focus on processes or specific areas. Instead, the risk-based approach looks at auditing from a different perspective. It focuses on analyzing and managing risks. This approach is more pertinent during internal audits.
With a risk-based approach to audit, auditors can assess the importance and performance of each audit area. This approach also links a company’s internal auditing function to its overall risk management framework. Risk-based audits focus on how companies respond to the risks when they occur. Similarly, it also ensures companies achieve their goals and objectives during this process.
How Does Risk-Based Approach Audit Work?
A risk-based approach audit has several steps that auditors must follow.
Assessing Risks
These audits start with auditors assessing a company’s organizational risks. During this, they consider the processes and departments they audit. For each area, they set a risk level. There are several factors that auditors examine during this process. They may consider the performance risks, compliance risks, or risks to the company’s operations.
Usually, auditors rank each area and assign it a score. Once they assess all areas, they combine these scores to create an overall risk score for a process. This way, they can separate high-risk areas from those that have lower risks.
Modify the Audit Plan to Accommodate Risks
After ranking risks, auditors can compose an audit plan. During this process, auditors will focus on their audit schedule. Areas with higher risks will be a priority. Therefore, auditors will pay more attention to it and audit them more frequently. Low-risk areas are not a priority. However, it doesn’t mean that auditors will neglect them. Instead, auditors will only assess these areas less frequently.
The audit plan, once composed, will define various aspects of the audit. These will include the timing, resources required, size of the audit team, etc. Higher-risk areas will generally require more resources and more experienced staff. Therefore, they will also be longer. Lower-risk areas, on the other hand, may not have similar requirements.
Perform Risk-Based Audit
The final step in a risk-based approach audit is the actual audit process. During this step, auditors will review the existing procedures for each process and area. This way, they get an understanding of how these work and which areas are riskier. For subsequent audits, auditors can use their previous work to identify the areas which require attention.
During this performance, auditors will put their audit plan into action. As mentioned, this stage will take longer for higher-risk areas. It is because auditors need more time to ensure that proper risk management exists in those areas. Auditors can then report their findings and present any recommendations for weaknesses identified.
Risk-Based Follow Up
Risk-based approach audits don’t end after performing the audit. It also requires auditors to follow up on any deficiencies found. Usually, auditors will track their recommendations to ensure that the management fixes any weaknesses. Auditors also assign a risk level to each finding in the report. This way, they can follow up on high-risk findings more frequently.
Monitor Changes in Risk
Risk-based approach audits also require auditors to monitor the risks continuously. As mentioned, auditors investigate various processes to identify risk areas. Based on that, they assign ratings to each area. However, these risks may change with any changes in the company’s external or internal environment. Therefore, auditors need to be aware of any fluctuations in the risk levels.
Importance of a Risk-Based Approach Audit
Risk-based approach audits have several uses. Firstly, this approach allows auditors to develop an efficient and effective approach to risk management. It can be significantly helpful for companies going through substantial changes. A risk-based approach to audits allows auditors to gain a better understanding of the company’s risks. This way, it also allows the company to manage those risks better.
Risk-based approach audits also help internal auditors in identifying risks correctly. Based on that, the management can put the appropriate internal controls to tackle them. Overall, risk-based approach audits make it easier for companies to understand their risks and their effects. Based on that, it makes them more prepared to face those risks.
Conclusion
A risk-based approach to audits starts with audit plans that focus on risks. Usually, auditors assess a company’s risks and give them ratings. After that, they incorporate those risks into their audit plans. Once they do so, they perform an audit and report their findings and recommendations. After that, they follow up on those findings and monitor changes in risk levels.
