The Internal Auditor’s Role in Risk Management

Understanding the Internal Auditor’s Role in an Organization’s Risk Management

Risk is inevitable in any business – how risks are managed and approached is the difference between an organization’s success and failure.  As organizations focus more on risk management and risk governance, internal auditors have an increased responsibility to help their organizations with assessing their risk management efforts.

As you prepare for your role as an internal auditor, it is vital that you are informed to better understand your responsibilities in relation to risk management.

What is risk management?

Risk management means setting up a process to identify, assess, manage, and control risks relating to specific events or situations an organization may face in order to provide assurance on how likely it is for the organization to accomplish its goals.

Effective risk management allows an organization to understand how much risk it’s willing to take and make decisions accordingly. It helps leaders put in place appropriate frameworks and actions, communicate risk info effectively internally, and put in place measurements that enable risk mitigation to be refined.

Risk management helps an organization by:

• Enabling consistent and thorough reporting of risks
• Helping organizations and boards understand the risks they face and what they could lead to
• Allowing business leaders to prioritize managing risks
• Better oversight of risks and potential threats
• Allowing organizations to approach decisions while better informed about the challenges they face
• Enabling the organization to deal with more complex risks that organizations are facing in the modern world, and to deal with rapid changes that lead to new risks evolving at a faster rate

Risk management and assessment are vital responsibilities that should be a part of business culture so that everyone in the organization contributes to risk management, which encourages ongoing success.

Companies are looking to redirect from risk management to a more holistic approach, risk governance, where risks are not only addressed as they occur, but a robust approach is taken to risk – assessing and improving processes to oversee the organization’s approach to risk management activities.

This is where internal auditors come into play; their assessment of an organization’s risk management helps protect the company and evaluate its approach.

What role does the internal auditor have in risk management?

Internal auditing is an objective assurance and consulting activity that evaluates the effectiveness of current risk management processes.

According to the IIA, the internal auditor’s role regarding risk management includes providing assurance on risk management processes, evaluating risk management processes, reporting key risks, and reviewing the management of key risks.

As a rule of thumb, the internal audit process includes reviewing, assessing, and providing assurance.

Internal auditors do not design, secure, implement, manage, or take responsibility for control.

Internal auditors can be responsible for carrying out regular assessments of an organization’s risk management program, especially as related to regulatory compliance. They produce the basis of improvement, identify issues, and enable compliance teams to take remedial actions.

The internal auditor assures senior management that risks are being addressed and that steps are being taken to identify and manage the range of risks they face on an ongoing basis.

Internal auditors also work with compliance teams to recommend a complete solution to risk assessment and resolution as related to regulatory compliance needs.

A quality auditor will not only participate in these responsibilities but offer value by being proactive. Offering new insights and considering the future impact of decisions help an auditor become a credible asset for an organization.

Consulting on Risks

Internal auditors can also have a consultative role, not just auditing risk management processes but offering recommendations on how to improve them. They do not manage the resolution, as that would create a biased perspective that would impact future audits.

The extent to which the internal audit provides consulting depends on the other resources an organization has that can provide such services, and the risk management maturity of an organization. If a company has a risk management specialist role, internal auditors may concentrate more on their assurance role.

However, if an internal auditor is providing consulting services, they should be experienced and knowledgeable enough to provide the insight required to add value to the organization.

Why have an internal auditor assess risk management when there is a risk management team?

Risk management teams oversee the management of risks in the organization, while an internal audit provides the board with an assessment of how the organization is managing risks. The best way to understand the relationship between risk management and internal audit is through the three lines of defense model.

Through the model we see that the first line of defense includes functions that own and manage risks – these functions are responsible for maintaining effective internal controls and executing risk and control procedures on a day-to-day basis.

The second line includes functions that oversee or specialize in risk management and compliance - such as risk management teams – these functions make sure that controls and risk management processes implemented by the first line of defense are designed appropriately and operating as intended.

The third line represents functions that provide independent assurance on the management of risks, internal control, and governance – the internal audit. Auditors provide assurance on how the first and second line of defense achieve their objectives.

The model also clarifies how risk management is a function that falls under the responsibility of senior management, while internal audit, the third line of defense, has a direct reporting relationship with the body governing the organization, i.e., the board.

How to prepare for these responsibilities?

The assessment of risk management is an important part of an internal auditor’s responsibilities, and as such has a major focus in the CIA exams.

Several standards for the professional practice of internal auditing also focus on this area, ensuring that you are appropriately prepared to perform internal audits effectively.

To best be prepared to become an internal auditor, it’s important that you focus your attention on the areas that matter. PRC’s robust CIA exam prep extensively covers this topic and provides helpful tools to prepare you for your responsibility as a Certified Internal Auditor.

If you’re ready to become a CIA-certified auditor, we encourage you to check out PRC’s CIA exam prep materials. Designed by world-renowned Certified Internal Auditors with decades of experience, we help you accelerate your exam prep and increase your chances of success. Study with PRC today.