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InsightsInternal Audit and Internal Control

The Relationship Between Internal Audit and Risk Management

Risk: The potential consequences of possible threats that prevent an institution, unit, or activity from achieving its goals.

Risk Management: It is a dynamic process of evaluating the risks faced by the institution (that is, identifying, measuring, and prioritizing the risk) and providing the necessary response to reduce them to an acceptable level (the risk appetite of the institution).

Risk management is an essential process at the center of the organization’s strategic management and is one of the most important management responsibilities.

Risks and Controls in Terms of Audit

Risk (obstacles to goals) can generally be expressed as any event that prevents the organization from achieving its goals.

Risk arises from the business’s strategies; without a strategy, there can be no risk. 

Risk basically consists of two components: uncertainty and impact.

Every institution operates in a particular risk environment. Completely eliminating risks is neither possible nor optimal. However, risks can be kept within acceptable limits. Controls are the most basic way to do this.

Risk-Focused Internal Audit

Risk Management Based Audit focuses on understanding the corporate business model and processes, identifying relevant risks, understanding tolerance levels, defining performance and risk measurements, and evaluating risk management effectiveness. 

The information provided here is used to identify risky areas that may affect the financial statements, to transfer audit resources to these areas, and, therefore, to eliminate or reduce the effects of activities that will prevent the enterprise from achieving its objectives.

In the Risk-Focused Internal Audit Approach,

  • Risks, units, and processes are inspected in decreasing order of risk value,
  • Controls with the highest impact and lowest risk exposure are audited,
  • The inherent risk and residual risk of the job are determined,
  • Prioritization is made based on risk exposure, not on probabilities.
  • If any, risks outside the scope of the audit are also taken into consideration,
  • Interactions between risks are taken into account.

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