Monitor your internal control and governance processes to strategically manage business risk.

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Risk assessment can be daunting. But an effective risk assessment ultimately results in a better understanding of an organization’s critical business and operational risks. Aligning these risks to specific objectives and business processes allows organizations to appropriately identify its business risks. This, in turn, results in a well-defined and efficient risk-based internal audit plan.

Here’s what you need to know about your organization’s risk assessment.

1. Know your organization’s internal and external operational, financial, strategic, compliance and general information security risks. Here's how to do it:

✓ Interview key members of senior management, the board of directors, the audit committee and other key employees about their opinion on the following topics:

  • External influences, such as economic factors, industry competition, the current legislative and regulatory environment, changing business conditions and other variables, including the organization’s information security environment.
  • The current internal environment, including topics such as the current financial condition of the organization, policies and procedures, the existing internal control structure, staffing levels and tenures of employees, and the results of prior audits.
  • The goal is to build the rapport needed to develop an effective risk assessment.

✓ Observe daily activities within significant departments of your organization.

✓ Review important documentation such as board of directors’ meeting minutes, strategic reports, industry studies, contractual arrangements or other similar industry or company information.

2. Based on the knowledge and insight gained, utilize a risk assessment software, matrix or checklist to ultimately assign a risk ranking to your organization’s key risk areas. Here's how to do it:

✓ Determine your organization’s classification of key risk areas, as well as other operational or regulatory areas of risk.

✓ For each area, assess the individual area from the perspective of different risks, including financial, operational, liquidity, legal, compliance, human resources, reputational and fraud risk.

  • Determine whether the risk within a particular area is increasing, decreasing or stable.
  • Determine whether specific risks within a particular area deserve more focus and consider incorporating a weighting system for risks for each area.

✓ Utilize a matrix or similar tool to consider these factors as a quantified risk score for each of the risk areas.

✓ Now that you have overall risk scores for each area, set your numeric scale to determine the area’s risk ranking of high, moderate or low. For example, risk scores of 7 to 9 could be high-risk areas, 4 to 6 could be moderate-risk areas, and 1 to 3 could be low-risk areas. There is variability in how this may be determined.

✓ Validate such risk rankings to ensure management and stakeholders believe the resulting assessments are reasonable.

3. Use the resulting risk rankings to determine your overall risk management or internal audit plan. Here's how to do it:

✓ Use this tool to tie your risk rankings to the internal audit frequency of the area. For example, high-risk areas could be audited annually, moderate-risk areas on a bi-annual basis and low-risk areas every three years.

✓  Keep in mind that the scale and frequency are subjective and should be appropriate based on past experience and resources within the organization.

Reduce risk and improve business and operational controls, governance and performance.

Utilize internal audit in your risk management strategy today.