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If an organization understands the risks it faces, it will also comprehend the opportunities it can seize. If an organization cannot see its internal risks, does not know the risks it can tolerate, or does not accept risks, then that organization will not know how to develop and will eventually decline.
When Harold Macmillan (Prime Minister of the United Kingdom from 1957-1963) was asked by a journalist what could most easily deflect a government, he replied, "Events, dear boy. Events." Time has not changed this reality, as investors and managers alike do not wish for unexpected events to occur. They want to control them or, at the very least, know when they will happen to take measures to minimize any adverse impact on the organization. That's why organizations need to identify risks that could give rise to such unexpected events.
How can any organization control unexpected events and seize opportunities in the face of risks?
Understand the risks that the organization faces.
Identify the risks that the organization has prepared to accept within permissible limits.
Take necessary actions to manage unacceptable or inadequately prepared risks.
What is RBIA?
Risk-based internal audit (RBIA) is an audit approach that identifies and assesses an organization's risks to build an audit plan and select audit procedures aimed at providing assurance to leadership regarding the effectiveness and efficiency of risk management processes.
The Institute of Internal Auditors (IIA) defines RBIA as a method that links internal audit activities with an organization's overall risk management framework. RBIA allows internal auditors to provide assurance to the board of directors and management that risk processes are being managed effectively.
When conducting RBIA, internal audit reports to senior management and the board of directors must include reports on significant risks and control issues, including fraud risks, governance issues, and other matters necessary or requested by senior management and the board of directors.
Advantages of RBIA
Organizations subject to internal auditing have objectives, which are always accompanied by risks that threaten the achievement of these objectives. Internal auditing organizations respond to these threats by applying control measures and procedures designed by internal auditors. Consequently, the Board of Directors knows that these designed internal controls are reducing risks to acceptable levels.
By applying the RBIA method, internal auditors can conclude that:
The Board of Directors has identified, assessed, and responded to the risks and reduced them to an acceptable level.
Measures to address risks are effective in risk management.
When potential risks exceed acceptable levels, the Board of Directors takes action to rectify the situation.
Risk control processes and their operations are monitored by the Board of Directors to ensure their continued effectiveness.
Risks, preventive measures, and actions are regularly classified and reported.
Is your organization ready to use RBIA?
Every organization has different management approaches, risk coping attitudes, structures, processes, and cultures. Internal auditors need to design RBIA methods that are appropriate for the structure, processes, and culture of their organization.
If risk management processes are not strong or do not exist, an organization may not be ready to use RBIA. More importantly, this means the organization's internal control system is lacking. In such cases, you may consider using third-party consultants to advise on building a control system, or you can use third parties to perform internal audit functions and advise on establishing these control procedures. RSM is one of the leading trusted partners in providing risk management services, internal audit consulting, and building internal control procedures.
Conclusion
RBIA enables internal auditors to provide assurance about risk management processes, both in terms of their design and their operational effectiveness, as well as the management of risks classified as "significant," including the effectiveness of control measures.