Internal audit is transforming from a traditional compliance-focused function to a more strategic and value-added function.
i. This transformation is being driven by a number of factors, including:
A. Increased complexity and interconnectedness of business risks. Businesses today face a wider range of risks than ever before, and these risks are often interconnected. This makes it more challenging for internal audit to keep up and to provide effective assurance.
B. Rising expectations from stakeholders. Stakeholders, such as boards of directors and investors, are increasingly expecting internal audit to provide insights and recommendations that can help the business to achieve its goals and objectives.
C. Advances in technology. Technology is transforming the way that businesses operate and manage their risks. Internal audit needs to embrace technology in order to remain effective and to provide value to the business.
ii. Traditional versus Transformed Internal Audit
A. Traditional Internal Audit
o Compliance-focused
o Reactive
o Siloed
o Retrospective
B. Transformed Internal Audit
o Risk-based
o Proactive
o Integrated
o Forward-looking
iii. The transformed internal audit function is characterized by the following:
A. Moving Beyond Compliance: Traditional internal auditing was often associated heavily with ensuring regulatory compliance. Nowadays, the role has broadened to involve business performance advisory, risk management, fraud detection, governance, and operations efficiency.
B. Strategic Partner: Internal auditors are increasingly seen as strategic partners, contributing valuable insights to help shape organizational strategy. They now play a more integral role in decision-making processes, focusing more on adding value and less on merely compliance or control objectives.
C. Integrated: The transformed internal audit function is integrated with other functions within the business, such as risk management, compliance, and operations. This allows internal audit to provide a more holistic view of the business’s risks and to provide more effective assurance.
D. Focus on Risk Management: Auditors are now more involved in pre-empting risk. They are shifting from simply assessing and reporting on controls to proactively identifying and assessing operational, strategic, and financial risks. The transformed internal audit function focuses on the risks that are most important to the business. This means that internal audit resources are allocated to the areas where they can have the biggest impact.
E. Proactive Risk Management: The role of internal audit has shifted from being just a finder of faults to a more proactive risk management role. Auditors today are expected to anticipate potential risks, drive risk management strategies, and champion sound governance. The transformed internal audit function is not just reactive to problems. It is also proactive in identifying and addressing risks before they cause damage.
F. Focus on Organization’s Goals: The internal audit is now aligned more with the organization’s goals, enabling auditors to focus on areas that are critical to strategic goals. This includes not just financial risks but also operational, compliance, and reputational risks.
G. Forward-looking: The transformed internal audit function is forward-looking. It looks at the trends and emerging risks that could impact the business in the future. This allows internal audit to help the business to prepare for these risks and to mitigate their impact.
H. Enhancing Corporate Culture: Auditors have an increased role in evaluating a company’s culture, ethics, and behavior, providing a holistic view of an organization’s health and potential risks and driving improvements.
I. Emphasis on Soft Skills: With changes in the scope of internal audit comes the necessary change in skills needed. Auditors now need to know how to communicate effectively, work with various stakeholders, and have a deep understanding of the strategic goals and operations of the business.
J. Expertise in Diverse Fields: With increased complexity in business operations, auditors are now expected to have expertise in various fields like IT, cybersecurity, laws and regulations across different geographies, and knowledge about various industry standards.
K. Use of Technology: Advances in technology have seen the audit function become more integrated with data analytics, cybersecurity, AI, and other digital tools, making it more effective and efficient. These tools help in performing complex calculations, automating evaluation processes, and providing more thorough and accurate reports.
iv. Benefits of a transformed internal audit function:
o Improved risk management
o Increased stakeholder confidence
o Reduced costs
o Enhanced value to the business
v. How to transform internal audit:
o Conduct a risk assessment to identify the most important risks to the business.
o Develop a risk-based audit plan that focuses on these risks.
o Invest in technology and training to enable the audit team to be more effective.
o Integrate internal audit with other functions within the business.
o Communicate the value of internal audit to stakeholders.
Overall, there’s been a shift in focus from reactive activities to proactive engagement in risk management and advisory roles. It places auditors in the position of trusted advisors who use their expertise to guide businesses through rapidly changing landscapes in this digital era.