Internal audit's evolution in the digital age
Internal Audit is not new; it has evolved a lot since the beginning. Earlier the scope of internal audit was to audit the financial records and identify frauds and corruption in an organization. However, today in the digital age, the role of internal audit has changed. It covers a vast scope, such as governance, risk management, compliance, data verification, resource conservation, and an overall analysis of the entire organization.
With rising technological advancement and fueling innovation, changes in internal audit is still a question to many. Is it changing enough to adjust to innovative technology, or should the executive management carefully consider the evolution of internal audit? In a world where changes are happening rapidly in almost everything, each organization thinks of either adapting to the new technologies and growing or taking a risk and declining the changes. The outbreak of the COVID-19 pandemic and the emergence of social unrest have left leaders and directors exhausted from the intensity of their efforts to align their organizations with evolving market realities. Several organizations also face alignment challenges as the complexities and risks faced by organizations change, and so do the skill sets, focus, and capabilities needed by internal audits. While there is no universal size for approaches to transform internal audits, the notion of the function’s digital future is no longer hypothetical.
In a time of spiraling cost structures, emerging competition, newer technologies, integrated global economies, and changing financial instruments, internal audit has often failed to keep pace with the technology and changes in the technological environment. This has resulted in internal audit services being replaced by outside service providers and consultants. While several auditors try to build a strong relationship with their audit committees, they still lack regular updates on their audit quality improvement program. There is a lack of management support to drive consistent internal audit operations, which has often affected the auditors taking key strategic initiatives.
While there are a lot of changes in the team and function of internal auditing, there have been very few changes in the skill sets required for internal auditing. Some skill that still continues to exist includes excellent communication skills, critical thinking skills, and industry-specific knowledge. Most of the internal auditing skills required these days are less related to accounting and are focused on building relationships with clients, shareholders, and customers, negotiation skills, presentation skills, conflict resolution, and the ability to handle high-level meetings. Furthermore, in addition to these soft skills, several other skills are required to be an internal auditor, such as having deeper knowledge about the industry and organizations, risk management, etc. These skills can be easily acquired by additional training. Every organization these days is making it mandatory to recruit internal auditors with skills other than just finance and accounting.
Thus, internal auditing plays a bigger role in adding value to the industry and organization by expanding control focus and including performance focus. Internal auditing not only focuses on internal controls but is also concerned with identifying threats, opportunities, and requirements. They also tend to understand internal controls' risk, performance, and compliance impact on an organization.
Role changes of internal audit
There has been a considerable transformation in internal audit functions over the years. Every business needs to adhere to the external and internal compliance requirements of auditing; the responsibility of auditors increases, and they must work to synchronize the compliance requirements with the performance expectations. Furthermore, the auditors must also consider governance guidelines to ensure the organization's better performance to meet the business's objectives and address uncertainties. Considering the emerging and new risks to the enterprises, internal audit will have to adopt a long-term risk-based approach to auditing and transform itself into a Risk-based Internal Audit (RBIA) function. Risk-Based Internal Auditing is an approach for internal auditing which focuses on auditing based on the objectives of the business, rather than just testing internal controls. A Risk-Based Internal Auditing focus asks auditors working for the organization to consider all the factors that may affect its growth and hinder an organization from meeting its objectives. This approach allows the internal auditor's team to align more closely with the management team and provides more value to the organization's internal auditing. The traditional internal audit focused only on accounting and financial controls.
Most often, auditors have emphasized the importance of technology for internal audits. However, technology has not been adequately used by organizations for managing internal audits. Earlier, productivity software like the MS Office Suite was used for Internal audits. Still, today, mainstream technology has been utilized to add value through automated control testing, automated work paper management, data mining and analytics, risk-based audit planning and scheduling, issue tracking, continuous risk monitoring, knowledge management, graphical audit reporting, and improved audit execution and documentation. Technological development has been used to develop consolidated risk management to support the organization in obtaining objectives, risk management, coordinating governance, and compliance activities. These benefits of technology for internal audit help in obtaining a future with an internal audit function that is agile and aligned with organizational objectives and flexible risk-based audit plans. The areas of internal audit being impacted by the digital age include:
- Process: Auditors must use a risk-based approach to develop a full proof plan for audit by keeping in mind all kinds of processes and transactions that pose higher risks for the organization.
- Rotational: Special projects, processes, and business units must be audited on a risk-based rotation basis, to ensure that the critical aspects of business are audited frequently.
- Systems: Internal audit systems must list out all the different systems such as IT resources, and assets, and then select the areas demanding focus -- particularly those related to compliance requirements, regulations and laws, and higher risk.
- Risk-based: There are several threats that might damage the reputation of the organization and may cause the organization not to meet its objectives. Management should take the required controls and actions to reduce these risks. The internal auditing team should focus on these controls and actions for testing.
As risk management is becoming an integral part of good governance, organizations are striving hard to identify the vast scope of risks in an organization and find out ways to deal with them and mitigate the risks. Implementing strict internal controls offer assurance to the organization to help in mitigating the risk in an organization. Risk-based Internal Audit (RBIA) function focuses more on high-risk impact areas instead of only checking internal controls. It is expected to be the right tool for the future. RBIA helps in developing audit mechanisms by prioritizing issues, allocating resources more efficiently, and focusing effort on audit areas that need it the most. It also focuses on the need to evaluate risk exposure by taking inputs from the senior management team. Apart from this, the Risk-based Internal Audit also focuses on auditing and improving risk management processes, and integrity, testing reliability, safeguarding assets, the effectiveness of operational information, and sustaining compliance with rules, laws, and contracts.
Internal audit has remarkably evolved and plays an important role in enhancing businesses by introducing new approaches and best practices for risk detection and management. Owing to the changing risk landscape, internal audit needs the best technology solutions, along with, an understanding of Risk-based Internal Audit in order to play a critical role in today’s business environment.