Understanding the risk management process in auditing is essential to knowing how risk assessments are conducted. There are multiple steps to the process, and they can be included into five broad categories.
A risk management process in auditing is used to report on time and cost performance, advocate the selection of certain audit procedures, select a specific risk profile among those permitted by the auditor’s professional standard, and provide professional competence.
Let’s discuss the risk management process steps in detail.
Identify the Risks
Risk management is a strategic business planning process that identifies, analyses, and manages risks and opportunities. It is used by organizations in every industry, but the risk management strategy varies based on the nature of the organization, its operating environment, and its goals. First, we have to identify the risks. This is done with the help of a team of people who have different perspectives on your organization; this helps to make sure you’re getting a broad picture of potential risks.
After you’ve identified all the risks, it’s time to put together a plan for how you’re going to deal with them or avoid them entirely. You’ll want to think about which risks are most important for your organization and how each risk should be managed so that you can create an appropriate plan for your business. You will also want to prioritize dealing with the risks to ensure that you move from risk identification through implementation as quickly and effectively as possible. Sometimes it’s better to take on a small risk than avoid it altogether if you can do so at little cost.
Analyse the Risk
Once a risk is identified and described, the next step is to analyse how likely it is to occur and its impact. This involves determining the frequency with which the risk will occur, its likelihood of occurring, and the potential impact if it does happen. This step involves identifying the risk and its potential impact on an organization. It also involves determining whether any given risks are controllable or non-controllable. Once this is done, the auditor must determine whether the risk is high, medium, or low.
Without analysing the risk, you cannot create a preventive plan that can reduce or eliminate it. You start by looking at the most recent similar events and using those examples to predict how bad a situation could be if it were to happen again.
Assign Ranking (Severity, Probability)
In the audit risk management process, the third step is to assign a ranking (severity/probability) to all risks that have been identified so far. These rankings are then used to determine which risk controls should be implemented and in what order they should be implemented. The auditor should identify the extent of potential losses incurred if the risk occurs and the potential for the occurrence of the risk-based on current conditions. The auditor may need to consult with others to gain and evaluate this information.
The auditor may also want to evaluate current controls to reduce or prevent such risks from occurring and re-evaluate them as part of this step. The auditor should then compare both the potential for loss and current controls with those identified at previous audits to determine whether new risks have been introduced over time.
Identify Mitigation
The next step in the risk management process is to identify mitigation. Step A in identifying mitigation is to evaluate the risks that have been identified and prioritize them according to their likelihood and impact. Step B is to develop strategies for mitigating those risks. These strategies should be developed with the help of IT, legal, risk management, and compliance teams.
In order to mitigate those risks, an organization needs to put in place a process for monitoring those risks and conducting regular reviews of the controls in place and their effectiveness.
Continuous Monitoring
When a company undergoes the risk management process in auditing, the last step is Continuous Monitoring. This is to ensure that the company will properly monitor corporate activities and mitigate any issues that may arise from internal or external changes or events.
In order to keep up with the rapidly changing and increasingly complex business environment, a business needs to consistently monitor its systems and operations. This helps the business ensure that the risks associated with its processes are being managed effectively and efficiently.
Final Words
Are you looking for a professional audit tool to enable you perform your audits with an eye on risk management? Auditproo software allows for the auditor to scope and focus on the audit key risks and therefore return results which are relevant to the users of the financial statements. Risk management process is the most crucial aspect of any audit process, don’t leave it to fate, use Auditproo.
