“Current Auditing Hot Button Issues”

What Are Hot Button Issues

• Hot button issues for business leaders include a range of complex matters, including ideas, subjects, issues, etc. that evokes strong feelings

• Hot button Issues are driven by internal and external factors including:

new opportunities and challenges, emerging areas, global developments, effects of new regulations or pronouncements, effects of technological or market developments on audit processes

Evolution of Auditing Hot Button Issues

Changing internal-audit roles,

Globalization

Changes in risk management

Shortage of audit talent

Technological advancement

Environmental concerns /climate change

Crime and Forensics

Movement Towards More Risk Centric Approach to Auditing

Risk Centric vs Control Centric

• Evolution in the primary role of internal audit from control centric to risk centric

• The Institute of Internal Auditors’ revised definition of internal audit: providing objective assurance over both controls and risk management.

• This evolution is a strategic expansion of internal-audit’s role and one that directly enhances the ability of the audit committee to oversee the company’s controls and practices.

Globalisation Globalization and new technology have a dramatic impact on

how companies structure business processes and operations.

Changes in regulations, institutional investor demands, the complexity of today’s multinational corporations—are influencing

corporate efforts to improve risk management.

As organizations expand overseas, there is a corresponding increase in the demand for internal-audit services.

Expect globalization, outsourcing, and off-shoring to have a profound impact on the roles and responsibilities of internal audit.

As companies expand globally, they also need to determine whether to provide audit coverage from a central location or from a satellite operation aligned geographically with the business footprint—not a decision to be taken lightly.

Technological Advancement

• Directors should be aware of the potential impact of technology on the ability of internal audit to identify and audit risks and to enhance functional effectiveness and efficiency and the additional risk that it introduces

• Given the speed of technology development, it is predicted that technology will affect internal-audit roles and responsibilities more than any other business trend.

• Technology is important in continuous monitoring and fraud detection.

• Technology can be leveraged to pinpoint Key Risk Indicators in order to identify changes in organizational risk profiles in advance of internal control breakdowns and enable CAEs to initiate audits in those areas.

Shortage of Audit Talent• A broader set of risk-monitoring and analysis capabilities are

needed for a risk-centric auditing environment • Critical to have sufficient talent to address strategic and business

risks, as well as risks stemming from fraud and technology.• The traditional internal-audit skill sets is much smaller than

marketplace demand,• Significant competition exist for well-qualified internal-audit talent

which extends beyond the ranks of IT, finance, and risk management.

• There is need for a critical mass of auditors who can access, assess, and analyze risk data as well as help prevent and detect fraud.

Hot Button Issues Internal Audit strategic sourcing

Enterprise risk management

Regulatory compliance

IT Growth /Data Safety and Integrity

Corporate governance

Global sustainability/environment /climate change

Continuous Auditing and Monitoring

Forensics /Personnel Security and safety/ Crime

Internal Audit strategic sourcing

As companies expand globally, they also need to determine whether to provide audit coverage from a central location or from a satellite operation aligned geographically with the business footprint

If you are a director of a company active in global markets, you should be asking: Does our internal audit group have what it takes to address the risks of international expansion? How good is the company at complying with the Foreign Corrupt Practices Act ? Does management’s existing enterprise-wide risk assessment address political risk? Does the company possess the the internal talent and expertise to access, assess, and analyze

risk data as well as help prevent and detect fraud ? Does the company have the people who can evaluate and test internal controls, audit complex IT

environments, and address both enterprise-wide risk and governance issues ? Should the internal audit group provide audit coverage from a central location or from a satellite

operation aligned geographically with its expanded operations?

Internal Audit strategic sourcing

Co sourcing This involves enhancing a clients existing internal audit capabilities by complementing in-house functions with specialist skills or geographical coverage or by providing project-based advisory services.

The audit consultants selected will have specific experience and specialized knowledge

Knowledge and experience across a wide range of industries and extensive internal auditing knowledge to assist the management in developing a number of proprietary models of internal audit solution, which can be used by identify critical areas of risk

As well as able to perform a more focused, strategically driven risk assessment to identify other potential risk areas.

Internal Audit Strategic Sourcing

OutsourcingSimilar to the hiring of an external auditor but goes beyond testing transactions and balances to providing insights that help management better understand their business.

It is based on the premise that firms board and management expect more than traditional internal audit service and seeks to ensure that the talent and skills required are more easily secured through outsourcing

It is a costly but necessary service The also require personalized guidance as well as use of the

Consultants knowledge and wisdom to provide value-added suggestions which will help them achieve financial and operational success.

Audit Committee Training /Advisory

• Seeking independent advisory services to Audit Committee on technical accounting issues, corporate governance, structure and effectiveness of internal audit-related activities, risk assessment evaluation and advise on other business risks

• Training and remaining up-to-date on issues

Enterprise Wide Risk Management

Internal auditing's core role with regard to ERM is to provide objective assurance tothe board on the effectiveness of an organization's ERM activities with the aim of :

ensuring that key business risks are being managed appropriately and

that the system of internal control is operating effectively.

Recommended Roles

• The main factors CAEs should take into account when determining internal auditing's role are whether the activity raises any threats to the internal auditors' independence and objectivity, and whether it is likely to improve the organization's risk management, control, and governance processes. – Facilitating identification and evaluation of risks.– Coaching management in responding to risks.– Coordinating ERM activities.– Consolidating the reporting on risks.– Maintaining and developing the ERM framework.– Championing establishment of ERM.– Developing risk management strategy for board approval.

Roles Internal Auditing Should NOT Undertake.

Setting the risk appetite

Imposing risk management processes. Management assurance on risks.

Taking decisions on risk responses. Implementing risk responses on management's behalf. Accountability for risk management.

Regulatory Compliance• Pose complex business challenges.

• New laws and regulations are introduced, their requirements challenge boards to greater levels of transparency, objectivity and professionalism.

• Increased accountability and potential exposure to liability means directors need to ensure that corporate governance standards are adhered to and robust compliance management systems are in place.

Corporate Governance• Corporate governance is a system by which organizations are

controlled, directed, and held accountable to its stakeholders.

• The recent declining economy, declining market valuation, increased unemployment, and increased possible fraudulent financial schemes have placed increased pressures on organizations. As a result of these pressures, organizations are forced to focus on designing sustainable business strategies.

• These strategies seek not only to provide a return on investment or assets, but to also generate shared value for society and promote business model sustainability.

• Climate Change , Environmental Sustainability, CSR

Climate change / Environmental risk management

Climate change / Environmental risk management — the need for IA to understand, mitigate and manage (i.e. physical, regulatory, reputational and litigation) in an integrated way using the existing internal audit and (enterprise) risk management framework.

Advising on how to grasp the competitive advantage that comes with fuller and earlier understanding of climate change and environmental management . These include :

Sustainable supply chain — Improving the management of carbon , and other emissions (and therefore costs) across the supply chain and performance efficiencies and enhancing brand value and reputation.

Sustainable IT (Green IT) —introducing new IT strategies and value chains through a process of assessment, strategic improvements and verification.

Clean Development Mechanism

Corporate climate change /carbon strategy — Understanding the business implications of climate change and facilitating the company’s strategy development.

Emissions trading —making strategic decisions in relation to emissions trading or investment in emission reduction projects (internal/external).

Carbon footprint — Calculating the direct carbon-emissions of the company as well as the emissions caused along the value chain in accordance with the Greenhouse Gas (GHG) protocol as a baseline for further action.

Mitigating all major environmental risk through greater understanding of environmental impact of products and operations

CSR

Continuous Auditing & Monitoring

• Continuous Auditing enables companies to leverage technology to more efficiently analyze risk data on a frequent basis, while Continuous Monitoring provides management with information on key performance metrics in close to real-time.

• Continuous Auditing and Continuous Monitoring are automated feedback mechanisms used respectively by Internal Audit or Management to monitor IT systems, transactions and controls on a frequent or continuous basis, throughout a given period

• To do so organizations must accurately assess risk, design query protocols and reports; identify the appropriate software tools and create the capacity to execute continuous audits and monitoring regimes.

Forensics /Personnel Security and Safety/ Crime

• The changing nature of business has created new opportunities, but also new risks and potential threats.

• Businesses have to cope with the increasing sophistication of fraud, organized crime, but also with more complex legislation and regulations (some with increasing extra-territorial reach).

• Developments in technology and complex cross-border disputes.

• The pitfalls associated with expanding into emerging markets, dependencies on unfamiliar business partners, and more complex supply and distribution channels.

•

• Theft and misuse of intellectual property

• Organised crime and the money laundering

• IA’s must use accounting, investigation, intelligence, strategy, criminology, technology and industry skills to help prevent commercial crime.

• They must also use this know-how to help you manage conflicts involving commercial disputes, fraud, misconduct or breaches of rules and regulations, as well as help public sector agencies deal with criminal issues.

• Challenging in light of greater propensity for criminal backlash

Strategic Responses

Directors should ensure that their internal-audit groups adopt a risk-centric mindset. This may require audit leaders to redefine departmental roles and establish a unified value proposition so that their departments will be viewed as strategic players.

Internal auditors need to adopt a more conceptual approach to audit, risk assessment, and risk management that goes beyond a narrow focus on controls. This will require forging a strong link between the risk-management initiatives of internal-audit functions and those undertaken by the rest of the organization.

Directors need to ensure that internal audit receives the budget and management support needed to achieve this transition. If internal audit fails to evolve in this manner, it could be viewed as a narrow, controls-oriented entity, and its potential contribution marginalized.

• audit committees should encourage internal audit leaders to gain more strategic value from internal audit, by :

Making it a primary objective to provide assurance over risk management. Including strategic risks within the risk universe targeted by internal audit.

• Directors should also be inquiring about and encouraging internal-audit’s career-development programs. To attract and retain talent, audit needs to be viewed as a function that offers talented people ample opportunity for career development

Internal auditors should sharpen their focus on continuous auditing in an effort to streamline the audit process As risk assessments and risk monitoring assume a more real-time dimension, audit timing will become more dynamic. Audits will have to be conducted on an as-needed basis, triggered more by changes to organizational risk profiles than by set plans

Fraud detection, fraud risk-assessments, and fraud investigations—three key aspects of a comprehensive antifraud program—must be given more focus

Increased globalization and advances in technology will have a significant impact on internal audit and the talent it needs to meet its objectives. Audit committee members must ensure they understand these factors and their implications, so that they will be able to work more effectively with internal-audit leaders to determine how to help senior management identify and manage risk

Directors should ensure that whether internal audit has people who can evaluate and test internal controls, audit complex IT environments, and address both enterprise-wide risk and governance issues. (co-source)

• Increased globalization and advances in technology will have a significant impact on internal audit and the talent it needs to meet its objectives. Audit committee members must ensure they understand these factors and their implications, so that they will be able to work more effectively with internal-audit leaders to determine how to help senior management identify and manage risk

• Directors should ensure that internal audit has people or access to people who can evaluate and test internal controls, audit complex IT environments, and address both enterprise-wide risk and governance issues. (co-source)

• CAEs and Audit Committees should seek support if required from analysts who understand risks, can provide timely risk-and-control assurances, and can update organizational risk profiles. Such analysts would also have the capability to focus on fraud and other areas of significant risk, monitor KRIs, and analyze business processes to determine which controls, if any, can be removed with little or no negative impact.

Thank You