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Auditing & Risk Management

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Presentation on theme: "Auditing & Risk Management"— Presentation transcript:

1 Auditing & Risk Management
A Happy Couple or a Shotgun Marriage? Presented by Bruce Turner CGAP, FIIA (Aust), CISA, CFE, FFin, FPNA, MAICD, AFAIM Chief Internal Auditor Australian Taxation Office 15 October 2010

2 Overview We’ll explore the pre-nuptials … how strong is the connection between internal audit and risk management … does it provide the foundation for a happy couple?

3 Overview Internal Audit Governance Roles
Integrating Internal Audit with Enterprise Risk Management

4 Internal audit Fundamentals of professional auditing practices
Definition Key elements Professional standards

5 Definition of internal auditing
“Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

6 Key elements Governance Risk management Control

7 Auditing standards 1000 – Purpose, Authority, and Responsibility
1100 – Independence and Objectivity 1200 – Proficiency and Due Professional Care 1300 – Quality Assurance and Improvement Program 2000 – Managing the Internal Audit Activity 2100 – Nature of Work 2200 – Engagement Planning 2300 – Performing the Engagement 2400 – Communicating Results 2500 – Monitoring Progress 2600 – Resolution of Management’s Acceptance of Risks

8 Auditing standards - planning (2010)
“The chief audit executive must establish risk-based plans to determine the priorities of the internal audit activity, consistent with the organisation’s goals.”

9 Auditing standards – risk management (2120)
“The internal audit activity must evaluate the effectiveness and contribute to the improvement of risk management processes.”

10 “Risk management remains at the heart of internal audit
“Risk management remains at the heart of internal audit. It defines the focus as well as the effort of the internal audit staff. Getting it right through a comprehensive risk assessment will drive better results, achieve greater efficiencies, and cover the important things that either add or preserve value in an organisation.” * Financial Executive November Better Internal Audit Leads to Better Controls - by Robert B Hirth Jr – from Protiviti NewsAlert January 2009

11 Risk elements in audit process
Planning Forward work program Each audit engagement Fieldwork Scope and work program Reporting Each audit reported Basis of prioritising recommendations Consolidated high-level reporting Follow-up of recommendations

12 Example - audit planning development process

13 Example – ATO audit themes
Core tax administrative activities Change Program Financial stewardship Strategic reviews Assurance activities

14 Example – ATO audit themes cont’d
Managing contracts Managing overheads Fraud control Non-financial management information Security and privacy

15 Looks like a marriage …

16 Governance The inter-relationships between the risk management players
Risk management advisor Auditors The effect of changing risk profiles

17 Management Owns the risks Manages the risks Risk management advisor Develops the framework Produces risk reporting Internal auditors Use risk based planning Evaluate controls

18 Business Objectives Governance Heightens likelihood of achieving objectives Risk Management Charts & oversights the business Internal Controls

19 The changing risk profile

20 Change is inevitable Risk management activity must be dynamic
Vital to embed risk management in organisational processes Both risk management framework and processes The organisation and its environment will change Auditors to be agile and flexible to accommodate changes

21 Thinking about risks Yesterday Tomorrow Managing known risks
Exploring emerging risks Avoiding unknown risks Capitalise emerging opportunities Register of known risks Radar of emerging risks Established risk tools Optimised approaches to risk Individual risk responses Collaborative risk mitigation * Based on thought leadership in a PwC Publication – Extending Enterprise Risk Management to address emerging risks (2009)

22 Examples - emerging risk areas
Increased competitive pressures Continued recessionary pressures Cost reduction pressures Talent risks Commodity prices

23 Examples - emerging risk areas (cont’d)
Strategic change management Third party solvency Political trends Compliance Lack of investment in product innovation * Sourced from Audit Director Roundtable Publication – Top Ten Emerging Risks – Likelihood, Impact and Velocity (October 2009)

24 Examples - local government risk areas
Developer contributions Water supply Culture centre development Asset maintenance Integrated planning Climate change Attract / retain staff Long-term finances Information management Fraud and corruption

25 Examples - state government risk areas
Shared services provision Information technology Security State plan delivery Specific reforms Attract / retain staff OH&S Major projects Reactive work Fiduciary controls

26 Examples - enterprise risk categories .
External Environment Policy Advice & Design Security & Privacy Law Interpretation Innovation & Change Tax Product Compliance Knowledge Major Tax Integrity Threats Technology Transfers Compliance People Product & Payment Processing Governance Tax Revenue Finance Marketing & Communications Client Experience Legal Support Facilities Client Engagement Regulatory Compliance Government Engagement Business Continuity International Engagement Reputation Management Supplier Engagement

27 Internal auditing policy agenda
Internal audit is fundamental to good governance Public entities need strong effective audit committees Appropriate reporting lines for head of internal audit Clear accountability for risk management and control Internal audit operates at consistently high standard

28 Ticks along like a marriage …

29 Integrating internal audit and enterprise risk management
Optimising the benefits of the risk management investment A long engagement Audit themes Case studies

30 A long engagement - case study - loan portfolio audit

31 Routine auditing Broad coverage of personal loans Average loan $30,000
Thorough audit completed Appropriate sampling techniques well-constructed working papers well-written report

32 Different loan product offering
Foreign exchange loans introduced that year Average loan $750,000 Not part of ‘routine’ audit program No audit coverage of new product lines

33 Adding value Changing risk profile not assessed Audit value diminished
Narrow focus on ‘routine’ loan portfolio Changing risk profile not assessed Audit value diminished The audit and risk marriage is already over 25 years strong

34 Case study – on time running

35 Public information Objectives of entity articulated
Clean Safe Reliable Key measure of reliability – on time running KPI result updated daily on website

36 End-to-end controls Well articulated policy and KPI commitment
Counting rules clear and transparent High-level sign-offs for release to website and Minister Assertions on the collation of data and calculation of results Strong website security

37 Data origination Grassroots collection of data
Near enough is good enough approach Integrity of data severely tarnished Reputational damage Strong Auditor-General criticism

38 Case study – security risks

39 Emerging security risks (2008)
More electronic records breached than 4 prior years Corporations fell victim to the largest cyber-crimes ever Motivated hackers know where and what to target 90% of records breaches involved organised crime Could avoid 9 out of 10 breaches with security basics Mistakes and oversights hindered security efforts * Australian Institute of Management, Management Today, July 2009, pp. 7-8, 37

40 “In recent times, a number of events have occurred overseas resulting in the loss or disclosure of sensitive information. One particularly high public profile incident resulted in the resignation of the Chief Executive of Her Majesty’s Revenue and Customs (HMRC) in the UK.” * ATO, Information Security Practices Review, PricewaterhouseCoopers, April 2008, p. 2

41 Example – ATO reporting on audit themes
Consolidated high-level audit report on security Logical access provisions Managing client records Site visits – remote locations (physical security) Satellite audit – security classifications

42 Risk management elements
Sound governance structures A clear corporate stance Effective education and awareness programs A well-defined security classification framework Effective security monitoring incident response mechanisms Robust plans for IT incidents. * ATO, Information Security Practices Review, PricewaterhouseCoopers, April 2008, covering letter, p. 2

43 Influences service standards
Community perceptions strong 80% think the ATO is doing a good job* Business perceptions strong 89% think the ATO is doing a good job* Professional survey positive 79% are ‘satisfied’ or ‘very satisfied’ with the professionalism of ATO employees*

44 Comes together like a marriage …

45 Conclusion The pre-nuptials are sound: In turn internal audit:
Internal audit and risk management have a strong inseparable connection Risk management provides the foundation for effective auditing In turn internal audit: Supports the risk management process Validates the effectiveness of internal controls that mitigate the risks

46 My vote … a happy couple!

This presentation was current in July 2010

48 About the ATO Australian Government’s main revenue collection agency
Administers main aspects of Australia’s super system Celebrates its centenary in 2010 Net revenue collection of billion* Operating budget of $3.1 billion** Average staffing level 21,720** 75 locations across all states and territories** 25 business and service lines* * end June ** end June 2009

49 Audit staff Around 40 full-time equivalent staff
We employ specialist external staff for technical audits Four teams across 3 sites in ACT, NSW and Victoria Audit capability meets global benchmarks Qualifications, certifications, experience Multi-disciplinary team Completes 60 to 70 audits per year

50 Our commitment to you We are committed to providing you with guidance you can rely on, so we make every effort to ensure that our presentations are correct.

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