The difference between internal audit vs risk management appears in the nature of the role that each function performs within the establishment, despite the close relationship between them and their shared general objective of supporting the institution’s ability to achieve its objectives and deal with risks effectively.
Risk management focuses on identifying, assessing, treating, and monitoring risks, while internal audit focuses on providing an independent and objective assessment of the effectiveness of governance, risk management, and control.
The Global Internal Audit Standards clarify that internal audit helps organizations achieve their objectives by following a systematic approach to evaluating and improving governance, risk management, and control.
Despite this interconnection, confusing the two functions may lead to a lack of clarity in responsibilities within the company. Therefore, it is important to understand the jurisdiction of each, and how internal audit integrates with risk management without one replacing the other.
The Difference Between internal audit vs risk management
The difference between internal audit vs risk management can be clarified through the nature of each function and its responsibilities.
Internal audit is an independent and objective function that aims to assess the effectiveness of governance, risk management, and internal control, while providing the necessary assurances, advice, and recommendations for improvement.
Risk management, on the other hand, is a managerial function that focuses on identifying the risks that the establishment may face, analyzing and assessing them, then developing appropriate responses and monitoring their implementation.
Therefore, management bears the responsibility for owning and managing risks, while internal audit assesses the adequacy and effectiveness of these processes from an independent perspective.
The focus differs between the two functions; risk management focuses on dealing with risks before they occur and as they develop, whereas internal audit reviews operations, controls, and risk management procedures to verify their effectiveness and provide appropriate recommendations.
Internal audit is also characterized by the need to maintain independence and objectivity when performing its duties, while risk management is part of the management and operational system. Accordingly, internal audit raises the results of its work and recommendations in accordance with the governance structure, while risk management raises risk reports and related information to management and the relevant parties.
What Is Meant by Internal Audit?
Internal audit is an independent and objective activity that provides assurance and consulting services aimed at adding value to the institution and improving its operations, by evaluating and improving the effectiveness of governance, risk management, and control.
Its work is not limited to auditing accounts; it can also include financial, operational, technical, and regulatory aspects according to the nature of the establishment and the scope of the engagement.
Internal audit operates according to a plan based on risks, objectives, and priorities, then performs the audit work, documents the findings, and provides appropriate recommendations, while following up on corrective actions in accordance with the methodology adopted by the establishment.
What Is Meant by Risk Management?
Risk management is an integrated process aimed at identifying events or circumstances that may affect the establishment’s ability to achieve its objectives, then analyzing and assessing the risks and determining how to deal with and monitor them.
Risk management typically includes a set of interconnected steps, such as:
- Identifying risks: Recognizing potential risks that may affect the establishment’s objectives.
- Analyzing risks: Studying the nature of risks, the likelihood of their occurrence, and their potential impacts.
- Assessing risks: Determining the level of risk compared to the acceptance levels approved by the establishment.
- Responding to risks: Choosing appropriate measures to deal with risks.
- Monitoring and review: Monitoring changes in risks and the effectiveness of responses and controls over time.
Risk management methodologies differ from one establishment to another according to the sector, size of activity, nature of risks, and regulatory environment.
The Relationship Between internal audit vs risk management
Despite the difference in roles, there is a complementary relationship between internal audit vs risk management.
Risk management works to identify and manage risks within the establishment’s operations, while internal audit can assess the effectiveness of these processes and the controls associated with them.
For example, if the company identifies risks related to cybersecurity, risk management may assess these risks, determine the company’s level of exposure to them, and develop appropriate responses in cooperation with the relevant departments.
After that, internal audit can assess the adequacy of the controls and procedures put in place to manage these risks and raise the findings and recommendations to the competent authorities.
The importance of separating the two roles lies in maintaining the independence of internal audit; internal audit should not become the party responsible for managing risks itself and then later review the decisions it made.
Risk Management Responsibilities Within the Company
Risk management, according to the establishment’s structure, undertakes a number of tasks that help build an integrated system for dealing with risks, the most prominent of which are:
Identifying Key Risks: Risk management works with various departments to identify risks related to objectives, strategy, and operations, including financial, operational, technical, legal, and strategic risks.
Assessing the Level of Risk: After identifying risks, the likelihood of their occurrence and their potential impact are analyzed, then they are classified according to the methodology adopted within the establishment.
Developing Response Plans: The response to risks may include avoiding, reducing, transferring, or accepting the risk, according to the nature of the risk, the level of tolerance, and the approved policies.
Monitoring Risks: Risks change over time as a result of economic, technological, regulatory, and operational changes, so risk management needs continuous monitoring and updating of its assessments when needed.
Raising Risk Reports: Risk management provides reports that help management, the board of directors, and the competent committees understand the key risks, their levels, and the measures taken to deal with them.
Internal Audit Responsibilities Toward Risk Management
Internal audit does not undertake risk management on behalf of management; rather, it can assess the efficiency and effectiveness of the risk management framework and the controls associated with it.
Among its most prominent tasks are:
- Assessing the methodology for identifying and classifying risks.
- Reviewing the extent to which risk management aligns with the establishment’s objectives.
- Assessing the adequacy of the controls used to mitigate risks.
- Examining the extent of compliance with approved policies and procedures.
- Assessing risk reporting mechanisms.
- Reviewing risk response plans within the scope of the audit engagement.
- Following up on the implementation of recommendations and corrective actions.
- Providing insights and recommendations that help improve risk management.
- The Global Internal Audit Standards clarify that assessing risk management processes is one of the fundamental areas that internal audit work can cover, while maintaining independence and objectivity.
How Does Internal Audit Cooperate with Risk Management?
Cooperation between the two functions can be achieved through the exchange of information and coordination in understanding key risks, while preserving the independence of internal audit.
Forms of cooperation include:
- Sharing information related to key risks.
- Coordinating when preparing risk-based audit plans.
- Exchanging the results of relevant assessments.
- Identifying areas that require more detailed review.
- Monitoring changes in the level of risk.
- Avoiding duplication of work between the different functions.
Cooperation does not mean that internal audit takes on risk management responsibilities; rather, the goal is to improve the flow of information and cover risks more efficiently.
Practical Examples of the Difference Between internal audit vs risk management
The difference can be illustrated practically through some scenarios:
Example: Financial Fraud Risks
Risk management identifies fraud risks, assesses the likelihood of their occurrence and their impact, and participates in developing appropriate controls and procedures to deal with them.
Internal audit, on the other hand, may examine the effectiveness of controls related to purchases, payments, and authorities, then submit a report including the audit findings and recommendations.
Example: Cybersecurity
Risk management identifies cyber risks, assesses the company’s level of exposure to them, and participates in determining appropriate responses.
In contrast, internal audit can review cybersecurity controls, system access management, backup, and incident response within the approved scope of the engagement.
Example: Supplier Risks
Risk management works to identify the risks of relying on a particular supplier or the risks of default or supply interruption, while internal audit can assess the procedures and controls used by the company to select, monitor, and manage the risks of its suppliers.
internal audit vs risk management Services from CLA
internal audit vs risk management complement each other in enhancing control and improving the efficiency of operations within the establishment; internal audit helps assess activities, controls, and procedures, and verify the extent of compliance with policies and laws and the effectiveness of internal control systems.
CLA Saudi Arabia provides these services systematically and independently to support establishments in identifying and dealing with risks effectively.
Frequently Asked Questions About the Difference Between internal audit vs risk management
What is the fundamental difference between internal audit vs risk management?
Risk management identifies, assesses, and treats risks, while internal audit independently assesses the effectiveness of risk management and control.
Is internal audit part of risk management?
No, but it assesses the effectiveness of risk management and controls while maintaining its independence and objectivity.
Is the risk manager higher than the internal auditor?
Not necessarily; the relationship between them depends on the administrative structure and governance system in each establishment.
Does internal audit detect risks?
Yes, it may identify risks and weaknesses and provide recommendations regarding them, without taking on the responsibility of managing them.
Who is responsible for risk management in the company?
Management and the board of directors bear the primary responsibility, while risk management coordinates the process and internal audit provides an independent assessment.
Finally, we have reached the end of this article, in which we reviewed a range of information about the difference between internal audit vs risk management. You can contact CLA to learn about our services.
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