Assessing Business Risk Through Internal Audit System

Assessing Business Risk Through Internal Audit System

Many of us believe that an internal audit system is required for the companies that are large, has complex accounting entries, transactions and functions. However, the truth is the need for internal audit system arises when the transaction volume is high; business relates to regulatory compliances and has a financial objective. Management of such companies must set up an independent department called “internal audit” to overview the business operations of all the departments of the organization. The Board or the management is ultimately responsible for framing the internal control system in the company.

The prime most function of an internal audit department in a company is to put internal control in place and monitor them frequently. Internal control has a broader scope in an organization. It includes:

Stage 1 – Planning, organizing, directing and controlling the operations.

Stage 2 – Measuring, reporting and monitoring the performance of each business division and assessing the risk, if any.

Stage 3 – Report to the management in case of any observations and advise on the means to solve the issue or any inefficiency.


How does an internal audit department assess risk in the company?


Establishing an effective internal control system assists the internal auditing department to identify the areas that require immediate attention and action for implementation. The control system identifies the business risk and plans action well ahead to mitigate such risk. Business risk is referred to as an event that may adversely affect the operations of the ongoing business activity. Every internal audit department in an organization must meet together with the management and discuss the ways to assess and manage risk. Assessing and managing the risk is the primary function of an internal audit team. By assessing the risk, internal audit system shall


  • Prioritize the audit of the business department that has a potential risk
  • Determine the audit procedure, action plan, internal controls to be in place to mitigate such risk
  • Determination of time period or the intervals to check the controls that have been put in place thereby reducing the risk.
  • If the risk is contingent, the impact it would create on the organization and the ways to overcome the same.


Risk assessment includes identifying the business transaction and reviewing the documentation that is prone to errors and frauds. Some companies do review the existing documents such as previous audit findings, financial statements, cash flow to compare with the current report and check with the departmental heads if they anticipate any risk.


Internal audit system alerts an organization in case of any risk and prepares the organization to face any potential risk that could affect the entire business. This is more common in companies that deal with financial instruments. As the market is highly volatile with higher risk, there are chances that business may turn rancid. Read more to know how an organization mitigates the risk and continue the business of trading effectively.