FINANCIAL SERVICES VOLUNTEER CORPS

Internal Audit: Modernization for Improved Lending & Risk

Management
Banque d’Algerie (BdA)

June 15-18, 2008

Presented by:
W. Valen McDaniel, CIA, CFSA, CRP, CFE
Risk Assessment for Audit Schedule

Audit what is more Risky

With limited human resources

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Objective

Evaluate each part of the

organization and rank them
in order of risk
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Audit Universe
• Break the organization into departments
• Break the departments into functions
• Use the chart of accounts from the general
ledger
• Think of non-accounting functions also

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Risk Assessment Theory
• Measure
• Subjective judgement
• Relativity

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Identify Risk Elements
• What risk elements are common to all
areas
• Think outside the box

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 Size
• The magnitude or share of the whole
Organization.

• NUMBER OF EMPLOYEES
• TOTAL ASSETS/LIABILITIES FOR
BRANCH/DEPT
• TOTAL OPERATING EXPENSE
• CUSTOMER COUNT (TRANSACTION
VOLUME)

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 Economic Condition
• The demographics of clientele
and the rate of change of
activity.

• GROWTH
• CLIENT CLASS

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 Personnel
• The influence of management and staff of
a particular unit on achieving corporate
goals.

• MANAGEMENT EXPERIENCE
• DISTANCE FROM REGIONAL OFFICE
• CHANGE IN KEY PERSONNEL
• STAFF TURNOVER

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 Complexity
– The diversity or intricacy of a unit can
adversely effect the output. A department
which handles a routine transaction originating
from another department and sends it to
another department is less risky than a
department which originates a multitude of
transactions all which require unique solutions.

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 Complexity continued

• # OF FUNCTIONS
• NORMALCY OF ACTIVITY
• SOURCE OF TRANSACTIONS
• % AUTOMATED
• % NON-VALUE ACTIVITY
• DEGREE OF REGULATION

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 Accounting Control
– this relates to the stability and accuracy of the
accounting and reporting functions of the unit.

• INTERNAL CONTROL RATING

• CHANGE IN ACCOUNTING OPERATIONS
• ACCURACY OF REPORTS
• ACCURACY OF SUB-ACCOUNTING

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 Direct Loss
– is the loss of value due to theft (internal or
external), fraud, accident (injury or vandalism),
or catastrophe (fire, flood, riot or wind).

• POTENTIAL THEFT/FRAUD
• ACTUAL LOSS

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 Audit Attitude
– is the evaluation of the units responsiveness
of the audit function.

• % COOPERATION
• TIME OF AUDIT CRITICAL
• LAST AUDIT COMPLETE
• TIMELY RESPONSE
• ADEQUATE RESPONSE

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 Subject to External Audit
– to avoid duplication of audit effort, sometimes an
external auditor will pre-select an area that the CPA
firm will audit and therefore not require Internal Audit's
attention. This may or may not be the case. To
determine if the external auditor's audit of an area is
sufficient to satisfy Internal Audit, the depth of their
examination as well as the number of and nature of the
external findings must be evaluated.

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 Subject to External Audit continued

• DEPTH OF EXTERNAL AUDIT

• # OF EXT. FINDINGS

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 Lapse Time Since Last Audit

is the length of time since last audit of the unit

as compared to the frequency scheduled.

DATE OF LAST AUDIT

• On Schedule - 5
– 1 month past - 6
• 1 month sooner - 4 – 2 months past - 7
• 2 months sooner - 3 – 3 months past - 8
• 3 months sooner - 2 – 4 months past - 9 16
• 4 months sooner - 1
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 Reputation
• Internal
• Domestic
• Foreign

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Describe Each Element of Risk
• Further quantify the elements with
modifiers

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Weight the Modifiers
• How does each modifier effect the
element?

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 Weight the Elements
• How does each element effect overall
risk?

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Revisit the Risk Scores
• See how the scores ranked the functions
as to risk.
• Review the values to ensure accurate
measurement.
• Make sure you considered all the functions
when assigning values.

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 Re-Assessment
• Perform this assessment:
– at least annually
– Whenever there is a material organizational
change
– at each audit

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 Don’t Keep It a Secret
• Share your evaluation with:
– management
– other departments
– department staff
It is a team effort

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 Special Skill
Very few people have had the advantage to
have seen the entire organization. This
view is invaluable for accomplishing overall
corporate goals.

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Risk Assessment Benefits
• Allocate resources to mitigate loss in the
most risky areas
• Identify areas for corrective action plans
• Decide if the benefit is worth the risk of
continued operation

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