An analytical review of internal audit coverage of strategic and reputation risks

Abstract

Purpose - This dissertation assesses the current methodology used by Internal Auditors in local listed companies to evaluate and provide assurance with respect to financial and non-financial risks. The study focuses on the manner by which Internal Auditors take into consideration Strategic Risk and Reputation Risk. These are not pure financial risks, thus making them harder to quantify however their impacts are not less costly. Design - The objectives were attained through semi-structured interviews with ten internal auditors in local listed companies and three of the Big Four audit firms. Value - This dissertation seeks to enhance the adoption of a Risk-Based Approach amongst Internal Auditors to enable them to audit higher-level risks such as Strategic Risk and Reputation Risk. Findings - The results of this study show that despite the fact that Internal Auditors strive to adopt a Risk-Based Approach, some still face certain limitations. This study confirms that non-financial risks have gained importance, with Reputation Risk being one that is present in each organisation. However, Strategic Risk is still not considered to be a significant risk. Higher-level risks such as Strategic Risk and Reputation Risk are not taken into consideration separately by Internal Auditors, and thus a methodology has been suggested for the audit of Strategic Risk and Reputation Risk. Conclusion - If the right environment is ensured, a Risk-Based Approach benefits not only the Internal Audit function, but also management, as this ensures that the top priority risks are being addressed and that non-financial risks such as Strategic Risk and Reputation Risk could be audited. To audit such risks that are considered higher-level, the Internal Auditor must completely detach from any traditional methods and focus on any attributes that feed into these risks, that is, their surroundings. It is a concept that is relatively new and may be challenging to grasp, yet with the right attitude and adequate resources, including appropriate skills, such an approach is the way forward.