Are You Ready for Your Internal Audit Inspection?

Mar

2023

Many regulated firms are understandably nervous when faced with the prospect of an internal audit inspection. After all, the inspection team will look for evidence that the firm’s processes and controls are up to scratch and compliant with all relevant regulations. But there is no need to panic! With some preparation, you can ensure that the inspection goes smoothly and that your firm comes out of it with a clean bill of health.

CX Financia’s professional team is here to help! All businesses are required to adhere to specific laws, guidelines, and operations as part of their operations. Internal audit reports are a crucial part of any organization’s compliance program. Regulated companies such as Cyprus Investment Firms (CIFS) and payment services operating under the supervision of the regulators Cyprus Securities and Exchange Commission (CySEC) or the Central Bank of Cyprus (CBC) submit an annual internal audit report along with the board minutes to their regulators. The report must be submitted the latest by the end of April of each year, referencing the organization’s operations during the previous financial year.

In this article,CX Financia’s professional team analyzes the following components of the internal audit report:

Unveiling the Steps of an Internal Audit
Unleashing the Power of the Internal Audit Reports: The 5C’s Approach
From Findings to Recommendations: Understanding the Components of an Internal Audit Report
Ace Your Next Internal Audit Inspection: Tips for Preparing for Inspection
CySEC’s Expectations and Highlights on Internal Audits

Unveiling the steps of an effective internal audit

There is no one-size-fits-all answer to this question, as the steps of an internal audit will vary depending on the organization being audited. However, in general, the steps of an internal audit usually involve the following:

Planning the audit

The first step of an internal audit is to plan the audit. It involves identifying the audit objectives, developing an audit plan, and selecting the audit team

Conducting fieldwork

The second step of an internal audit is to conduct fieldwork. This step involves collecting data and information through interviews, surveys, observations, and document review

Communicating results

The third step of an internal audit is to communicate the results. It involves preparing and issuing a report that summarizes the findings and recommendations

Following up on recommendations

An internal audit’s fourth and final step is to follow up on recommendations. It involves reviewing the implementation of recommendations

Unleashing the power of internal audit reports: the 5C’s approach

With the ability to identify areas of improvement and ensure regulatory compliance, effective internal audit reports are crucial for the success of any organization. But what criteria do these reports need to meet to be effective, and what sets these reports apart from the rest?

Internal audit reports are often known for adhering to the 5C’s reporting requirement:

Condition: What is the particular problem identified?
Criteria: What is the standard that was not met? The standard may be a company policy or other benchmark.
Cause: Why did the problem arise?
Consequence: What is the risk outcome because of the finding?
Corrective action: What particular steps will management take to resolve the issue, and how monitoring or review will take place to ensure a solution has been implemented?

By utilizing the 5C’s, the internal audit report will be compliant with regulations and provide valuable insights for decision-making and driving continuous improvement within your organization. Find more about our Internal Audit services here

From Findings to Recommendations: Understanding the Components of an Internal Audit Report

It’s important to remember that an internal audit is not a form of punishment or accusation; it exists to help businesses optimize their operations and meet established safety and ethical guidelines. The report should include a comprehensive range of topics, such as financials, compliance, personnel policies and procedures, systems configuration and security protocols.

The report should include a comprehensive range of topics, such as financials, compliance, personnel policies and procedures, systems configuration and security protocols. It consists of a findings summary which states all significant discoveries and correlations between irregularities, reasons for them being noteworthy, plus advice on essential improvements or adjustments to existing procedures embossed with risks to attaining success.

Based on CySEC’s and CBC’s regulations, the report should, at least, include the following:

The Executive Summary:

- At most 2-3 pages long. Indicatively consists of the following:
- Introduction
- Purpose/objectives/terms of reference.
- A summary of all key findings/weaknesses, regardless of whether they have been rectified or not, within the related year, and any material issues from previous years that are still pending)
- Suggestions
- Conclusion

Company’s controls and systems mechanisms

- An overall description of the company’s internal control, risk management and governance systems and process.

An audit plan and risk-based approach followed

- A description of the audit plan and explanation of the risk-based approach implemented

Findings and recommendations

- regular or extraordinary audits (on-site or desk-based) carried out,
- major audit findings/weaknesses identified,
- recommendations made concerning audit findings/weaknesses identified,
- management response, including the actions taken on the significant audit findings/weaknesses and recommendations,
- any outstanding issues for which the management response could have been more satisfactory or no actions have been taken.

Outstanding issues of the last internal audit report

- This is a follow-up on the weaknesses identified in the previous year’s internal audit report and the progress of their improvements.

Other significant internal audit issues

- Highlighting internal audit issues that have occurred since the last report.

Ace Your Next Internal Audit: Tips for Preparing for Inspection

The mere thought of an audit inspection can be daunting for business owners. With some preparation, you can ensure that your business is ready for an internal audit inspection. Here are some key things to consider:

Tip #1: Understanding the purpose of the audit inspection

Before preparing for an internal audit inspection, it’s crucial to understand the purpose of the inspection. The primary goal of an audit is to ensure compliance with regulations, identify improvement areas, and assess internal controls’ effectiveness. It is essential to remember this purpose to ensure that you focus on the right aspects of your business.

Tip #2: Understanding the Scope of the audit

Internal audits can be unpredictable, and reviewing details such as requirements carefully beforehand is paramount. This involves identifying the areas of your business that will be audited, for example, human resources policies and procedures and IT security protocols.Contact the auditor regarding questions and ensure you and your team fully understand what is expected of them for things to go smoothly.

Tip #3: Mobilizing Your Team

Having the right personnel involved during internal audits is crucial, so don’t wait until audit day to figure out who needs to handle which task. Let your staff know well when they need to submit required data and information- make this process organized and efficient! Engaging your employees and ensuring they understand what is expected of them during the audit process is essential.

Tip #4: Review internal controls

Internal controls are a vital component of any business operation. Reviewing your internal controls before the audit inspection to identify any potential weaknesses is essential. This will help you address the issues before the audit and avoid compliance issues. It is also essential to ensure that your employees know and follow the internal controls consistently.

*Tip #5:The Paper Trail Virtue***

Documentation is crucial for any internal audit inspection. Ensuring that you have all relevant documents ready and organized for the auditor’s review is essential. This may include financial statements, compliance reports, policies and procedures manuals, and other necessary documentation.

A consistent file structure will be immensely beneficial during everyday operations. Moreover, during audit periods, it becomes that much easier to identify and organize the required documents quickly.

Speaking of consistency, maintaining a robust paper trail is essential for all parties to benefit from this approach. Your auditor may need to review past reports and documentation in addition to the present material.

Key takeaways

It’s essential to familiarize yourself with what is covered in the report to prepare appropriately for its review.
You should identify any documents or materials that need in-depth review to prepare for the review process.
Ensure you have all the resources you need during the review so that questions can be answered easily and concerns can be addressed quickly.
Ensure you have any relevant documents or materials that could affect the validity of the findings and recommendations. Develop action plans based on these findings and evaluate their effectiveness over time.

Extra Tip!!

Don’t forget to consider if any changes the auditor suggested fit your budget constraints. These steps will ensure a successful review process and prompt addressing questions or concerns.

CySEC’s Expectations and Highlights on Internal Audits

Expectations

Regulators increasingly emphasize internal audit requirements, creating a growing demand for this vital part of the supervisory process. This requires internal audit teams to cover all areas of interest to the regulator, even beyond existing standards.

Regulators expect internal audits to provide more assurance services, such as tracing data from source to report and performing independent reviews. They are moving away from test-based sampling and instead focusing on continuous assurance-based testing that covers a larger population of transactions. This allows them to gain more insight into all phases of the business and ensure that doubts or opportunities for improvement are identified and remediated immediately.

They also require organizations to have a regular process to update and communicate applicable regulations and internal audit standards to management. They expect internal audit to report activities on an ongoing basis and annually, so it is expected to be an independent monitor over controls, processes and compliance in the organization.

Regulators have increased the relevance and expectations of the internal audit’s role. They have shifted the focus to highlight areas of reputational risk, challenge the effectiveness of management controls, and focus on evaluating management actions to ensure successful strategies.

Highlights

CySEC has issued the circular C186 ‘Executive Summary in the Compliance Officer’s Annual Report and the Internal Audit Report on the prevention of money laundering and terrorist financing’ to set standards to assist the Regulated Entities in meeting their compliance obligations regarding the preparation of the Compliance Officer’s Annual Report and the Internal Audit Report on the prevention of money laundering and terrorist financing. Specifically, it refers to:
- The obligation to prepare written reports for their respective areas of responsibility to assess the Regulated Entity’s level of compliance with its obligations laid down in the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007, as amended.
- The purpose of both reports is to inform the board of directors of the Regulated Entity, amongst others, of the effectiveness of the policy, practices, measures, procedures and controls applied by the Regulated Entity for the prevention of money laundering and terrorist financing and for the measures to be decided for the improvement or correction of any weaknesses/deficiencies, setting a timeframe for implementation.
- For a more efficient assessment, appraisal and review of the reports and to further facilitate the board of directors in its decision-making, the persons responsible for the preparation of the reports are requested to include an executive summary at the beginning of their reports, which will summarise the lengthy text of the report. (see the description of the executive summary of this article).

Circular C516 ‘Findings of the assessment of Compliance Officers’ Annual Reports and Internal Audit Reports on the prevention of money laundering and terrorist financing for 2020’ refer specifically to the annual exercise where regulated entities are obliged to submit the Reports to CySEC for the previous calendar year. It specifies:
- The internal auditor’s obligation for the correct preparation of the internal audit report and a sufficient review and evaluation of the appropriateness, effectiveness and adequacy of the policy, practices, measures, procedures and control mechanisms applied by the regulated entity to prevent money laundering and terrorist financing.
- The regulated entity’s BoD obligation for the sufficient assessment and approval of the annual report and the internal audit report and taking all appropriate measures to correct any weaknesses and deficiencies identified, as well as the implementation timeframe of these measures.
- The regulated entity’s BoD obligation to ensure the overall implementation of all requirements of the Law and the Directive and to ensure that appropriate, effective and sufficient systems and controls are introduced for achieving the abovementioned requirement.

Regulated entities should be aware that common and recurring weaknesses and deficiencies will be the subject of rigorous compliance checks by the CySEC.

Final Thoughts

Preparing for an internal audit inspection is a critical process that should not be taken lightly. Failing to prepare adequately could lead to significant consequences for your business. At CX Financia, we understand the importance of being ready for an internal audit inspection. Our team of experts has years of experience in conducting internal audits, and we can provide you with the guidance you need to prepare for your audit successfully.

So, don’t wait – start preparing today!

How can CX Financia help?

If you’re looking for an experienced and qualified team to help you with your internal audits, look no further than CX Financia. CX Financia is a professional service provider of internal audit services to Corporations, High Net Worth Individuals and Investment Firms. Our team has years of experience in the field and is dedicated to providing quality services to help you stay ahead of the curve. Plus, our annual reviews are tailored to meet your needs, so you can be sure you’re getting the most from our services.

We would be happy to discuss our services with you and answer any questions you may have!