At CX Financia, we understand the importance of the internal audit process in helping regulated entities achieve compliance, manage risk, and enhance performance. In our continued effort to add value to our clients, we are launching a two-part article series on internal audits for regulated entities supervised under CySEC and CBC. This article series aims to create awareness among regulated entities about the internal audit process and how it can prepare them for inspections. This first article will discuss the key components of an effective internal audit process and why they are important. The next article will focus on how regulated entities can prepare for an internal audit inspection and what to expect during the process. These articles will provide valuable insights and help regulated entities better understand the importance of internal audits in achieving their strategic goals.
The Strategic Importance of Internal Audit in Today’s Organizations
Improve business processes and controls
An effective internal audit function can be a powerful tool for organizational success. Internal audit helps ensure that organizational processes and controls are effective and efficient.
Identify and mitigate risks
By taking a systematic and disciplined approach to identifying and addressing risks, internal audits can help organizations stay ahead of the curve and prevent problems before they arise.
In addition, internal audits can uncover opportunities for process improvements and cost savings, leading to long-term benefits for the organization and building stakeholder confidence. And when done correctly, internal audits can:
- Save you time and money in the long run.
- Commit to continuous improvement to reap the rewards of a more resilient and sustainable business.
Understanding the Term Internal Auditing
Independent and objective assurance
In the business world, an internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. In other words, it is a magic tool that helps build stakeholder confidence in the organization.
Internal audit is widely recognized as essential in helping the organization achieve its strategic objectives, manage risks effectively and operate efficiently. The audits are conducted by independent auditors who report their findings to the organization’s board of directors or audit committee.
To be more precise regarding the regulated entities, according to paragraph 8 of the Directive DI144-2007-01 of 2012 (CySEC’s Directive), “A CIF is required, where appropriate and proportionate, taking into account the nature, the scale and the complexity of its business activities, as well as the nature and the range of its investment services and activities, to establish and maintain an internal audit function which is separate and independent from the other operations and activities of the CIF and which has the following responsibilities:
(a) to establish, implement and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the CIF’s systems, internal control mechanisms and arrangements
(b) to issue recommendations based on the result of work carried out in accordance with point (a)
The Essential Role of Internal Audits
An internal audit’s role is to evaluate the effectiveness of an organization’s internal controls and assess compliance with laws, regulations and ethical standards.
Establish an effective internal control system
An effective internal control system is essential for any organization. It helps ensure that the financial statements are accurate and reliable, that assets are adequately safeguarded, and that operations are efficient and effective.
Internal controls also help organizations detect and prevent fraud and corruption. Internal audits can influence the decision-making process within an organization by providing feedback about risks and vulnerabilities. This information can be used to improve processes or change policies accordingly.
In addition, proper implementation of an effective internal audit program can lead to significant benefits such as reduced fraud. It’s important to evaluate your internal controls regularly so that you can identify any issues early on and take appropriate action.
Ensure compliance with laws and regulations
Compliance with laws and regulations is another fundamental purpose of internal audits. Organizations can face severe penalties if they violate laws or rules, so it’s essential to have procedures in place to ensure compliance.
An audit is an effective way to ensure that a business or organization remains current on any new regulations or policy changes that could affect compliance. Internal auditors can help identify areas of non-compliance and provide expert advice to help organizations develop and implement processes for meeting the applicable regulations.
Ensure a culture of ethical behaviour and integrity
Ethical standards are also essential considerations in any organization. Ethical employees help maintain an organization’s reputation and foster trust and loyalty among customers, shareholders, and the public.
Internal audits help ensure that employees adhere to ethical standards and behave in a manner that is consistent with the organization’s values. Employees should receive frequent reminders and training about the importance of ethical behaviour and be expected to follow the standards set by the organization. Organizations should review their ethical standards regularly to ensure they are up-to-date, appropriate, and clear to all parties.
How Can Internal Auditing Benefit Your Business?
According to CySEC’s Directive,” CySEC formally evaluates the CIF’s business risks and internal governance (including risk controls, compliance and internal audit). CySEC reviews the controls put in place to mitigate risk and the adequacy and composition of capital held against those risks. The evaluation will focus on identifying each CIF’s risk profile and assessing the quality of the CIF’s risk management system. The evaluation is forward-looking, and it will use both qualitative and quantitative techniques.”
Therefore, internal audits provide many benefits to the organization, including:
- Improved risk management: Internal audits help identify risk areas and allow the organization to take corrective action before problems arise.
- Enhanced governance: Internal audits ensure the organization follows its policies, procedures and regulatory requirements.
- Increased efficiency and effectiveness: Internal audits help identify areas where the organization can become more efficient and effective, allowing for cost savings and increased productivity.
- Better decision-making: Internal audits provide management with information that can be used to make better decisions, such as where to allocate resources or how to improve processes.
- Increased accountability: Internal audits help ensure the organization is accountable to its stakeholders.
- Improved communication: Internal audits provide a means for management to communicate with stakeholders and ensure they know the organization’s risks and controls.
- Continuous improvement: Internal audits provide a mechanism for the organization to improve its processes, policies and procedures continually.
Internal audits provide valuable insights and recommendations that help organizations achieve their goals and objectives while maintaining compliance with regulations and ethical standards.
- An internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.
- By conducting an internal audit, organizations can identify areas where risk management, control, and governance processes are effective or any weak points and make necessary improvements.
- An internal audit can help an organization save money by identifying areas where efficiency can be improved.
- To take full advantage of the benefits of internal audits, organizations should invest in a reliable team with the appropriate skill set to conduct thorough audits that meet their needs.
- An effective internal audit function can help build stakeholder confidence in the organization.
How Does Internal Audit Impact Compliance
Reduce risk of non-compliance with regulators
When it comes to compliance, there’s no one-size-fits-all solution. That’s why an internal audit is so important. It is a process that helps organizations ensure that they are following all the relevant laws and regulations and reducing the risk of penalties, losing or suspending their operating license under the request of CySEC or CBC.
Review material aspects of the business based on the regulators’ Directives
The audit team can identify potential risks and fraud by performing independent audits. This information can improve financial reporting, corporate governance, and risk management. For instance, a CIF has to abide by CySEC’s command (Directive) regarding the ICAAP audit process “The ICAAP and its review process should be subject to an independent assessment by a function or person that has not been involved in the ICAAP process, such as the internal audit function. Any changes in the CIF’s strategic focus, business plan, operating environment or other factors that materially affect assumptions or methodologies used in the ICAAP should initiate appropriate adjustments to the ICAAP.”
Challenge the business to comply
Implementing an internal audit can be challenging- there are often challenges associated with getting the right resources in place, setting standards appropriately, and communicating findings effectively to all involved parties. To overcome these challenges, organizations must have a clear plan for how internal audits will impact their business. Additionally, it’s essential to have adequate resources to perform accurate audits and address any identified issues as quickly as possible.
Internal audit is vital in monitoring business operations and ensuring compliance with relevant laws and regulations. Embracing robust internal practices will benefit businesses in many ways-from, from protecting against fraudulent activities to increasing shareholder value over time. In today’s competitive environment, where companies constantly try to stay ahead, solid internal auditing practices help organizations maintain their edge.
Stay tuned for the following article, where we will dive deeper into regulated entities preparing for their internal audit inspections and what to expect from the internal audit report.
How can CX Financia Help?
CX Financia is an experienced service provider of Internal Audit Services to Corporations, High Net Worth Individuals and Investment Firms.If you’re looking for an experienced and qualified team to help you with your internal audits, look no further than CX Financia. 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.
Contact us today to learn more at [email protected] or call us at +357 22052920.
We would be happy to discuss our services with you and answer any questions you may have!
Should you be interested to read more about AML compliance and internal audit, read to our article ‘Tips for the Internal Audit Department’.