Annual Conference and Global Internal Audit Leadership Summit 2017 (27 Oct)

Managing Cyber Risks. (KPMG) Cybersecurity is one of the top 5 risks as rated by CAEs. Cyberattacks are one of the top 3 man-made risks which can be addressed. In a survey, Asian CEOs aren’t as well prepared as their US counterparts when dealing with cyber risks and cybersecurity. There is a need for cybersecurity risk assessment. Sometimes, insiders can provoke a cyberattack too. Due to the widening of the digital footprint, it can lead to greater cybersecurity threats. External threats like new technology, technology change, regulatory compliance and changing market forces will continue to affect the cyber landscape. The new cybersecurity bill by CSA is slated to be released in Feb 2018. The Bill will affect CIIs from 7 different industries. The cyber risk gap needs to be plugged through the use of specialist reviews and audits. Some of the losses that an organization could face are theft of client information, IP, corporate date, DOS attacks etc. Nowadays, it is quite common for the attacker to attack your service provider (since there are less strict internal controls) and get information from them about your company. Some of the staff from your vendor might not be well screened also. Usually, there is no point trying to figure out who the cyber-attacker is as it is hard to prosecute if it’s not in Singapore jurisdiction. Some of the tactics that cyber-attackers use is ransomware, key loggers, phishing, insider data theft and man in the middle attacks. Do not give away passwords at any cost. Training/education is important, more so that IT tools at times. As auditors, we can audit the data classification in an organization. Cybersecurity is a growing factor and needs to be included as a risk indicator. There needs to be a detailed response plan after being attacked. There is also a need to link the cybersecurity threats to your business. One can read the ISO27000 series, MAS TRM Guidelines, NIST, COBIT and others.

SAP Case Study. (SAP) SAP is a German company. Maintenance costs is a big part of the implementation costs of having such an ERP software. For SAP itself, some of the risks facing the organization are acquisition risks, cloud computing etc. Within the audit team, they use the SAP Audit Management Software, which is automated from the end to end auditing process. One will be able to see clear audit plan overviews and also real time status updates of the plan. There are also resource management tools in place which will help improve the global resource transparency. In addition, there are audit executive dashboards in use. All these lead to better cost savings, user satisfaction and faster audit cycles for the organization. As a result, during quality assessments, the IA function scores better. Analytics helps in audit sampling for auditors.

Internet of Things. (Microsoft) The Internet has shifted from the Internet of content to service to people and now to ‘Things’. Internet is very commonly used nowadays as it is more efficient and has led to increased productivity. It has brought the whole world together through Skype. There is data in chips in our everyday devices and such data can be harnessed for decision making. Some of the benefits of IoT are that it leads to 1) safety, comfort and efficiency; 2) faster decision making; 3) revenue generation. Some of the risks of IoT are 1) privacy, security and legal (types of data collected can be collected and should be collected etc). The major challenges that will be faced are to obtain the business and IT buy-in and also the fact that data magnitude can be huge and complex and hard to interpret. It is important for IA to stay ahead of the changes and understand the risks emanating from IoT. We need to be trusted advisers to the business. CAEs need to determine the skillsets required, like from data scientists, private specialists etc. IA needs to recruit the right people. We need to change our approach to how to audit etc. The process flow is like this: device connection -> data sensing -> communication (access rights) -> data analytics (queries etc) -> data value -> human value

Data Analytics at MAS. (MAS) Data is the new AIR that we breathe. Insight is the new storage of value also. There are a few Vs we need to be aware of: Veracity, Value etc. We have approached the other departments, like banking, insurance and capital markets, to understand what are the pain points of these departments. We have moved from rule based (AML + STR) to machine learning. There is a strong need to enforce data quality and to move from just big data to smart data. Labels must be given for supervised machine learning in order for it to work more efficiently. However, there is also such a thing as unsupervised machine learning etc. For data, there is a need to achieve generalisability. An important question to ask is whether your model can work on future data? Or just past data? Ensure that your data can be interpreted and cleaned before it can be used. The process is as follows: 1) know the question; 2) understand the data; 3) find the right algorithm; 4) be aware of the limitations; 5) be sceptical; 6) automate; 7) experiment. It is important to share insights across the different departments. Machine learning is a programme which automatically improve its performance through learning and experience. Culture is hard to change and in fact, culture is more important than the application of an algorithm.

Cybersecurity Lessons Learned. (SWIFT Asia Pacific) SWIFT is a co-operative that is based out of Belgium. Nowadays, cyberattacks are tailored for a particular institution and that can be really scary. Hackers are now able to perform multi-stage attacks. There is a hacker collaboration space in the dark web. Cross-border banking usually requires the use of SWIFT. Hackers have different motivations for committing crimes and it is difficult to predict. Cyber must be managed from the top-down. One needs to understand that spending money doesn’t make you more secure and there is a need to evaluate cost-benefit analysis. At times, it could be the client servers which have issues. There is a need to dictate how the client runs their programmes in order to secure their environment. There needs to be a cyber-response plan in place to address attacks and to recover. In future, SWIFT would make it compulsory for banks to report on their compliance to SWIFT’s assurance framework. This will certainly help to improve transparency.

Ethics in a Digital World. (Avande) Avanade is a cloud service provider and is a partnership between Accenture and Microsoft. In this digital age, there is a debate between Personalization vs Privacy. Facebook tried to have two bots chats with one another, but they turned racist and eventually had to be put down. Although AI development is swift, it might be necessary to put the guardrails on AI and curb its growth in view of ethical considerations. What is morally acceptable in today’s society? What is lawful? Digital is becoming a way of life and ethical behaviour is vital in this day and age. Is there a need for a framework to manage ethical dilemmas? What are the possibilities of digital tech? Core ethical values are embodied by leadership and there needs to be a good tone from the top.

IA in the Age of Transformation. (Asia Pacific Black Sun, Sofitel Singapore, UOB, NTUC, EDB) What are the elephants in the room? This refers to important issues that are not being addressed by IA. IA needs to keep themselves relevant. 43% of jobs in Singapore can eventually become automated (mechanized, robotized, digitalized) etc. However, there are still many opportunities in the audit space to add value. IA needs to be high tech, high touch (build strong relationships with management), and high trust. IA’s job is to highlight exceptions to management and in order to do so, they need to be loud and courageous in the boardroom and not shirk from difficult conversations. IA needs to avoid getting on the newspaper. IA needs to familiarize themselves in the area of sustainability reporting and professional scepticism. IA needs to constantly update themselves through attending training etc. Industrial domain knowledge is also important and this is usually learnt on-the-job. People retention is important and there could be a risk of knowledge loss without people. There is a need for IA to provide inputs on controls for IT projects right at the start. If there are no audit findings, it is possible for IA to issue a clean audit report. IA should gradually take on a more advisory role for the business.

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IIA Magazine Jun 2016 issue

A toxic culture is present when your work negatively affects your health – physically and emotionally. An example of such could be a change in management or management through fear and intimidation. The two options are to leave or to name the problem and discuss to make it better. Payroll should have continuous checks and balances. It is not good to report risks on an ad-hoc basis. Talent issues and development need to be addressed. There is a strong need to fight corruption. However, whistle-blowing hotlines might be underutilized, as employees fear retaliation after reporting. There are some companies which do not trust enterprise cloud deployments still.

The Fire Drill. Auditors can learn to deliver a focused message that results in management action. Effective planning of our work is the key. For instance, we can look at past audit findings. Next, one should compensate with competence, meaning backing up observation with data and experience. Sell with the passion of a champion. Findings should be sold to address a control weakness that is causing an unacceptable risk. One needs to communicate the big risks well. In the end, we need to deliver a focused message that can result in management action.

The Tech-Savvy Auditor. Effective use of audit technology can enable audit departments to provide valuable insights. Most IA staff are not familiar with IT or have weak IT backgrounds. This is not acceptable. Technology can lead to a more efficient audit and also might cut fraud losses. There is a need to improve the audit software. There should be a data analytics centre in-house. There is a need to review software usage.

Integrating Key Risks and Performance Indicators. IA can leverage its risk knowledge to improve operational performance and reduce risks exposures. IA can provide assurance on the achievement of objectives. IA can encourage the formalization of KPIs and KRIs. KRIs can serve as an early signal of increasing risk exposure. There needs to be a formal project charter. There needs to be a KPI framework with proper planning, reporting, monitoring etc. The key metrics need to be identified and a dashboard can help to present graphically the results. The KRI should be closely linked to the KPI.

Toxic Leaders, Toxic Culture. IA can identify unhealthy behaviors that may undermine the organization. Culture will affect an organization’s success. Therefore, identifying the toxic leader is important. Toxic leaders want power and control. These tend to be autocratic leaders. They could have a strong sense of entitlement and focus on themselves and not the organization. Exerting power through fear can undermine morale. They do not like to be challenged and seek to manipulate others. Closed-minded leaders think of ‘My way or the highway’. There is no need to confront the toxic leader. IA can refer the person to compliance or legal counsel. One can use behavioural psychology to analyse. For a more objective method, one can look at the reasons for turnover and examine turnover rates. One can also look at employee engagement survey results. One needs to use experience and facts as much as possible.

Analytics and the small audit department. No matter the size of an audit function, analytics can be implemented for big gains. How to go about using analytics? Some simple ones to consider are benchmarking, variance analysis, ROA, turnover etc. The analytics must have goals and performance measures. Selecting the right data source is the key and there is a need to verify the accuracy of the source. Brainstorming can help to identify key data. It is crucial to have a plan that will allow IA to continue to improve its analytics capability. It is important to attain small wins in analytics.

Business Risk. Keynote speakers for this year’s IIA International Conference identify emerging risks facing organizations. Cyber risks is at the top of the priority list for many. Ransomware is a big threat to hospitals nowadays. Other threats include politics, the economy and terrorism. Social media risks sometimes aren’t within an organization’s control. Auditors should use corporate culture to work in their favour. An organization must monitor the external environment closely. There should be a common understanding of what the risk appetite and risk cultures are. Audit needs to adjust fast and invest continually in education. IA now also needs to learn to be innovative.

An Anti-corruption Check-up. Capability maturity models can help organizations assess the effectiveness of the anti-corruption programs. This model was developed at Carnegie Mellon University. One can use the model to identify strengths and weaknesses. There are basically 4 levels of maturity. There are 7 components that form the basis of anti-corruption maturity model. There is a need to tally the scorecard too.

Craft Our Role. IA should create the role for themselves that is best for both the organization and their own personal development. IA needs to be ingenious, use creativity and resourcefulness when developing their role. Do not limit the scope to be too small. It is important to be familiar with the business in order to value add properly. The control environment needs to be evaluated properly. One can develop business acumen. It is crucial to ask the right questions. IA should network more with the other departments to build rapport and also to get a feel about the management style in the department. Learn to practise combined assurance. One can work with another dept for a joint review. This is the way to maximize external resources.

Fraud and related-party transactions. IA can identify red flags and reduce the risk and impact of related-party fraud. IA need to be able to recognize related-party fraud risks. Providing loans at below market rates is a red flag. Failing to disclose the related-party nature of the loan is a red flag. IA should try to identify related party transactions. Try to identify whether employees have link to companies that transact with the organization itself. It is also possible to compare cost variations among vendors to see how they differ from the average cost. The organization should not pay costs significantly above market prices.

Communicating Results. Sharing audit observations is one of the most important tasks auditors perform. Communicating properly can help enhance rapport. Make sure the observations are correct and are not challenged by management. Plan the timing of issue dissemination, which is as soon as possible. Try not to surprise management at the end of the audit. Write clearly. Exercise diplomacy.

‘One of the quickest ways to lose management’s respect is to make it clear that IA does not understand what is has been auditing. The answer is to take the time to learn the business, processes, and risk associated with the audited area.’

Care and Feeding of The Company’s Culture. How can IA help to ensure a healthy organizational culture? Auditing culture is certainly work examining. Healthy organizations should have guidance on norms and expectations and a healthy tone at the top. Transparency is important. Management should think long term and have a sound strategy. Ask yourself whether the root cause is behavioural or cultural in nature. The problem with culture is that it is not clear cut and might be hard to evaluate. Those who are toxic in nature might be held accountable and be responsible.

Internal-Audit

 

IIA Magazine Oct 2016 issue

There needs to be reporting beyond just financial type. There is a need for a risk-based approach and to look at the major objectives of the organization. It is important to have a policy for conflict of interests. Do not simply give customers what we think we can deliver, but ask them what they need. Company culture is crucial in the employee rating of their CEO. Those CEOs who are the founders, have lower pay, have good profitability usually have better ratings. Some FIs are concerned by the staffing of their AML team and the adjustment needed for new regulations. The US is the most cyber aware country. However, there are some countries which are lacking in cybersecurity preparedness and that is a concern. Brexit might have the effect of changing the impact of globalization over time.

The Art of Recommending. Internal Auditors walk a fine line when presenting recommendations to management. IA needs to show how the recommendations fix gaps and mitigate risk. There needs to be a cost vs benefit analysis too. Recommendation can either be to address a gap or as a suggestion for improvement. There needs to be both internal and external sources of information. One needs to spend time documentation down potential recommendations. It should address the root cause. Avoid addressing a person. Indicate a repeat finding. Explain how the recommendation will mitigate the risk. For areas for improvement, list them separately from the gaps. Some external info could be ‘IIA research materials, professional literature, networking, procedures from other organizations.’

‘It is a good practice to jot down recommendation ideas as soon as they come to mind, even though they may not find a place in the final report. Even if internal audit testing does not result does not result in a finding, the auditor may still recommend improvements to the current process.’

‘It is internal audit’s prerogative to provide recommendations, regardless of whether management agrees with them. Persuasive and open-minded discussions with process owners are important to achieving agreeable and implementable recommendations.’

Big Data and IA. Today’s data analytics expand auditors’ ability to tap into all types of info generated by the organization. Auditors can mine data and analyse them. IA can use statistics or visualization tools to help them too. One can test all the transactions now. There is also a great variety of data available. Velocity of data now makes it possible for IA to perform continuous auditing. Learn to understand the data and acquire the analytics tools. It is also important to develop a road map too. Big data can be harnessed in a meaningful way.

Is IA in your Audit Universe? IA should seek to enhance and protect organizational value. IA should be audited via a QAR (quality assurance review). One can evaluate the IA’s conformance to the standards, code of ethics, efficiency and effectiveness of the IA activity. It must be conducted by someone who is objective in nature. An external assessment needs to be conducted once every 5 years.

Blurred Lines. Internal auditors need to have the skills and perspective to deal with frauds that don’t match the standard villain story. One needs to look for the motivations and benefits. IA needs a clear perspective on how to approach fraud. One needs to analyse why did the fraudster want to commit the crime.

Taking the Lead on Nonfinancial Reporting. Internal audit is well-positioned to examine how its organization reports on nonfinancial issues. European companies now need to disclose in the annual report how they are discharging social, environmental and ethical issues. Non-financial info is important to gauge the society’s impact. Management needs to be concerned over non-financial reporting. Sustainability reports should disclose how the company performs in some specific areas. You need good non-financial reporting systems. In the US, sustainability reporting is not mandated and not practiced by many companies. Non-financial data are often over-looked by IA. IA needs to have the right process competencies for effective non-financial reporting. There needs to decisions on materiality over nonfinancial reporting. Strong communication skills are the key. It is possible to create a multidisciplinary team that can provide combined assurance. IA needs to engage the first line of defense first.

Audit processes take flight. The updated COSO Internal Control-Integrated Framework is at the heart of Boeing’s internal audit work. The new COSO framework has 17 guiding principles across the 5 control components. The principles-based approach is being used. It is important to give weight to all of the COSO components. Keep the focus on inherent risks. Every audit requires a detailed process flowchart.

Privacy in the workplace. Organizations must find ways to accommodate employees’ personal technology use while also meeting regulatory and other requirements. Digital technology has changed a lot of things. Privacy issues are becoming more important. Employees tend to violate privacy risks more. IA should be able to understand where the risks lie. A lot of data is being collected and analysed. Some form of employee monitoring is necessary, but not excessively. Who is responsible for lost data on a cloud? In the US and Europe, there are a lot of acts that company must comply in relation to global privacy laws and regulations. In Europe or Japan, the privacy laws are more absolute. There needs to be a strong governance/ privacy framework in place. A risk assessment should be performed on a frequent basis to evaluate the impact of changes to regulation. If an organization expands, IA should make sure controls are in place to manage privacy. Training and awareness needs to be made at every level. Trust must be built between employers and employees.

A Unified Approach to Compliance. Failure to comply with regulation could lead to fines and reputational damage. There needs to be a co-ordination between IA and compliance function. IA needs to understand the business goals and how the compliance team plans to assist the business in achieving them. One can examine from both a macro and a micro level. The IA charter should clearly document the role of the IA team in compliance. We should focus on the foundations of the assessment. IA should sound out levels of residual risks that are greater than risk appetite. How does the organization ensure completeness in the assessment? IA can rely on the compliance team to update them on the regulations. Key compliance decisions must be documented. IA and compliance teams should meet to discuss once in a while. IA can share audit reports with the compliance teams. IA can leverage and use the compliance risk assessment. However, IA should check whether it is complete. To achieve the IA mission, IA needs to include compliance too.

The Power of Rhetoric. Understanding the powers of persuasion and applying key rhetorical skills can improve the work of any IA. IA needs to possess rhetoric to persuade the auditee to accept the recommendations. The key elements are speech, audience, text. The author is usually the engagement lead. All members and groups of audience needs to be considered. The audit report is the written text. The team selected must be capable and know how to perform the engagement. Logos appears to one’s logic and the supporting documents. Pathos focuses on the audience’s irrational modes of response and is an appeal to emotions. Design of slides must be beautiful and also simple to read. Word selection is important and IA should give a balanced view.

The Red Flags of Fraud. Internal auditors’ knowledge of the business makes them ideal candidates to detect unethical behaviour. Fraud affects the bottom line and active measures to detect it are better. Red flags are signs that it could occur. IA can do a red flag analysis. There are different types of fraud, financial statement fraud, employee fraud, tech fraud etc. For FS fraud, personal enrichment is common. IA can scan the GL to look out for unusual trends etc. Analytical procedures can be used too. Employee theft of cash is possible. Other types of fraud are employee expense reimbursement fraud, payroll fraud and kickback scheme. Most frauds usually happen only after a year of service, because the employee needs to learn of the internal controls first. The chance of fraud is greater if the person is in financial difficulty. Data analytics can help to review red flags. Anti-fraud training must be conducted. Early detection is the key as if the fraud persists, the loss will be even greater.

‘Ethos is established when the audience determines that the author is qualified, trustworthy, and believable.’

Anticipating Information Security Regulation. As threats and data breaches become more common, so will regulatory oversight. Data breaches are more common and the risk to consumers are growing. One needs to establish a security risk assessment process. IA can adopt ISO 270001 to enhance their information security program. An employee security awareness program is very important too. IA needs to validate and assess the control environment too.

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IIA Magazine Dec 2016

One potential failure of ERM is that of green-washing, this is when crucial risks are pushed down into the larger collection of more trivial risks. Cybercrime is a current buzz risk. The first line of defence needs to take on better accountability for sound risk management and control.

Investors are pushing for more accountability and transparency behind decision-making. Shareholder activism is playing a big role nowadays.

The EU has released new general data protection regulation (GDPR) which intends to strengthen and unify data protection for individuals within the EU. However, most organizations say that they are not well prepared. Organizations should start preparing for this as it will kick off in May 2018.

Client Feedback. Audit performance can be fine-tuned with the right input from stakeholders. Feedback should aid audit performance. Feedback should be to the point and be specific and timely in order to be effective. Useful feedback can increase audit effectiveness. Feedback can be provided during the opening meeting, during the audit or during the closing meeting. The client should take the opportunity to clarify any concerns that they may have. During the closing meeting, IA needs to present the supporting documents and records. A post-audit questionnaire can be sent to the client after the audit.

Must-have Controls for Small Medium Enterprises. 5 controls can help SMEs protect themselves against cyber breaches. Sometimes, they do not have sufficient resources to deal with threats. Firstly, scan the network quarterly and identify vulnerabilities. Train employees on IT security. Protect sensitive information by inventorizing sensitive business processes and reviewing access to information. Learn to segment the network. Deploy extra protection for endpoints and encrypt the data. Learn to monitor the network, manage service providers, protect smart devices and monitor activity related to sensitive information.

A Holistic Approach to IT Risk. The COBIT framework can help auditors understand and address their organization’s technology risks. IT can be very complex but IA needs to evaluate the full range of IT risks. COBIT is valuable for the whole process, from end to end. The 5 key principles are meeting stakeholder needs, covering the enterprise end-to-end, applying a single integrated framework, enabling a holistic approach, and separating governance from management. Internal auditors can use COBIT to understand the nature of IT risks that are unique to their organization.

A Toxic Culture. A department leader creates a hostile work environment by promoting friends and abusing employees and company assets. When many employees leave, there could be a sign of a toxic culture. There was an inadequate internal control system as no one tracked expenses. Critically review turnover data as this is a big red flag. Exit interview results should be reviewed regularly. Access control over reports should be reviewed and approved.

On The Rise. Learning is the key to do well in IA. Get students involved early and you can volunteer as a guest speaker on internal auditing topics. IA an get involved in many projects and act as change agents for the organization. Projects can allow one to build and develop business relationships with stakeholders. One can use data analytics during audit engagements. IA can add as a trusted advisor and perform consulting work. One can learn SQL, which is a tool for managing data. One could take others under their wing and mentor them so that they can grow. Interaction between auditee and IA must be positive. Spread the good word that your team does. IA should be innovative in addressing solutions. It is helpful to distinguish the different roles of EA and IA too. Communication skills are the key for IA’s success.

Growth through challenge. Current and past emerging leaders discuss the tough assignments that helped propel their careers forward. Challenges faced in your career can propel you to be a better auditor. It is good to share with others what are some of the common mistakes. See auditors as people and go in with a customer first mentality. Be client centric. Be prepared when you go for meetings and interviews. Get a mentor, build relationships, learn from your mistakes and learn to network. It is important to preserve independence and objectivity. Influencing mindsets are tough. Building relationships with auditees can be tough when you are new. It is important to have a good audit methodology. The learning curve can be steep especially if the industry is new for you. Some departments are resistant to let the IA perform audits on operations. Talent auditors are always in demand. Once you are good, you can engage the C-suite management easily and without fear. Young auditors are always eager for more opportunities.

It’s all in the delivery. Sharing difficult messages is an unavoidable part of the job for internal auditors. Some audit observations can be difficult to convey. You should always build the relationship before telling the bad news. Telling the bad news right away is unlikely to work. Using weekly updates once the exceptions are noted is the key. Preparation is the key to accomplishing objectives. It is important to be fair and factual. Focus on the process as well as content. If you can, you can tailor the response to the personality of the recipient. During the discussion, one can seek opportunities, offer to help, make it clear and maintain open body language. ‘If the audit report is the first time a client is seeing something in writing, that is the first and biggest mistake. Verbal updates are great, but periodic written updates go a long way. Auditors might get into trouble over their poor soft skills. Focus on the problem, include some positives, have a face-to-face meeting etc. The key is not to beat around the bush. EQ is important in helping good delivery. The key is to deliver bad news but still build a good relationship with the auditee.

Breaking Through. Women in business are taking on the barriers to advancement, and that’s good news for everyone. Diversity is good for the workplace. More women need to be in leadership positions. However, women might face issues like lack of support, exclusion, apathy. There needs to be sufficient support from male leaders. Men should be interested in achieving gender equality. Be You. Seize the Moment. Integrate Your Life. Earn Respect. Stay Behind Facts. Be realistic and practical. Forget silos. Think context before issue. Rethink reporting. Aim at destination with gratitude. Women may also face the motherhood penalty.

Mapping Assurance. Internal auditors can facilitate efforts to document the organization’s combined assurance activities. There are a variety of assurance providers. CAE can use an assurance map to co-ordinate assurance activities. It can also aid to prevent gaps in coverage. IA is well positioned to provide combined assurance. The plan should start with the organization’s strategic plan and the key risks that are associated with the strategic objectives. There should be 3 tiers of defence to provide assurance. IA need to assess the quality and quantity of assurance received.

A Winning Pair. Governance and automated controls must work in tandem to achieve maximum results. Good governance is the key. IA needs to access the current risk profile, mitigation activities and residual risks. Good behaviour requires time and employees should receive reminders in order to conduct good behaviour. Desired behaviour ultimately stems from the top.

The High-Performance Audit Team. Today’s complex, evolving business environment demands more of internal auditors. The world is changing and stakeholder expectations are increasing. IA can also rotate and fill other operational positions. An integrated internal audit function can boost performance. There is a strong need to invest in training and learning. Verbal, leadership, communication skills are very important. A high performance team can evolve to meet new challenges and reinvent itself. We also welcome constructive feedback from staff.

auditing-service-singapore

IIA Magazine Feb 2017 issue

IIA Feb 2017 Issue

Internal Auditors need to provide maximum return on investment and audit the right things. They need to understand the company’s strategic mission, objectives and KPIs. More auditors need to base their work on the International Standards for the Professional Practice of Internal Auditing.

The 5 emerging threats are (i) global economic uncertainty; (ii) increased regulatory burden; (iii) significant industry changes; (iv) business model disruption; (v) cybersecurity threats. Global economic uncertainty seems to a bigger risk in 2017 as compared to previous years. In the compliance space, with the new US administration, enforcement areas could see some change. Trump could change the legislative, regulatory and executive actions under Obama’s reign.

Although most companies feel that they could detect a sophisticated cyberattack, many of them do not have an adequate communication strategy in the event of a significant attack. Also, some of the BCP might be lacking. The continuous monitoring of cyberattacks is also a challenge.

Data Mining. By leveraging data, internal auditors can address issues beyond the reach of traditional analysis techniques. It involves making use of data which had previously no formulated relationships, patterns. Artificial intelligence, machine learning, statistics and database systems all come into play. Some of the techniques auditors can use are predictive modeling (IF), data segmentation (data clustering), neural networks (artificial intelligence), link analysis (links between records), deviation detection (red flags). The use of email mining can identify red flags in fraud etc. Social network analysis is also possible. IA should continue to look for ways to innovate their audit testing.

Intelligent Assessments. Use cognitive technology to help identify high-risk areas. These are intelligent computer systems that can aid in the performance of risk assessments. For instance, this tool can extract and analyze text from audit reports and analyze trends and high-risk areas. Natural language processing (NLP) has the power to tap into every sentence of every report to churn out more information. The machine will convert text to a certain structure and add meaning to the text and teach the computer to understand audit concepts. Words like ‘fraud’, ‘finding’, ‘auditee’ can be flagged out.

Turning Up the Heat on Fraud. A fraud risk assessment can help auditors take the organization’s ethical temperature. There are many ways to do it, example, through surveys, focus groups, workshops etc. The focus is mainly on fraud risk. It works best in small brainstorming sessions with operational management. Using the ACFE’s Fraud Risk Assessment Tool can be useful as it provides a structured approach. Risk assessment is about identifying where fraud might occur and the potential perpetrators. IA can do surveys to measure the ethical climate and voting can be anonymous. The results of the survey can be discussed with management. If there are high risk areas with fraud risks, IA can pay more attention to them.

The Accidental Discovery. Small or remote locations can be more susceptible to embezzlement, especially when they are not audited regularly. Confront someone after the facts have been reviewed. Look at the big picture. Controls that aren’t operating effectively are as good as them not being there.

Auditing what matters. Add value by selecting audits that contribute to achievement of strategic objectives. Auditors now should start looking at this area. Look at where the company spends the most money, what their main programmes are etc. Find out who is responsible for the strategy and make them IA’s stakeholders. Traditional audit activities can move towards strategy too. IA should use the COSO ERM framework in its entirety. The aim is for IA to a strategic partner to management. Don’t fear failure and find out more from the auditee by talking to them. The trick is to engage with processor owners easy and evaluate control design. IA should do the following: (i) Identify and define the risks; (ii) rate the risks; (iii) address risks in detail. Getting management buy-in is also important. The CAE must convince the AC to highlight the need for a strategic approach. Most IA wants to be a trusted advisor.

Core Principles and the QAIP. The new IPPF in 2015 can be incorporated into the QAIP to show that the IA is aligned with the mandatory IPPF elements. Learn to develop a concept and approach that is easy to understand. Core principles are a mandatory element of the IPPF. IA need to have general conformance with the Code of Ethics and Standards. The 5 steps are (i) establish a maturity framework (ineffective, partially effective, effective, sustainable, world class); (ii) map core principles with the standards and code of ethics; (iii) Define characteristics of maturity in 3 aspects of standards and QAIP characteristics, infrastructure and process characteristics, core principles and specific characteristics; (iv) perform internal and external assessment consistent with requirements of QAIP; (v) Evaluate and report maturity levels for core principles.

Champion of Trust. By modelling high standards of ethical behaviour, IA can help shore up faith in the organizations they serve. How can IA be a trusted advisor that is well respected? One way is via ethical commitment. IA needs to model ethical conduct in everything they do. IA must have the courage to sound off before things get in trouble. Ethical commitment is the key to a well-functioning IA. Ethics should come naturally to all. We also need to build ethical resilience (integrity, courage, honesty, accountability, trustworthiness).

Infusing IT Auditing into Engagements via a three-phase approach. The tech sector is growing at a rapid rate. Internal auditors also need to develop IT-related capabilities. IA needs to think about the future of integrated auditing. For a start, IA can incorporate IT perspectives into current audit engagements. This can involve documenting down what are the IT automated controls. One can also read IT policies or those on change management. One should also identify resources and pinpoint where they are stored (example: servers). Map core IT resources and data to key business objectives. Respond to IT risks and identify audit objectives that can add value. An integrated audit can help in this. In the middle term, IA can build an IT audit team, understand the IT framework like COBIT, perform IT audits and also foster relationships with IT and management. In the long term, IA can leverage on data analytics and obtain professional certifications (like IIA and CISA).

Breaking Down The Standards. With the right strategy, practitioners can divide conformance into bite-size, easily digested portions. The standards consist of attribute standards (series 1000 to 1322) and performance standards (series 2000 to 2600). Some IA may neglect the attribute standards and focus on the performance standards instead. However, both are very important. IA should perform an assessment of how well they are conforming to the Standards. An external assessment must be conducted once every 5 years. The audit work program needs to be reviewed and approved by the CAE before engagement commencement. Ultimately, conforming and understanding the principles behind the Standards are important.

Auditing Organizational Governance. IA has an integral role to play in improving the organization’s strategic performance. This area is becoming increasingly important in recent years. Governance reviews can help prevent governance failures. Less than 1 in 6 IAs conduct reviews for their organization’s strategy. Sometimes, it might be difficult to conduct a separate governance review. Rather, it might be easier to incorporate it as part of routine audits. One can focus on both the governance structures as well as the organizational culture. Some of the soft controls can include management competence/style; mutual trust and openness; strong leadership; high performance and quality expectations; shared values and understanding; high ethical standards. However, for some of these measures, there are no hard data to analyse. Hence, it is important for IA to read the signs. IA can also provide a more advisory role, which is educating board about developments and trends in the industry and governance best practices. In terms of strategic reviews, IA has much to work on. There is a tendency to focus on weaknesses in financial reporting etc.

Good Governance is All About Quality. The 5 quality rules are (i) customer focus; (ii) management leadership; (iii) Teamwork; (iv) Measurement; (v) Total commitment to continuous improvement.

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Audit Analytics by Sean Elrington

Data analytics is useful for good governance as it provides better assurance as compared to manual sampling. Is the need to hire consultants necessary for straight-forward audit tests? It can help recover unnecessary spending. There may be resistance from the other departments if audit wants to perform 100% checks. There are still auditors which do not use data analytics.

Common Objections to Using Audit Analytics. Some auditors are too busy to learn and to change. The data may not be readily available. In addition, the cost has to be justified. Some are too intimidated by change. You need an understanding of ERP, database structures, views, tables etc. The benefit is that you might save time for data analysis. How will analytics help audit productivity? As it requires less man-hours, analytics can be useful. Although in the short-run, probably more work will be required. If the error is systematic, testing 100% of the population might not be very useful. In such cases, it will be better just to test a few samples and fix the control first. Analytics is here to stay.

Questions that the IT manager will ask you. Why can’t the auditors use Excel? Excel has its limitations on data size. Random sampling is not a good way to detect fraud. Data can be amended easily in excel and it does not have much data security. Sorting can be slow and Excel lacks functions like Benford’s Analysis. Modern audit software have data logs too. It is good to host the data on a server especially when there are multiple users. If you rely on the IT department to generate data for you, there is a risk that the data could be manipulated before being provided to you. There is an issue of how much access that an audit should be given. Data should be obtained from production and not the data warehouse. In the data warehouse, bad data might have been removed already. Application controls rely on passwords and roles to work. Relying on the controls in the ERP system might not be useful when there is collusion. Data might be present from different systems and auditors can’t simply draw the data from one ERP system.

Considerations when choosing audit software. Some of the functions that are heavily used are extract, join, relate, summarize, stratify, classify and age. Continuous monitoring is a lot more expensive and complicated. Is training a big consideration? Do you need to write your own scripts? Or can you buy scripts? What is your required return on investment? Will learning the software help the auditors in their career development? How much technical support is needed? What are the server requirements?

Analytic Software Tools. Picalo is a free tool that can be downloaded online. Some of the other software besides Excel are TopCATTs, Arbutus Software, IDEA, Monarch, Picalo, ACL. ACL usually requires a lot of training before users will know how to use.

Testing for Duplicate Payments. One can test both exact and fuzzy matches. There are multiple reasons why this might occur. First, you have to ensure that there are no duplicate vendors by scrutinizing the vendor’s details. For exact match testing, you can use ‘Substring’; ‘Include’; ‘Exclude’; ‘Alltrim’ formulae to remove dashes, hyphens etc. Testing should be performed on fields like Invoice Number, Vendor Number, PO Number, Date, Amount etc. Deconstruction techniques are used for Fuzzy matches. They use techniques like Soundex, Soundslike, HEX etc. Some of the algorithms are Levenshtein distance, Metaphone etc.

P2P Vendor Analytics. Some of the objectives are 1) vendor master file is correct; 2) employees are not vendors; 3) no duplicate or unused vendors. Match vendor information with employee information. Check out vendor addresses to ensure that they are not mail drop addresses used by delivery services. Sort the number of vendors by payments per year. Use a vendor name fuzzy match. Find vendors with missing fields to check whether the vendor master is well-kept or not.

Purchase Card Analytics. Objectives are 1) only authorized employees are using cards; 2) card purchases are acceptable. Try and detect transactions by authorized card-holders. Find cardholders not in employee master file. List top spenders by department. Find transactions in excess of authorization limits. Identify weekend and holiday purchases.

FCPA analytics. Objectives are 1) test that there are no suspicious payments made to individuals or entities; 2) verify that gifts received are permitted. Identify payments made to high risk countries. Identify cash payments. Identify unusual gifts. Identify credit card spending with unusual Merchant Category Codes. Find unusual vendors, like PEPs etc. Flag out payments with the words ‘facilitate’. Match to watch-lists, world-check etc.

P2P Payment Analytics. Objectives: 1) POs are unique and properly filled; 2) SODs are working; 3) controls to match invoice and PO amounts are accurate. Detect split purchases. Find duplicate payments. Find POs that were raised late. Look out for people who can create and approve their own POs. Look out for unauthorized purchasers. Ensure that there is approval for all POs. Compare a list of payments to prohibited vendor lists.

GL Analytics. Objectives: 1) Only authorized employees are making GL entries; 2) GL entries are acceptable. Detect duplicate GL entries. Look for suspicious wordings like ‘park’; ‘temp’; ‘reverse’; ‘suspense’. Detect GLs made at odd timings. Detect payment voucher and look out for approvals etc. Look out for frequently changed or reversed accounts. Find temporary accounts.

Healthcare Analytics. Objectives: 1) procedures billed to the correct code; 2) appropriate charges are billed to correct account; 3) reasonable timeline of patient activities.

Fraud Facts. Whistle-blower hotlines are a great way to detect fraud. Some level of fraud might be acceptable. It depends on the organizational culture. It is not the auditor’s responsibility to detect fraud. Look out for transactions with fraud symptoms. In general, there are two types of fraud: 1) Fraudulent financial reporting and 2) misappropriation of assets. It is hard to distinguish whether it was an honest mistake or fraudulent. The top from the top must be correct.

Common Business Frauds. You might need the help of a skilful financial auditor to deconstruct fraudulent financial reporting. Financial fraud is a very serious matter. Misappropriation of assets often involve kickbacks. Multiple payees could be an issue. Duplicate payments are a potential source of fraud too. A shell company could be used to deliver fictitious services. Detect maintenance which has been performed too frequently. Physical inspection of works/goods can help. Look out for defective delivery of goods/services by having good IC over the receipting of goods and services. See how often different employees reject or accept goods based on their quality. Inaccurate pricing is one of the type of risks too. Contract rigging means awarding to the lowest bid, but later subsequently changing the product specs so that the contractor will have to deliver more and thus can earn more money. Check contracted projects over their original budgets. Contract rigging is difficult to detect if you are not familiar with the goods. Bid rigging is very difficult to detect. Ensure that there are no phantom employees or contractors. Look out for invalid employees’ wages.

Interesting Fraud Stories. The fraud triangle occurs when there is 1) opportunity; 2) motivation; 3) rationalization. Don’t let non-trained employees do the accounts. Do not let the salespeople collect the cash. Be wary of bribery to win contracts etc.

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