Risk Based Internal Audit in Banks April 7

Risk Based Internal Audit in Banks April 7, 2014

Agenda 1. Principles of Risk Based Internal Audit 2. Methodology 3. Risk Assessment 4. Annual Plan 5. Audit Engagement 6. Reporting 7. Benefits of Risk Based Audit Page 2

1. Principles of Risk Based Internal Audit Risk: The probability of occurring an event having effects on achievement to objectives. Risk has 4 components: q q Event Effect Likelihood Result Risk Management: The process of identification of potential cases, assessment, managing and controlling in order to realize institution’s objectives, for providing acceptable assurance. Risk Assessment Process Identification Classification Prioritization Measuring Page 3

1. Principles of Risk Based Internal Audit Risk Assessment Process q A “risk assessment” is an effort to identify, measure, and prioritize risks organization faces, so that internal audit activities are focused on the auditable areas with the greatest significance. q Through the risk assessment process, it is able to develop a risk-based Internal Audit Plan. Risk Assessment Goals q Inform senior management and the Board of Directors on risk assessment process. q Get to know your client needs. q Develop a project plan, timeline, and agree upon deliverables. q Provides a framework for assessing and prioritizing risks. Page 4

1. Principles of Risk Based Internal Audit What is risk based internal audit? The Institute of Internal Auditors defines Risk Based Internal Auditing (RBIA) as: • a methodology that links internal auditing to an organization’s overall risk management framework • that allows internal audit to provide assurance to the board that risk management processes are managing risk effectively, in relation to the risk appetite Page 5

2. Methodology Assessing Risk Annual Plan Audit Engagement Reporting Page 6

3. Risk Assessment Evaluate the level of risk for each auditable area. Risk factors to consider include: Materiality Complexity of Process Business Environment Exposure to Loss Regulatory Environment Page 7

3. Risk Assessment Identify potential areas for internal auditing through discussions with key management and review of documentation. Key risks should be taken into account. Interview executive, senior management, middle management, and Board of Directors / Audit Committee. Review financial statements, strategic plans, budgets, policies and procedures, code of conduct, and other entity related information. Review industry information. Facilitate risk assessment sessions with management. Page 8

3. Risk Assessment Sample Heat Map Page 9

4. Annual Plan Establishing the Risk Based Internal Audit Plan According to IIA standards, a risk based internal audit plan should satisfy the following issues: q The internal audit activity’s plan of engagements must be based on a documented risk assessment, undertaken at least annually. The input of senior management and the board must be considered in this process. q The chief audit executive must identify and consider the expectations of senior management, the board, and other stakeholders for internal audit opinions and other conclusions. q The chief audit executive should consider accepting proposed consulting engagements based on the engagement’s potential to improve management of risks, add value, and improve the organization’s operations. Accepted engagements must be included in the plan. Page 10

4. Annual Plan In Turkey, regulations of Banking Regulation and Supervision Agency necessitate the following conditions for an efficient internal audit system: q Annual risk assessments that consider all business units and operations of the bank shall be made. q An annual audit plan shall be established conveniently to the results of risk assessments. q Annual audit plan shall be approved by the Board. Page 11

4. Annual Plan Annual Audit Plan is determined by evaluation of q Risk matrix, q Risk Matrices of Subsidiaries (If applicable) q Risk level of activities q Risk Indicators & Dynamic Risk Assessment q Contemporary conditions and expectations q Feedbacks of Board of Directors, Audit Committee & Senior Management, etc. SAMPLE AUDIT PLAN PROCESS Internal Audit Department Audit Committee (Approval) Board of Directors (Approval) Regulatory Authority (for information purposes only) Page 12

4. Annual Plan – Sample Risk Assessment Process: Bank Example Identify Key Risks Define Audit Universe Perform Risk Ranking Audit Plan The Bank’s Risk Matrix Risk Level of Bank’s Activities Risk Indicators Risk Assessment Reports AUDIT PLAN Auditable Entities Audit Period Identifying the Importance Level* Corporate Finance Trading and Sales Retail Banking Credit Extension Deposit Collection and Investment Products Retail Banking Operations Retail Brokerage Commercial Banking Credit Extension Deposit Collection and Investment Products Commercial Banking Operations Payment and Settlement Agency Services Asset Management Mergers and Acquisitions Insurance Services Information Systems Human Resources Legal Proceedings New Technologies * A risk rating model can be used to define ideal audit periods. A risk rate can be given to each auditable entity from “ 1 -High Risk” to “ 5 -Low Risk”. Page 13

4. Annual Plan – Sample Risk Based Annual Plan Audit Cycle / Area LENDING OPERATIONS Commercial Loans Consumer Loans Real Estate Loans Credit Administration Secondary Marketing TREASURY MANAGEMENT Securities Cash Management Asset/Liquidity Management Wire Transfer Automated Clearing House Borrowings and Repurchase Agreements ACCOUNTING AND FINANCIAL REPORTING General Accounting Financial Reporting DEPOSIT OPERATIONS BRANCH OPERATIONS BANK ADMINISTRATION Human Resources Payroll Purchasing Insurance Coverage High (H); Medium (M); Low (L) Aggregate Risk from Audit Frequency Risk Assessment (1, 2, or 3 year Year - 1 Year - 2 Year - 3 Matrix rotation) M M M H L M L M H H L M M M L L M 2 2 2 1 3 2 3 2 1 1 3 2 2 2 3 3 2 X X X X X X X X X X X X X Page 14

5. Audit Engagement Subjects reviewed during the audit engagements vary according to the work performed by those units. According to the model, controls should provide tenable assurance about the following 4 issues. In the audit engagement controls on these issues are tested. • Financial records, • Operational records, • Record keeping and reporting activities. • Policies for Segregation of Duties • Evaluation of procedures designed against theft, forgery, illegal acts and etc. Reliability & Integrity of Information Compliance • Policies, • Procedures, • Laws and regulations, • Agreements. Safeguarding of Assets Effectiveness & Efficiency of Operations • Efficiency of workflows, • Evaluation of capacity usage, • Over/under employment. COSO is a committee composed of 5 professional organizations. This model is preferred and suggested by IIA (Institute of Internal Auditors. ). Page 15

5. Audit Engagement SPECIFIC TECHNIQUES USED TO OBTAIN INFORMATION EXECUTING THE AUDITS g tin s e T d e il D eta nfi Co Statistical Sampling Recomputing Observation & Inspection ing iew erv rm a Int Analyzing Evaluation of Information tio n Identifying An aly oc tica ed l ur es Pr Page 16

5. Audit Engagement Sample Audit Plan Sample Working Paper Risk based audit plans and working papers are prepared in audit engagement. Contents of these documents that are mentioned below identify the scope of assurance. v. Purpose, v. Scope, v. Analyzing Method, v. Sampling Method, v. Results Page 17

6. Reporting What is expected by the senior management and the board from internal audit reports? • Compliance of the audited unit to the Law and other legal procedures • Compliance of the audited unit to the internal policies and procedures • Efficiency and effectiveness of processes in the audited unit and possible corrective actions that may be taken by the senior management Page 18

6. Reporting Internal Audit Reporting Sample Result Risk and Examined Suggestion Process Current State Number of Finding (High / Medium / Low) Headline 2013 -910 -H-001 Auditee Controls Finding Any kind of controls that are currently available in the process Explaining the examined process briefly Highlighting the risky points Auditor’s opinions Related Process / Process from the audit plan in which the finding is Sub-Process detected Risk Suggestion Risks regarding the process Suggestions to cover risk Response of The answer / opinion of the auditee regarding the finding, Auditee risk and suggestion Target Remedition Date Related Parties Assistant Manager Unit Manager Page 19

6. Reporting to the Audit Committee The internal audit function is ultimately reports and is accountable to the Audit Committee. Prior to meeting the Audit Committee, internal audit reports of the audit period are prepared and delivered to the members of the Audit Committee and other concerned parties. Reporting to Senior Management and the Board In IIA standards, reporting levels are explained as follows: The chief audit executive must report periodically to senior management and the board on the internal audit activity’s purpose, authority, responsibility, and performance relative to its plan. Reporting must also include significant risk exposures and control issues, including fraud risks, governance issues, and other matters needed or requested by senior management and the board. Page 20

6. Reporting Monitoring Progress and Communicating the Acceptance of Risks The chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management. When the chief audit executive concludes that management has accepted a level of risk that may be unacceptable to the organization, the chief audit executive must discuss the matter with senior management. If the chief audit executive determines that the matter has not been resolved, the chief audit executive must communicate the matter to the board. The identification of risk accepted by management may be observed through an assurance or consulting engagement, monitoring progress on actions taken by management as a result of prior engagements, or other means. It is not the responsibility of the chief audit executive to resolve the risk. Page 21

7. Benefits of Risk Based Audit Conducting efficient audit activities Focusing on the most significant and risky auditable areas Fulfilling the stakeholders’ expectations Identifying the risk appropriately Benefits of Risk Based Audit Affirmative cost-benefit impacts Page 22

Internal Audit Exam Date: April 27 th, 2014 Expected to Hire: 35 People Deadline to Application: April 18 th, 2014 Exam Locations: İstanbul Ankara İzmir Expected Date to Begin: July 2014 http: //garantilikariyer. garanti. com. tr/ Page 23

April 7, 2014 - Istanbul Page 24