Agile Audit within Banks - Part 1

What is Agile Auditing?

As audit departments increasingly incorporate agile methodologies into their practices, the concept of agile auditing is becoming clearer. Originally utilized by software developers and project managers, the agile methodology is characterized by a mindset aimed at delivering results swiftly in response to evolving requirements and priorities. Agile auditing adopts this approach, centering on a customer-focused strategy to audit development and implementation. This strategy is distinguished by a condensed audit lifecycle, from evaluation to reporting, with a primary objective of quickly obtaining and disseminating insights concerning an organization's most pressing risks.

Implementing an agile methodology throughout the audit process, including risk assessment, planning, fieldwork, and reporting, offers a framework for transforming the audit department. This article will explore how embracing agile principles can revolutionize audit practices by focusing on these elements.

Understanding agile auditing requires a look back at its roots. Over the past four decades, there has been a concerted effort to enhance business efficiency through methodologies such as "just in time," "six sigma," "total quality management," and "lean." The "Agile Manifesto," drafted by a cohort of IT professionals in early 2001, laid the groundwork for what agile stands for today, outlining its core values and principles. Since its inception, the agile mindset has been adopted and adapted by numerous organizations to meet their operational needs, including in the realm of internal audit.

The inception of the agile philosophy was marked by the establishment of a set of values and principles, with the four core values highlighting the essence of an agile working environment. As auditors, I have embraced and modified these values and principles to suit our specific context, laying the foundation for agile auditing.

Agile Audit Values

Enhancing Stakeholder Engagement Beyond Rigid Schedules and Organizational Politics

Within any organization, a rigid commitment to specific communication timelines and the impact of internal politics can impede the efficient exchange of vital information from the internal audit team to management stakeholders who depend on audit findings. By prioritizing stakeholder engagement, we can enhance the accessibility and flow of critical information to those who require it most.

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Prioritizing Insightful Communication over Standardized Reporting

The internal audit function plays a crucial role in uncovering and communicating deep insights into the organization's risk profile. Unfortunately, the impact of these insights can be diminished or entirely lost due to disputes over the wording in audit reports. By focusing on the essence of the insights rather than the format of the report, we ensure that the core message remains clear and actionable.

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Fostering Management Collaboration Instead of Negotiating on Issues

During the audit process, it is common to identify areas of control weakness. Rather than spending valuable time negotiating over these findings, a more productive approach involves collaborating with management to develop effective solutions. The internal audit team is uniquely positioned to facilitate this process by leveraging its comprehensive understanding of the organization's operations and identifying the appropriate parties for interdepartmental corrective measures.

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Shifting Focus from Entity Coverage to Risk Response

The primary objective of internal auditing is to provide insights into the organization's risk landscape. To achieve this, the scope of the audit, including the audit universe and risk assessment, should be strategically aligned with risk priorities rather than being constrained by entity-based coverage. This approach ensures that the audit plan is responsive and directly relevant to the organization's most significant risks.

Agile Auditing Framework: Guiding Principles

The principles of agile auditing have been developed to elaborate on the foundational values, contributing to a comprehensive framework that guides the agile audit department's operations. The following 12 principles are essential for the effective implementation of agile auditing, reflecting the ethos of the original agile principles while being tailored for the audit context.

1. Aligning with Management Goals: The primary focus is to aid in achieving management's objectives by identifying and assessing critical and emerging risks.
2. Adapting to Changes: Agile auditing welcomes adjustments to requirements even during the execution of the audit plan, recognizing that change serves the organization's best interests.
3. Frequent Insight Delivery: The goal is to provide audit insights on a regular basis, offering real-time feedback during audits and ensuring at least quarterly updates to the audit committee, ideally on a more frequent basis.
4. Collaboration Between Managers and Auditors: Essential to the process is the daily collaboration between business managers and auditors throughout the audit project.
5. Empowering Auditors: Successful audits are built around motivated individuals. Providing them with the necessary environment, support, and trust is key to achieving audit objectives.
6. Face-to-Face Communication: Direct conversation is identified as the most effective means of sharing information between management and the audit team.
7. Insightful Engagement with Leadership: Progress is measured by the ability to provide senior leadership with insights into the organization's risk and control environment.
8. Promoting Risk Awareness: Agile auditing enhances the timely understanding of operational risks, encouraging open communication and result sharing across all lines of defense.
9. Continuous Skill Development: The agility of the audit process is bolstered by ongoing attention to both technical and soft skills.
10. Embracing Simplicity: Essential to agile auditing is the ability to derive insights into risk and control environments without unnecessarily broadening the audit's scope.
11. Leveraging Self-Managing Teams: The most effective assessments, audits, and insights are produced by teams that are empowered to manage themselves.
12. Ongoing Process Improvement: The audit team commits to regular reflection on its effectiveness, pursuing continuous improvement through training and process adjustments.

These principles serve as the cornerstone of an agile audit department, ensuring that agility is not just a concept, but a practical approach embedded in the department's operations.

Transitioning to Agile Auditing: A Streamlined Approach

Traditionally, audit plans were structured as annual or multi-year schedules of engagements, with success metrics tied to their timely and budget-compliant completion. However, the advent of risk-based planning highlights the inadequacy of such rigid schedules. Today's dynamic business environment demands audit plans that are both flexible and timely, aligning more closely with the organization's evolving risk landscape. The agile audit methodology offers a contemporary solution, tailored for a modern, risk-focused audit team. While the broader discourse on agile auditing often borrows heavily from agile development practices—including roles like scrum masters and tools like scrum boards and burn-down charts—such complexity can deter rather than attract audit departments. This guide proposes a simplified, audit-centric approach to adopting agile methodologies, avoiding unnecessary complexities in the transition process.

The Essence of Simplified Agile Auditing

The first step in transitioning to an agile auditing framework involves clearly defining the objective of this shift. With a clear goal in mind, the transition can proceed smoothly through the three critical phases of the audit lifecycle: planning, execution, and reporting/issue resolution. In each phase, targeted adjustments will be made to integrate agility into the audit process. Key objectives include a paradigm shift from focusing on entity coverage to prioritizing risk coverage, and from merely providing status updates to delivering meaningful organizational insights.

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Adapting Agile Auditing to Your Organization

It's important to recognize that there is no one-size-fits-all approach to adopting agile auditing; the strategy must be customized to fit the unique characteristics of your audit department, including its size, objectives, and maturity level. This guide will present a variety of options and considerations, along with discussion questions to facilitate internal dialogue. While incorporating elements of agile project management vocabulary for clarity, the ultimate goal of this guide is to enhance the audit process rather than transform auditors into agile project managers. Agile terms will be explained with their audit-related equivalences, and comparisons of terminology will be provided where relevant.

This streamlined approach to agile auditing aims to make the transition as straightforward and beneficial as possible, focusing on practical adjustments to enhance the audit department's efficiency and responsiveness to risk.

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Advantages of Adopting Agile Auditing Practices

Embracing agile auditing methodologies can significantly enhance the effectiveness and efficiency of audit processes. The following are the top five advantages that organizations can expect from transitioning to an agile audit approach:

1. Enhanced Alignment with Management Expectations: Agile auditing facilitates early and ongoing discussions with senior management about the organization’s strategic goals, focusing on the risks that are most pertinent to management. This proactive engagement allows for the identification and prioritization of emerging risks, supported by research from authoritative sources such as The IIA, external audit firms, industry publications, and analyses of competitors.
2. Greater Depth of Insights: By concentrating on specific risks rather than broad processes, agile auditing enables a deeper examination of areas of concern, leading to more nuanced understandings of control mechanisms for critical risks. This focused approach delivers insights that are significantly more valuable to the organization.
3. Increased Engagement with Auditees: Agile methods promote enhanced interaction with auditees throughout the audit lifecycle. From including senior management in the planning phase to conducting daily standup meetings during fieldwork, and engaging in review processes at the end of each audit segment, the agile process ensures continuous communication and collaboration.
4. Minimized Scope Creep: Agile auditing aims to limit the audit scope to specific risks, clearly defining audit completion criteria to manage the extent of testing required for insightful analysis effectively. Daily standup meetings serve as a platform to identify and address any roadblocks promptly, preventing delays and scope creep.
5. Improved Team Communication: Adopting agile practices cultivates a high-performing audit team dynamic. Regular discussions on progress and challenges foster a shared understanding among team members, enhancing coordination, reducing redundant efforts, and bolstering the overall internal communication within the audit team.

In-Depth Exploration of Benefits

1. Better Alignment: Engaging with senior management from the outset ensures that the audit plan is strategically aligned with organizational objectives and is responsive to both existing and emerging risks. This alignment elevates the relevance and impact of the audit function.
2. Deeper Insights: The agile audit approach's emphasis on targeted risk areas rather than entire processes allows for a more detailed exploration of critical controls and vulnerabilities, offering substantive benefits to the organization.
3. Increased Interaction: The agile methodology’s structured yet flexible interaction framework ensures stakeholders are actively involved throughout the audit process, enhancing the quality of feedback and the applicability of audit findings.
4. Reduced Scope Creep: By establishing clear boundaries and objectives for each audit engagement, the agile approach effectively prevents the expansion of the audit scope beyond its intended focus, ensuring efficiency and relevance in audit activities.
5. Increased Communication: Regular team meetings not only address operational challenges but also foster a culture of openness and collaboration, leading to more cohesive and effective audit teams.

Through these advantages, agile auditing presents a transformative approach for audit departments, aligning closely with organizational goals, enhancing stakeholder engagement, and delivering valuable insights with greater efficiency and impact.

Roles and Responsibilities within an Agile Audit Framework

In an agile audit framework, clearly defined roles and responsibilities are essential for the smooth operation and success of the audit process. Below is an overview of key roles within this framework, each contributing uniquely to the agile audit cycle.

Audit Plan Owner (Comparable to Product Owner)

• Responsibilities: Collaborates with senior management and the board to formulate and prioritize the audit plan. Continuously assesses risks and adjusts the audit priorities to ensure high-value outcomes. Makes decisions on accepting or rejecting the work produced by the audit team. Sets the frequency of insight reporting based on management's needs and strategic opportunities.

Audit Lead (Analogous to Scrum Master)

• Key Functions: Serves as a servant leader and represents the agile audit team, guiding its efforts toward achieving audit objectives. Advocates for continuous improvement in alignment with agile values, principles, and best practices. Coordinates daily stand-up meetings, interim and final reviews of audit findings, and communication with the Audit Plan Owner. Facilitates collaboration across roles within the team and works to remove any impediments to the audit process. Supports the Audit Plan Owner in backlog preparation and refinement.

Audit Project Team (Agile Team)

• Duties: Operates as a cross-functional group, usually comprising 3–5 individuals, focused on examining risks, evaluating controls, and reporting findings. Committed to delivering specific audit goals for each audit segment, ensuring adherence to IIA Standards for quality. Engages in agile practices to continuously deliver value, solicit feedback, and strive for relentless improvement.

SMEs (Subject Matter Experts)

• Role: Provide specialized knowledge and skills to the audit process, ranging from data analytics to compliance and IT. Can be full-time members of the Audit Project Team or consulted for particular aspects of the audit.

Quality Assessment Team (Independent Testing Team)

• Overview: While not every audit department may have the capacity for a dedicated professional practice or quality assessment team, all audit activities require thorough review to ensure adherence to standards and objectives.

Agile and Audit Terminology Cross-reference

The agile audit methodology introduces several terms that align with traditional audit vocabulary, facilitating a common understanding and application of agile principles within the audit context. This cross-referencing helps integrate agile practices into audit workflows, enhancing efficiency and effectiveness.

Through these defined roles and the integration of agile methodologies, audit departments can achieve a more responsive, collaborative, and efficient approach to addressing organizational risks and providing valuable insights.

Introduction to Agile Audit Terminology and Processes

In transitioning to an agile audit approach, understanding the terminology and how it applies to the audit lifecycle is crucial. This section introduces key agile audit terms, providing a foundation for their application throughout the audit process.

Agile Audit Planning and Execution Terms:

• Draft Audit Plan (Backlog): This is the initial compilation of potential audits identified through risk assessment. It represents a preliminary list and not a commitment, including audits that may or may not be selected for the final plan.
• Final Audit Plan (Epic): Following the prioritization of the draft audit plan, the final plan comprises a selected list of audits committed to be conducted within a specified timeframe.
• Audit (Story): Each audit within the plan has a well-defined, focused scope targeting specific risks for investigation. These are akin to agile stories, with the emphasis on delivering valuable insights to senior management.
• Audit Schedule (Timebox): The scheduling framework for the final audit plan, individual audits, and audit segments operates within a fixed timeframe, ensuring synchronized audit cycles across the department.

Agile Audit Tools and Methods:

• Scope: Defines the boundaries of the audit, focusing the work on one or two specific risks, in contrast to traditional comprehensive process audits.
• Burn-Down Chart: A graphical representation used to track the remaining work against the remaining time in the timebox, offering a unique visualization of audit progress.
• Audit Program (Sprint): Audit sprints are smaller segments within an audit, often centered around specific risks or controls. These sprints typically last one to two weeks, focusing on achieving a risk-based approach.

Agile Audit Communication and Review:

• Interim Issue Updates (Sprint Review): At the conclusion of each sprint, findings are shared with auditees in meetings that review the work done, successes, areas for improvement, and planned actions. This ensures that stakeholders are engaged and informed about the audit's progress.
• Daily Team Meeting (Daily Scrum): A specialized meeting that includes both the audit team and auditees, focusing on discussing current progress and identifying any obstacles, rather than reviewing past activities.

Through the integration of these agile audit terms and methodologies, the audit process becomes more adaptive, focused, and collaborative, ultimately enhancing the audit department's value and efficiency.

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Evaluating the Transition to Agile Auditing: A Comprehensive Approach

As we delve into the complexities of agile auditing and familiarize ourselves with its core concepts, the immediate next step is to evaluate whether your audit department is primed for a transition to agile methodologies. Before embarking on transforming your internal audit function into an agile framework, it is essential to address two fundamental questions: Is your department capable of making the transition to agile auditing? And, importantly, should it make this transition? In this section, we will undertake a thorough assessment to ascertain your department's readiness for adopting agile auditing practices. We will then weigh the advantages and disadvantages of agile auditing, examining how the specific cultural dynamics of your organization may influence the success or potential challenges of this transition. To conclude, we will highlight a series of common pitfalls encountered during the shift to agile auditing, aiming to equip you with insights to avoid these obstacles.

Understanding that agile auditing might not be the universal solution for every organization, it's critical to recognize that there isn't a "one size fits all" approach to adopting an agile mindset within audit departments.

Conducting a Readiness Assessment for Agile Auditing within Your Department

Initiating the Assessment within the Internal Audit Department

The journey towards agile auditing begins with a comprehensive evaluation of your internal audit department's current state and readiness. Providing the team with foundational knowledge on agile auditing principles and practices is crucial. Consider engaging a specialized expert to deliver in-depth training, ensuring the team gains a thorough understanding of agile methodologies beyond just a superficial overview.

Following this foundational training, it’s important to gauge the team’s sentiments towards adopting agile auditing. Assess their levels of excitement, apprehension, and concern to gauge their overall willingness and preparedness for this transition.

Understanding Stakeholder Perspectives

The transition to agile auditing extends beyond the internal audit team; it encompasses a wide range of stakeholders including the audit committee, auditees, and other assurance partners within the organization.

• Audit Committee: As the primary stakeholder, the audit committee's buy-in is essential. Given their focus on governance and organizational risk, presenting the transition to agile auditing as an effort to enhance governance effectiveness is likely to align with their objectives.
• Auditees: Agile auditing will bring about significant changes for auditees, including more frequent communication, potentially shorter notice periods for audits, and quicker turnaround times for requested documentation and interviews.
• Assurance Partners: The transition also involves other internal assurance teams responsible for risk, control, and compliance. It’s critical to evaluate these teams' willingness and capacity to adopt agile practices, as their collaboration will be vital for a comprehensive risk coverage strategy.

Weighing the Pros and Cons

Before proceeding with the transition to agile auditing, it’s crucial to take a step back and critically evaluate the potential benefits and challenges. While the agile auditing approach offers numerous advantages, it’s not a universal solution suitable for all organizations. To assist in this evaluation, a detailed analysis of the pros and cons will provide valuable insights into the suitability of agile auditing for your department and organization.

This balanced approach ensures that the decision to transition to agile auditing is made with a clear understanding of its potential impact, aligning with both the internal audit department's capabilities and the broader organizational context.

In addition to the benefits of agile auditing we discussed previously, there are several other items to add to the Pros list.

Flexibility

The most critical advantage of agile auditing is the flexibility it allows within the audit plan. The idea of setting an annual plan that requires board approval to change is not acceptable in a modern audit department. The entire premise behind agile auditing is to audit the risks that matter the most, and this prioritized list of risks will continually change. The audit committee and senior leadership will have a hard time arguing against this approach since it is in their best interest to use the audit department as a tactical team to explore the control environment in the areas of most significant concern.

Freedom to Stop

With flexibility comes the option to stop a project when the insights have been gained. Too often in the traditional process, we commit resources to test control operation effectiveness even after the design was determined to be flawed. By having a narrowly defined scope and the option to stop once the risk and controls are understood, we more efficiently and effectively use our limited time and resources.

Reduced Report Negotiation

An agile audit is performed in sprints of one or two weeks that end with reviewing the issues uncovered with management. Since this is?done consistently throughout the audit, the final sprint review represents the audit closing meeting. At this point, there is very little arguing or negotiating over issues in the report as these have already been discussed.

Insights Provided to the Audit Committee

A significant advantage of agile auditing is the ability to produce real-time insight reports for the audit committee. Once all the audits are working on the same two-week cadence, all the sprint reviews occur simultaneously. This means the issues are ready for reporting and follow-up at the end of every two-week cycle. Assuming you have an issue tracking mechanism in place, the aggregated issues are ready for reporting in near real-time, with just a two-week lag. Of course, you are free to create a more formal reporting package for a quarterly meeting, but you have the option to provide more timely insights.

Cons of Agile Auditing

While agile auditing is a highly effective method for addressing risk-based auditing, there are valid reasons for remaining in a traditional audit methodology or possibly adopting a hybrid approach.

Hard Sell for Regulators

Perhaps the most common argument against agile auditing is the need to perform regulatory or statutory audits. For example, in banking, the regulators often require a three-year audit plan with evidence that the plan covers the entire organization. A quarterly plan is not going to support an agile plan that targets a quarterly planning cycle. For some, this means splitting the plan into regulatory audit and risk-based audits, and only the risk-based plan is agile.

Requires Retraining

The audit department will require training and coaching during the transition. Especially for long-term auditors, the shift to agile goes against years of experience in the traditional method. For some, the?change may be too much. They can become frustrated and possibly leave the department.

Lack of Predictability

Many of us have experienced delays in getting documentation from control operators, and some of the documentation will inevitably be insufficient and lead to subsequent requests. There are also times when the one person you need to talk to is on vacation. In the end, audit timing is highly dependent on the team getting to the right people and the correct documentation, but people are unpredictable. Any delay can potentially derail the sprint cycle with a narrow scope audit in a short time frame.

Understanding Your Culture

Culture also plays an essential part in the success or failure of a transition to agile audit. For some organizations, the audit department is making this move as part of a larger initiative. In others, audit is blazing a new trail. In either case, the important point is to understand the environment in which you will be working.

Suppose you are working in the context of a larger initiative. In that case, the objective will be to align the values and principles, synchronize the audit sprints, and partner with the organization's scrum masters. On the other hand, if you are a trailblazer, you will need to educate the audit committee, and other stakeholders set clear expectations with the auditees, and find support from trained professionals.

Also, take the culture of the audit department itself into consideration. Your team may be open to change and ready to embrace agile auditing, or the team could be highly traditional, tenured auditors who are resistant to change. Acknowledging the cultural landscape allows you to plan more appropriately.

Avoiding Common Transition Pitfalls

Another tool in your readiness evaluation is planning for common pitfalls. Many other audit departments have already gone through this transition, and we can all learn from their lessons. Come back to this section if and?when?the inevitable mistakes happen.

Too Much Too Fast

When we layout the eventual transition plan, there will be multiple variations on the approach. In some cases, the approach takes on the full scope of all work completed by the audit department, from risk assessment to reporting, including every type of audit and consulting engagement. This approach is not going to work for everyone. If you take on more change than the team can absorb, the project will fail. For the transition to work, you should set a pace for change that works for your team.

Too Little Too Slow

Just like going too fast, you can also set a pace that is too slow and loses momentum. For example, you could transition fieldwork to an agile format to move planning and reporting later. If this goes on for more than a few months or even quarters, the team will become frustrated because the power of agile auditing comes from planning and scoping a much different type of audit.

Underestimating the Scrum Leader Role

The roles within the audit department will change with the agile audit implementation. Perhaps the most significant role change is the addition of the scrum master. The scrum master is commonly described as a servant leader whose job is to manage timelines, resolve problems, remove roadblocks, and coach the team members on agile audit methodologies. The scrum master is essential in an agile environment, making this one of the places that can fail in multiple ways if the role is underestimated.

Scrum masters need specialized training to perform their roles effectively. Especially in the transition from traditional to agile audit, we will turn auditors trained as project leads into a completely new role. Without proper training, we are setting them up to fail.

The other major cause for failure is overextending the scrum masters. There is a penchant for treating the scrum master like a lead auditor who reviews and prepares new audit work when reorganizing?the department. Otherwise, the scrum master may be added to too many audits at once, reducing their effectiveness.

Team Rotation

Many audit departments operate on a team rotation basis. The benefit of this method is increased exposure to different management styles and the ability to create teams with specialized knowledge for each audit. The rotational structure works against you in an agile setting. With agile, the agile team dynamic requires the team to self-organize and work together like a well-oiled machine. Using rotational teams disrupts the necessary dynamic.

Lack of Training

Scrum masters are not the only ones who need training. The entire team is shifting to a new way of working. The department will need the training to develop an agile mindset and to undo many years of training and experience. Failure comes when audit leaders skip training due to scheduling and budgetary constraints. Training should include an overview of agile audit, role-based training, and audit phase training.

Inability to Scope Small Audits

When focused on specific risks, agile auditing yields a series of smaller scoped audits, at times an audit of a single risk. The ability to scope an audit of this nature requires a mindset shift. Early in the transition to agile audit, this can seem like too much change and scare away some more risk-averse auditors.

Fear of Missing Out

Another change that illicit fear is derived from the shift from an entity-based to a risk-based audit universe. Actual risk-based auditing is concerned with risk coverage, not entity coverage. There will likely be parts of the organization that are not included in the audit plan over a year. Once we understand that we are covering the most critical risks timely, the fear of missing entity coverage goes away.

Lack of Leadership Support

Support?from?the?audit?committee?is?required?before?we?embark?on?the?agile?audit?journey,?but?leadership?support?extends?beyond?this?group.?A?successful?transition?to?agile?audit?also?requires?support?from?operational?management,?who?will?be?more?closely?involved?with?the?audit?team.?Depending?on?your?culture,?this?may?require?top-down?direction,?or?the?audit?team?may?require?bottom-up?training?and?socializing.

Ceremony Over Substance

Some?departments?have?already?tried?and?failed?to?implement?agile?auditing.?The?most?common?reason?given?was?a?focus?on?ceremony?over?substance.?When?this?happens,?the?focus?was?primarily?on?the?fieldwork?phase?of?the?audit?and?almost?entirely?on?the?practice?of?holding?scrum?meetings,?using?a?Kanban?board,?and?conducting?a?retrospective.?While?these?are?essential?elements?of?the?process,?the?team?failed?to?understand?the?purpose?and?objective?of?the?event.?Some?teams?understood?the?reasoning?but?drifted?from?the?purpose?or?failed?to?follow?through?on?action?items?from?the?retrospective.?The?lack?of?meaningful?change?leads?to?team?frustration.

Settling Back Into Old Habits

The?single?most?common?cause?for?failure?is?falling?back?into?our?comfort?zone.?Typically,?this?slides?back?into?the?traditional?method?start?in?the?daily?scrum.?When?that?meeting?starts?to?become?an?update?meeting,?the?scrum?master's?job?is?to?bring?this?back?to?agile?best?practices.?If?this?does?not?happen,?the?meeting?loses?any?value,?and?this?spiral?can?quickly?take?hold?and?undo?the?entire?agile?methodology.

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Agile Audit Lifecycle

Traditional vs. Agile Audit Lifecycle

The audit process has traditionally been characterized by a sequential approach, beginning with a comprehensive risk assessment and culminating in the issuance of a final report to the audit committee. This linear methodology focuses predominantly on the fulfillment of an annual audit plan, with a significant emphasis on plan completion as a measure of the audit department's success.

Traditional Audit Lifecycle

In the conventional model, the audit lifecycle unfolds as follows:

1. Risk Assessment: The process initiates with a risk assessment phase, where information is gathered through interviews with management and evaluations by the audit team to identify potential risks. This assessment forms the basis of the annual audit plan, incorporating mandatory audits, any specific requests from management, and areas deemed high risk by the audit team.
2. Plan Approval: Once formulated, this annual audit plan is presented to the audit committee for approval. Upon endorsement, the plan is considered fixed for the upcoming year.
3. Audit Execution: Audits are then systematically scheduled throughout the year, taking into account the identified risks, logistical considerations, and potential impact on the auditee. This scheduling aims to evenly distribute audit activities and ensure a comprehensive evaluation of all areas included in the plan.
4. Reporting: At the conclusion of each audit, a report is generated detailing the findings and recommendations. This report is then submitted to the audit committee and forms the basis for any follow-up actions required to address identified issues.
5. Quarterly Updates: In addition to the individual audit reports, the audit department compiles and presents quarterly updates to the audit committee, summarizing the progress made against the annual plan and highlighting any significant issues uncovered.

This traditional approach provides a structured framework for audit activities, ensuring a thorough examination of all areas deemed significant during the initial risk assessment phase. However, it often lacks the flexibility to adapt to emerging risks or changes in organizational priorities, potentially limiting its effectiveness in a rapidly evolving business environment.

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Agile Audit Lifecycle

The agile audit lifecycle represents a significant departure from traditional methods, adopting a circular process that integrates continuous feedback and iterative learning. This model is characterized by its flexibility, enabling the audit function to adapt swiftly to new insights and emerging risks. The essence of the agile audit process lies in its ability to refine risk assessments continually and reprioritize audits based on the most current information.

Agile Audit Risk Assessment

At the heart of the agile audit process is a dynamic risk assessment mechanism. This process is designed to evaluate and rank risks within a risk-based audit universe, focusing on those most pertinent to management's objectives at any given time. Adhering to the principle of prioritizing the audit of critical and emerging risks, the risk assessment is not a one-time activity but an ongoing process that demands regular, ideally quarterly, reevaluation to stay aligned with the organization's evolving risk landscape.

Principle Highlight: The primary objective is to align audit activities with management's goals by targeting critical and emerging risks. (Principle1)

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Formulating the Agile Audit Plan

Derived from the updated risk assessment, the agile audit plan is essentially a backlog of potential audits ranked according to risk significance. This flexible planning approach allows for agile adaptation to changing priorities and risk profiles, ensuring that audit efforts are always focused where they can deliver the most value.

Agile Audit Scheduling and Capacity Planning

With the agile audit backlog in place, the next step involves scheduling based on team capacity for the upcoming quarter. The aim is to establish a synchronized sprint cadence across all audit projects, enhancing coordination and efficiency. This synchronized approach not only improves team dynamics but also ensures consistent delivery of insights to the audit committee.

Execution in Agile Auditing

Fieldwork in agile auditing is executed by teams tackling prioritized risks, guided by a scrum master responsible for workload management, timeline monitoring, and team coaching. Regular stand-up meetings and sprint reviews facilitate proactive issue identification and resolution, with a retrospective at the end to identify continuous improvement opportunities.

Agile Reporting Mechanisms

Unlike traditional audits, reporting in an agile setting is streamlined into two phases focusing on real-time issue discussion and action plan development with management. This process minimizes the need for extensive report negotiation, making the formal audit report a succinct summary of already addressed and resolved issues.

·?????? Audit Committee Insight Reporting: The ultimate goal is to provide the audit committee with continuous insights on critical risks, achieved through regular collection and analysis of audit findings. By maintaining a regular sprint cadence, the audit department can offer timely, actionable intelligence, greatly enhancing the strategic value of the audit function.

This agile audit lifecycle fosters a more responsive, impactful, and efficient audit process, aligning closely with organizational objectives and enhancing the audit's role as a strategic partner in governance and risk management.

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Agile Audit Risk Assessment

Transitioning to an agile audit framework marks a significant shift in how audit departments approach planning, which is among the most intricate yet crucial phases of the audit lifecycle. Traditional audit planning methodologies vary widely among departments, each adopting a unique approach to mapping out their annual audit activities. However, the agile audit planning process introduces a more focused and adaptable strategy, aimed at addressing the most pressing risks to the organization in a rapidly changing risk landscape.

Embracing Agility in Audit Planning

Agile audit planning is designed to create a more responsive audit plan, concentrating on the urgent and significant risks that could impede the organization's objectives. Recognizing the volatile nature of risk in today’s environment, agile planning advocates for a departure from the traditional annual planning cycle in favor of a more nimble, quarterly planning framework. This approach allows for the inclusion of both obligatory audits scheduled for the quarter and prioritization of audits based on the emerging and highest-rated risks for the upcoming period.

The hallmark of agile auditing lies in its inherent flexibility, permitting swift adjustments to the audit plan in response to new or escalating risks. This capacity to pivot quickly is what distinguishes agile auditing from more conventional methods, ensuring that the audit function remains closely aligned with the organization’s current risk profile and strategic priorities.

Traditional vs. Agile Audit Universe

Traditionally, the audit planning process starts with an exhaustive assessment of the potential audit universe, often delineated by processes or departments within the organization. Auditors then engage in a risk-ranking exercise to identify priority areas for audit, a process that varies widely due to the lack of standardized guidance.

In contrast, agile audit planning refines this approach by focusing on a risk-based audit universe that is continually reassessed. This dynamic risk assessment feeds directly into the agile planning process, ensuring that the audit focus is consistently aligned with the most immediate and impactful risks facing the organization. By adopting a quarterly planning cycle, agile audit planning not only enhances the audit department’s relevance and responsiveness but also ensures that it contributes strategic value by addressing risks that are most critical to the organization’s success.

Conclusion

The transition to agile audit planning represents a strategic evolution in audit methodology, emphasizing responsiveness, flexibility, and strategic alignment with organizational objectives. By adopting a quarterly planning cycle and focusing on emergent and significant risks, audit departments can significantly increase their impact and effectiveness in navigating the complex and ever-changing risk landscape.

Reimagining the Audit Universe in an Agile Framework

Transitioning to an agile audit framework necessitates a fundamental reevaluation of the audit universe, shifting the focus towards the organization's pivotal objectives and the risks that could impede achieving these goals. This change underscores the agile audit's essence: the agility to adapt swiftly to emerging risks and organizational shifts, ensuring that the audit function remains tightly aligned with the most critical areas of concern.

Agile Audit Universe: Strategic Focus

In an agile auditing context, the concept of the audit universe is expanded beyond traditional entity-based structures to encompass strategic objectives and the associated risks. This approach moves away from auditing specific departments or functions in isolation, like "auditing accounting," and towards a holistic examination of how various risks impact the organization's strategic goals.

Case Study: Bank ABCs Strategic Audit Universe

To exemplify this transformation, let's consider the case of Bank ABC, a hypothetical bank that redefined its audit universe to align with its strategic objectives. Traditionally, Bank ABC’s audit universe mirrored the organizational functional structure, a common practice that facilitates a straightforward mapping of audit areas but may not fully capture the nuances of strategic risk exposure.

In transitioning to an agile audit methodology, Bank ABC initiated the process by identifying the five key strategic objectives outlined by management to fulfill the bank's mission. The next step involved a comprehensive risk assessment to pinpoint the known risks associated with these objectives. This strategic pivot from a functionally oriented to an objectives-and-risks-focused audit universe is a hallmark of agile auditing, emphasizing the importance of aligning audit activities with overarching organizational goals.

Agile Planning: Epics and Stories

Within this revamped audit universe, the agile audit plan is conceptualized as an "epic," comprising smaller, more focused "stories" (individual audits). Each story targets specific aspects of the strategic objectives and their related risks, allowing for a more nuanced and effective audit response to the dynamic risk landscape.

This strategic, agile approach enables the audit function to offer more than just compliance and control assessments; it transforms the audit into a vital tool for gaining insights into strategic risk management, offering tangible value in steering the organization towards its mission and objectives amidst an ever-evolving risk environment.

Conclusion

The shift towards an agile audit universe, as demonstrated by Bank ABC, illustrates the potential for audit departments to enhance their relevance and impact significantly. By focusing on strategic objectives and associated risks, rather than adhering to a rigid, entity-based audit plan, audit departments can better support the organization's goals and adapt to changes with greater agility and foresight.

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Innovating Audit Planning with a Strategic Risk Focus (Starting with Strategic Risks)

As audit departments embark on the agile transformation journey, reimagining the audit universe and planning processes becomes imperative. Agile audit planning distinguishes itself by zeroing in on the most pressing organizational risks, offering a framework that is both dynamic and tightly aligned with strategic objectives. This approach allows for rapid adaptation to the ever-changing risk landscape, a critical advantage in today’s fast-paced business environment.

Agile Audit Universe: Centered on Strategic Objectives

In an agile audit environment, the audit universe evolves to prioritize the organization's strategic goals and the risks that could derail these objectives. Traditional entity-based audit plans make way for a more focused assessment of risks directly tied to strategic outcomes. For instance, at Bank ABC, a shift from a functionally structured audit universe to one that underscores strategic objectives and associated risks illustrates this new direction. This change enables a more targeted approach to auditing, moving beyond conventional areas to include significant strategic concerns like talent acquisition and retention, as highlighted in the bank's financial disclosures.

Embracing Emerging and Strategic Risks

Agile auditing requires a continual risk assessment process, moving away from the once-a-year evaluation to a more frequent, ideally quarterly, reassessment. This ensures that the audit plan remains relevant and responsive to new challenges and opportunities as they arise. For example, risks identified in Bank ABC’s financial statements, such as the challenge of attracting and retaining qualified personnel, become central to the agile audit plan. This approach ensures that audits are not only aligned with current strategic objectives but are also capable of incorporating emerging risks that could impact the organization’s ability to achieve its goals.

Dynamic Risk Assessment and Planning

Agile audit planning projects a quarter at a time, incorporating risks related to strategic objectives, emerging issues, and insights from recent audits into a comprehensive, responsive audit plan. This plan, characterized by its adaptability, allows for the inclusion of exploratory testing and analytics to investigate specific concerns, such as pay disparity among genders, without committing to a full-scale audit initially.

Engaging with Management on Risk

Effective agile auditing also involves deep engagement with management to identify and assess both strategic and emerging risks. This engagement can take various forms, including management interviews, facilitated workshops, surveys, and self-assessments. Each method offers unique advantages, from fostering open discussion about risks and controls in workshops to gathering broad insights through surveys. This continuous dialogue helps ensure that the audit focus remains aligned with the organization's most critical risks and objectives.

Conclusion

Transitioning to an agile audit framework represents a paradigm shift in how audit departments approach planning and execution. By centering the audit universe around strategic objectives and maintaining a flexible, responsive approach to risk assessment, agile auditing positions the audit function as a vital strategic partner. This dynamic approach not only enhances the audit’s relevance and impact but also ensures that it remains agile in a business landscape marked by rapid change and uncertainty.

Refining the Risk Assessment Approach for Agile Auditing

In the quest to enhance the effectiveness and precision of audit activities, the transition towards agile auditing necessitates a fundamental reevaluation of the traditional risk assessment methodologies. Typically, risk assessments have been structured around entities, categories of risk, or specific processes, each method harboring inherent limitations that could detract from the agility and focus required in an agile audit environment.

Evaluating Traditional Risk Rating Approaches

1. Entity-Level Risk Rating: Rating entities on a high, moderate, or low scale often results in an overly broad focus that lacks specificity for actionable auditing. This approach tends to lead to comprehensive, entity-wide audits that may not target the most significant risks effectively.
2. Categorical Risk Rating: Although categorizing risks offers a step towards specificity, it can still be too broad, making it challenging for auditors to concentrate their efforts on the most critical issues. For instance, categorizing all strategic risks under a single umbrella such as Human Resources could entail an exhaustive examination of numerous aspects without necessarily honing in on the most impactful risks.
3. Process-Level Risk Rating: Delving into process-level risks presents a more detailed assessment, enabling auditors to focus on more narrowly defined risk areas. However, even this approach can lead to audits with scopes that are too wide-ranging, encompassing areas like discrimination, market comparisons, and performance evaluations under a single audit of pay practices.

Often, auditors might attempt to integrate financial statement accounts to incorporate financial materiality into the risk assessment. Typically, the culmination of this process is the selection of the highest-rated entities for inclusion in the annual audit plan. Despite intentions to adopt a risk-based planning approach, the practical execution frequently mirrors entity-based planning, with the audit universe's construction centering around entities rather than discrete risks.

Agile Shift: Risk-Centric Assessment and Planning

The agile audit methodology advocates for a departure from entity-centric planning towards a risk-centric perspective. This shift focuses on identifying and assessing the most critical risks to management’s ability to achieve strategic objectives. The initial step in this transformative approach involves an in-depth risk assessment that draws upon various sources, including financial statements, discussions with senior leadership, and insights from previous audits.

Key Considerations for Agile Risk Assessment:

• Strategic and Emerging Risks: Prioritize auditing the highest-rated strategic and emerging risks, utilizing comprehensive information to identify and evaluate these risks.
• Regulatory Compliance: Acknowledge regulatory compliance as a critical risk factor and incorporate mandatory regulatory audits into the planning process.
• Quarterly Planning: Formulate the potential audit plan on a quarterly basis, aligning audit targets with the most current and significant risk landscape.

Implementation: Risk to Process Mapping

After identifying the priority risks, the subsequent step is to map these risks to their underlying processes. This mapping exercise is crucial for determining the precise scope of each audit, ensuring that audit efforts are tightly focused on areas of highest impact and relevance. This approach enables auditors to direct their resources towards evaluating controls and processes that are directly related to the mitigation of identified strategic and emerging risks.

Conclusion:

Transitioning to a risk-centric assessment and planning methodology within the agile audit framework empowers audit departments to become more responsive, focused, and strategically aligned. By prioritizing the assessment and auditing of significant risks based on an updated and dynamic understanding of the organization's risk profile, agile auditing fosters a proactive and impactful audit function capable of adapting to the complexities of the modern business environment.