5 Key Steps to Perform a Risk-Based Internal Audit

TL;DR

Risk-based internal audits focus on identifying, assessing, and addressing an organization’s most significant risks. They go beyond routine control checks to provide strategic insights and drive proactive risk management. Key points include:

• Audit Scope: Defined based on specific risk categories, business priorities, and available resources
• Stakeholder Engagement: Involving management and control owners to capture a full view of risks
• Risk Prioritization: Using impact and likelihood scores to focus on areas with the highest exposure
• Rating Framework: Applying an adaptive, quantitative model to ensure defensible, board-aligned decision-making
• Audit Execution: Targeted procedures for high-risk areas, supported by dashboards, data analytics, and post-audit tracking

Risk-based audits are essential for organizations operating in dynamic environments. They shift internal audit from a compliance role to a strategic partner in resilience and performance.

Traditional audit approaches leave critical gaps in a world where business risk evolves faster than static controls can keep up. A risk-based internal audit provides a more strategic approach, enabling your organization to first identify and address the most significant exposures and adapt as risks evolve.

For fast-growing FinTechs and health-techs navigating changing regulations, the ability to audit dynamically, rather than retrospectively, is no longer optional. It’s essential for operational continuity and investor confidence. 

Built on a comprehensive risk universe, this approach aligns internal audit priorities with leadership objectives and regulatory expectations. It enables internal audit to integrate fully with enterprise risk management, surfacing critical insights early and ensuring that limited resources focus on areas of significant impact.

This blog outlines the essential steps of a risk-based internal audit—from scoping and assessment to implementation and monitoring. Done well, this process transforms internal audit from a compliance checkpoint into a driver of resilience and informed decision-making.

What Is an Internal Audit Risk Assessment?

An internal audit risk assessment is the cornerstone of modern risk-based auditing. It systematically identifies, evaluates, and prioritizes risks that could impede your organization’s ability to achieve its strategic and operational goals. Rather than simply testing for compliance with established controls, this assessment provides a holistic view of the risk landscape, highlighting emerging threats, control gaps, and areas of vulnerability.

By delivering actionable insights, it equips leadership with the intelligence needed to allocate resources strategically, strengthen resilience, and drive continuous improvement in risk management practices.

Aligning Internal Audits with Strategic Risk Priorities

The primary purpose of risk-based auditing is to align internal audit efforts with the organization's top risk priorities. This ensures that audit resources deliver maximum value by focusing on areas where risk exposure could have the most significant impact on strategic and operational goals.

Unlike traditional audit cycles that apply uniform review processes, risk-based internal auditing (RBIA) integrates audit planning with the enterprise risk management (ERM) framework. This approach enables the internal audit team to provide targeted assurance to the board and senior leadership on whether critical risks are being effectively managed within the defined risk appetite.

A well-executed RBIA covers a broad risk landscape, including:

• Strategic Alignment: Assessing risks that could derail key business objectives.
• Financial Integrity: Evaluating risks to financial reporting accuracy and stability.
• Operational Resilience: Identifying process inefficiencies and vulnerabilities across business operations.
• Regulatory Compliance: Ensuring adherence to applicable laws and industry standards.
• External and Emerging Risks: Monitoring market shifts, geopolitical factors, and environmental threats.
• Control Effectiveness: Measuring how well existing controls mitigate identified risks.

Why It Matters for Modern Organizations?

In today’s dynamic business environment, understanding and managing your organization’s comprehensive risk landscape is crucial for maintaining agility and a competitive advantage. Risk-based auditing transforms internal audit from a retrospective compliance check into a forward-looking, strategic tool that directly supports enterprise risk management.

Key advantages of this approach include:

• Optimized Resource Allocation: Focus limited audit and risk management resources on the most critical risks, driving better return on effort.
• Informed Decision-Making: Risk assessments provide leadership with actionable insights into potential threats and vulnerabilities, supporting proactive, evidence-based decisions.
• Enhanced Organizational Awareness: Engaging staff through workshops and self-assessments fosters a culture of shared accountability for risk and builds enterprise-wide understanding of key risk processes.
• Improved Compliance Posture: Systematically identifying compliance gaps enables timely remediation, helping the organization stay ahead of evolving regulatory demands and avoid costly penalties.
• Operational Resilience: The risk assessment process drives continuous evaluation of operational practices, equipping leadership to adapt quickly to emerging risks and shifting market conditions.

For instance, a Series B fintech managing multiple data flows across payment APIs and lending tools can use RBIA to prioritize risks around transaction integrity, partner integrations, and emerging fraud patterns.

To carry this out effectively, organizations need a structured approach that aligns audit focus with actual risk exposure.

Read here: Key Steps in Compliance Risk Assessment to delve deeper into mapping risk points, assessing controls, and prioritizing enhancements.

5 Key Steps to Conduct a Risk-Based Internal Audit

Conducting a risk-based internal audit requires a methodical and business-aligned approach. Once you've analyzed the key factors shaping your organization's risk landscape, it’s time to translate those insights into an actionable audit process. The steps below outline how to implement a risk-based methodology that delivers meaningful, prioritised results.

Step 1. Define Audit Objectives and Scope

Begin by articulating clear, measurable audit objectives that are directly linked to your risk assessment findings. These should outline what the audit is intended to achieve and how success will be evaluated.

Next, define the audit scope:

• Identify specific processes, activities, and systems to be reviewed.
• Establish boundaries around timeframes, locations, and resources.
• Document any limitations and communicate them to senior leadership to ensure expectations are managed effectively.

Fraxtional helps teams map audit universes based on specific risk categories and maturity models, eliminating guesswork and ensuring scope is aligned to areas of highest exposure.

Step 2. Engage Stakeholders to Gather Insights

Effective risk-based auditing depends on deep stakeholder engagement. Conduct structured discussions with key groups, including management, risk owners, internal controls teams, and IT.

Key goals of these sessions:

• Understand current risk perceptions and operational realities.
• Clarify stakeholder expectations for audit outcomes.
• Collect insights from self-assessments or prior reviews.

Fraxtional’s fractional audit leads integrate directly into your systems, enabling efficient engagement with stakeholders while maintaining continuity with day-to-day operations.

Step 3. Identify and Prioritize Risks

Use a combination of data analysis, interviews, and workshops to identify risks across functions and business units systematically.

Once identified, prioritize risks based on:

• Likelihood of occurrence.
• Potential impact on organizational objectives.
• Regulatory or compliance significance.

Fraxtional’s audit teams apply analytics dashboards to surface emerging risks using historical patterns, anomaly detection, and industry benchmarks, strengthening the prioritization process with real-time insight.

Step 4. Develop a Risk Rating System

A consistent, quantitative risk rating system is critical for objective prioritization. Common elements include:

• Likelihood (rated 1–5): Probability of risk materializing.
• Impact (rated 1–5): Potential consequences if risk occurs.

Calculate risk scores (likelihood × impact) to classify risks:

• Low Risk (1–5): Minimal probability and limited effects.
• Medium Risk (6–15): Moderate probability and notable impact.
• High Risk (16–25): High probability and potentially severe consequences.

Fraxtional supports an adaptive risk scoring model aligned with industry-specific tolerances, ensuring your rating framework is defensible and audit priorities are board-ready.

Step 5. Create a Targeted Audit Plan

Design an audit plan that concentrates on your highest-priority risks:

• Define specific audit procedures for each major risk area.
• Allocate time, resources, and audit team expertise appropriately.
• Build flexibility into the plan to accommodate evolving risks.

Key components of the plan should include:

• Audit objectives and scope.
• Audit methodology and procedures.
• Resource allocation and budget.
• Reporting timelines and escalation protocols.

Fraxtional’s fractional audit leadership model ensures rapid execution of scoped audits with minimal business disruption. Post-audit, they also support follow-through by helping teams track findings, update dashboards, and send automated reminders to close identified gaps..

As your organization refines its internal audit methodology, there are broader elements that warrant attention. These go beyond operational execution and influence the long-term effectiveness of audit planning, stakeholder engagement, and risk response..

Critical Considerations to Shape Your Risk-Based Audit Strategy

Before conducting a risk-based internal audit, it is essential first to understand the key factors that shape your organization's risk landscape. This preparatory stage demands thoughtful analysis of both internal and external variables that influence your risk profile. A well-informed foundation enables you to design an audit plan that targets the risks most likely to impact your objectives.

Industry and Regulatory Environment

Your industry context fundamentally shapes your audit approach. Different sectors face unique risk dynamics and compliance demands that directly influence audit focus areas. For instance:

• Highly Regulated Industries (e.g., healthcare, finance) demand audit approaches centered on regulatory compliance, data privacy, and reporting integrity.
• Less Regulated Sectors may prioritize operational efficiency, supply chain risks, or emerging technologies.

As regulatory scrutiny intensifies across industries, compliance management must remain a core priority for internal audit teams. Audit planning should address both industry-specific mandates and broader legal frameworks, such as the Sarbanes-Oxley Act (SOX) or the General Data Protection Regulation (GDPR), regulations designed to safeguard stakeholders from systemic risks, including fraud or data misuse.

Financial and Operational Data

Analyzing your organization's financial health and operational workflows provides critical insights into potential vulnerabilities. Focus areas include:

• Financial Analysis: Scrutinize financial statements, budgets, and cash flow forecasts to identify risks related to liquidity, fraud, or accounting irregularities.
• Operational Processes: Evaluate core business processes to detect inefficiencies, control gaps, and potential fraud channels.

Internal audit analytics amplify these efforts through:

• Automated anomaly detection across large data sets.
• Application of techniques such as Benford's testing, stratification, and duplicate detection.

With 88% of audit teams utilizing analytics in every audit cycle, data-driven methods are now central to enhancing audit precision and strengthening risk assurance.

Read here: Understanding KYC: Differences Between CDD and EDD to understand how varying levels of customer due diligence impact risk assessments.

Compliance and External Risks

Compliance forms the basis of risk assessment. Regulatory violations can trigger severe legal and financial penalties, such as the $2.15 million HIPAA fine imposed by the US Department of Health and Human Services in 2019.

Audit teams must also proactively monitor external risk drivers that extend beyond organizational control, including:

• Shifts in economic conditions and market trends.
• Geopolitical instability and regulatory changes.
• Rapid technological innovation and associated risks.
• Environmental factors and climate-related impacts.

To address these influences, the internal audit must cultivate a deep understanding of macroeconomic and geopolitical dynamics. Specific focus areas include:

• Trade compliance and export controls.
• Country-specific risk exposures affecting revenue and operations.
• Currency fluctuations and their potential impact on margins.

Additionally, maintaining a structured risk scoring process is essential to demonstrating compliance and enabling informed risk management decisions. Risk scores should be updated quarterly, or as needed, based on changes in the external or internal environment, to ensure they accurately reflect your organization's evolving risk landscape.

Read here: Understanding AML Compliance and Its Importance to explore how AML practices integrate with internal audit processes to prevent financial crimes.

With this groundwork in place, the next step is to execute the audit itself, guided by a transparent, structured approach.

Tools and Techniques to Support the Process

Implementing the right tools and techniques elevates the effectiveness of your risk-based internal audit process. When utilized properly, these tools enhance risk identification, optimize audit activities, and transform raw data into actionable intelligence, driving smarter decisions across every stage of the audit cycle.

For lean audit teams in early-stage companies, using automated anomaly detection and full-population analytics is a game-changer. It ensures depth of insight without adding headcount.

Risk Assessment Software

Specialized risk assessment software centralizes standards, policies, and requirements within a single platform. This consolidation fosters repeatable, consistent processes while reducing manual workload and human error.

Key capabilities include:

• Automated compliance checks.
• Customizable audit templates aligned with industry and regulatory standards.
• Real-time monitoring that flags non-compliance and emerging risks.

By linking audits directly to organizational risks, processes, and controls, these tools eliminate data silos that often impede comprehensive risk assessment. They also enable robust tracking of recommendation implementation and produce detailed documentation, reinforcing transparency and accountability to stakeholders.

Fraxtional provides tailored risk assessments to help businesses and investors stay ahead of compliance challenges. Our tools identify emerging risks early, offer precise documentation, and support ongoing alignment with regulatory standards. Partner with Fraxtional to ensure your audit processes are proactive, clear, and fully aligned with business goals.

Data Analytics for Risk Detection

Data analytics transforms risk detection by shifting from manual sampling to full-population analysis. This empowers auditors to pinpoint high-risk areas with precision and deliver deeper audit assurance.

Core advantages include:

• Analyzing entire data sets, not isolated samples.
• Visualizing complex data through interactive graphs and charts.
• Detecting anomalies, outliers, and hidden risks that could indicate control weaknesses.

Advanced techniques like Benford’s testing, stratification, and gap detection further sharpen your ability to identify irregularities. These insights enable auditors to prioritize resources and focus their efforts where they can have the greatest impact.

Surveys and Interviews for Qualitative Input

Technology alone cannot capture every dimension of organizational risk. Structured interviews with key stakeholders reveal insights that quantitative data may overlook, surfacing process-specific risks and offering context on how management currently addresses them.

Supplementary Techniques:

• Surveys validate findings across a broader management base.
• Visible leadership involvement fosters open, honest dialogue on risk exposure and control effectiveness.
• Control Self-Assessment (CSA) actively engages employees in evaluating internal controls, cultivating greater ownership and accountability.

Together, these tools and techniques create a holistic, dynamic approach to risk-based internal auditing, balancing advanced technology with human insight to drive more informed, actionable outcomes. As this process evolves, organizations must also focus on monitoring and reviewing audit effectiveness to ensure continual improvement and alignment with strategic goals.

Risk Management Framework Examples

Selecting the right risk management framework is central to conducting an effective risk-based internal audit. These frameworks provide a structure for identifying, assessing, and addressing risks in a consistent and strategic manner. Below are three widely adopted examples that help organizations link their internal audits to actual business priorities.

1. ISO 31000 - Risk Management Principles
ISO 31000 offers a comprehensive approach to identifying and managing risk across an organization. Rather than prescribing exact controls, it provides guiding principles that help teams evaluate risk in context. This flexibility makes it a useful reference point for building internal audit plans that are adaptable and tailored to different risk environments.

2. COSO - Enterprise Risk Management (ERM)
The COSO ERM framework focuses on aligning risk oversight with business strategy. It breaks risk down into categories like control, compliance, and operational risk. COSO also helps teams understand how risks impact organizational goals. For internal auditors, COSO is particularly useful when integrating audit activities into broader governance and performance systems.

3. Bottom-Up Risk Planning
This approach begins with building a complete view of all potential risks, commonly known as a risk universe. Auditors assess each risk for likelihood and impact, then prioritize audit efforts accordingly. It ensures audit time is allocated to areas with the most significant potential impact rather than routine processes. This method is especially effective for dynamic organizations where risk profiles change rapidly.

Each of these frameworks serves a different purpose but shares a common goal: improving the accuracy and relevance of internal audits. ISO 31000 enhances consistency in how risks are approached. COSO supports strategic alignment. Bottom-up planning ensures that high-risk areas are addressed early and thoroughly.

By using these frameworks individually or in combination, organizations can strengthen the focus of their internal audits. This not only improves risk mitigation but also increases the value audits bring to overall business performance.

Fraxtional delivers end-to-end risk management solutions tailored for FinTech, Crypto, Banks, and Private Equity firms. Our compliance services are built to proactively identify, assess, and address operational and regulatory risks before they escalate. With a deep understanding of evolving industry challenges, we help your organization stay audit-ready, compliant, and resilient across all critical touchpoints. Ready to strengthen your risk posture? Talk to our team today.

Driving Audit Effectiveness Through Monitoring and Continuous Improvement

The final phase of your risk-based internal audit process involves measuring effectiveness and driving continuous improvement. Thoughtful monitoring turns audit insights into actionable organizational changes while helping the audit function itself evolve. This step closes the audit cycle, ensuring that recommendations strengthen your risk management framework and elevate audit quality over time.

1. Track Implementation of Recommendations

Systematically tracking recommendations ensures that identified risks are addressed and controls are strengthened. Build a monitoring framework that clearly assigns ownership; every recommendation should have a responsible party and timeline.

Your tracking system should capture:

• The issue identified.
• Recommended action.
• Responsible owner.
• Target completion date.
• Current status.

Regular progress reports, typically aligned with quarterly audit committee meetings, create transparency and accountability. When management asserts a recommendation is complete, the report should include sufficient evidence to validate this in future reviews.

2. Review Audit Quality and Independence

Maintaining a high-performing internal audit function requires ongoing evaluation and assessment. Implement a formal quality assurance and improvement program that encompasses all audit operations, including both internal reviews and independent external assessments.

Key areas of focus include:

• Adherence to professional standards and ethics
• Operational effectiveness and efficiency
• Overall value delivered to the organization

Audit independence is equally critical. Elevate reporting lines to enhance objectivity and ensure unrestricted access to information. Board-level involvement in CAE hiring and oversight strengthens audit integrity and broadens the function's ability to address strategic risks.

3. Use Feedback to Improve Future Audits

Stakeholder feedback is a powerful lever for audit improvement. Regularly survey executives, board members, and key managers to assess whether the audit function is meeting expectations.

Gather insights on:

• Clarity and relevance of audit purpose
• Adequacy of independence
• Communication quality
• Responsiveness to evolving business needs

Use this input to refine audit processes and reporting. Quarterly reporting on internal audit effectiveness provides a foundation that can be adjusted as feedback and organizational priorities evolve. Additionally, benchmark your performance metrics against peer organizations to ensure your audit function remains competitive and forward-looking.

Read here: How to Achieve GLBA Compliance and Prepare for Audits for insights into aligning your audit processes with GLBA requirements.

Elevating Your Risk-Based Audit Program for Lasting Impact

A risk-based internal audit program is more than just a compliance exercise; it is a strategic lever for enhancing resilience and achieving sustainable performance. Done right, it shifts your audit function from reactive oversight to proactive value creation.

But success demands more than initial implementation. Risk landscapes evolve, and so must your audit approach. This means continuously reassessing priorities, integrating tightly with enterprise risk management, and aligning with strategic business objectives. Only then will your audits remain relevant, actionable, and trusted by leadership.

Technology is a force multiplier; analytics, automation, and modern audit platforms help scale your capabilities. Yet technology alone is not the answer. The sharpest audit programs combine advanced tools with professional judgment and stakeholder insight, a balance that drives real business outcomes.

At Fraxtional, we help organizations design, refine, and elevate their risk-based audit capabilities to deliver lasting impact. From framework alignment to process optimization to technology enablement, we partner with you to turn your audit function into a true driver of strategic value.

Looking to elevate your risk-based audit program? Let's explore how Fraxtional can help you drive sharper insights, stronger controls, and more strategic outcomes.

Talk to Us.

FAQs

Q1. How often should a risk-based internal audit be conducted?
A1. Risk-based internal audits are typically conducted annually. However, high-growth organizations or those operating in volatile regulatory environments may require more frequent audits or rolling updates to the audit plan.

Q2. What role does technology play in a risk-based audit?
A2. Technology enables real-time data analysis, risk scoring automation, and continuous monitoring. Tools like analytics dashboards and automated anomaly detection help auditors identify and prioritize emerging risks more effectively.

Q3. How does a risk-based audit differ from a traditional audit?
A3. A traditional audit applies a fixed review cycle, often focusing on historical transactions. In contrast, a risk-based audit prioritizes high-risk areas and adapts as new threats emerge, offering greater strategic value.

Q4. Who should be involved in developing a risk-based audit plan?
A4. Audit teams should collaborate with senior leadership, risk owners, compliance officers, and IT to align the plan with the organization’s key objectives and risk appetite.

Q5. Can smaller companies implement risk-based internal audits effectively?
A5. Yes. With the right tools and external support, even lean teams can adopt a risk-based approach. Partnering with firms like Fraxtional provides access to experienced audit leads and scalable audit frameworks customized to specific needs.