Internal Control Audit: Building Better Cybersecurity Defenses

Heer Chheda

Heer Chheda

Oct 10, 2024

Internal Control Audit

Amidst the dance of commerce, the internal control system is a silent watchdog. It does not always make the headlines in case of breaches or system crashes, but the consequences can be devastating when controls are not in place. 

Case in point: A fine of $136 million was levied on Citigroup by the US regulatory body.  Citigroup’s inability to resolve persistent problems with data management, even after coming under regulatory investigation since 2020, underscoring the difficulties of upholding internal controls.

Internal controls, especially in critical areas like data management and risk assessment, are not one-time implementations but ongoing processes demanding constant attention. Therefore, routine internal control audits are essential to avoid such errors and ensure the control environment in your organization is still relevant and efficient 

While internal controls might not grab your attention, their absence can lead to seismic consequences.

TL;DR 

Internal control audits, which look at the processes that safeguard resources, reduce risks, and accomplish corporate goals, are essential for guaranteeing organizational integrity, operational performance, and compliance. 
The COSO framework offers a thorough framework for conducting internal control audits, encompassing information and communication, risk assessment, control actions, control environment, and monitoring activities.
To implement the COSO framework establish a strong control environment, assess risks, set control activities, ensure strong communication, and continuously monitor the system.

What is an internal control audit?

An internal control audit is an evaluation of a company’s internal controls, focusing on the systems and processes designed to ensure compliance with regulatory requirements, operational efficiency, and financial accuracy. 

It involves assessing corporate governance, accounting practices, and other control mechanisms to safeguard the organization’s resources, mitigate risks, and achieve business objectives

An internal control audit delves deeper into your organization’s operational fabric, evaluating controls’ efficacy at every level. During an internal audit, the auditor will determine:

  1. The design of control systems:  Are they appropriately structured to address potential risks?
  2. Implementation of controls: Are the planned controls actually in place and operational?
  3. Effectiveness of controls: Do these measures mitigate risks and prevent errors or fraud?

It also looks into the practices of an organization, covering:

  1. Separation of duties 
  2. Authorization of procedures
  3. Digital and physical security measures in place 
  4. Mechanisms that review the performance of your internal controls
  5. Information technology controls that ensure data integrity and security

How to conduct an internal audit?

Internal control auditing is an essential part of the auditing process. It entails using a methodical process to assess how well an organization’s control systems are designed and function.  If your organization members are going to be performing this audit, here’s how they can go about it:

  1. Planning and risk assessment: Start by gaining an understanding of your operations,  the industry you’re in, and the regulations that apply to your organization. Next, identify areas that pose a significant risk, and categorize them accordingly. 
  2. Documenting internal controls: Review all the documentation you have, current and past, interview stakeholders, and create a control matrix of all the significant controls for each process. 
  3. Evaluating control design: Assess your control objectives and evaluate the segregation of duties. Consider the types of control you have in place. Make adjustments to accommodate results from risk assessments. 
  4. Test your controls: Develop testing procedures to test your controls, perform those tests, and evaluate the efficacy of your controls. 
  5. Assess IT general controls: Review your IT governance, evaluate the access controls, and assess data backup. 
  6. Identify and evaluate control deficiencies: Categorize your findings, assess their impact, and determine their pervasiveness. Categorize controls into deficiencies, significant deviations, or material weaknesses.
  7. Follow-up and monitoring: Develop action plans, conduct follow-up audits, and implement ongoing monitoring.

During the testing phase, your auditors may employ one or more of these testing procedures:

  • Observing security controls: Involves watching security procedures in action, such as monitoring how employee badge access protocols are followed or reviewing real-time network traffic for unusual activities..
  • Inspecting cybersecurity documentation: Go through cybersecurity logs and documents, such as firewall configurations and incident response plans, to ensure they are up-to-date and effective.
  • Re-performing security procedures: Involves independently executing security controls, such as attempting to access systems with expired credentials or conducting vulnerability scans to verify the effectiveness of existing controls
  • Inquiring::  Speak with IT and security teams to get a clear picture of the current cybersecurity policies, processes, and controls in place..
  • Confirming vendor compliance:Request written confirmations from third-party vendors to verify that their security measures meet agreed-upon standards.
  • Analyzing data: Review security data to find inconsistencies, comparing current patterns with historical baselines to detect any unusual behavior.
  • Conducting penetration Testing: Simulate cyberattacks to identify vulnerabilities in your systems, networks, or applications that could be exploited.
  • Using computer assisted tools: Utilize specialized software to sift through large amounts of security-related data, like logs and user access records, to detect any red flags.

Your audit team or auditors will examine a broad variety of controls in numerous organizational domains, such as:

Operational controls 

  • IT controls, such as the need for a secure password
  • Controls related to human resources, such as background checks for new hiring
  • Controls for compliance, such as tracking mandatory compliance training 
  • Controls for research and development, such privacy by design and SDLC policies
  • Controls related to the environment, health, and safety, such as routine safety inspections
  • Controls over data inventory, such as data classification and mapping techniques
  • Controls over third-party risk management, such as procedures for vendor security assessments
  • Controls related to access management, such as user provisioning and deprovisioning processes
  • Controls related to network and infrastructure security, such as firewall configurations and patch management

This comprehensive approach ensures that auditors thoroughly evaluate the effectiveness of an organization’s internal control system across all significant areas of operation.

While internal controls are crucial for organizational governance and risk management, they are not without limitations. Understanding these constraints is essential for auditors, management, and stakeholders to maintain realistic expectations and implement compensating measures where necessary. 

Sprinto is a GRC platform that removes manual effort and organizes everything you need to ace security audits—monitoring logs, documentation, system snapshots—so you can confidently walk into evidence review with your auditors, stay in control, and complete due diligence without the back-and-forth.

Sprinto continuously tests controls, flags anomalies, and triages alerts to ensure compliance. It automatically collects evidence with a high level of accuracy and documents it for subsequent review.

You can onboard your preferred auditor to a secure Sprinto dashboard to streamline evidence review and collaboration. 

What are the components of an internal control audit?

The components of an internal control audit are typically based on the widely recognised COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework. This framework serves as a comprehensive guide for assessing the effectiveness of an organization’s internal controls across various areas, including financial reporting, operations, and compliance. 

It provides a structured approach that helps organizations identify and address potential risks, ensuring that control systems are both effective and aligned with business objectives.

1. Control environment

The control environment serves as the bedrock of your organization’s internal control system, setting the tone that reverberates throughout every company level. 

The key elements that will be audited are: 

  • Integrity and ethical values of your organization
  • Board of directors, their oversight, and independence
  • Organizational structure and assignment of authority and responsibility
  • Process for attracting, developing, and retaining competent individuals
  • Accountability measures and performance incentives

An auditor will assess how well these are integrated into your organization’s operations and culture. 

2. Risk assessment 

Risk assessment entails a systematic examination of both internal and external factors that may make it more difficult for your organization to fulfill its objectives. This procedure necessitates thoroughly examining several corporate facets, including financial reporting, operational procedures, regulatory compliance, and strategic initiatives. 

This component involves identifying and analyzing relevant risks to achieving objectives and forming a basis for determining how the risks should be managed.

The real value of risk assessment lies in its ability to prioritize. Not every risk is equal. Certain events may have a high probability of happening but little effect, whereas others may be unlikely yet disastrous if they do. This is the point at which likelihood and impact become relevant.

You can develop a risk profile by evaluating each risk’s probable occurrence and possible impact. This profile serves as the activity control’s road map. It provides crucial answers to problems like: 

  1. Where should our efforts be directed? 
  2. Which hazards need to be addressed right away? 
  3. Where can we afford to take on a certain amount of risk?

All of these answers can be solved through automation tools. Sprinto is a GRC tool with automated risk management capabilities to help you reduce manual work. 

Sprinto goes beyond mere risk identification by providing quantitative risk assessment tools. It enables your organization to score risks for their impact and likelihood using built-in industry benchmarks, facilitating more informed decision-making about risk acceptance, rejection, or transfer. 

The platform also supports continuous risk monitoring by automatically mapping risks to compliance criteria and controls, launching automated checks to test controls, and triggering alerts and remediation workflows when anomalies are detected.

3. Control activities

Internal control systems are built on control activities, which are the practical implementation of risk mitigation measures by management. An essential first step is the creation and use of policies and procedures. These documents give your staff a road map by describing procedures and expected behaviors. 

Areas of focus include:

  • Development and implementation of policies and procedures
  • Segregation of duties
  • Physical controls over assets
  • Information technology general controls and application controls
  • Review of performance measures

Auditors assess the relevance, consistency, and effectiveness of these control activities across your organization.

4. Information and communication

When an auditor is examining the information and communication protocol, he’s evaluating the efficacy of your decision-making process. You’re being assessed on how effectively information is flowing through your organization and how it supports the control objectives set in place. 

Auditors examine:

  • Systems for capturing and processing relevant data
  • Quality of information (timeliness, accuracy, accessibility, and protection)
  • Internal communication processes (including whistleblower mechanisms)
  • External communication strategies
  • Methods for communicating significant matters to the board of directors

The audit evaluates how well information flows support the functioning of internal control.

5. Monitoring 

Monitoring your activities is designed to ensure that your controls remain effective over time, adapt to changes in the business environment, and address any risks.

Key aspects include:

  • Ongoing evaluations built into business processes
  • Separate evaluations performed periodically
  • Evaluation and communication of internal control deficiencies
  • Management’s responsiveness to audit findings and recommendations

Auditors assess the effectiveness of the monitoring process in identifying and addressing control weaknesses.

Aside from the components of the COSO framework, an auditor would generally also examine:

  1. Entity-level controls: These are overarching controls that have a pervasive effect on the organization’s system of internal control. Areas that an auditor would examine under this are:
    • Risk assessment processes
    • Centralized processing and controls
    • Controls to monitor results of operations
    • Controls to monitor other controls
    • Period-end financial reporting process
  2. IT general controls: Given the pervasive nature of technology in modern businesses, IT general controls often form a distinct component of internal control audits. An auditor will examine the following IT general controls:
    • IT governance
    • Systems development and change management
    • Access controls
    • Computer operations
    • Service provider oversight

Auditors evaluate how well IT controls support the integrity of financial reporting and operational effectiveness.

  1. Compliance with laws and regulations: The audit evaluates the organization’s ability to prevent, detect, and correct non-compliance. The audit would generally assess:
    • Processes for identifying applicable laws and regulations
    • Policies and procedures to ensure compliance
    • Monitoring mechanisms for regulatory changes
    • Reporting systems for compliance issues

The areas show the growth of internal control audits. The point is that it’s necessary to adopt a comprehensive risk management strategy and a holistic approach to control implementation. 

This understanding brings us to an important question: which types of internal controls do organizations usually put in place to manage these diverse risks? Knowing different types of controls gives an idea of how firms are organized with regard to traditional and emerging dangers they have to face.

Types of internal controls

Establishing internal controls as part of an organization’s operating systems is essential to ensure their effectiveness, reliability in financial reporting, and compliance with legal requirements. These controls come in various types, each serving a distinct role within a broader risk management strategy.. 

Preventive controls 

Preventive controls are proactive steps taken by an organization to stop mistakes, irregularities, or fraud before it starts. As the first line of defense in an organization’s risk management approach, these controls seek to prevent issues before they arise rather than address their effects after the fact.

Key characteristics of preventive controls:

  • Proactive in nature
  • Designed to stop errors or fraud from happening
  • Often built into systems and processes
  • Typically more cost-effective than detective controls

Here are some common examples of preventive controls:

  1. Separation of duties: This requires dividing workloads between different people in order to minimize chances of fraud or error. 
  2. Authorization process: The approval process often involves multiple levels of authorization. For example, significant changes to security configurations or access permissions may require approval from both the IT security team and senior management. Similarly, the deployment of new compliance policies might need a review by risk management before being finalized. 
  3. Access controls: Access controls can include digital methods like passwords and biometrics, as well as physical measures such as security personnel and key card systems. These controls are implemented to limit entry to sensitive areas and data, ensuring that only authorized individuals have access. 
  4. Data input controls: Data input controls are mechanisms designed to maintain the accuracy and integrity of critical data. They help prevent unauthorized or erroneous data entries that could compromise compliance or security.

By investing in a well-designed system of preventive controls, you can create a strong foundation for their overall control environment, reducing the likelihood of costly errors and breaches while fostering a culture of proactive risk management. 

Ultimately, while preventive controls are not infallible, they form an essential component of a multi-layered control strategy. 

Detective controls 

As a safety measure in the event that preventive measures are compromised or fail, these controls are put in place to detect mistakes, anomalies, or fraudulent activity that has already taken place. Although detective controls do not prevent problems from occurring, they are essential in reducing the effects of fraud or errors by facilitating prompt detection and action..

Examples of detective controls include:

  1. Intrusion Detection Systems (IDS): Monitoring network traffic involves continuously analyzing data packets moving through the network to detect abnormal behavior or known attack patterns. This can include identifying unusual traffic spikes, connections to malicious IP addresses, or attempts to access restricted resources. 
  2. Security Information and Event Management (SIEM) systems: SIEM systems collect, correlate, and analyze log data from various sources such as firewalls, servers, and endpoint devices. By aggregating this data, SIEMs can provide real-time alerts on suspicious activities, such as unauthorized access attempts or anomalies in user behavior.
  3. File integrity monitoring: File integrity monitoring is a process that tracks changes to critical system files and configurations, such as unauthorized modifications, deletions, or additions. FIM solutions compare current file states to a known, trusted baseline and alert security teams when discrepancies are detected. 
  4. Data Loss Prevention (DLP) tools: DLP tools are designed to prevent sensitive data from leaving the organization without authorization. They monitor and control the movement of data across endpoints, networks, and cloud environments. 
  5. User and Entity Behavior Analytics (UEBA): UEBA uses machine learning and advanced analytics to monitor user behavior and identify deviations from normal patterns. It analyzes activities such as login times, locations, and access to sensitive data to detect potential security threats like compromised accounts or insider attacks.
  6. Antivirus and anti-malware scans: Antivirus and anti-malware tools scan systems regularly to detect and remove malicious software, such as viruses, trojans, and ransomware. These tools use signature-based detection to identify known malware and heuristic or behavior-based techniques to catch new, previously unknown threats.
  7. Network traffic analysis: Network traffic analysis involves examining the flow of data across the network to identify patterns that could indicate a security issue, such as unexpected data transfers or unusual connection attempts. 
  8. Access log reviews: Access log reviews involve systematically examining logs that record user and system activities, such as login attempts, file accesses, and administrative actions. By analyzing these logs, organizations can detect unauthorized access attempts, identify potential security policy violations, and investigate suspicious behavior.

Detective controls offer crucial data regarding the effectiveness of your present preventive measures. When issues arise repeatedly in a certain area, it may be necessary to reinforce or reassess the preventative measures in that specific process.

Corrective controls 

Corrective controls activate when investigative controls find mistakes, anomalies, or policy infractions. Their two main goals are to address the current issue and put policies in place that will stop similar issues from happening in the future. 

Examples of corrective controls include: 

  1. Incident response plan: An incident response plan is a guide outlining the steps an organization should take in the event of a cybersecurity incident. It includes predefined actions for identifying, containing, eradicating, and recovering from threats like data breaches or malware infections..
  2. System restoration procedures: System restoration procedures focus on recovering and rebuilding systems to a secure and operational state after a security incident. This process involves restoring data from clean backups, reconfiguring systems to their pre-incident settings, and applying the latest security patches.
  3. Patch management systems: Patch management systems involve regularly updating software and systems to address security vulnerabilities. This process includes identifying missing patches, testing updates in a controlled environment, and deploying them across the organization.
  4. Access revocation protocol: An access revocation protocol provides a structured approach for quickly removing access rights when a user account is compromised or no longer required. This includes disabling user accounts, changing passwords, and revoking permissions to critical systems and data.
  5. Malware removal tools: Malware removal tools are specialized software designed to detect and eliminate malicious software from infected systems. These tools use a combination of signature-based detection and heuristic analysis to identify and remove threats like viruses, spyware, and ransomware
  6. Network segmentation: Network segmentation divides a network into smaller, isolated segments, each with its own security controls. This approach limits the movement of attackers within the network, preventing them from accessing critical systems and data. If a breach occurs, segmentation helps contain the threat to a specific area, reducing the overall impact. 
  7. Security control improvement process: The security control improvement process involves regularly reviewing and enhancing security measures based on findings from audits, incident reports, and changing threat landscapes. 

Corrective controls are most effective when they’re timely, proportionate to the issue at hand, and designed with an eye toward future prevention. They should be documented and communicated clearly to ensure consistent application and to serve as a reference for future incidents.

Importance of internal control audit

Internal controls lay the foundation of organizational integrity, process efficiency, and risk management, and is the audit’s central nervous system. Its importance extends beyond mere compliance, affecting all aspects of an organization’s functioning as a means of ensuring its long-term survival and growth.

“Internal control audits are crucial for any business. They help you understand where your processes are strong and where they need work. It’s not always comfortable, but it’s necessary if you want to manage risks effectively and keep your organization running smoothly.” 

Rajiv Ranjan: ISO Lead Auditor at Sprinto

Comprehensive organizational insight

Senior management and board members can gain a bird’s eye view of your organization’s current situation and identify areas for improvement by having insights into its workings. Auditors attempt to: 

  • Examine how well the organization’s declared values and its actual practices coincide.
  • Determine which policy and implementation differences exist.
  • Find redundant or inefficient operations in your operational workflow.

It provides the auditors with insight into your organizational culture in addition to the rules and guidelines you have established. 

Better risk management 

Having a robust internal control framework that is subject to regular audits is essential for effective risk management. Through the assessment of internal controls, auditors are able to pinpoint and rank risks within your company. This procedure highlights potential and current hazards.

Internal control audits can highlight flaws or openings in the control system. Establishing focused remediation programs and bolstering the organization’s overall risk posture depend on this identification. 

Operational efficacy 

Internal control audits are an effective means of improving operational effectiveness. These audits determine whether your current controls are effective in reducing intended risks and serving their intended purpose. Audits frequently identify possibilities for process improvement by closely examining controls.

Internal control audits can help build and improve key performance indicators (KPIs) so that management has relevant information for decision-making.

Regulatory compliance assurance

In an increasingly complex regulatory landscape, internal control audits play a crucial role in ensuring compliance:

  1. All-round coverage ensures that the organization remains compliant with various applicable laws, regulations, and industry standards through regular audits.
  2. Anticipatory compliance identifies potential compliance issues early, allowing for proactive responses to avoid hefty fines and reputational damage.
  3. Readiness for external audit is achieved by maintaining a thorough system of internal controls, ensuring that the organization is always prepared for external auditors, thus minimizing anxiety and potential disruptions.

Internal audit vs external audit, what’s the difference?

While both internal and external audits are essential for financial integrity and organizational governance, they have different functions and operate in different ways. Together, these two audit methods offer a thorough understanding of an organization’s operational efficiency, regulatory compliance, and financial stability. 

Internal auditExternal audit 
Internal audits are generally carried out by the members of your company. External audits are performed by third party contractors. 
Focuses on process improvement, internal controls, and risk management.Focuses on compliance certification and mandated checks.
Reports to management or audit committee.Reports to shareholders or board.
Ongoing and risk-based.Periodic and independent.

Limitations of internal control audits

1. Human judgment and decision making

Internal controls rely heavily on human judgment, which can be prone to errors and biases. Even well-trained individuals may make poor decisions under pressure or when dealing with incomplete information. Additionally, personal biases can affect how controls are implemented or interpreted, and complex controls may be misunderstood or misapplied by staff.

2. Management override

Those in positions of authority can potentially circumvent internal controls. High-level managers might override existing controls for personal gain or to manipulate financial results. 

Collusion between individuals can also undermine the effectiveness of controls, allowing them to bypass checks like segregation of duties, and misuse their position to authorize inappropriate transactions.

3. Cost constraints

Implementing and maintaining internal controls requires resources, and organizations must weigh the costs against the benefits. At a certain point, adding more controls may provide minimal additional security at a high cost, representing diminishing returns. Resources allocated to controls might also divert attention from other important business activities.

4. Changing conditions

Internal controls can become less effective as organizational circumstances change. Mergers, acquisitions, or restructuring can render existing controls obsolete, while rapid technological advancements may outpace the adaptation of controls. New laws or regulations might also require significant changes to current control structures, affecting their effectiveness.

5. Inherent limitations in control types

Different types of controls have their own limitations. Preventive controls can slow down processes and may be bypassed. Detective controls only identify issues after they occur, which could be too late to prevent damage. Automated controls, while efficient, are susceptible to programming errors or system malfunctions.

6. Limited scope

Internal controls typically focus on specific objectives, which may not cover all potential risks. They are designed based on known or anticipated risks and may not address unforeseen threats. Often, controls target financial reporting, potentially overlooking operational or compliance risks, leading to gaps in risk management.

Internal audits are essential for corporate governance, but they frequently encounter difficulties with funding, gathering evidence, and upholding ongoing compliance. How do you get around these issues? 

How do auditors audit internal controls

The true purpose of an auditor auditing internal controls is to provide an independent assessment of whether an organization’s controls are designed and operating effectively to manage risks, ensure accurate financial reporting, safeguard assets, and comply with regulatory requirements. Here’s what they do: 

  1. Planning: Auditors start by understanding the organization’s business operations, regulatory environment, and specific risks. They identify which areas to focus on based on the potential impact and likelihood of risks. 
  2. Documenting and reviewing controls: They then review existing documentation, such as policies, procedures, and process flows, to understand how controls are designed and implemented. 
  3. Testing control and design efficacy: Auditors test whether controls are well-designed to address identified risks and if they are operating as intended. This involves evaluating segregation of duties, reviewing access controls, and examining whether processes are followed correctly. 
  4. Evaluating IT controls: Auditors assess IT general controls, such as system access, data backup, and change management procedures. This helps ensure that technology-related controls support the integrity and security of information systems.
  5. Identifying any weaknesses and gaps: Auditors identify weaknesses in the control environment, categorize them as deficiencies, significant deviations, or material weaknesses, and assess their impact on the organization’s ability to manage risks effectively.
  6. Reporting any findings: Auditors compile their findings in a detailed report, highlighting any control deficiencies and providing recommendations for improvement. They also discuss these findings with management to agree on corrective actions and establish timelines for implementation.

How can Sprinto help you automate internal control audits?

Sprinto provides a comprehensive platform that automates and integrates the internal audit process to handle these problems.

Some of Sprinto’s features include:

  • Continuous compliance and monitoring to detect control gaps in real time and take immediate corrective action. 
  • Automated evidence gathering enhances the completeness and quality of documentation
  • Tools for collaboration to facilitate communication between management, external auditors, and internal teams
  • Scalability for overseeing several compliance frameworks in different business divisions

Sprinto’s platform enables organizations to maintain constant audit readiness, significantly reducing the risk of non-compliance. It’s particularly valuable in complex regulatory environments where the volume of required evidence can be overwhelming.

It must be noted that Sprinto aims to complement, rather than replace professional judgment and expertise. 

Book a call with us to know more! 

FAQs 

What is an example of an internal audit control?

As an example, the person who approves purchases shouldn’t be the same person who reconciles bank statements. Segregation of duties is a sort of internal audit control where critical tasks are given to distinct persons in order to minimize the potential of fraud or error.

What are the 7 internal controls?

The following are the seven internal controls:

  • Division of Responsibilities
  • Limitations on Access
  • Physical Examinations
  • Consistent Recordkeeping
  • Trial Equilibrium
  • Regular Reconciliations
  • Authority of Approval

What are the 5 C’s of audit?

The five Cs of audit are:

  • Criteria
  • Condition
  • Cause
  • Consequence
  • Corrective Action

What is the full form of COSO?

The Committee of Sponsoring Organisations of the Treadway Commission is referred to as COSO. Five private sector organizations have joined forces to launch this joint venture, which aims to provide thought leadership on business risk management, internal control, and fraud deterrence through the creation of frameworks and guidelines.

Heer Chheda

Heer Chheda

Heer is a content marketer at Sprinto. With a degree in Media, she has a knack for crafting words that drive results. When she’s not breaking down complex cyber topics, you can find her swimming or relaxing by cooking a meal. A fan of geopolitics, she’s always ready for a debate.

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