6 Must-Have Elements of an Effective Audit Program

There’s a reason internal auditors are referred to as the third line. They independently ensure your financial institution’s (FI’s) operations are safe and compliant, as well as help navigate opportunity risks — the areas where you can minimize strategic vulnerabilities and maximize profitability. 

But how do you know if your audit program is strong enough? Regardless of whether your FI has an internal audit function or uses an audit firm, an audit program needs a few key elements.

Related: Learn best practices for tracking audit and exam findings in our free whitepaper.

1. Board support and access

To effectively fulfill their mission, auditors must be independent and empowered to assess an institution's operations objectively. When internal auditors report directly to executives, they may hesitate to disclose serious findings or compliance violations for fear of retaliation. No auditor should have to choose between integrity and job security.

That's why internal auditors should have direct access to the board of directors or the audit or supervisory committee (which is composed of directors). It should also go without saying that auditors should not be fired because of audit reports, and that the board should review any disciplinary action taken against an auditor.

Auditors also need the support of the board and management to obtain work papers and test samples from business units. To facilitate their audits and reviews, auditors should have the authority to communicate with business units and employees with little red tape. While executives are protective of their resources, audits are like a health checkup — if you stop going to your primary doctor for checkups, the results could be much worse.

Once assessments are complete, financial institutions should safeguard the integrity of audit findings by allowing auditors to report observations, issues, and recommendations directly to the board. There’s a fine line between giving management a chance to respond and allowing business units to alter or obscure audit conclusions — and that line must never be crossed.

Related: 5 Ways Boards Can Support Internal Auditors

2. Independence

The best audit reports come from teams that are able to objectively assess any business function. Unfortunately, human nature makes it difficult for people to evaluate their own work without bias.  Psychologists even have a term for this tendency to believe that our own work is better than it really is: illusory superiority. That's why most professions have implemented peer reviews and other types of practices to allow fresh, unbiased eyes to evaluate work.

The same idea applies to auditing. People who help build a compliance program or craft policies, procedures, and internal controls are rarely the best judges of their own work. That's why regulators emphasize the need for independent auditors who can objectively assess a program's effectiveness and deliver unbiased findings and recommendations.

Related: Credibility in an Era of Misinformation: What is the Purpose of Auditing?

3. Opportunity risk management

In an evolving regulatory and operational environment, forward-thinking auditors help FIs manage risks by evaluating how effectively processes align with strategic goals, proactively identifying risks through data analysis and risk workshops, and fostering a collaborative risk-management culture.

With an independent perspective and a comprehensive view across the organization, auditors are uniquely positioned to uncover process improvements, efficiency gains, and market opportunities that other departments may overlook. By using frameworks like COSO ERM, they can assess operational risks and recommend targeted improvements to strengthen performance, maximize profitability, and minimize vulnerabilities.

When internal audit moves from a defensive safeguard to a value-adding partner, the result is more informed decision-making, effectively allocated resources, and sustainable growth.

Related: Creating Value with A Culture of Risk Management

4. Risk-based reviews

FIs are required to comply with thousands of laws, regulations, and internal processes. However, resources are finite. Auditors must take the same approach as banking regulators, allocating their resources to assess higher-risk practices or areas with heightened risk of non-compliance or consumer harm. This means that the depth and frequency of an audit should reflect the level of risk while ensuring that lower-risk areas are also periodically reviewed.

Auditors should not spend their time recreating the wheel. A good practice is to review risk assessments, focus on the areas with the highest inherent risk, and audit the effectiveness of controls. If those controls are not mitigating the risk, this can have a dire impact on the institution.

A good audit plan should also consider previous examinations and examiner findings. If an independent party has already identified an area of weakness, auditors should review the activities undertaken to resolve deficiencies and ensure their effectiveness. Additionally, auditors can turn to recent enforcement actions and supervisory priorities to determine areas of perceived risk and regulatory scrutiny.

Complaints also serve as key risk indicators. Regulatory complaints can reveal complex compliance risks, including Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) and fair lending issues, pinpointing areas of your operations that require closer scrutiny. A robust complaint management process delivers actionable data that helps auditors evaluate both inherent risk and the effectiveness of controls.

Related: 5 Ways Complaint Management Can Reduce Compliance Risk

5. Expertise and training

Whether it’s financial statements, regulatory compliance, or operational risk, auditors need to be knowledgeable, or they will not be effective. A common complaint we hear from compliance officers is that they know more about compliance than the examiners and are often teaching them on the job. Audit teams will lose the respect, collaboration, and buy-in from those they audit if they are not knowledgeable.

Ensure your auditors have the appropriate training and understanding of the process they audit; otherwise, the audit results and the working relationship between the auditor and the FI will suffer. Auditors may not be authorities on a specific regulation, but they should have access to tools and resources to become specialists in the field(s) they audit. That means auditors should stay up to date on regulatory and institutional changes and leverage guidance documents to ask the right questions. Furthermore, auditors need to stay informed about the latest auditing best practices, enabling them to use appropriate tools ranging from statistical methods to effective communication and thorough preparation.

Related: 5 Mistakes That Will Sink Your Compliance Training Program

6. Technology

From organizing files to planning audits, technology makes auditors more effective. 

Depending on the level of complexity, risk profile, and size of your institution, audits can become unwieldy without the right tools. Find a technology partner that understands the types of audits required by FIs like yours. It should also support your institution's operations, foster collaboration, and make the job of preparing, organizing, retaining, presenting, and resolving issues as seamless as possible.

Related: Internal Audit 101: Audits vs. Compliance Reviews

When your audit function has board backing, true independence, a risk-based approach, skilled staff, and the right technology, it can serve as a strong third line. These elements work together to help your FI identify weaknesses, evaluate control effectiveness, and provide the assurance needed to operate safely and compliantly. 

Ready to strengthen your FI’s audit program? Check out our Audit Management Software Buyer’s Guide to help your team identify risks, assess controls, and support continuous improvement.