All organisations need financial capital to operate; without it headlines emerge such as ‘Northampton County Council cash crisis’ and ‘Thomas Cook has ceased trading.’ Credit and liquidity risks are not exclusive to the financial services sector.

The Institute’s Risk in Focus 2020 survey identified financial risk as a top five risk for 30% of chief audit executives with 40% saying it is one of the key areas for internal audit focus. 

Financial risk is a complex area but one that internal audit should not avoid. We have included ideas in this thought leadership piece to inspire confidence that audit leaders can apply the same principles of governance, internal control and risk management assurance to these risks as for any other part of the organisation.

This piece will ask you to consider your own audit plan and whether the issue of financial risk is sufficiently addressed. It is written for a non-financial services audience.

What is financial risk?

Financial risk addresses the ability of an organisation to manage its money, particularly in light of changes in interest rates, foreign exchange rates and the creditworthiness of counter-parties.

Audit leaders will be familiar with auditing financial controls. These controls help an organisation to mitigate its financial risks so the impact of exposure in the event of a failure is reduced.

Financial risk is a very broad category and the specific details can vary according to sector and business model. At its core is sustainability, the availability of funds to enable the organisation to meet its strategic vision as well as its basic financial obligations to stakeholders; investors, suppliers, clients and customers.

Financial risk encompasses everything from working capital management to the treasury function, pension liabilities to cash flow forecasting, debt management to cost control.

The risks are split between those that are…