Internal Audit Issues and Corrective Action Plans (or Recommendations)

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 The 4 Cs Approach: Explanation and Example

The 4 Cs approach is a structured method for writing internal audit issues and recommendations. It ensures that findings are clearly communicated, comprehensive, and actionable. The 4 Cs stand for Cause, Concern, Context, and Consequence. Here's an explanation of each component, along with an example related to non-adherence to EBA guidelines in IFRS 9 models.


 1. Cause:

The underlying reason or root cause of the issue identified during the audit.

Explanation:

- The Cause identifies why the issue occurred. It involves looking deeper into the processes, policies, or behaviors that led to the problem.

- Understanding the Cause is crucial for developing effective recommendations to prevent recurrence.

 

 2. Concern:

The specific issue or deficiency identified. 

Explanation:

- The Concern describes the actual problem or deficiency found during the audit.

- It provides a clear statement of what is wrong, supported by evidence.

 

 3. Context:

The circumstances surrounding the issue, providing background information to understand its significance.

Explanation:

- The Context gives additional information about the environment in which the issue occurred.

- It helps stakeholders understand why the issue is important and the factors that may have contributed to it.

 

4. Consequence:

The potential or actual impact of the issue on the organization.

Explanation:

- The Consequence explains the effects or potential effects of the issue if it is not addressed.

- It highlights the risks and impacts on the organization’s operations, financial reporting, compliance, or reputation.

 

 

 Example Issue Write-Up Using the 4 Cs Approach

Issue: Non-Adherence to EBA Guidelines in IFRS 9 Models

Cause:

The modeling team did not receive adequate training on the latest EBA guidelines. Furthermore, there was a lack of clear communication and integration of these guidelines into the model development and validation processes.

Concern:

The IFRS 9 models used for calculating expected credit losses (ECLs) did not incorporate the EBA’s prescribed methodologies. This deficiency was identified during the review of the model documentation and validation reports.

Context:

The bank recently implemented updates to its IFRS 9 models to improve accuracy. However, due to tight deadlines and limited resources, the updates were made without a comprehensive review against the EBA guidelines. This oversight occurred despite the critical importance of these guidelines for regulatory compliance.

Consequence:

Failure to adhere to EBA guidelines could result in significant inaccuracies in the reported ECLs, leading to potential financial misstatements. This non-compliance with regulatory standards could expose the bank to penalties, affect its reputation, and undermine stakeholder confidence in its risk management practices.

Recommendations

Enhance the integration of EBA guidelines into the IFRS 9 model development and validation processes to ensure compliance and accuracy.

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