The IIA’s Third-Party Topical Requirement: Everything You Need to Know

Modern businesses cannot exist without third-party relationships, which introduce significant risks. If a vendor fails to meet its obligations, experiences a cybersecurity breach, or engages in unethical behavior, your organization ultimately bears the consequences. Add the growing complexity of global supply chains and outsourcing models, effective third-party risk management strategies are vital to gain visibility into an organization’s risk exposure, mitigate potential threats, and ensure robust, long-term business resilience. 

Third-party incidents are not theoretical. Recent examples illustrate the disruptive nature of these risks:

• Cybersecurity Breaches: The 2020 SolarWinds incident demonstrated how third-party vulnerabilities could compromise global supply chains, causing widespread operational disruptions and reputational damage.
• Regulatory Violations: Financial institutions face penalties due to third-party vendors failing to comply with data privacy regulations, such as GDPR.
• Operational Failures: Vendor insolvencies, like the sudden collapse of major IT service providers, can abruptly halt business operations, highlighting the importance of comprehensive vendor monitoring and contingency planning.

Recognizing these risks, The Institute of Internal Auditors (The IIA) has introduced the Third-Party Topical Requirement as part of its Global Internal Audit Standards. The requirement mandates that internal auditors apply a standardized approach to auditing third-party risk management (TPRM) processes, ensuring consistent, high-quality assessments that strengthen organizational resilience.

This guide breaks down the Third-Party Topical Requirement, outlining key governance, risk, and control expectations. It also provides a roadmap for assurance professionals to navigate TPRM audits efficiently while fostering a collaborative approach to third-party risk oversight.

Share Your Feedback! The IIA’s public consultation draft of the Third-Party Topical Requirement is open until April 20, 2025. We encourage all internal auditors to download the draft for review and share their opinions as engaged members of the audit community.

Quick Overview of The IIA’s Third-Party Topical Requirement

The IIA’s Third-Party Topical Requirement establishes a mandatory framework for assessing third-party risks. Internal auditors must consistently evaluate governance structures, risk management strategies, and control processes. 

This requirement enhances transparency by setting clear organizational expectations and ensuring risk mitigation measures align with business objectives. The requirement applies to internal audit engagements where third-party risks are part of the audit plan, arise during an engagement, or are requested by stakeholders. While compliance is mandatory for assurance services, it is also recommended for advisory services to reinforce best practices in third-party risk management.

Regulatory Alignment and Industry Frameworks

The IIA’s Third-Party Topical Requirement aligns seamlessly with widely recognized regulatory standards and industry frameworks, including ISO 27001, GDPR, SOC 2, and HIPAA. By integrating the Third-Party Topical Requirement within existing compliance efforts, organizations can avoid redundant processes, streamline audits, and enhance overall compliance efficiency. Leveraging these complementary frameworks supports a comprehensive approach to managing third-party risks and strengthens organizational resilience.

Specifics of the Third-Party Topical Requirement

The Third-Party Topical Requirement is structured around three key domains: governance, risk management, and control processes. 

• Governance oversees third-party engagements, ensuring well-defined policies, roles, and responsibilities. 
• Risk management involves assessing the identification, assessment, and mitigation of third-party risks, requiring organizations to implement structured frameworks for ongoing monitoring. 
• Control processes ensure that contractual obligations are met, performance is continuously evaluated, and necessary corrective actions are taken when third parties fail to meet expectations. 

The three domains establish a comprehensive approach to managing third-party risks effectively.

Governance Requirements for Third-Party Risk Management

A well-structured governance framework is essential for managing third-party risks effectively. Internal auditors must evaluate whether an organization has established formal policies and procedures for engaging with third parties, ensuring these policies align with regulatory requirements and business objectives. The governance structure should clearly define roles and responsibilities for selecting, monitoring, and overseeing third-party relationships. 

Additionally, auditors should assess whether there is appropriate executive and board-level oversight, particularly for high-risk third-party engagements. Communication protocols must be in place to ensure that relevant stakeholders receive timely updates regarding third-party performance, risks, and compliance issues. Strong governance mitigates risk and ensures accountability and strategic alignment in third-party relationships.

Risk Management in Third-Party Relationships

Risk management is critical in third-party oversight, requiring organizations to identify and classify risks associated with vendors, contractors, and service providers. 

Internal auditors must assess whether organizations employ standardized risk management processes that account for financial, operational, cybersecurity, and regulatory risks. A structured approach to third-party risk classification helps organizations prioritize their response strategies and allocate resources accordingly. 

Organizations must also conduct initial and periodic risk assessments to ensure ongoing alignment with evolving threats and regulatory changes. Effective incident escalation procedures should be in place to address third-party failures, ensuring prompt corrective action when necessary. Organizations can proactively address vulnerabilities and safeguard operations by continuously monitoring third-party risks.

Control Processes for Third-Party Oversight

Effective control processes are fundamental to managing third-party risks. Internal auditors should evaluate whether organizations have documented and enforceable contracts that outline performance expectations, security requirements, and compliance obligations. 

Before entering into the relationship, the due diligence process must be comprehensive, incorporating financial background checks, cybersecurity assessments, and regulatory compliance reviews. Once the third party has a contract in place, ongoing monitoring ensures that third-party relationships comply with contractual agreements and organizational policies. 

Internally, organizations should have processes to track vendor access to critical systems and data, mitigate potential breaches, and implement corrective measures when security concerns arise. Additionally, internal auditors should assess whether there are protocols for contract renewal, offboarding, and transitioning to new service providers when necessary. Well-defined control processes ensure organizations maintain resilience and minimize exposure to third-party risks.

How the Requirement Impacts Your Job

For third-party risk management professionals, the Third-Party Topical Requirement provides a clear framework for internal audits, allowing them to prepare proactively and align risk mitigation strategies with audit expectations. By implementing structured policies and processes, teams can ensure third-party oversight is well-integrated into enterprise risk management. Additionally, this requirement strengthens the case for securing resources and investments in vendor risk management initiatives.

For internal auditors, the requirement expands responsibilities by necessitating a deeper understanding of third-party risk management practices. Auditors must work closely with procurement, legal, and compliance teams to evaluate third-party governance structures and control mechanisms. The requirement also promotes stronger collaboration between auditors and risk managers, fostering a more cohesive approach to identifying and addressing third-party vulnerabilities.

Preparing for a Third-Party Risk Management Audit

Preparation is key to successfully navigating a third-party risk management audit. Organizations should thoroughly review The IIA’s Third-Party Topical Requirement to understand its implications for their existing risk management practices. Gathering relevant documentation such as third-party contracts, risk assessments, and compliance reports ensures auditors can access the necessary information. Establishing clear communication channels between audit and risk management teams can also streamline the audit process and prevent misunderstandings.

If you are planning ahead for a TPRM audit in the future, there are steps your organization can take to integrate best practices into the risk management process, namely:

• Standardize Risk Assessments: Develop uniform third-party risk assessment checklists covering governance, financial stability, cybersecurity, regulatory compliance, and operational resilience.
• Integrate into Enterprise Risk Management: Ensure third-party risks are reflected in broader enterprise risk frameworks, facilitating holistic visibility and coordinated mitigation efforts.
• Establish Cross-Functional Committees: Form committees involving audit, compliance, procurement, legal, cybersecurity, and operational teams to enhance communication, accountability, and response capabilities.

Maintaining transparency during the audit is essential. Risk management and compliance teams should proactively share known risks and ongoing mitigation efforts with auditors rather than waiting for auditors to identify them independently. Focusing on actionable solutions rather than just highlighting deficiencies fosters a more constructive audit experience. Leveraging technology to facilitate documentation, control testing, and reporting can enhance efficiency and accuracy.

Following the audit, organizations should align on remediation strategies and implementation timelines. Internal audit and third-party risk management teams should work together to communicate findings and recommendations to senior leadership, ensuring that corrective actions are prioritized effectively. Establishing an ongoing partnership between audit and compliance teams can lead to long-term improvements in third-party risk management practices and overall organizational resilience.

Leveraging Technology to Meet the Third-Party Topical Requirement

Traditional third-party risk management processes are often fragmented and inefficient, leading to compliance gaps and increased risk exposure. Integrated technology solutions like AuditBoard simplify TPRM audits by centralizing risk data, automating compliance tracking, and improving collaboration across audit, risk, procurement, and compliance teams.

Organizations leveraging technology can:

• Centralize and Streamline Data Management: Technology platforms centralize third-party information, creating a single source of truth that enables easy access and analysis of vendor performance, contracts, compliance records, and risk assessments.
• Enhance Real-Time Monitoring and Response: Real-time monitoring tools provide continuous visibility into third-party risks and compliance, enabling organizations to detect and swiftly address emerging risks or compliance deviations proactively.
• Automate Compliance and Reporting: Automation reduces manual compliance tracking and reporting tasks, allowing auditors and risk managers to focus on strategic oversight rather than administrative burdens.
• Facilitate Collaboration: Integrated platforms promote effective collaboration among audit, risk management, compliance, procurement, and cybersecurity teams, ensuring alignment on third-party risk management priorities and actions.
• Improve Audit Readiness: Seamless documentation, comprehensive reporting, and easy retrieval of critical audit information improve audit readiness and simplify compliance with The IIA’s Third-Party Topical Requirement.

Adopting advanced technology solutions significantly enhances organizational resilience by enabling more efficient and effective management of third-party risks.

Moreover, Generative Artificial Intelligence (GenAI) is increasingly transforming TPRM. GenAI-powered solutions enhance risk identification through predictive analytics, efficiently analyzing large datasets to highlight potential vulnerabilities and emerging risks. Machine learning algorithms refine risk assessments and forecasting accuracy, enabling organizations to address potential threats and optimize resource allocation proactively. AI-driven automation also streamlines vendor due diligence, compliance verification, and performance evaluations, reducing operational burdens and enabling risk management teams to focus on high-priority strategic tasks.

Share Your Feedback!

The IIA’s public consultation draft of the Third-Party Topical Requirement is open until April 20, 2025. We encourage all internal auditors to download the draft for review and share their opinions as engaged members of the audit community.