Writing

A Guide to Auditing Generative AI

By GRCGuy • 12 Dec 2025 • 7 min read

AI Governance Audit Cloud & Platforms

The rise of generative AI has turned every office chat into a potential Black Swan for risk-aware auditors. Tools like Microsoft Copilot, Power Platform LLM agents, ChatGPT Enterprise or Google’s Gemini can supercharge productivity – but they also introduce hidden tail-risk. As Nassim Taleb might warn, an AI assistant could be a “turkey” enjoying 1,000 days of friendly data before Thanksgiving: one unexpected prompt leak can collapse the business. Recent real-world incidents highlight this danger: for example, a Hong Kong finance employee was fooled into sending $25 million by a deepfake “CFO” on a video call. Generative AI is projected to cost U.S. companies $40B in fraud losses by 2027 (32% CAGR from 2023). The message is clear: auditors must treat enterprise AI like any other high-stakes system – probing confidentiality, integrity and compliance.

Savvy auditors know the tech is only half the story. The regulatory environment is catching up fast. In financial services, the EU’s Digital Operational Resilience Act (DORA) mandates that all ICT risks including AI platforms be managed with the same rigor as critical banking systems. DORA requires encryption, backup, third‑party oversight and periodic resilience testing; generative AI systems fall squarely under its ICT risk and incident‑reporting rules. Similarly, frameworks like Microsoft’s Responsible AI Standard and the NIST AI Risk Management Framework encourage “trustworthiness by design” i.e. bake in transparency, bias checks and auditability from Day 1.

In parallel, the EU AI Act (effective 2025/26) classifies AI systems by risk. For example, “chatbots” and general-purpose LLMs are currently treated as “limited-risk” systems, requiring only transparency obligations. In practice this means any employee interacting with ChatGPT or Gemini should be informed they’re talking to AI. However, if an LLM is used for high-stakes decisions (credit scoring, customer onboarding, interviews and hiring, medical advice, etc.), it may become “high-risk” and face stringent documentation, testing and human‑oversight mandates. Auditors must therefore map each AI use-case to the AI Act’s categories and verify compliance: e.g. confirming that required risk assessments and disclosures are in place.

Generative AI risk often lurks in surprising places. Consider a prompt injection attack: a malicious user could craft input that bypasses safeguards and extracts confidential data or makes the model reveal hidden instructions. Or imagine an engineer using ChatGPT to draft trading algorithms: the AI’s unverified code introduces systemic risk (a Tiny modelling flaw could have cascading effects). Another scenario: a report hallucinated by Gemini omits a crucial risk factor, leading to a blind spot in the balance sheet – a classic missing-antifragility trap. Practical research shows AI tools can leak data if not properly managed. For instance, generative systems often pull from vast context; if an insider prompts a Copilot with sensitive customer info, that data could end up inadvertently revealed (or stored) unless strict DLP is enforced.

We also must heed the “turkey problem”: many AI systems perform well until a sudden, extreme event occurs. The recent trend of ransomware and deep-fake financial frauds illustrates that legacy controls often fail against novel AI tricks. Algorithmic bias and model flaws are other silent dangers – if an AI-assisted loan decision tool systematically skews against a protected class, it could trigger compliance disasters. Auditors should thus challenge assumptions of normality and inspect the tail: deliberately pushing models with edge-case prompts to uncover hidden vulnerabilities.

Logging and Monitoring:

For Microsoft Copilot (Microsoft 365 Copilot, Copilot Studio, Copilot in Power Apps/Automate, etc.), auditability is built in. Microsoft automatically logs all user interactions with Copilot and connected AI apps into the Microsoft 365 Audit log. Each record notes who asked what and which files or data sources were accessed. Auditors should verify that Azure AD audit logging is enabled and that Copilot logs are retained (180 days by default for pay-as-you-go scenarios). Copilot Chat is even more transparent: both prompts and responses are stored in the user’s Exchange mailbox for eDiscovery/audit. These logs are critical evidence; as a control expectation, auditors should ensure logs are periodically reviewed for anomalies (e.g. unusual data accessed by AI).

Data Protection Controls:

Governance Features:

Data Ownership & Isolation:

Enterprise-tier LLM services are designed for corporate use. For ChatGPT Enterprise, OpenAI explicitly does not train on customer data by default, and the business retains ownership of all inputs/outputs. Google’s Gemini for Workspace similarly “keeps all prompts and content within your organization”. It will not share your data with other customers, nor use it to train external models, without permission. As a result, a key control is simply to ensure employees use the enterprise or business edition – not free public versions. Auditors should confirm that only licensed organizational accounts (with SSO/MFA) can access these AI apps.

Security & Compliance:

Both OpenAI and Google maintain robust compliance postures. ChatGPT Enterprise completed a SOC 2 audit and offers encrypted data storage (AES‑256 at rest, TLS in transit). Gemini for Workspace runs on Google Cloud with FedRAMP High authorization and inherits Workspace’s encryption and DLP controls. For example, Gemini automatically applies the organization’s existing data protection policies (scanning for malware/PII, enforcing region restrictions). Auditors should check that these integrations are active: e.g. verify that Gemini searches or email summaries respect Gmail’s confidential mode or DLP rules. They should also ensure logs of AI interactions feed into enterprise SIEM/Audit: Google’s Audit Logs or OpenAI’s activity reports. (For instance, Microsoft Purview now offers auditing for ChatGPT Enterprise as well.)

Human Oversight Controls:

Since outputs can be unpredictable, a core control is human review. Establish policies (and evidence of training) requiring that any AI-generated analysis or content used in decisions be vetted. Nightfall’s (nightfall.ai) guidance suggests having developers avoid feeding proprietary code to the AI and mandating code reviews of AI-written code for security bugs. In practice, auditors might sample AI-generated documents to check they have human approval stamps or to see if factual inaccuracies were corrected. It’s wise to use templated template prompts (with redacted fields) so real data isn’t exposed.

Testing Tip: Use the AI yourself – try querying ChatGPT Enterprise or Gemini with dummy confidential phrases. Confirm that (a) it refuses to reveal a password or access a file you don’t have permissions for, and (b) the interaction is logged in your corporate monitoring tool. Also, simulate a “hallucination” by asking for specific factual details and check if staff recognize the error.

All three platforms emphasize data protection by default, but auditors must verify the implementation: e.g. ensure only authorized users can invoke them, and that AI queries are contained within approved environments. The subtle differences above mostly reflect integration and control points – not ranking which is “best,” but outlining each tool’s context so auditors know what to audit.

In summary, as enterprises rush into the AI era, IT auditors should apply classic control principles to these new tools: enforce least privilege, log everything, keep humans in the loop, and map to standards (DORA’s resilience checks, EU AI Act’s transparency rules, IEEE/NIST AI risk standards, etc.). In Taleb’s terms, we must avoid fragility: anticipate failures and stress-test our AI controls. With thoughtful governance (see table above), auditors can turn generative AI from a liability into a fully controlled advantage.

Sources and Refernces:

Sources and References

Collaboration welcome: corrections, counterexamples, and build ideas — grcguy@rtapulse.com • Discussions • Issues • How to collaborate.

Request a topic

Writing home

Home Next