Compliance Audit: What Is It, How To Conduct, And What Compliance Audits Does Your Business Need To Meet?
An imperative part of a regulatory system aimed to develop and enhance your company’s strengths while creating the roadmap for your company’s success
What Is a Compliance Audit?
A compliance audit is a formal review of an organization’s procedures and operations mainly focusing on whether an entity is complying with internal rules, regulations, policies, decisions, and procedures. An audit report will cover the resilience of compliance preparations, security policies, risk management processes, and user access controls observed during the audit.
What Is the Purpose of a Compliance Audit?
A compliance audit assesses how well an organization adheres to internal bylaws, rules and regulations, standards, and even codes of conduct. An audit also reviews the effectiveness of an organization’s internal controls using multiple types of audits. External agencies such as regulatory bodies too conduct compliance audits to assess a business’s adherence to regulations governing that industry.
- Internal Audits: Internal audits enable an organization to follow processes, procedures, and guidelines. On the other hand, a compliance audit ensures that the organization is fulfilling outside obligations such as agreements, rules and regulations, or standards. Internal audits may be financial, operational, IT, or regulatory, but are conducted using formal audit approaches prior to an outside compliance audit to ensure that the organization is following the standards.
- Compliance Audits: Compliance audits are different from internal audits. Compliance audits are outward-facing, ensuring that the company complies with regulations or codes of conduct. Both internal and compliance audit functions share the same language and even software to make sure that reviews are holistic.
- Operational Audits: Operational audits identify how effective and efficient various departments and activities are and whether these areas operate in line with the mission and purpose of the organization.
Audit monitoring help organizations to validate processes including:
- The security of critical data
- The records of financial departments
- Health and safety
- Payroll and HR policies
- Management standards
The History of Compliance Auditing
Regulations and compliance section grew mainly with the industrial age as governments, professional groups, and social welfare organizations desired enhanced monitoring and control over business practices. Beginning in the 1970s, internal auditing was created as companies wanted to ensure the integrity of their own practices. This was followed by a rise in government monitoring authorities as well as voluntary certification standards such as the ISO 9000.
How Are Compliance Audits Conducted ?
Conducting audits is about gathering and evaluating evidence, forming conclusions, documenting the audit process and communicating with the auditable entities and starts after finalizing an audit strategy and plan. In the planning phase, auditors review the internal controls and institutional arrangements to prevent, detect, and rectify instances of non-compliance before they start gathering audit evidence.
These are a few steps in a compliance audit:
- After connecting with the auditor, the organization decides if the auditor’s expertise is a good fit.
- At a preliminary meeting, the auditor explains the audit guidelines and what is required. The auditor may provide auditing checklists so that the client can prepare.
- Once the organization completes audit questionnaires and supplies the auditor with the needed documents, the auditor may work on-site to view documents, walk through the workspaces, study infrastructure and security features, and interview management and employees.
- The report should be delivered within a comparatively short time. At the final meeting, the auditor discusses the report and makes recommendations to address any areas of risk. Whether working under a regulatory deadline or not, organizations should generally rectify any deficiencies within 120 days to ensure that they have completed the corrective actions. Sometimes, auditing firms do follow-up support to help organizations rectify any risks or deficiencies. Auditors then validate and verify whether those measures have been met.
The Importance of Compliance Auditing
Compliance auditing, whether internal or external, enables a company to identify weaknesses in regulatory compliance processes and create ways for improvement. Sometimes, guidance determined by a compliance audit can help reduce risk while also avoiding potential risks or federal fines for noncompliance. Compliance auditing provides an outline of the internal business processes that can be improved or changed according to changes in regulations and requirements.
Internal vs. Compliance Audit
Internal audits are conducted by employees of a company to evaluate overall risks to compliance and security and to identify whether the company is following internal guidelines. Internal audits occur throughout the fiscal year and reports can be used by management teams to recognize areas that require improvement. Internal audits measure company goals against output and strategic risks.
External audits are formal compliance audits that are performed by independent third parties and follow a specific format that is established based on the compliance regulation being assessed. External audit reports gauge if an organization is complying with state, federal or corporate regulations, rules and standards. An auditor’s report is used by the C-suite to prove regulatory compliance or by regulators to review penalties for noncompliance. An external compliance auditor may use internal audits to assess compliance and regulatory risk management efforts.
Compliance Audit Procedures
External audits outline compliance checklists, guidelines and the scope of the audit. The auditor investigates internal controls, conducts reviews of employee performance, evaluates documents and checks for compliance in individual departments. Compliance auditors will primarily ask IT administrators and members of the C-suite certain questions including who has left the company, what new users were added and when, whether employee IDs have been canceled, and which IT administrators have access to critical systems. IT administrators can develop compliance audits using robust change management software and event log managers to track and document authentication and controls in their IT systems. Auditors create a final audit report after reviewing business compliance processes as a whole. Compliance auditors provide comprehensive information to company leaders about the organization’s level of compliance adherence, any violations and suggestions for improvement.
Frequently Asked Questions
What is a compliance audit example?
The world’s largest dealer of construction equipment and heavy machinery streamlined health and safety processes with ComplianceQuest’s audit and inspection solutions within a day. The business was able to identify and improve site safety audits by adding ComplianceQuest’s modern and efficient audit management tool to streamline the process. A transparent site audit process was initiated with versatile and multi-language reports to increase proactiveness for safety issues. Thus, it results in reducing site safety inspection time by 93%.
What is a compliance audit and when does it have to be performed?
Compliance auditors must have the skills to verify that the rules are being followed effectively using authoritative materials, understand how to apply the knowledge gained to the situations being tested, and explain to the organization what compliance means in their daily operations.
Failure to comply can cause all kinds of trouble, such as fines, penalties etc. If rules are violated, the auditor identifies the cause and recommends ways to make improvements or corrective action.
A compliance audit is an independent evaluation to ensure that an organization is complying with rules and regulations, internal guidelines, or, external laws. Eventually, every compliance violation can be traced back to the particular actions of a user, whether it’s a contractor or an employee or a remote vendor involved in the collection, storage and transmission of confidential data. Data safety in accordance with compliance regulations should be a top priority for any security team.
What are the types of audits?
Health Insurance Portability and Accountability Act of 1996 (HIPAA)
The HIPAA Act passed in 1996 to protect the privacy and security of patient medical information to reduce healthcare fraud. This type of compliance audit covers businesses within:
- Any healthcare provider who conveys health information
- Health insurers or health care cleaning services
Payment Card Industry Data Security Standard (PCI-DSS)
Payment Card Industry (PCI) compliance, formed in 2006, is a set of regulations designed to ensure that the credit card industry is effectively managing and securing customer data. Data Security Standard (DSS) is the regulations being placed on anyone who has to follow PCI compliance.
To ensure your organization remains compliant, you must:
- Assess your business processes, IT infrastructure, and credit card handling procedures to find out risks to credit card data.
- Identify and resolve any security gaps to avoid a data breach.
- Avoid keeping any confidential cardholder information, including PINs and social security numbers.
Systems and Organizational Controls (SOC 2)
SOC 2 is a common compliance audit determined by the AICPA (The American Institute of Certified Public Accountants) for modern technology companies. It mainly focuses on service providers who keep customer data in the cloud. Companies need to be compliant as SOC 2 follows strict policies and procedures to protect private information. Many companies prepare themselves to achieve SOC 2 compliance from developing policies and procedures, identifying the scope of the audit for their businesses, to putting new security controls to reduce risks. It mainly focuses on security, privacy, confidentiality, availability, and processing integrity. There are two types of SOC 2: SOC 2 Type 1 certification and SOC 2 Type 2 certification. ComplianceQuest successfully completed its Service Organization Control (SOC) 2 Type 1 certification. The company also successfully completed the mapping of the internal controls to align with ISO 27001 requirements that verify the existence of internal controls which have been designed and implemented to meet the requirements for the security principles. It reinforces ComplianceQuest’s internal controls that impact the security, availability, and processing integrity of the systems it uses to process users’ data and the privacy and confidentiality of the information processed by these systems. This independent validation of security controls is important for customers in highly regulated industries.
SOX (Sarbanes-Oxley Act of 2002)
The Sarbanes-Oxley Act, passed by Congress in 2002, is mandatory for all public companies to protect investors by improving the levels of accuracy and reliability of all corporate disclosures.
The SOX rules and regulations include:
- Electronic records management
- Internal controls reporting
- Data protection
- Executive accountability
International Organization of Standardization (ISO)
The ISO Compliance audit is an information security compliance standard that helps companies manage the security of assets, such as an employee or third-party data, financial information, and intellectual property. ISO Compliance audit implies a risk management process for people, processes, and technology and requires an independent auditor to assess a company’s security controls to ensure its mitigating risks properly.
General Data Protection Regulation (GDPR)
GDPR, effective from May 2018, is one of the most comprehensive government-imposed data privacy frameworks implemented to protect the data privacy of EU citizens. GDPR auditing is primarily followed a four-step process:
- Gap analysis
- Rectify gaps
- Check new processes
How do I prepare for a compliance audit?
Initially, your organization and your auditing company must fix a schedule for the formal audit when the auditors will review the documents, processes, and other proofs of compliance. A final report including nonconformances and recommendations is generated and depending on the level of non-compliance, your organization might face penalties or a chance to fix the identified gaps.
However, preparation for a compliance audit is vital if you want to pass. Below are a few tips on how to prepare for a compliance audit:
- Prepare the required documents: The required documents should be ready defining how the organization complies with the standard.
- Perform an internal review first: An internal review should identify the gaps and improvement opportunities before the external audit.
- A prominent audit trail: Audit trails are electronic records that act as documentation and proof of compliance. If companies are not conducting their audit trails well, there’s a high chance of having problems with the auditors. Security policies, data retention and document control play a crucial role in managing audit trails.
- Conduct training: Organizations need to train their staff or employees so that they can follow and understand the policies and procedures.
- Stay updated: It is important to keep a track of new or updated regulations and standards that apply to your organization.