Once upon a time, performing a SOC 2 audit was a rite of passage for service companies: “Wow, we’re so successful now that big clients want us to do important things, and we need a SOC 2 audit to prove our street cred!”
Times have changed. In today’s cybersecurity world, the SOC (Systems and Organizations Controls) 2 audit plan is more like a fact of life: “Yikes, if we can’t pass a SOC 2 audit to document our security controls, nobody will give us the time of day.”
An internal audit is no easy task for a small firm, and setting the scope of your SOC 2 audit correctly is crucial. Define the scope too narrowly, and you might not give the assurance your customers will want – prompting more SOC 2 audits in the future. On the other hand, define it too broadly, and you waste money auditing more processes than necessary (while disrupting daily operations, too).
Hence the need to understand SOC 2 audits, and how to scope them wisely.
What Is Audit Scoping?
Audit scoping is the process of determining the nature, type, and timeliness of procedures that will be carried out during an audit. Typically, you perform a risk assessment to determine the audit’s scope. The greater the risk of errors or weaknesses in the processes you’re auditing, the more extensive your audit procedures should be and the greater scope of the audit you should have.
For example, an audit would usually follow these steps:
- Learning about the operations of audit clients (scoping)
- Evaluation of the possibility of errors, fraud, or noncompliance (scoping)
- Creating auditing processes (scoping)
- Acquiring adequate and relevant audit evidence (execution)
- Forming a judgment about the effectiveness of internal controls (execution)
- Presenting audit results (reporting)
Why Is Audit Scoping Important?
Audit scoping is of paramount importance in the audit process for several compelling reasons.
Firstly, it directly influences the efficiency and effectiveness of the audit. By clearly delineating the areas of focus, auditors can channel their efforts and resources towards the most pertinent areas. This not only conserves time but also ensures that crucial aspects or high-risk areas aren’t overlooked. An audit that is too broad can become unwieldy and may dilute the depth of analysis in key areas, while one that is too narrow may miss significant risks or issues.
Secondly, achieving the intended objectives of the audit is anchored in proper scoping. Each audit is initiated with specific goals, whether they are to assess compliance with particular regulations, gauge the effectiveness of internal controls, or determine the accuracy of financial statements. Proper scoping ensures that these objectives are met by offering a roadmap of areas to be examined and the depth of inquiry required. Without a well-defined scope, the audit could stray from its intended objectives, leading to inconclusive or irrelevant findings.
Additionally, audit scoping is essential for managing stakeholder expectations. Stakeholders, whether they’re management, board members, regulators, or investors, have certain expectations about the audit’s outcomes. A clearly defined scope provides transparency about what the audit will and will not cover. This clarity helps in aligning expectations and prevents potential misunderstandings or disputes over the audit results.
In essence, audit scoping is a foundational step that sets the direction for the entire audit. It ensures precision, guides auditors in their inquiry, and serves as a reference point for evaluating the audit’s success and completeness.
What Should SOC 2 Audit Scoping Include?
The first three audit steps in the above list are what audit scoping is about. These phases involve risk assessment and business comprehension.
You may use different methods to understand the business. For example, you could interview key employees, review company policies, study flow charts of how business processes work, or ask employees to walk through a business process while you observe.
A SOC 2 audit specifically assesses how well a company’s cybersecurity controls measure against five “Trust Service Principles” (TSPs) developed by the American Institute of Certified Public Accountants. Those principles are:
- Security. The system is protected against unauthorized access, use, or modification.
- Availability. The system is available for operation and used to meet the firm’s commitments and system requirements.
- Processing integrity. System processing is complete, valid, accurate, timely, and authorized.
- Confidentiality. Information designated as confidential is protected per the firm’s commitments and system requirements.
- Privacy. Personal information is collected, used, retained, disclosed, and disposed of to meet the entity’s commitments and system requirements.
Not every SOC 2 audit must consider all five principles. After all, these audits only go to specific clients (or prospective clients) your firm has, presumably with specific needs they want your firm to address. So deciding which TSPs satisfy your client’s concerns about security is the key to determining the scope of your SOC 2 audit. Include only those TSPs that are necessary and no more.
For example, if you provide user entities data storage in a data center, and clients do all processing on their systems, then you need to include the Security and Availability principles in your SOC 2 audit, not Processing Integrity. The Privacy principle is in scope if you store personal data about individuals. If you only hold product design plans, the Confidentiality principle is in scope, but the Privacy principle may not be.
Which Service(s) Require SOC 2 Compliance?
SOC 2 (System and Organization Controls 2) is not a compliance requirement that is specific to any one service or industry. Instead, it’s a framework for controls that a service organization implements to ensure the security, availability, processing integrity, confidentiality, or privacy of customer data.
SOC 2 reports are typically relevant for service organizations that store, process, or transmit customer data, particularly in the cloud. Here are some types of services or companies for which SOC 2 might be relevant:
- Cloud Service Providers (CSPs): Companies that offer infrastructure, platforms, or software as a service.
- Data Centers: Facilities that house computer systems and related components, such as telecommunications and storage systems.
- IT Managed Services: Companies that provide IT services, such as network management, system updates, and data backups.
- Software as a Service (SaaS) Providers: Businesses that offer software applications over the internet on a subscription basis.
- Financial Services: Organizations that process financial transactions or handle sensitive financial data.
- Healthcare Service Providers: Particularly those that handle electronic health records or other patient information.
- Payment Processors: Companies that manage transactions between the merchant and the customer credit card or payment systems.
- HR and Payroll Processors: Companies that handle employee data, benefits, and payrolls for other companies.
- E-commerce Platforms: Businesses that offer online purchasing platforms and might handle customer data and financial transactions.
- CRM Platforms: Customer Relationship Management systems that store information about an organization’s interactions with its customers.
Remember, while some industries or types of services might inherently pose more risks to data security and privacy and thus have a higher likelihood of customers requesting a SOC 2 report, any service organization that handles customer data in some capacity and wants to demonstrate a commitment to security and privacy can undergo a SOC 2 audit.
Moreover, it’s not that these services “require” SOC 2 compliance in the regulatory sense (like how healthcare entities must comply with HIPAA). Instead, it’s often driven by business needs. Clients or partners might request or expect a SOC 2 report before they do business with a service organization, especially if they’re entrusting their sensitive data to that organization.
How is audit scoping done?
Audit scoping is a critical step in the audit process, as it defines the boundaries and focus areas of the audit. Proper scoping ensures that the audit is effective, efficient, and achieves its intended objectives. Here is a general overview of how audit scoping is typically done:
1. Objective Definition:
- Determine the purpose of the audit.
- Understand the intended outcomes or what the stakeholders want to achieve.
2. Risk Assessment:
- Identify the main risks associated with the area to be audited.
- Focus on areas with higher inherent risks, where controls might be weaker or non-existent.
3. Regulatory and Compliance Requirements:
- Identify any statutory, regulatory, or compliance obligations related to the audit area.
- This is especially important for industries like finance, healthcare, and others with specific regulatory requirements.
4. Previous Audit Findings:
- Review findings and recommendations from previous audits.
- Determine if follow-up is needed on prior recommendations or if prior issues have been resolved.
5. Stakeholder Input:
- Engage with management, process owners, and other stakeholders to get their perspectives on areas of concern or focus.
- Use their insights to inform the audit scope.
6. Resource Limitations:
- Consider the available resources, including time, personnel, and tools.
- Ensure the scope is achievable given the constraints.
7. Complexity and Size of the Audit Area:
- Understand the size, complexity, and nature of the area or process to be audited.
- Large or complex areas might need to be broken down into smaller, more manageable pieces.
8. Data Availability and Analysis:
- Determine if data analytics can be used to inform the scope.
- Identify which data is available, its reliability, and how it can be accessed and analyzed.
9. Operational Changes or Events:
- Consider any significant changes in operations, organizational structure, systems, or processes that might impact the audit scope.
- For instance, a recent merger or acquisition, system implementation, or reorganization might affect the areas to be audited.
10. Define Boundaries:
- Clearly define what is in scope and out of scope for the audit.
- Document the rationale for these decisions.
11. Document the Scope:
- Clearly articulate the audit objectives, scope, criteria, and any limitations.
- This provides clarity for both the auditors and the auditees.
12. Review and Approval:
- The defined scope should be reviewed and approved by appropriate stakeholders, such as audit management, audit committee, or client representatives, to ensure alignment and agreement.
13. Continuous Monitoring:
- Stay abreast of any changes or emerging risks during the audit that might affect the scope.
- Adjust the scope as needed, with proper communication and documentation.
The scoping process will vary depending on the type of audit (e.g., financial, operational, IT, compliance) and the industry or sector. Still, these general steps provide a framework to ensure a well-defined and effective audit scope.
Why the Principles of SOC 2 Audits Matter
Identifying the relevant TSPs is vital because your next step is determining which systems, policies, and procedures support those principles and organizing your internal controls to match these needs. Those things will be what your SOC 2 audit examines. SOC 2 audits covering multiple TSPs can sweep lots of your firm’s systems and controls into scope.
One starter question is: “If we can’t guarantee this principle, does that harm our relationship with the customer?” If the answer is yes, then the principle is probably in scope.
Another important task at this juncture is to work with senior executives to define the firm’s products, services, and strategy as clearly as possible. For example, who are the target customers? What do they need? What benefit does your firm provide? What else will you provide in the future? The answers will define the TSPs your firm needs to provide to customers. That, in turn, will drive the scope of your SOC 2 audit.
Compliance and audit executives don’t need to answer those questions yourselves. You do, however, need to put the questions to senior management and insist: “We need to answer these.”
Scoping questions become more granular and company-specific from there. For example, you may want to start with a Type I audit before a more intrusive Type II audit. You might begin with “easier” principles, such as Availability, before more complex ones, such as Processing Integrity. SOC 2 advisory firms (and there are plenty of them) are more than happy to perform readiness assessments before an actual audit gets underway.
The crucial questions are: (1) are we clear on what our firm offers? and (2) what do our systems have to provide security and integrity to uphold our end of that relationship?
These days, if you want to do any business at all, you’d better have good answers.
Prepare for your SOC 2 with ZenGRC
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To find out more, schedule a demo today!