What Is a Compliance Audit and How to Conduct It Effectively?

Imagine building a company from scratch only to lose it to a preventable oversight. 67% of organizations have faced a cybersecurity incident in the past year or so.

A thorough compliance audit is your first line of defense. It evaluates your position concerning laws, internal bylaws, regulations, and industry practices relevant to your organization. While it does not protect you from the threats, it allows you to identify and mitigate them before it’s catastrophic.  

TL;DR

A compliance audit is an examination of a company’s adherence to the compliance requirements, business processes,  laws, regulations, and industry practices. It helps in identifying risks, finding areas of non-compliance, and filling gaps to improve operational processes.

The audit process typically involves defining the scope, understanding the internal control environment, conducting risk assessments, collecting and documenting the evidence, and ensuring you maintain audit approved evidence.

Let’s examine how you can conduct these audits effectively and safeguard your organization against threats.

What is a compliance audit?

A compliance audit is a systematic and thorough assessment of an organization’s adherence to compliance programs, the codes of conduct, laws, regulations, guidelines, and internal policies.

A compliance audit aims to:

• Assess if your organization meets all the regulatory and protective compliances.
• Identify areas where you fail to meet the industry standards.
• Highlight any risks that are associated with non-compliance.
• Highlight and recommend any changes to improve the efficacy of your company.

A compliance audit assesses the comprehensiveness of an organization’s compliance measures, security protocols, internal controls, and risk assessment strategies. Since every organization operates differently, you need to undertake a customized approach to get an accurate picture of your organization’s security posture.

Compliance audits come in various forms, each designed to address specific areas and requirements of an organization. The type of audit you pick determines the scope of the examination, the resources required, and the potential outcomes. 

A poorly thought-out audit may overlook critical aspects, while an extensive one could exhaust your resources, which is why it is crucial to understand the nuances of each audit. 

Different types of compliance audits

There are three types of compliance audits: internal audit, external audit and surveillance audit. 

Internal audits

Internal compliance audits are self-assessments conducted by organizations to evaluate their adherence to internal policies, procedures, control systems, and other processes. They are performed by the organization’s internal staff. 

So, when do you conduct an internal audit? 

Internal audits are conducted on a timely basis, either quarterly or annually. They can also be triggered by an event, such as changes in policy, a merger, or organizational restructuring. 

These audits are necessary as they proactively address and mitigate risks, prevent compliance drifts, and help refine incident response plans. They also ensure that you are ready for regulatory inspections or external audits. Internal audits are generally cost-effective and can be tailored to meet your organization’s needs. 

An internal auditor will evaluate the following areas:

1. Internal policies and procedures
2. Financial controls
3. Operational efficiency 
4. Information security
5. H.R. Compliance 

External audits

An external audit is an independent evaluation of an organization’s internal controls, security policies,  internal operations, and compliance with regulatory standards. The evaluation is performed by an accredited independent third-party auditor to provide an unbiased evaluation.

These audits are often necessary to achieve certification for frameworks like SOC 2, PCI DSS, and HIPAA, among others. 

You can conduct external audits based on the regulatory requirements, which could be annually or biannually. 

External audits provide an impartial assessment of your organization’s compliance posture. They ensure the entire organization adheres to regulatory requirements mandated by law or industry bodies. 

Moreover, external audits instill trust and confidence among stakeholders, such as partners, boards of directors, and customers. These audits certify your compliance with the regulatory frameworks and provide insights and recommendations for improving posture and maintaining continuous compliance. 

The audit usually covers the following areas: 

1. Regulatory compliance 
2. Financial reporting 
3. Information security 
4. Risk management 
5. Vendor and third-party management 
6. Incident management 

Surveillance audits

Surveillance audits are periodic assessments that examine a company’s practices and ensure that they align with legal requirements, best practices, and business objectives. They focus on maintaining an organization’s compliance.

Surveillance audits are follow-up audits that are typically performed once a year. The certification body and the terms and conditions of the certification determine the exact frequency. External auditors usually perform these audits, typically from the same body that issued the certification. 

Frameworks like ISO 27001 and 9001 are examples of compliance frameworks that require surveillance audits to be conducted at least annually. 

What are the compliance audit criteria?

Different frameworks have specific criteria that guide these audits. Here are five frameworks with each specific criteria:

1. Security Operations Center or SOC 2 audit

A SOC 2 audit evaluates an organization’s controls for security, availability, processing integrity, confidentiality, and privacy. Also known as the Trust Service Criteria, they form the base of the SOC 2 frameworks. 

While organizations can choose which of the TSCs they want to be audited for, Security is the only mandatory criterion for a SOC 2 audit.

SOC 2 audits are carried out by independent accredited third-party auditors. SOC 2 has two types of audits: type 1 and type 2. Type 1 evaluates the controls designed for a specific point in time, while Type 2 evaluates the design and efficacy of these controls over a period of 6-12 months. 

The compliance auditor for SOC 2 examines the following criteria:

1. Security: The audits check whether the system is protected against unauthorized access to ensure the integrity of the data. They review controls related to access controls, firewalls, security, encryption, and intrusion detection systems. 
2. Availability: The audit ensures that the system is available for use. It reviews disaster recovery measures, backup procedures, and incident response. 
3. Processing integrity: The audit also evaluates the system that processes data to ensure it is timely, valid, accurate, and authorized. It examines data processing, transaction monitoring, and system operations. 
4. Confidentiality: A SOC 2 audit ensures that the information designated as ‘confidential’ is protected and examines controls related to data encryption, access controls, restrictions, and communication channels.
5. Privacy: The audit ensures that the information collected, used, disclosed, or disposed of is in accordance with the generally accepted privacy principles (GAPP). 

Apart from the trust service criteria, a SOC 2 audit also examines:

1. Policies and procedures for information security.
2. Strategies for risk assessment and management.
3. Incident response strategies and recovery plans.
4. Third-party and vendor management. 
5. Access controls and user management. 

A SOC 2 audit is relevant for modern technology companies that store customer data. While it is not a mandatory requirement, it could be a prerequisite for businesses that want to secure enterprise-level deals. 

2. International Organization for Standardization or ISO audit

An ISO audit evaluates an organization’s management against a specific set of standards set by the ISO, a non-governmental organization that has set standards for business practices globally. 

An ISO audit demonstrates an organization’s commitment to security and boosts customer confidence. The certification is often seen as a mark of trust and reliability. The audit can also identify areas for improvement within the organization’s system. 

The audit criteria for an ISO audit depends on the ISO framework you have adopted, but there are a few common elements that many standards share:

1. System: An ISO audit evaluates the management system and examines how well it is documented, implemented, maintained, and improved. It focuses on the efficiency of the system. 
2. Plan-Do-Check-Act: ISO auditors will evaluate the organization’s PDCA cycle to understand the processes it has implemented. It checks if the process has been measured against the objectives set. And finally, if any corrective actions have been taken to improve the process.
3. Risk-based approach: An ISO audit will also evaluate an organization’s ability to achieve the intended objectives. It also accounts for the internal and external factors that can affect the objectives, which includes assessing risks and opportunities and evaluating the efficacy of the incident response plans. 
4. Resource management: An ISO audit evaluates the resources an organization has to implement, monitor, maintain, and improve processes. This includes H.R., infrastructure, and the work environment.
5. Compliance:  An ISO audit focuses on evaluating how well the organization has implemented and maintained a system that meets the ISO standards and achieves the intended outcomes. 

As mentioned before, there are different types of ISO standards. They range from currency codes and social responsibility to information security management. Different types of ISO compliance frameworks include:

1. ISO 45001
2. ISO/IEC 27001
3. ISO 26000
4. ISO 22000 
5. ISO 6
6. ISO 8601
7. ISO 27017

ISO frameworks are not mandatory frameworks that have fines and penalties for noncompliance. However, adherence to ISO could open up new business opportunities for organizations. 

3. Payment Card Industry Data Security Standard or PCI DSS audit

PCI DSS audits evaluate an organization’s security posture regarding credit card data. Any organization that stores, processes, or transmits cardholder data must be PCI DSS compliant.

This includes,

1. Merchants that accept credit card payments, online or offline.
2. Service providers that store, process, or transmit data on behalf of the businesses. 
3. Financial institutions that issue and process credit cards. 

The requirements for the audit depend on the annual volume of credit card transactions an organization processes. 

The PCI DSS standards were created to ensure that the credit card industry securely manages sensitive credit card information.

The compliance auditor for PCI DSS examines the following criteria:

1. Vulnerability management: A PCI DSS audit examines an organization’s commitment to updating its antivirus software, which maintains security in the systems and applications. It addresses whether the processes in place can identify security vulnerabilities. 
2. Protection of cardholder data: The key focus of the audit is to examine how protected the cardholder data is. The audit will examine whether authentication data is deleted securely post-authorization and check whether the primary account number is masked when displayed. It will also verify that encryption keys are protected against misuse. 
3. Network: A PCI DSS audit focuses on an organization’s architecture, policies, procedures, and controls. It will assess whether the organization has implemented and maintained a firewall configuration.
4. Regular monitoring: The audit checks if the optimization monitors all access to network resources and cardholder data.
5. Incident response plan: The audit verifies the response plan to a system breach. This plan needs to be tested annually, and if it fails, it should be reported immediately.  

PCI DSS is a mandatory compliance that can take 2 days to a week. Noncompliance can lead to massive fines and penalties, even the potential loss of the ability to accept credit cards. 

4. Health Insurance Portability and Accountability Act or HIPAA audit 

A HIPAA audit examines a healthcare organization’s compliance with the HIPAA regulations. The regulations protect the privacy and security of patients’ protected health information (PHI). Any healthcare provider that stores, transmits, and processes PHI has to be HIPAA compliant.

The Department of Health and Human Services’ Office for Civil Rights conducts HIPAA audits. The OCR enforces the compliance regulations and ensures that the covered entities and business entities comply with the Breach Notification Rule and Privacy Security. 

Essentially, it ensures that healthcare organizations keep PHI confidential and use it for authorized purposes. In case of a breach of PHI, the organization immediately notifies the affected individuals.

The compliance auditor for HIPAA examines the following criteria:

1. A HIPAA audit examines the security of electronic PHI or ePHI and evaluates the access controls, audit logs, and encryption methods.  
2. How an organization interacts with the patients about their rights. It also ensures that the organization disclose the use of PHI. 
3. The security measures that an organization undertakes to protect PHI from unauthorized access, disclosure, destruction, or alteration include physical, technical, and technical records.
4. The audit will also examine an organization’s breach notification procedures. These encompass an organization’s ability to identify the breach, evaluate the impact, and provide appropriate notifications to affected individuals. The organization also has to notify the Department of Health and Human Services and, in some cases, the media. 
5. The employees receive HIPAA training and evaluate their roles and responsibilities in protecting PHI. 
6. The procedures for analyzing and mitigating risks that pose a threat to PHI. 

HIPAA is a mandatory compliance, and the penalty for noncompliance can range from USD 100 to USD 1.5 million, depending on the frequency and the severity. 

5. Sarbanes-Oxley Act or SOX audit

The Sarbanes-Oxley Act of 2002 audits a public company’s financial reporting processes and internal controls. This audit requires management and auditors to establish internal controls to safeguard the company’s financial data and ensure the accuracy and adequacy of the reporting methods. 

The SOX audit was a response to the accounting scandals that affected Enron, Tyco, and World.com. The audit primarily aims to:

1. Improve the reliability and accuracy of corporate financial disclosures. 
2. Protect the investors from fraudulent financial declarations. 
3. Restore the public’s trust in the U.S. financial system. 

SOX audits are performed once a year by independent auditors. External auditors do these audits to ensure the accuracy of the reporting. They usually involve the audit team evaluating the company’s financial statements, looking for errors and inconsistencies. Any discrepancies that exceed 5% are flagged, requiring additional investigation. 

Here are 5 elements that a SOX audit examines:

1. Financial reporting: An SOX audit examines the internal control over financial reporting or IFRCR. It evaluates the company’s systems, processes, and procedures that ensure accurate reporting. This includes investigating how transactions are initiated, authorized, processed, and reported. The audit also examines how effective the system controls are in case of misconduct. 
2. Environment: The audit examines the company’s control environment. It will also evaluate factors like integrity, ethical values, organizational structure, and the assignment of roles and responsibilities. 
3. Risk assessment: A SOX audit examines how well the company identifies and manages financial risks. It also looks into the incident response plan and whether the organization can fund the resources needed for it. 
4. Information and communication: Systems related to information and communication are also audited to assess if the company can adequately capture and exchange financial information. 
5. Accounts: An SOX audit also examines financial processes and accounts, including revenue recognition, inventory management, payroll, and reporting. 

The audit team also assesses the internal financial team to ensure they have training to follow the financial procedures. 

If you are planning to conduct an audit, you need to follow a well-structured process that verifies adherence to regulatory requirements and identifies areas for improvement. The audit needs to ensure governance and risk management while adhering to compliance. 

How can you effectively conduct a compliance audit? 

A thorough compliance audit is a valuable tool for ensuring your operations are within legal and regulatory boundaries. 

Here are five steps to conduct an effective, economical, and comprehensive compliance audit. 

Step 1: Define the scope and the objective of your audit

A well-thought-out meal is a good meal. Such is the case when doing an audit. Establishing clear boundaries and goals is the first step to a successful compliance audit. This step lays the foundation for your entire audit procedure. 

1. Identify the subject matter for this audit.
   • This step involves analyzing your company’s risk profile and prioritizing areas that significantly impact compliance and operations. 
   • For healthcare companies, it could be the security of their Electronic Health record systems. For a financial company, it could be examining the process through which credit card data is currently transmitted. 
2. Define the issue(s) that needs to be examined.
   • Define these issues based on the regulatory requirements, industry best practices, and risk factors specific to your industry. 
3. What have the previous audits told you about your company’s compliance and security posture?
   • Your company’s previous audits could highlight potential issues like inconsistency in data encryption standards, inadequate documentation, or gaps in following procedures. 
   • Understanding whether these issues have been persistent can help you look for emerging trends. 
4. Which areas do you now want to focus on? Transactions, procedures, or areas that need to be scrutin