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 scrutinized.
   • Infosec measures like data authentication, encryption, authorization can help ensure secure data transmission, access controls, and maintaining the integrity of transactions. 
   • Information security also prioritizes volume of sensitive information, frequency, or history of security changes. 
5. Have a sampling strategy in place to ensure that you are being comprehensive.
   • The strategy should consider the volume and complexity of the audit process. 
   • Ensure that there’s enough representation across different periods and operational units. 

By addressing these areas, the audit team can establish a solid foundation for a comprehensive audit. 

Step 2: Understand the internal controls you have in place

This step involves a comprehensive evaluation of your implemented processes to ensure compliance with the laws, regulations, and internal policies. The process includes:

• Understanding the effectiveness in identifying.
• Preventing.
• Correcting instances that arise due to noncompliance.

The efficacy of the process determines your organization’s ability to adapt to a changing regulatory environment. Moreover, understanding your controls also allows you to tailor your audit approach, allowing you to focus on areas that are a priority.

Step 3: Conduct a risk assessment

This process begins with recognizing all the areas and factors that could compromise your organization’s security posture. Factors that could affect are:

1. Changes in regulatory requirements.
2. Updates in compliance frameworks.
3. Alterations in the organizational structure.
4. Shifts in business operations. 

Once you’ve recognized the potential risks, score them based on their likelihood of occurrence and potential impact. Prioritize risks that have a higher score. 

RISK = PROBABILITY x IMPACT 

In addition to defining the scope and objectives, your audit team can also use these assessment techniques to understand how well your current risk mitigation strategies are:

1. Reviewing previous audits and corrective actions that were taken.
2. Analyzing industry trends. 
3. Using data analytics tools to identify patterns and spot anomalies.

Well, instead of doing this manually or through boring old Excel sheets, why don’t you use Sprinto? 

Sprinto is a GRC automation tool that helps you identify risks, score them, and build a comprehensive risk registry. It visualizes the risk, providing you with the heatmap. The risk is calculated based on 3 things:

1. Likelihood of occurrence
2. Potential impact
3. Industry benchmarks. 

Sprinto quantitatively analyzes these risks and triage them with rigor, to accurately prioritize them. 

Unlike point-in-time assessments, Sprinto continuously monitors risks and ensures continuous compliance. It enables you to test controls, flag any anomalies in the system, and proactively assess any risks.  

Sprinto does the grunt work for you so you can focus on higher-value activities, such as interpreting the risk data, devising risk mitigation strategies, or providing strategic advice to the organization.

Step 4: Collect and document evidence

Document and gather all the evidence. Review all your compliance frameworks and requirements, and create a checklist of the necessary documents, logs, and records. Meticulous evidence collection and documentation allows you to identify security gaps and communicate the same with the external auditors seamlessly. 

Having a readily available audit trail allows you to efficiently verify and demonstrate your compliance, just by reviewing the documentation. Documentation also allows you to derive insights and look for historical trends that could point out weaknesses that have not been solved. 

Use a centralized repository to store all the compliance-related documentation which is secure and easily accessible. Documentation also allows you to expedite the audit process, simplify compliance efforts and contribute towards a secure and a resilient compliance environment. 

Step 5: Maintain audit-grade evidence 

Not all evidence is created equal and hence during an audit, evidence that meets criteria for completeness, authenticity, and accuracy will be considered. Maintaining tamper-proof audit grade evidence is crucial. 

Maintaining evidence tells the auditors that you are adhering to the security protocols and regulations, consistently, and not just preparing for an audit. 

To ensure your evidence is admissible and can be communicated effectively with an auditor, ensure the following steps:

1. Establish clear policies on what needs to be retained, what qualifies as evidence, and how long before the evidence runs past its statute of limitations. 
2. Document the history of evidence collection, who handled it, timestamps, digital signatures, and other verification procedures to ensure the authenticity of the documents. 
3. Store these documents in a secure and reliable manner, making it tamper proof. You can use data encryption methods and regular backups to prevent loss of data due to corruption. 
4. Automate as much as you can. 

Leverage technology

This is not a step but a word of advice. Manual processes are time-consuming, prone to errors, and do not efficiently utilize resources. 

Leveraging technology to automate your compliance process, enhance audit reporting, and help you maintain continuous compliance. 

Take Sprinto; it can compile audit data into standardized reports so that you can effectively communicate this with the board of directors or external auditors who need to validate the process. Sprinto collects all the information in an auditor-approved way so you can connect with auditors async. It saves time and ensures standardization.

Internal audits, as a precursor to external audits

An external audit is a necessary part of your compliance routine. It gives you the stamp of approval, i.e. the compliance certification, ensures that there are no risks and vulnerabilities lurking in your system, and addresses any gaps. 

Internal audits are self assessments of the same, allowing you to work on them before an external audit happens, potentially saving you from losing compliance certifications. Which is why thorough internal audits help you breeze through external audits, enabling you to build a resilient line of security in a streamlined and faster way.

The key to faster external audits is to maintain the evidence in an auditor approved way. This practice ensures that the organization has a well-organized, accurate, and a comprehensive set of evidence ready. 

We’ve covered a lot about being audit ready and automating these tiny manual processes. How about a software that does the job for you? 

Sprinto, a GRC automation tool helps you get audit ready, saving you cost and man-hours. Sprinto has a structured, automated, and fail-proof audit preparation process that helps you maintain continuous compliance across different cloud environments. 

Sprinto allows you to collaborate with external auditors completely asynchronously, through the audit window, leading to faster audit cycles and timely reporting. 

As I mentioned before, understanding the “why” of any issue is as important as addressing it. So why do you need to conduct compliance audits? 

Is conducting a compliance audit important?

Conducting a compliance audit is important for the following reasons:

1. Adherence to regulatory compliance: These audits ensure you comply with laws, regulations and industry standards that apply to your business. This prevents you from emptying your hard-earned money into the hands of authorities for violating compliance. It also ensures that your data is protected from threats and vulnerabilities, enhancing customer trust. 
2. Managing risks: Audits can help you recognize risks and prevent them from escalating into threats by identifying areas of noncompliance. They can also save your resources and protect your organization’s reputation. 
3. Increased operational efficacy: Audits reveal inefficiencies or redundancies in the organizational structure and processes. Addressing these can streamline operations, reduce costs, and improve overall performance. 
4. Fraud and data protection: Compliance audits can discover any irregularities or suspicious activities that deter fraud, helping organizations maintain their integrity and safeguard their data. Compliance audits also ensure that the data you have is upheld to the highest standards of security and privacy. 
5. Business continuity: Adhering to compliance standards can give you a competitive advantage, particularly in highly regulated industries. It also prevents compliance failures and contributes to long-term financial stability.

These points underline the importance of compliance audits and their role in achieving success. 

4 tips for a successful compliance audit

Here are 4 things to keep in mind for a  successful compliance audit 

Preparation

A compliance audit is a valuable opportunity for you to understand your business’s compliance posture, find out areas of improvement and measure the effectiveness of controls. To be prepared for your audit, conduct a comprehensive review of  your compliance policies, security controls, external regulations, management standards, and internal business processes. Try to identify and address any gaps and inconsistencies in your findings as it can significantly reduce the external auditors time to complete the audit. 

Gather evidence and all relevant documentation that demonstrate your compliance efforts. This includes your company’s policies on risks, incident response plans, training records, and anything else that supports your claims of compliance. 

If you have the time and resources, have your internal audit team conduct a mock audit. It will familiarize you with the process and address any vulnerabilities before the official audit. 

Technology

I know the preparation sounds exhaustive which is why it is advisable to leverage technology and automation to reduce your workload. Go for automation tools that allow you

1. Automate evidence collection.
2. Help you with risk assessments.
3. Layer multiple frameworks on top of each other.
4. Have pre-built templates.
5. Create compliance checklists. 
6. Customize frameworks 

By implementing technology and automating labor intensive, error-prone tasks, you can have a stress free compliance audit program. 

The reason why companies shudder at the thought of compliance, audits, cybersecurity or anything that is remotely close to these things, is because of the manual work that is involved. But thanks to technology, you don’t have to worry about this. 

Delegate

To ensure that one person is not carrying the entire team, delegate responsibilities and strategically distribute tasks. Once you have a clear understanding of the scope of the audit, you can start assigning tasks. 

Communication is key when you are assigning work. There should be a clear division of responsibilities, deadlines and expectations. Ensure that you maintain a good line of communication for the team members to communicate shortcomings beforehand. 

Ensure that you appoint an internal audit coordinator that can oversee the entire process. This person should be the point of contact for the team members and stakeholders. 

Remember that the sum of its parts is greater than the whole. 

Documentation

Documentation serves as the backbone for the entire audit process. It gives the auditor tangible evidence of your compliance efforts and the effectiveness of the controls. These documents include policies, procedures, incident reports, and any other material you may possess. 

Ensure that your records are up to date and accessible. Use a centralized document management system to store the documents. It will enable you to maintain the documents in an organized way, track access and changes, and look at previous versions of the documents. 

Make sure that your documents are clear and precise so that the auditors can understand the processes you have and how your controls operate. 

How can Sprinto help you ace your audits?

Audits are boring; there’s no denying it. You are in luck if you can find a companion that helps you through it.

Sprnto significantly reduces the pressure of audits by streamlining the process and providing tools and features that facilitate each stage of a compliance audit. Sprinto speaks the audit language, so your reports are always audit-ready. 

While automation plays an important role, a successful audit hinges on seamless communication between the auditors and you. Email threads can be confusing, leading to potential delays. Sprinto bridges this by offering a centralized chat function, where auditors can request clarifications, ask for evidence or drop comments, eliminating the risk of getting lost in threads. 

Sprinto streamlines the process of audit grade evidence gathering by providing you with a centralized repository for logs and records. y. 

Book a 1:1 demo with our experts! 

FAQs

What is the meaning of a compliance audit?

A compliance audit is an examination of an organization’s processes, practices, and policies to ensure compliance with regulatory guidelines, internal policies, and laws and regulations. It aims to identify areas of non-compliance and recommend corrective actions to ensure that the organization maintains its security and compliance posture. 

What are the elements of a compliance audit?

The elements of a compliance audit are as follows:

• Identifying the scope of the audit. 
• Reviewing relevant documentation.
• Testing controls and procedures. 
• Identifying areas of noncompliance.
• Gathering evidence and documenting the same, 

What are the principles of compliance audit?

The principles of compliance audit are:

• Independence 
• Objectivity
• Competence 
• Confidentiality