Statement on Auditing Standards No. 70: Service Organizations

Statement on Auditing Standards No. 70: Service Organizations, commonly abbreviated as SAS 70 and available in full-text by permission of the AICPA, is an auditing statement issued by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) with its content codified as AU 324. As of June 2011, the Statement on Standards for Attestation Engagements No. 16, Reporting on Controls at a Service Organization, SSAE 16, replaces SAS 70.[1] SAS 70 provides guidance to service auditors when assessing the internal control of a service organization and issuing a service auditor’s report. SAS 70 also provides guidance to auditors of financial statements of an entity that uses one or more service organizations. Service organizations are typically entities that provide outsourcing services that impact the control environment of their customers. Examples of service organizations are insurance and medical claims processors, trust companies, hosted data centers, application service providers (ASPs), managed security providers, credit processing organizations and clearinghouses.

There are two types of service auditor reports. A Type I service auditor’s report includes the service auditor's opinion on the fairness of the presentation of the service organization's description of controls that had been placed in operation and the suitability of the design of the controls to achieve the specified control objectives. A Type II service auditor’s report includes the information contained in a Type I service auditor's report and also includes the service auditor's opinion on whether the specific controls were operating effectively during the period under review.

Background

SAS 70 was originally titled “Reports on the Processing of Transactions by Service Organizations” but was changed by Statement on Auditing Standards No. 88 to "Service Organizations". The guidance contained in SAS 70 is effective for all service auditors' reports dated after March 31, 1993.

SAS 55

In 1988, the AICPA issued SAS 55, titled “Consideration of the Internal Control Structure in a Financial Statement Audit”. SAS 55 required that financial statement auditors assess the internal control related to any process that could impact the client’s financial reporting objectives. In cases where the client outsourced a critical process that impacted the financial statements, the auditor was required to assess the internal control of that process as it is performed by the service organization. For example, an auditor might be required to examine the manner in which a payroll processing company controls the processing of payroll for its client. This situation was very detrimental to many service organizations since all of their clients’ auditors have an obligation to perform the same internal control assessment on them.

The overwhelming resources that service organizations were spending complying with requests from financial auditors led the AICPA to issue SAS 70. In layman’s terms, SAS 70 allowed for one internal control review to be performed on service organizations that examined all of the areas that the financial statement auditors were required to consider to meet SAS 55 requirements. The resulting service auditor’s report (i.e. SAS 70 report) can be distributed and relied upon by all of the financial statement auditors of the service organizations' clients. The extent of that reliance is based on whether a Type I or Type II SAS 70 audit was performed.

SAS 94

In 2001, SAS 55 was amended by SAS 94, titled “The Effect of Information Technology on the Auditor’s Consideration of Internal Control in a Financial Statement Audit”. SAS 94 obliges the financial statement auditors to place an increased focus on the increasing role of information technology on meeting financial reporting objectives. Given this change, SAS 70 reports are now placing similar emphasis on information technology’s role in the control environment of service organizations. This helps to ensure that the SAS 70 report contains all of the information required by user organization auditors.

SAS 109

In 2006, SAS 55 was superseded by SAS 109 (codified as AU 314) which provided an expanded theory regarding an auditor's responsibility to understand the entity under audit including the information systems employed by the entity under audit among other items. This understanding is to be used in determining certain risks associated with the financial statements and audit.

Changing uses of the SAS 70

Over the last few years, the use of the SAS 70 audit has migrated to be used in non-traditional ways. Companies in the financial services industry are being required to show adequate oversight of service providers, such as obtaining a SAS 70 review conducted to comply with Gramm-Leach-Bliley Act (GLBA) requirements. Service organizations which provide services to healthcare companies are often asked by their clients to have a SAS 70 audit conducted to ensure an independent third party has examined the controls over the processing of sensitive healthcare information.

While some companies utilize the SAS 70 audit to promote themselves in the "Other Information Provided by Service Organization" section, the more appropriate application is to utilize properly modified objectives from internal control framework(s) appropriate to their industry and company; such as COSO, COBIT for SOX, ISO, ITIL, BITS, or the AICPA's Trust Principles (which are specifically applicable to SysTrust or WebTrust services).

Users of SAS 70 audit reports

User auditor

Traditionally, service auditor reports are primarily used as auditor-to-auditor communication. The auditors of the service organization’s customers (i.e. user auditors) can use the service auditor’s report to gain an understanding of the internal controls in operation at the service organization. Additionally, Type II service auditor reports can be used by the user organizations’ auditors to assess internal control risk for the purposes of planning and executing their financial audit.

Other third parties external to service organizations

Service auditor reports are growing in popularity and are being used by customers, prospective customers and financiers to gain an understanding of the control environment of outsourcing companies. In some cases, these third parties are not intended users of the report, but still find value in using the report as third party independent verification that controls are in place and are operating effectively.

Unless the report is noted for restricted use only by the CPA firm, the service organization retains control of distributing the report. Every Service Auditor’s report contains an auditor’s opinion letter. The opinion letter is required to contain a paragraph that defines the authorized user of the report. On rare occasions, this paragraph is limited to a specific third party, which may or may not be a user organization. Use of the report is typically restricted to the service organization’s management, its customers, and the financial statement auditors of its customers. Typically, a statement in the final paragraph states:

This report is intended solely for use by the management of XYZ Service Organization, its user organizations, and the independent auditors of its user organizations.

Financial statement auditor of service organization

The report is not designed to support the financial statement auditors of the service organization, because the service organization's own financial reporting IT controls are not the target of a SAS 70 audit. The environment supporting user organization's processes is the SAS 70 audit scope. However, a service organization's external auditor's Entity Level Control Considerations may be useful for a SAS 70 report.

Other auditing standards address the appropriate process to obtain client authorizations for auditors of different firms to obtain audit information about a shared client, which may include the sharing of workpapers and reports between the auditors.

SAS 70 report types

Report on controls placed in operation

A report on controls placed in operation, referred to as a Type 1 report, opines on controls that are in place as of a date in time. The opinion states whether the controls are fairly presented, whether the controls are suitably designed to achieve defined control objectives, and whether the controls were in place as of a specific date. Since these reports only provide assurance over a single day, they are of limited value to third parties.

Report on controls placed in operation and tests of operating effectiveness

A report on controls placed in operation and tests of operating effectiveness, or Type 2 report, opines on controls that were in place over a period of time, which is typically a period of six months or more. The opinion states all that is covered by a Type 1 report and whether the controls were operating effectively enough to achieve the defined control objectives during a specified period. Third parties are better able to rely on these reports because a verification is provided regarding these matters for a substantial period of time.[2]

SAS 70 and Sarbanes-Oxley Act of 2002

With the introduction of the Sarbanes–Oxley Act of 2002 (SOX), SAS 70 took on increased importance. SOX adopted the COSO model of controls, which is the same model that SAS 70 audits have used since inception. SOX heightened the focus placed on understanding the controls over financial reporting and identified a Type II SAS 70 report as the only acceptable method for a third party to assure a service organization's controls. Security "certifications" are excluded as acceptable substitutes for a Type II SAS 70 audit report. PCAOB's Audit Standard No. 5 (which replaced AS 2) details how a SAS 70 audit should be used in relation to SOX.[3]

Changes to SAS 70

The AICPA had proposed changes that would move the guidance for Service Auditors to the Statements on Standards for Attestation Engagements (SSAE), naming the standard Reporting on Controls at a Service Organization. The guidance for User Auditors would remain in AU section 324 (codified location of SAS 70) but would be renamed Audit Considerations Relating to an Entity Using a Service Organization.[4]

Service Auditors to the Statements on Standards for Attestation Engagements No. 16 (SSAE 16) was formally issued in June 2010 and became effective on 15 June 2011. SSAE 16 reports (also known as "SOC 1" reports), which have effectively replaced SAS 70 reports, are prepared in accordance with Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization. SOC 1 reports retain the original purpose of SAS 70 by providing a means of reporting on the system of internal control for purposes of complying with internal control over financial reporting.[5]

Similar international guidance

Germany

The German standard report in this section is called IDW PS 951. It is similar to SAS 70 Type II. IDW PS 951 is released by Institut der Wirtschaftsprüfer.

United Kingdom

A SAS 70 is similar to the United Kingdom guidance provided by the Audit and Assurance Faculty of the Institute of Chartered Accountants in England and Wales. The technical release is titled AAF 01/06 which supersedes the earlier FRAG 21/94 guidance.

Canada

In Canada, a similar report known as a Section 5970 report (CICA 5970) may be issued by a service organization auditor. It usually gives two separate audit opinions on the controls in place. Furthermore, it may also give an opinion on the operating effectiveness over a period. These reports tend to be quite long, with descriptions of the controls in place.

The CICA 5970 has been replaced by the CSAE 3416 report "In response to changes in third-party assurance standards in both the US and internationally"[6]

India

Similar to the SAS 70 Report in the United States of America, reporting requirements are defined in India's Audit and Assurance Standards 24 "Audit Consideration Relating to Entities Using Service Organizations". The AAS 24 is issued by the Institute of Chartered Accountants of India

See also

References

  1. ↑ "SAS No. 70 Transformed". American Institute of Certified Public Accountants. May 4, 2010. Retrieved 24 March 2014.
  2. ↑ AICPA AU Section 324, para. 02
  3. ↑ PCAOB Auditing Standard No. 5, para. B17-B27
  4. ↑ AICPA Proposed Statement on Standards for Attestation Engagements, Reporting on Controls at a Service Organization
  5. ↑ Sherinsky, Judith M. (August 2010). "Replacing SAS 70". Journal of Accountancy.
  6. ↑ PWC http://www.pwc.com/ca/en/controls/business-process-controls/navigating-transition-csae-3416.jhtml. Missing or empty |title= (help)

Further reading

External links

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