SOX audit is an important process in audit management to ensure the company's internal controls run effectively and transparently according to financial regulations.
What is a SOX Audit and why is it important?
SOX audit is the process of checking internal systems and controls within a company to ensure compliance with the Sarbanes-Oxley Act (SOX), a law issued in the United States in 2002.
These audits are designed to increase transparency and accountability in financial reporting, while preventing fraud as occurred in the case of Enron or WorldCom.
The importance of SOX audit lies in its ability to strengthen internal control systems and minimize the risk of manipulation of financial data.
In audit management, SOX audit is the foundation that ensures that all processes related to financial statements run according to standards, are accurate, and can be traced. This is an indicator that the company has a strong and responsible supervision system.
What is an example of SOX in the Audit process?
To understand what SOX examples are, let's look at some real-life practices commonly audited by auditor team. For example, the approval process of purchase transactions above a certain amount that must go through two levels of authorization is an example of internal controls that support SOX compliance.
In addition, the regulation of access to the financial system that can only be accessed by certain employees with special authority is another important control.
Other practices include automatic backups of financial data on a daily basis, as well as the implementation of a digital audit trail that records all activities in the ERP system.
This allows companies to keep track of who did what, when, and in what context all of this forms the basis of the transparency that SOX desperately needs.
What is SOX Audit?
SOX audits don't just talk about numbers, but also the processes and documentation that support those numbers. The audit process is carried out systematically ranging from risk assessment, materiality analysis, to testing the effectiveness of controls.
The auditor team will conduct interviews with relevant staff, evaluate SOP documents, and test information systems.
Usually this audit is carried out once a year by independent auditors, but companies that have a solid internal audit team will carry out regular monitoring throughout the year.
This is why SOX audits are often considered part of an overarching risk management system in modern organizations.
SOX Audit's 8-Step Guide to Audit management
1. Risk Assessment
The first step in SOX audit is to perform risk assessment comprehensive to the entire process that has an impact on financial statements.
The audit team must identify any areas of high risk, be it due to complexity, transaction volume, or the potential for fraud.
These risks can come from IT systems, operational processes, to organizational structures.Once risks are identified, priority mapping is done to determine which areas need to be tested more deeply.
This will assist auditors in allocating time and resources efficiently, as well as focusing on the controls that have the most significant impact on SOX compliance.
2. Materiality Analysis
Materiality analysis serves to establish thresholds for the value or impact of financial statement errors that are considered important to stakeholders.
This becomes the main criterion for determining which transactions, accounts, or processes fall within the scope of the audit. Without the limitation of materiality, audits can become unfocused and take too much time.
The delimitation of materiality involves quantitative and qualitative considerations. The Auditor will use parameters such as the percentage of net profit or total assets, as well as take into account reputational and legal risks. The result is a more structured and targeted audit priority.
3. Identification Of Internal Controls
At this stage, the audit team mapped all internal control which has been applied related companies financial reporting.
This control can be in the form of segregation of duties, data verification processes, or automated transaction authorization systems. The goal is to find out if the company has built an adequate layer of Defense.
This identification process is important so that there are no gaps in the system that can be exploited for manipulation or reporting errors. All relevant controls are systematically documented so that they can be tested at a later stage.
4. Fraud Risk Assessment
SOX explicitly asks companies to assess the risk of fraud that could have an impact on financial statements.
At this stage, the auditor will review processes that are prone to abuse, such as cash transactions, manual journals, and consolidation processes.
This risk assessment involves management interviews, review of unusual transaction patterns, and anomaly analysis.
The results of this stage are often the main reference for further control testing, especially for the detection of cracks that are not visible to the naked eye.
5. Process and System Documentation
SOX audits rely heavily on documentation. All processes, controls and systems must be clearly documented so that auditors can trace every step the company takes.
This documentation includes sops, flowcharts, system logs, to proof of control implementation. Complete documentation not only speeds up the audit process, but is also strong evidence that the company has carried out the process correctly.
Therefore, the audit team must work closely with various departments to collect and compile relevant documents.
6. Control Effectiveness Testing (Testing)
Once the controls have been identified and documented, the next step is to test the effectiveness of those controls. Testing is done to ensure that controls not only exist in theory, but are actually executed consistently and effectively in practice.
This test can be sampling or comprehensive depending on the level of risk found. The results of these tests will determine whether the controls are reliable as a basis for accurate and manipulation-free financial reporting.
7. Deficiency evaluation and Improvement Plan
If weaknesses or deficiencies are found in the internal control system, the audit team must prepare an evaluation report that includes the severity and potential impact.
This deficiency can be in the form of ineffective, unworkable, or even non-existent controls for important processes.
The next important step is to recommend an improvement plan. The management team is responsible for drawing up an action plan that is clear, measurable, and has an execution timeline. In the next audit, the auditor team will verify whether the recommendations have been implemented.
8. Reporting Audit results to management
The last stage is drawing up audit report which presents all the findings, risk evaluations, and recommendations. This report should be addressed to top management and, if necessary, the audit committee or board of directors. Transparency in this reporting is crucial for the reputation and governance of the company.
The final report also serves as the basis for strategic decision-making. Management can use it to strengthen internal control systems, allocate resources, and demonstrate compliance commitments to investors and regulators.
Differences between SOX Audit and Internal Audit
Many question the difference SOX audit vs internal audit, as they are both concerned with control and compliance evaluation.
However, essentially SOX audits are external and specific to financial reporting compliance under SOX law, while internal audits are broader in scope, including operational efficiency and compliance with company policies.
SOX audits demand a more formal, structured, and documented approach because their impact is legal and directly affects investor confidence. Internal audits are preventive in nature and are often part of the preparedness for SOX audits.
SOX Audit Tools and Technology Support
Technological advances have greatly helped the implementation of complex Sox audits. Companies can take advantage of ERP such as SAP or Oracle who already have internal access control. In addition, GRC platforms such as AuditBoard, Sprinto or Pathlock help in documentation, control testing and automated reporting.
The use of this system not only speeds up the audit process, but also improves accuracy and reduces the risk of human error that is common in the implementation of manual audits.
Checklist SOX Audit untuk Tim Internal
Pre-Audit:
- Identify high risk areas
- Collect sops and process flow
- Determine the value of materiality
During The Audit:
- Conduct interviews and observations
- Test the main controls
- Evaluation of system gaps or weaknesses
Post-Audit:
- Arrange audit report
- Follow up on recommendations and corrections
- Communicate results to management
This Checklist can be used as a practical guide that strengthens collaboration between the internal audit team and company executives.
Start Internal business auditing more effectively with Audithink!
SOX audit is a crucial element in the modern audit management system. By consistently implementing these 8 strategic steps, the company will not only be better prepared to face external audits, but also build a high reputation and transparency in the eyes of stakeholders.
Ready to improve the effectiveness of your internal audit and control system? Visit Audithink's Comprehensive Features or contact our team for reliable and effective audit and GRC solutions.
Frequently Asked Questions
Who is required to conduct SOX audits?
Public companies listed on US stock exchanges are required to conduct SOX audits. However, companies that have relationships with US entities are also strongly advised to apply this standard.
Do all companies have to be Sox compliant?
Not all. But multinationals, technology vendors, or startups that are about to IPO will have to start building SOX compliance systems from scratch.
Can SOX audit be replaced by internal audit?
No. Internal audits can support the implementation of SOX audits, but cannot replace the role and scope of SOX audits legally and regulatively.
