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SOX Testing: Tips & Tricks

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June 8, 2023

First things first - a quick history lesson. The Sarbanes-Oxley Act of 2002 (SOX) is a US federal law that makes financial information businesses’ disclose more reliable and accurate. It demands that every business establishes internal controls and ensures these controls are both functional and effective.

Internal controls are auditing and accounting processes that enable companies to avoid fraud and subsequent penalties by complying with laws and regulations.

Sections 404 and 302

Section 404 is all about internal controls. Think of it as a system of checks and balances to ensure accurate financial reporting. During SOX testing, we assess the effectiveness of these controls, identify any weaknesses, and suggest improvements. By doing so, we enhance confidence in the reliability of financial information.

Now, meet Section 302, which focuses on disclosure controls. It requires CEOs and CFOs to certify the accuracy of financial statements and disclose any significant changes or deficiencies in controls. Our role during testing is to ensure these controls are in place, accurate information is reported on time, and potential fraud is prevented.

Being SOX compliant

Compliance with SOX is mandatory for all public companies in the United States. The first step in internal SOX testing is understanding what your company needs to do to be SOX compliant.

SOX compliance testing assesses a business's internal controls processes. these tests are conducted by management who are ultimately responsible for the structure and effectiveness of all internal controls.

Controls must be designed and implemented to ensure the accuracy and reliability of financial reporting. It is important to identify the key controls that are in place to prevent fraud and ensure they are operating effectively. This includes controls related to financial reporting, IT systems, and other critical business processes.

At the end of the year, if there are flaws or errors found within the internal controls, they must be acknowledged and reported by independent registered auditors. Failing SOX results in huge fines, a damaged reputation, and potential removal from public stock exchanges.

Despite the challenges, SOX has had a positive impact on financial reporting and has helped to restore trust in public companies. It has also led to increased accountability for senior management and has helped to prevent fraudulent financial reporting.

With that in mind, being SOX compliant is vital for businesses. Below are simple-to-implement tips & tricks your business needs to use to ensure that every SOX test is thorough and results in no errors. 

What is SOX Internal Control Testing?

SOX Internal Control Testing assesses and tests a company's internal controls over financial reporting, as mandated by the Sarbanes-Oxley Act.

It involves identifying risks, testing control effectiveness, documenting procedures, and reporting findings. This process ensures the reliability of financial information and helps restore public trust in corporate governance.

Tips & tricks for SOX testing

Now that you understand the basics of SOX compliance, here are some tips and tricks to make your SOX testing process smoother:

Ensure the efficiency of key controls

The number of key controls used will increase and the efficiency of these controls can take a hit. This often happens as internal audit teams continually create new controls for new risks but then don’t spend the time to fully refine and define these controls.

It’s also important to differentiate between key controls and secondary or backup controls that won’t result in material impact. The failure of a key control would result in material impact and this is the key (mind the pun) difference.

In order to build efficiency, you don’t need to reduce the number of controls you’re using. Every control was created for a reason in the first place, right? What’s most important is that internal audit teams familiarise themselves with the risks involved in the financial reporting process. Conduct control rationalization reviews regularly to identify which controls are key and which are secondary.

It’s important to ask yourself; What’s being tested? What’s the best way to test each control? How much time and person-power is being committed to each control? Does the control have material impact?

Define all controls prior to testing

Leading on nicely from the first tip, it’s important to ensure the control is well-defined prior to testing. Ensure your audit team understands the control definition and who is performing what and during what time period.

Walkthroughs are key here. The sample you choose to go through in detail with the control owner should be carefully considered and the walkthrough itself should be meticulous. This equips your team with the necessary focus and understanding required to test each control.

Create efficient teams

Knowing the skills and areas of improvement of the internal audit team is vital. Ensure that each control is assigned to the best member of your team for the job. 

Measuring efficiency isn’t easy. Use industry benchmarks to discover the average number of hours a business or organization of comparable size should put into testing the number of controls you have. This way you can at least determine the efficiency of your team and make necessary changes.

Lastly, assessing the skills and areas of improvement of your team isn’t something you can do overnight. It takes time to get to know your audit team. Conduct walkthroughs, consistent status meetings using real-time dashboards, and, most importantly, coach.

Coaching and training your team

Coaching and training an internal team should be an ongoing process. The auditing world moves and shifts quickly so keeping up with the latest requirements or best practices is impossible without regular training. 

The biggest audit firms do this best so they’re a good example to follow. They hold daily or weekly check-ins to see if the plan is still on track. This is something that should be adopted in internal audit too. If a member of the audit team needs more support or guidance on how to change key factors of the control to make it more effective, this can be quickly actioned.

Another thing the biggest audit firms do that internal audit needs to adopt too is audit automation software.

Use audit automation

SOX testing doesn’t have to be rocket science. By leveraging the right audit automation solutions, internal controls tests are simple and efficient but still comprehensive and accurate.

Many auditing tasks are still done using Microsoft Excel. However, audit projects almost always require working with huge sets of data and that’s where struggles in terms of speed and efficiency crop up.

With that in mind, finding a platform within Microsoft Excel that increases audit quality while boosting efficiency should be your number one priority. 

DataSnipper’s SOX testing solution

You can use DataSnipper to assist you in documenting Test of Controls related to the purchases cycle by creating cross-references between evidence and your testing workbook.

 

"Since we implemented DataSnipper last year, it has greatly reduced the time spent documenting and reviewing work papers. We are constantly evaluating ways to continue to leverage DataSnipper for SOX testing and operational audits. Looking forward to the increased time savings as we continue to integrate the use of the tool".
Victoria Sporn, Audit Manager – SOX & Financial, MarketAxess

Interested in DataSnipper's Sox testing solution? Calculate your potential cost savings using DataSnipper's ROI calculator.

FAQs

What is the difference between SOC and SOX controls?

SOC controls ensure data security for companies that provide services, while SOX controls focus on keeping financial reporting accurate for publicly traded companies.

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