Statement on Auditing Standards No.

70: Service Organizations 1

Statement on Auditing Standards No. 70: Service

Organizations
Statement on Auditing Standards No. 70: Service Organizations, commonly abbreviated as SAS 70 and available
full-text [1] 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 [2]. SAS 70
provides guidance to service auditors when assessing the internal controls 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 [3], 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.
Statement on Auditing Standards No. 70: Service Organizations 2

SAS 94
In 2001, SAS 55 was amended by SAS 94 [4], 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 [5]) 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:
Statement on Auditing Standards No. 70: Service Organizations 3

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.

Audit frequency
Type 1 audits are typically performed no more than once per year; however, there is no technical reason for this
practice. In fact, many companies use the type 1 audit as a primer and tend to move on to a type 2 audit for the
purposes of subsequent audits. Sarbanes-Oxley Act (SOX) provisions that require a type 2 audit have made this a
very common practice.
Type 2 audits are also typically performed once per year; however, a small percentage of companies undergo
multiple type 2 audits during any 12 month period. There is no technical guidance that states, or even recommends, a
type 2 audit frequency requirement. It is generally expected that the frequency will be no less than once per year.
The SAS 70 audit guide recommends, but does not require, that type 2 examination periods be at least six months in
length. Companies generally choose a review period between six and 12 months. There is no requirement or
recommendation that the examination period fall completely within the calendar year.
SAS 70 audits are performed throughout the calendar year. Each service organization is responsible for making their
own decisions regarding the type of audit they undergo, the timing of the audit, and the review period of the audit in
the case of a type 2 audit.
User organizations will desire a type 2 audit report that has an examination period with as many months as possible
falling within their own fiscal year and an examination period end date that is within three months of their fiscal year
end. Most service organizations have many user organizations and often can not satisfy all of their clients if they
only perform one audit per year, regardless of the length of their review period. For example, a company could have
a 12 month Type 2 SAS 70 audit review period ending 12/31. This report would be less than ideal for clients with
6/30 fiscal year-ends because it will be six months "old" by that point in time. However, this issue does not render
the report useless and audit guidance and SOX guidance provide specific directions for dealing with this common
situation when it occurs.
Statement on Auditing Standards No. 70: Service Organizations 4

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.[6]

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.[7]

Proposed changes to SAS 70

The AICPA has 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.[8]
Service Auditors to the Statements on Standards for Attestation Engagements No. 16 (SSAE 16) will be formally
issued in June 2010, effective June 15, 2011. Because many organizations have reporting periods that cover a full 12
month period and begin in July, the new standards will affect many organizations as early as July 1, 2010.

Similar international guidance

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 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.
Statement on Auditing Standards No. 70: Service Organizations 5

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, and is operative for all audits relating to periods beginning
on or after 1 April 2003.

References
[9]
[1] http:/ / umiss. lib. olemiss. edu:82/ record=b1038093
[2] http:/ / www. aicpa. org/ download/ members/ div/ auditstd/ AU-00324. PDF
[3] http:/ / umiss. lib. olemiss. edu:82/ record=b1038078
[4] http:/ / umiss. lib. olemiss. edu:82/ record=b1038121
[5] http:/ / www. aicpa. org/ download/ members/ div/ auditstd/ AU-00314. PDF
[6] AICPA AU Section 324 (http:/ / www. aicpa. org/ download/ members/ div/ auditstd/ AU-00324. PDF), para. 02
[7] PCAOB Auditing Standard No. 5 (http:/ / www. pcaob. org/ Rules/ Rules_of_the_Board/ Auditing_Standard_5. pdf), para. B17-B27
[8] AICPA Proposed Statement on Standards for Attestation Engagements, Reporting on Controls at a Service Organization (http:/ / www. aicpa.
org/ Professional+ Resources/ Accounting+ and+ Auditing/ Audit+ and+ Attest+ Standards/ Exposure+ Drafts+ of+ Proposed+ Statements/
Reporting+ Service+ Organization. htm)
[9] http:/ / www. aicpa. org/ Research/ Standards/ AuditAttest/ DownloadableDocuments/ AU-00324. pdf

External links
• AICPA (http://www.aicpa.org)
• Auditing Standards Board (http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/
Audit+and+Attest+Standards/Auditing+Standards+Board/)
• ICAI (http://www.icai.org)
Article Sources and Contributors 6

Article Sources and Contributors

Statement on Auditing Standards No. 70: Service Organizations  Source: http://en.wikipedia.org/w/index.php?oldid=399104866  Contributors: ADobkin, Amalthea, Auminski, Avalon,
Axel.fois, Bart133, Beetstra, Bobo192, DoktorSulo, Doniago, Euchiasmus, Grafikm fr, Kubigula, Lkinkade, Malawianziontrain, Michaelas10, Monkiiiii, Mtmelendez, Mtorres402, Nick Number,
Nlsanand, Pacioli, PaulHanson, Persian Poet Gal, Rich Farmbrough, Rob smith 06, Rossami, S2000magician, SAS70Expert, Sollosonic, Ssae16pro, Tabletop, The Anome, Tmh, Tmopkisn,
Trinityacg, Welsh, Willhung27, Ynhockey, 105 anonymous edits

License
Creative Commons Attribution-Share Alike 3.0 Unported
http:/ / creativecommons. org/ licenses/ by-sa/ 3. 0/