Internal Audit and SOX: Step by Step to Effective Compliance

The Sarbanes-Oxley Act (SOX) was implemented to restore investor confidence and strengthen transparency and corporate governance, especially after a series of financial scandals in the early 2000s. One of the most relevant SOX requirements is the establishment of robust, auditable and regularly monitored internal controls. In this context, internal auditing plays a fundamental role, ensuring that the organization's practices comply with the requirements of the law and offering an additional layer of security and integrity to the business.

Read on to understand the role of internal auditing in complying with SOX, and to learn the step by step to ensure an effective audit aligned with best governance practices.
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The role of internal auditing in SOX compliance

Internal auditing is responsible for evaluating and monitoring the company's internal controls, ensuring that they are in line with the standards established by the SOX. This includes analyzing financial and operational processes, identifying potential risks, and recommending improvements to mitigate flaws and vulnerabilities.

Since implementing SOX, companies need to have full control over their internal processes. This includes the establishment of a governance structure, the creation of a board of directors, and the adoption of a transparent stance with the market.
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Step by step for an effective and SOX-compliant internal audit

Below are the essential steps to structure an effective internal audit for compliance with the Sarbanes-Oxley Act:

1. Understand the SOX requirements

The first step is to ensure that the internal auditing team thoroughly understands the SOX requirements, especially those articles that directly impact internal controls and corporate governance. This includes:

• Corporate Governance Requirements: Implementation of a structure that includes the board of directors and the clear definition of executive responsibilities.
• Internal Financial Reporting Controls: Ensure that financial reports are accurate and reliable.
• Transparency and Accountability: Maintain clear and transparent communication with stakeholders.

2. Process mapping and risk identification

The next step is to map all the internal processes that directly impact the company's finances and operation. Identifying and documenting these processes allows internal auditing to understand where the risk and vulnerability points are. Key points of attention include:

• Accounts Payable and Receivable Processes
• Inventory and Inventory Control
• Access to Critical Systems and Access Management
• Compliance with Policies and Regulations

3. Implementing effective internal controls

With processes mapped out, it's time to implement robust internal controls to mitigate identified risks. SOX requires that these controls be auditable and well documented. Some best practices include:

• Access Controls: Restrict access to critical systems and financial data.
• Segregation of Duties (SoD): Ensure that sensitive functions are not performed by a single person, reducing the risk of fraud and errors.
• Log Audit: Monitor and document activities in the system for a clear and traceable view of the actions taken.

4. Control testing

After the internal controls are implemented, the internal audit must carry out tests to verify their effectiveness. The tests can be conducted continuously or periodically, depending on the critical nature of the control. This step is essential to ensure that the controls are working as planned and that they meet SOX requirements.

5. Report and documentation of results

Transparency is one of the pillars of SOX, and therefore, documenting the results of the audit is essential. The internal audit must create detailed reports with the findings, highlighting any flaws in the controls and providing recommendations for corrections. These reports help senior management and board make informed decisions and proactively implement improvements.

6. Monitoring

SOX compliance is not a static process but a continuous journey, and so regular monitoring of controls and adjusting practices as necessary are critical steps to maintain compliance over time. Investing in automation technology and continuous auditing tools can facilitate this process, allowing the internal auditing team to detect and respond to control failures in real time.
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Benefits of an effective internal audit for SOX compliance

A well-structured internal audit aligned with SOX requirements brings a series of benefits to the company, such as:

• Risk reduction: Identifying and mitigating risks helps protect company assets and reputation.
• Investor trust: Compliance with SOX demonstrates transparency and commitment to governance, which increases the trust of investors and stakeholders.
• Operational efficiency: Well implemented and monitored controls reduce the need for rework and increase process efficiency.
• Compliance: Internal auditing ensures that the company complies with all legal requirements, avoiding penalties and other sanctions.

Internal auditing is an essential component of achieving and maintaining compliance with the Sarbanes-Oxley Act. By following a structured process, companies can not only meet SOX requirements, but also strengthen their corporate governance, improve transparency, and reduce operational risks.

If your company wishes to improve its internal auditing and ensure effective SOX compliance, consider implementing the best practices presented here and through other relevant content on our blog.

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