ASAE 3402

This Standard on Assurance Engagements (ASAE) deals with assurance engagements undertaken by an assurance practitioner[1]^{, #} to provide a report for use by user entities and their auditors, on the controls at a service organisation that provides a service to user entities that is likely to be relevant to user entities’ internal control as it relates to financial reporting.  It complements ASA 402,[2] in that reports prepared in accordance with this ASAE are capable of providing appropriate evidence under ASA 402.  (Ref: Para. A1)

The Framework for Assurance Engagements (the Assurance Framework) states that an assurance engagement may be a “reasonable assurance” engagement or a “limited assurance” engagement and that an assurance engagement may be either an attestation engagement or a direct engagement.[3]  This ASAE only deals with reasonable assurance attestation engagements.[4]

This ASAE applies only when the service organisation is responsible for, or otherwise able to make a statement about, the suitable design of controls.  This ASAE does not deal with assurance engagements:

1. To report only on whether controls at a service organisation operated as described; or
2. To report on controls at a service organisation other than those related to a service that is likely to be relevant to user entities’ internal control as it relates to financial reporting (for example, reports only on controls that affect user entities’ production or quality control).  

This ASAE, however, provides some guidance for such engagements carried out under ASAE 3000.  (Ref: Para.A2)

In addition to issuing an assurance report on controls, a service auditor may also be engaged to provide reports such as the following, which are not dealt with in this ASAE:

1. A report on a user entity’s transactions or balances maintained by a service organisation; or
2. An agreed‑upon procedures report on controls at a service organisation.

Relationship with ASAE 3000, Other Pronouncements and Other Requirements

The service auditor is required to comply with ASAE 3000 and this ASAE when performing assurance engagements on controls at a service organisation.  This ASAE supplements, but does not replace, ASAE 3000, and expands on how ASAE 3000 is to be applied in a reasonable assurance engagement to report on controls at a service organisation. 

[Deleted by the AUASB.  Refer Aus 6.1.[5]^,[6]]

Compliance with ASAE 3000 requires, among other things, that the service auditor complies with the relevant ethical requirements^* related to assurance engagements. It also requires the lead assurance practitioner^# to be a member of a firm that applies ASQC 1.^†

[Deleted by the AUASB.  Refer Aus 0.2.]

The service auditor shall not represent compliance with this ASAE unless the service auditor has complied with the requirements of this ASAE and ASAE 3000.

[Deleted by the AUASB.  Refer Aus 11.1.]

The service auditor shall comply with relevant ethical requirements related to assurance engagements.^* (Ref: Para. Aus A5.1)

Where this ASAE requires the service auditor to enquire of, request representations from, communicate with, or otherwise interact with the service organisation, the service auditor shall determine the appropriate person(s) within the service organisation’s management or governance structure with whom to interact.  This shall include consideration of which person(s) have the appropriate responsibilities for and knowledge of the matters concerned.  (Ref: Para. A6)

Before agreeing to accept, or continue, an engagement, the service auditor shall: 

1. Determine whether:
   1. The service auditor has the capabilities and competence to perform the engagement; (Ref: Para. A7)
   2. The criteria the assurance practitioner expects to be applied by the service organisation to prepare the description of its system are suitable and will be available to user entities and their auditors; and
   3. The scope of the engagement and the service organisation’s description of its system will not be so limited that they are unlikely to be useful to user entities and their auditors. 
2. Obtain the agreement of the service organisation that it acknowledges and understands its responsibility:
   1. For the preparation of the description of its system, and accompanying service organisation’s statement, including the completeness, accuracy and method of presentation of that description and statement; (Ref: Para. A8)
   2. To have a reasonable basis for the service organisation’s statement accompanying the description of its system; (Ref: Para. A9)
   3. For stating in the service organisation’s statement the criteria it used to prepare the description of its system;
   4. For stating in the description of its system:
      1. The control objectives; and,
      2. Where they are specified by law or regulation, or another party (for example, a user group or a professional body), the party who specified them;
   5. For identifying the risks that threaten achievement of the control objectives stated in the description of its system, and designing and implementing controls to provide reasonable assurance that those risks will not prevent achievement of the control objectives stated in the description of its system, and therefore that the stated control objectives will be achieved; and (Ref: Para. A10)
   6. To provide the service auditor with:
      1. Access to all information, such as records, documentation and other matters, including service level agreements, of which the service organisation is aware that is relevant to the description of the service organisation’s system and the accompanying service organisation’s statement;
      2. Additional information that the service auditor may request from the service organisation for the purpose of the assurance engagement; and
      3. Unrestricted access to persons within the service organisation from whom the service auditor determines it necessary to obtain evidence.

Acceptance of a Change in the Terms of the Engagement

If the service organisation requests a change in the scope of the engagement before the completion of the engagement, the service auditor shall be satisfied that there is a reasonable justification for the change.  (Ref: Para. A11‑Aus A12.1)

The service auditor shall determine whether the service organisation has used suitable criteria in preparing the description of its system, in evaluating whether controls are suitably designed, and, in the case of a type 2 report, in evaluating whether controls are operating effectively.*

In determining the suitability of the criteria to evaluate the service organisation’s description of its system, the service auditor shall determine if the criteria encompass, at a minimum:

1. Whether the description presents how the service organisation’s system was designed and implemented, including, as appropriate:
   1. The types of services provided, including, as appropriate, classes of transactions processed;
   2. The procedures, within both information technology and manual systems, by which services are provided, including, as appropriate, procedures by which transactions are initiated, recorded, processed, corrected as necessary, and transferred to the reports and other information prepared for user entities;
   3. The related records and supporting information, including, as appropriate, accounting records, supporting information and specific accounts that are used to initiate, record, process and report transactions; this includes the correction of incorrect information and how information is transferred to the reports and other information prepared for user entities;
   4. How the service organisation’s system deals with significant events and conditions, other than transactions;
   5. The process used to prepare reports and other information for user entities;
   6. The specified control objectives and controls designed to achieve those objectives;
   7. Complementary user entity controls contemplated in the design of the controls; and
   8. Other aspects of the service organisation’s control environment, risk assessment process, information system (including the related business processes) and communication, control activities and monitoring controls that are relevant to the services provided.  (Ref: Para. A15)
2. In the case of a type 2 report, whether the description includes relevant details of changes to the service organisation’s system during the period covered by the description. 
3. Whether the description omits or distorts information relevant to the scope of the service organisation’s system being described, while acknowledging that the description is prepared to meet the common needs of a broad range of user entities and their auditors and may not, therefore, include every aspect of the service organisation’s system that each individual user entity and its auditor may consider important in its particular environment.

In determining the suitability of the criteria to evaluate the design of controls, the service auditor shall determine if the criteria encompass, at a minimum, whether:

1. The service organisation has identified the risks that threaten achievement of the control objectives stated in the description of its system; and
2. The controls identified in that description would, if operated as described, provide reasonable assurance that those risks do not prevent the stated control objectives from being achieved.

In determining the suitability of the criteria to evaluate the operating effectiveness of controls in providing reasonable assurance that the stated control objectives identified in the description will be achieved, the service auditor shall determine if the criteria encompass, at a minimum, whether the controls were consistently applied as designed throughout the specified period.  This includes whether manual controls were applied by individuals who have the appropriate competence and authority.  (Ref: Para. A13‑A14)

When planning and performing the engagement, the service auditor shall consider materiality with respect to the fair presentation of the description, the suitability of the design of controls and, in the case of a type 2 report, the operating effectiveness of controls.  (Ref: Para. A16‑A18)

The service auditor shall obtain an understanding of the service organisation’s system, including controls that are included in the scope of the engagement.  (Ref: Para. A19‑A20)

The service auditor shall obtain and read the service organisation’s description of its system, and shall evaluate whether those aspects of the description included in the scope of the engagement are fairly presented, including whether: (Ref: Para. A21‑A22)

1. Control objectives stated in the service organisation’s description of its system are reasonable in the circumstances; (Ref: Para. A23)
2. Controls identified in that description were implemented;
3. Complementary user entity controls, if any, are adequately described; and
4. Services performed by a subservice organisation, if any, are adequately described, including whether the inclusive method or the carve‑out method has been used in relation to them. 

The service auditor shall determine, through other procedures in combination with enquiries, whether the service organisation’s system has been implemented.  Those other procedures shall include observation, and inspection of records and other documentation, of the manner in which the service organisation’s system operates and controls are applied.  (Ref: Para. A24)

The service auditor shall determine which of the controls at the service organisation are necessary to achieve the control objectives stated in the service organisation’s description of its system, and shall assess whether those controls were suitably designed.  This determination shall include: (Ref: Para. A25‑A27)

1. Identifying the risks that threaten the achievement of the control objectives stated in the service organisation’s description of its system; and
2. Evaluating the linkage of controls identified in the service organisation’s description of its system with those risks. 

When providing a type 2 report, the service auditor shall test those controls that the service auditor has determined are necessary to achieve the control objectives stated in the service organisation’s description of its system, and assess their operating effectiveness throughout the period.  Evidence obtained in prior engagements about the satisfactory operation of controls in prior periods does not provide a basis for a reduction in testing, even if it is supplemented with evidence obtained during the current period.  (Ref: Para. A28‑A32)

When designing and performing tests of controls, the service auditor shall:

1. Perform other procedures in combination with enquiry to obtain evidence about:
   1. How the control was applied;
   2. The consistency with which the control was applied; and
   3. By whom or by what means the control was applied;
2. Determine whether controls to be tested depend upon other controls (indirect controls) and, if so, whether it is necessary to obtain evidence supporting the operating effectiveness of those indirect controls; and (Ref: Para. A33‑A34)
3. Determine means of selecting items for testing that are effective in meeting the objectives of the procedure.  (Ref: Para. A35‑A36)

When determining the extent of tests of controls, the service auditor shall consider matters including the characteristics of the population to be tested, which includes the nature of controls, the frequency of their application (for example, monthly, daily, a number of times per day), and the expected rate of deviation. 

Sampling

When the service auditor uses sampling, the service auditor shall: (Ref: Para. A35‑A36)

1. Consider the purpose of the procedure and the characteristics of the population from which the sample will be drawn when designing the sample;
2. Determine a sample size sufficient to reduce sampling risk to an appropriately low level;
3. Select items for the sample in such a way that each sampling unit in the population has a chance of selection;
4. If a designed procedure is not applicable to a selected item, perform the procedure on a replacement item; and
5. If unable to apply the designed procedures, or suitable alternative procedures, to a selected item, treat that item as a deviation. 

Nature and Cause of Deviations

The service auditor shall investigate the nature and cause of any deviations identified and shall determine whether:

1. Identified deviations are within the expected rate of deviation and are acceptable; therefore, the testing that has been performed provides an appropriate basis for concluding that the control is operating effectively throughout the specified period;
2. Additional testing of the control or of other controls is necessary to reach a conclusion on whether the controls relative to a particular control objective are operating effectively throughout the specified period; or (Ref: Para. A25)
3. The testing that has been performed provides an appropriate basis for concluding that the control did not operate effectively throughout the specified period. 

In the extremely rare circumstances when the service auditor considers a deviation discovered in a sample to be an anomaly and no other deviations have been identified that cause the service auditor to conclude that the relevant control is not operating effectively throughout the specified period, the service auditor shall obtain a high degree of certainty that such deviation is not representative of the population.  The service auditor shall obtain this degree of certainty by performing additional procedures to obtain sufficient appropriate evidence that the deviation does not affect the remainder of the population. 

[8]Obtaining an Understanding of the Internal Audit Function

If the service organisation has an internal audit function, the service auditor shall obtain an understanding of the nature of the responsibilities of the internal audit function and of the activities performed in order to determine whether the internal audit function is likely to be relevant to the engagement.  (Ref: Para. A37)

This ASAE does not deal with instances when individual internal auditors provide direct assistance to the service auditor in carrying out assurance procedures.

Determining Whether and to What Extent to Use the Work of the Internal Auditors

The service auditor shall determine:

1. Whether the work of the internal auditors is likely to be adequate for purposes of the engagement; and
2. If so, the planned effect of the work of the internal auditors on the nature, timing or extent of the service auditor’s procedures.

In determining whether the work of the internal auditors is likely to be adequate for purposes of the engagement, the service auditor shall evaluate:

1. The objectivity of the internal audit function;
2. The technical competence of the internal auditors;
3. Whether the work of the internal auditors is likely to be carried out with due professional care; and
4. Whether there is likely to be effective communication between the internal auditors and the service auditor. 

In determining the planned effect of the work of the internal auditors on the nature, timing or extent of the service auditor’s procedures, the service auditor shall consider: (Ref: Para. A38)

1. The nature and scope of specific work performed, or to be performed, by the internal auditors;
2. The significance of that work to the service auditor’s conclusions; and
3. The degree of subjectivity involved in the evaluation of the evidence gathered in support of those conclusions. 

Using the Work of the Internal Audit Function

In order for the service auditor to use specific work of the internal auditors, the service auditor shall evaluate and perform procedures on that work to determine its adequacy for the service auditor’s purposes.  (Ref: Para. A39)

To determine the adequacy of specific work performed by the internal auditors for the service auditor’s purposes, the service auditor shall evaluate whether:

1. The work was performed by internal auditors having adequate technical training and proficiency;
2. The work was properly supervised, reviewed and documented;
3. Adequate evidence has been obtained to enable the internal auditors to draw reasonable conclusions;
4. Conclusions reached are appropriate in the circumstances and any reports prepared by the internal auditors are consistent with the results of the work performed; and
5. Exceptions relevant to the engagement or unusual matters disclosed by the internal auditors are properly resolved.

Effect on the Service Auditor’s Assurance Report

If the work of the internal audit function has been used, the service auditor shall make no reference to that work in the section of the service auditor’s assurance report that contains the service auditor’s opinion.  (Ref: Para. A40)

In the case of a type 2 report, if the work of the internal audit function has been used in performing tests of controls, that part of the service auditor’s assurance report that describes the service auditor’s tests of controls and the results thereof shall include a description of the internal auditor’s work and of the service auditor’s procedures with respect to that work.  (Ref: Para. A41)

The service auditor shall request the service organisation to provide written representations: (Ref: Para. A42)

1. That reaffirm the statement accompanying the description of the system;
2. That it has provided the service auditor with all relevant information and access agreed to;[9] and
3. That it has disclosed to the service auditor any of the following of which it is aware:
   1. Non‑compliance with law and regulation, fraud, or uncorrected deviations attributable to the service organisation that may affect one or more user entities;
   2. Design deficiencies in controls;
   3. Instances where controls have not operated as described; and
   4. Any events subsequent to the period covered by the service organisation’s description of its system up to the date of the service auditor’s assurance report that could have a significant effect on the service auditor’s assurance report. 

The written representations shall be in the form of a representation letter addressed to the service auditor.^*.  The date of the written representations shall be as near as practicable to, but not after, the date of the service auditor’s assurance report. 

If, having discussed the matter with the service auditor, the service organisation does not provide one or more of the written representations requested in accordance with paragraph 38(a) and (b) of this ASAE, the service auditor shall disclaim an opinion.  (Ref: Para. A43)

The service auditor shall read the other information, if any, included in a document containing the service organisation’s description of its system and the service auditor’s assurance report, to identify material inconsistencies, if any, with that description.  While reading the other information for the purpose of identifying material inconsistencies, the service auditor may become aware of an apparent misstatement of fact in that other information.

If the service auditor identifies a material inconsistency or becomes aware of an apparent misstatement of fact in the other information, the service auditor shall discuss the matter with the service organisation.  If the service auditor concludes that there is a material inconsistency or a misstatement of fact in the other information that the service organisation refuses to correct, the service auditor shall take further appropriate action.  (Ref: Para. A44‑A45)

The service auditor shall enquire whether the service organisation is aware of any events subsequent to the period covered by the service organisation’s description of its system up to the date of the service auditor’s assurance report that may have caused the service auditor to amend the assurance report.  If the service auditor is aware of such an event, and information about that event is not disclosed by the service organisation, the service auditor shall disclose it in the service auditor’s assurance report. 

The service auditor has no obligation to perform any procedures regarding the description of the service organisation’s system, or the suitability of design or operating effectiveness of controls, after the date of the service auditor’s assurance report.

The service auditor shall prepare, on a timely basis, engagement documentation that provides a record of the basis for the assurance report that is sufficient and appropriate to enable an experienced service auditor, having no previous connection with the engagement, to understand:

1. The nature, timing, and extent of the procedures performed to comply with this ASAE and applicable legal and regulatory requirements;
2. The results of the procedures performed, and the evidence obtained; and
3. Significant matters arising during the engagement, and the conclusions reached thereon and significant professional judgements made in reaching those conclusions.

In documenting the nature, timing and extent of procedures performed, the service auditor shall record:

1. The identifying characteristics of the specific items or matters being tested;
2. Who performed the work and the date such work was completed; and
3. Who reviewed the work performed and the date and extent of such review.

If the service auditor uses specific work of the internal auditors, the service auditor shall document the conclusions reached regarding the evaluation of the adequacy of the work of the internal auditors, and the procedures performed by the service auditor on that work.

The service auditor shall document discussions of significant matters with the service organisation and others including the nature of the significant matters discussed and when and with whom the discussions took place.

If the service auditor has identified information that is inconsistent with the service auditor’s final conclusion regarding a significant matter, the service auditor shall document how the service auditor addressed the inconsistency. 

The service auditor shall assemble the documentation in an engagement file and complete the administrative process of assembling the final engagement file on a timely basis after the date of the service auditor’s assurance report.[10]

After the assembly of the final engagement file has been completed, the service auditor shall not delete or discard documentation before the end of its retention period.  (Ref: Para. A46)

If the service auditor finds it necessary to modify existing engagement documentation or add new documentation after the assembly of the final engagement file has been completed and that documentation does not affect the service auditor’s report, the service auditor shall, regardless of the nature of the modifications or additions, document:

1. The specific reasons for making them; and
2. When and by whom they were made and reviewed.

Content of the Service Auditor’s Assurance Report

The service auditor’s assurance report shall include, at a minimum, the following basic elements: (Ref: Para. A47)

1. A title that clearly indicates the report is an independent service auditor’s assurance report.
2. An addressee.
3. Identification of:
   1. The service organisation’s description of its system, and the service organisation’s statement, which includes the matters described in paragraph 9(k)(ii) of this ASAE for a type 2 report, or paragraph 9(j)(ii) of this ASAE for a type 1 report.
   2. Those parts of the service organisation’s description of its system, if any, that are not covered by the service auditor’s opinion. 
   3. If the description refers to the need for complementary user entity controls, a statement that the service auditor has not evaluated the suitability of design or operating effectiveness of complementary user entity controls, and that the control objectives stated in the service organisation’s description of its system can be achieved only if complementary user entity controls are suitably designed or operating effectively, along with the controls at the service organisation.
   4. If services are performed by a subservice organisation, the nature of activities performed by the subservice organisation as described in the service organisation’s description of its system and whether the inclusive method or the carve‑out method has been used in relation to them.  Where the carve‑out method has been used, a statement that the service organisation’s description of its system excludes the control objectives and related controls at relevant subservice organisations, and that the service auditor’s procedures do not extend to controls at the subservice organisation.  Where the inclusive method has been used, a statement that the service organisation’s description of its system includes control objectives and related controls at the subservice organisation, and that the service auditor’s procedures extended to controls at the subservice organisation.
4. Identification of the applicable criteria, and the party specifying the control objectives. 
5. A statement that the report and, in the case of a type 2 report, the description of tests of controls are intended only for user entities and their auditors, who have a sufficient understanding to consider it, along with other information including information about controls operated by user entities themselves, when assessing the risks of material misstatements of user entities’ financial reports/statements.  (Ref: Para. A48)
6. A statement that the service organisation is responsible for:
   1. Preparing the description of its system, and the accompanying statement, including the completeness, accuracy and method of presentation of that description and that statement;
   2. Providing the services covered by the service organisation’s description of its system;
   3. Stating the control objectives (where not identified by law or regulation, or another party, for example, a user group or a professional body); and
   4. Designing and implementing controls to achieve the control objectives stated in the service organisation’s description of its system.
7. A statement that the service auditor’s responsibility is to express an opinion on the service organisation’s description, on the design of controls related to the control objectives stated in that description and, in the case of a type 2 report, on the operating effectiveness of those controls, based on the service auditor’s procedures.
8. [Deleted by the AUASB.  Refer Aus 53.1(h).]

A statement that the firm of which the assurance practitioner is a member applies ASQC 1.

[Deleted by the AUASB.  Refer Aus 53.2(i).]

A statement that the assurance practitioner complies with the independence and other ethical requirements related to assurance engagements.^*

1. A statement that the engagement was performed in accordance with ASAE 3402 Assurance Reports on Controls at a Service Organisation, which requires that the service auditor plan and perform procedures to obtain reasonable assurance about whether, in all material respects, the service organisation’s description of its system is fairly presented and the controls are suitably designed and, in the case of a type 2 report, are operating effectively.
2. A summary of the service auditor’s procedures to obtain reasonable assurance and a statement of the service auditor’s belief that the evidence obtained is sufficient and appropriate to provide a basis for the service auditor’s opinion, and, in the case of a type 1 report, a statement that the service auditor has not performed any procedures regarding the operating effectiveness of controls and therefore no opinion is expressed thereon. 
3. A statement of the limitations of controls and, in the case of a type 2 report, of the risk of projecting to future periods any evaluation of the operating effectiveness of controls. 
4. The service auditor’s opinion, expressed in the positive form, on whether, in all material respects, based on suitable criteria:
   1. In the case of a type 2 report:
      1. The description fairly presents the service organisation’s system that had been designed and implemented throughout the specified period;
      2. The controls related to the control objectives stated in the service organisation’s description of its system were suitably designed throughout the specified period; and
      3. The controls tested, which were those necessary to provide reasonable assurance that the control objectives stated in the description were achieved, operated effectively throughout the specified period.
   2. In the case of a type 1 report:
      1. The description fairly presents the service organisation’s system that had been designed and implemented as at the specified date; and
      2. The controls related to the control objectives stated in the service organisation’s description of its system were suitably designed as at the specified date.
5. The date of the service auditor’s assurance report, which shall be no earlier than the date on which the service auditor has obtained the evidence on which the service auditor’s opinion is based. 
6. The name of the service auditor, and the location in the jurisdiction where the service auditor practices. 

In the case of a type 2 report, the service auditor’s assurance report shall include a separate section after the opinion, or an attachment, that describes the tests of controls that were performed and the results of those tests.  In describing the tests of controls, the service auditor shall clearly state which controls were tested, identify whether the items tested represent all or a selection of the items in the population, and indicate the nature of the tests in sufficient detail to enable user auditors to determine the effect of such tests on their risk assessments.  If deviations have been identified, the service auditor shall include the extent of testing performed that led to identification of the deviations (including the sample size where sampling has been used), and the number and nature of the deviations noted.  The service auditor shall report deviations even if, on the basis of tests performed, the service auditor has concluded that the related control objective was achieved.  (Ref: Para. A18 and A49)

Modified Opinions

If the service auditor concludes that: (Ref: Para. A50‑A52)

1. The service organisation’s description does not fairly present, in all material respects, the system as designed and implemented;
2. The controls related to the control objectives stated in the description were not suitably designed, in all material respects;
3. In the case of a type 2 report, the controls tested, which were those necessary to provide reasonable assurance that the control objectives stated in the service organisation’s description of its system were achieved, did not operate effectively, in all material respects; or
4. The service auditor is unable to obtain sufficient appropriate evidence,

the service auditor’s opinion shall be modified, and the service auditor’s assurance report shall include a section with a clear description of all the reasons for the modification.

If the service auditor becomes aware of non‑compliance with laws and regulations, fraud, or uncorrected errors attributable to the service organisation that are not clearly trivial and may affect one or more user entities, the service auditor shall determine whether the matter has been communicated appropriately to affected user entities.  If the matter has not been so communicated and the service organisation is unwilling to do so, the service auditor shall take appropriate action.  (Ref: Para. A53)

(Ref: Para. 1 and 3)

Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives related to the reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable law and regulation.  Controls related to a service organisation's operations and compliance objectives may be relevant to a user entity’s internal control as it relates to financial reporting.  Such controls may pertain to assertions about presentation and disclosure relating to account balances, classes of transactions or disclosures, or may pertain to evidence that the user auditor evaluates or uses in applying auditing procedures.  For example, a payroll processing service organisation’s controls related to the timely remittance of payroll deductions to government authorities may be relevant to a user entity as late remittances could incur interest and penalties that would result in a liability for the user entity.  Similarly, a service organisation’s controls over the acceptability of investment transactions from a regulatory perspective may be considered relevant to a user entity’s presentation and disclosure of transactions and account balances in its financial report.  The determination of whether controls at a service organisation related to operations and compliance are likely to be relevant to user entities’ internal control as it relates to financial reporting is a matter of professional judgement, having regard to the control objectives set by the service organisation and the suitability of the criteria.

The service organisation may not be able to assert that the system is suitably designed when, for example, the service organisation is operating a system that has been designed by a user entity or is stipulated in a contract between a user entity and the service organisation.  Because of the inextricable link between the suitable design of controls and their operating effectiveness, the absence of a statement with respect to the suitability of design will likely preclude the service auditor from concluding that the controls provide reasonable assurance that the control objectives have been met and thus from opining on the operating effectiveness of controls.  As an alternative, the assurance practitioner may choose to accept an agreed‑upon procedures engagement to perform tests of controls, or an assurance engagement under ASAE 3000 to conclude on whether, based on tests of controls, the controls have operated as described.

(Ref: Para. 9(d) and 9(g))

The definition of “controls at the service organisation” includes aspects of user entities’ information systems maintained by the service organisation, and may also include aspects of one or more of the other components of internal control at a service organisation.  For example, it may include aspects of a service organisation’s control environment, monitoring, and control activities when they relate to the services provided.  It does not, however, include controls at a service organisation that are not related to the achievement of the control objectives stated in the service organisation’s description of its system, for example, controls related to the preparation of the service organisation’s own financial report/statements. 

When the inclusive method is used, the requirements in this ASAE also apply to the services provided by the subservice organisation, including obtaining agreement regarding the matters in paragraph 13(b)(i)‑(vi) as applied to the subservice organisation rather than the service organisation.  Performing procedures at the subservice organisation entails co‑ordination and communication between the service organisation, the subservice organisation, and the service auditor.  The inclusive method generally is feasible only if the service organisation and the subservice organisation are related, or if the contract between the service organisation and the subservice organisation provides for its use.

(Ref: Para. 11)

[Deleted by the AUASB.  Refer Aus A5.1.]

The service auditor is subject to relevant independence requirements, which comprise the requirements referenced in ASA 102.  In performing an engagement in accordance with this ASAE, relevant independence requirements do not require the service auditor to be independent from each user entity.

(Ref: Para. 12)

Management and governance structures vary by jurisdiction and by entity, reflecting influences such as different cultural and legal backgrounds, and size and ownership characteristics.  Such diversity means that it is not possible for this ASAE to specify for all engagements the person(s) with whom the service auditor is to interact regarding particular matters.  For example, the service organisation may be a segment of a third‑party organisation and not a separate legal entity.  In such cases, identifying the appropriate management personnel or those charged with governance from whom to request written representations may require the exercise of professional judgement. 

Capabilities and Competence to Perform the Engagement (Ref: Para. 13(a)(i))

Relevant capabilities and competence to perform the engagement include matters such as the following:

• Knowledge of the relevant industry;
• An understanding of information technology and systems;
• Experience in evaluating risks as they relate to the suitable design of controls; and
• Experience in the design and execution of tests of controls and the evaluation of the results.

Service Organisation’s Statement (Ref: Para. 13(b)(i))

Refusal, by a service organisation, to provide a written statement, subsequent to an agreement by the service auditor to accept, or continue, an engagement, represents a scope limitation that causes the service auditor to withdraw from the engagement.  If law or regulation does not allow the service auditor to withdraw from the engagement, the service auditor disclaims an opinion. 

Reasonable Basis for Service Organisation’s Statement (Ref: Para. 13(b)(ii))

In the case of a type 2 report, the service organisation’s statement includes a statement that the controls related to the control objectives stated in the service organisation’s description of its system operated effectively throughout the specified period.  This statement may be based on the service organisation’s monitoring activities.  Monitoring of controls is a process to assess the effectiveness of controls over time.  It involves assessing the effectiveness of controls on a timely basis, identifying and reporting deficiencies to appropriate individuals within the service organisation, and taking necessary corrective actions.  The service organisation accomplishes monitoring of controls through ongoing activities, separate evaluations, or a combination of both.  The greater the degree and effectiveness of ongoing monitoring activities, the less need for separate evaluations.  Ongoing monitoring activities are often built into the normal recurring activities of a service organisation and include regular management and supervisory activities.  Internal auditors or personnel performing similar functions may contribute to the monitoring of a service organisation’s activities.  Monitoring activities may also include using information communicated by external parties, such as customer complaints and regulator comments, which may indicate problems or highlight areas in need of improvement.  The fact that the service auditor will report on the operating effectiveness of controls is not a substitute for the service organisation’s own processes to provide a reasonable basis for its statement. 

Identification of Risks (Ref: Para. 13(b)(v))

As noted in paragraph 9(c), control objectives relate to risks that controls seek to mitigate.  For example, the risk that a transaction is recorded at the wrong amount or in the wrong period can be expressed as a control objective that transactions are recorded at the correct amount and in the correct period.  The service organisation is responsible for identifying the risks that threaten achievement of the control objectives stated in the description of its system.  The service organisation may have a formal or informal process for identifying relevant risks.  A formal process may include estimating the significance of identified risks, assessing the likelihood of their occurrence, and deciding about actions to address them.  However, since control objectives relate to risks that controls seek to mitigate, thoughtful identification of control objectives when designing and implementing the service organisation’s system may itself comprise an informal process for identifying relevant risks. 

Acceptance of a Change in the Terms of the Engagement (Ref: Para. 14)

A request to change the scope of the engagement may not have a reasonable justification when, for example, the request is made to exclude certain control objectives from the scope of the engagement because of the likelihood that the service auditor’s opinion would be modified; or the service organisation will not provide the service auditor with a written statement and the request is made to perform the engagement under ASAE 3000.

A request to change the scope of the engagement may have a reasonable justification when, for example, the request is made to exclude from the engagement a subservice organisation when the service organisation cannot arrange for access by the service auditor, and the method used for dealing with the services provided by that subservice organisation is changed from the inclusive method to the carve‑out method.

An example engagement letter is contained in [Aus] Appendix 0A.

(Ref: Para. 15-18)

Criteria need to be available to the intended users to allow them to understand the basis for the service organisation’s statement about the fair presentation of its description of the system, the suitability of the design of controls and, in the case of a type 2 report, the operating effectiveness of the controls related to the control objectives. 

ASAE 3000 requires the service auditor, among other things, to determine whether the criteria to be used are suitable, and to determine the appropriateness of the underlying subject matter.[11]  The underlying subject matter is the underlying condition of interest to intended users of an assurance report.  The following table identifies the subject matter and minimum criteria for each of the opinions in type 2 and type 1 reports.

Paragraph 16(a) identifies a number of elements that are included in the service organisation’s description of its system as appropriate.  These elements may not be appropriate if the system being described is not a system that processes transactions, for example, if the system relates to general controls over the hosting of an IT application but not the controls embedded in the application itself. 

(Ref: Para. 19 and 54)

In an engagement to report on controls at a service organisation, the concept of materiality relates to the system being reported on, not the financial reports/statements of user entities.  The service auditor plans and performs procedures to determine whether the service organisation’s description of its system is fairly presented in all material respects, whether controls at the service organisation are suitably designed in all material respects and, in the case of a type 2 report, whether controls at the service organisation are operating effectively in all material respects.  The concept of materiality takes into account that the service auditor’s assurance report provides information about the service organisation’s system to meet the common information needs of a broad range of user entities and their auditors who have an understanding of the manner in which that system has been used. 

Materiality with respect to the fair presentation of the service organisation’s description of its system, and with respect to the design of controls, includes primarily the consideration of qualitative factors, for example: whether the description includes the significant aspects of processing significant transactions; whether the description omits or distorts relevant information; and the ability of controls, as designed, to provide reasonable assurance that control objectives would be achieved.  Materiality with respect to the service auditor’s opinion on the operating effectiveness of controls includes the consideration of both quantitative and qualitative factors, for example, the tolerable rate and observed rate of deviation (a quantitative matter), and the nature and cause of any observed deviation (a qualitative matter). 

The concept of materiality is not applied when disclosing, in the description of the tests of controls, the results of those tests where deviations have been identified.  This is because, in the particular circumstances of a specific user entity or user auditor, a deviation may have significance beyond whether or not, in the opinion of the service auditor, it prevents a control from operating effectively.  For example, the control to which the deviation relates may be particularly significant in preventing a certain type of error that may be material in the particular circumstances of a user entity’s financial report/statements. 

(Ref: Para. 20) 

Obtaining an understanding of the service organisation’s system, including controls, included in the scope of the engagement, assists the service auditor in:

• Identifying the boundaries of that system, and how it interfaces with other systems.
• Assessing whether the service organisation’s description fairly presents the system that has been designed and implemented.
• Obtaining an understanding of internal control over the preparation of the service organisation’s statement.
• Determining which controls are necessary to achieve the control objectives stated in the service organisation’s description of its system.
• Assessing whether controls were suitably designed.
• Assessing, in the case of a type 2 report, whether controls were operating effectively. 

The service auditor’s procedures to obtain this understanding may include:

• Enquiring of those within the service organisation who, in the service auditor’s judgement, may have relevant information. 
• Observing operations and inspecting documents, reports, printed and electronic records of transaction processing. 
• Inspecting a selection of agreements between the service organisation and user entities to identify their common terms. 
• Reperforming control procedures.

(Ref: Para. 21-22) 

Considering the following questions may assist the service auditor in determining whether those aspects of the description included in the scope of the engagement are fairly presented in all material respects:

• Does the description address the major aspects of the service provided (within the scope of the engagement) that could reasonably be expected to be relevant to the common needs of a broad range of user auditors in planning their audits of user entities’ financial reports/statements?
• Is the description prepared at a level of detail that could reasonably be expected to provide a broad range of user auditors with sufficient information to obtain an understanding of internal control in accordance with ASA 315?^[13]  The description need not address every aspect of the service organisation’s processing or the services provided to user entities, and need not be so detailed as to potentially allow a reader to compromise security or other controls at the service organisation.
• Is the description prepared in a manner that does not omit or distort information that may affect the common needs of a broad range of user auditors’ decisions, for example, does the description contain any significant omissions or inaccuracies in processing of which the service auditor is aware?
• Where some of the control objectives stated in the service organisation’s description of its system have been excluded from the scope of the engagement, does the description clearly identify the excluded objectives?
• Have the controls identified in the description been implemented?
• Are complementary user entity controls, if any, described adequately?  In most cases, the description of control objectives is worded such that the control objectives are capable of being achieved through effective operation of controls implemented by the service organisation alone.  In some cases, however, the control objectives stated in the service organisation’s description of its system cannot be achieved by the service organisation alone because their achievement requires particular controls to be implemented by user entities.  This may be the case where, for example, the control objectives are specified by a regulatory authority.  When the description does include complementary user entity controls, the description separately identifies those controls along with the specific control objectives that cannot be achieved by the service organisation alone. 
• If the inclusive method has been used, does the description separately identify controls at the service organisation and controls at the subservice organisation?  If the carve‑out method is used, does the description identify the functions that are performed by the subservice organisation?  When the carve‑out method is used, the description need not describe the detailed processing or controls at the subservice organisation.

The service auditor’s procedures to evaluate the fair presentation of the description may include:

• Considering the nature of user entities and how the services provided by the service organisation are likely to affect them, for example, whether user entities are from a particular industry and whether they are regulated by government agencies.
• Reading standard contracts, or standard terms of contracts, (if applicable) with user entities to gain an understanding of the service organisation’s contractual obligations.
• Observing procedures performed by service organisation personnel.
• Reviewing the service organisation’s policy and procedure manuals and other systems documentation, for example, flowcharts and narratives.

Paragraph 21(a) requires the service auditor to evaluate whether the control objectives stated in the service organisation’s description of its system are reasonable in the circumstances.  Considering the following questions may assist the service auditor in this evaluation:

• Have the stated control objectives been designated by the service organisation or by outside parties such as a regulatory authority, a user group, or a professional body that follows a transparent due process? 
• Where the stated control objectives have been specified by the service organisation, do they relate to the types of s commonly embodied in the broad range of user entities’ financial reports/statements to which controls at the service organisation could reasonably be expected to relate?  Although the service auditor ordinarily will not be able to determine how controls at a service organisation specifically relate to the assertions embodied in individual user entities’ financial reports/statements, the service auditor’s understanding of the nature of the service organisation’s system, including controls, and services being provided is used to identify the types of assertions to which those controls are likely to relate.
• Where the stated control objectives have been specified by the service organisation, are they complete?  A complete set of control objectives can provide a broad range of user auditors with a framework to assess the effect of controls at the service organisation on the assertions commonly embodied in user entities’ financial reports/statements.

The service auditor’s procedures to determine whether the service organisation’s system has been implemented may be similar to, and performed in conjunction with, procedures to obtain an understanding of that system.  They may also include tracing items through the service organisation’s system and, in the case of a type 2 report, specific enquiries about changes in controls that were implemented during the period.  Changes that are significant to user entities or their auditors are included in the description of the service organisation’s system.

(Ref: Para. 23 and 28(b))

From the viewpoint of a user entity or a user auditor, a control is suitably designed if, individually or in combination with other controls, it would, when complied with satisfactorily, provide reasonable assurance that material misstatements are prevented, or detected and corrected.  A service organisation or a service auditor, however, is not aware of the circumstances at individual user entities that would determine whether or not a misstatement resulting from a control deviation is material to those user entities.  Therefore, from the viewpoint of a service auditor, a control is suitably designed if, individually or in combination with other controls, it would, when complied with satisfactorily, provide reasonable assurance that control objectives stated in the service organisation’s description of its system are achieved. 

A service auditor may consider using flowcharts, questionnaires, or decision tables to facilitate understanding the design of the controls.

Controls may consist of a number of activities directed at the achievement of a control objective.  Consequently, if the service auditor evaluates certain activities as being ineffective in achieving a particular control objective, the existence of other activities may allow the service auditor to conclude that controls related to the control objective are suitably designed. 

Assessing Operating Effectiveness (Ref: Para. 24)

From the viewpoint of a user entity or a user auditor, a control is operating effectively if, individually or in combination with other controls, it provides reasonable assurance that material misstatements, whether due to fraud or error, are prevented, or detected and corrected.  A service organisation or a service auditor, however, is not aware of the circumstances at individual user entities that would determine whether a misstatement resulting from a control deviation had occurred and, if so, whether it is material.  Therefore, from the viewpoint of a service auditor, a control is operating effectively if, individually or in combination with other controls, it provides reasonable assurance that control objectives stated in the service organisation’s description of its system are achieved.  Similarly, a service organisation or a service auditor is not in a position to determine whether any observed control deviation would result in a material misstatement from the viewpoint of an individual user entity.

Obtaining an understanding of controls sufficient to opine on the suitability of their design is not sufficient evidence regarding their operating effectiveness, unless there is some automation that provides for the consistent operation of the controls as they were designed and implemented.  For example, obtaining information about the implementation of a manual control at a point in time does not provide evidence about operation of the control at other times.  However, because of the inherent consistency of IT processing, performing procedures to determine the design of an automated control, and whether it has been implemented, may serve as evidence of that control’s operating effectiveness, depending on the service auditor’s assessment and testing of other controls, such as those over program changes. 

To be useful to user auditors, a type 2 report ordinarily covers a minimum period of six months.  If the period is less than six months, the service auditor may consider it appropriate to describe the reasons for the shorter period in the service auditor’s assurance report.  Circumstances that may result in a report covering a period of less than six months include when (a) the service auditor is engaged close to the date by which the report on controls is to be issued; (b) the service organisation (or a particular system or application) has been in operation for less than six months; or (c) significant changes have been made to the controls and it is not practicable either to wait six months before issuing a report or to issue a report covering the system both before and after the changes.

Certain control procedures may not leave evidence of their operation that can be tested at a later date and, accordingly, the service auditor may find it necessary to test the operating effectiveness of such control procedures at various times throughout the reporting period.

The service auditor provides an opinion on the operating effectiveness of controls throughout each period, therefore, sufficient appropriate evidence about the operation of controls during the current period is required for the service auditor to express that opinion.  Knowledge of deviations observed in prior engagements may, however, lead the service auditor to increase the extent of testing during the current period.

Testing of Indirect Controls (Ref: Para. 25(b))

In some circumstances, it may be necessary to obtain evidence supporting the effective operation of indirect controls.  For example, when the service auditor decides to test the effectiveness of a review of exception reports detailing sales in excess of authorised credit limits, the review and related follow up is the control that is directly of relevance to the service auditor.  Controls over the accuracy of the information in the reports (for example, the general IT controls) are described as “indirect” controls.

Because of the inherent consistency of IT processing, evidence about the implementation of an automated application control, when considered in combination with evidence about the operating effectiveness of the service organisation’s general controls (in particular, change controls), may also provide substantial evidence about its operating effectiveness.

Means of Selecting Items for Testing (Ref: Para. 25(c) and 27)

The means of selecting items for testing available to the service auditor are:

1. Selecting all items (100% examination).  This may be appropriate for testing controls that are applied infrequently, for example, quarterly, or when evidence regarding application of the control makes 100% examination efficient;
2. Selecting specific items.  This may be appropriate where 100% examination would not be efficient and sampling would not be effective, such as testing controls that are not applied sufficiently frequently to render a large population for sampling, for example, controls that are applied monthly or weekly; and
3. Sampling.  This may be appropriate for testing controls that are applied frequently in a uniform manner and which leave documentary evidence of their application. 

The means of selecting items for testing available to the service auditor are:

1. Selecting all items (100% examination).  This may be appropriate for testing controls that are applied infrequently, for example, quarterly, or when evidence regarding application of the control makes 100% examination efficient;
2. Selecting specific items.  This may be appropriate where 100% examination would not be efficient and sampling would not be effective, such as testing controls that are not applied sufficiently frequently to render a large population for sampling, for example, controls that are applied monthly or weekly; and
3. Sampling.  This may be appropriate for testing controls that are applied frequently in a uniform manner and which leave documentary evidence of their application. 

Obtaining an Understanding of the Internal Audit Function (Ref: Para. 30)

An internal audit function may be responsible for providing analyses, evaluations, assurances, recommendations, and other information to management and those charged with governance.  An internal audit function at a service organisation may perform activities related to the service organisation’s own system of internal control, or activities related to the services and systems, including controls, that the service organisation is providing to user entities.

Determining Whether and to What Extent to Use the Work of the Internal Auditors (Ref: Para. 33)

In determining the planned effect of the work of the internal auditors on the nature, timing or extent of the service auditor’s procedures, the following factors may suggest the need for different or less extensive procedures than would otherwise be the case:

• The nature and scope of specific work performed, or to be performed, by the internal auditors is quite limited. 
• The work of the internal auditors relates to controls that are less significant to the service auditor’s conclusions.
• The work performed, or to be performed, by the internal auditors does not require subjective or complex judgements.

Using the Work of the Internal Audit Function (Ref: Para. 34)

The nature, timing and extent of the service auditor’s procedures on specific work of the internal auditors will depend on the service auditor’s assessment of the significance of that work to the service auditor’s conclusions (for example, the significance of the risks that the controls tested seek to mitigate), the evaluation of the internal audit function and the evaluation of the specific work of the internal auditors.  Such procedures may include:

• Examination of items already examined by the internal auditors;
• Examination of other similar items; and
• Observation of procedures performed by the internal auditors.

Effect on the Service Auditor’s Assurance Report (Ref: Para. 36‑37)

Irrespective of the degree of autonomy and objectivity of the internal audit function, such function is not independent of the service organisation as is required of the service auditor when performing the engagement.  The service auditor has sole responsibility for the opinion expressed in the service auditor’s assurance report, and that responsibility is not reduced by the service auditor’s use of the work of the internal auditors.

The service auditor’s description of work performed by the internal audit function may be presented in a number of ways, for example:

• By including introductory material to the description of tests of controls indicating that certain work of the internal audit function was used in performing tests of controls. 
• Attribution of individual tests to internal audit.

(Ref: Para. 38 and 40) 

The written representations required by paragraph 38 are separate from, and in addition to, the service organisation’s statement, as defined at paragraph 9(o).

If the service organisation does not provide the written representations requested in accordance with paragraph 38(c) of this ASAE, it may be appropriate for the service auditor’s opinion to be modified in accordance with paragraph 55(d) of this ASAE.

(Ref: Para. 42)

Relevant ethical requirements require that a service auditor not be associated with information where the service auditor believes that the information:

1. Contains a materially false or misleading statement;
2. Contains statements or information furnished recklessly; or
3. Omits or obscures information required to be included where such omission or obscurity would be misleading.[14]

If other information included in a document containing the service organisation’s description of its system and the service auditor’s assurance report contains future‑oriented information such as recovery or contingency plans, or plans for modifications to the system that will address deviations identified in the service auditor’s assurance report, or claims of a promotional nature that cannot be reasonably substantiated, the service auditor may request that information be removed or restated. 

If the service organisation refuses to remove or restate the other information, further actions that may be appropriate include, for example:

• Requesting the service organisation to consult with its legal counsel as to the appropriate course of action.
• Describing the material inconsistency or material misstatement of fact in the assurance report.
• Withholding the assurance report until the matter is resolved.
• Withdrawing from the engagement. 

ASQC 1 requires firms to establish policies and procedures for the timely completion of the assembly of engagement files.[15]  An appropriate time limit within which to complete the assembly of the final engagement file is ordinarily not more than 60 days after the date of the service auditor’s report.[16]

Content of the Service Auditor’s Assurance Report (Ref: Para. 53)

Illustrative examples of service auditors’ assurance reports, related service organisations’ statements and a description of the system are contained in Appendices 1, [Aus] 1A and 2.

Intended Users and Purposes of the Service Auditor’s Assurance Report (Ref: Para. 53(e))

The criteria used for engagements to report on controls at a service organisation are relevant only for the purposes of providing information about the service organisation’s system, including controls, to those who have an understanding of how the system has been used for financial reporting by user entities.  Accordingly this is stated in the service auditor’s assurance report.  In addition, the service auditor may consider it appropriate to include wording that specifically restricts distribution of the assurance report other than to intended users, its use by others, or its use for other purposes.

Description of the Tests of Controls (Ref: Para. 54)

In describing the nature of the tests of controls for a type 2 report, it assists readers of the service auditor’s assurance report if the service auditor includes:

• The results of all tests where deviations have been identified, even if other controls have been identified that allow the service auditor to conclude that the relevant control objective has been achieved or the control tested has subsequently been removed from the service organisation’s description of its system. 
• Information about causative factors for identified deviations, to the extent the service auditor has identified such factors.

Modified Opinions (Ref: Para. 55)

Illustrative examples of elements of modified service auditor’s assurance reports are contained in Appendix 3.

Even if the service auditor has expressed an adverse opinion or disclaimed an opinion, it may be appropriate to describe in the basis for modification paragraph the reasons for any other matters of which the service auditor is aware that would have required a modification to the opinion, and the effects thereof.

When expressing a disclaimer of opinion because of a scope limitation, it is not ordinarily appropriate to identify the procedures that were performed nor include statements describing the characteristics of a service auditor’s engagement; to do so might overshadow the disclaimer of opinion.

(Ref: Para. 56)

Appropriate actions to respond to the circumstances identified in paragraph 56, unless prohibited by law or regulation, may include:

• Obtaining legal advice about the consequences of different courses of action.
• Communicating with those charged with governance of the service organisation.
• Determining whether to communicate with third parties (e.g., law, regulation or relevant ethical requirements may require the service auditor to report to an appropriate authority outside the entity or the external auditor of the service organisation,^[17] or establish responsibilities under which such reporting may be appropriate in the circumstances).
• Modifying the service auditor’s opinion, or adding an Other Matter paragraph.
• Withdrawing from the engagement.

The following example of a service auditor’s engagement letter is for guidance only and is not intended to be exhaustive or applicable to all situations.

The following example of a representation letter is for guidance only and is not intended to be exhaustive or applicable to all situations. 

The following examples of service organisations’ statements are for guidance only and are not intended to be exhaustive or applicable to all situations. 

The following example of the service organisation’s description of the system is illustrative only and is not intended to be exhaustive or applicable to all situations.  The preparation and presentation of the description of the service organisation’s system is the responsibility of management of the service organisation and the format is not prescribed by this ASAE, including this appendix.  Management’s description of the service organisation’s system should be developed as appropriate to suit the individual circumstances of the assurance engagement.

The following examples of reports are for guidance only and are not intended to be exhaustive or applicable to all situations.

The following examples of modified reports are for guidance only and are not intended to be exhaustive or applicable to all situations.  They are based on the examples of reports in Appendix 2.