Although internal audits are rarely discussed, they are unquestionably crucial to preserving financial integrity in any SaaS organization. Your organization can better comprehend risks and receive confirmation that your internal controls are effective thanks to the independent voice.

It’s tempting to “save time” by painting your financial procedures in broad strokes and disregarding the tiny details when you contemplate the amount of labor that goes into a single audit. (This is particularly true for early-stage SaaS businesses that are just interested in determining product/market fit and producing positive cash flow each month.)

With hackers always coming up with inventive new ways to target websites and applications, especially those of small and medium-sized enterprises, SaaS security audits are becoming more and more crucial. Unfortunately, because their security procedures are routinely neglected or completely disregarded, such organizations are frequently an easy target for those with evil intentions.

What is an Internal Audit?

The goal of an internal audit is to find weaknesses in your company’s internal controls and financial procedures so that they may be fixed before an external audit. This gives management a safeguard against erroneous financial information during an external audit or during due diligence with prospective investors (i.e., risk management).

You must delve deeply into your company’s financial status in order to successfully execute an internal audit. Examine the accounting records. Examine internal control procedures, cash holdings, and other delicate financial areas that an external auditor would examine.

Unlike external audits, internal audits don’t conclude with an audit report. It’s a preventative measure to obtain evidence related to compliance with regulatory requirements provided by GAAP or IFRS. It’s not a pass/fail activity. The internal auditor is usually tasked with providing recommendations to improve and correct inefficiencies in an organization’s existing financial procedures.

There aren’t any “rules” per se because the internal audit system is not constrained by any one set of laws or regulations. Here is how we advise SaaS companies to organize and carry out an internal audit from beginning to end.

1. Draft your auditing plan

First things first, create an audit schedule and communicate it to everyone involved. You can draft your own audit programs and tests, or you can use resources provided by the Institute of Internal Auditors (IIA), a professional association that advocates and promotes the importance of internal audits.

2. Review previous audits 

Next, you’ll want to review the results of any previous internal audits. This will make it easier to identify potential deficiencies or areas of concern in your company’s financial operations and internal controls. 

Pay special attention to any failures in following accounting principles and accounting standards. 

Startups tend to take shortcuts when it comes to compliance with the Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS). Compliant financial statements are not their primary focus, so they’re often inclined to use the cheapest accounting solution. But all companies—yes, even startups—should think long-term about their financial future and whether they should raise a funding round, continue to scale, or prepare to sell. Such strategic events generally require compliance with required standards, and having reliable reports ready when requested during due diligence is critical. 

3. Gather financial documents

Grab the financials documents that would be subject to an external review: signed customer contracts, addendums, SOWs, POs, vendor contracts, invoices, batch deposit support, bank statements, time entry reports tracking time for capitalized software and percentage-of-complete revenue. 

4. Keep financial records up to date 

Without timely and reliable information, accounting records can become unreliable themselves, creating discrepancies in your company’s financial records. Your bookkeeping can be done manually, however, it’s not time-efficient and could leave your auditing procedure prone to human error.

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Using financial operations software like Maxio enables you to sync data between your CRM and general ledger in real time, ensuring that all your financial records are readily available and up-to-date.

5. Review your accounting system

It’s finally time to start the auditing process! 

First, identify and review each element of your company’s accounting system, including individual T-accounts (debits and credits), journal entries, the general ledger, and current financial statements. Systematically work through the accounting system to ensure all necessary accounts are present, journal entries are posted to the general ledger in a timely manner, and your accounting system has the ability to support upcoming changes in the accounting standards like ASC-606 and ASC-842 (i.e. a forward-thinking accounting system).

Here’s a quick list of the features you should have at your disposal:

• Automate basic tasks such as billings, sub-ledger to main ledger reconciliation, and running reports based on customized queries.
• The option to set up standard protocols to prevent unauthorized transactions such as deleting records, or creating a duplicate journal entry.
• A backup plan to safeguard financial records against server crashes, accidentally deleted files, etc.
• Restrict access to specific modules so that only the appropriate people have access to the data they need. (For example, the sales team shouldn’t be able to prepare bank reconciliation or cut checks.)
• Ability to handle recurring revenues, subscriptions, SOW, sales orders, products, services, and unexpected deals separately

6. Review your internal control policies

Do your internal controls provide adequate protection against instances of potential theft or fraud? Internal control policies typically include the separation of accounting duties between different employees, locked safes for holding pending bank deposits, and individual permissions for password-protected accounting software.

7. Compare internal and external records

After you’ve reviewed your internal control policies, you’ll need to compare your internal records of cash holdings, income, and expenses against external records, such as bank statements and tax records. Similarly, you can also compare your company’s stored external records against internal records.

8. Look at tax records

Analyze your company’s internal tax records and official tax returns. According to the IRS, you should hold onto records for at least three years, unless you filed a fraudulent return—in this case, you should hold onto your tax records indefinitely.

Browse through your company’s tax receipts from the IRS and compare them against records of tax liabilities and taxes paid in your company’s accounting records. You should also review the range of credits and deductions claimed on your most recent tax return, looking for discrepancies in your company’s financial reporting, such as inflated expense numbers.

What is a SaaS Security Audit?

You must evaluate a few aspects of your company’s security procedures in order to guarantee that the data on your SaaS platform is kept safe, secure, and confidential. This includes anything from the security practices of your workers to any software flaws.

A SaaS security audit is the entire procedure, which identifies risky areas and allows you to start repairing them. Conducting such audits on a regular basis is an excellent strategy to make sure that you are less likely to be hacked.

How Can You Conduct a SaaS Security Audit?

There are a few things to do before you conduct an audit – namely, do some preliminary research about your platform, and make sure that your platform meets the SaaS Considerations. Then, you can follow these broad categories as convenient:

1. Make sure your employees are security smart

The security practices of your organization’s employees make a world of difference to your overall security. By ensuring that every person has their own accounts (following the principle of least privilege to decide how to assign permissions), using strong passwords that are regularly changed, and using two-factor authentication.

Finding out how security-aware your team is a good foundation for a SaaS security audit. This can also help you decide whether you need to conduct specialized security awareness sessions for your employees.

2. Assessing your customers

Protecting your customers is essential. Making sure your customers are security-aware can ensure that they can deal with security incidents better. You can also enforce two-factor authentication to uphold security.

Assessing your customers’ awareness during a SaaS security audit would help paint a clearer picture of your security scenario.

3. Making sure data is protected

Data is next, and it is one of the most critical components of a SaaS security audit. Data is usually in one of three different states, and each one of them has a different level of vulnerability and needs to be secured in a different manner.

• 1. Data at Rest

Data stored on your cloud is at rest, and this is a relatively secure state. Here, information is primarily protected by defenses such as firewalls and anti-virus programs. However, you would need additional layers of defense to protect sensitive data from intruders in the event of a hack.

Another good security practice is to store individual data elements in separate locations to decrease the likelihood of attackers gaining access to all information at once.

• 2. Data Being Used

Data that you’re currently using is more vulnerable than data at rest because, by definition, it must be accessible to those who need it. The more people and devices that have access to the data, the greater is the risk that it can be compromised. The key to securing data in use is to authenticate and control who has access to it. Make sure you can track and report any relevant activity which might mean that your data is in danger.

• 3. Data in Transit

Data is at its most vulnerable when it is in motion. Anyone with the right tools can intercept your data as it moves from source to destination. The best way to ensure that your data remains confidential is to transmit it through an encryption platform that integrates with your existing systems and workflows.

In addition to the above points, you might want to ensure the following too:

• Data is validated and sanitized upon entry: Data that has not been validated or sanitized can lead to a lot of dangerous attacks – most commonly, injection attacks. Make sure you check this during your audit.
• All data is encrypted: All data coming in and going out must be segregated meaningfully and encrypted separately and securely. The encryption keys must be handled carefully, too.
• Data is protected and has a well-tested recovery plan: Data security must be carefully monitored. Even in the case of data loss, you should have a great, foolproof Incident Response plan.
• There is a strict data retention policy: This is extremely important. This way, not only do you free up space you can use for your backups, but also makes your users feel more secure sharing their data with you. You can’t lose it if you don’t have it.

4. Following secure coding and secure software development life cycles

Your code is one of the most important facets of your security, so make sure to assess it during your SaaS security audit. Secure code definitely helps in taking your security to the next level. By shifting the security earlier to the development stage, you can easily detect potential vulnerabilities or weaknesses in your applications early in the life cycle, and build a secure application.

To effectively measure code quality, one needs to look at it under four different measures – reliability, efficiency, security, and maintainability. Following are some points you should keep in mind while conducting an evaluation of your code:

• 1. Reliability

• You need to ensure the protection of the state in multi-threaded environments.
• Check for the safe use of inheritance and polymorphism.
• Analyze the resource bounds management and complex code.
• Look at how allocated resources and timeouts are being managed.

• 2. Efficiency

• Make sure the code complies with the best practices of Object-Oriented Programming.
• Check if the best database and SQL practices are being followed.
• Look for and evaluate expensive computations in loops.
• Analyze static connections versus connection pools.
• Ensure that the best garbage collection practices are being followed.

• 3. Security

• Check for the use of hard-coded credentials.
• Look for any buffer overflows.
• Also, look for missing initializations.
• Make sure all array indices are properly validated.
• Look for and ensure proper locking.
• Make sure there are no uncontrolled format strings.

• 4. Maintainability

• Make sure the code is well-structured.
• Analyse the cyclomatic complexity.
• Analyse the level of dynamic coding.
• Look for and control the over-parameterization of methods.
• Look for any hard coding of literals.
• Check and manage excessive component size.

5. Ensure that applications are deployed safely

Another great place to audit is the platform used to deploy your application. Established SaaS vendors like Amazon and Google go to great lengths to ensure security, and you can also come up with a checklist to make sure that appropriate safety measures are taken and safety standards are followed.

6. Ensure compliance with standards

Make sure your application complies with well-known security standards. You may make a checklist of all the compliances and check and test them accordingly – this may even help set a procedure for conducting your SaaS security audit.

You can also get a professional security team to conduct a security audit. Astra Security’s engineers quickly audit your applications and also help your development team patch them. At the end of the process, you are issued a safe-to-host certificate that you can proudly display. After all, such a secure application does call for some bragging!

7. Invest in security resources

Whether in-house or external professionals like Astra Security to conduct your SaaS security audits, investing in security teams is always a good idea (not just hassle-free), and it is one of the only tried-and-true methods to make sure you never get hacked.