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Understanding an Entity: Cloud Computing – CPA Exam Definitions

Understanding an Entity Cloud Computing CPA Exam

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Understanding an Entity: Cloud Computing

An auditor needs to obtain an understanding of an entity’s cloud computing system or arrangements, as they can have a significant impact on the processing, storage, and reporting of financial data. This understanding helps the auditor assess the risks of material misstatements and design further audit procedures. The following steps outline how to obtain an understanding of an entity’s cloud computing system or arrangements and document the procedures performed:

  1. Review cloud service agreements: Obtain and review the entity’s cloud service agreements, including service level agreements (SLAs), terms of service, and data privacy policies, to understand the roles and responsibilities of both the entity and the cloud service provider (CSP).
  2. Understand the cloud deployment model: Identify the cloud deployment model used by the entity, such as public, private, or hybrid cloud, and understand the associated benefits, risks, and control responsibilities.
  3. Identify key cloud services: Determine the key cloud services used by the entity that are relevant to the financial reporting process, such as Infrastructure as a Service (IaaS), Platform as a Service (PaaS), or Software as a Service (SaaS), and understand how these services support the entity’s significant business processes.
  4. Evaluate the entity’s cloud governance: Assess the entity’s cloud governance framework, including its risk assessment, cloud strategy, and policies and procedures related to cloud computing. Understand the roles and responsibilities of key personnel involved in managing and overseeing the entity’s cloud arrangements.
  5. Assess cloud-related controls: Evaluate the design and effectiveness of controls related to cloud computing, focusing on areas such as access controls, data encryption, data backup and recovery, and incident response. Understand the roles of both the entity and the CSP in managing and maintaining these controls.
  6. Review CSP audit reports: Obtain and review any available audit reports or certifications related to the CSP’s internal controls, such as Service Organization Control (SOC) reports or ISO certifications. Assess the adequacy of the CSP’s controls in addressing risks related to the entity’s financial reporting process.
  7. Interview key personnel: Interview key personnel involved in the implementation, operation, and maintenance of the entity’s cloud computing arrangements, such as IT management, system administrators, and business process owners. Obtain insights into the entity’s cloud strategy, challenges, and control activities, as well as any known issues or risks.
  8. Document the understanding: Create clear and comprehensive documentation of the procedures performed to obtain an understanding of the entity’s cloud computing system or arrangements, including a narrative or flowchart that details the cloud deployment model, services, and related controls. Highlight any identified risks or control weaknesses and describe how they may impact the financial statements.
  9. Assess the risks of material misstatements: Based on the understanding of the entity’s cloud computing system or arrangements, identify and assess the risks of material misstatements at the assertion level for each relevant financial statement item. This information will be used to plan further audit procedures, including tests of controls and substantive procedures.

By following these steps, auditors can obtain an understanding of an entity’s cloud computing system or arrangements and document the procedures performed, providing a solid foundation for the planning and execution of the audit.

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