Complementary Subservice Organization Carve Out & Inclusive Method.

In this video, we discuss complementary subservice organization carve out and inclusive method as covered on the Information Systems and Controls (ISC) CPA Exam.

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Complementary Subservice Organization Controls
In the context of Service Organization Control (SOC) engagements, particularly SOC 1 and SOC 2 reports, the term "complementary subservice organization controls" refers to controls that are implemented by a subservice organization (also known as a sub-service provider) which are necessary to achieve control objectives stated by the service organization in its system description. This concept is essential when the service organization outsources some of its tasks or functions to another entity. Here’s a detailed overview:

1. Definition and Importance
Complementary Controls: These are specific controls at the subservice organization that the service organization relies upon to meet its control objectives. These controls complement the controls of the service organization, ensuring a comprehensive approach to risk management and control effectiveness.
Importance: They are crucial because they address potential gaps in the service organization's control environment that may arise due to the outsourcing of services. They ensure that the overall control objectives are met despite some processes being handled externally.
2. Responsibility of Service Organizations
Disclosure and Description: The service organization is responsible for disclosing the nature of the services provided by the subservice organization and describing the complementary subservice organization controls in its system description.
Monitoring: It is also responsible for monitoring the effectiveness of these controls to ensure that they are appropriately designed and operating effectively.
3. Inclusion in SOC Reports
SOC 1 Report: In a SOC 1 report, these controls are relevant where the subservice organization's activities impact the service organization's ability to achieve control objectives related to financial reporting.
SOC 2 Report: In SOC 2 engagements, the focus extends to controls related to security, availability, processing integrity, confidentiality, or privacy. The complementary subservice organization controls help ensure that these criteria are met consistently, even when some processes are outsourced.
4. Evaluation by Auditors
Auditor's Role: Auditors review whether the service organization has effectively described and considered the complementary subservice organization controls in its system description. Auditors also assess whether the service organization has processes in place to monitor and evaluate the effectiveness of these controls.
Testing: Depending on the nature of the engagement, auditors may need to consider testing these controls directly, particularly if they are critical to the service organization's control environment.
5. Challenges
Complexity: Managing and monitoring controls across multiple organizations can be complex, especially when subservice providers are involved in critical processes.
Dependencies: The service organization's control environment becomes partially dependent on another entity's controls, which may vary in effectiveness and reliability.
6. Best Practices
Clear Agreements: Service organizations should have clear and enforceable agreements with subservice organizations that specify required controls and reporting responsibilities.
Regular Assessments: Conduct regular assessments or audits of the subservice organization's controls to ensure they are effective and align with the stated objectives.
Transparency: Maintain transparency with users about the use of subservice organizations and the impact of their controls on the service organization’s overall control environment.
7. User Entity Considerations
User Review: Entities using the service organization’s reports should understand and consider how complementary subservice organization controls affect their own risk assessments and control environments.
Understanding and managing complementary subservice organization controls is crucial for service organizations that outsource part of their operations. These controls ensure that outsourcing does not compromise the integrity, security, and effectiveness of the service organization’s overall control environment, thereby maintaining trust with clients and stakeholders.

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