Vendor Audit: Overview and Guide

More and more organizations are outsourcing their infrastructure, software, and manufacturing to reduce overhead and gain efficiencies as well as being able to focus on what they do best. Therefore, an increase in vendor usage creates a much greater vendor risk landscape. A standardized process for managing third-party risks enables benchmarking risks across vendors and quantifying risk transference.

Vendor audits are essential for managing relationships, ensuring compliance, and minimizing risks. This guide covers key audit types, processes, risk mitigation strategies, and reporting best practices to help businesses maintain quality standards and strengthen vendor partnerships.

Introduction to Vendor Audits

What Is a Vendor Audit?

Vendor audits are essential in today’s business landscape, allowing organizations to ensure that vendors comply with contract terms, meet stringent security standards, and adhere to industry regulations. My industry experience includes working with healthcare organizations where HIPAA regulations mandate that protected health information, regardless of whether on paper or electronic, must be secured. Vendor audits support these requirements, especially as healthcare providers and benefit administrators often rely on numerous third-party data processors. These processors, in turn, are bound by strict contractual obligations to protect data, which cascade down to their own subcontractors, or fourth parties. 

If you’re a startup service provider to a heavily regulated industry, like healthcare or finance, then maintaining client trust is crucial to business growth and retention, as any lapse in security can jeopardize relationships and future opportunities. When outsourcing the processing or custodianship of data in these industries, regular audits become an essential part of vendor risk management. For organizations with low risk tolerance, particularly when handling private or confidential data, these audits serve as a critical safeguard against security breaches. By embedding vendor audits into internal governance practices, companies can better protect their “crown jewels”—their most vital and sensitive data—and integrate these audits into their larger enterprise risk management strategies.

A key component of vendor management is auditing your outsourced processes to measure the risk transferred to the third party and ensuring compliance with contract terms, security policies, and industry regulation.

What Are the Types of Vendor Audits?

Supplier Audit vs. Service Provider Audit

Suppliers are typically providing some sort of product or goods as part of your supply chain. Supplier audits assess quality control, manufacturing processes, supply chain reliability, and product safety. This typically requires testing of metric thresholds by using industry standards (like ISO) and quality metric systems. For reference, see Preparing Your First Supplier Audit Plan published by ISACA.

Service Providers are providing intangible services, such as IT, cloud hosting, legal support, or consulting. Audits of Service Providers focuses on data security, regulatory compliance, service reliability, and performance standards. Some methods of validating compliance of Service Providers are using questionnaires, performance reports, and audit reports.

Internal Audits vs. Third-Party Audits

Internal Audits are conducted by an organization’s in-house audit team focusing on providing management with insights into the effectiveness of processes, uncover inefficiencies, and identify potential risks. The audience is typically intended for internal eyes; therefore, while value can be added to these types of assessments as the in-house audit team has some independence, the assessment may not be sufficient to cover all control aspects of a domain.

Third-party audits offer an unbiased assessment of the organization’s adherence to external standards, such as ISO certifications or regulatory compliance like SOC2, HIPAA, or PCI-DSS. Third-party audits verify compliance from an outsider’s perspective, adding credibility and enhancing trust with customers, investors, and regulatory bodies. Since they are independent, third-party audits provide a more reliable measure of an organization’s adherence to required standards for being granted formal certifications.

Role of Certifications

The following types of certifications, in the form of independent third-party assessments, give some adherence to cybersecurity regulatory standards, such as HIPAA/HITECH or California Consumer Protection Act (CCPA) for sensitive data protection:

• AICPA SOC2 Type 2 (including privacy)
• HITRUST assessment report
• ISO/IEC 27001:2013
• PCI-DES (Payment Card Industry Data Security Standard)

Certifications play a big role in assisting a Vendor Audit, however, not all certifications are created equal and they don’t provide full risk mitigation that something couldn’t go wrong. Additional due diligence may also require penetration test results.

A key part of your vendor audit checklist should be obtaining and reviewing third-party audit reports and certificates. Make sure to examine not only the pending failures but also the third-party auditor’s scope, approach, testing methods, and whether any vendor subcontractors should also be included in your audit procedures. If controls or processes that you would expect the vendor to be performing aren’t audited, inquire with the vendor for evidence of those processes.

What Are the Steps in the Vendor Audit Process?

Step 1: Initial vendor onboarding and audit questionnaires

Make sure the process for requesting new vendors to onboard is seamless and available for your employees within your organization to ensure timely vetting of vendors. When onboarding new vendors, perform a risk assessment based upon operational reliance, data classification, and vendor integrations. These factors will help you decide the frequency and scope of audits for that particular vendor. 

Gathering feedback from the vendors on their procedures is typically done through vendor security assessments. The Cybersecurity and Infrastructure Security Agency (CISA) has a good template to compare your questionnaire against. Again, the size and scope of the questionnaire depends on the outstanding risk your organization has transferred to that vendor. 

Step 2: Audit checklist creation and defining metrics

Begin by identifying specific metrics and controls that align with your organization’s security and compliance requirements. These can include data handling practices, access control policies, and disaster recovery procedures. Defining clear, measurable criteria ensures consistency in evaluations, allowing for meaningful comparisons across vendors. Thresholds should be set to determine how often a vendor is required to be audited, typically based on risk, and threshold(s) that signal an additional inquiry must occur. An example would be setting alerts on RSS feeds for negative news related to your vendor.

Step 3: Performing on-site and remote audits

Depending on the nature of the vendor relationship, audits can be conducted either on-site or remotely. Typically on-site audits are reserved for supplier quality audits which are arranged per contract. These allow for a firsthand inspection of the vendor’s security controls, infrastructure, and practices, often yielding deeper insights. However, remote audits can be just as effective, especially for Service Provider vendors who have detailed documentation and evidence of compliance practices. Whichever method is chosen, maintaining thorough documentation and verifying evidence of compliance are essential to identifying any gaps or areas for improvement in the vendor’s processes. While scheduled spot audits are good, acquiring evidence showing security is occurring effectively on a periodic basis ensures the past history and potential future of those controls maintaining their effectiveness.

Step 4: Internal and external stakeholder involvement

Working with both internal and external stakeholders are crucial for seeing the full picture of the vendor’s process and the internal stakeholders’ intended use of the product or service. Building rapport and open communications between stakeholders fosters collaboration, which can enhance the accuracy and efficiency of the audits.

In Summary: A structured and collaborative vendor audit process includes thorough onboarding, defining clear metrics, consistent auditing practices, and active stakeholder involvement. This proactive approach to vetting vendors is critical in ensuring vendors are meeting security and compliance standards.

Identifying and Managing Vendor Risks

Conducting a Vendor Risk Assessment

Guidance for conducting a vendor risk assessment is similar to any other risk assessment by determining potential threats to assets or operations. This includes review of operational procedures, procurement, financial health, compliance standards adherence, upholding customer privacy and security.

Common Vulnerabilities and Potential Risks

Vendors can introduce a range of security weaknesses, often stemming from inadequate cybersecurity practices, lack of regular security updates, or limited visibility into data handling processes. Common vulnerabilities include unpatched software, insufficient encryption protocols, and poorly configured access controls, which could lead to unauthorized access or data breaches. Additionally, reliance on third-party vendors can expose businesses to vulnerabilities in vendor networks, creating an extended threat landscape that complicates security management. Refer to Supply Chain Risk Management: Best Practices for examples of threats to your supply chain. 

Potential risks associated with vendor vulnerabilities include data breaches, regulatory non-compliance, and reputational damage. For example, a vendor with lax security practices could inadvertently expose sensitive data, potentially leading to compliance penalties under regulations like GDPR or HIPAA. Beyond compliance, these incidents can erode customer trust, resulting in significant brand and financial losses. 

Risk Mitigation Strategies 

Mitigating vendor risks requires proactiveness by determining the highest risks for each vendor and strengthening cybersecurity in those areas. For example, your organiztion can mitigate the risk of a data breach by enforcing strict access controls, requiring multi-factor authentication, and mandating encryption protocols for sensitive data. Sometimes these controls are not out of the box for the vendor and need to be vetted before onboarding. Alongside these protections, implementing clear remediation efforts to address non-compliance or performance issues ensures that vendors quickly align with security standards or correct operational lapses.

An effective risk management strategy also involves developing actionable plans that outline explicit steps, timelines, and responsibilities, both for vendors and internal teams. These plans can detail incident response procedures, designate accountability for risk oversight, and provide regular checkpoints for progress and compliance. 

Proper vendor risk management entails continuous monitoring and contractual stipulations that mandate vendor adherence to security standards, ensuring a more secure partnership. By combining robust preventive measures with structured, ongoing management, organizations can minimize vendor-related risks effectively.

Ensuring Compliance and Quality Standards

Regulatory Requirements and Compliance Audits

Determining regulatory requirements and compliance for vendor audits begins with identifying the specific regulations that apply to your industry, location, and type of data handled. These may include frameworks like GDPR for data protection in the EU, HIPAA for health information in the U.S., or PCI DSS for handling payment card data. 

Once relevant regulations are identified, map out the compliance criteria that vendors need to meet. This may involve reviewing data protection practices, assessing their security policies, and examining their incident response plans to ensure they align with regulatory standards. For critical vendors, an in-depth audit might include inspecting their penetration examinations, encryption methods, data handling protocols, and employee training initiatives. 

Additionally, ensuring that vendor contracts explicitly state compliance obligations is essential; this can include provisions for regular compliance assessments, updates on regulatory changes, and clear accountability measures in case of non-compliance.

Quality Assurance through a Quality Management System (QMS)

Quality assurance (QA) through a QMS is a systematic approach to ensuring that products or services meet established standards and fulfill customer expectations. A QMS integrates various processes, policies, and procedures that help organizations maintain consistency, improve efficiency, and enhance overall quality with the goal of minimizing errors and discrepancies. This system typically includes setting quality objectives, conducting regular audits, managing documentation, and continuously analyzing performance metrics to identify improvement opportunities.

A robust QMS also enables companies to implement corrective and preventive actions effectively. By identifying root causes of issues and addressing them at the source, organizations can prevent recurrence and improve customer satisfaction. Furthermore, a QMS supports regulatory compliance by documenting compliance procedures and providing traceable records, which are valuable during audits. 

Monitoring Vendor Relationships and Ensuring Continuous Improvement?

Regular security audits or assessments, often conducted annually or quarterly, help identify potential weaknesses in a vendor’s systems. There should be a vendor owner who the information security team works with to gather the necessary information on the vendor. 

To promote continuous improvement, organizations should engage in proactive communication with vendors by holding regular cybersecurity review meetings, where both parties can discuss recent security incidents, threat landscapes, and any needed adjustments to protocols. Additionally, implementing a vendor improvement plan that includes cybersecurity training, patch management, and response simulations can elevate the vendor’s security posture over time. 

A QMS enhances quality assurance, reduces operational risks, and fosters a culture of continuous improvement, while positioning the organization as a reliable provider of high-quality products or services. Additionally, building cybersecurity resilience into the vendor management process, organizations can better protect their digital assets and foster a more secure vendor ecosystem.

Reporting and Follow-Up Actions

A detailed audit report template should include the following areas:

• The internal auditors review approach.
• Summary of findings or vulnerabilities.
• An assessment of the vendor’s compliance with security standards.
• Specific risks identified during the audit.

The report should clearly identify any specific recommendations and corrective action plans with details of risk and timelines for remediation.

Vendor management should be integrated as part of a team’s service management workflow management systems to facilitate real-time tracking of audit processes, statuses of vendor findings and orchestrating notifications when new vulnerabilities or audits need to occur. 

After an audit, working with vendors to develop corrective action plans, also known as plan of actions & milestones (POA&M), are critical to ensuring vendors implement recommended changes in a timely manner. Clear remediation plans consist of having defined timelines, responsibilities, and milestones. Including contractual obligations with your vendors about setting deadlines for critical and high-risk vulnerabilities is typical. 

Automated platforms can generate audit reports, send reminders for follow-up actions, track compliance metrics, and maintain documentation of each audit cycle. Automation also enables continuous monitoring of vendor compliance, with real-time alerts for any changes or potential risks in vendor systems. These tools not only save time but also enhance visibility, reduce errors, and allow organizations to scale their vendor management efforts more effectively. By integrating automation, vendor management becomes a more seamless, efficient, and proactive process, ultimately contributing to a stronger, more resilient security posture.

Creating comprehensive audit reports, managing workflows for real-time tracking, implementing follow-up procedures and remediation plans, and leveraging automation tools are key strategies in efficient vendor audit reporting.

Effective Vendor Risk Management

Effective vendor management relies on proactive oversight and continuous improvement to safeguard against risks and maintain secure, reliable partnerships. Comprehensive assessments covering security, compliance, and operational quality, along with detailed audit reports and real-time tracking workflows that reveal each vendor’s risk profile. Structured remediation plans ensure swift corrective actions, while automation tools streamline processes, enabling real-time compliance monitoring and enhancing overall efficiency.

AuditBoard’s Third-Party Risk Management capabilities offer a comprehensive solution for vendor audits, which includes AI-powered automated vendor assessments with metrics and reporting, real-time issue tracking,  and automated follow-ups to streamline vendor oversight and drive continuous improvement. 

Using AuditBoard, you can automate workflows for requesting, submitting, and reviewing vendor questionnaires and aggregate details to create a central inventory to track relevant information on all your vendors. Prioritize your inventory and focus on the vendors that matter most with auto-inherent risk scores.

Schedule a demo to find out how you can take your third-party risk management program to the next level today!

Frequently Asked Questions About Vendor Audit

What is a vendor audit?

Answer: A vendor audit is a proactive approach to managing third-party risks, involving a comprehensive review of a vendor’s compliance to terms outlined in the agreement. A vendor audit assesses security practices, regulatory compliance, and operational quality to ensure alignment with the organization’s standards. Usually a structured evaluation to provide potential risks or vulnerabilities and support a secure, transparent vendor relationship.

What are the types of vendor audits?

Answer: Vendor audits include Supplier Audits for quality and safety of physical goods, Service Provider Audits focusing on data security and compliance in service-based vendors, Internal Audits for identifying process risks within an organization, and Third-Party Audits as independent assessments that validate adherence to external standards, adding credibility and trust.

What are the steps in the vendor audit process?

Answer: The vendor audit process includes four key steps: onboarding and risk assessment, where vendors are vetted based on operational impact and data classification through audit questionnaires; checklist and metric creation, establishing specific criteria and thresholds for security and compliance evaluations; conducting audits, either on-site or remotely, to review vendor practices and gather compliance evidence; and stakeholder collaboration, engaging internal and external stakeholders to ensure accurate and efficient audits. This comprehensive approach enables consistent monitoring and improvement of vendor security and compliance practices.