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Listen to: "SOC 1 and SOC 2 Reports – Do You Know The Difference?"

If your company provides services to other companies, those services may have an impact on your customers’ financial reporting. As a result, your customers’ auditors may need assurance that the controls surrounding your services are designed effectively, and in some cases, operating effectively. A way to provide that assurance is by undergoing a Service Organization Control (SOC) audit. SOC 1 and SOC 2 audit reports have distinct differences.

SOC Reports serve to assist service organizations “that operate information systems and provide information system services to other entities, build trust and confidence in their service delivery processes and controls through a report by an independent Certified Public Accountant,” according to American Institute of CPAs (AICPA). Your customers will frequently need to comply with audit requests from outside accounting firms, so the results of your SOC audit helps make those audit processes smoother.

Recently, more and more services are being outsourced data centers. Service organizations have made these services a core component of their business model, providing these services more efficiently and cost effectively. It must be noted that the service organization retains the responsibility for the services it provides and for the confidentiality and secure protocols in protecting sensitive data. The SOC 1 and 2 reports grant transparency of specific controls implemented by a service organization, and the tests performed by the auditor. The success or failure of these controls has a direct or indirect impact on the reputation, financial statements and stability of the user organization.

The SOC 1 Report

Also known as the SSAE 18, the SOC 1 report has a financial focus; it covers the service organization’s controls that are relevant to an audit of a user entity’s (customer’s) financial statements. Control objectives are related to both business process and information technology.

A SOC 1 – Type I audit report focuses on a description of a service organization’s control and the suitability of how those controls are designed to achieve the control objectives as of a specified dates. A SOC 1 –Type II audit report contains the same opinions as a Type I, but it adds an opinion on the operating effectiveness to achieve related control objectives throughout a specified period. Learn more about SOC 1 Type I and Type II reports here. SOC 1 audit reports are restricted to the management of the services organization, user entities, and user auditors.

Does My Organization Need a SOC 1 Report?

You probably know whether your organization needs to perform SOC 1 reports for your customers, but it might help you to ask yourself a few key questions to make sure you need to perform this particular report:

  1. Will a SOC 1 report serve as a reliable tool for your customers and their auditors when performing an audit? This function is the cornerstone of a SOC 1 Type 1 report and is invaluable to helping your customer undergo a smooth audit that leaves little room for questions from outside auditors.
  2. Will the SOC 1 report prove useful to your customers who need to comply with the Sarbanes-Oxley Act (SOX) of 2002? A SOC 1 report serves as a solid tool that will help your customers comply with financial laws and regulations, improve adherence to corporate responsibilities, and combat corporate and accounting fraud.
  3. Will the SOC 1 report help form strong relationships with stakeholders and customers? One benefit of a SOC 1 report is that it helps boost trust and confidence in your service organization among stakeholders. A SOC 1 provides an easily accessible report of your processes to create transparency and assurance.

The AICPA clarifies that this type of SOC report is for service organizations that directly impact, or has the potential to impact, their clients’ financial reporting. It is also relevant to user entities’ internal control over financial reporting, according to the Statement on Standards for Attestation Engagements No. 16 (SSAE 16).

The SOC 2 Report

The SOC 2 report is also connected to the SSAE 18 standard. It was created in part because of the rise of cloud computing and business outsourcing of functions to service organizations. These are called user entities in the SOC reports. Liability concerns have caused a demand in assurance of confidentiality and privacy of information processed by the system.

The SOC 2 report addresses a service organization’s controls that relate to operations and compliance, as outlined by the AICPA’s Trust Services criteria in relation to its services, operations, and compliance. Specifically, it reports on the criteria of availability, security, processing integrity, confidentiality and privacy. A service organization may choose a SOC 2 report that focuses on anyone or all five Trust Service principles and may choose either a Type I or a Type II audit. A SOC 2 report includes a detailed description of the service auditor’s test of controls and results. The use of this report is generally restricted.

Does My Organization Need a SOC 2?

SOC 2 requirements govern engaged, technology-based service organizations which store client information in the cloud. This includes SaaS providers and other cloud service platforms.

How Are SOC 1 and SOC 2 Reports Different?

Let’s look at the important differences between the SOC 1 and SOC 2:

  • The scope is different: SOC 1 reports focus on financial controls, while SOC 2 reports focus more broadly on availability, security, processing integrity, confidentiality and privacy.
  • Though they both stem from the Statement on Standards for Attestation Engagements (SSAE) 18, SOC 1 addresses section AT-C 320, while SOC 2 addresses sections AT-C 105 and AT-C 205.
  • SOC 1 tests controls that meet the identified control objectives, where SOC 2 identifies and tests controls that meet the criteria.

Table illustrating the differences between soc 1 and soc 2 reports

Who Receives & Reviews SOC Reports?

The user entity’s auditors are responsible for an organization’s internal controls, regulatory and IT compliance should obtain and review the SOC 1 or 2 report. Anyone in vendor compliance, internal audit, IT management and legal departments may all be parties that have an interest in understanding the control structure of the service organization. Key components to consider when undergoing an SOC report:

  • Does the report include testing operating effectiveness of controls for a specific period of time, or does it only cover a specific point in time?
  • For SOC 1 reports, does the time period of the tests of controls provide appropriate coverage for the specific fiscal year?
  • Does the system or report scope comprehensively outline the services that you outsource?
  • Does the scope of the system include a sub-service organization? Has the service organization utilized the carve-out or inclusive method?
  • Review any testing exceptions to determine impact of your assessment of the service organization.
  • The service auditor’s professional reputation.

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