Understand the Difference Between SOC 1 Type 1 & 2 Reports

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Sometimes it may seem like your role as your company’s CIO or IT manager — in its multiple and varied facets — never ends. The influx and increasing improvement of technology associated with compliance and auditing may toggle somewhere between “a gift and a curse” in your estimation, and that is as true in your work with SOC (Service Organization Controls) audits as in any other task or procedure that you oversee. However, when it comes to accurate financial reporting for your customers, SOC is an essential tool to keep everyone accountable and protected.

What Are SOC 1 Reports and Why Are They So Vital to Your Organization?

Service Organization 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 testing can help make those audits run more smoothly.

Practical Questions You Can Ask to Determine the Need to Perform 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:

  • Will a SOC 1 report serve as a reliable tool for your customers and their auditors when performing an audit of your customers’ financials? This function is the cornerstone of a SOC 1 Type 1 report and is invaluable to helping your customer undergo a smooth audit that, with diligence from you and your team, leaves little room for questions from outside auditors.
  • Will the SOC 1 report prove useful to your customers who need to maintain compliance with regulations and acts such as the Sarbanes-Oxley Act of 2002? A SOC 1 report serves as a solid tool that will help your customers readily comply with mandated financial laws and regulations to enhance adherence to corporate responsibilities and combat corporate and accounting fraud.
  • Will the SOC 1 Report Help Form and Seal Good Relationships With Stakeholders and Customers? One large benefit that a SOC 1 report provides certainly includes creating trust and confidence in your service organization for your stakeholders and other user entities. A SOC 1 provides an easily accessible report of your processes to create transparency and a shorthand for frank discussions about processes and results.

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

As useful as SOC 1 reports are, the different types of these specific reports (Type 1 and Type 2) tend to cause confusion for many IT professionals who work to wrap their minds around the definition of a SOC 1 Type 1 Report and Type 2 Report and sorting out the practical differences between the two. If you struggle to distinguish the subtle definition between the two, you are not alone, so take some time to learn the details of each type of report before getting started.

soc type 1 type 2 report

What Is a SOC 1 Type 1 Report?

The information that you gain from a SOC 1 Type 1 report allows you, as the user auditor, to perform critical risk assessment procedures and lets you know whether you can achieve the related control objectives on a specified date. The report also describes your organization’s system and how it works to achieve goals set to serve your customers. The report also delivers an opinion on the fairness of your system and the design of the controls.

What Is a SOC 1 Type 2 Report?

Similar to a Type 1 SOC report, a Type 2 report contains all the same information but adds in your design and testing of the controls over a period of time, which is typically six months — as opposed to a specified date used on a Type 1 SOC report — and describes the testing performed and the results. SOC 1 Type 2 reports cover more time and a more thorough investigation of your design and processes, so it is a significantly more rigorous test for you and your team to perform. The benefit of such hard work is the detailed results that you can provide to your customer.

SOC 1 Type 1 and Type 2 Reports Provide a Panoramic and Confidential View of Your Organization’s Processes

Unless otherwise authorized, any SOC 1 testing you do, as well as any results you derive, are to remain strictly between your service organization, user entities and user auditors.

Finding Outside Help to Further Clarify the Difference Between SOC 1 Type 1 and Type 2 Reports

Learning the difference between these types of results, as well as the other myriad tasks you perform in the course of the day for your service organization, can take time. In your efforts to always provide your customers with the best efforts to ensure accuracy and compliance, you and your executive board might consider hiring a professional firm filled with expert Certified Public Accountants who continually study and practice the differences between the types of SOC 1 reports.

At I.S. Partners, LLC, we can ease the process for you and your conscientious IT team until you all thoroughly understand the differences and gain enough confidence to take the lead on your own. We hope you contact us. We would love to talk to you about your SOC 1 Type 1 and Type 2 services and what we can do to help. Contact us today by calling 215-675-1400 or receive a free SOC 1 Quote here!

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