What is SOC 1 Audit?
SOC 1 reports address a company's internal control over financial reporting, which pertains to the application of checks-and-limits. By its very definition, as mandated by SSAE 18, SOC 1 is the audit of a third-party vendor’s accounting and financial controls. It is the metric of how well they keep up their books of accounts..
There are two types of SOC 1 reports available, differing by the extent to which the controls need to be examined to create adequate user entity assurance.
Type I – often referred to as point-in-time reports, the controls within this type of audit are tested as of a specific date and include a description of the service organization’s system. Type I reports only test the design of a service organization’s controls, not the operating effectiveness. Most organizations receive a Type I report once and then transition to a Type II report.
Type II – this report covers a period of time (typically 12 months), includes a description of the service organization’s system, and tests the design and operating effectiveness of the controls.
What is SOC 2 Audit?
While the SOC 1 report focuses on internal controls related to financial reporting, the SOC 2 report is directed toward non-financial controls. SOC 2 reports are important for organization oversight, vendor management programs, risk management processes, and regulatory oversight. The non-financial controls that make up the SOC 2 report are based on the five Trust Services Categories (TSC):
1).Security – information and systems are protected against unauthorized physical and logical access that could affect the entity’s ability to meet its objectives.
2).Availability – information and systems are available for operation and use as committed or agreed.
3).Processing Integrity – information and systems processing is complete, accurate, timely, and authorized.
4).Confidentiality – information that has been designated as confidential is protected to meet the user entity’s objectives.
5).Privacy – personal information is collected, used, retained, disclosed, and destroyed in conformity with the user entity’s privacy notice.
Similar to the SOC 1 report, the SOC 2 report has the same structure and can be divided into Type I and Type II based on whether or not the control design and effectiveness need to be tested. Additionally, a SOC 2 report is often a prerequisite for service organizations to partner with tier-one organizations in the supply chain. Examples of the types of service organizations that would receive a SOC 2 report include data centers, SaaS, and network monitoring service providers.
When to go for SOC 2 Audit?
Your organization should pursue SOC 1 if your services impact your clients’ financial reporting. For example, if your organization creates software that processes your clients’ billing and collections data, you are affecting your client’s financial reporting, and thus a SOC 1 is appropriate. Another reason organizations pursue SOC 1 vs SOC 2 is if their clients ask for a “right to audit.†Without SOC 1, this could be a costly and time-intensive process for both parties, especially if several of your clients ask to submit a similar request. You may also need to comply with SOC 1 as part of a compliance requirement. If your company is publicly traded, for example, you will need to pursue SOC 1 as part of the Sarbanes-Oxley Act (SOX).
SOC 2, on the other hand, is not required by any compliance framework, such as HIPAA or PCI-DSS. But if your organization doesn’t process financial data but processes or hosts other types of data, SOC 2 makes sense. With today’s business climate being extraordinarily aware and sensitive to data breaches, your clients may want proof that you are taking reasonable precautions to protect their data and stop any leaks.
The choice to pursue SOC 1 vs SOC 2 depends on your organization’s situation. One critical determining factor when choosing between SOC 1 or 2 is whether your organization’s controls would affect your client’s internal control over financial reporting. You may want to engage with an audit firm to determine which SOC type (or both) is the right fit for your organization.
What is SOC 3 Audit?
Many times your customers want firm assurances that their data has the pinnacle of protection from your service organization. Your user entities often want or need to show their own auditors that your organization has adhered to the “5 Trust Services Principals of Security, Availability, Processing Integrity, Confidentiality, and Privacy for all shared data and information.†A user organization can request a SOC 3 Report to address any or all of the 5 Trust Services Principals.
A SOC 3 Report covers the same basic materials and concerns of a SOC 2 Report, but it only distributes the auditor’s report without including description of the tests and their results or any opinions on the processes and results. More of a general-use type of report, a SOC 3 allows you to place a SOC 3 seal on your website to show your good standing..