What Is the Difference Between Type 1 and Type 2 SOC?

What information do you need about SOC 1 and its 1 Type 2 requirements? Service Organization Control (SOC 1) is a set of standards developed by the American Institute of Certified Public Accountants (AICPA). It evaluates a service organization's internal controls related to financial reporting. SOC 1 compliance for SaaS providers ensures they've implemented and maintained effective measures over their financial reporting processes.

There are two types of SOC 1—Type 1 and Type 2 (They are different from SOC 2 Type 1 and Type 2). Read on to understand the definitions of SOC Type 1 and Type 2, plus how they differ.

What is SOC Type 1?

SOC Type 1 report example is issued by an independent auditor that evaluates a service organization's internal controls over financial reporting as of a specific date. SOC 1 Type 2 is similar to SOC 1 Type 1 only that it assesses a company's financial reporting over a period of time.

Who Needs a SOC 1 report?

SOC 1 report suits companies that handle data or provide services critical to their clients' financial reporting. This may include providers of cloud services, data centers, payroll processing, and other similar organizations.

With this report, organizations that process information that could impact the financial statements of their customers can assure clients about the effectiveness of their control environment. This is best proven with a SOC 1 Type 2 report, which is usually more comprehensive than a SOC Type 1 report example.

SOC 1 Type 2 Requirements

A SOC 1 Type 2 report includes everything in a Type 1 report but goes a step further. It evaluates the operational effectiveness of these controls over a period, usually a minimum of six months. This type of report is more detailed as it assesses how an organization's internal controls operate over time, providing a higher assurance level than Type 1.

Understanding the Difference Between Type 1 and Type 2 SOC

Type 1 and Type 2 report audits are part of the SOC 1 framework in assessing financial reporting, but they differ in timing and depth of evaluation. SOC 1 Type 1 report evaluates a firm's internal processes related to finance as of a specific date, making it less detailed and simpler to prepare. On the other hand, SOC 1 Type 2 covers a period, typically between six months and a year. This makes it more detailed and more comprehensive than SOC 1 Type 1.

Another difference between the two is their scope of assessment. SOC Type 1 assesses the design of internal controls at a certain point in time, while SOC Type 2 evaluates the effectiveness of these controls over a designated period.

Therefore, Type 2 offers a higher level of assurance to stakeholders as it demonstrates the adequacy of control design and how operational and reliable they are in the long term.

What are the Five Sections Usually in a SOC 1 Type 2 Report?

A SOC 1 Type 2 report example commonly includes the following five parts:

Auditor's Report

This section is usually the first part of the SOC 1 Type 2 report. An independent service auditor writes who conducted the assessment. Here, the auditor provides a professional opinion on whether the existing internal controls are suitable and their operating effectiveness during the assessment period. This is the most critical part of the report.

Management's Assertion

In this section, the service organization's management provides a written assertion about the effectiveness of the controls over the relevant financial reporting processes. Management asserts that they design controls effectively and operate effectively throughout the assessment period.

Description of the System

The description of the system section provides an overview of the service organization's control environment and the relevant processes involved. It includes detailed information about how the controls are designed and operated to achieve their objectives. This section helps user organizations understand the context in which the controls operate.

Tests of Controls and Results

This part describes the procedures performed by the independent service auditor during the assessment period. It outlines the testing methods used to evaluate the operating effectiveness of controls. The section includes details on the tests conducted, the results of those tests, any control deficiencies or weaknesses identified, and the auditor's conclusions about control performance.

Other Information

This part entails extra details that management wishes to include, such as context around specific controls or additional explanations.

Understanding the differences between SOC 1 Type 1 and Type 2 reports is crucial if you handle sensitive data or provide services vital to your customers' financial reporting. Following these standards helps you comply with regulations and build trust with clients by showing your commitment to security and integrity. Contact us today to learn more about SOC Type 1 and Type 2 report audits and which suits your organization best.