SOC 1 vs SOC 2

Companies that handle client data bear a great deal of obligation to their customers, both legally and ethically. Stringent internal security rules and controls must be set up to ensure data security. Even with the greatest degree of execution, stakeholders may not completely understand the magnitude of the efforts made to secure systems and develop a strong framework. Service Organization Control (SOC) reports, including SOC 1 and SOC 2, are useful in this situation.

SOC reports help to evaluate and demonstrate the efficacy of controls for security, availability, processing integrity, confidentiality, and privacy. SOC reports address security, availability, processing integrity, confidentiality, and privacy. Understanding and executing these rules is critical to compliance for SaaS.

What is SOC 1?

The AICPA defines SOC 1 as the first section of the Service Organization Control series. It focuses on controls related to financial reporting. SOC 1, 2, and 3 adhere to the guidelines established in the Statement on Standards for Attestation Engagements (SSAE 18). Specifically designed for companies (service organizations) handling financial data for clients or partners, SOC 1, although not as relevant as its counterparts, caters to this specific domain.

SOC 1 compliance involves ensuring that companies handle, transmit, or store its users’ financial statements securely. These reports help boost client confidence while reducing the risk of fraud or financial irregularities. They are particularly beneficial for management, investors, auditors, and consumers for reviewing internal controls over financial reporting per AICPA rules.

SOC 1 compliance becomes critical for your firm when customers or prospects request to see your report, especially if you handle financial data or financial reporting for users, such as payroll, stock options, retirement plans, and so on. Larger organizations may need their providers to be compliant to pass audits. Similarly, if your vendors manage user financial reports, you may need to check their compliance.

Is SOC 1 a Certification?

A SOC 1 certification is a document that demonstrates that an organization has undergone a SOC 1 audit on its services regarding clients’ financial reports and information. It serves as evidence that the company follows best practices to protect customer data in areas such as finance, security, privacy, and processing integrity. Having SOC 1 Certification is beneficial, especially when clients request an audit, as conducting one without SOC 1 could be costly and time-consuming.

After a SOC 1 audit, organizations create a report called a SOC 1 report, previously named SAS 70 (Statement on Auditing Standards 70) and later replaced by SSAE 16 (Statements on Standards for Attestation Engagements no. 16).

Clients or investors in a Service Organization may require SOC 1 certification/attestation reports, which have an impact on the client’s Internal Controls over Financial Reporting (ICFR). Depending on the industry and related risks, SOC 1 certification shows that the required controls are in place to meet control objectives.

SOC 1 certification remains valid for a year. A SOC 1 report’s opinion remains valid for one year from its issuance. To ensure SOC 1 compliance, the company must conduct an annual SOC 1 audit.

What Does a SOC 1 Report Cover?

A SOC 1 Report, or System and Organization Controls Report, focuses on controls within a service organization that affect user entities’ internal control over financial reporting. This report, formerly known as the SAS70 (or SSAE 16) standard, covers both Type I and Type II reports that have been subject to SSAE 18 guidance since May 1, 2017.

A SOC 1 report example evaluates service organization controls related to a user entity’s internal control over financial reporting. To meet the needs of user entities and their auditors by assessing how well a service organization’s internal controls work.

SOC 1 Type 1, also known as a “Report on Management’s Description of a Service Organization’s System and the Suitability of the Design of Controls,” enables user auditors to perform important risk assessment processes. It gives insights into meeting control objectives on a certain day, as well as an opinion on the system’s fairness and control architecture.

SOC 1 Type 2, formally known as a “Report on Management’s Description of a Service Organization’s System and the Suitability of the Design and Operating Effectiveness of Controls,” includes all Type I material but goes beyond. The SOC 1 Type 2 report example includes the design and testing of controls over some time (often six months), including both the testing done and the findings. This type of report is more rigorous and intensive, requiring a thorough investigation of the system’s design and processes by auditors.

What Are the SOC 1 Controls?

SOC 1 focuses on controlling objectives within a given process area and outlining internal controls that are important to auditing a user entity’s financials. When enterprises rely on a service provider’s controls for financial reporting, such as a payroll provider, they look for SOC 1 reports to demonstrate operational success.

Furthermore, a SOC 1 report assists financial statement auditors in reducing audit procedures.

SOC Controls refer to the procedures, rules, and systems in place to prevent and detect gaps in achieving SOC (Service Organization Control) compliance standards. If you want to achieve SOC 2 compliance, you must implement controls that fulfill your organization’s Trust Services Criteria (TSCs). Having SOC controls that align with TSCs helps to prevent gaps in your SOC report and simplifies the compliance process.

Despite the lack of statutory prerequisites for SOC examinations, there is an increasing commercial need for them. The primary purpose of a SOC audit is to evaluate a company’s internal safeguards and controls and provide unbiased and meaningful criticism.

How Much Does a SOC 1 Cost?

SOC 1 vs SOC 2 cost for compliance depends on several factors, including the extent and expected level of assistance, among others. SOC 1 audits typically cost between $7000 and $20,000, whereas SOC 2 audits cost between $7000 and $50000.

While both compliance frameworks attest to your organization’s SOC controls, they have different focuses. A SOC 1 audit focuses on internal control over financial reporting (ICFR) and is appropriate if you host or handle financial data that may impact your clients’ financial reporting. A SOC 2 audit focuses on the five TSCs and demonstrates long-term, continuous measures to secure consumer data.

What is a SOC 2 Report Used for?

After a SOC 2 audit, the auditor provides you with a SOC 2 report. This report describes their assessment of whether your company’s internal cybersecurity fulfills SOC 2 security criteria. Remember that there is no formal SOC 2 certification; instead, you receive a report outlining the auditor’s assessment of how well your service organization’s controls are performing. Everyone who completes a SOC 2 audit receives a report, whether or not they passed.

A SOC 2 report contains various sections with specific information.

• Management Assertion: This section describes what firm executives informed the auditor regarding its security and privacy procedures. It describes if the systems are accurately portrayed in the report. This section also details whether your systems meet the Trust Service Criteria you choose to include in your audit.

• Independent Service Auditor’s Report: This part contains the auditor’s official assessment of how effectively your controls function against the TSC you specified.

• System Overview: The system overview describes what your organization performs. It covers industry, geography, and how you characterize your infrastructure. It also offers an overview of your data security procedures and why you implemented them.

• Infrastructure: This part describes the organization’s personnel, rules, procedures, software, data, and technology. It also offers information on any third-party suppliers to which it outsources.

• Relevant Parts Of the Control Environment: This section describes the most critical aspects of your internal control environment.

• Complementary User Entity Controls (CUECs) are sometimes called User Control Considerations (UCCs). Organizations rely on their customers to apply these measures.

• Complementary Subservice Organization Controls: The American Institute of CPAs defines a subservice organization as a supporting vendor. Examples include data center hosting and transaction/data processing services. Depending on the type of service outsourced, your business may wish to incorporate some of the sub-service organization’s controls in its audit.

• Trust Services Criteria, Criteria-Related Controls, and Control Testing: This document includes a list of all internal security controls implemented by your organization, as well as the results of control testing.

• Other Information: Information submitted by the firm that the auditor determined was irrelevant.

The shift towards cloud computing and outsourcing, in general, has increased the need for SOC 2 reports in the United States. SOC 2 compliance enables a service company to assure its stakeholders that its services are safe and dependable.

SOC 1 VS SOC 2

When comparing SOC 1 to SOC 2 cybersecurity assessments, it’s important to recognize their different scopes and goals. SOC 1 assessments focus on evaluating internal controls. They relate to financial reporting, ensuring accurate and reliable statements. These controls include transaction processing, account reconciliation, and making financial statements.

SOC 2 assessments take a broader approach. They cover not just finances. They also cover crucial aspects like security, availability, and privacy. They also cover integrity and confidentiality. The Trust Service Criteria assess control effectiveness. They focus on key areas. The criteria form the basis of this evaluation.

SOC 1 reports are vital for organizations. They impact their clients’ financial statements. Entities want SOC 2 reports. They care about a service provider’s overall security and reliability. So, the choice between SOC 1 and SOC 2 depends on the needs and priorities of the organization and its clients. This includes things like industry regulations, contracts, and risk management. These factors play a big role in the choice.

Who Needs a SOC 2 Report?

SOC 2 reports aren’t mandatory, but clients, especially those in the mid-market and corporate sectors, often ask for them. Even if it is not a requirement, potential consumers comparing service providers frequently see a SOC 2 report as a critical consideration in their decision-making.

In today’s setting, SOC 2 has evolved from a competitive advantage to a fundamental requirement for information security. Without a SOC 2 report, sales processes may stall or even stop during procurement and security inspections.

Even if no one is asking for a SOC 2 report right now, bear in mind that preparing for and completing the audit might take more than a year. It is never too early to begin working on compliance.

Consider your target audience while assessing TSC-related controls. If they have a technical understanding, a full SOC 2 report might be valuable. However, if they lack this experience, SOC 3 may be a viable option. High-level SOC 3 reports are publishable to the public. For people with technical skills interested in controlling supply chain risks, a SOC for supply chain evaluation and report may be the best option.

SOC1 vs SOC2 audit. Would you require a SOC1 and SOC2 report? Companies may require a SOC 1, SOC 2, or both, depending on their nature and services. Some serve as both financial service providers and software vendors. They believe that receiving both SOC 1 and SOC 2 reports helps them address the needs of all stakeholders.

What is SOC 1 Versus SOC 3?

SOC 1 and SOC 2 are the most common SOC reports, with SOC 3 reports being less common.

A SOC 1 audit tests a service organization’s controls that are relevant to the financial statements of its end customers. The service organization establishes important control goals for the services it provides, providing reasonable assurance for certain components of the service. For example, a payroll service provider may prioritize access to client data files or the accuracy of crucial computations, which encompass both IT and business operations.

SOC 1 and SOC 2 vary in that SOC 1 reports focus on financial reporting, whereas SOC 2 focuses on compliance and operations.

SOC 3 reports are for a wide audience and have the same information as SOC 2 but are easier to understand. Instead of going into too much information, businesses frequently utilize SOC 3 compliance and a compliance seal on their websites. You can get SOC 3 reports for major providers such as Microsoft, AWS, and Google Cloud.

Businesses use SOC 3 reports mainly as marketing tools to highlight how well their internal controls work. Interestingly, SOC 3 reports are almost like a condensed version of SOC 2 reports, containing most of the same data. That’s why many businesses ask auditors who created their SOC 2 report to also create a summary that serves as their SOC 3 report.

Get SOC Compliance Right with Trava

The fundamental purpose of SOC compliance is to verify that a company’s internal controls work properly to fulfill its objectives. With so many checklists and high-stakes audits, navigating SOC reports and attaining compliance may be intimidating. Without SOC 1 or SOC 2 reports, businesses risk harming their brand and possible earnings. The good news is that passing SOC audits is simple if you have the right foundation. If you need assistance, talk to the Trava Team – we’re here to help with your compliance needs.