SOC 1 vs. SOC 2: Differences You Need to Understand
If you are a company that provides outsourced software services to user organizations that affect the financial statements of the user organization, they’ll more likely to ask you to provide confirmation that the safeguards underlying your services are well-designed and efficiently functioning. A way to offer this confirmation is by having undergone a Service Organization Control (SOC) audit.
There are different types of audits, namely SOC1, SOC 2, and SOC 3. The differences between SOC 1 and SOC 2 audit reports are more easily discernible. By comprehending the function of SOC 1 and SOC 2 reports and the distinctions between them, businesses can create a complete and comprehensive research solution that gives consumers the assurance they require.
The article explores the differences between SOC 1 and SOC 2 to help you understand which type of audit your organization requires.
What is SOC 1?
SOC 1 (System and Organization Controls 1) is a type of audit report that details a service organization’s controls that are pertinent to the internal control over the financial reporting of user entities. SOC 1 reports are “attestation” reports, meaning an outside auditor is required to express an assessment of the effectiveness of your controls.
The management, auditors, and regulatory bodies of user organizations are intended to use SOC 1 reports to evaluate the risk involved in outsourcing financial reporting procedures and comprehend the controls in place at the service organization that could impact the security and precision of the customer’s data. Hence the SOC 1 audits assist you in verifying your controls and informing users that your business’s operations are secure.
What is SOC 2?
SOC 2 (System and Organization Controls 2) is a type of audit report that details the security, availability, processing integrity, confidentiality, and privacy controls used by a service organization that concentrates on operation and compliance.
The Trust Services Criteria created by the American Institute of Certified Public Accountants (AICPA) offers a framework for assessing and reporting on a service business’s privacy, scalability, processing integrity, secrecy, and privacy settings. In a SOC 2 report, the system and controls of the service organization are typically described, together with the auditor’s testing of the controls and their outcomes.
SOC 1 vs. SOC 2
If your business provides outsourced advanced technologies, customers may request a proper research package from you. This bundle often includes a recently completed SOC 1 or SOC 2 audit. It is intended to provide prospective or existing clients with a substantial degree of confidence regarding the safety and integrity of your internal systems.
Determining which SOC audits and what type a consumer usually requires might be difficult for service businesses that are unfamiliar with the standards for SOC audits. Hence understanding the purpose of these audit reports and their differences will help you give your customers the assurance they are looking for.
Purpose
- SOC1: The purpose of SOC 1 reports is to provide consumers and auditors confidence that an organization has sufficient safeguards in place around its processes for financial reporting.
- SOC 2: The purpose of SOC 2 reports is to reassure clients and auditors that an organization has sufficient security, reliability, processing integrity, secrecy, and privacy control measures.
Control objectives
- SOC 1: SOC 1 strives to assure the correctness and dependability of financial reporting by concentrating on controls surrounding financial reporting procedures, such as wages and current liabilities.
- SOC 2: To guarantee the confidentiality and validity of clients’ data, SOC 2 concentrates on measures regarding security, availability, processing integrity, secrecy, and privacy.
Readers & user
- SOC 1: Customers, auditors, and regulatory bodies are the primary consumers of SOC 1 reports for businesses.
- SOC 2: SOC 2 reports are frequently used for regulatory monitoring, the company’s internal governance and risk control procedures, supplier management programs, and service organization oversight.
Use examples
- SOC 1: To show their auditors and clients that they have sufficient controls to assure the accuracy and dependability of their financial reporting, firms that outsource critical financial operations and systems, such as payroll or accounts payable, should use SOC 1 reports.
- SOC 2: Organizations that offer services to clients and must prove that they have measures to protect the confidentiality, integrity, and availability of customer data should employ SOC 2 reports. These papers are essential for SaaS, cloud computing, and technology businesses.
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FAQs
What is the difference between SOC 1, SOC 2, and SOC 3?
Three different SOC (Service Organization Control) reports, SOC 1, SOC 2, and SOC 3, offer details on a service organization’s controls.SOC 1 reports are concerned with the financial reporting of the service organization, SOC 2 reports are concerned with security and privacy, and SOC 3 reports give a general review of a service organization’s internal controls for the general public.
Do I need SOC 1 or SOC 2?
The need for the SOC 1 or SOC 2 report depends on the requirements and demands of your particular organization. To help you choose the best report, you should also speak with a trusted advisor like an auditor.
What is SOC Type 1 and Type 2?
- SOC Type 1 reports concentrate on financial reporting and are intended for the auditors of the user organizations.
- SOC Type 2 reports concentrate on privacy, reliability, secrecy, and transparency and are intended for the service company’s clients.
What is SOC 2 vs. SOC 3?
SOC 2 reports give more specific information about the controls at a service organization and are targeted at the clients. In contrast, SOC 3 reports provide a high-level overview of the controls and are designed for use by the general public.
What is the SOC standard?
The SOC (Service Organization Control) standard is a collection of assurance reports that details a service organization’s credibility, processing integrity, transparency, and security controls. SOC 1, SOC 2, and SOC 3 are the three primary forms of SOC reports, each with a distinct purpose and intended readership.
