SOC 1 Type 1 vs Type 2: What’s the Difference?
by Joseph Kirkpatrick / February 5th, 2024
You know you need to complete a SOC 1 audit but aren’t sure if you need a SOC 1 Type I or a SOC 1 Type II.
What sets them apart and which makes the most sense for your organization’s needs? Don’t let the complexities of SOC reports overwhelm you!
Below, we explore the importance of a SOC 1 audit report and compare the SOC 1 Type I vs Type II audit reports to help you decide which is best for your business needs.
What is a SOC 1 Audit?
A SOC 1 audit, or System and Organization Control 1 engagement, is an audit of internal controls at a service organization that may affect their clients’ internal control over financial reporting (ICFR). A SOC 1 audit report provides user entities with reasonable assurance and the peace of mind that the controls at a service organization are operating effectively and appropriately protecting client data.
There are two types of SOC 1 audit reports: SOC 1 Type I and a SOC 1 Type II.
What is a SOC 1 Type I Audit?
A SOC 1 Type I audit checks control design and implementation at a service organization at a certain time. It focuses on the effectiveness of these controls and whether they are suitably designed to achieve the intended objectives. This audit type provides a snapshot of the controls in place and their ability to safeguard client data and ensure the accuracy of financial reporting.
In a SOC 1 Type I audit, the auditor checks the control environment, risk assessment, control activities, information systems, and monitoring. They evaluate these controls for proper design and implementation to mitigate risks and ensure financial information integrity.
The resulting audit report covers the service organization’s system, the controls in place, and the auditor’s opinion on the suitability of these controls. It provides valuable information to user entities, such as clients and stakeholders, about the effectiveness of the controls and the level of assurance they can have regarding the service organization’s internal control over financial reporting.
What is a SOC 1 Type II Audit?
A SOC 1 Type II audit is an extension of the Type I audit, providing a more comprehensive evaluation of the service organization’s controls. While the Type I audit focuses on control design, the Type II audit assesses the operating effectiveness of these controls over a specified period, typically six to twelve months.
During a SOC 1 Type II audit, the auditor examines the service organization’s controls and processes to ensure they are not only designed appropriately but also implemented and functioning effectively. This involves testing the controls to determine if they are operating as intended and providing the necessary level of assurance.
Additionally, the auditor will review various aspects of the service organization’s operations, including its policies, procedures, and documentation. They will also conduct interviews with key personnel and perform sample testing to validate the controls’ effectiveness. This rigorous evaluation helps identify any weaknesses or deficiencies in the controls and provides recommendations for improvement.
The SOC 1 Type II audit report includes a detailed description of the service organization’s system, the controls in place, and the auditor’s opinion on the operating effectiveness of these controls. This report is valuable to user entities as it provides them with a higher level of assurance regarding the service organization’s internal control over financial reporting.
By undergoing a SOC 1 Type II audit, service organizations demonstrate their commitment to maintaining strong internal controls and providing reliable services to their clients. It gives clients and stakeholders confidence in the service organization’s ability to safeguard their financial information and mitigate risks.
SOC 1 Type I vs. SOC 1 Type II
| Aspect | SOC 1 Type I Audit | SOC 1 Type II Audit |
| Time Frame | Specific point in time | Minimum six-month period |
| Evaluation Focus | Design and implementation of controls | Design, implementation, and operational effectiveness |
| Report Emphasis | Suitability of design and implementation of controls | Suitability and operational effectiveness of controls |
| Ideal Use | For initial assurance of control design and implementation | For comprehensive evaluation over a period |
| Benefits for Clients | Assures control design and implementation | Demonstrates consistent operational effectiveness |
Purpose
The SOC 1 Type I Audit serves as a snapshot of control efficacy at a single moment.
The SOC 1 Type II Audit extends this scope over a minimum period of six months, offering a more comprehensive understanding of the organization’s operational control environment.
Focus
The SOC 1 Type I Audit evaluates the design and implementation of controls within the organization, ensuring they are suitably constructed and installed.
Alternatively, the SOC 1 Type II Audit delves deeper by additionally examining the operating effectiveness of these controls over time. This broader focus in the Type II audit provides a more in-depth analysis of how well the controls function in the day-to-day operations of the organization.
Report Contents
SOC 1 Type I Audit report details the controls as provided by the management of the service organization, attesting to their suitable design and implementation.
Conversely, the SOC 1 Type II encompasses all elements found in the Type I report, with the addition of an attestation to the operational effectiveness of the controls throughout the audit period. This inclusion in the Type II report offers a more thorough and dynamic understanding of the control environment.
Suitability
SOC 1 Type I Audits are ideal for organizations seeking to demonstrate their controls are appropriately designed and implemented. It’s a starting point for service organizations to showcase their control environment.
In contrast, the SOC 1 Type II Audit is more suited for organizations looking to not only prove the proper design and implementation of controls but also to affirm their consistent operational effectiveness over time. This makes the Type II audit a more comprehensive tool for organizations that wish to demonstrate an ongoing commitment to effective control management.
SOC 1 Type I vs Type II FAQs
When choosing a SOC 1 report type for your business, service organizations often have common questions during the SOC audit process. Below are the most common FAQs we receive.
Do I need a Type I or a Type II report?
The key difference between a Type I and Type II report is the attestation on the operating effectiveness of controls. A Type I report is an attestation about controls at a service organization at a specific point in time, and a Type II report is an attestation about controls at a service organization over a period of time.
Observing controls over a period of time allows for verification that controls are suitably designed and operating effectively – whereas a Type I report attests that controls are suitably designed and implemented.
Many questions about the SOC report types depend on what your client is asking for. If they are satisfied with a Type I report, you may elect to undergo that audit and stop there. If you’re undergoing these audits to be proactive, we recommend getting a Type II report – but this doesn’t always mean you skip the Type I.
Do I have to complete a Type I audit before a Type II audit?
It is not a requirement to go through a Type I audit before you go through a Type II audit – but it is our recommendation. Gaining a Type II attestation on your very first audit will be a difficult process for your team – you have to be prepared to show your policies, controls, objectives, and commitment to compliance, all while establishing that your controls have been operating effectively for at least six months.
Doing a Type I audit first helps you understand the SOC audit process. It also helps you set control goals, identify business issues, and find areas for improvement before completing the Type II audit. We have found that when a service organization rushes to get a Type II report, the final result isn’t as valuable as it would be if they were better prepared.
Do I need to complete a gap analysis before the Type I or Type II?
Whenever any organization goes through any audit for the first time, we strongly recommend starting with a gap analysis. By starting the SOC audit process with a gap analysis, our auditors can identify any operational, reporting, and compliance gaps in your organization and advise you on strategies for remediation. Gap analyses compare what you’re doing to what regulations require of you. Once you receive the results of the gap analysis, your organization can remediate any identified gaps before the audit begins.
For a first time SOC audit, a basic audit map may be: a gap analysis first, then the Type I audit, then the Type II audit. If you elect to skip the Type I, you can still choose to go through a gap analysis before the Type II audit. In some cases, organizations have thought they should skip the Type I audit, but after receiving their gap analysis results, they thought it would be wise to undergo the Type I before the Type II.
What happens if I fail the Type I?
SOC audits do not operate on a pass/fail system, but instead provide reasonable assurance that their controls are suitably designed and operating effectively. Instead of passing or failing your organization, an auditor will issue a qualified or unqualified opinion.
Consider how an auditor would assess specific controls. Would an auditor find these controls suitably designed? Would we achieve reasonable assurance? If an auditor determines that a control was not in place or effective, then a qualified opinion would be issued.
This would sound something like, “Except for Control X, reasonable assurance is there. The controls have been suitably designed and operating effectively.” An unqualified opinion means there are no qualifications or significant exceptions being issued and reasonable assurance has been determined.
Start Your SOC 1 Type I and Type II Audits Today with KirkpatrickPrice
Many organizations are required to undergo a third-party SOC 1 audit, but we know this process can feel overwhelming. That’s why we’re here to support your organization from initial assessment to final report.
If you have questions about which type of SOC report you need or want help demonstrating to your clients your commitment to security and compliance, connect with one of our experts today. Our dedicated team will work closely with you to determine the most suitable SOC report for your organization’s needs.
More SOC 1 Resources
Understanding Your SOC 1 Report Video Series
SOC 1 Compliance Checklist: Are You Prepared for an Audit?
How to Read Your Vendors SOC 1 or SOC 2 Report?
The SSAE 18 (formerly SSAE 16), otherwise known as the SOC 1 report, is available in two types of reports: there’s a Type I Report, and a Type II Report. The Type I Report issues an attestation on the description of controls provided by management of the service organization, and there’s also an attestation that the controls are suitably designed and implemented. For a Type II Report, you have those two same sections in the report, plus an additional section that talks about the operating effectiveness of those controls over a period of time.
The Type II Report is concerned about that period of time, whereas a Type I Report is “as of a particular date.” So, your controls could be in place as of a particular date for a Type I Report, whereas for a Type II those controls must be in place and operating effectively over a period of time determined by you and the auditor that is involved in performing the engagement.
