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Everything You Need to Know About SOC 1 Audits

Are you being asked by a top client for a SOC 1 audit report? What is a SOC 1 report? Do you need a SOC 1 audit? In this free white paper, Everything You Need to Know About SOC 1 Audit, you’ll find answers to frequently asked questions about SOC 1 audit reports and learn how your organization can benefit from having a SOC 1 report and what you can expect from your SOC 1 audit process.

What is a SOC Report?

Developed primarily for third-party service providers by the AICPA, SOC (Service Organization Control) reports are issues by Certified Public Accountants (CPAs) and report on a service organization’s internal controls – policies and procedures – which could impact their client’s sensitive data. SOC reports help service organizations’ clients (referred to as user entities) to comply with regulatory and/or contractual requirements. SOC reports allow user entities to obtain an objective evaluation of the effectiveness of controls that address compliance, operations, and financial reporting of a service organization.

What is a SOC 1 Audit Report?

SOC 1 engagements are performed in accordance with the Statement on Standards for Attestation Engagements No. 18 (SSAE 18), formerly known as SSAE 16. SOC 1 reports are specifically designed to report on the controls at a service organization that could ultimately impact their client’s financial statements. A SOC 1 audit is not a review of a service organization’s financial statements, but rather a review of internal controls over financial reporting.

Do I Need a SOC 1 Audit?

Many organizations are legally required to verify the suitability of internal controls at a service provider prior to engaging with the service provider. Generally speaking, publicly traded companies looking to comply with Sarbanes Oxley (SOX), financial institutions looking to comply with the Gramm-Leach-Bliley Act (GBLA), as well as state and local government, have all standardized on SOC reports to meet this requirement. If your clients outsource any of their information technology systems management activities to your organization, you may be asked for a SOC 1 report, so they can gain a better understanding of the controls at your organization and how they meet specific requirements.

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What is a SOC 1 Audit and Why Do I Need One?

Have you had a client tell your organization that it needs to have a SOC 1 audit performed? If your immediate reaction was, “What is a SOC 1?”, that’s completely normal. You’re in the right place!

Have you ever had your boss ask you “What is a SOC 1 audit?” and need a project timeline as soon as possible? You’re also in the right place! Have you seen competitors announce their compliance and wondered, “What is a SOC 1 and why is the competition pursuing one?” Don’t worry, we’ll cover that, too. Let’s answer three basic questions about SOC 1 audits:

  • What is a SOC 1?
  • Why do I need a SOC 1?
  • What are the benefits of a SOC 1?

What is a SOC 1 Compliance Audit?

A Service Organization Control 1 (SOC 1) engagement is an audit of the internal controls (policies, procedures, and technologies) which a service provider has implemented to protect client data. SOC 1 audits are performed in accordance with the Statement on Standards for Attestation Engagements No. 18 (SSAE 18). SOC 1 reports were primarily designed to report on the controls of service organizations that are relevant to their client’s financial statements. SOC 1 audits are intended to aid service organizations in eliminating potential errors to client information and ensuring efficiency in their controls.

We most commonly perform a SOC 1 for small to medium-sized service providers who deliver managed services, application services, or any type of third-party service. Now that we’ve figured out what a SOC 1 is, the next thing to consider is: why do I need a SOC 1?

Why do I need a SOC 1?

If you’ve ever asked, “What is a SOC 1?” then you’ve probably also wondered, “Why do I need a SOC 1?” Let’s say your organization is a service provider, providing payment processing services. Why would you need a SOC 1? SOC 1 engagements are designed specifically for service providers. If you provide payment processing services to clients, your service organization may need a SOC 1 because you could potentially impact clients’ financial statements. Your service organization may need a SOC 1 report because your client or regulatory body is requesting it, or maybe because you’re being proactive with information security and compliance.

A SOC 1 report demonstrates to your clients that you take the security of sensitive data seriously. You’ve hired a third-party auditing firm to validate your controls are suitably designed and operating effectively, you’re gaining assurance, you’re maturing your environment – all things that assure your clients that their sensitive information is being handled in accordance with their expectations and with SSAE 18.

Culture of Compliance

We see many service organizations initially engage in an audit, like a SOC 1, because it’s something they are required to do by a client or regulatory body. An audit can be costly, time-consuming, and confusing – we know. So when something like a SOC 1 audit is forced on an organization, it can create a negative outlook on the entire auditing process. This attitude towards compliance makes organizations reluctant to give the audit their full effort or attention. Because a SOC 1 audit deals with something as important as internal control over financial reporting, it’s vital that the engagement receives the full attention it deserves.

We believe that the best-kept industry secret to achieving compliance success is creating a culture of compliance within your organization. Compliance isn’t a quick fix to all of your security needs; it’s a constant cycle of improvement. Audits are healthy for any organization. They help you see how you can grow and mature. After two or three years of audits, our clients come to appreciate the advantages that an audit brings.

The Benefits of a SOC 1 Audit

A SOC 1 audit can bring so many benefits to your company, especially if a culture of compliance has been created. The top six benefits of a SOC 1 include:

  • Verifying that your organization has the proper internal controls and processes in place to deliver high quality services to your clients.
  • Evaluating your policies and procedures, which are crucial to the operability of your organization.
  • Assuring clients that their sensitive data is protected, building trust between service providers and user organizations.
  • Removing the internal blinders; personnel often can’t or don’t want to see vulnerabilities that an experienced auditor does.
  • Strengthening your environment, and teaching you ways to mature your practices.
  • Giving you a competitive advantage by demonstrating your commitment to security.

View more SOC 1 compliance resources.

Video Transcription

The SSAE 16 (now SSAE 18) is a Service Organization Control Report. Most of the service organizations that we audit are small to medium size service providers who are delivering managed services, application services, or any type of third party or outsourced service that a client has hired you to do. I’ve found that clients initially do this audit because they’re being required to do it, they’re being forced to do it, but later on in the process, they come to appreciate what an audit does for them.

An audit is very helpful to you as a small to medium size service provider because it helps you to validate what you’re doing, it helps you to see whether or not the controls that you’ve put into place are effective, and it’s a very valuable resource for an experienced auditor to review you without the blinders that sometimes we have on internally. When an external auditor comes in, they’re able to bring their experience and perspective to your environment and controls and provide you with very valuable guidance and recommendations to strengthen your environment. We’ve had clients who’ve been working with us for three or more years say, “The first year, I didn’t want to do it. It was just a task that we had to do.” But after year two and three, they start to see that an audit is very helpful and healthy for an organization to receive that validation and recommendations about how they can mature in their practices.

What’s The Difference Between SOC 1, SOC 2, and SOC 3?

When it comes to SOC (System and Organization Controls) reports, there are three different report types: SOC 1, SOC 2, and SOC 3. When considering which report fits your organization’s needs, you must first understand what your clients require of you and then consider the areas of internal control over financial reporting (ICFR), the Trust Services Criteria, and restricted use.

SOC 1 vs. SOC 2 vs. SOC 3

What Is a SOC 1 Report?

What Is a SOC 1 Report?

SOC 1 engagements are based on the SSAE 18 standard and report on the effectiveness of internal controls at a service organization that may be relevant to their client’s internal control over financial reporting (ICFR).

 

What Is a SOC 2 Report?

What Is a SOC 1 Report?

A SOC 2 audit evaluates internal controls, policies, and procedures that directly relate to the security of a system at a service organization. The SOC 2 report was designed to determine if service organizations are compliant with the following categories: security, availability, processing integrity, confidentiality, and privacy, which are also known as the Trust Services Criteria. These principles address internal controls unrelated to ICFR.

What Is a SOC 3 Report?

What Is a SOC 3 Report?

A SOC 3 report, just like a SOC 2, is based on the Trust Services Criteria, but there’s a major difference between these types of reports: restricted use. A SOC 3 report can be freely distributed, whereas a SOC 1 or SOC 2 can only be read by the user organizations that rely on your services. A SOC 3 does not give a description of the service organization’s system, but it can provide interested parties with the auditor’s report on whether an entity maintained effective controls over its systems as it relates to the Trust Services Criteria.

When trying to determine whether your service organization needs a SOC 1, SOC 2, or SOC 3, keep these requirements in mind:

  • Could your service organization affect a client’s financial reporting? A SOC 1 would apply to you.
  • Does your service organization want to be evaluated on the Trust Service Criteria? SOC 2 and SOC 3 reports would work.
  • Does restricted use affect your decision? SOC 1 and SOC 2 reports can only be read by the user organizations that rely on your services. A SOC 3 report can be freely distributed and used in many different applications.

Each of these reports must be issued by a licensed CPA firm, such as KirkpatrickPrice. We offer SOC 1, SOC 2, and SOC 3 engagements. To learn more about KirkpatrickPrice’s SOC services, contact us today.

Video Transcription

What is the difference between SOC 1, SOC 2, and SOC 3 reports? SOC reports are Service Organization Control reports.

SOC 1 reports work off of the SSAE 16 (now SSAE 18), which is about internal control over financial reporting. As a service organization, you may affect your user organization’s financial reporting. If so, a SOC 1 is the one for you.
Trust Services Principles have to do with criteria dealing with security, availability, processing integrity, confidentiality, and privacy. Those Principles work with SOC 2 and SOC 3 reports.

These reports are restricted in use when your issue a SOC 1 or a SOC 2 report. They are only to be read by the user organizations who rely upon your services, where a SOC 3 can be used in many different applications.

Finally, these 3 types of reports need to be issues by a licensed CPA firm that specializes in this particular industry and the industry that you work in. KirkpatrickPrice is a licensed CPA firm that can help you with all three types of reports – the SOC 1, SOC 2, and SOC 3.

SAS 70 Auditing Standard vs. SSAE 16 Report: What’s the Difference?

What’s the purpose of an SSAE 16 audit and should I pursue one? If you’re new to the world of information security audits, check out this comprehensive guide on the history of SSAE 16, why it replaced the SAS 70, and how becoming SSAE 16 compliant could benefit your business.