What Is SOC 1 Type 2 Report And Why Is It Needed?

Differences & Similarities Between Type 2 And Type 1 Reports

Here’s a comparison of the similarities and differences between SOC 1 Type 1 and Type 2 reports:

Similarities:

• Framework: Both SOC 1 Type 1 and Type 2 reports are based on the Service Organization Control (SOC) 1 framework established by the American Institute of Certified Public Accountants (AICPA).
• Internal Controls: Both reports evaluate the internal controls of a service organization, specifically focusing on controls relevant to financial reporting.
• Audit Process: Both reports require an audit conducted by an independent auditor who assesses the design and effectiveness of the internal controls.

Differences:

• Timeframe: SOC 1 Type 1 report evaluates controls at a specific point in time. While SOC 1 Type 2 report evaluates the controls over a specified period (typically 6 to 12 months).
• Control Testing: SOC 1 Type 1 report tests the controls for design effectiveness only, whereas the SOC 1 Type 2 report tests both the design and operating effectiveness of the controls.
• Reporting Focus: SOC 1 Type 1 report primarily focuses on the design of controls and provides an opinion on their effectiveness. SOC 1 Type 2 report covers both the design and operating effectiveness of controls, providing more comprehensive insights into their implementation and effectiveness.
• Control Exceptions: Type 1 report may mention control deficiencies, but the emphasis is on design effectiveness. On the contrary, the Type 2 report explicitly reports control deficiencies and exceptions identified during the testing period.
• Use Cases: Type 1 report is commonly for vendor assessments and due diligence, providing insights into the design of controls. While, Type 2 report is often for risk evaluation, financial audits, and ongoing monitoring, as it provides information about both the design and operating effectiveness of controls.

• Understand the SOC 1 Framework: Familiarize yourself with the requirements and guidelines of the SOC 1 framework to have a clear understanding of what is expected in terms of internal controls and reporting.
• Identify Relevant Controls: Determine which systems, processes, and controls within your organization are relevant to financial reporting and need to be included in the scope of the SOC 1 Type 2 report.
• Engage a Qualified Service Auditor: Select a qualified and experienced service auditor who specializes in SOC 1 audits. Consider their expertise, reputation, and experience in conducting similar engagements.
• Document Controls: Ensure well-documentation of your control activities, including policies, procedures, and processes. Clear and comprehensive documentation will facilitate the audit process and help the service auditor evaluate the controls effectively.
• Perform Ongoing Monitoring: Continuously monitor and assess the effectiveness of your internal controls throughout the audit period. This will help identify and address any control deficiencies promptly and demonstrate a proactive approach to risk management.
• Address Control Deficiencies: If any control deficiencies or exceptions are identified during the audit, take prompt action to address and remediate them. Work closely with the service auditor to understand their recommendations and implement necessary improvements.
• Review and Distribute the Report: Once the SOC 1 Type 2 report is final, carefully review it to ensure accuracy and completeness. Then, distribute the report to relevant stakeholders, such as clients and business partners, who may request or rely on the report for their assessments or audits.

Conclusion