SOC 1 vs SOC 2 audits serve different purposes and are designed for different audiences. That leads to several key differences between them:
Purpose and Focus
SOC 1 focuses on the controls at a service organization that are relevant to an audit of a user entity’s financial statements. In other words, it is mainly concerned with financial reporting and financial controls. SOC 2, on the other hand, focuses on a business’s non-financial reporting controls as they relate to the security, availability, processing integrity, confidentiality, and privacy of a system.
If a service organization provides services that could impact their clients’ financial reporting, a SOC 1 report is typically necessary. Examples might include payroll processing or debt servicing companies. SOC 2 is generally applicable when a service provider stores, processes, or transmits any customer data, particularly when that data is sensitive and needs secure handling. This could apply to many technology and cloud computing providers.
SOC 1 reports are based on the Internal Control over Financial Reporting (ICFR) framework. SOC 2 reports, however, use the Trust Services Criteria (TSC). That cover security, availability, processing integrity, confidentiality, and privacy.
Because SOC 1 reports are concerned with financial reporting, they are intended for an audience that understands the service organization’s services and the transaction processed by those systems, such as the entity’s management, auditors, and customers’ financial executives.
SOC 2 reports are intended for a broader range of users that need information and assurance about the controls at a service organization. That affect the security, availability, and processing integrity of the systems that process users’ data and the confidentiality and privacy of that data. This can include stakeholders such as regulators, customers, business partners, and suppliers.
Both SOC 1 and SOC 2 reports come in Type I and Type II variants. A Type I report discusses whether systems and controls have been properly designed (as of a specific date). While a Type II report also includes whether the systems and controls operated effectively over a period of time.
These are some of the key differences between SOC 1 and SOC 2. The choice between the two will depend largely on the nature of the service provided by the organization. And the requirements of its customers and stakeholders.
Where SOC 1 vs SOC 2 Are Most Applied?
The application of SOC 1 and SOC 2 depends primarily on the nature of the services provided by an organization. Also, the needs of its clients or stakeholders.
SOC 1 is most commonly applied in situations where the service organization’s controls could impact their clients’ financial reporting. For instance, if an organization provides financial services such as accounting, payroll processing, loan servicing, or certain types of financial transactions processing. Then, they would typically undergo a SOC 1 audit. The results are typically used by the clients’ auditors during their audit of the clients’ financial statements.
SOC 2, on the other hand, is primarily applied in scenarios where a service provider is handling, storing, or transmitting sensitive client data and there is a need to assure security, availability, processing integrity, confidentiality, or privacy. This is particularly common in technology and cloud services industries.
For example, data centers, IT managed services, SaaS providers, and many other technology and cloud-computing based businesses are frequently required by their clients to undergo SOC 2 audits. The results are used by a broader range of stakeholders. Such as management, customers, regulators, business partners, and suppliers to gain confidence and place trust in the service organization’s system.
In some cases, a service organization might even need both SOC 1 and SOC 2 reports. Especially if they impact both the financial reporting and handle sensitive data of their clients. For instance, a financial technology (FinTech) company may handle financial transactions (requiring SOC 1). And also store sensitive customer data (requiring SOC 2).
What Is The Role of Auditors in SOC 1 and SOC 2 Evaluations?
The role of auditors in SOC 1 and SOC 2 evaluations is significant. Thus, involves several key responsibilities:
Planning and Scoping the Audit
Auditors initiate the process by working with the service organization to identify the systems, processes, and controls to be included in the audit scope. They identify relevant control objectives (in the case of SOC 1) or Trust Service Criteria (in the case of SOC 2) to be assessed.
Testing and Assessing Controls
The heart of the SOC audit involves the auditors testing and assessing the design (Type I) and operating effectiveness (Type II) of the service organization’s controls. This includes gathering evidence, conducting interviews, observing processes, and performing various testing procedures.
Documenting and Reporting
Following the audit, auditors document their findings and produce the SOC report. The report includes a detailed description of the service organization’s system, the auditor’s opinion on the fairness of the system description, suitability of the design of controls. And in Type II reports, the operating effectiveness of controls.
While not a formal part of the SOC report, auditors often provide the service organization with recommendations for enhancing their control environment, based on any identified weaknesses or deficiencies.
Guiding Remediation Efforts
If issues or deficiencies are identified during the audit. Then, the auditors typically work with the organization to understand the causes and guide the remediation process. Although the responsibility to remediate falls on the organization.
It’s worth noting that SOC audits must be conducted by a licensed CPA firm. As the AICPA holds the auditing standards. The auditor’s role is crucial in providing an objective and thorough evaluation of a service organization’s controls. Thereby giving stakeholders reliable information about the organization’s systems and processes.
In conclusion, SOC 1 vs SOC 2 are fundamental frameworks designed by the American Institute of CPAs. And this is to help service organizations demonstrate their commitment to robust controls related to financial reporting and data security, respectively. The choice between SOC 1 and SOC 2 – or the necessity for both – relies heavily on the nature of an organization’s services. Also, the type of data it handles, and the needs of its clients and stakeholders.
Therefore, understanding these frameworks and determining which is most appropriate for your organization is a critical step towards enhancing trust with your clients. And achieving compliance with industry standards.
If you are looking to implement any of the Infosec compliance frameworks such as SOC 2 compliance, HIPAA, ISO 27001, and GDPR compliance, Impanix can help. Book a Free consultation call with our experts or email us at [email protected] for inquiries.