While there are three primary categories of SOC (Service Organization Controls) reports—SOC 1, SOC 2, and SOC 3—differentiating between the two types of SOC 2 reports allows for the identification of four distinct and commonly discussed types of SOC engagements. These reports are crucial for organizations that provide services to other entities, offering assurance over their internal controls.
Understanding SOC Reports
SOC reports, issued by independent certified public accountants (CPAs), provide valuable insights into a service organization's controls. These reports help user entities understand the risks associated with outsourcing certain functions and ensure their service providers have adequate controls in place.
Here are the four types of SOC commonly referred to:
- SOC 1
- SOC 2 Type 1
- SOC 2 Type 2
- SOC 3
Detailed Breakdown of Each SOC Type
Let's explore each type in more detail, highlighting their unique focus and characteristics. SOC 1 and SOC 2 are among the most frequently utilized reports.
1. SOC 1 Report
A SOC 1 report focuses on a service organization's internal controls relevant to a user entity's internal control over financial reporting (ICFR). It is specifically designed for service organizations that impact their client's financial statements.
- Primary Focus: Controls relevant to financial reporting.
- Audience: User entities' financial statement auditors.
- Types:
- Type 1: Describes the service organization's system and the suitability of the design of controls at a specific point in time.
- Type 2: Describes the system and the suitability of the design and operating effectiveness of controls over a specified period (e.g., 6-12 months).
2. SOC 2 Type 1 Report
A SOC 2 report concentrates on a service organization's controls related to operations and compliance, specifically against the American Institute of Certified Public Accountants (AICPA) Trust Services Criteria (TSC). These criteria include Security, Availability, Processing Integrity, Confidentiality, and Privacy.
A SOC 2 Type 1 report provides an opinion on the fairness of the presentation of the system and the suitability of the design of controls at a specific date.
- Primary Focus: Operations and compliance, addressing the Trust Services Criteria.
- Key Differentiator: Evaluates controls at a specific point in time.
- Audience: Restricted to user entities and their auditors.
- Common Use Cases: Often serves as an initial assessment or for organizations that need a quick, point-in-time snapshot of their control design.
3. SOC 2 Type 2 Report
Similar to a SOC 2 Type 1 report, the SOC 2 Type 2 report also addresses controls related to operations and compliance based on the Trust Services Criteria. However, it goes a significant step further by evaluating the operating effectiveness of these controls over a period of time. This provides a more comprehensive and robust level of assurance.
- Primary Focus: Operations and compliance, addressing the Trust Services Criteria.
- Key Differentiator: Evaluates the suitability of design and operating effectiveness of controls over a period of time (typically 6-12 months).
- Audience: Restricted to user entities and their auditors.
- Common Use Cases: Widely accepted as the gold standard for demonstrating a strong control environment over an extended period, crucial for ongoing compliance and security assurance.
4. SOC 3 Report
A SOC 3 report is essentially a general-use report based on a SOC 2 engagement. While it covers the same Trust Services Criteria as a SOC 2, it is less detailed and provides a summary of the auditor's opinion without the detailed description of the controls and tests performed.
- Primary Focus: Operations and compliance (same as SOC 2).
- Key Differentiator: General use report, less detailed, often used for public display or marketing purposes.
- Audience: General public, often displayed on a service organization's website.
- Common Use Cases: Best for organizations that want to demonstrate their commitment to security and compliance to a broad audience without sharing sensitive details of their internal controls.
Summary of SOC Types
The table below provides a concise overview of the distinct characteristics of each SOC type:
| SOC Type | Primary Focus | Assessment Period / Scope | Auditor Opinion | Target Audience | Common Use Case |
|---|---|---|---|---|---|
| SOC 1 | Financial Reporting Controls (ICFR) | Point in time (Type 1) or over a period (Type 2) | Design suitability or design & operating effectiveness | User entities' financial statement auditors | Assurance on controls affecting financial statements |
| SOC 2 Type 1 | Operations & Compliance (TSC) | At a specific point in time | Design suitability | User entities and their auditors (restricted use) | Initial control assessment; quick snapshot of control design |
| SOC 2 Type 2 | Operations & Compliance (TSC) | Over a specified period | Design & operating effectiveness | User entities and their auditors (restricted use) | Comprehensive assurance on ongoing security and compliance |
| SOC 3 | Operations & Compliance (TSC) | Over a specified period (derived from SOC 2 Type 2) | Design & operating effectiveness (summary) | General public | Public demonstration of security and compliance |
The main difference between SOC 1 and SOC 2 is that SOC 1 focuses on financial reporting, while SOC 2 focuses on operations and compliance related to security, availability, processing integrity, confidentiality, and privacy.
