SOC Report FAQ: Expert Answers to Common Questions

A SOC 1 report is an attestation report that evaluates a service organization's internal controls relevant to user entities' financial reporting. It is issued by an independent auditor in accordance with SSAE 18 or ISAE 3402 standards.

Service organizations whose services affect their clients' financial reporting need SOC 1 reports. Common examples include payroll processors, claims administrators, loan servicers, and data centers that host financial applications.

A SOC 1 Type II audit typically takes 2-4 months from planning to report issuance. Type I audits are shorter (4-8 weeks) since they only evaluate control design at a point in time without testing operating effectiveness.

SOC 1 audit costs typically range from $15,000 to $50,000 depending on organization size, complexity, number of control objectives, and scope. Type II reports cost more than Type I due to extensive testing requirements.

SOC 1 Type II reports should be updated annually. The review period typically covers 6-12 months, with most organizations maintaining 12-month review periods to provide continuous coverage for user auditors.

No. SOC 1 reports are restricted-use documents intended only for user entities and their auditors who have sufficient understanding of the controls and limitations. They should not be shared publicly or with prospects who lack this understanding.

SSAE 18 (Statement on Standards for Attestation Engagements No. 18) is the U.S. auditing standard that governs SOC 1 examinations. It replaced SSAE 16 in 2017 and provides requirements for reporting on controls at a service organization.

ISAE 3402 is the international equivalent of SSAE 18, issued by the International Auditing and Assurance Standards Board (IAASB). It serves the same purpose as SSAE 18 but is used for international service organizations.

SOC 1 audits must be performed by independent Certified Public Accountants (CPAs) or CPA firms licensed to practice public accounting. The service auditor must be independent of the service organization being audited.

Without a SOC 1 report, user auditors must perform alternative procedures to test your controls directly, which is time-consuming and costly. This often leads to client dissatisfaction and may result in losing the client to competitors who have SOC 1 reports.

Type I reports evaluate the design of controls at a specific point in time, while Type II reports evaluate both design and operating effectiveness over a period of time (typically 6-12 months). Type II reports include extensive testing and provide higher assurance.

User auditors overwhelmingly prefer Type II reports because they include testing of operating effectiveness over a period. Type I reports provide limited assurance and often require user auditors to perform additional testing, reducing their value.

Yes. Many organizations obtain a Type I report first to validate control design, then proceed to Type II after controls have been operating for 6-12 months. However, most skip Type I and go directly to Type II since that's what clients ultimately need.

Type II reports typically cost 1.5 to 2 times more than Type I due to the extensive testing required over the review period. However, the increased assurance and reliance value justify the additional cost.

While SSAE 18 doesn't mandate a minimum period, industry practice is 6 months minimum, with 12 months being standard. Shorter periods provide less assurance and may not satisfy user auditor requirements.

Yes. For example, you could have a Type I report as of December 31, 2024, and then a Type II report covering January 1 - December 31, 2025. The Type I validates design before testing begins.

Significant control changes must be disclosed in the report. The service auditor tests controls as they existed during the period. If major changes occur, it may impact the review period or require a modified opinion.

No. Most organizations only maintain Type II reports since they provide both design and operating effectiveness assurance. Type I is typically only used as a stepping stone or when controls are newly implemented.

Control objectives describe the intended purpose or goal of controls within a system. They are directly linked to the risks that could prevent achievement of operational goals relevant to user entities' financial reporting.

The service organization's management defines control objectives based on the services provided and their impact on user entities' financial reporting. The service auditor reviews these objectives for completeness and appropriateness.

There is no fixed number. It depends on the complexity of services and systems. Simple service organizations may have 10-20 objectives, while complex ones may have 50+ objectives covering various operational areas.

Common categories include: Logical Access Controls, Change Management, Data Processing and Integrity, Computer Operations, Backup and Recovery, and Monitoring. Each category addresses different aspects of the control environment.

Sample sizes vary based on control frequency and auditor judgment. Annual controls may have 1 sample, quarterly controls 4 samples, monthly controls 12-25 samples, and daily/continuous controls 25-60 samples over a 12-month period.

Service auditors use inquiry, observation, inspection of evidence, re-performance of controls, and system interrogation. The specific methods depend on the nature of the control (manual vs. automated, preventive vs. detective).

Inquiry involves asking personnel about control procedures. It alone is not sufficient for Type II reports. It must be combined with inspection of evidence, observation, or re-performance to provide adequate assurance.

Re-performance means the auditor independently executes the control procedure to verify it produces the expected result. For example, re-calculating a mathematical control or re-running a report to verify accuracy.

Automated controls (system-enforced) can often be tested with smaller sample sizes since they operate consistently. Manual controls require larger samples since they depend on human performance and may vary.

Test of design evaluates whether a control, if properly performed, would prevent or detect errors. Test of operating effectiveness evaluates whether the control actually operated as designed throughout the review period.

Yes. Screenshots, system-generated reports, logs, and configuration settings are common evidence for automated controls. However, the auditor must verify the authenticity and completeness of such evidence.

If evidence is missing, the auditor cannot conclude the control operated effectively. This results in an exception or qualification in the report. Service organizations must maintain evidence throughout the review period.

An exception is a specific instance where a control did not operate as designed or testing identified a deviation from expected results. For example, 3 out of 25 access reviews not completed timely would be an exception.

A control deficiency is a design or operating weakness that affects the control's ability to meet its objective. It may be a missing control, an inadequately designed control, or a systematic failure in control execution.

Exceptions are specific testing deviations (isolated instances), while deficiencies are systematic control weaknesses. Multiple exceptions may indicate an underlying deficiency in control design or the control environment.

Exceptions are typically classified as Critical (affecting financial reporting assertions with high likelihood of misstatement), Significant (affecting control objectives with moderate risk), or Minor (isolated instances with low risk and strong compensating controls).

Compensating controls are alternative controls that mitigate the risk addressed by a control with an exception. They must address the same risk, operate at sufficient precision, and have operated effectively during the exception period.

Not necessarily. Minor exceptions with strong compensating controls may not require additional testing. However, significant or critical exceptions typically require user auditors to perform substantive testing or alternative procedures.

Yes. The service auditor can issue an unqualified (clean) opinion even with exceptions, as long as the exceptions are disclosed in the test results section. The opinion addresses whether controls were suitably designed and operating effectively except for disclosed exceptions.

A modified opinion (qualified or adverse) is issued when there are pervasive control deficiencies, when the service auditor cannot obtain sufficient evidence, or when management's description is not fairly presented.

Exception documentation should include: specific control tested, nature of deviation, sample size and exception count, root cause analysis, severity assessment, compensating controls evaluation, and impact on user entities.

Remediated exceptions should still be reported. The report should note when the exception occurred, when it was corrected, and whether subsequent testing showed effective operation post-remediation.

CUECs (Complementary User Entity Controls) are controls that must be implemented by user entities for the service organization's controls to operate effectively. They represent the shared responsibility between service organization and user entities.

User auditors must verify that user entities have implemented and are operating CUECs effectively. If CUECs are not in place, the service organization's controls may not achieve their intended objectives.

Common CUECs include: reviewing service organization reports for accuracy, maintaining appropriate access controls to service portals, reconciling output from the service organization, and timely review of exception reports provided by the service organization.

A subservice organization is a third party used by the service organization to perform services that are part of the overall service provided to user entities. For example, a payroll processor using a cloud hosting provider.

The carve-out method excludes the subservice organization's controls from the scope of the SOC report. The report describes subservice organization activities but does not test their controls. User auditors must obtain the subservice organization's SOC report separately.

The inclusive method includes the subservice organization's controls within the scope of the SOC report. The service auditor tests the subservice organization's relevant controls or reviews their SOC report as part of the examination.

The inclusive method is generally preferred by user auditors because it provides complete coverage in a single report. However, the carve-out method is acceptable and common when the subservice organization maintains its own SOC report.

If using the carve-out method and the subservice organization lacks a SOC report, user auditors must perform alternative procedures to test the subservice organization's controls. This increases audit effort and cost for user entities.

SOC 1 focuses on controls relevant to financial reporting, while SOC 2 focuses on Trust Service Criteria (security, availability, processing integrity, confidentiality, privacy). SOC 1 is for financial audits; SOC 2 is for operational and security assurance.

Yes. Many organizations maintain both because they serve different purposes: SOC 1 for financial audit requirements and SOC 2 for security and operational assurance. The audits can often be conducted simultaneously to reduce cost and effort.

There is no such thing as "SOC 1 certification." SOC 1 is an attestation report, not a certification. Organizations undergo a SOC 1 examination and receive a report, but they are not "certified." Marketing materials claiming "SOC 1 certified" are technically incorrect.

ISO 27001 is a certification standard for information security management systems, while SOC 2 is an attestation report. They cover similar security areas but have different frameworks, audiences, and purposes. Organizations may maintain both.

SOC 1 reports help user entities satisfy SOX 404 requirements by providing assurance over service organization controls. User entities can rely on SOC 1 reports rather than testing service organization controls themselves, reducing compliance burden.

While SOC 1 is not explicitly required by regulations, it is effectively required by AU-C Section 402 (using the work of a service organization) in GAAS audits. Financial statement auditors must obtain SOC reports or perform alternative procedures.

AU-C Section 402 is the auditing standard that provides guidance for user auditors when user entities use service organizations. It requires user auditors to obtain an understanding of service organization controls and their impact on financial reporting.

SOC reports are not legally required for private companies, but they are required by client auditors when services affect financial reporting. Many private companies obtain SOC reports to satisfy client audit requirements and competitive pressures.