Overview

When organizations look to provide assurance on their internal controls, they often face a critical decision: SOC 1 or SOC 2? Both types of audits fall under the SOC (System and Organization Controls) framework, but they serve different purposes and are conducted under distinct standards. Understanding these differences and their business implications helps organizations align their SOC audit with specific operational needs and client expectations.

Scenario: A Financial Service Provider’s Dilemma

Consider a financial services provider that comes to Auditvisor unsure whether they need a SOC 1 or SOC 2 audit. This company manages payroll for clients, directly impacting client financial records, but it also stores clients’ personal data, raising questions about data security. In this case, our recommendation might be to prioritize SOC 1 to satisfy financial reporting needs under SSAE 18 (Statements on Standards for Attestation Engagements No. 18), the authoritative standard for SOC 1 audits, and then consider SOC 2 to address client concerns around data privacy.

At Auditvisor, we guide clients through these decisions, ensuring the selected SOC audit type aligns with both compliance requirements and business objectives.

What is SOC 1?

SOC 1 reports are conducted under SSAE 18 and focus on evaluating controls relevant to an organization’s financial reporting. These audits are essential for service providers that influence their clients’ financial statements, such as payroll processors, loan service providers, and asset managers. A SOC 1 report verifies the accuracy and reliability of financial processes, giving clients confidence in the integrity of their financial data.

Applicability of SOC 1 Type 1 and Type 2‍

SOC 1 audits, like other SOC reports, come in two forms:

• Type 1: A Type 1 SOC 1 report assesses the design and implementation of controls at a specific point in time. It’s useful for companies seeking an initial attestation of control design, especially when establishing trust with clients for the first time.
• Type 2: A Type 2 SOC 1 report evaluates the design and operational effectiveness of controls over a period, usually six months to a year. For businesses with established financial reporting controls, a Type 2 report demonstrates that controls not only exist but also operate effectively over time, adding a deeper layer of client confidence.

What is SOC 2?

SOC 2 audits, governed by SSAE 18 but structured under the Trust Services Criteria (TSC) established by the American Institute of Certified Public Accountants (AICPA), assess controls related to data security, availability, processing integrity, confidentiality, and privacy. Unlike SOC 1, which focuses on financial reporting, SOC 2 is centered on data protection and risk management, making it especially relevant for technology providers, SaaS companies, and any organization handling client data.

Exploring the Trust Services Criteria (TSC)‍

SOC 2 reports are based on five Trust Service Criteria, each addressing a specific area of data protection and organizational controls:

1. Security: This criterion examines whether the system is protected against unauthorized access. Security controls often include access management, network security, and intrusion detection, all critical for protecting client data from external threats.
2. Availability: Availability evaluates whether the system is operational and accessible as committed in service agreements. Controls under this criterion focus on performance monitoring, backup and disaster recovery, and infrastructure maintenance to ensure continuous service availability.
3. Processing Integrity: Processing integrity ensures that system processing is complete, accurate, and timely. This is particularly important for businesses that process data on behalf of clients, ensuring that data is reliable and unaltered throughout processing.
4. Confidentiality: The confidentiality criterion focuses on the protection of sensitive information. Controls in this area are designed to limit access to authorized personnel only, preventing unauthorized disclosure of confidential data.
5. Privacy: Privacy focuses on the collection, use, retention, and disposal of personally identifiable information (PII). This criterion ensures compliance with privacy laws and regulations, which is crucial for businesses operating across multiple jurisdictions with varying privacy standards.

Each criterion allows organizations to customize their SOC 2 audit according to the specific data they handle and the expectations of their clients, providing a flexible yet rigorous framework for data protection.

Applicability of SOC 2 Type 1 and Type 2‍

SOC 2 also offers both Type 1 and Type 2 reporting options:

• Type 1: A Type 1 SOC 2 report provides a snapshot assessment, verifying that controls are designed effectively at a specific point in time. For companies pursuing their first SOC 2 audit, this report builds initial client confidence in the organization’s security measures.
• Type 2: A Type 2 SOC 2 report examines both the design and operational effectiveness of controls over an extended period, typically six months to a year. For businesses handling high volumes of sensitive data, a Type 2 report offers stronger assurance, showing a sustained commitment to protecting client information.

Business Implications: SOC 1 vs. SOC 2

Choosing between SOC 1 and SOC 2 has significant implications for a business’s client relationships and reputation. Organizations responsible for client financial data benefit from SOC 1, as it demonstrates strong financial reporting controls in compliance with SSAE 18 standards. For instance, clients relying on payroll processors need the assurance that their financial data is accurate and protected, and a SOC 1 attestation from a reputable CPA firm like Auditvisor provides exactly that.

In contrast, companies handling sensitive client data—such as cloud providers, SaaS platforms, or data centers—often find SOC 2 more suitable. SOC 2 provides a structured evaluation of data security, availability, and privacy, aligned with the Trust Services Criteria. SOC 2 attestation under SSAE 18 demonstrates that these companies meet stringent security standards, adding a competitive edge in today’s data-driven marketplace.

SOC Audits: Not One-Size-Fits-All

Every organization has unique compliance needs, and the choice between SOC 1 and SOC 2 depends on the services provided and the type of data managed. At Auditvisor, our role as a licensed CPA firm allows us to conduct SOC audits under SSAE 18 standards, delivering trusted, third-party attestation. We understand that choosing between SOC 1 and SOC 2 is not always straightforward, and we’re here to guide clients toward the audit type that maximizes value and builds lasting client confidence.

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