A SOC 1 (System and Organization Controls 1) report is an independent examination of a service organization’s controls that affect its clients’ financial reporting. A licensed CPA firm conducts the examination and issues an opinion on the controls described by management.
The report is intended for the service organization’s management, its clients, and their financial statement auditors. It examines relevant business processes and technology controls, including transaction processing, system access, and financial reconciliations.
Unlike a certification, a SOC 1 provides an auditor’s opinion on specific controls. Its scope is tailored to the organization’s services and associated financial reporting risks.
Organizations that process financial transactions or maintain information used in clients’ financial statements often need SOC 1 examinations. Examples include payroll processors, loan servicers, benefits administrators, trust and custody providers, and financial software companies.
Providers using Artificial Intelligence to calculate or process financial transactions may also fall within the scope of an examination.
Although SOC 1 reports are not universally required by law, clients and their external auditors frequently request them. These reports help auditors evaluate outsourced controls that could affect financial reporting accuracy.
The deciding factor is whether the provider’s services influence a client’s financial records.
A SOC 1 type 1 report evaluates whether controls are suitably designed at a specific point in time. It does not establish whether those controls operated effectively over an extended period.
A SOC 1 type 2 report examines both control design and operating effectiveness throughout a defined examination period, typically 12 months.
Type 2 reports provide stronger evidence because auditors test whether controls actually operated as intended.
Organizations undergoing their first examination may begin with Type 1 while establishing consistent procedures and documentation. Clients and external auditors generally prefer Type 2 reports because they demonstrate control performance over time.
A SOC 1 examination conducted under SSAE 18 evaluates controls relevant to clients’ internal control over financial reporting.
Auditors assess the organization’s system description, management’s assertions, control objectives, and supporting procedures.
Common examination areas include user access, system changes, transaction processing, reconciliations, data security, and computer operations.
Auditors also consider outsourced service providers and controls that clients must perform themselves.
For Type 2 examinations, auditors review evidence showing whether controls operated effectively throughout the reporting period.
The examination concludes with an independent opinion, identifying any significant control weaknesses or qualifications that could affect reliance on the report.
External auditors use SOC 1 reports to understand and evaluate controls performed by third-party service providers.
A relevant Type 2 report can reduce the need for auditors to test those controls independently, potentially saving time and avoiding duplicate procedures.
However, auditors must assess the report’s scope, examination period, opinion, testing exceptions, and controls that clients are responsible for maintaining.
For example, when evaluating financial reporting processes involving Penalty Abatement Requests, auditors must determine whether any outsourced activities affect the company’s accounting records.
A SOC 1 supports audit planning and evidence gathering but does not replace management’s responsibility for accurate financial reporting.
A Type 2 examination typically covers 12 months of control activity, although shorter periods are possible. Auditor fieldwork generally takes four to eight weeks, depending on organizational complexity, available documentation, and how quickly the service provider responds to requests.
SOC 1 focuses on controls affecting clients’ financial reporting. SOC 2 evaluates controls related to security, availability, processing integrity, confidentiality, and privacy. Organizations may need both reports when their services involve financial processing and the protection of sensitive client information.
Most service organizations obtain SOC 1 reports annually. Consistent reporting periods help clients and their auditors evaluate controls without significant coverage gaps. Organizations should coordinate examination schedules with clients’ financial statement audit deadlines to ensure reports are available when needed.
Yes. A qualified opinion indicates that certain controls or objectives did not meet the auditor’s expectations. Clients and their auditors may request additional information, corrective actions, or testing before relying on the report for their financial statement audit work.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Risk Advisory Services practice, or call us at 770.396.2200.
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