What Is a SOC Report and Its Role in an Audit?

A Service Organization Control (SOC) report formally assesses a service organization’s internal controls. As businesses increasingly outsource core functions, these reports assure the effectiveness of controls at third-party service providers. They offer transparency and confidence to organizations relying on external services, particularly for financial reporting and data security.

Understanding SOC Reports

SOC reports are generated by an independent auditor to provide assurance regarding the controls implemented by a service organization. This organization offers services to other entities, known as user entities, which can significantly impact the user entities’ operations, financial reporting, or data security. These reports are necessary in an audit context because user entities and their auditors need to understand the control environment of third-party service providers. For instance, a company using a cloud service provider needs assurance that the provider’s controls are adequate. This understanding helps user entities assess their own risks and supports their internal control over financial reporting.

Different Types of SOC Reports

The American Institute of Certified Public Accountants (AICPA) issues distinct categories of SOC reports, each serving a specific purpose. These include SOC 1, SOC 2, and SOC 3 reports, which help user entities and their auditors evaluate service organization controls. The type of report chosen depends on the nature of the services provided and the information needs of the users.

SOC 1 reports focus on controls relevant to a user entity’s internal control over financial reporting (ICFR). These reports are primarily for financial statement auditors of user entities. The underlying standard for SOC 1 reports is Statement on Standards for Attestation Engagements (SSAE) 18, AT-C 320.

SOC 2 reports address controls related to security, availability, processing integrity, confidentiality, or privacy, based on the AICPA’s Trust Services Criteria. These reports cater to a broader range of stakeholders, including management, customers, regulators, and business partners. The focus shifts from financial reporting to the five Trust Services Criteria.

SOC 3 reports are general-use reports based on the same Trust Services Criteria as SOC 2 reports. They are less detailed than SOC 2 reports and are suitable for public distribution, often used for marketing purposes or to provide a high-level overview.

For both SOC 1 and SOC 2, there are two types of reports: Type 1 and Type 2. A Type 1 report describes the service organization’s system and the suitability of the design of its controls at a specific point in time. A Type 2 report describes the service organization’s system, the suitability of the design of its controls, and the operating effectiveness of those controls over a specified period, typically six to twelve months. The added value of a Type 2 report stems from the auditor’s testing of the controls’ operating effectiveness, which provides greater assurance than a Type 1 report.

Key Sections Within a SOC Report

A typical SOC report contains several standardized components that provide a comprehensive view of a service organization’s control environment. These sections are consistently structured, helping users navigate the report and extract relevant information.

The Independent Service Auditor’s Report contains the auditor’s opinion on the service organization’s controls. This section outlines the scope of the engagement, the auditor’s findings, and their conclusion regarding the suitability of the design and, for Type 2 reports, the operating effectiveness of the controls. It serves as the auditor’s formal attestation.

Management’s Assertion presents the service organization’s statement about its system and controls. This assertion affirms that the system description is accurate and that the controls were suitably designed and, for Type 2 reports, operated effectively. It represents management’s responsibility for the system and controls.

The Description of the Service Organization’s System provides an overview of the services offered and the system used to deliver them. This section explains the service organization’s processes, infrastructure, software, data, people, and procedures relevant to the services provided. It also details the control objectives and related controls implemented by the service organization.

For Type 2 reports, the Applicable Controls and Tests of Controls section outlines the specific controls tested by the service auditor and presents the results of that testing. It provides evidence of the operating effectiveness of the controls over the defined period, which is a key differentiator for Type 2 reports.

SOC reports often include Other Information, which may consist of definitions, contextual details, or additional information relevant to the report. This supplementary content helps users better understand the report’s specifics and the environment in which the services are provided.

Roles and Reliance on SOC Reports

Several key parties are involved with SOC reports, each playing a distinct role and relying on them for various purposes. Their interactions highlight the importance of these reports in fostering trust and transparency in business relationships.

The service organization undergoes the SOC audit and issues the report. Their motivation for obtaining a SOC report often stems from client requests, regulatory compliance requirements, or the desire to gain a competitive advantage. Obtaining such a report demonstrates a commitment to strong internal controls and security practices.

The service auditor is an independent Certified Public Accountant (CPA) firm qualified to perform these specialized audits and issue the SOC report. These auditors adhere to professional standards set by the AICPA, ensuring the credibility and reliability of the reports. Their independence provides an objective assessment of the service organization’s control environment.

The user entity is the client of the service organization, relying on the services provided. User entities need these reports to understand how the service organization’s controls impact their financial reporting, data security, or privacy. This understanding is essential for managing their risks and meeting regulatory obligations, especially when sensitive data or financial transactions are involved.

The user entity’s auditor is the independent auditor responsible for auditing the financial statements or other assertions of the user entity. They rely on SOC reports to gain assurance over the controls at the service organization that affect the user entity’s financial reporting or operational processes. This reliance can significantly reduce the scope of their audit procedures related to outsourced functions, leading to more efficient and focused audits. Other beneficiaries may include regulators, business partners, or prospective clients evaluating service providers.