What Is an SOC Audit? A Breakdown of the Different Reports

A System and Organization Controls (SOC) audit is a formal assessment performed by an independent third-party auditor. It evaluates a service organization’s internal controls related to its services and data protection. As businesses increasingly rely on third-party providers, these audits help establish trust and transparency.

The audit provides assurance to clients, or user entities, that their data and systems are handled with appropriate controls. This process helps service organizations demonstrate their commitment to security and operational integrity, and identifies potential risks or weaknesses within their control environment.

Understanding SOC Audit Fundamentals

SOC audits are governed by standards established by the American Institute of Certified Public Accountants (AICPA). This framework provides a structured approach for reporting on controls at service organizations, addressing the complexities of modern business practices like cloud computing and outsourced services.

A service organization is the entity undergoing the audit, providing services to its clients, known as user entities. These services often involve processing sensitive financial or operational data.

Internal controls are policies, procedures, and activities an organization implements to meet its objectives. In a SOC audit, these controls safeguard data, maintain operational effectiveness, and ensure reliable financial reporting. Service organizations pursue these audits to meet contractual obligations with customers.

Exploring the Different SOC Reports

The AICPA offers various SOC reporting options: SOC 1, SOC 2, and SOC 3. These reports provide different levels of detail and focus, tailored to the needs of various stakeholders. Understanding these distinctions helps user entities request the appropriate report.

SOC 1 Reports

SOC 1 reports concentrate on a service organization’s internal controls over financial reporting (ICFR). These controls are relevant to a user entity’s financial statements. For example, a payroll processing company undergoes a SOC 1 audit to assure clients their financial data is processed accurately and securely.

These reports are issued under Statement on Standards for Attestation Engagements (SSAE) 18, an auditing standard that provides guidelines for auditors. SOC 1 reports are restricted-use, shared only with existing customers and their financial auditors.

SOC 2 Reports

SOC 2 reports focus on a service organization’s controls relevant to the AICPA’s Trust Services Criteria (TSC). These criteria include Security, Availability, Processing Integrity, Confidentiality, and Privacy. Security is mandatory for all SOC 2 reports; the others are optional, selected based on services and client needs.

Security ensures that systems and data are protected against unauthorized access and disclosure.
Availability confirms that systems are accessible for operation and use as agreed upon.
Processing Integrity verifies that system processing is complete, valid, accurate, timely, and authorized.
Confidentiality protects confidential information, such as intellectual property or sensitive business data, from unauthorized disclosure.
Privacy specifically addresses the collection, use, retention, disclosure, and disposal of personal information in accordance with privacy policies.

SOC 2 reports are common for cloud service providers or software companies, as they address data security, privacy, and operational reliability.

SOC 3 Reports

SOC 3 reports are general-use reports derived from a SOC 2 audit. They provide a high-level summary of the service organization’s controls related to the Trust Services Criteria. Unlike SOC 2 reports, which contain detailed control descriptions and testing results, SOC 3 reports are less detailed and can be freely distributed, often posted on a company’s website.

Type 1 vs. Type 2 Reports

Both SOC 1 and SOC 2 audits can result in either a Type 1 or a Type 2 report. The distinction lies in the scope and period covered by the audit. A Type 1 report assesses the design suitability of controls at a specific point in time.

A Type 2 report provides a more comprehensive assessment. It evaluates both the design suitability and the operating effectiveness of controls over a specified period. Type 2 reports offer a higher level of assurance because the auditor tests whether controls consistently operated as intended throughout the audit period.

The SOC Audit Process and Report Structure

The SOC audit process involves several phases. It begins with planning and defining the audit’s scope, including the systems and services to be assessed. This stage identifies which Trust Services Criteria, if applicable, will be included in the report.

Following scope definition, the auditor performs fieldwork, gathering evidence and testing controls. This involves reviewing policies, procedures, system configurations, and interviewing personnel to verify control operations. The auditor collects documentation supporting control existence and operation, such as system logs, incident reports, and change management records.

Upon completion of fieldwork, the auditor prepares the SOC report. A standard SOC report includes several components. It starts with Management’s Assertion, a statement by the service organization’s management about their system and control effectiveness.

The report then contains the Independent Service Auditor’s Report, presenting the auditor’s opinion on management’s assertion and control suitability. This section provides an objective assessment of the service organization’s control environment. A detailed Description of the Service Organization’s System follows, explaining the services provided and the control environment.

For Type 2 reports, the document also includes a section on Applicable Controls and Tests of Controls. This part describes the specific controls evaluated and the results of the auditor’s testing, providing evidence of their operating effectiveness over the audit period. The comprehensive nature of these reports allows user entities to gain a clear understanding of the service organization’s control posture.