What Is an SSAE 18 Report? The Standard for SOC Reports

An SSAE 18 report provides assurance about controls at service organizations that process information for other entities. Issued by the American Institute of Certified Public Accountants (AICPA), this standard establishes guidelines for auditors to assess and report on internal controls. These reports are relevant for businesses that outsource functions, offering transparency regarding the security and integrity of outsourced processes. SSAE 18 serves as the foundational auditing standard under which various types of Service Organization Control (SOC) reports are issued.

The SSAE 18 Standard Explained

SSAE 18, officially Statement on Standards for Attestation Engagements No. 18, is a professional standard that replaced SSAE 16. It provides a framework for auditors to evaluate and report on controls implemented by service organizations. Its objective is to offer assurance to user entities, the clients of these organizations, regarding control effectiveness, thereby building trust in outsourced operations.

The standard focuses on controls relevant to a user entity’s internal control over financial reporting, security, availability, processing integrity, confidentiality, and privacy. SSAE 18 ensures consistency and reliability in audit reports across service providers. This framework is important in today’s interconnected business environment, where outsourcing is common.

SSAE 18 helps user entities understand outsourcing risks and assess the control environment of their service providers. It bridges the information gap when a user entity’s operations depend on a separate service organization’s internal controls.

SSAE 18 is not a report itself, but the overarching standard for independent auditors performing engagements that result in SOC reports. It sets professional requirements for auditors, including independence, due professional care, and engagement scope. SOC reports are the output of an audit conducted under SSAE 18 guidelines, ensuring their credibility and utility.

Understanding Service Organization Control (SOC) Reports

Service Organization Control (SOC) reports provide insights into the internal controls of service organizations. These reports are categorized into different types, each addressing specific concerns of user entities. The most common types are SOC 1, SOC 2, and SOC 3, all prepared under the SSAE 18 standard.

A SOC 1 report focuses on controls relevant to a user entity’s internal control over financial reporting (ICFR). Financial statement auditors of user entities primarily use this report to evaluate controls impacting financial statements. It is essential for compliance with regulations requiring robust financial reporting controls, such as Sarbanes-Oxley (SOX). A SOC 1 report describes the service organization’s system, control objectives, and controls designed to achieve them.

SOC 2 reports address controls related to the Trust Services Criteria (TSC): Security, Availability, Processing Integrity, Confidentiality, and Privacy. These reports are relevant for technology and data-driven service organizations, such as cloud providers and data centers. User entities rely on SOC 2 reports to assess risks associated with data security, system uptime, and sensitive information handling. The specific criteria covered depend on the services provided and the needs of the user entity.

A SOC 3 report is a general-use summary of a SOC 2 report. Unlike SOC 1 and SOC 2 reports, which have restricted distribution, SOC 3 reports are for public distribution. They offer a concise overview of a service organization’s controls related to the Trust Services Criteria. SOC 3 reports do not include detailed control descriptions or specific auditor tests, making them suitable for general assurance or marketing purposes.

For both SOC 1 and SOC 2 reports, there are two types of engagements: Type 1 and Type 2. A Type 1 report describes the service organization’s system and the suitability of its control design at a specific point in time. It provides assurance that controls are appropriately designed to meet objectives. This report is useful for an initial assessment of a service organization’s control environment.

A Type 2 report describes the service organization’s system, the suitability of its control design, and the operating effectiveness of those controls over a specified period, typically six to twelve months. This report includes details of tests performed by the service auditor and their results. Type 2 reports are preferred as they provide ongoing assurance about control performance over time, offering a more comprehensive view of the control environment’s reliability.

Key Elements Within a SOC Report

A typical SOC 1 or SOC 2 report is structured into several sections. These sections present information for user entities to evaluate the assurance provided by the report.

Management’s Assertion

This section contains a statement from the service organization’s management. It affirms the accuracy of their system description and, for Type 2 reports, the operating effectiveness of their controls. This assertion is a formal declaration of responsibility by the service organization for the information presented.

Independent Service Auditor’s Report

This report includes the auditor’s opinion, providing an independent assessment of the service organization’s controls. An unqualified opinion indicates controls are effectively designed and operating with no significant issues. A qualified opinion suggests minor exceptions, while an adverse opinion indicates significant control deficiencies. A disclaimer of opinion means the auditor could not form an opinion due to scope limitations.

Description of the Service Organization’s System

This section details the services provided and the system used to deliver them. It includes information on system components like infrastructure, software, people, data, and procedures relevant to the report’s scope. It also outlines the control objectives or Trust Services Criteria addressed, providing context for the controls.

Control Objectives/Criteria, Related Controls, and Tests of Controls

For Type 2 reports, this section lists specific control objectives (for SOC 1) or Trust Services Criteria (for SOC 2). For each objective or criterion, the report describes the implemented controls. It details the tests performed by the independent auditor to evaluate the operating effectiveness of these controls over the reporting period. The results of these tests, including any identified exceptions, are also presented, providing empirical evidence of control performance.

How Service Organizations Obtain a SOC Report

Obtaining a SOC report involves a structured process, beginning with internal preparation and culminating in an independent audit. This process demonstrates the effectiveness of internal controls to external auditors and requires significant planning.

Defining the Scope

The initial step is defining the report’s scope. This determines which services, systems, and control objectives or Trust Services Criteria will be included in the audit. A clear scope ensures the audit focuses on relevant operational aspects impacting user entities and helps identify the appropriate SOC report type.

Readiness Assessment

Many organizations conduct a readiness assessment after scope definition. This internal review identifies gaps in existing controls or documentation that might hinder a successful audit. It allows the organization to remediate issues before the formal audit begins. This proactive approach can save time and resources.

Control Documentation

Thoroughly documenting policies, procedures, and internal controls relevant to the report’s scope is fundamental. This documentation serves as a roadmap for auditors, explaining control design and implementation. Clear documentation is crucial for auditors to understand the control environment and perform testing efficiently.

Engaging an Independent Service Auditor

Service organizations must select a qualified auditing firm with expertise in SOC engagements. The auditor must be independent to provide an unbiased opinion. The engagement process typically involves signing an engagement letter outlining the scope, responsibilities, and timeline.

Evidence Gathering

During the audit, the service organization provides auditors with necessary documentation, system access, and personnel for interviews. The organization must demonstrate that its controls are designed appropriately and operating effectively over the specified period, especially for a Type 2 report. This effort helps the auditor gather sufficient audit evidence to support their opinion.

Using a SOC Report as a User Entity

Receiving a SOC report from a service organization aids user entities in their operations and compliance. Effectively utilizing these reports is important for maximizing their value, as they serve as a tool for due diligence and risk management.

Reasons for Requesting SOC Reports

User entities request SOC reports for vendor due diligence and risk assessment. They help assess a provider’s control environment and potential risks before engagement or during ongoing monitoring. These reports are also important for regulatory compliance, as many regulations require oversight of third-party service providers. Information in a SOC report can support the user entity’s financial statement audits by providing assurance over outsourced processes that impact their financial reporting.

Reviewing a SOC Report

When reviewing a SOC report, user entities should focus on key information. The auditor’s opinion is primary, providing an independent assessment of controls; an unqualified opinion offers the highest assurance. Review the period covered to ensure it is current and relevant. The description of controls provides context, and any identified exceptions should be evaluated for their potential impact on the user entity’s operations.

Integrating SOC Report Information

Integrating information from a SOC report into a user entity’s internal control framework is a practical application. For example, if a service organization handles payroll, the user entity’s internal controls might rely on the SOC 1 report’s described controls. This allows the user entity to reduce their own internal testing for outsourced processes, streamlining internal audit efforts.

Limitations and Responsibilities

User entities must acknowledge a SOC report’s limitations and their own continuing responsibilities. A SOC report covers specific controls and a defined period, not guaranteeing indefinite control effectiveness. The user entity remains responsible for establishing and maintaining its own internal controls, including those related to the interface with the service organization. Furthermore, the user entity must ensure that their own processes complement the service organization’s controls, and that any identified control deficiencies are appropriately addressed.