Banking and Finance
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System and Organization Controls (SOC 1, SOC 2 & SOC 3) Reporting
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System and Organization Controls (SOC 1, SOC 2 & SOC 3) Reporting
If your company provides services to other companies, those reporting may have an impact on your customers’ financial reporting. As a result, your customers’ auditors may need assurance that the controls surrounding your services are designed effectively, and in some cases, operating effectively. A way to provide that assurance is by undergoing a Service Organization Control (SOC) audit. SOC 1, SOC 2 and SOC 3 audit reports have distinct differences.
These reporting, prepared in accordance with AT-C section 320, Reporting on an Examination of Controls at a Service Organization Relevant to User Entities’ Internal Control Over Financial Reporting, are specifically intended to meet the needs of entities that use service organizations (user entities) and the CPAs that audit the user entities’ financial statements (user auditors), in evaluating the effect of the controls at the service organization on the user entities’ financial statements.
Benefits of SOC Reporting:Difference Between SOC 1, 2, & 3 Audit Reports
SOC 1 reports is a report on Controls at a Service Organization which are relevant to user entities’ internal control over financial reporting. By its very definition, as mandated by SSAE 18, SOC 1 is the audit of a third-party vendor’s accounting and financial controls. It is the metric of how well they keep up their books of accounts.
SOC 2 reports will be performed in accordance with AT 101 and based upon the Trust Services Principles. SOC 2 is the most sought-after report in this domain and a must if you are dealing with an IT vendor. It is quite common for people to believe that SOC 2 is some upgrade over the SOC 1, which is entirely untrue.
SOC 3 report is also based upon the Trust Service Principles and performed under AT101. It may have some of the components of SOC 2; still, it is entirely a different audit. SOC 3 is a summarized report of the SOC 2 Type 2 report. So, yes, it is not as detailed as SOC 2 Type I report, or SOC 2 Type II reports are, but a SOC 3 report is designated to be a less technical and detailed audit report with a seal of approval which could be put up on the website of the vendor.
Restriction of SOC 1 Report
Because SOC 1 reports may contain sensitive information about service organizations, they are considered restricted use reports and should only be shared with management of the service organization (the company who has the SOC 1 performed), user entities of the service organization (the service organization’s clients) and the user entities’ financial auditors (user auditors).
Why Are The SOC 1 And SOC 2 Reports Important?
Service organizations have made these services a core component of their business model, providing these services more efficiently and cost effectively. It must be noted that the service organization retains the responsibility for the services it provides and for the confidentiality and secure protocols in protecting sensitive data. The SOC 1 and 2 reports help gain transparency of the specific controls implemented by a service organization, and the tests performed by the auditor. The success or failure of these controls has a direct or indirect impact on the reputation, financial statements and stability of the user organization.
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