What is SOC 1?
A SOC 1 report is an independent audit report that evaluates the internal controls of a service organization that could impact its clients’ financial reporting. If your organization provides outsourced services—such as payroll processing or loan servicing—that affect your clients’ financial statements, you may need a SOC 1 report to assure stakeholders that your controls are operating effectively.
SOC 1 reports stem from the American Institute of Certified Public Accountants (AICPA) and are primarily used by auditors and financial regulators to assess how a service provider’s controls might impact a client’s internal control over financial reporting (ICFR).
How do you know if you need a SOC 1 report?
The key question to ask: Does your service influence your clients’ financial records? If the answer is yes, then a SOC 1 report may be necessary.
SOC 1 vs. SOC 2: What’s the Difference?
Unlike SOC 2 reports, which focus on security, availability, processing integrity, confidentiality, and privacy (known as Trust Services Criteria), SOC 1 requirements are specifically designed for financial controls. This makes them essential for industries such as banking, payroll processing, and financial services where accuracy and control over financial data are paramount.
Who Performs a SOC 1 Audit?
Only licensed Certified Public Accountant (CPA) firms that specialize in IT security and business process audits can issue SOC 1 reports. The audit assesses whether management’s control assertions are valid and whether the controls in place effectively support the stated objectives.
Control Objectives in a SOC 1 Report
Control objectives define the purpose of controls within the SOC 1 requirements. They focus on mitigating financial reporting risks, such as unauthorized access to financial systems or inaccurate processing of transactions. Examples of control objectives include:
- Ensuring only authorized personnel can access financial systems.
- Protecting data through password policies and multi-factor authentication.
- Implementing proper transaction reconciliation processes.
To achieve a clean SOC 1 report, an organization must demonstrate that its controls provide reasonable assurance that financial reporting risks are mitigated. However, auditors do not provide absolute assurance—even with strong controls, isolated control failures may not necessarily result in a negative report if the overall system remains effective.
SOC 1 Type I vs. Type II Reports
There are two types of SOC 1 reports:
- Type I: Assesses the design and implementation of controls at a specific point in time.
- Type II: Evaluates the operating effectiveness of controls over a defined period (usually 12 months).
Type II reports offer greater assurance to stakeholders since they provide evidence of sustained control effectiveness rather than just a snapshot in time.
Who Needs a SOC 1 Report?
Organizations that provide financially relevant outsourced services often need SOC 1 certification. Some common examples include:
- Payroll providers (e.g., ADP, Paychex)
- Loan and claims processors
- SaaS providers handling financial transactions
- Data centers housing financial systems
Clients or investors may require a SOC 1 report to assess whether their service providers’ controls are reliable and align with their own financial reporting obligations.
How Long is a SOC 1 Report Valid?
SOC 1 Type II reports typically cover a 12-month period, though some may span 6-18 months. Regular audits ensure continuous compliance and provide assurance to clients and stakeholders.
How Much Does a SOC 1 Audit Cost?
SOC 1 audit costs vary based on factors such as:
- Company size and complexity
- Number of employees with access to financial systems
- Use of cloud services (AWS, Azure, etc.)
- Number of control objectives assessed
Larger, more complex organizations with extensive IT and business process controls will generally incur higher audit costs.
On average, a SOC 1 audit can range from a few thousand dollars for smaller organizations to tens of thousands for larger, more complex entities. Refer to this blog to understand how this compares to SOC 2 pricing.
SOC 1 and Audit Methodologies: Substantive vs. Control Auditing
A SOC 1 audit typically involves control-based auditing, where the auditor assesses the design and effectiveness of controls that mitigate financial risks. However, some audits also incorporate substantive testing.
Control Auditing
Control auditing focuses on testing policies, procedures, and security measures to ensure they work effectively. It includes:
- Evaluating user access controls
- Assessing change management policies
- Reviewing automated system controls
Substantive Auditing
Substantive auditing verifies financial transactions and balances. This method is typically used when controls are weak or untested. It involves:
- Directly testing financial transactions
- Recalculate balances to verify accuracy
- Confirming transactions with third parties
A SOC 1 audit primarily relies on control-based auditing, but understanding substantive testing helps companies strengthen their financial reporting processes.
Final Word: Choose a SOC 1 Auditor Wisely
If your organization is considering a SOC 1 audit, selecting the right auditor is critical. Some firms specialize exclusively in SOC examinations, while others offer a broader range of accounting services. Choose an auditor with experience in IT security and business process audits to ensure a thorough and credible report.
