my job is to keep businesses and their data safe from cyber threats. One of the ways we do this is by performing audits and assessments of their security protocols. Two common audits that are important to understand are SOC 1 and SOC 2. These audits provide crucial information regarding a company’s control environment, but it’s easy to get confused between the two. In this article, I’ll explain the key differences between SOC 1 and SOC 2, so you can better understand which one is relevant for your business and why it matters from a cybersecurity perspective. So, let’s dive in!
What is SOC 1 and SOC 2?
Whether a company needs SOC 1 or SOC 2 report depends on its industry, its clients’ needs, and the services it provides. If a company provides outsourced services that affect the financial statements of its clients, a SOC 1 report will likely be required. If the company stores, processes, or transfers sensitive client information, a SOC 2 report may be more appropriate. Regardless of the report type required, both SOC 1 and SOC 2 reports demonstrate an organization’s commitment to internal controls and risk management.
???? Pro Tips:
1. Understand the purpose of SOC 1 and SOC 2 reports. These reports are conducted by third-party auditors to assess the effectiveness of a company’s internal controls over financial reporting (SOC 1) or non-financial reporting (SOC 2) related to data security, availability, processing integrity, confidentiality, and privacy.
2. Know if your organization needs a SOC 1 or SOC 2 report. SOC 1 reports are usually required for companies that provide critical services to their clients, such as financial and healthcare institutions. SOC 2 reports are useful for any company that wants to demonstrate its commitment to data security and provide assurance to customers.
3. Determine the scope of the SOC 1 or SOC 2 audit. The auditor will need to know the specific services or systems that are in scope for the audit. This will help ensure that all relevant controls are being tested.
4. Work with the auditor to gather necessary documentation. The auditor will likely request documentation such as policies, procedures, and evidence of controls to support the audit. Make sure to have this information readily available and organized beforehand.
5. Address any identified control gaps or deficiencies promptly. The auditor will provide a report that details any control gaps or deficiencies that were identified during the audit. Address these gaps promptly and implement corrective action plans to improve your control environment.
Understanding the Basics of SOC 1 and SOC 2 Reports
As more businesses move their operations and data to cloud service providers, it has become increasingly important to ensure that the controls implemented by these providers are adequate and effective in protecting the security, confidentiality, and integrity of business-critical information. This is where SOC (System and Organization Controls) reports come in. SOC reports are prepared by licensed CPA firms and can be used by organizations to provide assurance about the effectiveness of their controls.
The two most common types of SOC reports are SOC 1 and SOC 2. SOC 1 reports are primarily used to evaluate and report on the internal controls of a service organization related to their clients’ financial reporting. SOC 2 reports, on the other hand, evaluate and report on controls related to the security, availability, processing integrity, confidentiality, and privacy of a service organization’s system.
Key Differences in Scope between SOC 1 and SOC 2 Reports
While both SOC 1 and SOC 2 reports evaluate controls, the scope of the report is different. SOC 1 reports concentrate on financial controls, whereas SOC 2 reports concentrate more on accessibility security, processing integrity, confidentiality, and privacy.
Another key difference is who the reports are intended for. SOC 1 reports are typically used by companies that outsource critical financial operations to service providers, such as payroll processing, billing, and funds transfer. SOC 2 reports, on the other hand, are used by companies that outsource various IT functions, including data hosting, data processing, and application management.
The Focus of SOC 1 Reports: Financial Controls
SOC 1 reports evaluate the internal controls of a service organization that are relevant to its clients’ financial reporting. This means that SOC 1 reports evaluate controls that are in line with the specified control goals, which are typically related to financial reporting. For example, if a company outsources its payroll processing to a service organization, the SOC 1 report will evaluate the controls related to the accuracy of the payroll data, the completeness of the payroll data, and the timeliness of the payroll data processing.
The Focus of SOC 2 Reports: Accessibility Security, Processing Integrity, Confidentiality, and Privacy
SOC 2 reports, on the other hand, focus on five key areas of control relevant to information security and operations. These areas are:
1. Accessibility Security: Refers to controls that ensure that the system is protected against unauthorized access, both physical and logical.
2. Processing Integrity: Refers to controls that ensure that processing is accurate and timely, and that data is not lost, destroyed or corrupted.
3. Confidentiality: Refers to controls that protect confidentiality of data from unauthorized disclosure, both accidental and intentional.
4. Privacy: Refers to controls that protect personal identifiable information (PII) from unauthorized collection, use, retention, disclosure or disposal.
5. Availability: Refers to controls that ensure that the system is available for use when required.
Evaluating Controls in SOC 1 Reports
SOC 1 reports evaluate internal controls that are relevant to financial reporting. The report is typically limited in scope and provides assurance to management, auditors, and stakeholder that the relevant controls are designed and operating effectively. The report provides valuable information about the controls over financial data, including the completeness, accuracy, and timeliness of the information.
SOC 1 reports provide service organizations with a framework for establishing, maintaining, and evaluating their internal financial controls. This is important because it helps organizations demonstrate their ability to provide accurate and timely financial information to their clients and stakeholders on a consistent basis.
Identifying and Testing Controls in SOC 2 Reports
SOC 2 reports evaluate controls that are relevant to information security and operations. The report is typically more extensive in scope than SOC 1 reports and provides detailed information on the controls related to accessibility security, processing integrity, confidentiality, and privacy.
Service organizations can use SOC 2 reports to identify and test controls that meet the requirements of their clients and stakeholders. SOC 2 reports are often used by vendors as a way to provide assurance to their customers regarding the effectiveness and adequacy of their internal controls related to information security and operations.
Choosing the Right SOC Report for Your Business Needs
When deciding which SOC report is right for your business, consider the scope of your operations and the risks associated with those operations. If you outsource critical financial operations, such as payroll processing, billing, and funds transfer, SOC 1 report will be the appropriate choice.
If you outsource various IT functions, including data hosting, data processing, and application management, a SOC 2 report will provide more detailed information about the controls that are relevant to your operations. It is also important to consider the risks and exposures that your business may face, including legal, financial, and reputational risks.