What is a SOC Type 1 Report?

A SOC 1 Type 1 report is an attestation report issued by an independent auditor that evaluates the design of a service organization’s internal controls relevant to user entities’ financial reporting as of a specific date. It assesses whether the controls are suitably designed to achieve the stated control objectives but does not test their operating effectiveness over time. The report is commonly used by auditors of user entities to understand control design at outsourced service providers.

What is a SOC Type 2 Report?

A SOC 1 Type 2 report is an attestation report issued by an independent auditor that evaluates both the design and operating effectiveness of a service organization’s internal controls relevant to user entities’ financial reporting. Unlike a Type 1 report, it covers a specified review period rather than a single point in time. The report provides evidence that the controls were suitably designed and operated effectively throughout the examination period.

Comparing SOC Type 1 and Type 2 Reports

The differences between the Type 1 and Type 2reports are noted below:

General description vs. actual operation of controls. A Type 1 report describes the procedures and controls that have been installed, while a Type 2 report provides evidence about how those controls have been operated over a period of time.
Suitability of controls vs. their effectiveness. A Type 1 report attests to the suitability of the controls being used, while a Type 2 report contains an opinion regarding the operating effectiveness of those controls over the audit period.
Span of time covered. A Type 1 report describes procedures and controls as of a specific point in time, while a Type 2 report covers how the controls have been operating during the audit period.

An auditor of a firm that is using a service organization to conduct certain operations on its behalf (such as payroll processing) will typically request one of these reports in order to gain some degree of assurance regarding the efficacy of the system of controls put in place by the service organization.

Both reports can assist the auditor in identifying and assessing the risk of material misstatement, but a Type 1 report does not provide evidence concerning the operating effectiveness of controls. A Type 2 report may offer little audit evidence when there is little overlap between the period covered by the report and the period being audited.