System and Organization Controls 1, or SOC 1, aims to control objectives within a SOC 1 process area and to document internal controls relevant to audit of financial statement of the user entity. It is specially designed to meet the needs of user and account entities to whom audit is performed. It is essentially an evaluation of the effectiveness of a service organization's internal controls.
What is SOC 1 certification?
SOC 1 certification is required when an entity's services have an impact on entity's financial reporting. For example, if a manufacturer uses a component that Company “ABC” has /owns in its product, the Company ABC's business have an impact on financial reporting. SOC 1 certification is also necessary when an organization demands the right to audit before engaging an organization.
SOC 1 type I
The SOC 1 type I report focuses on the service organization's system, the suitability of the system for achieving control objectives, and the description on a specified date.
These reports are often restricted to user entities, auditors, and managers. A service auditor performs SOC 1 reports that cover the requirements of Statement on Standards for Attestation Engagements No. 16 (SSAE 16).
SOC 1 type II
The SOC 1 type II report has the same analysis and conclusions found in a type I report but also includes views on the operating effectiveness of preestablished controls designed to achieve all related control objectives established in the description over a specified period.
In this report type, control objectives address potential risks that internal controls intend to mitigate. The report's scope includes all of the relevant control domains and provides reasonable assurances that internal control over financial reporting is restricted to only authorized individuals. It also ensures that they are limited to performing only appropriate and authorized actions.
Why the SOC 1 report is needed
When businesses depend on service organization controls to achieve effective control over their financial reporting process, such as a company that relies on a payroll service provider to process and manage payroll, they want to see their SOC 1 reports as evidence of their operational effectiveness. The SOC 1 report was previously known as Statement on Auditing Standards No. 70. This report was eventually replaced by SSAE Report 16.
Although there are no formal requirements for SOC examinations, businesses increasingly demand them. The primary purpose of SOC audit is to ascertain the effectiveness of a company's internal safeguards and controls with independent and actionable feedback.
The SOC 1 report also helps financial statement auditors minimalize audit processes.