What’s the Difference Between Type 1 and Type 2 SOC 2 Reports?
The SOC 2 (System and Organization Controls) framework helps build trust between organizations by assessing their internal controls for information security. This is primarily achieved through SOC 2 reports, independent audit documents that provide insight, evidence, and assurance on how well a company protects its clients’ sensitive data.
There are two types of SOC 2 reports: Type 1 and Type 2. This article explores the key differences between Type 1 and Type 2 reports and gives guidance on which type to choose for your business needs.
SOC 2 Report Fundamentals
Based on standards set by the American Institute of Certified Public Accountants (AICPA), a SOC 2 report documents an independent audit conducted by a qualified assessor.
Core Principles
SOC 2 reports evaluate how internal controls meet the objectives of relevant Trust Services Criteria (TSC). TSCs constitute the core principles upon which the SOC 2 framework was built: security, availability, processing integrity, confidentiality, and privacy.
Process
The process starts with a planning stage that defines the scope of the audit (specifically which report type the organization needs and which TSCs to include). The assessor then evaluates the design, implementation, and/or effectiveness of the organization’s internal controls against the selected criteria. Once relevant controls have been assessed, the auditor will issue a report — either Type 1 or 2 — that documents the process and provides an opinion on whether the company fully complies with SOC 2 standards.
Content
A SOC 2 report includes information about the report type, the scope of the audit, the organization’s internal controls, the results of the auditor’s tests, and the auditor’s opinion on whether the controls meet the criteria objectives.
A SOC 2 report typically includes the following sections:
- Auditor’s Report: This section includes the assessor’s opinion on whether internal controls meet the relevant trust services criteria.
- Management Assertion: This section includes an assertion from the organization’s top leadership about the design and effectiveness of their internal controls.
- System Description: This section describes the systems and controls in place to meet the relevant TSCs.
- Description of Criteria: This section describes the TSCs used to evaluate the company’s internal controls.
- Other Information (optional): This section may include additional information such as system changes during the audit period.
Benefits
SOC 2 reports provide the audited organization with several benefits including increased customer trust and confidence, improved compliance posture, reduced security risks, and competitive advantage.
Other entities also derive value from SOC 2 reports:
- Customers use SOC 2 reports to assess the security and privacy of their data when processed by a third-party organization.
- Investors use SOC 2 reports to evaluate the risk of misstatements in an organization’s due diligence documents such as its financial statements.
- Regulators can use SOC 2 reports to assess the compliance of an organization with relevant laws and regulatory standards.
Types
There are two types of SOC 2 reports: Type 1 and Type 2.
- A SOC 2 Type 1 report evaluates the design and implementation of internal controls at a specific point in time.
- A SOC 2 Type 2 report evaluates the design, implementation, and operational effectiveness of internal controls over a given period.
SOC 2 Type 1 Report
A Type 1 report presents an auditor’s assessment of an organization’s systems and internal controls at a specific point in time. In particular, the report evaluates whether relevant internal controls are designed properly and whether they have been implemented correctly.
Type 1 reports do not assess the operational effectiveness of internal controls (i.e., whether they have detected or prevented errors and unauthorized access). The primary focus is on whether relevant internal controls are in place at the specific audit date.
Pros
- Provides a snapshot of the design and implementation of internal controls at a specific point in time
- Relatively quicker to conduct/produce (duration typically ranges from a few weeks to a few months)
- Less expensive to obtain compared to Type 2 reports.
- Suitable for evaluating a company’s readiness and initial compliance efforts
- Can be used to demonstrate compliance with some industry regulations
Cons
- Does not provide assurance on the operating effectiveness of relevant internal controls.
- Might be inadequate for companies that need to demonstrate a high level of security and trustworthiness to potential clients, partners, or investors
- Limited acceptance by regulatory bodies
- Likelihood of missing compliance gaps and security weaknesses that may arise over time
SOC 2 Type 2 Report
A Type 2 report presents an auditor’s assessment of an organization’s systems and internal controls over a period of time. In particular, the report evaluates the design, implementation, and operational effectiveness of relevant internal controls based on the selected TSCs.
Type 2 reports go beyond assuring whether controls are in place to also test whether these controls are effective at performing their expected functions (e.g., detect and prevent errors and unauthorized access), over an extended period of time.
Pros
- Presents a more accurate and comprehensive assessment of the company’s internal controls
- Provides greater assurance on the trustworthiness of the company’s information security systems
- Involves actual testing of relevant internal controls over an extended period of time (typically six to 12 months)
- Suitable for demonstrating a high level of security to customers, partners, and investors
- Provides the base document for a general-use SOC 3 report, which can be a powerful marketing tool
Cons
- Relatively more expensive to obtain
- May not be suitable (i.e., overkill) for organizations that do not need to demonstrate a high level of security to internal and external stakeholders
- Requires a longer engagement period with a qualified auditor (takes at least six months to more than a year to complete)
Conclusion and Final Tips
SOC 2 reports serve as widely accepted proof organizations can use to demonstrate trustworthiness, security, and due diligence to customers, partners, and investors.
By understanding the differences between Type 1 and Type 2 reports, you can make informed decisions about which type meets your needs and your stakeholders’ expectations.
The type of SOC 2 report your company should acquire depends on many factors:
- Your company’s industry, line of business, and regulatory environment.
- Your company’s risk tolerance.
- Your company’s timeline.
- Your company’s budget.
- The specific requirements of your internal and external stakeholders.
Ultimately, the decision depends on your goals, budget, and schedule. While Type 1 reports may be faster and less costly to complete, Type 2 reports deliver a more compelling assurance to your stakeholders. All things considered; a Type 2 report delivers a more valuable set of benefits that far outweighs costs.
Here are some final tips that can help you achieve better SOC 2 compliance outcomes:
- Brainstorm to determine your compliance goals.
- Choose an experienced auditor with proven expertise in your line of business.
- Provide adequate documentation about your internal controls.
- Implement remedial recommendations to the best of your ability.
- Practice due diligence before, during, and after the audit.
The delivery of SOC 2 reports can be accelerated in a cost-efficient manner. But that entails specialized human skills and advanced technologies only a few experienced providers can deliver.
Call an expert for a free consultation on how best to customize a SOC 2 program for your specific line of business and unique compliance needs.