Aug

Soc Audit: What is it and why is it important?

May 24, 2021

In the modern days, organizations are continually relying on service providers to streamline their operations and ensure functionality. This has greatly facilitated the emergence of cloud computing, software as a service (SaaS), and data centers. However, with the ease of outsourcing these tasks come a degree of risk.

The important thing that places a service provider on a map is the ability to demonstrate their effective implementation of internal controls against the services they offer. An easy way of assuring customers is through undergoing thorough System and Organization Control, SOC audit. This report is key to win the trust of your potential customers.

What's a SOC report, and Why Is It Important?

Simply, System and Organization Control is a report that a third-party auditor issues to a service provider company after a thorough examination to verify that an organization has adequate system controls in relation to security, processing integrity, privacy, availability, and confidentiality. These reports are issued by certified public accountants (CPA). It outlines all the potential risks, the advantages, and the company's operating effectiveness that the service provider organization assures its customers who are considering working with them.

To better understand these reports, here are a few terms that you should understand.

Service Organization - This refers to the service provider company that is being tested for effectiveness
User Entity - This is the organization that outsources its service to the service organization
Control - This is the auditable mechanism that an organization has kept in place to detect or prevent risk.

Transparency is essential when it comes to trusting another organization to move your functions on your behalf. The success or failure of some specific controls directly impacts the reputation, stability, and financial statements of the organization.

Different Types of SOC Reports

Owing to the different industries and the various services providers, SOC engagements come in different forms and types. According to the American Institute of certified public accountants (AICPA), there are different types of these reports. Read on to understand the different SOC audit reports.

SOC 1

These are reports that mainly focus on the organization's business processes as well as information technology that can affect the user entities financial statements. They are referred to as internal controls over financial reporting.

Examples of the type of organizations that would significantly benefit from type I and II reports include medical claim processing, payroll processing, and loan servicing companies.

Depending on the extent to which controls are to be examined to create appropriate System and Organization Control engagements, there are two different types of reports—Type 1 and II.

Type I - The type I audits are reports tested for specific dates and include a description of the service organization's controls system. They only test the design of the organization's controls and not its operating effectiveness.
Type II report - These types are designed for a specific period, mostly annual (12 months). They include a description of the organization's system and is meant to test the effectiveness and design of the available controls. It addresses issues relating to security, processing integrity, uptime, confidentiality, and privacy. The type 2 reports are typically done for companies providing services like data hosting, cloud-based services, software as a service (SaaS)

SOC 2

While the former audit reports revolve around the client's financial data, these reports revolve around controls pertinent to the organization's operations. These audits are geared towards ascertaining whether the organization meets the required trust service criteria defined by AICPA.

The SOC 3 Audit Report

This type of report follows the same process as the type 2, but it's less comprehensive. The report is mainly for general use and can be shared with clients to lure them from using your services. These reports are not common because they provide less value for auditors and due diligence reports.

The SOC for Cybersecurity Report

This is a relatively new controls reporting framework that was mainly established to enable an organization to report its cybersecurity vulnerability. Unlike the other types, this type of audit report can be done for any organization, not only the service businesses.

SOC for Supply Chain

These audit reports are ideal for manufacturers, producers, suppliers, commercial software developers, and distributors where a secure supply chain is crucial for the operations. The reports leverage on SOC Control trust services criteria with a focus on conformity to the regulations in place. They are also structured according to the business’s commitments relating to consistency, product labeling, availability, performance, quality, and delivery. Organizations share this type of SOC audit report with existing customers and partners and prospective business customers to showcase the communication effectiveness of their supply chain to build confidence and trust.

What is the Importance of SOC Audits?

These SOC audits are very important in ensuring client trust. Firstly, the client will always want to work with a law abiding partner who delivers top-notch services. For instance, these reports tell your clients that you have controls to ensure that their information is secure and accurately processed to add some value.

These audits also provide information that is very valuable to your financial auditors. In case you have a customer who has outsourced service to you, and it has significant financial implications, a good auditor will always want to know more. They might want to know things like what you do, how do you do them, and the available controls around the service.

More importantly, it makes sense to have this audit. While some business owners never want to hear words like auditors or audits around their premises, most business owners wish to have these types of reports to pinpoint their weaknesses. They use these reports to improve their overall processes, which helps them save more when they employ their resources optimally.

Bottom Line

System and Organization Control reporting offers a comprehensive reporting process that helps to boost transparency and trust between organizations and the user entities stakeholders. By actively identifying and eradicating risks, organizations can always leverage on SOC audits that their contractual obligations are met without strain while reducing compliance costs significantly.