Why a SOC 1 Report Matters for Your Organization

When your organization outsources critical business processes—such as payroll, claims processing, or transaction management—to a service provider, you are entrusting them with activities that may directly impact your financial statements. In effect, these outsourced services take the place of your team and the processes you would otherwise maintain in-house. As a result, the same risks to your financial reporting still exist, but the controls to address those risks are now being performed outside your organization. To bridge the gap of understanding and evaluating these controls performed at a service provider, a SOC 1 report is often important.

What is a SOC 1 Report?

A SOC (System and Organization Controls) 1 report is a report that includes an independent, third-party attestation that evaluates the design and operating effectiveness of a service provider’s controls relevant to their clients’ financial reporting. It is performed in accordance with AICPA attestation standards. Note that there are other standards, such as ISAE 3402 as well as SOC 2, SOC 3 and a number of others, which are not covered here. Also note that, while a SOC 1 Type 1 report may be helpful in understanding controls at a service provider, a SOC 1 Type 2 report is generally needed to demonstrate controls operating over a period of time at the service provider.

Why is it important for a company to perform and document a comprehensive SOC 1 report review? 

• Demonstrates Effective Risk Management and Due Diligence
  
  
  • Reviewing the SOC 1 report helps identify any control gaps, exceptions, or issues that could impact your organization.
  • Documenting your review process provides evidence that you are actively managing third-party risks and fulfilling your oversight responsibilities.
• Supports Financial Statement Integrity
  • Many outsourced processes directly affect your financial reporting. A careful review helps to ensure that the service provider is operating controls that help to reduce the risk of misstatements in your financial statements.
• Satisfies Auditor and Regulatory Expectations, Demonstrates Governance
  • External auditors and regulators expect companies to not only obtain but also evaluate SOC 1 reports. Well-documented reviews demonstrate compliance with internal control requirements and practices common in the industry. Whether you work in a regulated industry or not, having governance over the impact third parties have on your financial statements is important.
  • SOC 1 report reviews are a critical component of third-party risk management programs. By systematically evaluating the controls and risks associated with service organizations, companies can proactively identify and address potential vulnerabilities. This process not only strengthens oversight of outsourced relationships but also provides assurance to the Board of Directors and Audit Committee that appropriate due diligence and ongoing monitoring are in place to safeguard the organization’s operations and reputation.
• Identifies User Entity Control Considerations
  • SOC 1 reports frequently specify controls that your organization (the user entity) must implement in addition to the service provider’s controls. Reviewing and documenting these considerations, and subsequently ensuring you have relevant controls in place, helps to control the risks to financial statements.
• Enables Timely Response to Changes and Issues
  • A thorough review allows you to promptly address any control deficiencies (sometimes referred to as deviations or exceptions) or changes in the service provider’s environment that could impact your operations or compliance.
• Provides an Audit Trail
  • Documenting your review creates a clear record for internal and external stakeholders, auditors, and regulators, showing how you assessed and responded to risks.

What to Consider When Reviewing and Documenting your Review of a SOC 1 Report from Your Service Organization

SOC 1 reports are critical tools for understanding the controls in place at your service providers. When you rely on third-party services for key business processes, there are a number of areas to review. The list below includes some of the main areas and considerations you may want to have as you review. The list does not cover all possible considerations.

1. Scope of the Report

• Services Covered: Confirm the report covers the specific services you use. Often a third party provides many different services and as such, it is important the scope covers the relevant services and, if relevant, applications provided.
• Control Objectives/Criteria: Review which control objectives are included.
• Subservice Organizations: Check if any critical processes are outsourced further (fourth or fifth parties, otherwise known as subservice organizations) and how they are addressed (carve-out: The service auditor’s report excludes controls at the subservice organization; the user entity is responsible for evaluating those controls separately vs. Inclusive method: The service auditor’s report includes and tests relevant controls at the subservice organization, providing a more comprehensive view within the main report).

2. Report Period and Timeliness

• Period Covered: Ensure the report covers the period relevant to your audit or review. Does the report cover a sufficient amount of time from your fiscal year and/or for your audit period? Should a bridge letter from the service provider be requested, obtained, and reviewed?
• Type 1 vs. Type 2: Type 1 reports assess controls at a point in time; Type 2 reports assess operating effectiveness over a period (typically more valuable for audits).

3. Auditor’s Opinion

• Unqualified Opinion: Indicates controls were suitably designed and (for Type 2) operating effectively.
• Qualified/Adverse/Disclaimer: Understand the nature and impact of any qualifications or disclaimers. If you have mapped your risks to a control objective that may be qualified in the opinion, your ability to rely on the report may be impeded and likely further follow up with the service provider will be helpful.

4. Reputation and Qualification of the Service Auditor:

• Confirm that the service auditor issuing the SOC 1 report is a licensed CPA firm with a strong reputation and recognized expertise in the market. Engaging a reputable and experienced auditor enhances the reliability of the report and provides greater assurance that the procedures performed meet professional standards, allowing you to place appropriate reliance on their findings.

5. Reading and Understanding Control Descriptions

• Why It’s Important: Fully reading the control descriptions in the SOC report helps you understand exactly how each control operates and how it aligns with your expectations and requirements.
• Align with Expectations: Assess whether the described controls address your organization’s needs and risk areas. Don’t assume that they do—it is important to confirm that the control activities are sufficient for your reliance.
• Understand the Control Framework: Gain insight into the service provider’s overall control environment, including entity-level controls that set the tone for effective risk management.
• Document Your Review: Keep a record of your review process, noting any questions

6. Risk & Control Mapping

• Why it Matters: Not all SOC reports are created equal. It’s essential to confirm that the report addresses the specific risks associated with the services you use—and that the controls implemented by the service provider and tested by the service auditor align with those risks.
• Map Your Risks: Identify the key risks related to the outsourced services you receive 
• Match Controls: Review the SOC report to confirm the controls tested by the auditor directly address those risks
• Gaps: If you find that certain risks are not covered, consider additional due diligence or request clarification from the service provider or, when permissible, the service auditor. 

7. Information Produced by the Entity (Key Reports)

• Service Auditor’s Procedures: Review how the independent service auditor evaluated the completeness and accuracy of reports (sometimes referred to as Information produced by the entity or IPE) used in control activities. This may include:
  • Testing the source of the data.
  • Verifying parameters used to generate reports.
  • Re-performing calculations or data extraction.
  • Reviewing access controls over report generation.
• Documentation in the SOC Report: The SOC 1 report should describe the procedures performed by the auditor to assess each relevant IPE’s completeness and accuracy. Look for explicit references in the control descriptions and test procedures/results.
• Exceptions or Issues: Note any exceptions identified by the auditor related to IPE. These could impact the reliability of controls and, ultimately, your reliance on the service organization.

8. Complementary User Entity Controls (CUECs)

• Your Responsibilities: SOC reports often list controls that are the responsibility of the user organization (that is, your organization). Review these carefully and ensure you have implemented them and tied them back to your key controls. Your own system of internal controls should appropriately reflect the operation of those controls (CUECs) that are critical to the achievement of the control objectives in the SOC 1 report, so it will be beneficial to map the CUECs in the SOC 1 report to the controls at your organization that satisfy the considerations noted.

9. Complementary Subservice Organization Controls (CSOCs)

• In addition to CUECs, SOC reports may also identify CSOCs—controls that the subservice organization (e.g., a critical vendor or outsourced provider) is expected to have in place to achieve certain control objectives. It is important to understand which controls are designated as CSOCs and to assess whether the subservice organization has implemented them effectively. Where possible, obtain assurance (such as through a SOC report from the subservice organization) that these controls are operating as intended, as your organization may rely on them to meet its own control objectives.

10. Test Procedures, Results, and Exceptions

• Control Testing: Review the auditor’s testing procedures and results for each relevant control. The relevant controls are those you noted in the mapping of your risks to the control objectives in the report.
• Procedures: Evaluate to determine if the testing steps are sufficiently robust to test the controls in lieu of your organization performing its own procedures.
• Exceptions/Deviations: Note any exceptions or control failures and assess their impact on your organization.
• Management Response: Check if the service organization has addressed any exceptions.

11. Ongoing Monitoring

• Annual Review: SOC reports should be reviewed as frequently as deemed necessary by management. Often, they are reviewed annually or when significant changes occur.
• Communication: Maintain open communication with your service provider regarding control changes or incidents.