Do You Need a SOC 1 Report? How to Know If SOC 1 Applies to You—And What It Should Cover

For organizations whose services could impact their customers’ financial reporting, establishing clear and effective internal controls is essential. 

Regulatory pressure and rising customer expectations mean that simply claiming that your processes are secure is no longer enough. Stakeholders, including SOX auditors and procurement teams, expect independent assurance that your controls are in place and functioning effectively. That’s where a SOC 1 report comes in.

Is a SOC 1 report right for your organization—and if so, what should it include? Let’s break it down.

What is a SOC 1 Report?

Issued under standards defined by the American Institute of Certified Public Accountants (AICPA), a System and Organization Controls (SOC) 1 report is an independent assessment of a service organization’s internal controls that are relevant to its customers’ financial reporting. 

Unlike frameworks such as ISO 27001 and HITRUST, a SOC 1 audit does not result in any certification. Instead, it offers a CPA’s opinion on whether your controls are suitably designed and operating effectively to meet control objectives tied to financial reporting.

There are two types of SOC 1 reports: 

• SOC 1 Type 1 reports examine the design of controls at a single point in time.
• SOC 1 Type 2 reports examine both the design and operating effectiveness of controls over a period of time, typically between six and 12 months.

In all cases, the purpose of a SOC 1 report is to provide your customers—and their auditors—with confidence that your controls support the integrity and accuracy of their financial data.

How Do I Know If My Organization Needs a SOC 1?

If you’re unsure whether a SOC 1 report is applicable to your business, start by evaluating the nature of the services you provide. 

SOC 1 reports are specifically designed for service organizations whose systems or processes have a direct or indirect impact on a customer’s financial statements. A SOC 1 report is most applicable to organizations that:

• Provide services that affect your customers’ financial transactions or reporting processes;
• Operate or manage systems used for financial data processing, reporting, or recordkeeping;
• Support functions that customers rely on to meet their own compliance obligations, such as SOX audits;
• Regularly receive requests for a SOC 1 report from customers, auditors, or procurement teams;
• Handle services such as payroll processing, benefits administration, invoicing, loan servicing, or escrow management; and/or,
• Host applications that generate or store financial data.

If any of the above apply to your organization, a SOC 1 audit can help you demonstrate control effectiveness, streamline vendor risk assessments, and reduce friction in the sales cycle.

The primary question to ask is: Does your service impact your customers’ internal controls over financial reporting? If the answer is “yes,” obtaining a SOC 1 report is likely a smart move.

What Should My SOC 1 Exam Cover?

Once you’ve determined that a SOC 1 report makes sense for your organization, the next step is to define what it will cover. 

SOC 1 reports do not prescribe a specific set of controls. Instead, they assess whether the controls you’ve designed and implemented are adequate to meet your own stated objectives.

This means it’s up to your security and compliance team to identify the services, systems, and processes in scope, as well as define the control objectives that your auditor will test.

Here are five steps to nail down the scope and substance of your SOC 1 audit:

1. Understand the Services You Provide

To identify what services you offer that could impact your clients’ financial reporting, a good first step is to document all of the products, services, or platforms your organization provides. 

You’ll want to consider:

• Specific systems, databases, applications, and platforms;
• Key business processes, such as payment processing and data reporting; and,
• Areas where your systems interact with customer data.

Once this documentation is complete, consult with your SOX auditor to review and validate the identified services and systems. This alignment helps ensure that all relevant risks are addressed and the scope fully reflects all systems and services that could impact financial reporting.

2. Define the Boundaries of the Audit

The next step is to determine which of these systems directly or indirectly support customers’ financial reporting.

For each item on your list, consider questions like:

• Does this service integrate with, generate, or store financial data?
• Does this process affect the accuracy, completeness, or timing of customer financial records?
• Would a breakdown in this process create financial reporting risks for your clients?

As part of this process, you should also identify key stakeholders who are responsible for operating and maintaining these systems. These individuals will play an important role in the SOC 1 audit process.

3. Establish Control Objectives

Next, use your list of in-scope systems to help define appropriate control objectives (i.e., the high-level goals that your controls are meant to achieve), ensuring that each objective maps to a specific risk related to financial reporting.

Examples of common SOC 1 control objectives include:

• Transactions are authorized, complete, accurate, and timely;
• System changes are appropriately tested, approved, and documented;
• Logical and physical access to systems is restricted to authorized users; and,
• Backup and recovery procedures are in place and effective.

4. Determine the Report Type and Audit Period

If you’re pursuing a SOC 1 Type 2 report, you’ll also need to determine the review period that the audit will cover, which usually spans several months. All controls must be in place and operating effectively during this time to ensure a clean, unqualified report with no exceptions.

For Type 1 reports, you’re assessed at one specific point in time. While more limited in scope, Type 1 examinations can be a good first step for organizations pursuing a SOC 1 report for the first time.

5. Undergo a Readiness Assessment with Your Auditor

Before launching into the full audit, it’s a good idea to engage in a readiness assessment with your chosen auditing firm. This process helps identify any gaps in your current control environment and gives you an opportunity to remediate them before the formal audit begins.

As part of the readiness assessment, your auditor will help:

• Review your draft control objectives;
• Map your existing controls to those objectives;
• Evaluate documentation and evidence readiness; and,
• Identify gaps or inconsistencies that may affect the final audit report.

Your auditor can also help you tailor your control objectives to reflect the services you provide and the controls you’ve implemented. While optional, completing a readiness assessment helps make for a more streamlined and efficient SOC 1 examination.

The Bottom Line

A SOC 1 report is not just a checkbox exercise—it’s a strategic tool for building trust with clients and proving that your internal controls are both well-designed and reliable. But not every organization needs one, and not every SOC 1 report should look the same.

By carefully evaluating your services and working with an experienced audit firm to define the right scope and control objectives, you can ensure that your SOC 1 engagement provides meaningful assurance to your stakeholders and supports your business goals.

Still not sure whether undergoing a SOC 1 examination is the right choice for your team? Contact us today for a free consultation.