Key Takeaways:
- A SOC 1 report provides independent assurance that a service provider’s internal controls are designed and operating effectively to support your financial reporting.
- Reviewing SOC 1 reports is a critical component of Internal Control over Financial Reporting (ICFR), SOX compliance, and financial statement audits.
- A disciplined SOC 1 review process strengthens audit readiness, governance, and third-party risk management.
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Why SOC 1 Reports Are Critical?
Many organizations rely on third-party service providers for key processes such as payroll, claims processing, system administration, and financial applications. Although these activities are outsourced, management remains responsible for the accuracy and completeness of the financial statements.
Because these vendors can directly impact financial reporting, auditors and stakeholders expect organizations to understand and evaluate the controls operating at those service providers. SOC 1 (System and Organization Controls 1) reports provide that insight by offering independent assurance over controls relevant to financial reporting.
What Is a SOC 1 Report?
A SOC 1 report is an independent attestation report issued by a CPA firm under American Institute of Certified Public Accountant (AICPA) attestation standards. It evaluates a service organization’s controls that may affect a user entity’s Internal Control over Financial Reporting (ICFR).
There are two types of SOC 1 reports:
- SOC 1 Type 1: Evaluates the design of controls as of a specific point in time.
- SOC 1 Type 2: Evaluates both the design and operating effectiveness of controls over a defined period (typically 6-12 months). Type 2 reports generally provide stronger audit evidence and are preferred for financial statement audits.
SOC 1 reports are primarily used to support management’s ICFR assessment and external audit reliance.
Why SOC 1 Reports Matter for Your Audit
A properly reviewed SOC 1 report can help your organization:
- Provide audit evidence that third-party controls are properly designed and operating effectively
- Demonstrate management oversight and due diligence over outsourced processes
- Reduce duplicative or expanded audit testing, saving time and cost
- Strengthen governance, compliance, and risk management practices
Importantly, receiving a SOC 1 report is not sufficient on its own. Management must review, evaluate, and document how the report supports its ICFR conclusions.
8 Key Areas to Review in a SOC 1 Report
When reviewing a SOC 1 report, focus on the following areas to determine whether reliance is appropriate:
1. Scope and Services Covered
Confirm the report covers the specific services, systems, and processes your organization uses.
2. Report Type and Coverage Period
Verify whether the report is a Type 1 or Type 2 and ensure the coverage period aligns with your fiscal year or audit period.
3. Auditor’s Opinion
Assess whether the opinion is unqualified (clean) or includes qualifications, disclaimers, or adverse conclusions that may limit reliance.
4. Subservice Organizations
Determine whether key processes are further outsourced or the report uses the inclusive or carve-out method to address those entities.
5. Complementary User Entity Controls (CUECs)
Identify controls that management is responsible for implementing and confirm they are designed and operating effectively.
6. Testing Procedures and Exceptions
Review how controls were tested and evaluate the nature, timing, and severity of any exceptions noted.
7. Information Produced by the Entity (IPE)
Understand how the auditor evaluated the completeness and accuracy of reports or data used in control activities.
8. Documentation and Follow-Up
Retain evidence of management’s review and follow-up with the service provider on unresolved issues or gaps.
Incorporating SOC 1 Reviews Into Risk and Compliance Programs
SOC 1 report reviews should be a recurring control activity, not a one-time exercise. Effective programs typically include:
- Annual reviews of all relevant SOC 1 reports
- Tracking control changes and remediation of exceptions
- Ongoing communications with service providers regarding control environment updates
A well-documented SOC 1 review process provides clear evidence of governance and helps proactively manage risks associated with outsourcing.
Strengthen Your Audit Readiness and Third-Party Oversight
MGO helps organizations evaluate SOC 1 reports as part of a comprehensive audit readiness and ICFR strategy. Whether you are performing your first SOC 1 review or enhancing an existing framework, our consulting professionals can verify your process meets audit and regulatory expectations.
Connect with us to strengthen your SOC 1 review process and support long-term financial integrity.