SOC 2 Type 1 vs Type 2: Differences, Similarities, and Use Cases

System and Organization Controls (SOC) is a series of standards CPA firms may deliver relating to either system-level service organization controls or entity-level controls of other organizations. The framework consists of several standards with SOC 2® being one of the most common of the series. SOC 2® involves Type 1 audits, Type 2 audits, and related attestations.

This article outlines the key aspects of SOC 2® Type 1 and Type 2 examinations and attestations. The subject matter covered is relevant to organizations, IT professionals, compliance managers, CPA firms, stakeholders, and service providers striving to understand the requirements of obtaining a SOC 2® report.

SOC Compliance

Let’s clear up a few misnomers regarding SOC compliance and certification. In short, SOC audit reports are the outcome of examinations and attestations related to internal controls. Obtaining a SOC report is not a security compliance-driven activity. SOC examinations do not result in a “pass/fail” or “compliant/non-compliant” disposition or opinion.

Similarly, SOC is not a certification standard; meaning that organizations can not be “certified” against SOC requirements. In a SOC engagement, the auditor issues an opinion on the design at a single point in time, and in the case of a Type 2 audit, the effectiveness of an organization’s internal controls over time.

In essence, the SOC compliance journey is a journey towards examination and attestation. So, if there is no SOC certification or SOC compliance report, how do organizations show evidence of completing the SOC examination and attestation processes? The answer is the SOC audit report. SOC reports consist of the attributes listed below.

SOC Examinations and Types of Reports

There are different types of SOC examinations including SOC 1®, SOC 2®, and SOC 3® as described below.

According to the AICPA:

SOC 1® – SOC for Service Organizations: ICFR

Report on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting (ICFR)

These reports, prepared in accordance with AT-C section 320, Reporting on an Examination of Controls at a Service Organization Relevant to User Entities’ Internal Control Over Financial Reporting, are specifically intended to meet the needs of entities that use service organizations (user entities) and the CPAs that audit the user entities’ financial statements (user auditors), in evaluating the effect of the controls at the service organization on the user entities’ financial statements.

SOC 2® – SOC for Service Organizations: Trust Services Criteria

Report on Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality or Privacy

These reports are intended to meet the needs of a broad range of users who need detailed information and assurance about the controls at a service organization relevant to the security, availability, and processing integrity of the systems the service organization uses to process users’ data and the confidentiality and privacy of the information processed by these systems.

SOC 3® SOC for Service Organizations: Trust Services Criteria for General Use Report

These reports are designed to meet the needs of users who need assurance about the controls at a service organization relevant to security, availability, processing integrity, confidentiality, or privacy, but do not need the knowledge necessary to make effective use of a SOC 2® Report. Because they are general-use reports, SOC 3® reports can be freely distributed.

SOC 1®

Typical scenario: Financial Statement Audits

SOC 1® examinations are designed primarily for service organizations that handle financial transactions and reporting for their clients. Unlike SOC 2®, which addresses security, availability, processing integrity, confidentiality, and privacy, SOC 1® is centered around the internal controls over financial reporting. SOC 1® reports fall into the following categories:

• Type 1: A report on the design of the controls to achieve the related control objectives included in the description as of a specified date.
• Type 2: Includes the same information as a Type 1 report, but also includes the auditor’s opinion on the operating effectiveness of the controls that affect the user entities ICFR over a specified period of time.

SOC 2®

Typical scenarios: Internal Control, Regulatory Compliance, Due Diligence

Like SOC 1®, SOC 2® also has Type 1 and Type 2 examinations and reports. A Type 1 report examines the design of controls at service organizations and Type 2 centers on the effectiveness of these controls. However, unlike SOC 1®, the aim is on the TSC as opposed to ICFR. As the focus of this article, SOC 2® Type 1 and 2 examinations are explained in more detail in the next section.

SOC 3®

Typical scenarios: Marketing

A SOC 3® report is the same as a SOC 2®; however, a SOC 3® can be used in a service organization’s marketing efforts.

Additional SOC Types

Other SOC service offerings include:

• SOC for Cybersecurity
• SOC for Supply Chain
• SOC Report Audiences

Each SOC report is typically intended for a different audience as described below:

• SOC 1®: Management, user entities, and the independent auditors
• SOC 2®: Management, user entities, business partners, and other parties
• SOC 3®: Interested parties
•  SOC for Cybersecurity: General users
•  SOC for Supply Chain: Specified users

Like ISO 27001,  SOC examinations and reports are not mandatory as compared to other regulations (e.g., GDPR, PCI DSS for card services, or HIPAA for healthcare) but can be used to assure clients that the service provider is managing customer data with consideration of ICFR and TSC.

Statement on Standards for Attestation Engagements (SSAE) 18

A SOC 1® report falls under the SSAE 18 AT-C 320 (formerly SSAE 16 or AT 801). A SOC 2® report falls under the SSAE 18 standard AT-C 105 and the SSAE 21 standard AT-C 205.

What is SOC 2® Type 1?

SOC 2® Type 1 examinations are “point in time” assessments. The goal of a SOC 2® Type 1 assessment is to determine if controls have been identified, documented, and are functional at the point in time when tested. Organizations typically begin their SOC pursuits with a SOC 2® Type 1, especially if time is of the essence.

 TSC

SOC 2® examinations are based on one or more of the following five TSCs:

1. Security (Unlike the other criteria, the security TSC is required for all SOC 2 reports. The objective of the security TSC is to ensure information and systems are protected against unauthorized access, unauthorized disclosure of information, and damage to systems.
2. Availability
3. Confidentiality
4. Privacy
5. Processing Integrity

The “Security” TSC is included/considered in scope in all SOC 2® examinations. The TSC controls are aligned with the 17 principles of the 2013 Committee of Sponsoring Organizations (COSO) framework and grouped into the following five categories:

1. Control Environment (CC1 series)
2. Information and Communication (CC2 series)
3. Risk Assessment (CC3 series)
4. Monitoring of Controls (CC4 series)
5. Control Activities Related to The Design and Implementation of Controls (CC5 series)

These five categories are also referred to as common criteria. The TSC Points of Focus were revised in 2022 with minimal updates. In addition to the five categories, below are the additional SOC 2 Criteria outside of the COSO Principles:

1. Logical and Physical Access Controls (CC6 series)
2. System Operations (CC7 series)
3. Change Management (CC8 series)
4. Risk Mitigation (CC9 series)

What is SOC 2® Type 2?

SOC 2® Type 2 extends beyond the SOC 2® Type 1 evaluation of the design of controls to examine the operational effectiveness of those controls. The emphasis at this stage is related to service commitments and system requirements based on the TSC over a defined period, typically a minimum of six months. The SOC 2® Type 2 audit process includes a detailed description of the auditor’s tests of controls and results. SOC 2® Type 2 reports are integral for organizations that require ongoing assurance that their information security practices align with industry standards.

Below is a brief overview of the SOC 2® examination cycle.

Table 1: SOC 2® Examination Cycle

Throughout this process, communication and collaboration within the organization are crucial. To ensure success, organizations should involve cross-functional teams in the process including IT, HR, legal, and executive leadership. 

What are the Key Similarities and Differences Between SOC 2® Type 1 and SOC 2® Type 2?

Similarities between SOC 2® Type 1 and Type 2 reports include the fact that both report types aim to protect the interests and confidentiality of client data, and both report types adhere to the same set of TSC.

As discussed above, the differences between the two report types are Type 1 examinations focus on the design of controls at a specific point in time, whereas Type 2 assessments are more rigorous, involving testing controls to validate their effectiveness in achieving the specified TSC over a prescribed time period.

How to Choose Between SOC 2® Type 1 and SOC 2® Type 2

The choice between SOC 2® Type 1 and Type 2 depends on several factors, including the organization’s security posture, overall maturity, customer requirements, and market demands.

• Starting with SOC 2® Type 1 provides a solid foundation and framework for establishing and enhancing security controls quickly.
• Transitioning to SOC 2® Type 2 becomes a choice once the foundational controls are in place, and the organization needs to demonstrate ongoing data security and the operational effectiveness of its controls to partners and clients.

How Automation Can Lead to Success

Leveraging automation tools like CrossComply can dramatically streamline SOC 2® processes for both Type 1 and Type 2 reports. Automation platforms can facilitate organizational evidence collection, continuous monitoring, and controls management. Such tools not only reduce the time and resources spent on SOC 2® initiatives but also significantly enhance accuracy and reliability, ultimately simplifying the path to maintaining ongoing suitability.

Frequently Asked Questions About ISO/IEC 27001

What is SOC 2® Type 1?

SOC 2® Type 1 examinations are “point in time” assessments. The goal of a SOC 2® Type 1 assessment is to determine if controls have been identified, are documented, and are functional at the point in time when tested.

What is SOC 2® Type 2?

SOC 2® Type 2 extends beyond the design of controls in a SOC 2® Type 1 to evaluate the operational effectiveness of those controls related to the service commitments and system requirements based on the TSC over a defined period. This audit involves a more in-depth examination and includes a detailed description of the auditor’s tests of controls and results. SOC 2® Type 2 assessments can be an excellent indicator of an organization’s overall cybersecurity posture.

What are the key similarities and differences between SOC 2® Type 1 and SOC 2® Type 2?

Similarities:

• Both aim to protect sensitive data and client data and contribute to overall risk management activities.
• They adhere to the same set of Trust Services Principles and Criteria.

Differences:

• Type 1 – focuses on the design of controls at a specific point in time, whereas Type 2 assesses the operational effectiveness over a period.
• Type 2 – requires more rigorous assessment, involving the testing of controls to validate their effectiveness in achieving the specified TSC.