In this video, we cover type 1 and type 2 SOC reports as covered in the Information Systems and Controls ISC CPA exam.
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Service Organization Control (SOC) reports are a way for service organizations to demonstrate the effectiveness of their control environment to clients and their auditors. The American Institute of Certified Public Accountants (AICPA) has defined two types of reports: SOC 1 and SOC 2, each serving different purposes and focusing on different types of controls. Additionally, within the SOC framework, both Type 1 and Type 2 reports can be issued.

SOC 1 Report
Purpose: SOC 1 reports focus on controls at a service organization that are relevant to an entity’s internal control over financial reporting. These reports are important for the audit of financial statements, particularly when the services provided have a direct impact on the client’s financials.

Types:

Type 1: This report assesses the design of controls at a service organization at a specific point in time. It evaluates whether the controls are suitably designed to meet specified control objectives.
Type 2: This report goes further by also assessing the operational effectiveness of these controls over a defined period, typically at least six months. It includes detailed testing of the service organization’s controls to see if they are operating effectively throughout the period.
SOC 2 Report
Purpose: SOC 2 reports are designed to meet a broader range of needs than SOC 1 reports and are specifically intended to provide assurances about the controls at a service organization relevant to security, availability, processing integrity, confidentiality, or privacy—these are the Trust Services Criteria.

Types:

Type 1: Similar to the SOC 1 Type 1, this report examines the design of controls at a service organization at a specific point in time based on the Trust Services Criteria.
Type 2: Like SOC 1 Type 2, a SOC 2 Type 2 report assesses the operational effectiveness of the controls over a period of time, ensuring that they meet the Trust Services Criteria continuously over the review period.
Each type of report serves different needs:

Type 1 reports are often used in the early phases of a vendor-client relationship when the client needs assurance that the service provider’s controls are appropriately designed.
Type 2 reports provide deeper assurance through the operational effectiveness of these controls over time, which is crucial for ongoing partnerships where continuous compliance is critical.
Companies often use these reports to assure clients and regulators that they manage data with a high standard of security and compliance, especially where sensitive information is concerned.


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