What is SOC audit?

What is SOC audit?
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A SOC audit is a way to build trust in the services you provide as a third-party entity. Specifically, it tells potential customers that your company follows best practices for securing and managing the information entrusted to your care.

Of course, the ideal way to build trust is to have a fruitful provider-client relationship over many years, but that’s not something you can lay down as table stakes. A report from a SOC audit can be an excellent reference from a known key player in the industry and can help establish trust more quickly with prospects.

However, passing a SOC audit is neither quick nor easy. It takes a lot of work to achieve compliance — if it didn’t, a positive SOC report wouldn’t be worth the paper it was printed on.

The process revolves around a visit from an unbiased third-party auditor known as a Certified Public Accountant (CPA). The CPA will take stock of your documented information security controls and evaluate how close your documentation comes to each SOC control objective.

Once the CPA assesses whether your company’s internal cybersecurity posture upholds SOC security standards and requirements, they will issue a SOC report with their opinion.

Technically speaking, there is no pass/fail for a SOC report. An unqualified opinion means you passed with flying colors. A qualified opinion means you’re almost there. An adverse opinion means your security posture and control implementations need to be improved. And a disclaimer of opinion means the CPA doesn’t have enough evidence.

Let’s discuss and understand Auditor’s opinion in details;

Once the testing process is complete, you will receive the report containing the auditor’s opinion, although the language of these reports can be tricky to understand. It is important to carefully review the report and understand the different types of opinions, paying close attention to the service organization’s controls that have the capacity to impact your business’s security. 

Unqualified Opinion –  Controls were designed effectively (Type I) or designed and operating effectively (Type II) to address the stated control objectives (SOC 1) or TSC (SOC 2). 

Qualified Opinion – the auditor cannot deliver an unqualified opinion, but the qualified findings are not severe enough to warrant an adverse opinion. One or more control objectives (SOC 1) or TSC (SOC 2) were not effectively addressed. 

Adverse Opinion –  Testing exceptions are material and pervasive and controls are generally not designed and/or operating effectively. 

Disclaimer Opinion – the auditor cannot deliver an official opinion because they were not able to obtain the necessary evidence required to develop an opinion. 

The best outcome, for both the user entity and the service organization, is to receive an unqualified opinion. Reports that are concluded with any other type of opinion should elicit further examination and caution on the part of the user entity. 

What is a SOC Report and Who Needs One? 

In a nutshell, a SOC report is issued after a third-party auditor conducts a thorough examination of an organization to verify that they have an effective system of controls related to security, availability, processing integrity, confidentiality, and/or privacy. The report, which is issued by a Certified Public Accountant (CPA), provides reasonable assurance over the design and operating effectiveness of controls and clearly outlines any potential risks for customers or partners that are considering working with the organization. 

To understand SOC lingo, there are a few key terms you will want to be familiar with: 

  • Service Organization – the organization that is being tested.
  • User Entity – the organization that outsources a function to a service organization.
  • Control – the auditable process or mechanism designed to prevent or detect risk. 

Transparency is crucial when it comes to gaining the trust of another organization and its stakeholders, such as vendor compliance, internal audit, IT management, and legal departments. The success or failure of specific controls has a significant impact on the reputation, financial statements, and stability of the service organization. 

Who performs a SOC audit?

Audits can only be conducted by a qualified CPA or an agency accredited by the American Institute of Certified Public Accountants (AICPA). Non-accountants might be enlisted to help, but everyone is held to the same set of rigorous standards.

  • Choosing an auditor is one of the most crucial steps in the SOC audit process, yet companies often overlook it. An auditor should have clear experience conducting SOC audits and should be able to point to examples of reports they’ve generated in the past.
  • Most service organizations conduct interviews with several auditors before deciding on one, which makes sense. Essentially, you’re hiring an employee, so you should treat this process as a talent search. 

Frequently Asked Questions:

What is SOC audit vs SOX audit?

A SOC audit is how organizations can get a SOC 1, SOC 2, or SOC 3 report. It involves an external auditor assessing an organization’s internal controls over financial reporting (in the case of SOC 1) or controls that are relevant to security, availability, processing integrity, confidentiality, and /or privacy (n the case of SOC 2 and SOC 3). SOC audits are voluntary for organizations, although customers may request an organization complete one.

A SOX audit is a requirement for organizations to comply with the Sarbanes-Oxley Act of 2022. Management must conduct a yearly audit of their financial statements and controls over financial reporting, and an external auditor must report if they agree with management’s assessment of those controls. A SOX audit is mandatory for publicly traded companies in the US.

What are the different types of SOC audits?

There are three types of SOC audits. SOC 1 evaluates an organization’s internal controls over financial reporting, whereas SOC 2 and SOC 3 examine the organization’s controls relevant to security and any other applicable Trust Services Criteria. The difference between SOC 2 and SOC 3 is how organizations can use the resulting report. Organizations can post their SOC 3 report on their website or distribute them in another way to customers and prospects freely. But SOC 2 reports contain some confidential information about the organization’s system and controls and detailed information about the auditor’s tests, procedures, and results and therefore cannot be released publicly.

Who needs a SOC audit?

Organizations that handle sensitive customer data likely need a SOC audit. The type depends on what user needs they are looking to meet with the SOC report. If the organization’s service impacts the financial operations of their users, they should likely get a SOC 1 report. If their service impacts customer’s sensitive information not related to financial reporting, then they should get a SOC 2 report. If they fall into the latter category and want to be able to share the results of their audit with the general public, then they should get a SOC 3 report.

Is SOC 2 audit mandatory?

SOC 2 audits are not mandatory. However, they are increasingly requested by customers looking for companies that can protect the security and privacy of their data and interests. A SOC 2 report is an ideal way to demonstrate a commitment to security and privacy to those customers.

What happens if you fail a SOC 2 audit?

Technically speaking, you cannot fail a SOC 2 audit. However, you can get results other than an “unqualified opinion” which indicate that the auditor was not able to assess that your controls were designed and operating effectively. You can get a qualified opinion, which might mean some of your controls fail to meet SOC 2 requirements due to their design or implementation. You can also get an adverse opinion, which means there are pervasive issues with your control design and implementation. You can also get a disclaimer of opinion, which means the CPA doesn’t have enough evidence to make an opinion. In any of these cases, you should pay close attention to the report and highlighted issues and take steps to solve them. You should also be prepared to address customer questions in the meantime and assure them that you’ll be resolving any outstanding issues and working on getting an unqualified opinion on your next SOC 2 audit.

CRSP Connect Role:

SOC reporting offers a comprehensive, repeatable reporting process to help establish trust and transparency between service organizations and stakeholders of user entities. By proactively identifying and addressing risk, businesses can ensure that contractual obligations are being addressed while reducing compliance costs upfront. Our experienced team at CRSP connect can complete SOC testing independently.

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