Navigating ISAE 3402 | SOC 1 Compliance Organizations are increasingly entrusting non-core business processes to service providers. For comprehensive assurance over these outsourced activities, a Service Organization Control (SOC) report in line with ISAE 3402 is the go-to solution. The ISAE 3402 standard emerged in response to the growing demand for robust oversight of outsourced functions. These outsourced services span a wide spectrum, including Software-As-A-Service (SaaS) providers, asset managers, data centers, or property management. Below, you’ll find FAQs and a deeper dive into ISAE 3402 | SOC 1.
ISAE 3402 | SOC 1 Assurance Report ISAE 3402 becomes relevant when an independent auditor (referred to as the “user auditor”) is planning the financial statement audit of an entity (the “user organization”) that relies on services from another organization (the “service organization”). A SOC1 report, essentially an ISAE 3402 report, empowers service organizations to transparently disclose their control measures and processes to their clients and clients’ auditors within a standardized reporting framework. The report, complete with the service auditor’s opinion, is furnished to the service organization upon completing the audit. Importantly, ISAE 3402 doesn’t impose specific pre-defined control objectives or activities that service organizations must fulfill. Instead, service auditors are mandated to adhere to IAASB’s standards governing fieldwork, quality control, and reporting. When user auditors evaluate an entity’s internal control as part of their financial statement audit, the identification and assessment of pertinent controls is a pivotal step, often obviating the need for a separate audit of outsourced processes. Service auditors have the option to issue two types of reports: an ISAE 3402 Type I report or an ISAE 3402 Type II report.
Deciphering the Two Types The ISAE 3402 report encompasses two distinct variations, namely Type I and Type II. The crux of the distinction lies not in the report’s content but in the nature of the assessments conducted. The following concise breakdown illuminates the dissimilarities between Type I and Type II reports.
ISAE 3402 | SOC 1 TYPE I An ISAE 3402 Type I report features an external auditor’s opinion on controls in operation at a specific point in time. The external auditor evaluates whether these controls are aptly designed to provide reasonable assurance that financial statement assertions are met and that the controls are effectively in place. However, a Type I audit opinion isn’t comprehensive enough for user auditors to curtail their audit procedures on outsourced services. The audit centers on assessing whether the described state aligns with actual practice and pertains to a single evaluation moment.
ISAE 3402 | SOC 1 TYPE II In an ISAE 3402 Type II report, the external auditor scrutinizes both the appropriateness of control design and the existence of these controls, along with their operating effectiveness over a predetermined period. This entails a thorough examination of the service organization’s internal control and validation of whether all controls operate effectively in accordance with pre-defined processes and protocols. Crucially, this involves collecting evidence over a span of at least six months.