A SOC 1 audit is a type of audit report that focuses on the controls and processes within a service organization that are relevant to their user entity’s financial reporting. The primary goal of a SOC 1 audit is to provide assurance to user entities that the necessary controls are in place to maintain data security, integrity, and confidentiality. The audit is conducted in accordance with the Statement on Standards for Attestation Engagements (SSAE) No. 18, issued by the American Institute of Certified Public Accountants (AICPA).
Scoping a SOC 1 audit involves identifying the relevant processes and controls within the service organization that may impact the user entity’s financial reporting. Here are the key steps to follow when scoping a SOC 1 audit:
1. Understand the Purpose of the SOC 1 Audit
Before scoping a SOC 1 audit, it is essential to understand its purpose. A SOC 1 audit aims to provide assurance over the internal controls at a service organization that impact their clients’ financial reporting. The audit is intended for user entities and their financial statement auditors.
2. Identify Relevant Services and Processes
The next step in scoping a SOC 1 audit is to identify the services and processes provided by the service organization to its clients that may have a direct or indirect impact on their user entity’s financial reporting. This may include data processing, billing, payroll, or any other services that involve financial transactions or data.
3. Define Control Objectives
Once the relevant services and processes have been identified, the next step is to define the control objectives that cover the key risks associated with those services. These control objectives should be based on an understanding of the user entity’s financial reporting requirements and the service organization’s processes. Control objectives are high-level goals that the organization’s internal controls must achieve to ensure accurate financial reporting. Examples of control objectives may include data accuracy, completeness, and timely processing of transactions.
4. Identify Key Controls
With the control objectives in place, the next step is to identify the key controls that the service organization has implemented to mitigate the risks associated with each objective. Key controls are the specific activities or mechanisms that help achieve the control objectives. These controls may be preventive, detective, or corrective in nature and may include a mix of manual and automated controls. These may include access controls, segregation of duties, or system-generated reports, among others.
5. Determine the Scope of Testing
The next step in scoping a SOC 1 audit is to determine the scope of testing for each control. This involves identifying the sample size, selecting the appropriate testing methods, and defining the criteria for evaluating the control’s effectiveness. The scope of testing should be sufficient to provide reasonable assurance that the control objectives are being met.
6. Define the System Boundaries
When scoping a SOC 1 audit, it is crucial to define the system boundaries, which include the infrastructure, software, people, and procedures that comprise the service organization’s system. This helps ensure that all relevant components of the system are evaluated during the audit.
7. Consider Subservice Providers
If the service organization relies on subservice providers (also known as third-party vendors or subcontractors) to perform critical functions related to the services within the SOC 1 audit scope, these providers must also be included in the audit. This may involve obtaining a SOC 1 or SOC 2 report from the subservice provider or including their controls within the service organization’s SOC 1 report.
8. Determine the Audit’s Type and the Reporting Period
There are two types of SOC 1 audits – Type I and Type II. A Type I audit assesses the design of the service organization’s controls at a specific point in time. A Type II audit goes a step further, testing the operating effectiveness of those controls over a specified period, usually 6 to 12 months. The choice between the two depends on the level of assurance required by user entities and the maturity of the service organization’s controls.
Scoping a SOC 1 audit requires a thorough understanding of the service organization’s processes, user entity’s financial reporting requirements, and the applicable control objectives. By following these steps, you can ensure that your SOC 1 audit is properly scoped to meet the required control objectives and address the relevant risks associated with the services and processes. With a properly scoped SOC 1 audit, you can help build trust and confidence between service organizations and their user entities, fostering a strong business relationship built on transparency and accountability.