SOC 1 Framework

Understand whether SOC 1 applies to your services, what auditors test, and how to achieve a Type I/Type II report.

What is SOC 1 and what does it cover?

SOC 1 is an AICPA attestation (under SSAE 18) over controls at a service organization that are relevant to customers’ Internal Control over Financial Reporting (ICFR).

Outcome: An independent SOC 1 Type I (design at a point in time) or Type II (design + operating effectiveness over a period) report intended for customers and their external auditors.

Scope examples (ICFR-relevant services):

  • Payroll & benefits administration, claims processing, loan servicing

  • Billing/invoicing, AR/AP processing, revenue recognition, fund accounting

  • Financial modules of SaaS/ERP (GL, sub-ledgers, reconciliations)

  • Payment/transaction processing that feeds the general ledger

Does it apply to my organization?

You likely need SOC 1 if you:

  • Provide services that impact customers’ financial statements or key ICFR assertions (completeness, accuracy, existence, cut-off)

  • Are asked for SOC 1 (SSAE 18) in RFPs, contracts, or due-diligence

  • Host or process financial/transactional data used by your customers’ accountants/auditors

Often not required when:

  • Your service doesn’t affect ICFR (e.g., HR engagement tools without payroll, marketing automation)

  • You have no role in processing/hosting data that feeds customers’ financial reporting

Related/alternatives: If buyers care more about security/privacy than ICFR, see SOC 2 or ISO 27001.

Why are the benefits and risks related to SOC 1 complaince?

Benefits

  • Accelerate sales & renewals: satisfy procurement and audit evidence requests

  • Reduce audit friction: give customer auditors a reliable, independent report

  • Demonstrate control maturity over financial processing and ITGCs

Risks of skipping it

  • Deal blockers or long security/audit questionnaires

  • Increased substantive testing by customers’ auditors (more disruption)

  • Contractual exposure where SOC 1 is required

What are common SOC 1 pitfalls (and recommendations)?

  • Fuzzy ICFR scope/objectives: Map services→transactions→ICFR assertions; document control objectives, interfaces, CUECs, and subservice approach early.

  • Weak evidence & populations: Use system-of-record exports with timestamps + population-completeness steps; centralize in an evidence register.

  • ITGC gaps (access/change/ops): Enforce MFA/SSO, JML + quarterly access reviews; SoD with approved/tested changes; evidence backups/DR and incident/problem mgmt.

  • Subservice orgs & CUECs unmanaged: Decide carve-out vs inclusive; obtain current SOC reports/bridge letters, review exceptions, and publish clear customer CUECs.

What are the core requirements?

SOC 1 isn’t a control checklist—your control objectives and activities are tailored to your services and ICFR risks. Typical coverage includes:

  1. Control environment & risk

    • Tone at the top, policies, governance, ICFR risk assessment, monitoring

    IT General Controls (ITGC)

    • Logical access: provisioning, least privilege, MFA, periodic access reviews

    • Change management: SDLC, approvals, testing, separation of duties

    • Operations: backups, job scheduling, incident/problem management

    Application & processing controls

    • Input, processing, and output completeness/accuracy

    • Interface & reconciliation controls (subsidiary systems to GL)

    • Cut-off and exception handling controls

    Third parties & subservice organizations

    • Carve-out vs inclusive method; monitoring of subservice providers

    • CUECs (Complementary User Entity Controls) defined for customers

    Evidence examples: policies, role matrices, change tickets, approvals, deployment logs, batch/job logs, reconciliations, exception reports, incident records, SOC reports from subservice orgs.

How do we achieve SOC 1 (process & timeline)?

  1. Phases

    1. Readiness & scoping → identify in-scope services, systems, significant classes of transactions, subservice orgs, and control objectives

    2. Design & remediation → document controls, address gaps, define CUECs, decide carve-out vs inclusive

    3. Evidence mapping & operation → operate controls, retain artifacts, prepare populations

    4. Independent audit → Type I (design only) or Type II (design + operating effectiveness over a period, typically 6–12 months)

    5. Maintain & improve → control monitoring, issue management, annual cycle

    Effort drivers: service complexity, data flows to GL, subservice orgs, maturity of ITGCs/app controls, sample sizes, period length.


    Indicative timelines: Readiness 3–8 weeks • Remediation 4–12+ weeks • Type II period 6–12 months with testing/report 2–6 weeks.

What are the estimated timelines to conduct a SOC 1 Audit by company size?

  1. Small company SOC 1 audit timeline (startup or <100 employees): Typically 2–4 months including readiness assessment, evidence collection, and auditor review. Add up to 6 months for Type II scope.

  2. Mid-sized company SOC 1 audit timeline (100–1,000 employees): Usually 4–6 months, depending on control maturity, remediation needs, and Type I vs. Type II scope. Add 6 to 9 months for Type II scope.

  3. Large enterprise SOC 1 audit timeline (1,000+ employees): Can extend 6–12+ months, especially for complex environments, multiple business units, and inclusive subservice organizations. Add 6 to 12 months for Type II scope.

What are the costs to conduct a SOC 1 Audit?

  1. Small business SOC 1 audit cost: typically $20,000 – $40,000, depending on scope, controls, and readiness.

  2. Mid-sized company SOC 1 audit cost: often $40,000 – $80,000, factoring in complexity, multiple locations, and number of systems in scope.

  3. Large enterprise SOC 1 audit cost: can exceed $100,000+, driven by scale, subsidiaries, international operations, and detailed testing requirements.

  4. SOC 1 Type I vs. Type II audit pricing: Type I is less expensive (shorter timeframe), while Type II generally increases cost due to 6–12 months of testing.

  5. Additional SOC 1 readiness assessment costs: typically $10,000 – $30,000 depending on maturity of internal controls and need for remediation.

SOC 1 Framework - Quick Self Assessment

Answer Yes / No:

  1. Do we provide services that could impact customers’ Internal Controls over Financial Reporting (ICFR) (e.g., payroll, billing, claims, loan servicing, fund administration, finance-related SaaS)?

  2. Do our contracts, procurement requests, or RFPs specifically ask for a SOC 1 (SSAE 18) Type I or Type II report?

  3. Do we process, host, or transmit financial or transactional data that flows into customers’ financial statements?

  4. Are we considered a subservice organization supporting clients’ ITGCs (e.g., access management, system changes, operations monitoring)?

  5. Do our customers’ external auditors rely on CUECs (Complementary User Entity Controls) tied to our service?

  6. Do we perform outsourced financial processes (e.g., accounts payable, receivables, reconciliations, claims adjudication) for customers?

  7. Are we involved in calculating, validating, or reporting balances that directly affect customer revenue recognition, expenses, or assets/liabilities?

  8. Do we use third-party subservice providers whose controls would also need to be addressed (carve-out or inclusive method)?

  9. Have we received questions from customers’ finance or audit teams about how our controls impact their financial reporting?

  10. Would the absence of a SOC 1 report create friction in sales, renewals, or compliance reviews with customers?

Result guidance: 3–5 Yes = Likely Required • 1–2 Yes = Often Recommended • 0 Yes = Typically Not Required

SOC 1 Framework - FAQs

  • A SOC 1 report is a CPA attestation under SSAE 18 that evaluates a service organization’s controls relevant to customers’ Internal Control over Financial Reporting (ICFR). You typically need SOC 1 when your product or service (e.g., payroll processing, billing/invoicing, claims processing, loan servicing, fund administration, fintech platforms) can materially affect a customer’s financial statements (completeness, accuracy, existence, cutoff). Many RFPs and procurement teams explicitly request a SOC 1 Type I or SOC 1 Type II as audit evidence.

    • Type I assesses the design of controls at a point in time (snapshot). It’s a fast way to prove you’ve documented and implemented controls.

    • Type II covers both design and operating effectiveness over a period (commonly 6–12 months) and includes testing results. It’s the report most external auditors and enterprise customers prefer.
      Choose Type I if you’re early in your program or need a quick milestone for sales; choose Type II to meet most auditor expectations and reduce downstream testing and questionnaires.

    • SOC 1 = ICFR: financial reporting impact (e.g., transaction processing, reconciliations, interfaces to the GL).

    • SOC 2 = Trust Services Criteria: security, availability, confidentiality, processing integrity, privacy for technology and operations—not limited to ICFR.
      If your service impacts financial reporting assertions, start with SOC 1; if buyers ask for security assurance more broadly, SOC 2 may be the better fit (many organizations ultimately maintain both).

  • SOC 1 is a restricted-use report intended for your customers (user entities) and their independent/external auditors. They rely on it to plan and perform their own financial statement audits and to understand Complementary User Entity Controls (CUECs) they must operate. It should not be posted publicly or used as general marketing collateral (share under NDA instead).

  • If a subservice organization (e.g., a key processing vendor or hosting provider) supports your in-scope processes:

    • Carve-out: You exclude the subservice org’s controls from your report but define CUECs your customers must operate and note the reliance. This is the most common approach and keeps your scope manageable.

    • Inclusive: You include the subservice org’s relevant controls and testing inside your SOC 1. This can satisfy demanding customers but increases coordination and audit effort.

  • A strong SOC 1 Type I/Type II report typically includes:

    • Independent Service Auditor’s Report (opinion)

    • Management’s Assertion (scope, control objectives)

    • System Description (services, boundaries, processes, relevant ITGC)

    • Control Objectives and Related Controls

    • Tests of Controls and Results (Type II: procedures, samples, exceptions)

    • CUECs and Subservice Organizations (carve-out or inclusive)
      Some reports include other information (e.g., management responses, remediation notes).

  • Plan for:

    • Readiness & scoping: ~3–8 weeks (document processes, map control objectives, remediate gaps).

    • Operating period for Type II: 6–12 months (operate and evidence controls).

    • Audit fieldwork & reporting: ~2–6 weeks after the period ends.
      SOC 1 is typically annual. Many organizations issue a “bridge letter” to cover the gap between report end date and present.

  • Effective scoping focuses on services, systems, and transactions that drive ICFR assertions. Steps:

    1. Identify in-scope services and relevant control objectives (input, processing, output, reconciliations, interfaces).

    2. Decide carve-out vs inclusive for subservice orgs; define CUECs clearly.

    3. Map IT General Controls (ITGC) (logical access, change management, operations/backup, incident/problem mgmt) to the financial processes they support.

    4. Document policies, procedures, segregation of duties, and walkthroughs.

    5. Stand up evidence capture: tickets, approvals, logs, reconciliations, interface reports, job schedules.

    6. Perform a readiness assessment to surface gaps before the audit period.

  • Expect testing of:

    • Access management (joiner/mover/leaver, MFA, privileged access reviews)

    • Change management (segregated approvals, testing evidence, deployment logs)

    • Operations (backup jobs, batch processing, job monitoring, incident/problem tickets)

    • Application controls (input validation, completeness/accuracy checks, reconciliations, exception handling, interface controls to the GL)
      Auditors select samples based on period length and control frequency (e.g., monthly, quarterly, per-transaction). They test population completeness (e.g., full user list, full change log) before sampling.

    • Do startups need SOC 1? Only if your service impacts ICFR or buyers/auditors explicitly require it (common for payroll, payments, fintech, fund admin, BPO). Otherwise, SOC 2 often satisfies early-stage security reviews.

    • Is SOC 1 a certification? No. SOC 1 is a CPA attestation (an auditor’s opinion), not a “certification.” It demonstrates your control design (Type I) and operating effectiveness (Type II) under SSAE 18.

Where to Learn More

  1. SOC 1 - AICPA: https://www.aicpa-cima.com/topic/audit-assurance/audit-and-assurance-greater-than-soc-1?utm_source=chatgpt.com

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