Service Organizations: Use of SOC 1 Type 2 Report – CPA Exam Definitions

Service Organizations: Use of SOC 1 Type 2 Report

An auditor would use a SOC 1 Type 2 report to determine the nature and extent of testing procedures to be performed in an audit of an entity’s financial statements by following these steps:

1. Obtain and review the SOC 1 Type 2 report: Request and review the service organization’s most recent SOC 1 Type 2 report, which provides an independent assessment of the design, implementation, and operating effectiveness of the service organization’s controls relevant to the user entity’s internal control over financial reporting.
2. Assess the service auditor’s qualifications and independence: Evaluate the qualifications, competence, and independence of the service auditor who performed the SOC 1 Type 2 engagement. This will help determine the extent to which the auditor can rely on the report’s findings.
3. Evaluate the report’s scope and coverage: Ensure the SOC 1 Type 2 report covers the relevant controls and risks associated with the services provided to the entity and that it covers the appropriate period for the audit. Assess whether the report’s scope and coverage are sufficient for the auditor’s purposes.
4. Review the description of the service organization’s system: Analyze the description of the service organization’s system provided in the SOC 1 Type 2 report to obtain an understanding of the service organization’s processes, risks, and control objectives relevant to the user entity’s financial statements.
5. Review the control objectives, controls, and test results: Examine the control objectives, controls, and test results detailed in the SOC 1 Type 2 report. Evaluate whether the controls in place are relevant to the user entity’s internal control over financial reporting and whether they were operating effectively during the period covered by the report.
6. Assess the impact of the service organization’s controls on the user entity’s financial statements: Based on the review of the SOC 1 Type 2 report, assess the impact of the service organization’s controls on the user entity’s financial statements. This will help in determining the nature and extent of testing procedures to be performed in the audit.
7. Identify and assess control deficiencies: Identify any control deficiencies or deviations noted in the SOC 1 Type 2 report and assess their impact on the user entity’s financial statements and internal control over financial reporting. Determine whether additional audit procedures are necessary to obtain sufficient appropriate audit evidence.
8. Determine reliance on the SOC 1 Type 2 report: Based on the assessment of the SOC 1 Type 2 report and the impact of the service organization’s controls on the entity’s financial statements, decide the extent to which the auditor can rely on the report’s findings to reduce the nature, timing, and extent of further audit procedures.
9. Plan and perform additional audit procedures: If necessary, based on the review of the SOC 1 Type 2 report and the assessed impact of the service organization’s controls, plan and perform additional audit procedures to obtain sufficient appropriate audit evidence. This may include testing controls at the user entity level or performing substantive procedures.

By using a SOC 1 Type 2 report in this manner, an auditor can determine the nature and extent of testing procedures to be performed in an audit of an entity’s financial statements, considering the impact of the service organization’s controls on the user entity’s internal control over financial reporting and financial statements.