Lease Audit: What is a SOC 1 Report 

Last Updated on February 15, 2024 by Morgan Beard

In order to pass your lease accounting audit under ASC 842. IFRS 16 or GASB, your external auditors will likely ask for your SOC 1 report. So what is a SOC 1 compliance report, and why is it important? In short, a SOC 1 Report is an audit report that provides assurance on the user entities’ internal controls relevant to the user or customers’ financial statements.

Software service providers fulfilling your lease accounting operational needs should have a SOC 1 report. As businesses entrust their sensitive financial information and operations to these service organizations, it becomes crucial to ensure that proper controls and safeguards are in place to protect the integrity and confidentiality of financial data. 

This is where a SOC 1 audit report comes into play.

What is a SOC 1 Audit Report?

A SOC 1 controls objectives, also known as a Service Organization Control 1 report, is a detailed examination of the internal controls of a service organization. It is conducted by an independent auditor to attest to the effectiveness of these controls in relation to the financial reporting of the service organization’s clients. The SOC 1 process framework categorizes objectives for internal controls that a SaaS providers must address for data processing integrity: control environment, risk assessment, control activities, information and communication, and monitoring.

The SOC 1 audit report is guided by the Statement on Standards for Attestation Engagements (SSAE) issued by the American Institute of Certified Public Accountants (AICPA). This standard provides guidelines for auditors to assess the design and operating effectiveness of controls relevant to the protection of financial information.

The central purpose of a SOC 1 audit report is to provide assurance to the service organization’s clients and their auditors that the controls in place are suitably designed and operating effectively to achieve the stated control objectives. This helps build trust and confidence in the service organization’s financial reporting and compliance mechanisms.

Difference Between a SOC 1 – Type I and Type II

There are two types of SOC 1 audits that an organization can conduct – Type I and Type II. The main difference lies in the scope of assessment and the depth of evaluation.

SOC 1 Type I: This report evaluates the fairness of the presentation of the service organization’s description of its system and the suitability of the design of the controls at a specific point in time.

SOC 1 Type II: In addition to the above, this report also assesses the operating effectiveness of these controls over a period of time, typically a minimum of six months.

For lease accounting audits, typically a SOC 1 Type II report is needed. This is because lease accounting often involves ongoing transactions and activities over a period of time, and stakeholders require assurance not only on the design of controls but also on their operating effectiveness over that period. Therefore, a SOC 1 Type II audit, which evaluates the controls’ effectiveness over a specified timeframe, is more appropriate for lease accounting audits.

Key Components of a SOC 1 Type II Audit Report

Understanding the key components of a SOC 1 Type II Audit Report is essential for both service organizations and their clients seeking assurance on internal controls relevant to financial reporting. This report encompasses various sections, each crucial in evaluating the effectiveness and reliability of the service organization’s controls.  A SOC 1 audit report typically consists of the following key components:

• Management’s Assertion: This is a statement provided by the management of the service organization affirming their responsibility for the design and operation of the controls being audited.
• Service Auditor’s Report: This section includes the auditor’s opinion on the effectiveness of the service organization’s controls, based on the examination conducted. It may contain an unqualified opinion, indicating that the controls are suitably designed and operating effectively, or a qualified opinion, highlighting any deficiencies or weaknesses in the controls.
• Control Environment Test Procedures: These are the detailed steps performed by the auditor to test the operating effectiveness of the control activities. The auditor selects a sample of transactions or activities to assess if the controls are functioning as intended.
• Control Objectives: These are the specific goals and requirements that the service organization’s controls aim to achieve. They are usually identified and agreed upon between the service organization and its clients.
• Control Activities: This section outlines the specific control activities that have been implemented by the service organization. It describes the policies, procedures, and processes in place to mitigate risks and achieve the control objectives.
• Information Systems Communications: This includes protocols and safeguards put in place to protect data transmission, such as encryption methods, secure networks, and access controls to customer data.
• Monitoring Test Results and Deficiencies: This section presents the findings of the control tests, including any deficiencies or weaknesses identified during the audit. It may also include recommendations for improvement to enhance the level of control.

Why You Need a SOC 1 Audit Report

Enhanced Financial Data Security

By conducting a SOC 1 audit and obtaining a favorable audit report, service organizations can provide assurance to their clients that their financial data is handled securely and protected against unauthorized access or potential breaches. This helps foster trust and confidence in the service provider.

Compliance with Regulatory Requirements

Many industries have specific regulations and compliance requirements that organizations must meet. A SOC 1 audit report can serve as evidence of compliance with these requirements, providing peace of mind to both service organizations and their clients.

Improved Efficiency and Effectiveness

As part of the audit process, service organizations evaluate their internal controls and identify any gaps or weaknesses. By addressing these issues, organizations can enhance their control environment, leading to improved operational efficiency and effectiveness.

Facilitates Outsourcing Decisions

Clients often rely on SOC 1 audit reports when selecting a service organization for their outsourcing needs. The audit report provides valuable insights into the service organization’s controls and can assist in making informed decisions regarding service provider selection.

SOC I Audit Report Summary

In closing, a SOC 1 audit report plays a critical role in strengthening financial control documentation for businesses. By conducting regular audits and obtaining common criteria reports, technology platforms can demonstrate their commitment to maintaining robust control environments. This builds trust and confidence among their clients, contributing to long-term business relationships.

As organizations continue to navigate the complex and evolving landscape of outsourcing and service providers, the importance of SOC 1 audit reports cannot be overstated. By upholding the highest standards of financial controls, businesses can safeguard their financial data and maintain the trust of their stakeholders.