Understanding SOC Reports: Type 1 vs. Type 2

As you likely know, there are different System and Organization Controls (SOC) report options, such as SOC 1 and SOC 2/SOC 3. What may be lesser known is that within those SOC report options, there are also different types, referred to as Type 1 and Type 2. In other words, the specific use of “Type” as a distinguisher are different specified options for both the SOC 1 and SOC 2 reports.   

Upon examination, service organizations are responsible for specifying whether it’s best for a Type 1 or Type 2 report to be performed. Before making that decision, and in order to get the most value out of your SOC report, it’s important to fully understand the type variations of each SOC examination, as each presents notable differences. 

SOC Reports: Type 1 

A Type 1 SOC examination evaluates the design and implementation of a company’s controls at a specific point in time. Type 1 reports are typically performed when management requires a report on the fairness of presentation of the service organization’s description of internal controls and the suitability of the design of controls as of a specified date.  

A Type 1 report includes: 

• A description of the system 
• The control objectives or criteria and related control activities 
• Management assertion 
• The auditor’s opinion on whether the controls are appropriately designed and in place as of the report date  

However, a Type 1 report does not test the operating effectiveness of controls over time. Instead, a Type 1 serves as an initial validation that controls are in place and properly designed, often used by companies as a stepping stone before undergoing a Type 2 examination, which includes testing for operating effectiveness of controls over a period of time.  

SOC Reports: Type 2 

A Type 2 SOC examination evaluates the design and operating effectiveness of a company’s controls over a period of time, referred to as the examination period. An examination period can vary in length, typically anywhere from 3 months (often times for first-time reports) to 12 months (typical recurring cadence).  

Similar to a Type 1 report, a Type 2 report includes a system description, control objectives or criteria, related control activities, a management assertion, and the auditor’s opinion. However, it goes a step further by incorporating detailed testing procedures and results to assess how effectively the controls operate over a defined period.  

This extended evaluation ensures that the client’s controls are not only properly designed, but also function consistently throughout the reporting period, providing a higher level of assurance. Therefore, while a Type 1 report is often a good starting point for organizations undergoing their first SOC examination, a Type 2 report is viewed as the gold standard that most clients and regulators seek for continued trust and compliance. 

Type 1 vs. Type 2: Which Should You Choose? 

While both a Type 1 and a Type 2 report provide assurance over your internal controls, they serve different purposes that are suited for different business needs. Therefore, it's important to effectively determine which type is right for you before you begin your examination. 

Key factors to consider when choosing between a Type 1 and Type 2 examination: 

1. Client and Stakeholder Expectations

Many customers, prospects, partners, and user auditors prefer (or even require or request) a Type 2 report because it provides stronger assurance. If your stakeholders are requesting a SOC report, it’s important to understand their expectations—some may not accept a Type 1 report and will insist on a Type 2 examination to validate that your controls functioned reliably over a set period. 

2. Compliance and Regulatory Requirements

Certain industries, such as financial services, healthcare, and cloud computing, may have strict compliance standards that require ongoing monitoring of controls, making a Type 2 report the better option. If you operate in a highly regulated environment, it’s best practice to check if a Type 2 is mandatory for compliance. 

3. Maturity of Your Controls

If your company has recently implemented new security, operational, or financial controls, a Type 1 examination may be the best starting point (if not a readiness assessment prior to a Type 1) to evaluate the design of the newly implemented procedures. However, if your controls have been in place for some time and you want to show that they have operated effectively over a period of time, a Type 2 report is the better option. 

4. Risk Management and Assurance Needs

A Type 2 report provides higher assurance because it tests controls over an extended period. If your organization manages sensitive data, financial transactions, or mission-critical services, a Type 2 report is likely the better choice. However, if you’re simply looking for initial validation that your controls are designed correctly, a Type 1 report may be sufficient. 

5. Time and Resource Commitment

Audits require time and effort. A Type 1 report is quicker to complete because it only assesses controls at a single point in time, making it a good choice if you need a report urgently. In contrast, a Type 2 report requires ongoing evidence collection, monitoring, and testing, making it more resource-intensive, yet more valuable in the long run. 

It is important to note that a company pursuing its first SOC report typically starts with a readiness assessment to identify gaps, implement controls, and prepare for subsequent examinations. Then, they complete a Type 1 report after addressing any issues, which assesses control design at a specific point in time. Since a Type 1 report is issued as of a set date, organizations can remediate gaps prior to undergoing this examination. 

After a Type 1 report, companies often proceed with a Type 2 report, covering 3 to 12 months based on readiness and need. Once a Type 2 report is complete, organizations generally establish an ongoing compliance cycle, conducting annual SOC examinations to maintain security and long-term compliance. 

Moving Forward in Your SOC Report Journey 

In the end, each organization will have its own challenges as well as internal and external requirements and goals, but having options is a good thing. In many cases, the right answer will be determined based on the tradeoff of timeliness versus comprehensiveness, but the bottom line remains that both types of SOC reports have merit and a unique purpose in compliance. 

If you’re ready to begin your SOC Examinations and Attestations journey, or you have any additional questions about the different report options or processes, contact us today and we’ll get back to you shortly.  

In the meantime, discover other helpful SOC report insights in these additional resources:  

• How to Determine Your SOC Reporting Period & Report Validity
• Year 1 vs. Recurring SOC 2 Examinations: The Effort Involved 
• SOC 1 vs. SOC 2: Which SOC Report Do Data Centers Need?