The document discusses the importance of SOC 2 Type 1 and Type 2 reports for organizations handling sensitive data to ensure compliance with security and privacy standards. SOC 2 Type 1 focuses on the suitability of design controls, while SOC 2 Type 2 evaluates the effectiveness of those controls over a period of time, providing a higher level of assurance for data security. Organizations new to SOC 2 compliance may start with Type 1, while those with the resources might aim for Type 2 for better credibility and customer confidence.

1. SOC2 Type1 Vs. Type2
The prevalence of cyber security attacks and data breach in the recent years have brought to light how vulnerable
organizations are to a cyber-attack. The financial losses and the tarnish of reputation caused by such attacks cannot
Be underestimated by any organization handling confidential data. Data breach still continues to be a pressing concern for
companies across the globe. Indeed, information security has now become a major concern for organizations handling
sensitive data and including those who outsource their business requirements to third-party organizations such as SaaS
providers, data analytic companies and Cloud computing providers.
Needless to say, all IT managers and security stakeholders have been scrambling to find ways to tackle the situation and
gain control over their network and data security. One way to ensure the security and privacy of data is by obtaining a SOC
2 Type1 & Type 2 report from a CPA. So, let us today understand in detail about the SOC 2 audit and its application to your
organization.
What is SOC 2 audit
A SOC 2 report essentially verifies whether an organization is in compliance with the requirements relevant to Security,
Processing integrity, Availability, Confidentiality, and Privacy. It is an audit meant for service organizations that holds, stores,
or processes private data of their clients. A SOC 2 audit report provides the organization and its clients an assurance that
the reporting controls are suitably designed, well in place, and client’s sensitive data is appropriately secured.
Types of SOC 2 report
SOC 2 audits constitute two types of audit reporting, namely SOC 2 Type 1 & SOC 2 Type 2. Both the types of reports are
meant to tackle the reporting controls and processes of a service organization related to the five trust principles of data. For
more info on which Trust Principles are relevant to your organization, check out my earlier article (SOC 2 Trust Service
Criteria)
SOC 2 Type 1 Definition:
SOC 2 Type 1 is a report on a service organization’s system and the suitability of the design of controls. The report
describes the current systems and controls in place and review documents around these controls. Design sufficiency of all
Administrative, Technical and Logical controls is validated.
SOC 2 Type 2 Definitions:
SOC 2 Type 2 Report is very similar to the Type 1 report, except that the evidence of control effectiveness are described
and evaluated for a minimum of six months to see if the systems and control in place are functioning as described by the
management of the service organization.
Difference between SOC 2 type 1 & type 2:

2. The differences between SOC 2 Types 1 & 2 is arguably the most apparent or glaring difference with the SOC 2 Type 1
audit report covering the suitability of design controls and its effectiveness, the SOC 2 Type 2 audit report covers a detailed
Description with evaluation and evidence on its operating effectiveness. Although the Type II report takes more time
(spanning over 6-12 months) and effort for service providers to prepare for it. However, the additional time and resources
invested for compliance to SOC 2 Type 2 yields more value to companies. The Type 2 report clearly describes the steps and
efforts taken by the service provider to protect sensitive data of its customers. Typically, the SOC 2 Type 2 report appeals to
prospective customers and other stakeholders about the safety of their data with service organization.
Application of SOC 2 type 1 & type 2 for service organizations:
SOC 2 Compliance is mandatory for all technology-based service organizations who store, process and use client
information in the cloud. Such businesses include those that provide SaaS services, data processing/analytic companies
and Cloud service providers while also using the cloud to store engaged client’s information. That apart, as evident in the
description of SOC 2 Type 1 & Type 2 illustrated above, both the reports have a lot in common in terms of tackling the
reporting controls and processes of a service organization related to the five trust principles of data. So, let us take a
closer look at each of their implications.
SOC 2 Type 1 Audit:
The report clearly shows that the service organization has best practices in place. The auditor will base the report
on the description of controls and review of documentation around these controls. Design effectiveness of controls for
all Administrative, Technical and Logical whether Preventive, Detective or Corrective are validated. This kind of report is
particularly helpful to all service companies as it gives their potential customers the assurance that the data with service
organization is safe as per the SOC 2-Type 1 audit. Generally, companies prefer working with vendors who can prove
that they can handle sensitive data.
This kind of report is today a necessity for companies handling customer data like healthcare firms, financial institutions
and Cloud computing service providers. Clients most often look for this report in a third-party vendor who are hard-
pressed for time and are doing SOC 2 for the first time and need at least a basic level of SOC 2 compliance… this is true,
especially since Type 2 SOC 2 report takes almost a year when its done for the first time. Moreover, the audit report of
Type 1 is generally less expensive as the data required determining the compliance of a service organization is bare
minimum. Hence, Service organizations should initially strive to achieve SOC 2 Type 1 compliance, especially when trying
to collaborate or partner with bigger firms but need to get compliant say within 3 months or so.
SOC 2 Type 2 Audit:
Although, SOC 2 Type 1 compliance offers many benefits, it pales in comparison with the SOC 2 Type 2 audit
report. SOC 2 Type 2 compliance has a better leverage over the SOC 2 Type 1 report, for the service organization has to
pass through a thorough examination of its internal control and prove its operational effectiveness. The Type 2 audit
report provides a clear description with evidence to the evaluation of the company’s effectiveness with regards to its
internal control policies and practices over the time. The Type 2 audit report in comparison gives a higher level of
assurance on data security and control systems of the service organization. With SOC 2 Type 2 report, it gives a clear
message that the service organization applies the documented best practices in data security and control systems
effectively and efficiently. Further, these companies have a better chance to bag contracts from bigger firms. Although,
complying with SOC 2 Type 2 audit can be quite timing consuming and would also call for significant investment in
terms of money.
Companies today prefer achieving compliance to SOC 2 Type 2 for their desire to assure customers that they have the
best processes and controls to protect data. Moreover, customers too prefer a SOC 2 Type 2 compliant
service organization to work with as it gives better assurance of data safety over service organizations compliant with
SOC 2 Type 1 report.

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Closing thought
Having understood the differences and implications of both Type 1 & Type 2 reporting, it brings us back to the
question as to which type of report is ideal for an organization. Well, to put it in simple words, for an organization that is
new to the SOC 2 Compliance and has time/budget constraints, can initially kick-start with SOC 2 Type 1 compliance in
the first year. So, during the course of the first year, a readiness assessment can help identify failed controls in the service
organization which will enable them to prepare a detailed action plan to remediate gaps, gain efficiencies and achieve
SOC 2 Type 1 Compliance over the first year. Eventually in the later years, they can try achieving SOC 2 Type 2
Compliance. While, for those companies that can spare good amount of time and money towards being SOC 2 Type 2
Complaint, can opt for achieving the same in the very first year itself. However, the company has to pass through the
initial stage of SOC 2 Type 1 Compliance in order to proceed further, to achieve SOC 2 Type 2 Compliance. But, for the
max bang for the buck, SOC 2 Type 2 is always the best bet.
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