Understanding SSAE 18 SOC 1 Reports: What They Are and Why They Matter
SSAE 18
Sirr Gardener
4/13/20253 min read
In today’s increasingly outsourced business environment, many companies rely on third-party service providers for critical operational functions—especially those that impact financial reporting. But how do organizations know if those third parties have adequate internal controls?
That’s where the SSAE 18 SOC 1 report comes in.
SOC 1 reports play a vital role in financial statement audits, vendor risk assessments, and compliance requirements. This post explains what SOC 1 reports are, how they're structured under SSAE 18, and why they matter for both service organizations and their clients.
What is a SOC 1 Report?
A SOC 1 (System and Organization Control 1) report is an attestation report governed by SSAE 18, designed to evaluate internal controls at a service organization that are relevant to their clients’ financial reporting.
In short, SOC 1 helps answer the question:
“Can this service provider be trusted to operate controls that support accurate financial reporting for their clients?”
SSAE 18: The Framework Behind SOC 1
SSAE 18 is issued by the AICPA (American Institute of Certified Public Accountants) and sets the standard for attestation engagements. Under SSAE 18, a CPA performs an audit engagement to express an opinion on the design and/or operating effectiveness of a service organization’s internal controls.
SOC 1 engagements under SSAE 18 are also closely aligned with the ISAE 3402 standard used internationally.
When is a SOC 1 Report Needed?
A SOC 1 report is typically requested when:
A service organization performs financial processing or data management for its clients.
The client’s external auditors need to rely on the controls of a third-party provider.
There is a regulatory or contractual requirement to evaluate internal controls over financial reporting (ICFR).
Examples of SOC 1-Relevant Services:
Payroll processing
Claims processing for insurance companies
Loan servicing
Investment reporting
Clearinghouse operations
Billing and receivables management
SOC 1 Type I vs. Type II
There are two types of SOC 1 reports:
✅ Type I
Focuses on the design and implementation of controls at a specific point in time.
Answers: “Are the controls suitably designed as of [this date]?”
✅ Type II
Evaluates both design and operating effectiveness over a period of time (typically 6–12 months).
Answers: “Are the controls suitably designed and did they operate effectively over time?”
Type I is useful for initial assessments or new service offerings.
Type II is more valuable for demonstrating ongoing control effectiveness to clients and auditors.
Key Components of a SOC 1 Report
A SOC 1 report contains the following essential sections:
1. Independent Auditor’s Report
The CPA’s opinion on the fairness of the system description and the suitability and effectiveness of controls.
2. Management’s Assertion
A written statement from the service organization's management attesting to the accuracy of the system description and the design of controls.
3. System Description
A detailed narrative of the service organization's system, including:
Services provided
Subsystems and infrastructure
Relevant internal control objectives
Organizational structure
4. Control Objectives and Related Controls
A list of specific control objectives and the controls designed to achieve them.
5. Tests of Controls and Results (Type II only)
Describes the auditor’s testing procedures and results for each control.
6. Other Information
Optional section for management to include additional content not covered by the auditor's opinion.
Subservice Organizations and the "Carve-Out" vs. "Inclusive" Method
Many service providers rely on subservice organizations (e.g., cloud providers, payment processors). SSAE 18 requires service organizations to describe how they manage those third parties.
There are two approaches:
🔹 Carve-Out Method:
Subservice provider’s controls are excluded from the audit scope.
The report must describe the controls expected to be in place at the subservice organization.
🔹 Inclusive Method:
Subservice provider’s controls are included in the scope of the audit.
Requires access to the subservice provider’s data and cooperation.
The carve-out method is more common, but both approaches must address how dependent services are controlled and monitored.
Complementary User Entity Controls (CUECs)
SSAE 18 requires identifying CUECs—these are controls that the client (user entity) must implement for the service organization’s controls to work effectively.
Example:
If the service provider sends payroll reports to a client, a CUEC might require the client to review and approve payroll totals before disbursement.
Benefits of a SOC 1 Report
✅ For Service Organizations:
Increases trust with prospective clients
Reduces the burden of responding to individual audits
Demonstrates commitment to internal controls and compliance
✅ For User Entities:
Provides assurance over outsourced processes
Helps satisfy SOX and financial reporting requirements
Reduces audit effort and cost
SOC 1 Engagement Process
Here’s a simplified view of how a SOC 1 engagement unfolds:
Scoping – Determine which systems, services, and controls will be included.
Readiness Assessment (optional) – Evaluate current control design and identify gaps.
Engagement Letter – Formalize the agreement between the service organization and auditor.
Audit Fieldwork – Auditor performs walkthroughs, interviews, and control testing.
Draft Report Review – Management reviews the initial report for accuracy.
Final Report Issued – Typically valid for 12 months (especially Type II).
Final Thoughts
SOC 1 reports under SSAE 18 are a critical component of financial and operational assurance in today’s business landscape. Whether you're a service organization processing sensitive financial data or a user entity relying on outsourced services, understanding and leveraging SOC 1 reports is essential for transparency, risk management, and regulatory compliance.
As financial and IT landscapes grow more complex, the role of SOC 1 engagements continues to expand—bridging the gap between control assurance and organizational trust.
Additional Resources
AICPA SOC Resources: https://www.aicpa.org/soc
ISAE 3402 Overview (International Equivalent)
Sample SOC 1 Control Objectives by Industry