ISAE 3402 vs SOC1 - understanding the difference for international clients

ISAE 3402 vs SOC1 - understanding the difference for international clients

In brief: ISAE 3402 and SOC 1 cover the same ground — both focus on the controls within service organizations that impact their clients’ financial reporting. The distinction lies in the governing body: ISAE 3402 was developed by IAASB/IFAC, while SOC 1 follows AICPA standards. In practice, these two frameworks can be combined into a single audit and report — SOC 1/ISAE 3402 — offering a streamlined solution for companies working with international clients.

Why this distinction matters?

Global organizations serving clients in multiple regions often encounter differing audit requirements. US-based clients typically request a SOC 1 report, while non-US clients prefer ISAE 3402. In essence, both seek the same assurance — independent verification that a service provider’s operational and IT controls effectively support accurate financial reporting.

As a result, many service organizations opt for a combined SOC 1/ISAE 3402 report, which satisfies both requirements through a single engagement, saving time and cost while maintaining global compliance.

Understanding ISAE 3402 and SOC 1

ISAE 3402 is an international assurance standard issued by the International Auditing and Assurance Standards Board (IAASB) under the International Federation of Accountants (IFAC). It provides a framework for assessing the design and operational effectiveness of controls within service organizations.

SOC 1, meanwhile, is the American counterpart, developed by the American Institute of Certified Public Accountants (AICPA). It is based on SSAE 18 (Statements on Standards for Attestation Engagements) and addresses the same types of controls as ISAE 3402.

In short, SOC 1 and ISAE 3402 are equivalent standards serving the same purpose — the assurance of financial reporting controls — differing only in jurisdiction and reporting format.

Choosing the right report

The choice between ISAE 3402 and SOC 1 depends primarily on who the report is for.

• US clients will generally require a SOC 1 report compliant with SSAE 18.

• Non-US clients will expect an ISAE 3402 report.

• Global companies can meet both needs through a combined SOC 1/ISAE 3402 report, ensuring cross-border recognition and efficiency.

A combined report is often the most practical option, particularly when the audit firm operates under both AICPA and IAASB standards.

What an ISAE 3402 / SOC 1 report includes?

An ISAE 3402 or SOC 1 report consists of several key components. It includes the auditor’s opinion on the effectiveness of controls, details the scope and period of examination, and contains a description of the system — including general IT controls (GITCs) such as access management, change control, and physical security.

There are two types of reports:

• Type I – evaluates the design and implementation of controls as of a specific date.

• Type II – assesses both design and operational effectiveness over a defined period, typically six to twelve months.

• 
  

A Type II report offers greater assurance because it demonstrates that controls not only exist but function effectively over time.

Common misconceptions about these standards

It’s not uncommon to see RFPs requesting something like “SOC 2 ISAE 3402,” but this phrase mixes two unrelated frameworks. ISAE 3402 aligns exclusively with SOC 1, which deals with financial controls, while SOC 2 corresponds to ISAE 3000, focusing on the Trust Services Criteria — security, availability, processing integrity, confidentiality, and privacy.

Understanding this distinction is critical. Using the wrong terminology or framework can lead to unnecessary delays, additional costs, or even the wrong type of audit being performed.

How a combined SOC 1/ISAE 3402 audit works?

A combined audit allows a single engagement to satisfy both the AICPA (SSAE 18) and IAASB (ISAE 3402)requirements. This approach is efficient for multinational organizations, as it produces one report recognized across jurisdictions.

However, US-based auditors are bound by the AICPA Code of Professional Conduct, which imposes additional ethical and procedural obligations not explicitly required by ISAE 3402. Consequently, a US CPA cannot issue an ISAE 3402 report in isolation — it must also comply with AICPA requirements.

Where SOC and ISAE reports apply?

SOC and ISAE reports are vital in industries where service providers handle processes or data that affect their clients’ financial reporting. Typical sectors include IT services, cloud computing, data centers, accounting and payroll outsourcing, customer service operations, sales automation, and medical claims processing.

In these fields, SOC/ISAE reports act as a benchmark of trust, allowing clients to verify that their service providers maintain appropriate internal controls and data governance practices.

How these standards relate to others?

It’s important to clarify that ISAE 3402 is not equivalent to SOC 2. SOC 2 addresses cybersecurity and data privacy under the Trust Services Criteria and corresponds to ISAE 3000, while ISAE 3402 and SOC 1 focus specifically on financial reporting controls.

This distinction helps organizations select the most appropriate audit framework for their business objectives and contractual obligations.

Preparing for an ISAE 3402 or SOC 1 audit

Obtaining an ISAE 3402 or SOC 1 report requires careful preparation. The process typically follows these steps:

1. Understand the requirements of the relevant standard and define the report’s objectives.

2. Select a qualified auditor and agree on the audit’s scope.

3. Document the system and control environment, including key processes and risk management frameworks.

4. Conduct a gap analysis to identify weaknesses and implement corrective measures.

5. Perform internal testing, followed by the external audit.

6. Review findings, finalize the report, and address the auditor’s recommendations.

   
   

This approach not only facilitates a successful audit but also strengthens internal governance and control maturity across the organization.

Evolution and current trends

ISAE 3402 was introduced in 2009 and has evolved to reflect the realities of the digital economy. In 2013, it was aligned with SOC 1, making it easier to produce dual-standard reports. Over time, it has achieved global recognition, and since 2021, it has increasingly incorporated elements of cybersecurity and technology risk management.

With the expansion of outsourcing and digital transformation, SOC/ISAE reports have become a standard expectation in B2B partnerships. For many organizations, they now represent a currency of trust — evidence of reliability, transparency, and operational excellence.

Frequently asked questions

Can a single report serve both US and EU clients?Yes. A SOC 1/ISAE 3402 combined report meets the requirements of both jurisdictions.

Is ISAE 3402 the same as SOC 2?No. ISAE 3402 corresponds to SOC 1 and covers financial controls, while SOC 2 is based on ISAE 3000 and focuses on data security and privacy.

Which should I choose — Type I or Type II?If clients require proof that controls operate effectively over time, choose Type II. It provides greater assurance and is widely accepted among enterprise customers.

Conclusion

ISAE 3402 and SOC 1 serve the same purpose: to build trust in the control environment of service organizations. For internationally active companies, the most efficient option is a combined SOC 1/ISAE 3402 report, which meets both American and international expectations within a single engagement.

To maximize value, organizations should invest in robust IT and financial controls, perform regular testing, and engage auditors experienced in both AICPA and IAASB standards. This not only ensures compliance but also reinforces credibility, enhances customer confidence, and demonstrates operational maturity in global markets.