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ISAE 3402
ISAE 3402
ISAE 3402
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ISAE 3402, titled Assurance Reports on Controls at a Service Organization, is an international assurance standard that describes Service Organization Control (SOC) engagements, which provides assurance to an organization's customer that the service organization has adequate internal controls.[1]

ISAE 3402 was developed by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC) in 2009. It supersedes SAS 70 and puts more emphasis on procedures for the ongoing monitoring and evaluation of controls.[2]

An ISAE 3402 attestation including an audit report is regarded as a quality criterion for service providers that distinguishes them from competitors.[3]

Scope, Types and SOC classification

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The scope of an ISAE 3402 engagement is control set of the service organization, or to be more precise the service organizations controls over services, functions performed and applications that are likely to be relevant for the customer and its auditor to evaluate the internal control over financial reporting [further explanation needed]. It is also known as "Internal Control Framework over Financial Reporting" (ICFR)[citation needed]. When performing an ISAE 3402 the auditor has to take the position of the customer, selecting and testing controls that are relevant for the customer.

The ISAE 3000 standard is a more general standard for assurance engagements both for financial and non-financial purposes. Assurance engagements under ISAE 3402 require the auditor to comply with ISAE 3000.

ISAE 3402 defines two kinds of reports:

  • Type I: Documenting a "snapshot" of the organization's controls
  • Type II: Documenting over a period of time (typically 12 months) showing controls have been managed over time.[4]

ISAE 3402 is a SOC 1 engagement. SOC is an acronym coined by the American Institute of Certified Public Accountants (AICPA) for service organization controls, and was re-coined in 2017 as system and organizational controls. AICPA has defined three types of SOC reports: SOC 1, SOC 2, and SOC 3. SOC 1 is an abbreviation for SOC for Service Organizations: ICFR. SOC 2 is an abbreviation for SOC for Service Organizations: Trust Services Criteria. SOC 3 is an abbreviation for SOC for Service Organizations: Trust Services Criteria for General Use Report.[3]


SOC 2 engagements are performed based on the more general ISAE 3000, whereas SOC 1 engagements are performed based on ISAE 3402 (see above). Like SOC 1, a SOC 2 audit can be issued as a Type I report, which evaluates the design of controls at a specific point in time, or a Type II report, which assesses their operating effectiveness over a period of 3 to 12 months. While a Type I audit focuses on documentation and design, a Type II audit requires sustained evidence of the operation of continuous controls, such as monitoring logs and incident reports.

Definitions

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In order to be able to read and understand an ISAE 3402 report, some core terms are essential:

  • Criteria: In the context of ISAE 3402, these are comparative standards with which a situation can be assessed. Examples of legal and regulatory criteria are OECD principles, GDPR, MaRisk or GoBD.
  • Carve-out method: Refers to a method according to which the internal control system of a sub-service provider is not included in the scope of the audit of the service provider. For the service provider's customer, an ISAE 3402 report with a CARVE-OUT is unfavorable because relevant controls may not have been audited. Example: an IT service provider offers its software to the customer as SaaS, but the controls of the data center where the software is operated are not audited.
  • Inclusive method: Refers to a method whereby a sub-service provider's internal control system is included in the scope (extent) of the service provider's audit. An ISAE 3402 report using the inclusive method is beneficial to a service provider's client.
  • Complementary User Entity Controls: The service provider's audit of its ICS assumes that the customer itself performs certain controls and assumes responsibility for them. If the customer was not informed about the Complementary User Entity Controls in advance and did not perform them, the controls implemented at the service provider are not effective (efficient). Example: the service provider operates a data center and expects the customer to promptly inform the service provider about changes in the employees authorized to access the data center. The service provider only grants access to persons who are included on the access list. This control is audited and is effective. However, if the underlying access list is not current, the entire access control is not effective.
  • System: A system (service organization's system) is defined as the policies and procedures, and applications, required to provide a customer-related service.

See also

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References

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ISAE 3402

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ISAE 3402, formally known as the International Standard on Assurance Engagements 3402, is an assurance standard issued by the International Auditing and Assurance Standards Board (IAASB) on December 18, 2009, to guide professional accountants in public practice on performing and reporting assurance engagements related to controls at service organizations. It became effective for service auditors' reports covering periods ending on or after June 15, 2011, and serves as a global benchmark for evaluating controls that impact the financial reporting of user entities relying on outsourced services. The standard focuses on services such as and other business functions that could affect internal controls over financial reporting. The primary objective of ISAE 3402 is to enable service auditors to provide reasonable assurance that a service organization's description of its system is fairly presented, that its controls are suitably designed to meet identified control objectives, and—for certain report types—that those controls operated effectively over a specified period. It applies specifically to engagements where the service organization processes transactions or handles data on behalf of user entities, helping user auditors assess risks in their audits by relying on the service . Unlike broader assurance standards, ISAE 3402 emphasizes controls relevant to financial reporting and excludes direct audits of user entities' or reports on non-financial operational controls. ISAE 3402 defines two main types of assurance reports: Type 1 reports, which address the fairness of the service organization's system description and the suitability of control design as of a specific date; and Type 2 reports, which extend this to include an evaluation of the operating effectiveness of those controls over a review period, typically six months or more, through testing procedures. These reports are intended for distribution to user entities and their auditors, promoting transparency and consistency in outsourcing arrangements across international jurisdictions. The standard builds on the IAASB's International Framework for Assurance Engagements and aligns with ethical requirements under the International Ethics Standards Board for Accountants. Adopted widely by service providers in sectors like , , and , ISAE 3402 enhances global confidence in outsourced processes by standardizing assurance practices and facilitating cross-border reliance on reports, similar to but distinct from national standards like the U.S. SSAE 16. It addresses limitations inherent in service organization controls, such as the inability to provide absolute assurance, and requires service auditors to perform risk assessments and tests of controls to support their conclusions. Since its issuance, ISAE 3402 has remained a cornerstone for assurance on service organization controls, with no major revisions altering its core structure as of 2025.

Background and History

Development of the Standard

The International Standard on Assurance Engagements (ISAE) 3402, titled Assurance Reports on Controls at a Service Organization, was issued in December 2009 by the International Auditing and Assurance Standards Board (IAASB), a body operating under the auspices of the (IFAC). This standard marked the first new assurance engagement standard developed under the IAASB's International Framework for Assurance Engagements, distinct from its auditing standards series. ISAE 3402 is fundamentally based on (Revised), which provides the general framework for assurance engagements other than audits or reviews of historical financial information, but it adapts and expands those principles specifically for reasonable assurance on controls at service organizations. Compliance with ISAE 3402 requires adherence to ISAE 3000's core requirements, such as engagement acceptance, planning, evidence gathering, and documentation, while tailoring them to the context of service organization controls that impact user entities' financial reporting. The development of ISAE 3402 was driven by the growing prevalence of international outsourcing, where entities increasingly rely on service organizations for functions like and other business activities that influence financial reporting quality. This standard aimed to establish a uniform global framework for reporting on the design and operating effectiveness of such controls, thereby enhancing consistency in assurance practices worldwide and addressing the needs of user entities and their auditors. It became effective for service auditors' assurance reports covering periods ending on or after June 15, 2011. As an international equivalent to the U.S.-based Statement on Standards for Attestation Engagements (SSAE) No. 16, known as SOC 1 reports, ISAE 3402 facilitates cross-border comparability in controls assurance.

Superseding Previous Standards

ISAE 3402, issued by the International Auditing and Assurance Standards Board (IAASB) in December 2009 and effective for periods ending on or after June 15, 2011, effectively superseded the U.S.-centric Statement on Auditing Standards No. 70 (SAS 70), which had been the primary guidance for auditing service organizations' controls since its issuance by the American Institute of Certified Public Accountants (AICPA) in 1992. This transition marked a shift toward a more comprehensive international framework, aligning assurance practices globally and addressing the limitations of SAS 70's domestic focus, which hindered its adoption outside the . Key shortcomings of SAS 70 included its lack of global applicability, as it was tailored exclusively to U.S. auditing standards without provisions for international harmonization, leading to inconsistencies in cross-border service organization audits. Additionally, SAS 70 provided insufficient guidance on distinguishing between the design of controls and their operating effectiveness, often resulting in ambiguous reporting that failed to clearly delineate these aspects for user entities. It also inadequately addressed considerations for user entities, such as the need for complementary controls at the client level, which could expose financial reporting to unmitigated risks from dependencies. These gaps contributed to inefficiencies, including multiple overlapping audits requested by international stakeholders, straining service organizations' resources. To facilitate the shift, guidance encouraged service organizations to transition to ISAE 3402 reporting after , particularly those with international operations, to enhance credibility and streamline assurance for global user entities. In the U.S., this international alignment influenced the development of Statement on Standards for Attestation Engagements No. 16 () in 2010, which closely mirrored ISAE 3402 and directly replaced SAS 70; was later integrated into SSAE 18 in 2016. This convergence ensured that assurance reports on controls became more reliable and comparable worldwide, with ISAE 3402 emphasizing written and explicit coverage of user entity responsibilities to overcome prior deficiencies.

Purpose and Scope

Objectives of Assurance Engagements

The primary objective of an ISAE 3402 assurance engagement is for the service auditor to obtain reasonable assurance about whether, in all material respects, the service organization's description of its system is fairly presented, its controls are suitably designed to meet the related control objectives, and—for Type 2 reports—the controls operated effectively throughout the specified period, thereby enabling user entities and their auditors to assess the fairness and impact of a service organization's controls on the user entities' internal control over financial reporting (ICFR). This standard specifically targets controls that are relevant to the user entities' financial reporting processes, excluding those unrelated to financial statement assertions. ISAE 3402 engagements provide assurance through two types of reports. Type I reports provide reasonable assurance regarding the suitability of the of controls and the fair presentation of the service organization's system description as of a specified date. In contrast, Type II reports deliver reasonable assurance by also evaluating the operating effectiveness of those controls over a review period, allowing for a more robust assessment of ongoing control reliability. By providing independent assurance on these controls, ISAE 3402 engagements play a crucial role in reducing risks for user entity auditors, who can rely on the service auditor's findings to limit the extent of their own substantive testing and better evaluate risks of material misstatement in the user entities' . This reliance is particularly valuable in scenarios where user entities depend on service organizations for critical financial processes.

Applicability to Service Organizations

ISAE 3402 applies to assurance engagements performed by professional accountants in public practice to provide reports on controls at a service organization that are relevant to the internal control over financial reporting (ICFR) of user entities. A service organization is defined as a third-party organization (or segment thereof) that provides services to user entities that are likely to be relevant to those user entities' ICFR. Typical target entities include organizations offering outsourced services such as payroll processing, data centers for transaction handling, electronic claims processing, and other functions that impact financial statement assertions, like timely remittance of funds or accurate reconciliation of loan payments. These services are part of the broader outsourcing trend where user entities rely on external providers for transaction processing or data management that directly affects their financial reporting. The standard excludes services or controls that do not influence user entities' financial reporting, such as general IT support without a direct ICFR impact or pure consulting engagements lacking ongoing operational controls. For instance, engagements focused solely on production controls, unrelated to financial data, or operational effectiveness without an assertion on suitability fall outside its scope, as ISAE 3402 is limited to reasonable assurance attestation engagements on controls tied to financial reporting risks. As an issued by the International Auditing and Assurance Standards Board (IAASB), ISAE 3402 has global applicability, enabling multinational service providers to obtain assurance reports recognized across jurisdictions, in contrast to U.S.-centric standards like SSAE 18 (formerly ). It became effective for reports covering periods ending on or after June 15, 2011, and supports cross-border reliance by user entities' auditors worldwide. When a service uses a subservice to perform part or all of its relevant services, ISAE 3402 addresses inclusion through two methods: the inclusive method, which incorporates the subservice 's controls directly into the service 's ; or the carve-out method, which excludes those controls and instead describes the service 's complementary controls for monitoring the subservice provider. This approach ensures the report's scope clearly delineates responsibilities, allowing user entities to assess the overall control environment without gaps in coverage.

Key Concepts and Definitions

Core Terminology

In ISAE 3402, a control objective is the aim or purpose of a particular aspect of controls, relating to different types of risks (financial reporting, compliance, operational or other) that the controls seek to mitigate. A service organization is defined as a third-party (or segment of a third-party ) that provides services to user entities that are likely to be relevant to user entities’ as it relates to financial reporting. This term encompasses entities such as centers or providers whose operations could influence the of their clients. A user , in contrast, refers to an that uses a service organization, typically relying on the latter's controls to support its own over financial reporting. User entities are often the customers or clients whose auditors may use the assurance report to assess risks in financial reporting. Controls at a service organization are specified as the controls over the achievement of a control objective that is covered by the service auditor’s assurance report. These include the policies, procedures, and mechanisms implemented by the service organization to address risks relevant to the user entities' financial reporting. The description of the system constitutes the policies and procedures designed and implemented by the service organization to provide user entities with the services covered by the service auditor’s assurance report, including identification of the services covered, the relevant period (or date for Type 1 reports), control objectives, and related controls. This description forms the foundation for the assurance engagement, enabling evaluation of the system's design and effectiveness. Complementary user entity controls (CUECs) are controls that the service organization assumes, in the design of its service, will be implemented by user entities, and which, if necessary to achieve control objectives stated in the service organization’s description of its system, are identified in that description. These controls highlight responsibilities that must be fulfilled by the user entities to ensure the overall effectiveness of the control environment. Such is conveyed through the structure of ISAE 3402 reports to clarify roles and dependencies.

Types of Controls and Methods

In ISAE 3402, controls at a service organization are broadly categorized into general information (IT) controls and application controls, both of which are designed to support the user entity's over financial reporting (ICFR). General IT controls encompass foundational elements such as logical and physical access controls, processes, and system operations that ensure the reliability of the IT environment supporting financial processes. These controls address risks at the level, including preventing unauthorized access to systems and maintaining across the service organization's operations. Application controls, in contrast, are more targeted and focus on specific processing activities, such as input validation, automated calculations for billing or , and procedures within the relevant software applications. Together, these categories form the basis for the service organization's system description, with the assurance engagement evaluating their design and, in Type II reports, operating effectiveness. The selection of controls under ISAE 3402 is governed by criteria emphasizing their direct relevance to the user entity's financial reporting risks, rather than encompassing broader operational or security objectives. Specifically, controls must be identified and included if they mitigate risks that could lead to material misstatements in the user entity's , focusing on transaction initiation, recording, , and reporting within the service organization's . This scope excludes non-financial controls, such as those related to general privacy or , which are addressed in standards like SOC 2. The service auditor assesses whether these controls, when suitably designed and implemented, provide reasonable assurance that the control objectives—such as completeness and accuracy of financial —are achieved, without extending to exhaustive coverage of all IT or . When a service organization relies on subservice organizations, ISAE 3402 permits two primary methods for addressing their controls: the carve-out method and the inclusive method. Under the carve-out method, the subservice organization's controls are excluded from the scope of the service organization's description and assurance ; instead, the service organization includes only its own complementary controls for monitoring the subservice provider, leaving the user entity responsible for obtaining separate assurance or performing its own assessments of the subservice controls. This approach simplifies the but requires clear disclosure in the report of the nature of subservice activities and the exclusion. In the inclusive method, the subservice organization's relevant control objectives and controls are incorporated into the service organization's system description and subjected to the assurance procedures, necessitating coordination between the service and the subservice to include descriptions of those controls and any tests of their operating effectiveness. The choice of method is disclosed in the assurance report, ensuring transparency for user entities evaluating the overall control environment.

Report Types

Type I Reports

Type I reports under ISAE 3402 provide reasonable assurance on the design and implementation of a service organization's controls relevant to its financial reporting as of a specified date. These reports focus on whether the service organization's description of its system fairly presents the system designed and implemented on that date and whether the controls are suitably designed to meet the stated control objectives. Unlike broader assurance objectives, Type I engagements do not extend to evaluating how effectively controls operate in practice. The contents of a Type I report comprise three main elements: the service organization's detailed description of its system, including the services provided, control environment, and relevant controls; management's written assertion that the description is fairly presented and the controls are suitably designed; and the service auditor's assurance report. The auditor's report includes a title, addressee, reference to the system description and assertion, a summary of the procedures performed (such as walkthroughs and inquiries), inherent limitations of the engagement, and an unqualified opinion stating that the description presents the system fairly and the controls are suitably designed as of the specified date. If applicable, the report may include a restricted use paragraph indicating it is intended primarily for user entities and their auditors. Type I reports are particularly useful for initial evaluations of a service organization's control framework, such as during vendor or when establishing a new relationship, as they offer a point-in-time view that can inform user entities' risk assessments for audits. They are often chosen when time or resource constraints limit the feasibility of a more extensive review, providing foundational assurance to support planning decisions by user auditors. A key limitation of Type I reports is their snapshot nature, which assesses controls only as of a single date without examining their performance over time, potentially reducing the degree of reliance user auditors can place on them for ongoing audit evidence. Furthermore, these reports are designed to address the general needs of a wide range of users and may omit controls or details specific to certain user entities' requirements.

Type II Reports

Type II reports under ISAE 3402 provide assurance on both the design and operating effectiveness of a service organization's controls over a specified period, building upon the elements of Type I reports by incorporating tests of how controls function in practice. These reports are defined as comprising the service organization's description of its system, a written assertion by management, and the service auditor's report, which includes an opinion on whether the description presents fairly the system and whether the controls are suitably designed and operated effectively to meet control objectives throughout the period. The scope encompasses evaluation of the suitability of the design of controls—similar to Type I—plus substantive testing to verify operating effectiveness, ensuring that controls related to the stated objectives functioned as intended. The contents of a Type II report extend beyond a Type I report by detailing the nature, timing, and extent of tests of controls performed by the , along with the results of those tests, including any deviations identified. Even if the overall control objectives are achieved, any instances where controls did not operate effectively must be disclosed, potentially leading to a qualified if . This structure provides reasonable assurance about the operating effectiveness of the controls, in addition to the fairness of the description and suitability of design addressed in Type I reports, as the obtains sufficient appropriate through procedures designed to detect misstatements in the description or failures in control operation. Type II reports are particularly suited for user entities and their auditors seeking to place ongoing reliance on the service organization's controls for assessing risks of material misstatement in financial reporting, often serving as a basis for annual certifications in arrangements. The review period covered by these reports ordinarily spans a minimum of six months to allow evaluation of control consistency over time, though shorter periods may be used in exceptional cases such as a service organization's initial engagement, with the required to describe the reasons for the deviation. This temporal scope ensures the report reflects sustained control performance rather than a static assessment.

Engagement and Assurance Process

Planning and Risk Assessment

The planning and risk assessment phase of an ISAE 3402 assurance initiates with and continuance procedures to establish the preconditions for performing the work. The service auditor must first evaluate compliance with relevant ethical requirements, including as defined by the International Ethics Standards Board for Accountants (IESBA) Code of . This assessment extends to the practitioner's professional competence and capabilities necessary to undertake the effectively. Additionally, the integrity of the service organization's is scrutinized through inquiries and representations to confirm the reliability of provided, ensuring that management's assertions about the system description and controls can be trusted. If these preconditions are not met, the is declined or discontinued. Once accepted, the service auditor focuses on understanding the service organization's system by obtaining management's written of the system, which outlines the processes and controls relevant to user entities' over financial reporting. This must be evaluated for completeness, accuracy, and fair presentation in all material respects, covering elements such as the control environment, the service organization's process, the (including related processes), and the controls designed to meet specified control objectives. Procedures for this include inquiries of management, of operations, and of relevant documentation, with particular attention to any subservice organizations whose functions impact the described system. Management is required to acknowledge and accept responsibility for the 's preparation and fair presentation, including the identification of any subservice organizations and the completeness of disclosed controls. Risk assessment follows, where the service auditor identifies and evaluates risks arising from the service organization's activities that could prevent controls from achieving their objectives, particularly those affecting the user entities' . This involves mapping identified risks to relevant control objectives and assessing the suitability of to mitigate them, using professional judgment informed by the understanding of the system. Materiality plays a central role in this process, defined not in isolation for the service organization but in the context of the of the user entities who will rely on the report; it encompasses quantitative thresholds (e.g., based on benchmarks like or assets) and qualitative factors (e.g., nature of transactions or potential impacts on compliance) that could reasonably influence the economic decisions of those users. The guides the nature, timing, and extent of further procedures, with materiality revisited as new information emerges.

Testing and Reporting Procedures

In Type II assurance engagements under ISAE 3402, the service auditor performs tests of controls to obtain about the operating effectiveness of the service organization's controls in achieving the specified control objectives over a defined period, typically at least six months. The nature, timing, and extent of these tests are determined based on the assessed risks of misstatement to user entities' over financial reporting, considering factors such as the of control application (e.g., daily, monthly, or annual), the characteristics of the from which samples are drawn, and tolerable deviation rates. For instance, controls operating daily may require testing throughout the period, while less frequent controls might be tested at specific points. The tests encompass a range of procedures designed to evaluate how controls are applied, by whom, and with consistency. These include walkthroughs of individual transactions to trace processes from initiation to completion, inquiries of service organization personnel combined with observations of control activities, inspections of relevant documentation, and substantive testing such as reperformance of controls or analytical procedures. Sampling techniques are employed when testing populations, with sample sizes and selection methods (e.g., random or systematic) ensuring sufficient and appropriate to support conclusions on operating effectiveness; dual-purpose tests may also address both and operation. Evidence from prior periods or internal auditors can influence the timing and extent but does not eliminate the need for current-period testing. When deviations from expected control operations are identified during testing, the service auditor investigates their and cause to assess whether they indicate systemic weaknesses or isolated incidents. This evaluation determines the impact on control effectiveness and the potential for material effects on user entities' financial reporting, potentially requiring expanded testing or adjustments to the deviation rate. If deviations are projected to exceed tolerable levels, they may lead to a conclusion that controls are not operating effectively, influencing the overall assurance opinion. A key prerequisite for the engagement is the service organization's management's written assertion, which confirms that the description of the system is fairly presented in all material respects, that the controls are suitably designed to meet the control objectives outlined in the description, and—for Type II reports—that the controls operated effectively throughout the specified period based on the suitable criteria provided. Management must provide this assertion, along with representations on the completeness of the system description and access to necessary evidence, enabling the service auditor to evaluate its reasonableness. The assurance report is prepared upon completion of testing and includes essential elements such as the service auditor's opinion, the description, and—for Type II—a detailed section describing the tests performed (including their nature, timing, and extent) and the results, with any deviations disclosed regardless of their impact on overall effectiveness. The opinion is unmodified if the auditor concludes that the description is fairly presented, controls are suitably designed, and operate effectively; otherwise, it is modified (e.g., qualified or adverse) with explanations of the reasons, such as material deviations. Reports typically include restrictions on use, intended solely for user entities and their s to evaluate risks related to financial reporting, and prohibit broader distribution without the service auditor's consent.

Relation to Other Standards

Equivalence to SOC 1

ISAE 3402 engagements produce reports that are directly equivalent to those under the AICPA's SOC 1 standard, as both focus on providing assurance over a service organization's controls relevant to over financial reporting (ICFR). This equivalence ensures that service organizations can demonstrate the effectiveness of their financial controls to users across jurisdictions without needing separate audits. The standard was developed in parallel with the AICPA's (effective 2010, later updated to SSAE 18 in 2017) through collaborative efforts between the International Auditing and Assurance Standards Board (IAASB) and the AICPA's Auditing Standards Board (ASB), aiming to harmonize requirements for cross-border consistency. This harmonization addressed the limitations of the prior SAS 70 and standards by introducing uniform elements, such as a detailed description of the system and management's assertion on control design and operation. In practice, the SOC 1 designation is primarily used under AICPA guidance, while ISAE 3402 is applied internationally under IAASB standards, yet both share identical Type I (design effectiveness at a point in time) and Type II (design and operating effectiveness over a period) report structures and content requirements. This alignment facilitates global usage, with reports from either standard serving similar purposes in user entity audits. Practitioner guidance from the IAASB and AICPA emphasizes this reciprocity, enabling auditors to accept ISAE 3402 reports in U.S. audits and vice versa, provided the scope aligns with ICFR relevance and any minor jurisdictional differences are addressed. This mutual recognition reduces redundancy for multinational service organizations and enhances efficiency in assurance processes.

Comparisons with SOC 2 and SSAE 18

ISAE 3402 focuses exclusively on controls at a service organization that are relevant to its clients' over financial reporting (ICFR), making it analogous to SOC 1 reports under U.S. standards. In contrast, SOC 2 evaluates a broader range of non-financial controls based on the Trust Services Criteria, which encompass , , , , and . This distinction means ISAE 3402 does not address non-financial aspects such as data or system uptime, which are central to SOC 2 assessments. A key difference in report distribution is that SOC 2 reports, while technically restricted to specified parties, are often designed for wider stakeholder use, including prospective clients, whereas ISAE 3402 reports are strictly limited to identified users to maintain assurance integrity. Additionally, SOC 2 leverages as its foundational international standard rather than ISAE 3402, which is reserved for financial reporting-focused engagements. These variations reflect SOC 2's emphasis on building trust in service organizations handling sensitive data beyond financial transactions. SSAE 18, effective May 1, 2017, represents the updated U.S. auditing standard issued by the AICPA's Auditing Standards Board, superseding and incorporating guidance for both SOC 1 and SOC 2 reports, including enhanced provisions for group audits and subservice organizations. ISAE 3402, developed by the International Auditing and Assurance Standards Board (IAASB) under the (IFAC), serves as its international equivalent but does not include SSAE 18's specific updates on group audit considerations, such as coordinated reporting across related entities. This makes SSAE 18 more tailored to U.S. regulatory environments, while ISAE 3402 prioritizes global harmonization without those domestic enhancements. Despite these differences, ISAE 3402 and SSAE 18 share significant overlaps in structure and purpose, both requiring a detailed description of the service organization's system, management's assertion on control effectiveness, and testing for Type I (design) and Type II (operating effectiveness) reports. Their similar formats facilitate cross-border recognition, with ISAE 3402's international applicability enabling its use in non-U.S. jurisdictions where SSAE 18 compliance may require additional adaptations. These commonalities stem from collaborative development between the IAASB and AICPA to promote consistent assurance practices worldwide.

Implementation and Benefits

Steps for Achieving Compliance

Achieving compliance with ISAE 3402 requires service organizations to systematically prepare their internal controls for independent assurance, focusing on those relevant to user entities' financial reporting. The process emphasizes management's role in establishing a robust control environment and collaborating with a qualified to produce a reliable . The initial step entails documenting a comprehensive description of the service organization's and identifying the relevant controls. Under ISAE 3402, must prepare a description that fairly presents the , including the services provided, infrastructure, software, procedures used in processing transactions, the control environment, and details on how transactions are initiated, authorized, recorded, processed, corrected, and reported. This description addresses the needs of user entities and their auditors by specifying control objectives related to financial reporting and identifying associated risks, along with the controls designed and implemented to mitigate those risks and achieve reasonable assurance of the objectives. also provides a written assertion stating that the description is complete, accurate, and fairly presented, and that controls are suitably designed (and operating effectively for Type II reports). Subsequently, the organization engages a qualified independent practitioner and conducts scoping and a readiness assessment to evaluate . A service , independent in accordance with ISAE 3000 (Revised) and competent in performing such engagements, is selected to conduct the assurance. The scoping phase defines the boundaries of the system description and the controls to be included, often in consultation with the to align with user entity expectations. A readiness assessment follows, involving a of existing controls against ISAE 3402 criteria, identification of gaps through , and provision of remediation recommendations to strengthen the control framework before the formal engagement. Management grants the access to all relevant information, personnel, and records during this preparation. Once gaps are identified, the organization implements necessary controls and performs internal testing to address deficiencies through remediation. Controls must be suitably designed and implemented to mitigate identified risks, with management obtaining evidence of their operating effectiveness via internal monitoring or testing activities. Remediation involves updating policies, procedures, or personnel training as needed, followed by management's re-testing to confirm that controls operate consistently and provide the intended assurance. This phase ensures the system description and controls are ready for external verification. The final step is to undergo the full assurance engagement, culminating in the issuance and distribution of the for ongoing compliance. The service auditor performs procedures to opine on whether the system description is fairly presented, controls are suitably designed, and—for Type II reports—operate effectively over the review period (typically at least six months). Upon satisfactory completion, the auditor issues the ISAE 3402 , incorporating management's assertion, which is then shared with authorized user entities and their auditors under any agreed restrictions. Type II reports, which include operating effectiveness testing, are typically renewed annually to sustain user entity reliance on the controls.

Advantages and Limitations

ISAE 3402 enhances the of service organizations by providing independent assurance on the and operating of controls relevant to financial reporting, thereby building trust with clients and stakeholders. This assurance allows user entities to more efficiently incorporate the service organization's controls into their own audit processes, reducing the need for redundant testing and streamlining overall compliance efforts. As an issued by the International Auditing and Assurance Standards Board (IAASB), ISAE 3402 promotes global consistency in reporting, which lowers compliance costs for multinational organizations operating across jurisdictions with varying regulatory requirements. Despite these benefits, ISAE 3402 reports are subject to restricted distribution, intended solely for specified user entities and their auditors rather than use, limiting their broader marketing potential. Type II reports, which include testing of control operating effectiveness over a period, demand substantial time, resources, and financial investment from service organizations due to the rigorous procedures involved. The standard's scope is narrowly focused on controls impacting financial reporting, excluding assurance on non-financial risks such as cybersecurity, , or operational resilience. Issued in 2009 and effective from 2011, ISAE 3402 has not been substantively revised to incorporate post-issuance developments in related fields, such as the 2018 (GDPR), though it has received conforming amendments (e.g., in 2013 and 2019) that do not alter its core requirements; this results in gaps that require separate compliance efforts for emerging privacy and data protection requirements. Without periodic substantive updates, the standard risks becoming less relevant to evolving regulatory landscapes and technological risks. For user entities, ISAE 3402 enables reliance on the service organization's controls to support their financial audits, but this depends on a thorough understanding of complementary user entity controls (CUECs), which address interfaces and residual risks not covered by the ; failure to evaluate CUECs properly can lead to over-reliance and audit deficiencies.

References

  1. https://www.iaasb.org/news-events/2009-12/iaasb-issues-new-assurance-standard-controls-service-organizations
  2. https://www.iaasb.org/publications/staff-overview-international-standard-assurance-engagements-isae-3402-assurance-reports-controls
  3. https://www.icjce.es/images/pdfs/tecnica2/normativainternacional/isae3402.pdf
  4. https://www.icaew.com/technical/audit-and-assurance/assurance/standards-and-guidance
  5. https://www.journalofaccountancy.com/issues/2010/aug/20103009/
  6. https://www.claconnect.com/en/resources/tools/frequently-asked-questions-about-sas-70-now-ssae-16
  7. https://socreports.com/white-papers/educational/ssae-16-vs-sas-70-what-you-need-to-know-and-why
  8. https://socreports.com/white-papers/soc-1/ssae-18-and-isae-3402
  9. https://mia.org.my/storage/2022/09/ISAE-3402-Updated-2022.pdf
  10. https://www.ifac.org/system/files/publications/files/ISA-3402.pdf
  11. https://www.ifac.org/system/files/downloads/b014-2010-iaasb-handbook-isae-3402.pdf
  12. https://mia.org.my/storage/2022/04/MIA_ISAE_3402.pdf
  13. https://www.pwc.is/en/assets/document/isae_3402_standard.pdf
  14. https://www.auasb.gov.au/media/1qbljbed/asae_3402_12-22.pdf
  15. https://www.pwc.com/ph/en/assets/documents/2019/risk-assurance/pwcph_TPA-brochure.pdf
  16. https://learn.microsoft.com/en-us/compliance/regulatory/offering-soc-1
  17. https://investors.expleo.com/wp-content/documents/certifications/isae3402-ssae16-acctng-stds-1.pdf
  18. https://linfordco.com/blog/soc-2-isae-3402-aicpa-attestation-standards/
  19. https://www.china-briefing.com/news/understanding-u-s-auditing-standards-ssae-16-vs-isae-3402/
  20. https://www.bdo.com.au/en-au/insights/advisory/articles/soc-assurance-reports-the-differences
  21. https://www.pwc.com/ph/en/risk-assurance/trust-transparency/service-organization-controls-report-isae-3402.html
  22. https://assets.kpmg.com/content/dam/kpmgsites/ch/pdf/service-organization-controls.pdf
  23. https://ssae-16.com/ssae-16/ssae-16-vs-isae-3402-part-1/
  24. https://www.dotlegal.com/en/articles/information-security-management/isae-3402
  25. https://www.zluri.com/blog/isae-3402-vs-soc-2
  26. https://www.kiwa.com/nl/en-nl/services/certification/isae-3402-demonstrable-it-risk-assurance/
  27. https://www.iaasb.org/news-events/2013-12/iaasb-enhances-standard-assurance-engagements
  28. https://linfordco.com/blog/user-control-considerations-cuec-soc-report/
  29. https://asxonline.com/content/dam/asxonline/public/notices/2021/July/asae_3402_controls_report_austraclear_fy21.pdf
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