The International Standard on Assurance Engagements (ISAE) and the reason behind its importance

Trust is the cornerstone of business relationships. In today’s interconnected world, organizations increasingly rely on third parties for everything from financial processes to IT services and compliance with ever-evolving regulations. In recent years, this increased reliance has not gone unnoticed by regulators, establishing a set of new regulations such as GDPR, NIS2, and DORA; all further driving the demand for independent assurance. Organizations should no longer settle for promises. They expect concrete assurance that the services they depend on are reliable, secure, and compliant.

This is exactly where ISAE reports come in. These reports go beyond words and provide independent confirmation that a company’s controls are not only designed and implemented, but also effective in practice. They help bridge the trust gap between service providers and their clients, strengthening confidence in critical business relationships. Additionally, they serve as a valuable learning opportunity for companies under assessment, offering insights that can further enhance their internal processes and controls.

In this article, we’ll guide you through the different flavors of ISAE, explain why they matter, and show how they are becoming a powerful tool for organizations navigating today’s complex regulatory and business environment.

International Standard on Assurance Engagements (ISAE) reports are globally recognized assurance frameworks that enable organizations to demonstrate control over their processes and compliance with regulations. They serve as independent confirmation that a company is not only saying the right things but is also putting the right controls in place, and that these controls work in practice.

For service providers, this assurance is particularly valuable. Whether they manage financial processes, deliver IT services, or handle sensitive data, clients want to know that their operations are secure, reliable, and compliant. An ISAE report provides confidence by translating complex processes and controls into a structured, trusted format.

What makes ISAE unique is its versatility. The standard can be applied across different industries and contexts, from highly regulated financial environments to broader non-financial areas such as cybersecurity and data privacy. This flexibility allows organizations to tailor the scope of the report to the needs of their clients, stakeholders, and regulators.

There are several flavors of ISAE reports, each with its own focus and applications. In the next section, we will take a closer look at the different types of ISAE reports.

ISAE 3402 reports - also referred to as SOC 1 - are primarily designed for the financial audit context and are particularly relevant for service providers whose processes directly affect their clients’ financial reporting. These reports give clients confidence that key financial operations are executed accurately and reliably.

For instance, a payroll provider must ensure that salaries, tax withholdings, and benefits are processed correctly every pay period. Clients of such providers usually rely on ISAE 3402 reports to verify that internal controls around these critical processes are effective and compliant with financial audit standards.

Beyond payroll, ISAE 3402 can also apply to other services, such as fund administration, transaction processing, accounting outsourcing, or even warehouse management - where errors could have a significant impact on a client’s financial statements. By undergoing an ISAE 3402 assessment, organizations demonstrate transparency, reliability, and a strong control environment, giving clients the confidence that their financial data is in safe hands.

While ISAE 3402 focuses on financial processes, ISAE 3000 reports - often linked to SOC 2 standards - provide assurance over non-financial areas, such as data privacy, cybersecurity, and operational resilience. These reports are especially relevant in the context of modern regulations, where organizations must demonstrate that their controls not only exist but are operating effectively over time.

ISAE 3000 assessments can cover a wide range of non-financial criteria from ESG, DORA, GDPR, SOC2 5TSC (confidentiality, security, privacy, availability, and process integrity) to any other topic as considered relevant to a reader. For example, a company handling sensitive customer data can use an ISAE 3000 report to show clients and regulators that its data processing practices meet rigorous compliance standards.

Moreover, ISAE 3000 reports are flexible: they can be tailored to specific regulations or control frameworks, providing a targeted assurance that a company’s practices align with both industry standards and regulatory expectations.

ISAE reports come in two main types, each serving a different purpose:

Type 1 reports
Type 1 reports assess whether controls are appropriately designed and implemented at a specific point in time. They are often used as a starting point for organizations seeking assurance for the first time, providing a snapshot of their control environment.

Type 2 reports
Type 2 reports go further by evaluating whether these controls operate effectively over a period of time, typically covering several months. This ongoing validation offers clients and regulators confidence that controls are not only well-designed but consistently applied.

Apart from a Type 1 and Type 2 report, KPMG can also perform a diagnostic review. This initial assessment helps identify gaps in controls, assess readiness, and ensure that all relevant processes are properly documented and operating as intended. By performing walkthroughs and testing key controls, a diagnostic review provides a clear roadmap for achieving full compliance, helping organizations address issues proactively and gain confidence ahead of the formal ISAE engagement.

For many organizations, the journey begins with a readiness assessment, followed by a Type 1 assessment, and ultimately a Type 2 report once the controls have been operating for a period of time. This staged approach helps organizations progressively strengthen their control environment and demonstrate maturity in risk management.