Employee Benefit Plan Audit Quality Center

EBPAQC Auditor Communications: Best Practices and Common Pitfalls Live Forum

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EBPAQC Live Forum Auditor Communications: Best Practices and Common Pitfalls

November 10, 2010

Employee Benefit Plan Audit Quality Center

Marilee LauMarilee Lau CPA

Carl KampelEllin and Tucker, Chartered

Bob LavenbergBDO USA, LLP

Debbie SmithGrant Thornton LLP

Panelists

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CPE Credit For Participating

Must have registered for CPE credit prior to this live forum• CPE Credit Approval Form posted on webinar

instruction siteListen for announcement of 4 CPE codes (7 digits: ALL_ _ _ _ ) and 4 polling questions during the live forumRecord CPE Codes on CPE Credit Approval Form (no need to record polling questions)Return completed form (by fax or mail) to AICPA Service Center for record of attendanceKeep a copy of completed CPE Credit Approval Form for your records

Employee Benefit Plan Audit Quality Center

Bob Lavenberg, CPA

BDO USA, LLPChair

EBPAQC Executive Committee

Introduction

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Objectives

Present best practices tips and common deficiencies related to:• Engagement Letters• Management Representation Letters

Provide an overview of SAS 114 and SAS 115 Communications

Discuss various example control deficiencies under different scenarios

Employee Benefit Plan Audit Quality Center

Marilee Lau,

CPA

Engagement Letters

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Engagement Letters

Establish an understanding with the client in accordance with AU 311

Document the contractual duties agreed to by the auditor and the client

Explain the auditor’s and the client’s responsibilities

Explain the nature of services to be rendered by the auditor and establish that financial statements are the responsibility of the client

Helps avoid misunderstandings with the client

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Common Errors

Letter not properly addressed

Letter not sent or obtained before work commences

Scope of audit incorrect

Type of plan is incorrect

Schedule names or inclusion is incorrect

Trustee/custodian not properly identified

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Common Errors, Continued

Form 5500/electronic filing not addressed

Non-attest services not addressed

Heading on page 2-6 not changed from prior client template

Information in ( ) not addressed

Tailoring for specific situations (e.g., SEC 11-Ks, outsourcing, use of experts, non CPAs)

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Debbie Smith, CPA

PartnerGrant Thornton LLP

Management Representation Letters

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Management Representation Letters

Auditor required to obtain written representations from management as part of a financial statement audit performed in accordance with GAAS

Representations are audit evidence, but are not a substitute for application of auditing procedures necessary to express an opinion

AU 333 lists specific representations that should be obtained

If management refuses to furnish written representations that auditor believes are necessary it may constitute a scope limitation

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Common Errors

Poor tailoring- not specific to plan type, scope of audit (full vs. limited), etc.

Contradictory- with other audit evidence and/or financial statement disclosures

Doesn’t cover all financial statements and periods covered by auditor’s report

Incorrectly dated- should be dated as of the date of the auditor’s report

Not signed by appropriate individuals (e.g., those responsible for financial and operating matters)

Employee Benefit Plan Audit Quality Center

Carl Kampel, CPA

Partner

Ellin and Tucker, Chartered

Overview of SAS 114 and SAS 115 Communications

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Overview

Statement on Auditing Standards No. 114, The Auditor’s Communication With Those Charged With

Governance (AU 380)

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Beginning of the Audit

The auditor’s responsibility under generally accepted auditing standards (GAAS)• Responsible for expressing an opinion on the

financial statements or explanation of limitations of the auditors ability to express an opinion

• The planned scope and timing of the audit

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Beginning of the Audit, Continued

Approach to internal control • Service provider controls• User (plan sponsor) controls

Risk assessment

Division of responsibilities• Financial statements and notes – plan sponsor• Auditor’s report – auditor

Materiality

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End Of The Audit

Qualitative aspects of accounting policies, practices, estimates and disclosures

Any serious difficulties in completing the audit or disputes with management• Unavailability of expected information • Restrictions imposed by management

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End Of The Audit, Continued

Qualitative aspects of accounting policies, practices, estimates and disclosures

Any serious difficulties in completing the audit or disputes with management• Unavailability of expected information • Restrictions imposed by management

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Overview

Statement on Auditing Standards

No. 115, Communicating Internal Control Related Matters Identified in an Audit

(AU 325)

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Communications

Auditors are required to obtain an understanding of internal control and may become aware of deficiencies, which will be communicated to those charged with governance

Deficiencies in internal control – A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis

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Form of Communications

With those charged with governance

Internal control related matters

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Required Communications

Significant deficiencies – a significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance

Material weaknesses – a material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Plan’s financial statements will not be prevented, or detected and corrected on a timely basis

Employee Benefit Plan Audit Quality Center

Example Control Deficiency # 1

Plan sponsor does not have the ability to prepare or review the financial statements

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Example Control Deficiency # 2

Plan sponsor has outsourced the administration functions of the plan with no oversight by management

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Example Control Deficiency # 3

SAS No. 70 report with significant testing exceptions that are not mitigated by controls at the plan sponsor

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Example Control Deficiency # 4

Lack of controls when changing service providers and ensuring proper information has been transferred to the new service provider

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Example Control Deficiency # 5

For plan mergers, the recording of net appreciation and transfer amounts may be incorrect due to timing of the accounting for the merger

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Example Control Deficiency # 6

Improper valuation of investments, especially alternative investments

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Example Control Deficiency # 7

Plan management does not have the ability (methodology and process) to determine reasonableness of actuarial assumptions

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Example Control Deficiency # 8

IBNR is not accurately calculated or recorded

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Example Control Deficiency # 9

Benefit payments are not calculated in accordance with plan documents

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Example Control Deficiency # 10

Lack of performance of tax compliance testing such as discrimination testing or lack of taking appropriate corrective action when errors are found in such testing and other operational errors

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Example Control Deficiency # 11

Prohibited transactions such as timeliness of employee contributions or improper transactions with parties-in-interest and fiduciaries

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Resources

EBPAQC Plan Advisory, Understanding Auditor Communications

EBPAQC SAS No. 115 Tools and Resources:• Examples of Internal Control Communications for

Employee Benefit Plans• Summary of SAS No. 115 Requirements• SAS No. 115 Frequently Asked Questions

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Question and Answer Session

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Coming Events Mark Your Calendars!

Upcoming EBPAQC Live Forum Webinars:• Designated Partner Live Forum—2011, January 19, 2011,

1:00-3:00 pm ET• Managers & Supervisors Live Forum—2011, January 26,

2011, 1:00-3:00 pm ET• 11-K Audits Live Forum, March 16, 2011, 1:00-3:00 pm ET

Upcoming AICPA Conferences:• December 13-14, 2010, EBP Accounting, Auditing and

Regulatory Update, Omni Shoreham Hotel, Washington, DC • May 2-4 2011, National Conference on Employee Benefit

Plans, Aria, Las Vegas, NV

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Wrap Up

Consider using the

EBPAQC

Member-to-Member Forum

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