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1 2012 Employee Benefit Plan Audit Conference Basic Audit Workshop Maryland Association of CPAs Columbia, Maryland May 8, 2012 2 Discussion Leaders Marcus Aron Marilee P. Lau
1
2012
Employee Benefit Plan Audit Conference
Basic Audit Workshop
Maryland Association of CPAsColumbia, Maryland
May 8, 2012
2
Discussion Leaders
Marcus AronMarilee P. Lau
3
Overviewand
Introduction
4
Workshop
• ERISA and Related Regulations• Planning, Supervision and Internal Control• Contributions and Participant Data• Benefit Payments, Claims and Benefit
Obligations• Investments and Investment Income• Audit Completion• Reporting and Disclosure Requirements• Party-in-interest, Prohibited Transactions
and Plan Tax Status
5
Workshop
• Interactive with participants• Basic Regulatory, Accounting,
Auditing and Reporting fundamentals • Participant questions, observations
and real life examples encouraged
6
Who Is Here?
• External Auditors• Internal Auditors• Plan Administrators/sponsors• Attorneys• Tax Professionals• Third Party Administrators• Regulators—IRS/DOL
7
Plan Auditors
• Regional Firm• Local Firm• Partners• Managers• Staff
8
Plan Audits
• How many plans does your firm audit?A.< 5B.<10C.<25D.<50E.<100
9
Types of Audits
• Defined Benefit Plans• Defined Contribution Plans401(k)/403(b)Profit SharingESOPS
• Health and Welfare Plans• Full Scope Audits11K filings
• Limited Scope Audits
10
ERISA and Related Regulations
Audit GuideChapter 1 and Appendix A
11
Learning ObjectivesUpon completion you should have an understanding of the following:• How a benefit plan is defined under
ERISA, GAAP and the IRS• The design and functioning of various
types of benefit plans• When an audit is required• The role of the various parties involved
in the operation of the benefit plan
12
ERISA
Employee Retirement Income Security Act (ERISA) of 1974
Governs operation, administration & annual reporting for pension & welfare plans
ERISA contains four Titles– General DOL responsibilities– Tax Law requirements– Specific jurisdiction and enforcement
procedures– Multiemployer plan matters
13
ERISA is Administered By:
Department of Labor Internal Revenue Service Pension Benefit Guarantee Corp.
14
Provisions of ERISA
Applies to most employee benefit plans of employers doing interstate commerce
Protects interests of participants and beneficiaries
Establishes an effective mechanism to detect and deter abusive practices
15
Types of Plans
Defined Benefit Retirement PlansDefined Contribution Retirement
PlansHealth and Welfare Plans
16
Defined Benefit Plans
Promises a future benefit that is stated in the plan document or can be calculated according to a formula provided in the plan document• Traditional Defined Benefit Plan• Cash Balance Plan
17
Defined Contribution Plans
Requires an individual account for each participant and provides benefits based on amounts contributed, investment experience, allocated expenses and allocated forfeitures• Profit sharing plan• Money purchase plan• Cash or deferred arrangement—401(k) • Tax Savings Annuity Plans—403(b)• Employee stock ownership plan—ESOP
18
Health and Welfare Plans
Covers• Medical, dental, vision• Short and Long term disability• Prescription drugs• HSA, FSA, Dependent Care• Vacations, Tuition, Legal
Can be a DB plan or a DC plan
19
General Reporting Requirements
• Requires annual reporting via the Form 5500
• Plans with 100 or more participants may require a financial statement audit
• Plans with under 100 may require a financial statement audit if certain, waiver conditions are not met
• Certain financial entities also file directly with the DOL
20
Plans Requiring a Financial Statement Audit
• ERISA section 103(a)(3)(A) contains audit requirement
• Plans filing the Form 5500 as a “large plan” generally require an audit
• Some exceptions to the audit requirement do exist
• Some small pension plans may be required to have an audit
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Pension Benefit Plans(Filing Requirements)
• Plans with 100 or more participants (at the beginning of the plan year) file the Form 5500 for “large plans”
• Plans with less than 100 participants (at the beginning of the plan year) file the Form 5500 for “small plans”
22
Pension Benefit Plans(Audit Requirements)
• Large plan filers are required to have an audit
• Small plan filers may be exempt from the audit requirement
23
Small Pension Plan Security Regulation
• Vulnerability of small plans to theft & fraud• Small plans hold over $500 billion in assets• Goals:
– Improve security of pension assets– Increase the accountability of those handling
assets– Encourage small employers to sponsor plans
• Effective for plan years beginning after April 17, 2001
• Rule adds disclosure & fidelity bonding requirements to certain small plans
24
What Does This Mean?
• Only applies to pension plans with less than 100 Participants at the beginning of the year
• Includes a two part test• If the plan fails either part an audit
is required• The two tests are financial and
disclosure
25
Welfare Benefit Plans(Exemptions From Filing/Audit)
• Plans with less than 100 participants at beginning of the plan year, and–pay benefits solely from sponsor assets,
or–provide benefits through insurance
contracts, or– combination of two items above, and
forward any employee contributions within three months of receipt
26
Welfare Benefit Plans(Exemptions From Audit)
Plans with 100 or more participants at the beginning of the plan year, and
• benefits paid solely from sponsor assets• benefits provided exclusively through
insurance contracts• benefits paid partly from sponsor assets
and partly through insurance contracts
27
Cafeteria Arrangements
• Generally are not required to be audited unless they also provide welfare benefits
• PWBA Technical Release 92-1–Section 125 (Cafeteria) Plans may
not need an audit if assets are not held in trust
28
Direct Filing Entities (DFEs)• Entities required to file
–Master Trust Investment Accounts (MTIAs)
• Entities that may elect to file–Pooled Separate Accounts (PSAs)–Common Collective Trusts (CCTs)–103-12 Investment Entities (103-12IEs)–Group Insurance Arrangements (GIAs)
29
DFEs Electing Not to File• Affects how participating plans file
– If PSA or CCT does not file as DFE, plan may not use limited reporting on Schedule H
– If GIA does not file, each plan participating in GIA must make its own filing
– If 103-12 does not file, participating plans are not afforded limited reporting and plan audit relief
30
Helpful “Links”
• EBSA website– http://www.dol.gov/ebsa/
• FAQs about pensions plans and ERISA– http://www.dol.gov/ebsa/faqs/faq_compliance
_pension.html• FAQs on the Small Pension Plan Audit
Waiver Regulation– http://www.dol.gov/ebsa/faqs/faq_auditwaiver
.html
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Helpful “Links”
• FAQs about Abandoned Plans–http://www.dol.gov/ebsa/faqs/faq-
abplanreg.html• FAQs about the DFVC Program
–http://www.dol.gov/ebsa/faqs/faq_DFVC.html
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Common Audit Deficiencies
• Participant Data• Investments• Contributions• Benefit Payments• Related Party/Prohibited
Transactions• Reporting and Disclosures
33
Government Entities with Plan Oversight
For Enforcement of IRC & ERISA Pension Provisions
Treasury Department(writes regulations, etc.)
Internal Revenue Service(enforcement of laws)
Employee Plans/ExemptOrganization (EP/EO)
U.S. DOL
Employee Benefit Security
Administration(EBSA)
Field Examiners(auditors)
Plan Reviewers(determination
letters)
SEC/PCAOB Plans with
Employer Securities Form 11-K filings
PBGC (definedbenefit plans only)
34
Typical Players in U.S. Retirement Plans
EmployerAttorneyConsultant
Plan Design and Plan Document
InvestmentAdvisor
Trustee orCustodian w/Trust AssetInformation
Finance
Controller
InternalAudit Benefits Payroll
Plan’s Financial Information and/or GL
IndependentAuditor
Actuary(DB/HW Plans)
Third PartyAdministration
(All Plans)
InvestmentAdvisor
Plan Administratoror Administrative
Committee
DOL
ParticipantsParticipantStatements, SAR
Form 5500
SupplementalSchedules
Actuarial Report
HR
GL and Management Reports
Managementand Participant
Reports
Audited FinancialStatements
Employee and Participant Data
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Authoritative Literature• FASB Accounting Standards Codification
(FASB ASC)• Statements on Auditing Standards
(SAS-AU)• Audit & Accounting Guide for Employee
Benefit Plans• Audit Risk Alert for Employee Benefit
Plans Industry Developments• Employee Benefits Security
Administration (EBSA)• PCAOB/SEC
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Review Questions
1.What is the difference between a defined benefit plan and a defined contribution plan?
2.Name three common types of defined contribution plans?
3.When would an audit generally be triggered for a DC plan?
37
Questions????
38
Planning, Risk Assessment and Internal Control
Audit Guide Chapters 5 and 6
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Learning ObjectivesUpon completion you should have an understanding of the following:• Issues related to client acceptance• How to determine the scope of the audit• How to gain an understanding of a
plan’s internal controls• Assessing engagement fraud and overall
audit risk assessment• Development of a written audit program
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Planning and Supervision
Determination of Audit Scope• Is this an ERISA covered
plan?• How many participants at
the beginning of plan year?• < than 100 participants - no
audit is necessary• Regulatory exemptions from
audit
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Initial or First Year Audits• Predecessor Auditors
– AU 315 requirements• Communication• Review work papers
• Opening balances– What procedures need to be performed– Participant data
• Who are the Service Providers– Trustee– Record Keeper– Actuary
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What Type of Audit to Perform?
Must apply all applicable GAAS procedures
Basis of Accounting—accrual or modified cash
Full Scope Audit– Must audit investment information
Limited Scope Audit– Investment information not audited– Investments certified by a qualified Trustee– DOL Regulation 2520.103-8
Form 5500 and Supplemental Schedules
43
Form 5500 Schedules
Required schedules for audit opinion• Schedule H• Schedule G• Supplemental schedules
– 4(a) Delinquent Participant Contributions– 4(i) Assets Held– 4(j) 5% Reportable Transactions
Other schedules• Schedules A, C, D and SB/MB
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Professional Standards
• Professional Standards Relating to Audit Planning–First Standard of Field Work–Statements on Auditing Standards
• AU 311—Planning and Supervision• AU 380—Communications with those
charged with Governance– Needs to be done at the beginning of the
engagement
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Engagement Letter• Engagement letter is part of your
required communication with the those charged with governance—AU 380–Name of Plan, financial
statements/schedules–Audit Scope –Timing of audit work–5500 preparation–Fees
• See example letter in the Audit Guide
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Engagement LetterAdditional Matters
• Whether due to the complex or subjective nature of the subject matter, the audit may require the special skills and knowledge of a specialist (i.e. use of actuaries for DB and H&W plans or valuation professionals for investments)
• Non-attest services--assistance in drafting the Plan’s financial statements (including supplemental schedules) and related footnotes
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Audit Risk
• Assess audit risk• Create an audit staffing plan• Create a written audit program• Audit procedures
–Nature–Timing–Extent
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Internal Control
• Professional Standards• Standards of Field Work• Statements on Auditing Standards
–Numerous statements on the control environment• Such as: AU 314, AU 316, AU 318, AU
324, AU 325, AU 380 and PCAOB #5
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GAAS Requirement
• Auditor must understand each of the five components of internal control sufficient to plan the audit–Obtain via tests of design AND–Determining whether they have been
placed in operation• Required for ALL audits even if
control risk is planned at maximum
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Entity’s Internal Control Structure
• Obtain an understanding of:–Control environment–Risk assessment– Information and Communication–Control Activities–Monitoring
• Document the understanding of the internal control structure
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Entity’s Internal Control Structure
• Assessing Control Risk–Occurrence or Existence–Rights and obligations –Completeness–Accuracy or Valuation and Allocation–Cut-off–Classification and Understandability
• Document Basis for Conclusions
52
Risk Assessment
• Internal and External Events• Change in Circumstances• Understanding How Management
Identifies Risks• Understanding Management’s
Assertions
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Risk Assessment• SASs provide guidance concerning the
auditor’s assessment of risk of material misstatement whether caused by error or fraud in a financial statement audit
• Auditors need to design and perform audit procedures responsive to assessment of risks
• Requires an in-depth understanding of the entity including its internal control
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Risk Assessment• A rigorous assessment of risks of
material misstatement is required• Evaluation of and testing of internal
controls at the entity level• If risks are identified during planning
meeting, the audit team should identify the controls related to the risks to determine what additional audit procedures will be performed to address the risks
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Risk Assessment
• Consideration of management override will likely necessitate the performance of some substantive procedures
• Auditors can default to maximum control risk without documenting the basis for that assessment
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Overview of AU 325Communicating Internal Control Related
Matters Identified in An Audit
• Defines the terms deficiency in internal control, significant deficiency and material weakness
• Provides guidance on evaluating the severity of deficiencies in internal control identified in an audit of financial statements
• Requires the auditor to communicate, in writing, to management and those charged with governance significant deficiencies and material weaknesses identified in an audit
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Definitions
• 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 entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
• A significant deficient 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.
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Evaluating Deficiencies- Severity Evaluation
• Severity of deficiency depends on– Magnitude of the potential misstatement
resulting from the deficiency or deficiencies– Whether there is a reasonable possibility that
the entity’s controls will fail to prevent, or detect and correct a misstatement of an account balance of disclosure
• Does not depend on whether a misstatement actually occurred
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Impact of Service Organizations on Plan’s Internal Control
• Who Has Control of the assets and participant accounts?
• Where are participant and investment records?–Bank– Insurance company– Investment Advisor–Recordkeeper
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Service Organizations• SAS 70 superseded by two standards• SSAE No. 16, Reporting on Controls at a
Service Organization– Only contains guidance for service auditors– Three reports, SOC 1, SOC 2 and SOC 3– Effective for service auditor’s reports for periods
ending on or after June 15, 2011• Clarified SAS, Audit Considerations Related
to an Entity Using a Service Organization– Only for user auditors– Effective for audits of financial statements
for periods ending on or after December 15, 2012 (same as clarified standards)
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SOC Reports
• SCO 1 Reports– Restricted use report– Type 1 or type 2– Purpose is for reports on controls for financial statement
audits• SCO 2 Reports
– Generally a restricted use report– Type 1 or type 2– Purpose is for reports on controls related to compliance
or operations• SCO 3 Reports
– General use report– Public Seal– Purpose is for reports on controls related to compliance
or operations
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Service Organization Control Reports
SOC 1 Reports
• SSAE No. 16, Reporting on Controls at a Service Organization
• User auditors continue to use guidance in AU 324 until new guidance is effective
• Audit Tool “Documentation of Use of a Type 2 Service Auditor’s Report in an Employee Benefit Plan Financial Statement Audit”
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SOC 1 Reports
• What is similar– Type 1 and Type 2 reports– Service auditor obtains the same level of evidence
and issues examination level opinion– Restricted to user entities that are customers of the
service organization and user auditors– Primarily an auditor to auditor communication– Provides user auditors with information about
controls at a service organization that are relevant to the user entities’ financial statements
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Consideration of Fraud
• Requires the auditor to assess the risk of material misstatement due to fraud and provides categories of risk factors
• Document in the workpapers:–Risk factors–Response to those risk factors–Other considerations
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Requirements for AU 316
• Description of Fraud–Characteristics
• Incentive or pressures• Opportunity• Rationalization or Attitude
–Misstatement• Fraudulent reporting• Misappropriation of assets
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AU 316
• Importance of exercising professional skepticism
• Discussion among the engagement personnel regarding risks—brainstorming session
• Expanded inquiries regarding fraud among management and audit committees
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AU 316
• Generally requires more substantive auditing procedures and documentation– Risk of management override– Analytical procedures
• Presumption that improper revenue recognition is a fraud risk
• Fraud risk for a benefit plan– Misappropriation of assets– Hard to value investments– Fraudulent payment of claims and benefits
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Have You Ever Discovered Fraud in an Employee Benefit
Plan?
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Questions????
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Contributions and Participant Data
Audit GuideChapters 8 & 10
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Learning Objectives
Upon completion you should:Be able to plan and perform appropriate audit procedures with respect to participant data and contributions
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Contributions and Participant Data
Audit Objectives-Contributions–Whether the amounts received or due
the plan have been determined, recorded and disclosed in the plan’s financial statements in conformity with the plan document and GAAP
–Whether appropriate allowance has been made for uncollectible plan contributions receivable
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Contributions and Participant Data
Audit Objectives for Participant Data and Allocations– Whether covered employees have been properly
recorded in eligibility records and contribution reports – Accurate participant data for eligible employees has
been supplied to the plan’s recordkeeper and, if applicable to the plan’s actuary.
– Whether net assets have been properly allocated to the individual participant’s account
– Whether the sum of all participant accounts reconciles with the total net assets available for plan benefits
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Contributions
Defined Contribution Plan– 403(b) plans have additional contributions
• 15 years of service have an additional deferral limit• Allowable contributions for terminated employees for 5
years following severance
Defined Benefit PlansHealth and Welfare PlansTransfers and Merged Plans
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Auditing ConsiderationsDefined Contribution Plan
Participant eligibility and data integrity Participant enrollment (including automatic
enrollment) Employee deferrals, after-tax and catch up
contributions– Remittance of employee contributions
Employer contributions and receivables– Matching and discretionary contributions– Remittance of employer contributions
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DC Audit Procedures Obtain a schedule of contributions
received and receivable Reconcile contributions received from the
schedule to the plan’s payroll records, recordkeeper report and trustee report
Determine that employee contributions have been remitted timely to the trust
Obtain roll forward of the forfeiture account and determine whether forfeitures appropriately used based upon the plan document
Reconcile participant balances to trust assets
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Eligibility Testwork
• Determine what participant data must be tested, by reviewing plan document
• Select a sample of employees from payroll and recordkeeper
• Agree census data to employee’s personnel file, recordkeeping detail and payroll register
• Verify that eligibility is in accordance with the plan document and that the proper eligible compensation has been used
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DC Contribution Testwork
Test payroll data for a selected number of participants by agreeing to earnings records, time cards and authorization
Recalculate participant's deferral amount Recalculate matching contribution Determine that employee contributions have not
exceeded annual limits Recalculate income allocations for a sample of
participants Consider confirming investment elections and
salary deferral % directly with participants
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Other Considerations
Rollovers from other qualified plans
Catch up contributionsRoth ContributionsUse of forfeitures
– Employer contributions– Pay administrative expense– Reallocate to participants
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Rollover Contributions
Review plan document to determine that the rollover was made in accordance with the plan provisions
Test asset transfer from the former trustee (custodian) to the current trustee including verification of the participant-directed investments, if applicable
Review participant record keeping account to determine that the rollover amount is properly reflected
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Catch Up Contributions
$5,500 limit for 2011 and 2012Participant must be making
contributions to the planAge 50 or older by the end of the
calendar year
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Roth Contributions Plan document needs to be amended to
allow for Roth 401(k) contributions Contributions are subject to the same
limits as traditional contributions Changes in the law allow more
individual to contribute to the a Roth 401 (k)
There is no tax deduction for contributions to a Roth 401(k) as contributions are after tax
Income needs to be tracked separately
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Defined Benefit Plan Contributions
Determine that contributions are consistent with the plan’s funding policy and are properly authorized
Review the amount contributed and, if applicable, determine that it meets the requirements of the funding standard
Determine if receivables are properly recorded
Review the Schedule SB/MB of the Form 5500 and reconcile if necessary
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DB Participant Data Testwork
Complete similar procedures as for a defined contribution plan related to census data
Trace information from payroll records to the information provided to the plan’s actuary
Confirm information provided to the plan’s actuary for eligible compensation and census data
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Health & Welfare Plans
Determine that the employer contributions are consistent with the plan’s funding policy. (Usually pay as you go)
Insure that all contributions are reported for the plan regardless if deposited to the trust
Review the contribution provisions of the plan document for employees and test compliance
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HW Contributions Eligibility and contribution testwork
– Select a sample of employees from payroll and claims processor
– If a paper trail is not available, consider sending positive confirmations to a sample of participants
– Verify that eligibility is in accordance with the plan document
– Agree census data to employee’s personnel file, detail and payroll register
– Recalculate participant's contribution amount for benefits selected
– Test employer contributions to invoices (premiums and claims)
– Consider confirmations with service providers– Test contributions receivable– Verify payroll records are accurate
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Merged Plans
Reconcile net assets available per the trustee to the recordkeeper immediately prior and subsequent to the merger
For Defined Contribution plans compare selected participant accounts immediately prior to and subsequent to the merger to determine that accounts were transferred properly
Test transfer of assets from the former trustee to the current trustee
For Defined Benefit plans test selected employee census data and
Review actuarial report to determine that the effect of the merger on benefit obligations is properly accounted for and disclosed
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Benefit Paymentsand
Plan Obligations
Audit Guide Chapters 9 and 10
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Learning Objectives
• Benefit Payments—As a result you should be able to plan and perform appropriate audit procedures with respect to benefit payments
• Benefit Obligations—As a result you should be able to plan and perform appropriate audit procedures with respect to plan benefit obligations
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Benefit Payments
Audit Objectives–Payments are in accordance with plan
documents and other supporting documentation
–Whether the payments are made to or on behalf of persons entitled to them and only to such persons
–Whether transactions are recorded in the proper account, amount and period
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Types of Distributions
Termination/cash-out/rollover– Participants can elect to take their account balance
when they terminate employment with the Company– Plan sponsors can force out balances for terminated
participants if the account balance is < $1,000 or force to an IRA if < $5000)
– Participants can take their balance in cash (which would be taxable) or roll the amount into another qualified plan such as an IRA or their new employer’s plan.
Retirement– Participants may take their account balance when they
reach retirement age
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Types of Benefit Payments H&W benefit payments
–Claims paid directly to participants or paid directly to health care provider
Loans– Participants may borrow from their
account—amounts not subject to income tax if repaid
Hardship Withdrawal– If certain financial hardship provisions met,
can take a withdrawal while still employed but amount subject to income tax
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Types of Benefit Payments In Service Withdrawal
– After attaining 59 1/2, participants can request a distribution from their account while still employed. Income tax will be triggered unless the amounts are rolled over into an IRA
QDRO (Qualified Domestic Relations Order)– A judgment, decree or order that creates or
recognizes an alternate payee’s (such as former spouse) right to receive all or a portion of a participant’s account balance or retirement benefit
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VestingParticipant’s right to company contributions that have accrued in their individual account. “Cliff vesting” provides that company contributions
will be fully vested only after a specific amount of time and that employees who leave before this happens will not be entitled to any of the company contributions.
In plans with “graduated vesting,” vesting occurs in specified increments.
Generally vesting is graduated and is for 5 years or less
Safe Harbor Plans—fully vested at time of contribution
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Audit Procedures for Benefit Payments
Obtain a schedule of distributions, claim payments/premiums and withdrawals
Reconcile to trail balance and trustee statements
Consider analytical procedures
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Audit ProceduresFrom the schedule of distributions and
withdrawals• Select a sample which includes all types of
benefit payments and perform the following– Examine benefit election form and support for
qualifying event (such as termination notice)– Determine that the participant was eligible for the
type of distribution (such as hire date and term date per the employees file)
– Determine proper amount was forfeited, if applicable– Recalculate the distribution based on plan provisions– Determine that the appropriate tax has been withheld– For a H&W plan determine that the claim is for
covered services and applicable deductibles/limits have been applied
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Audit Procedures
Trace payment to cash disbursement/trust records Determine that employee has been removed from
payroll records and participant listings Agree distribution amount to participant’s statement Obtain check copy and agree signature to employee’s
HR file or send confirmation or examine wire transfer if done electronically
For hardship withdrawals—examine evidence supporting the need for hardship and determine if salary deferrals have be stopped
For death benefits—obtain death certificate For QDRO—obtain court order
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Other Procedures
Evaluate procedures for determining continued eligibility for benefits
Evaluate procedures for investigating long outstanding benefit checks
Compare participant payments with individual account records
Payments made by third party administrators may require a SOC 1 Type 2 report
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Heath & Welfare Plans Follow guidance in FASB ASC 965 Read relevant provisions of the plan document
and underlying contracts Review and test the accumulated eligibility
credits and total benefit obligations Test premiums paid to insurance companies
(Schedule A of Form 5500) Test the obligation for claims payable and
IBNR Test individual claims for eligibility, nature of
the claim and documentary support• Other Liabilities
– Excess Contributions– Payables to third parties
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Participant Loan Procedures
Obtain a listing of participant loans from the recordkeeper or trustee/custodian
Listing should include date of loan, original amount of loan, interest rate, due date, payments and ending loan balance
Agree to trust report and financial statements
101
Participant Loan Procedures
Select a sample of new loans Agree original loan amount to loan agreement or other
authorization Agree year end balance to loan amortization schedule Verify that the loan amount did not exceed 50% of the
participant’s account balance or $50,000 (less any outstanding loans), whichever is less, when loan was granted
Verify that the loan amortization period does not exceed the number years as indicated in the plan document
Agree distribution to participant’s statement Agree loan repayment amount to payroll deduction
102
Participant Loan Procedures
Additionally Determine if loans are current at year end Determine how delinquent loans and loans for
terminated employees are handled Determine if “deemed distributions” are
accounted for appropriately (i.e. receivable or a distribution for GAAP purposes)
Determine that loans receivable are included on the “Schedule Assets Held” as an investment
103
Participant Loans
Loan in default—if participant is not making the specified repayments through payroll (may occur if participant terminates, leave of absence, etc.)
Loan may become a deemed distribution if participant defaults and does not pay back the loan.
104
Plan Benefit ObligationsAudit Procedures
Utilize procedures for auditing participant data Check the professional qualifications and
competence of the plan actuary—AU 336, Using the work of a Specialist
Understand the actuary’s work Inquire about the actuary’s objectivity and
independence Test reliability and completeness of census data Send confirmation to actuary regarding census
data used and independence
105
Health and Welfare Plans
Determine that IBNR and benefits payable has been appropriately calculated–Obtain lag reports–Review assumptions if done by third
party such as the claims processor Insure that premiums payable are
included in obligation not statement of changes
106
Questions????
107
Investments andRelated Income
Audit GuideChapter 7
108
Learning Objectives
As a result you should be able to understand the various types of investments in employee benefit plans and to plan and perform appropriate audit procedures with respect to investments and related income in employee benefit plans.
109
Full Scope Vs. Limited Scope
That’s Easy! –In a full scope audit you audit the
investments –In a limited scope audit you don’t
audit the investments–So what’s so difficult?
109
110
Limited Scope Definition Summary of DOL Regulations 2520.103
– Where an audit is required, the financial statements accompanying the annual Form 5500 must be in accordance with GAAP
– Provides for an exclusion from the audit of investments (valuation and existence) and plan-level investment activity, if qualifying institution holding the assets certifies to the accuracy and completeness of the information
Qualifying Institutions Bank or similar institution (e.g., a trust company) Insurance carrier Regulated and supervised and subject to periodic examination by a State or Federal agency
110
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Limited Scope Definition
Summary of DOL Regulations 2520.103– Provides sample certification language to be used by the
certifying institution The XYZ Bank (Insurance Carrier) hereby certifies
that the foregoing statement furnished pursuant to 29 CFR 2520.103-5(c) is complete and accurate.
– Indicates that certification extends to “ordinary business records” of the certifying institution
– The certification must be signed by a person authorized to represent the insurance carrier or bank trust department
111
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Why the Limited Scope Audit Made Sense in 1974
ERISA Regulations – Pre-ERISA environment: no protection for participants or for assets– ERISA designed to ensure that participants are protected and that the
assets exist and values are accurate Financial institutions
– Highly regulated organizations– ERISA required plan assets to be held in a trust or an insurance contract– Holding assets in a trustee’s vault (versus the plan administrator’s safe)
provided more safeguards over the assets and protected the existence– Trustee/custodians could provide a valuation independent of the plan
sponsor Fair Value of plan assets were commonly part of trustee or
custodian's “ordinary business records”– Plan investments had readily determinable market values– Plan & trust structures were less complex
SAS 70 Reports did not exist—financial institutions did not want each plan’s auditors coming in to review their internal controls
Negotiated between the DOL and the financial institutions
112
113
Professional GuidanceRegarding Investments
FASB ASC 820, Fair value Measurements and Disclosure
FASB ASC 960-325, Plan Accounting Defined Benefit Plans-Investments
FASB ASC 962-325, Plan Accounting Defined Contribution Plans-Investments
FASB ASC 965-325, Plan Accounting Health and Welfare Benefit Plans--Investments
113
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Audit Objectives
Whether all investments are recorded and exist
Whether investments are owned by the plan, free of liens, etc.
Whether investment principal and income transactions are properly valued in conformity with GAAP
Whether investment information is properly presented and disclosed including leveling
Whether investment transactions are initiated in accordance with the established investment policies
Whether amounts are properly allocated114
115
Full Scope Audits
Assets held by a Third Party Are the investments recorded and do they
exist (Confirm in writing) Are assets owned by the plan Are assets reconciled to trustee
reports/recordkeeper/investment managers
Proper recording principal and income transactions
Proper presentation and disclosure of investment information–Does plan have hard to value investments–Does plan engage in securities lending
115
116
Full Scope Audits
Understand the plan’s investment strategy and valuation mythologies
Analyze changes in investments Determine existence and ownership
of assets Review and inquire:
–Plan minutes–Agreements for evidence of liens,
pledges and security interests–Investment manager reports
116
117
Investments Full Scope Audits
What Is Different From a Limited Scope Audit? Confirm existence directly with holder of assets
(more than one custodian may hold assets) Year-end market value testing and leveling Purchases and sales testing Investment income testing
– Interest & dividends– Realized gains and losses– Unrealized gains and losses
117
118
For All Audits
Review footnotes and schedules–Proper classification by type of
investment–Proper description for method of
determining fair value – Issuer of investment is correct
Review Schedules A & D of Form 5500–Determine if investments are with an
insurance company–Determine if investment is a DFE
118
119
Fair Value Measurements and Disclosures
Are Management's Responsibility
For all audits Management needs to:• Establish an accounting and financial reporting process
for determining the fair value measurements and disclosures
• Select appropriate valuation measurements• Identify and adequately support any significant
assumptions used• Prepare the valuation• Ensure that the presentation and disclosure of fair value
measurements are in accordance with GAAP
119
120
Common Types of Plan Investments
• Common stocks • Mutual funds
• Common/collective trusts • Unallocated Insurance contracts
• Pooled separate accounts • US Government Securities
• Corporate bonds • Master trusts – holding any or all of these investment types
120
121
New investment vehicles provided higher returns and therefore higher risks for employee benefit plans
–Derivatives–Emerging Market Funds–Funds of Funds–Hedge Funds–Private Equity Debt–Structured Notes–Venture Capital LPs
New types of InvestmentsHarder to Value
121
122
Common and Collective Trusts--CCTs
Generally sponsored by a bank Similar to mutual funds but have no
“quoted” market value--use net asset value valuation—NAV—Level 2
Plan acquires units of participation that represent an undivided interest in the underlying assets of the fund
Purchase or redemption price of the units is based on the fair value of the underlying assets of the fund
Auditor concerned with ownership, existence, and valuation of the units of participation
122
123
CCTsAudit procedures
– Obtain and read copy of contract– Confirm directly with trustee the units of
participation held– Obtain a copy of most recent audited financial
statements of the fund– Obtain SOC-1 Type 2 Report
Issues—audited statements not as of the plan year end
Fair value presentation with adjustment to contract value for CCTs that are stable value funds
Must chose to select the use of NAV as a practical expedient for fair value
123
124
Contracts with Insurance Companies
Investment contracts vs. insurance contracts– In an insurance contract the risk is shifted to the
insurance company– Investment contracts reported at fair value except for
“fully benefit responsive” contracts of defined contribution plans which are reported at fair value with an adjustment to contract value
Deposit administration contracts (DA) Immediate participation guarantee
contracts (IPG)Separate and pooled separate contracts
124
125
Insurance ContractsAllocated vs. Unallocated
Allocated:• Funding instruments can be individual
insurance or annuity contracts.• The insurance company is legally
obligated to make all benefit payments for which it received the premiums.
• Allocated insurance contracts are not considered part of the assets of the plan
125
126
Insurance ContractsAllocated vs. Unallocated
Unallocated:• Funding instruments apply to any
arrangement under which employer contributions to the plan are held in an undivided fund until they are used to meet benefit payments as they come due or to purchase annuities for participants at retirement or termination
• Unallocated insurance contracts remain as part of the assets of the plan
126
127
Audit Procedures for Insurance Contracts
Obtain and read copy of the contract Confirm contributions or premiums made to the
fund or account during the year Determine reasonableness of the interest rate Determine that the annuity purchases were made
on the basis of stipulated contract rates Obtain and review most recent audited financial
statements—many times no financial statements Obtain SOC 1 type 2 report Fair value may equal contract value
127
128
Pooled Separate Accounts—PSA’s
• Generally sponsored by an insurance company
• Several plans participate in PSA’s• Similar to mutual funds but have no “quoted”
value—use NAV—Level 2 investments• Assets of the separate account are assets of
the insurance company but are not commingled with the insurance company’s general assets
• Purpose is to allow flexibility in the investment of plan’ funds
128
129
PSA’s
Audit procedures—similar to CCT’s– Obtain and read copy of contract– Confirm directly with insurance company the
units of participation held– Obtain a copy of the most recent audited
financial statements of the account– Obtain SOC 1 type 2 report
Issues– Many times no audited financial statements– Audited statements are not as of the plan year
end– Use of NAV as practical expedient for fair
value
129
130
Master Trusts A combined account for companies that sponsor
more than one employee benefit plan A bank ordinarily serves as trustee, or
custodian, and may have discretionary control over the assets
Each plan has an interest in the assets of the trust and ownership is represented by a record of proportionate dollar interest, by units of participation, or specific identification
Master trusts are not required to be audited under ERISA, however appropriate audit procedures apply to individual plans with assets invested in a master trust
Apply the same auditing procedures that you would when auditing investments
130
131
Hard to Value Investments
Hard to value investments definition is broad:
It’s all about how easy or difficult it is to corroborate the value of the investment
When evaluating hard to value investments-there are three key questions:
1. What does the plan hold—marketable or non-marketable securities?2. How are they held—directly or indirectly?3. What is the valuation methodology?
• May need to hire a valuation specialist
131
132
Hard to Value Investment MeansHard to Audit Investments
No quoted market valuesThinly tradedHigh feesDifficult to exitGenerally not regulatedMany times no audited financial statements or
may only have non GAAP financial statements—tax basis
Stale information or lack of detailed investment information
132
133
Limited Scope Audits
What Procedures Are Not Performed?No audit procedures are performed on investments (and related activity) covered by certification No assessment of internal controls No confirmation procedures except for
allocation and investment elections No reliance on SOC 1 Type 2 reports for
investments or investment income (except for allocation and investment election controls)
133
134
Limited Scope Auditor’s Responsibilities
Determine if the financial institution qualifies for limited scope audit treatment
Compare the certified investment information to the form and content of the financial statements and footnote disclosures
Determine that the financial statements and disclosures are in compliance with GAAP and DOL requirements
Determine that investments comply with ERISA and plan documents
Test income allocations to participants Make sure-
– 5% of net asset disclosure is made– certification footnote is included in financial statements
which references what information was covered by the certification
134
135
Limited Scope Auditor’s Responsibilities
Proper presentation and disclosure– Inquire if plan’s certified investments are valued at
fair value as of the end of the plan year – Inquire as to the mythology for valuing plan
investments to determine if footnote disclosures are complete and accurate
– Inquire if plan investments include securities lending
135
136
Limited Scope Auditor’s Responsibilities
Participant Income Allocation Testing Tested in limited scope audit as allocations are
not certified Consider using investment returns for month or
quarter Some firms testing only allocations of interest
and dividends Cannot solely rely on a SOC 1 Type 2 Report
– A SOC 1 Type 2 Report can be used to reduce testing but need to document reliance on such report
136
137
Impact of ASU 820Limited Scope Audits
ASU 820 Fair Value Measurements-requires a better understanding of the custodial pricing processes– Requires communication with the trustee or
custodian to determine pricing methodologies used in order to facilitate disclosure of Level 1, 2 & 3 pricing inputs
– Requires an understanding of the nature of the investment, whether it is a partnership interest, an illiquid security, etc.
•137137
138
Hard To Value Investments in a Limited Scope Audit
Obtain an understanding as to the methodology for determining the fair value of the investments
Inquire of the plan sponsor if the value stated in the trust statements is based on values as of the financial statement date
If the certification does not cover the hard to value investments then full scope audit procedures will need to be performed for those investments or modify report per AG ¶ 7.77
Inquire as to securities lending arrangements
138
139
Limited Scope vs. Full Scope
Audit Procedures Limited Scope Full Scope
Confirm assets directly with custodian X
Agree the certified investment information to the Plan’s financial statement
X
Year-end market value testing and leveling X
Investment Transaction Testing X
Test investment income allocation to participants X X
Determine that the Plan’s financial statement and disclosures are in compliance with GAAP
X X
139
140
A-1 Retirement and Investment Services
The information provided on the enclosed reports is a summary of the financial activity for MRM 401(k) Plan for the plan year ended December 31, 2009. Life Savings Insurance Company certifies that the forgoing statement furnished pursuant to 29 CFR 2520.103-5(c) is complete and accurate in accordance with its business records.
Vice PresidentAccount Management ServicesA-1 Retirement and Investment Services
140
141
Issues with Certifications
Not certified as to fair value Fair value not certified as of the plan’s year
end Regulations only require certification to be
based upon the ordinary books and records of the trustee or custodian—No mention of “fair value”
Regulations require investments to be reported on Form 5500 at fair value regardless of what is certified
Limited scope may not be appropriate
141
142
"Ordinary Business Records"
DOL Regulations require:"…such information as is contained within the ordinary business records of the bank, trust company, or similar institution and is needed by the plan administrator to comply with the requirements of section…“
“Ordinary business records” may be best-available values, which may or may not be fair value!
142
143
Limited Scope Audit Issues
Indicators that there may be additional information required– Cost equals fair value for certain investments– Fair value for certain investments have not
changed for several years– Description of investments on the Schedule of
Assets is inconsistent with footnote for investments
– Certain investments are not included in the certification
143
144
Limited ScopeAuditor’s Responsibilities
If something unusual comes to your attention –bring matter to the attention of the plan management
If material discrepancies noted, plan management should investigate and consider:– Requesting trustee/custodian to correct and either
recertify or amend the certification– If information is excluded, the plan administrator is
responsible for proper valuation and reporting– Engage the auditor to perform full-scope audit and/or
full-scope procedures, as appropriate See Audit Guide ¶ 7.75
144
145
Investment information Not Prepared in Conformity With GAAP and DOL
Regulations
If plan administrator is unable to determine the fair value of alternative investments, the financial statements may not be in accordance with GAAP and DOL Requirements:– Auditors report would have to be modified
Add emphasis of matter paragraph to auditors' report for a limited scope engagement which would discuss the effects of not applying adequate valuation procedures
The auditor cannot perform valuation procedures for the plan in order to determine the fair value of alternative investments without impairing the auditors independence
145
146
Questions????
147
Commitments, Contingencies,
Administrative Expenses and Completion Procedures
Audit Guide Chapter 12
148
Learning Objectives
As a result you should be able to plan and perform appropriate audit procedures with respect to commitments and contingencies, administrative expenses and audit completion procedures for a defined contribution plan and defined benefit plan
149
Professional Standards
AU 337, Inquiry of a Client’s Lawyer Concerning Litigation, Claims and Assessments
AU 333, Client Representations FASB ASC 440 and 450, Commitments and
Contingencies AU 316, Consideration of Fraud in a Financial
Statement audit AU 339, Audit Documentation AU 380, Communication with Those Charged with
Governance AU 325, Communicating Internal Control Related
Matters Identified in an Audit FASB ASC 855, Subsequent Events
150
Commitments and Contingencies
Audit Procedures Discuss possible issues with plan sponsor or
third party administrator Review meeting minutes for contingent
liabilities Review plan sponsor’s financial statements Analyze legal expenses for contingencies or
prohibited transactions Obtain a client representation letter Inquire concerning any investigations by
regulatory authorities Send inquiry letter to plan’s ERISA counsel
151
Legal Letters
When management has consulted legal counsel regarding plan matters
Sent near the end of field work or an updated letter may be required
Should be sent to ERISA counsel Inquire regarding litigation, claims or assessments
and plan qualification issues Obtain audit inquiry letter from in-house counsel, if
applicable If no consultation include a statement in management
representation letter Legal letter inquiry should include example language
in Audit Guide
152
Administrative Expenses
Audit Objectives– Expenses in accordance with plan agreement– Properly classified and recorded
Audit Procedures– Are expenses properly authorized– Expenses in accordance with service contracts– Fees comply with service provider agreements
Hot button for DOL
153
Subsequent Events Review committee meeting minutes
through report date Supplemental legal letter may be
required Review of any interim plan financial
statements or trustee statements Review any interim financial statements
of the plan sponsor Inquire of client of any subsequent
events
154
Subsequent Events
Disclosure as to date that subsequent evaluation has been made through—usually a policy note–Usually the date of the report or
when the report is available to be issued
–11-K is different—no disclosure is required
155
Types of Subsequent Events
Recognized Subsequent Events--Type 1
Nonrecognized Subsequent Events--Type 2
Examples– Mergers– Termination– Spin-offs– Changes in service providers– Plan amendments
156
Specific Plan Representations
Plan amendments Intentions to merge or terminate the plan Omissions from participant data Acceptance of actuarial assumptions Whether the plan is qualified under the IRC Existence of related party and party-in-
interest transactions Investments valued at fair value Timely deposits of employee deferrals Compliance testing
157
Responsibility to the Form 5500
Extends to the financial information in the Form 5500-Schedule H
No obligation for other information on the Form 5500
Read Form 5500 for material inconsistency with audited financial statements (Schedules A, C, D, G, H and SB/MB)• Materially inconsistent information should
be revised• If not revised, consider explanatory
paragraph or withdrawal from engagement
158
Other Considerations
Plan mergersTerminating plansChanges in service providers
–Actuaries–Record keepers–Claims processors–Auditors
159
Communications with those Charged with Governance
AU 380 (SAS 114) requires communication regarding The auditors responsibility under GAAS An overview of the planned scope and timing
of the audit Significant findings from the audit such as
– Uncorrected misstatements– Risks of fraud identified– Judgments as to quality of the plans accounting
principles– Significant difficulties encounter during the audit– Disagreements with management, if any
160
Internal Control Related Matters
AU 325 (SAS 115), Communicating Internal Control Related Matters Identified in an Audit–Must be a written communication–Should be made not later than 60
days following the report release date
–Communicate significant deficiencies and material weaknesses
161
Review Questions
1.What types of things must be communicated to those charged with governance?
2.What procedures should be performed for administrative expenses which are deemed to be immaterial?
3.What are the new requirements for subsequent event disclosures?
162
Questions????
163
Audit GuideChapters 2, 3 and 13Appendix D & E
Reporting and Disclosure Requirements
164
Learning Objectives
As a result you should be able tounderstand the financial statement reporting and disclosure requirements with respect to benefit plans and thereporting required for the Form 5500.
165
Reporting and Disclosure Requirements
Authoritative LiteratureRequired Financial StatementsFinancial Statement Disclosure
RequirementsERISA and DOL Reporting
Requirements
166
Authoritative Literature and Other Tools
FASB ACC 960, 962 and 965AICPA Audit Guide—current editionAICPA Audit Risk Alert—current
editionTrends and TechniquesAICPA Disclosure GuidesEFAST-2 Form 5500 filings
167
Supplementary and Other Information
SAS No. 118, Other Information in Documents Containing Audited Financial Statements
SAS 119, Supplementary Information in Relation to the Financial Statements as a Whole
SAS 120 No. 120, Required Supplementary Information
168
SAS 118 Addresses auditor’s responsibility in relation to
other information in documents containing audited f/s and the auditor’s report there on
Auditor’s opinion on the f/s does not cover other information, and the auditor has no responsibility for determining whether such information is properly stated (absent a separate requirement)
Auditor required to read the other information for material inconsistencies between the audited financial statements and other information
169
SAS 119 Addresses the auditor’s responsibility when
engaged to report on whether “supplementary information” is fairly stated, in all material respects, in relation to the f/s as a whole
Information presented outside basic f/s excluding required information
Does not apply to DOL schedules In order to opine on whether information is
fairly stated in relation to the f/s as a whole– Auditor to determine if certain conditions are met– Auditor to perform certain procedures (using the
same materiality level as used during the f/s audit)
170
SAS 119 Applicability Full Scope Audit—generally engaged to
report on whether the supplementary information is fairly presented in relation to the basic financial statements (SAS 119)– Revised paragraph about supplemental
schedules in the auditor’s report—see audit guide
No changes to the Form 11-k auditor’s report when filing with the SEC under the PCAOB standards—two sets of standards
171
Applicability of SAS 118 ERISA limited scope engagements
– Disclaimer being issued on the basic financial statements—therefore precluded from expressing an “in relation to” opinion on the supplementary information
– Because the DOL requires the supplementary information to be presented with the financial statements, those schedules would be considered other information in documents containing audited financial statements
– Since likely not engaged to issue an opinion Auditor still required to follow SAS 118 See revisions in the Risk Alert
172
Defined Benefit Pension Plans
Statement of Net Assets Available for Plan Benefits
Statement of Changes in Net Assets Available for Plan Benefits
Information regarding the actuarial present value of accumulated plan benefits
Information regarding year-to-year change in accumulated plan benefits
173
Defined Benefit Health and Welfare Plans
Statement of Net Assets Available for Plan Benefits
Statement of Changes in Net Assets Available for Plan Benefits
Information regarding the plan’s benefit obligations
Information regarding year-to-year change in the plan’s benefit obligations
174
Defined Contribution Pension Plans and Health and Welfare
Plans
Statement of Net Assets Available for Plan Benefits
Statement of Changes in Net Assets Available for Plan Benefits
175
Disclosure Requirements
Plan’s accounting policies, including a description of methods and significant assumptions used to determine the fair value of investments
A brief general description of the plan agreement, including its contribution, vesting and allocation provisions, disposition of forfeitures and benefit provisions the year
Significant plan amendments adopted during the year and the effect of such amendments on net assets if significant either Individually or in the aggregate.
176
Disclosure Requirements Policy regarding the purchase of insurance contracts
that have been excluded from plan assets and the related income
Federal income status of the plan if a favorable determination letter has not been obtained or maintained. (ERISA plans require disclosure whether or not a tax ruling or determination letter has been obtained)
Investments that represent 5% or more of total net assets as of the end of the year
For ESOP plans, investments pledged to secure debt of the plan as well as a description of the provisions regarding the release of such investments
177
Disclosure Requirements
Participant-directed investment programs—amounts relating to these programs can be disclosed as a separate line item on the face of the financial statements
Amounts allocated to accounts of persons who have elected to withdraw from the plan but have not yet been paid as of year end
Significant related-party transactions Significant subsequent events—need date
included in footnotes
178
Disclosure Requirements-DB Plan
If the amendments were adopted after the date of the accumulated benefit information, and accordingly their effect was not included in the calculation, this fact should be stated
Significant assumptions used in determining the actuarial present value of accumulated plan benefits or benefit obligations, including any significant changes in the method or assumptions during the year.
179
Disclosure Requirements-DB Plan The funding policy and any changes in the
policy during the year. Disclose their funded status with respect to
any applicable minimum funding requirements and whether those requirements have been met.
If a minimum funding waiver has been granted or is pending by the IRS or if a rehabilitation program has been established, that fact should be disclosed
A brief description of the benefit priority and PBGC coverage in the event of plan termination
180
ERISA and DOL Reporting Requirements
Comparative Statement of Net Assets Available for Plan Benefits
Description of accounting principles Variances from GAAP Differences between financial
statements and Form 5500 Supplemental schedules Additional information attached to the
Form 5500
181
Form 5500 Reporting Supplemental Schedules—(All part of Schedule G except Schedules 4a, 4i and 4j)Schedule G Part I “Schedule of Loans or Fixed
Income Obligations in Default or Classified as Uncollectible”
Part II “Schedule of Leases in Default or Classified as Uncollectible”
Part III “Nonexempt Transaction”
182
Supplementary Schedules
“Schedule H, line 4a-Schedule of Delinquent Participant Contributions” (include participant loans)
“Schedule H, line 4i-Schedule of Assets (Held at End of the Year)”
“Schedule H, line 4i-Schedule of Assets (Acquired and Disposed of Within the Plan Year)” (schedule rarely required)
“Schedule H, line 4j-Schedule of Reportable Transactions”– For participant directed transactions this schedule is
not required
183
Example Financial Statements and Footnote
Disclosures
Audit GuideAppendix D, E, and F
184
Review Questions
1. List some specific disclosures for defined benefit plans?
2. Which statements are required to be comparative for a DC plan and for a DB plan?
3. Would your answer be different if beginning of the year valuation was performed for a DB plan?
185
Questions????
186
Party-in-Interest Transactions, Prohibited Transactions, and Plan Tax Status
Audit Guide Chapters 11 & 12
187
Learning Objectives
Upon completion of you should have an understanding of the following:• Who is a party-in-interest• How to identify a party-in-interest and a
prohibited transaction• What audit procedures to perform and
impact on the auditor’s report• Auditor’s responsibility related to Plan
tax status
188
Generally Accepted Auditing Standards
• Auditor’s cannot be expected to provide assurance that all related party transactions will be discovered
• Auditor’s need to be aware of the possible existence of material related party transactions as well as potential party-in-interest transactions that could impact the financial statements
189
Professional Standards
Related Party Transactions• FASB ASC 850, Related Party
Disclosures• AU 54, Illegal Acts by Clients
Prohibited Transactions• AU 317, Illegal Acts by Clients• FASB ASC 450, Accounting for
Contingencies• AU 316, Consideration of Fraud in a
Financial Statement Audit
190
Party In Interest Transactions
ERISA Section 3(14)• Fiduciaries or employees of the plan• Person providing services to the plan• Employer whose employees are
covered by the plan• Person who owns 50% or more of
such an employer or relatives of such persons
191
FASB ASC 850 - Related Party Disclosures
• Related parties are also Parties-in-Interest
• Related party transactions may not necessarily involve accounting recognition
• Related party transactions do not necessarily violate ERISA
192
ERISA section 406(a)
Forbids certain transactions between the plan and parties in interest• Sale, exchange or lease of property• Loan or other extension of credit (includes untimely
deposits to the trust of employee salary deferrals)• Furnishing of goods, services or facilities• Transfer of plan assets for the benefit of a party-in-
interest• Acquisition of employer securities or real property in
violation of the 10 percent limitationNot having a written service agreement with a service provider could be a prohibited transaction
193
Party In Interest Transactions
Impact the following audit areas:• Planning and performing the audit to
identify all material party-in-interest transactions
• Required disclosures• Possible report modifications if a
prohibited transaction has occurred
194
Related Party and Party in Interest Transactions
Existence of Related Parties and Parties in Interest• Evaluate the plan sponsor’s procedures for identifying, accounting
and reporting such transactions• Request names of related parties and parties-in-interest• Review transactions with such parties• Review prior year work papers containing transactions or inquire
of predecessor auditors• Review regulatory filings • Inquiries of plan management regarding any related party or
party-in-interest transactions• Review agreements with service providers
195
Identifying Party-In-Interest Transactions
• Provide audit staff with names of related parties• Review committee minutes• Review correspondence with regulatory agencies• Review invoices from legal council• Look for large, unusual transactions or
nonrecurring transactions• Review conflict of interest statements obtained
from plan management• Review transactions with the plan’s major service
providers, investees, etc.
196
Audit Implications for PTs• Obtain an understanding of the transaction
– How it occurred– Sufficiency of other information
• Inquire of management at a level above those involved
• Consult plan’s ERISA counsel or other specialists• Apply similar procedures as for related party
transactions or illegal acts• Test reasonableness of amounts being disclosed• Auditor has a responsibility to deal with all
prohibited transactions regardless of materiality
197
Prohibited Transactions
Reporting Implications• Financial impact of fines, penalties and receivables
for money being paid back to the plan• Adequacy of financial statement disclosures and
supplemental schedule • Contingencies may also need to be disclosed• Consider the implications of the prohibited
transaction in relation to other aspects of the audit• Prohibited transactions must be disclosed on
Schedule G, Part III of the Form 5500• Financial statement materiality does not apply to
supplemental schedules
198
Late Deposits
• Not reported on Schedule G• Late deposits recorded on Line 4a of
the Form 5500• Reported on Supplemental Schedule
199
Audit Implications for Prohibited Transactions
• AU 317, requires the auditor to be alert to prohibited transactions
• AU 316, requires the auditor to assess and document the risk of material misstatement
• Auditor has the responsibility to deal with all prohibited transactions, regardless of quantitative materiality
200
DOL’s Voluntary Correction Program
• Eligible for immediate relief from payment of certain excise taxed imposed by IRS
• Not required to report the corrected transaction as nonexempt on supplemental schedules of Form 5500
• Full compliance with the program will result in the DOL’s issuance of a “No Action Letter” and no imposition of penalties on the plan sponsor
• Disclosure is necessary if VFC has not yet been approved—consult plan’s legal counsel
201
Prohibited Transactions
• Proper disclosure not made:– If material, express a qualified or
adverse opinion on the supplemental schedules
– If not material, modify report on the supplemental schedules by disclosing the transaction
– If disclosure is not made, consider withdrawing from the engagement
202
Prohibited Transactions
Audit implications of prohibited transactions:• Reliability of management’s
representations• Impact on specific control procedures• Assure that appropriate plan management
is adequately informed of prohibited transactions
• Include in SAS 114 and 115 letters
203
Plan’s Tax Status• Plan financial statements generally do
not have accrued income taxes or a provision for income tax as qualified plans are granted special tax status
• Audit Objectives– Is the trust qualified under the Internal Revenue
Code– Is plan operating in compliance with the plan
document– Do any transactions impact plan qualification– Recording of asserted or unasserted claims– UBIT—impact of FASB ASC 740-10 (Fin 48)
204
Plan’s Tax Status
Audit Procedures• Review IRS determination letter
– 403(b) plans do not have a determination letter program yet
• Review current and subsequent plan amendments
• Inquire about plan’s operations or changes which may impact tax status including compliance testing
• Review results of other audit work for impact on tax status
205
Required Disclosures
• FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes– Required for all plans as of December 31,
2009– Main provisions require
Income taxes paid by the entityManagement’s determination of the taxable status
of the entity All tax positions need to be considered
• Disclosures– Whether an uncertainty exists or not– Open tax years
206
Required Compliance Testing
• Minimum coverage test• Minimum participation tests• Average deferral limits—not required for
403(b) plans• Average contribution percentage limits• Annual additions limitation• Top heavy test• Exclusive benefit rule• Diversification of certain employer security
holdings
207
Other Areas for Audit Emphasis
Plan Design Plan Amendments Operational Issues Eligibility testing Contributions testing Distributions testing Use of forfeitures and vesting test work Income and expense allocation test
work
208
What if Operational Issues?
Audit Procedures• Have client quantify the error as to dollar
impact on financial statements• Determine if the amount is material to the
financial statements and/or if disclosure is required
• Include in management representation letter how and when the error will be corrected
• Consider inclusion in SAS 114/115 letters• Depending on the nature and magnitude of
the error modification of the report may be necessary
209
Review Questions
1.What is the materiality threshold for reporting a prohibited transaction?
2.What responsibility does the auditor have for the discrimination testing?
3.Are the auditors a related party and/or a party in interest?
210
Questions????
