WHAT DOES YOUR PLAN AUDITOR DO?

By Michael Lawrance, CPA

August 14, 2013

KPMG LLP

The views in this presentation do not necessarily reflect that of KPMG LLP or any of its subsidiaries or affiliates.

It Depends on the Plan

Defined Contribution Plans (401(k), 403(b), ESOP’s, etc.)

Defined Benefit Plans

Health & Welfare Plans

(focused on 401(k) for this presentation)

Full or Limited Scope?

Limited scope – ERISA Section 103(a)(3)(c ); investment information certified by a bank or similar institution or by an insurance carrier that is regulated supervised, and subject to periodic examination by a state or federal agency. (generally, the trustee or custodian of the plan)

Full scope – Auditor issues an opinion which includes the assertions for investments.

Planning - Materiality

Materiality – Often based on the Net Assets Available for Benefits

Net Assets Available for Benefits is generally more relevant to the users (plan participants & the Department of Labor) than other accounts/measures (contributions, benefit payments, plan loans, etc.)

Planning – What to test?

Significant Accounts Accounts that there is a reasonable possibility

that such could contain a material misstatement that has a material effect on the financial statements

In 401(k)plans, this often includes (but is not limited to): Contributions, Employee and Employer Benefit Payments Investments

Planning – Plan Sponsor

Understand: Entity Level Controls – (COSO framework)

Processes - that impact significant accounts (e.g., payroll processing, pay rate authorization, time cards/hours reporting, new hire process, termination/retirement process)

Planning – Plan Sponsor

Events that can effect the plan Plan termination Plan merger/spin-off Mass layoffs

Potential partial plan termination

Planning – Third Party Administrators - SOC 1 reports Custodial Record keeper Payroll Type I (demonstrates understanding of

the process) Type II (same as Type I plus expresses an

opinion on the operating effectiveness of controls that govern the processes)

Planning – Plan Document

Plan Document – Governs the operation of the plan.

Determines who can participate, when participation can occur, what can be contributed, the circumstances for which a person is

eligible to receive a benefit payment

Substantive Procedures

The procedures mentioned are an illustrative but not exhaustive list of procedures performed during a standard 401(k) plan audit

Substantive Testing – Significant Accounts

Contributions Employee Employer

Benefit Payments

Investments

Substantive Testing - Contributions

For a sample of participants (often from payroll and participant statements): Test eligibility to participate (often a service

and age requirement) Examine source documents (I-9, employee

application, etc.) to determine the date of hire and/or date of birth

Determine whether the date of hire and/or date of birth allowed the employee to participate in the plan based on the provisions of the Plan Document

Substantive Testing - Contributions

For a sample of non-participants (generally pulled from payroll): Determine that the employee is not

participating due to: 1) employee does not meet eligibility

requirements or, 2) employee did not choose to participate in the

Plan Examine election not to participate

Substantive Testing - Contributions

For a sample of participants (often from payroll and participant statements); select pay periods and: Determine whether deferral election (% or $ amount)

was properly applied to the participant’s eligible compensation (based on Plan Document) for the payroll period Examine Enrollment Forms, Deferral Change Forms,

Confirmation with Participant, note consistency between deferral election per record keeper and that used in payroll

Example: $1,000 eligible compensation X 10% deferral = $100 employee contribution for the pay period

Substantive Testing - Contributions

For a sample of participants (often from payroll and participant statements); select pay periods and: Determine whether the employer match was

properly applied to the participant (often a fixed match specified in the plan document applied to the employee contribution)

Example: $1,000 eligible compensation X 10% deferral X 50% employer match = $50 employer contribution for the pay period

Substantive Testing - Contributions

Reconcile Employee and Employer Contributions from Payroll to Record keeper / Custodial reports

Check remittances for timeliness

Per Bank Statement

Per Custodian

Withholding Date

Amount

Posting date

Amount

01/01/xx $25,000

01/02/xx $25,000

02/01/xx 25,000 02/01/xx 25,000

03/01/xx 25,000 03/02/xx 25,000

Total $75,000

Total $75,000

Per Payroll

EE Contr. $50,000

ER Contr. $25,000

Total $75,000

Substantive Testing – Benefit Payments

For a sample of participants who received a benefit payment(s) during the period: Select different types of payments based on

reasons allowed in the Plan Document (Termination, Retirement, Hardship, Death, Disability, QDRO)

Determine Eligibility for distribution Termination/Retirement – Personnel Action Form/

Payroll Records Hardships – Eviction notice, Foreclosure notice Death – Death Certificate/Physician’s Statement QDRO – Executed court order

Substantive – Benefit Payments

Verify benefits were received Examine cancelled check, wire advice, confirm

with participant Verify vesting provisions of Plan Document

were followed Determine if income tax was appropriately

withheld (if applicable) Make sure participant account balance is zero

if a full payout was requested

Substantive - Investments

For Limited Scope: Agree investment balances from certified

custodial/trustee statements to the financial statements

Determine whether the Fair Value Level disclosures for investments in the financial statements are appropriate

Determine that participants receive an allocation of investment income/loss and invested in the chosen investment vehicles

Substantive - Investments

For Full Scope: Same as limited scope; plus Confirm the existence of the units/shares Price test the fair value of period end values

for the investments (compare to a pricing source)

Compare the prices of a sample of purchase and sales transactions noted in the trustee/custodial statements to price sources

Determine that investment income is reasonable by comparing reported plan returns for investments to published returns

How long does this take?

Depends on: How quickly information is provided How experienced the auditor is with benefit

plans What standards are being used (AICPA, Firm

standards above AICPA standards, etc.)

Questions?