Improving Audit Quality Through Enhanced Financial Reporting

Posted by Maria Hurd, CPA

Disclaimer: All blog posts are valid as of the date published.

In response to the DOL’s findings regarding ERISA plan audit deficiency rate, the AICPA has embarked on an initiative to improve audit quality through auditor badge certification programs, enhanced peer review checklists, and changes to auditing standards by strengthening the audit report.

To that end, on April 20, 2017, the AICPA Auditing Standards Board issued  Proposed Statement on Auditing Standards, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, addressing the auditor’s responsibilities to form an opinion and report on the financial statements of ERISA plan financial statements with the goals of:

1. Helping auditors better understand their responsibilities in a retirement plan audit, and
2. Providing financial statement users with more information about auditors’ and management’s responsibilities, particularly in limited scope audits

Specifically, the goals would be accomplished by changing the form and content of the auditors’ report to:

1. Report on specific plan provisions and any findings-In my view, requiring that auditors report on procedures performed would address audit deficiencies related to lack of audit work performed on compliance with plan provisions that auditors deemed immaterial to the financial statements, but that are part of the ERISA regulatory framework.
2. New management representations regarding the plan sponsor’s responsibilities- In my view, spelling out management responsibilities would address plan sponsor misconceptions that their service providers, such as the third party administrators and plan auditors, are responsible for their compliance and financial reporting.
3. Providing more detail about the audit steps performed in a limited scope audit- In my view, this report would clarify the value of a limited scope audit by eliminating the disclaimer and instead discussing the basis for limitation of the audit scope, discussing the procedures performed by the auditor, and stating an opinion on the financial statements based on the audit and the use of the limited scope certification.

If approved, the new standard will become effective for plan years ending on or after December 15, 2018.

Following are some examples of the proposed modifications to the audit reports:

Report on Specific Plan Provisions Relating to the Financial Statements

As part of obtaining reasonable assurance about whether ABC 401(k) Plan’s financial statements are free from material misstatement, we are required to perform certain procedures to test whether the plan and plan transactions are in accordance with specific plan provisions. We performed procedures relating to participant eligibility, benefit payments, participant vesting provisions, employer and employee contributions, disclosure of prohibited transactions, Internal Revenue Code compliance tests, participant asset allocations, use of forfeitures, and recording of account activity for the year ended December 31, 20X2 as required by generally accepted auditing standards for audits of employee benefit plans subject to the Employee Retirement Income Security Act of 1974 as set forth in AU-C section 703, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. However, these procedures were not performed for the purpose of providing an opinion on compliance with those provisions and, accordingly, we do not express such an opinion.

[No findings]

During our audit, we did not have any findings relating to whether the plan and plan transactions are in accordance with specific plan provisions. However, the audit was not designed to identify all instances when the plan and plan transactions are not in accordance with those specific plan provisions. or

[Findings have been noted]

During our audit, we noted the following findings relating to whether the plan and plan transactions are in accordance with specific plan provisions. However, the audit was not designed to identify all instances when the plan and plan transactions are not in accordance with those specific plan provisions. Our opinion on the financial statements is not modified with respect to these findings.

[Describe findings]

We noted instances when vesting was not calculated in accordance with the plan instrument which resulted in the plan not paying the appropriate benefits.

 Purpose of this Report

The purpose of this report on specific plan provisions relating to the financial statements is solely to describe the results of our procedures relating to specific plan provisions, and not to provide an opinion on the plan’s compliance with ABC 401(k) Plan’s provisions. This report on specific plan provisions relating to the financial statements is an integral part of an employee benefit plan audit performed in accordance with generally accepted auditing standards. Accordingly, this communication is not suitable for any other purpose.

Management’s Responsibility for the Financial Statements of an Employee Benefit Plan Subject to ERISA

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Management is also responsible for maintaining a current plan instrument including all plan amendments, administering the plan and determining that the plan’s transactions that are presented and disclosed in the financial statements are in conformity with the plan’s provisions, including maintaining sufficient records with respect to each of the participants, in accordance with sections 107 and 209 of the Employee Retirement Income Security Act of 1974, to determine the benefits due or which may become due to such participants.

Management’s Responsibility for the Financial Statements and the Limitation on the Scope of the Audit

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for determining whether a limitation on the scope of the audit is permissible in the circumstances, in accordance with the Employee Retirement Income Security Act of 1974, including evaluating whether · the certification is prepared by a qualified institution, and · the certified investment information is complete and accurate. The limitation on the scope of the audit does not affect management’s responsibility for the financial statements. Management is responsible for determining whether the certified investment information is appropriately measured, presented, and disclosed in accordance with accounting principles generally accepted in the United States of America.

 Auditor’s Responsibility (Including Responsibility for the Certified Investment Information)

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. With respect to the certified investment information that management instructed us not to audit, we did not assess the risks of material misstatement nor did we consider internal control over the certified investment information. Our procedures were limited to the following: (a) obtaining and reading the certification (b) evaluating management’s assessment of whether the entity issuing the certification is a qualified institution under the Employee Retirement Income Security Act of 1974 (c) comparing the certified investment information with the related information presented and disclosed in the financial statements (d) evaluating whether the form and content of the certified investment information presented and disclosed in the financial statements are in accordance with accounting principles generally accepted in the United States.

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