Posted by Chris Ciminera
The employee benefit plan audit season is in full gear now and, if not already started, your employee benefit plan audit is most likely around the corner. At our firm that means engagement letters and information request letters are being sent out in preparation for the audit. Having the right information ready in a timely fashion is imperative for a smooth and efficient audit. To help those plan sponsors that may be new to the audit process understand the extent of the audit procedures auditors will perform, as well as the extent to which their involvement will be necessary, the American Institute of Certified Public Accounts (AICPA) Employee Benefit Plan Audit Quality Center (EBPAQC) has a 403(b) Plan Resource Center which includes a 403(b) Sample Auditor Request List for Plan Information.
As you will see, the documents requested are separated into sections subtitled: General Plan Information, Plan Internal Controls, Financial Reporting Information, Cash and Investments, Contributions, Rollovers and Forfeitures, Benefits Payable and Expenses, Compliance Testing Documentation, and Participant Data Documentation. The list isn’t all-inclusive, but contains most of the information necessary to perform an audit of an employee benefit plan.
General Plan Information
As a first step, signed copies of executed plan documents, amendments, the adoption agreement, SPD, opinion or determination letter as applicable (not 403(b) plans), copies of the fidelity bond coverage, significant contracts, contact information for all the service providers, and a list of parties in interest and plan officials are essential to the audit and census data. To satisfy the General Plan Information request, the following advice will prove valuable:
- It is important for the plan documents and relevant amendments to be executed
- To ascertain that the plan is covered by an ERISA fidelity bond, which is distinct from fiduciary liability coverage, please refer to our previous blog Employee Benefit Plan Bonding and Fiduciary Liability Insurance
- The census information is the population from which most of the samples are selected. To ensure the completeness and accuracy of census information, plan sponsors should reconcile control totals to original source data, such as
- Reconcile total wages to the YTD payroll report
- Reconcile total deferrals to the W-3
- Reconcile the number of account balances in the plan to the # of W-2s by identifying
- Terminated participants who still have account balances
- Eligible participants who are not contributing
- Employees not yet eligible to each feature of the plan
- Employees with two or more W-2s
- Ensure the accuracy of demographic information
The auditor will perform walk-through procedures of the internal controls at the plan sponsor and use a Service Organization Control (SOC) report on the service providers, if available, to assess risk of material misstatement. For a better understanding of the use of SOC reports in an audit, please refer to our previous blog Service Organization Control (SOC) Reports Help to Gain Better Understanding.
Financial Reporting Information
A majority of the information listed in this section usually is obtained directly from the third-party administrator. The limited scope certification is necessary for the auditor to be able to perform a limited scope audit. Please refer to our previous blog Limited Scope Audits for a discussion of what plans are eligible for a limited scope audit. The trial balance is the basis for the financial statements and most clients provide contribution accruals separately from the cash basis records maintained by the recordkeeper.
Verifying that the deferral amount on the W-3 plus K-1s was deposited to the plan trust is a key step in establishing the completeness of the participant contributions on the financial statements. Receivables are often needed for deferral withholdings in December deposited in January. Also, we test the Timeliness of Deposits, also a previous blog. Through direct webstation access, we obtain the population of other balances on the financial statements including employer contributions distributions, hardship distributions, loans, rollover contributions into the plan, as well as some reports that we use to test compliance, as opposed to financial statement amounts, such as the list of highly compensated employees and newly eligible employees. From the detail reports of participants using each plan feature, we select a sample representative of the population of account balances for our substantive tests.
Documents Requested for Selected Participants
For the participants selected, the plan sponsor provides pay-by-pay detail information and backup documents for the plan features used by the participant including loan documents, distribution requests. Please refer to our blog It Takes a Village to gain a better understanding of the documents provided by the plan sponsor and by each service provider to the plan.
The Compliance Testing is very useful in performing analytical review of fluctuations in plan contributions.
All the work performed up to this point then leads to the culmination of the audited financial statements and auditor opinion. This is what is attached to the plan’s 5500 filing.
Depending on the complexity of the plan, an audit can take between 80 and 250 hours to complete. Even for the simplest plan, a lot of work is involved and inexperienced plan officials are often surprised at the extent of audit procedures much beyond the financial statement amounts, since qualified plan audits also have a regulatory compliance aspect. In the end, efficiently complying with our audit requests results in an efficient audit and audited financial statements attached to the electronic filing. The end justifies the means.