Posted by Maria Hurd, CPA, RPA
Updated May 22, 2019
First Things First: The Engagement Letter
The new audit standard, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, effective for plan years ending on or after December 15, 2020, will require certain management representations as a pre-condition for engagement acceptance. Specifically, auditors should only obtain management’s acknowledgement of their responsibility for the following:
- 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 ERISA plan financial statements are in conformity with the plan’s provisions, including maintaining sufficient records with respect to each of the participants to determine the benefits due or that may become due to such participants
- Determining, when management elects to have an ERISA Section 103(a)(3)(C) audit, (formerly known as the limited-scope audit), whether:
- an ERISA Section 103(a)(3)(C) audit is permissible under the circumstances,
- the investment information is prepared and certified by a qualified institution as described in 29 CFR 2520.103-8,
- the certification meets the requirements in 29 CFR 2520.103-5, and
- the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework
- Furnishing to the auditor, prior to the dating of the auditor’s report, a draft of Form 5500 that is substantially complete
Including the above representations in the management rep letter or as documentation of inquiries in the audit procedures will no longer meet the audit standards, since plan management’s acknowledgment of these responsibilities will be a pre-condition for engagement acceptance.
Although these management responsibilities are not new, obtaining this acknowledgement in the engagement letter, where they likely will be addressed, will highlight the importance of the plan sponsor/administrator’s role in operating the plan in accordance with its terms. Further, the required representations might help a plan’s administrator understand that auditors are not a part of a plan’s internal controls.
These engagement acceptance pre-conditions are the standard’s attempt to establish clear rules of engagement as an essential first step for a successful and effective audit relationship.