by michael lawrance, cpa august 14, 2013. the views in this presentation do not necessarily reflect...
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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?