Overview and Introduction. Basic Audit Workshop. Discussion Leaders. Michael E. Auerbach Marilee P. Lau Employee Benefit Plan Audit Conference

Transcription

1 2011 Employee Benefit Plan Audit Conference Basic Audit Workshop Maryland Association of CPAs Columbia, Maryland May 110, 2011 Discussion Leaders Michael E. Auerbach Marilee P. Lau 2 Overview and Introduction 3

2 Workshop ERISA and Related Regulations Planning, Supervision and Internal Control Contributions and Participant Data Benefit Payments, Claims and Benefit Obligations Investments and Investment Income Party-in-interest, Prohibited Transactions and Plan Tax Status Audit Completion Reporting and Disclosure Requirements 4 Workshop Interactive with participants Basic Regulatory, Accounting, and Reporting fundamentals Participant questions, observations and real life examples encouraged 5 Who Is Here? External Auditors Internal Auditors Plan Administrators/sponsors Attorneys Tax Professionals Third Party Administrators Regulators IRS/DOL 6

3 Plan Auditors Regional Firm Local Firm Partners Managers Staff 7 Plan Audits How many plans does your firm audit? A.< 5 B.<10 C.<25 D.<50 E. <100 8 Types of Audits Defined Benefit Plans Defined Contribution Plans 401(k)/403(b) Profit Sharing ESOPS Health and Welfare Plans Full Scope Audits 11K filings Limited Scope Audits 9

4 ERISA and Related Regulations Audit Guide Chapter 1 and Appendix A 10 Learning Objectives Upon completion you should have an understanding of the following: How a benefit plan is defined under ERISA, GAAP and the IRS The design and functioning of various types of benefit plans When an audit is required The role of the various parties involved in the operation of the benefit plan 11 ERISA Employee Retirement Income Security Act (ERISA) of 1974 Governs operation, administration & annual reporting for pension & welfare plans 12

5 ERISA is Administered By Department of Labor Internal Revenue Service Pension Benefit Guarantee Corp. 13 Provisions of ERISA Applies to most employee benefit plans of employers doing interstate commerce Protects interests of participants and beneficiaries Establishes an effective mechanism to detect and deter abusive practices 14 Types of Plans Defined Benefit Retirement Plans Defined Contribution Retirement Plans Health and Welfare Plans 15

6 Defined Benefit Plans Promises a future benefit that is stated in the plan document or can be calculated according to a formula provided in the plan document Traditional Defined Benefit Plan Cash Balance Plan 16 Defined Contribution Plan Requires an individual account for each participant and provides benefits based on amounts contributed, investment experience, allocated expenses and allocated forfeitures Profit sharing plan Money purchase plan Cash or deferred arrangement 401(k) Tax Savings Annuity Plans 403(b) Employee stock ownership plan ESOP 17 Health and Welfare Plans Covers Medical, dental, vision Short and Long term disability Prescription drugs HAS, FSA, Dependent Care Vacations, Tuition, Legal Can be a DB plan or a DC plan 18

7 General Reporting Requirements Requires annual reporting via the Form 5500 Plans with 100 or more participants may require a financial statement audit Plans with under 100 may require a financial statement audit if certain, waiver conditions are not met Certain financial entities also file directly with the DOL 19 Plans Requiring a Financial Statement Audit ERISA section 103(a)(3)(A) contains audit requirement Plans filing the Form 5500 as a large plan generally require an audit Some exceptions to the audit requirement do exist Some small pension plans may be required to have an audit 20 Pension Benefit Plans (Filing Requirements) Plans with 100 or more participants (at the beginning of the plan year) file the Form 5500 for large plans Plans with less than 100 participants (at the beginning of the plan year) file the Form 5500 for small plans 21

8 Pension Benefit Plans (Audit Requirements) Large plan filers are required to have an audit Small plan filers may be exempt from the audit requirement 22 Small Pension Plan Security Regulation Enacted 10 years ago Rule adds disclosure & fidelity bonding requirements to certain small plans 23 What Does This Mean? Only applies to pension plans with less than 100 Participants at the beginning of the year Includes a two part test If the plan fails either part an audit is required The two tests are financial and disclosure 24

9 Pension Benefit Plans (Exemptions From Audit) Benefits provided solely through allocated insurance contracts Plan funded solely by premiums paid directly from assets of employer Participant contributions forwarded within three months of receipt 25 Welfare Benefit Plans (General Filing Requirements) Plans with 100 or more participants (at the beginning of the plan year) file Form 5500 for large plans Plans with less than 100 participants (at the beginning of the plan year) file Form 5500 for small plans 26 Welfare Benefit Plans (Exemptions From Filing/Audit) Plans with less than 100 participants at beginning of the plan year, and Pay benefits solely from sponsor assets, or Provide benefits through insurance contracts, or Combination of two items above, and forward any employee contributions within three months of receipt 27

10 Cafeteria Arrangements Generally are not required to be audited unless they also provide welfare benefits PWBA Technical Release 92-1 Section 125 (Cafeteria) Plans may not need an audit if assets are not held in trust 28 Direct Filing Entities (DFEs) Entities required to file Master Trust Investment Accounts (MTIAs) Entities that may elect to file Pooled Separate Accounts (PSAs) Common Collective Trusts (CCTs) Investment Entities (103-12IEs) Group Insurance Arrangements (GIAs) 29 Helpful Links EBSA website FAQs about pensions plans and ERISA _pension.html FAQs on the Small Pension Plan Audit Waiver Regulation 30

11 Helpful Links FAQs about Abandoned Plans FAQs about the DFVC Program C.html 31 Common Audit Deficiencies Participant Data Investments Contributions Benefit Payments Related Party/Prohibited Transactions Reporting and Disclosures 32 Government Entities with Plan Oversight Treasury Department (writes regulations, etc.) U.S. DOL PBGC (defined benefit plans only) Internal Revenue Service (enforcement of laws) Employee Plans/Exempt Organization (EP/EO) Employee Benefit Security Administration (EBSA) SEC/PCAOB Plans with Employer Securities Form 11-K filings Field Examiners (auditors) Plan Reviewers (determination letters) For Enforcement of IRC & ERISA Pension 33 Provisions

12 Consultant Attorney Plan Design and Plan Document Employer Typical Players in U.S. Retirement Plans Investment Advisor Trustee or Custodian w/ Trust Asset Information Supplemental Schedules Finance Internal Audit Benefits HR Payroll Controller Employee and Participant Data Plan s Financial Information and/or GL Investment Advisor Actuary (DB/HW Plans) Actuarial Report Third Party Administration (All Plans) GL and Management Reports Independent Auditor Management and Participant Reports Audited Financial Statements 34 Plan Administrator or Administrative Committee Form 5500 DOL Participant Statements, SAR Participants Authoritative Literature FASB Accounting Standards Codification (FASB ASC) Statements on Auditing Standards (SAS-AU) Audit & Accounting Guide for Employee Benefit Plans Audit Risk Alert for Employee Benefit Plans Industry Developments Employee Benefits Security Administration (EBSA) PCAOB/SEC 35 Questions???? 36

13 Planning, Supervision and Internal Control Audit Guide Chapters 5 and 6 37 Learning Objectives Upon completion you should have an understanding of the following: Issues related to client acceptance How to determine the scope of the audit How to gain an understanding of a plan s internal controls Assessing engagement fraud and overall audit risk assessment Development of a written audit program 38 Planning and Supervision Determining the Audit Scope Is this an ERISA covered plan? How many participants at the beginning of plan year? < than 100 participants - no audit is necessary Regulatory exemptions from audit 39

14 Initial or First Year Audits Predecessor Auditors SAS 84 requirements Communication Review work papers Opening balances What procedures need to be performed Participant data Who are the Service Providers 40 What Type of Audit to Perform? Must apply all applicable GAAS procedures Basis of Accounting Accrual or Modified Cash Full Scope Audit Must audit investment information Limited Scope Audit Investment information not audited Investments certified by a qualified Trustee DOL Regulation Form 5500 and Supplemental Schedules 41 Form 5500 and Required Schedules Required schedules Schedule H Schedule G Supplemental schedules 4(a) Delinquent Participant Contributions 4(i) Assets Held 4(j) 5% Reportable Transactions Other schedules Schedules A, C, D, & SB/MB 42

15 Professional Standards Professional Standards Relating to Audit Planning First Standard of Field Work Statements on Auditing Standards SAS 83 Establishing an Understanding with the Client SAS 114 Communications with those charged with Governance Needs to be done at the beginning of the engagement 43 Engagement Letter Engagement letter is part of your required communication with the those charged with governance SAS 114 Name of Plan Audit Scope Timing of audit work 5500 preparation Fees See example engagement letter in the AICPA Audit Guide 44 Understanding the Plan and Information Gathering Obtain relevant documents Plan document Trust agreements Investment information Administrative service agreements Prior plan filings Determine how the plan operates Understand Service Providers Identify current developments Mergers, acquisitions, changes in service providers 45

16 Assess audit risk Audit Risk Create an audit staffing plan Create a written audit program Audit procedures Nature Timing Extent 46 Internal Control Professional Standards Second Standard of Field Work Statements on Auditing Standards Numerous statements on the control environment 47 GAAS Requirement Auditor must understand each of the five components of internal control sufficient to plan the audit Obtain via tests of design AND Determining whether they have been placed in operation Required for ALL audits even if control risk is planned at maximum 48

17 Entity s Internal Control Structure Obtain an understanding of: Control environment Risk assessment Information and Communication Control Activities Monitoring Document the understanding of the internal control structure 49 Entity s Internal Control Structure Assessing Control Risk Occurrence or Existence Rights and obligations Completeness Accuracy or Valuation and Allocation Cut-off Classification and Understandability Document Basis for Conclusions 50 Risk Assessment Internal and External Events Change in Circumstances Understanding How Management Identifies Risks Understanding Management s Assertions 51

18 SAS No SASs provide guidance concerning the auditor s assessment of risk of material misstatement whether caused by error or fraud in a financial statement audit Auditors needs to design and perform audit procedures responsive to assessment of risks Requires more in-depth understanding of the entity including its internal control 52 Overview of SAS No. 115 Statement on Auditing Standards (SAS) No. 115, Communicating Internal Control Related Matters Identified in an Audit Effective date--periods ending on or after December 15, Evaluating Deficiencies- Severity Evaluation Severity of deficiency depends on Magnitude of the potential misstatement resulting from the deficiency or deficiencies Whether there is a reasonable possibility that the entity s controls will fail to prevent, or detect and correct a misstatement of an account balance of disclosure Does not depend on whether a misstatement actually occurred 54

19 Impact of Service Organizations on Plan s Internal Control Who Has Control of the Assets? Where are participant data and investment records? Bank Insurance company Investment Advisor Recordkeeper Claims Processor 55 SAS 70 Reports Type I--Report on Policies and Procedures Placed in Operation Type II--Report on Policies and Procedures Placed in Operation and Tests of Operating Effectiveness Service Organization Reports (SOC Reports) New as of June 15, Consideration of Fraud Requires the auditor to assess the risk of material misstatement due to fraud and provides categories of risk factors Document in the workpapers: Risk factors Response to those risk factors Other considerations 57

20 Requirements for SAS 99 Description of Fraud Characteristics Incentive or pressures Opportunity Rationalization or Attitude Misstatement Fraudulent reporting Misappropriation of assets 58 SAS 99 Importance of exercising professional skepticism Discussion among the engagement personnel regarding risks brainstorming session Expanded inquiries regarding fraud among management and audit committees 59 Questions???? 60

21 Auditing Contributions and Participant Data Audit Guide Chapters 8 and Learning Objectives Upon completion you should: Be able to plan and perform appropriate audit procedures with respect to participant data and contributions. 62 Contributions and Participant Data Audit Objectives-Contributions Whether amounts received or due the plan have been determined, recorded and disclosed in the financial statements in conformity with the plan document and GAAP Whether appropriate allowance has been made for uncollectible plan contributions 63

22 Contributions and Participant Data Audit Objective for Participant Data Whether covered employees and beneficiaries have been properly recorded in eligibility records and contribution reports and accurate participant data for eligible employees and beneficiaries were supplied to the plan administrator 64 Contributions and Participant Data Defined Contribution Plans Rollover contributions Catch up contributions Roth Contributions/after tax Automatic enrollment issues Defined Benefit Plans Health and Welfare Plans Merged Plans 65 General Audit Procedures Participant eligibility and data integrity Participant enrollment (including automatic enrollment) Employee deferrals, after-tax and catch up contributions Remittance of employee contributions Remittance of loan repayments Employer contributions and receivables Matching and discretionary contributions Remittance of employer contributions 66

23 Audit Procedures-DC Plans Obtain a schedule of contributions received and receivable Reconcile contributions received from the schedule to the plan s payroll records, recordkeeper report and trustee report Determine that employee contributions have been remitted timely Obtain roll forward of the forfeiture account and determine whether forfeitures appropriately used based upon the plan document Reconcile participant balances to trust assets 67 Eligibility Testwork Determine what participant data must be tested, by reviewing plan document Select a sample of employees from payroll and recordkeeper Agree census data to employee s personnel file, recordkeeping detail and payroll register Verify that eligibility is in accordance with the plan document and that the proper eligible compensation has been used Automatic enrollment issues 68 Contribution Testwork Test payroll data for a selected number of participants by agreeing to earnings records, time cards and authorization Recalculate participant's deferral amount Recalculate matching contribution Determine that employee contributions have not exceeded annual limits Recalculate income allocations for a sample of participants Consider confirming investment elections and salary deferral directly with participants 69

24 Other Considerations Rollovers from other qualified plans Catch up contributions Use of forfeitures Employer contributions Pay administrative expense Reallocate to participants 70 Rollover Contributions Review plan document to determine that the rollover was made in accordance with the plan provisions Test asset transfer from the former trustee (custodian) to the current trustee including verification of the participantdirected investments, if applicable Review participant record keeping account to determine that the rollover amount is properly reflected 71 Catch Up Contributions $5,500 limit for 2009 and 2010 Participant must be making contributions to the plan Age 50 or older by the end of the calendar year 72

25 Defined Benefit Plan Contributions Determine that contributions are consistent with the plan s funding policy and are properly authorized Review the amount contributed and, if applicable, determine that it meets the requirements of the funding standard Determine if receivables are properly recorded Review the Schedule SB of the Form 5500 and reconcile if necessary 73 Health & Welfare Plans Determine that the employer contributions are consistent with the plan s funding policy. (Usually pay as you go) Insure that all contributions are reported for the plan regardless if deposited to the trust Review the contribution provisions of the plan document for employees and test compliance 74 HW Contributions-Cont d Eligibility and contribution testwork Select a sample of employees from payroll and claims processor If a paper trail is not available, consider sending positive confirmations to a sample of participants Verify that eligibility is in accordance with the plan document Agree census data to employee s personnel file, detail and payroll register Recalculate participant's contribution amount for benefits selected Test employer contributions to invoices (premiums and claims) Consider confirmations with service providers Test contributions receivable Verify payroll records are accurate 75

26 Merged Plans Reconcile net assets available per the trustee to the recordkeeper immediately prior and subsequent to the merger For Defined Contribution plans compare selected participant accounts immediately prior to and subsequent to the merger to determine that accounts were transferred properly Test transfer of assets from the former trustee to the current trustee For Defined Benefit plans test selected employee census data and Review actuarial report to determine that the effect of the merger on benefit obligations is properly accounted for and disclosed 76 Questions???? 77 Benefit Payments and Plan Obligations Audit Guide Chapters 9 and 78 10

27 Learning Objectives Benefit Payments As a result you should be able to plan and perform appropriate audit procedures with respect to benefit payments in a defined contribution plan and defined benefit plan Benefit Obligations As a result you should be able to plan and perform appropriate audit procedures with respect to plan benefit obligations in a defined benefit plan 79 Benefit/Claim Payments Audit Objectives Payments are in accordance with plan document Persons receiving benefits are entitled to them Transactions are recorded properly 80 Types of Benefit Payments H&W Claims, Cash-out/termination withdrawal Participants may take their money out of the plan when they terminate employment with the Company. (Companies able to force out terminated participants with balances less than $1,000 Retirement Participants may take their money out of the plan when they retire. Loans Participant may borrow from their account. 81

28 Types of Benefit Payments Hardship Withdrawal If certain financial hardship provisions met, can take a withdrawal while still employed. QDRO (Qualified Domestic Relations Order) A judgment, decree or order that creates or recognizes an alternate payee s (such as former spouse) right to receive all or a portion of a participant s retirement plan benefits. 82 Vesting Vesting schedule The structure for determining participants right to company contributions that have accrued in their individual accounts. Cliff vesting provides that company contributions will be fully vested only after a specific amount of time and that employees who leave before this happens will not be entitled to any of the company contributions. In plans with graduated vesting, vesting occurs in specified increments. 83 Audit Procedures for Benefit Payments Obtain a schedule of distributions, claim payments/premiums and withdrawals Reconcile to trail balance and trustee statements Consider analytical procedures 84

29 Audit Procedures Obtain a schedule of distributions and withdrawals Select a sample which includes all types of benefit payments and perform the following Examine benefit election form and support for qualifying event (such as termination notice) Determine that the participant was eligible for the type of distribution (such as hire date and term date per the employees file) Determine proper amount was forfeited, if applicable Recalculate the distribution based on plan provisions Determine that the appropriate tax has been withheld For a H&W plan determine that the claim is for covered services and applicable deductibles/limits have been applied 85 Audit Procedures Trace payment to cash disbursement/trust records Determine that employee has been removed from year end payroll records and participant listings Agree distribution amount to participants statements Obtain check copy and agree signature to employees file or send confirmation For hardship withdrawals, examine evidence of hardship For death benefits, obtain death certificate For QDRO, obtain court 86 order Other Procedures Evaluate procedures for determining continued eligibility for benefits Evaluate procedures for investigating long outstanding benefit checks Compare participant payments with individual account records Payments made by third party administrators may require a SAS 70 report 87

30 Heath & Welfare Plans Follow guidance in SOP 92-6 and Read relevant provisions of the plan document and underlying contracts Review and test the accumulated eligibility credits and total benefit obligations Test premiums paid to insurance companies (Schedule A of Form 5500) Test the obligation for claims payable and IBNR Test individual claims for eligibility, nature of the claim and documentary support Other Liabilities Excess Contributions Payables to third 88parties Participant Loan Procedures Obtain a listing of loans from the recordkeeper Should indicate date of loan, loan original amount, terms and loan balance Agree to trust report and financial statements 89 Participant Loan Procedures Select a sample of new loans Agree original signed loan amount to loan agreement and year end balance to loan amortization schedule Verify that the loan does not exceed 50% of the participants balance or $50,000 (less any outstanding loans), whichever is less Verify that the loan does not exceed the number years as indicated in the plan document Agree distribution to participant statement Agree loan repayment amount to payroll deduction 90

31 Participant Loan Procedures Additionally Determine if loans are current at year end Determine how delinquent loans and loans for terminated employees are handled Determine that deemed distributions are appropriately included in the financial statements 91 Participant Loans Loan is in default if participant is not making the specified repayments through payroll (may occur if participant terminates, is on leave of absence, etc.) Loan may become a deemed distribution if participant defaults and does not pay back the loan. 92 Plan Benefit Obligations Audit Procedures Some procedures are based on auditing participant data Check the professional qualifications and competence of the plan actuary SAS 73, Using the work of a Specialist Understand the actuary s work Inquire about the actuary s objectivity and independence Test reliability and completeness of census data Send confirmation to actuary regarding independence and census data used 93

32 Questions???? 94 Investments and Related Income Audit Guide Chapter 7 95 Learning Objectives As a result you should be able to understand the various types of investments in employee benefit plans and to plan and perform appropriate audit procedures with respect to investments and related income in employee benefit plans. 96

33 Professional Guidance FASB ASC 820, Fair value Measurements and Disclosure FASB ASC , Plan Accounting Defined Benefit Plans- Investments FASB ASC , Plan Accounting Defined Contribution Plans-Investments 97 Audit Objectives Whether all investments are recorded and exist Investments are owned by the plan, free of liens, etc. Investment principal and income transactions are properly recorded Investment information is properly presented and disclosed 98 Types of Plan Investments Marketable Securities Mutual Funds/Money Market Funds Real Estate Master Trusts Common or Collective Trusts (CCT s) Pooled Separate Accounts (PSA s) Insurance Contracts (GIC s) Participant Loans no longer an investment Mortgages/leases Limited Partnerships Employer Securities Other Hard to value 99 Investments

34 Participant Loans September 2010 FASB issued ASU Reporting Loans to Participants by Defined Contributions Plans Changed the reporting from a loan to a participant loan receivable Valued at amortized cost plus accrued but unpaid interest Effective for plan years ending after December 15, 2010 Can still utilize the limited scope exemption for loans if applicable 100 Participant Loans Should be applied retrospectively to all prior years presented May require participant loans to be reclassified in prior year presentations May require a reconciling footnote Loans are no longer required to be fair valued DOL requires loans to continue to be reported as investments on the schedule of assets held 101 Other Investments Limited liability partnerships and companies May include investment in limited partnerships and real estate holding companies Private equity ownership Hedge Funds Mortgages Leases Real estate Securities lending Repurchase or reverse repurchase agreements Repurchase agreement is a sale of a security for cash and an agreement to repurchase the same or similar security at a later date. The other party to the transaction may call it a reverse repurchase agreement. 102

35 Hard To Value Investments Need to understand what the investment really is Need to understand the valuation methodology Plan sponsor Investment manager or Advisor Trustee or Custodian 103 Hard to Value Investment = Hard to Audit Investments No quoted market values Thinly traded High fees Difficult to exit Not regulated No audited financial statements or non gaap statements Stale information or lack of investment details 104 Limited Scope Audits Obtain a list of plan investments Obtain a copy of financial institution certification Determine if financial institution qualifies for limited-scope audit treatment Determine if investments comply with ERISA and plan documents Proper presentation and disclosure Inquire if plan s assets are valued at fair value as of the end of the plan year Inquire as to securities lending 105

36 A-1 Retirement and Investment Services The information provided on the enclosed reports is a summary of the financial activity for MRM 401(k) Plan for the plan year ended December 31, Life Savings Insurance Company certifies that the forgoing statement furnished pursuant to 29 CFR (c) is complete and accurate in accordance with its business records. Vice President Account Management Services A-1 Retirement and Investment Services 106 Limited Scope Opinion Certifications Are certifications actually complete and accurate Does the institution actually hold the investments and execute investment transactions? What is the auditor s responsibility related to the reliability of the certification? What additional procedures need to be followed? Will the DOL accept a modification to the standard limited scope opinion? Audit Guide Par 7.67 Although an auditor is not required to audit certain investment information when the limited scope audit exception is applicable, further investigation and testing are required whenever the auditor becomes aware that such information is incorrect, incomplete, or otherwise unsatisfactory for the purpose of preparing financial statements. 107 Certified Investments Not certified as to fair value Fair value not certified as of the plan year end Regulations only require certification to be based upon the ordinary books and records of the trustee or custodian. No mention of fair value Regulations require investments to be reported on Form 5500 at fair value regardless of what is certified 108

37 Plan Administrator s Responsibility If the auditor becomes aware that the certified information my be incomplete or inaccurate the auditor should instruct the plan administrator to: Request that the trustee or custodian recertify or amend the certification for such investments at their appropriate year-end values or recertify or amend the certification to exclude such investments from the limited scope certification or Instruct the auditor to perform full scope procedures on such investments excluded from the certification If not done auditor should consider modifying his or her report See Audit Guide for modified report 109 Hard To Value Investments in a Limited Scope Audit Obtain an understanding as to the methodology for determining the fair value of the investments Inquire of the plan sponsor if the value stated in the trust statements is based on values as of the financial statement date If the certification does not cover the hard to value assets then full scope audit procedures will need to be performed for these assets Inquire as to securities lending arrangements 110 What Procedures Are Not Performed No audit procedures are performed on investments (and related activity) covered by certification No assessment of internal controls No confirmation procedures except for allocation and investment elections No reliance on SAS 70 (SOC Reports) for investments or investment income (except for allocation and investment election controls) 111

38 Full Scope Audits Trusteed Assets Are the investments recorded and do they exist (Confirm in writing) Are assets owned by the plan Are assets reconciled to trustee reports/recordkeeper/investment managers Proper recording principal and income transactions Proper presentation and disclosure of investment information Does plan have hard to value investments Does plan engage in securities lending 112 Full Scope Audits Understand the plan s investment strategy and valuation mythologies Analyze changes in investments Determine existence and ownership of assets Review and inquire: Plan minutes Agreements for evidence of liens, pledges and security interests Investment manager reports Inquire as to securities lending 113 For All Audits Review footnotes and schedules Proper classification by type of investment Proper description for method of determining fair value Issuer of investment is correct Review Schedule D of Form 5500 Determine if investment is a DFE 114

39 Investment Disclosures ASC requires certain disclosures to be made by major category Disclosure of realized/unrealized gain/loss by major category Amount of significant transfers between level 1 and level 2 and the reasons for the transfers disclosure example in audit guide 115 ERISA Considerations Investment concentrationsshould have some diversification ERISA bonding requirements Generally requires that all funded plans obtain fiduciary bonds for all administrators, officers, and employees who handle funds or other property of the plan in the amount of 10% of funds handled 116 Questions???? 117

40 Party-in-Interest Transactions, Prohibited Transactions, and Plan Tax Status Audit Guide Chapters 11 & Learning Objectives Upon completion of you should have an understanding of the following: Who is a party-in-interest How to identify a party-in-interest and a prohibited transaction What audit procedures to perform and impact on the auditor s report Auditor s responsibility related to Plan tax status 119 Generally Accepted Auditing Standards Auditor s cannot be expected to provide assurance that all related party transactions will be discovered Auditor s need to be aware of the possible existence of material related party transactions as well as potential party-ininterest transactions that could impact the financial statements 120

41 Professional Standards Related Party Transactions FASB ASC 850, Related Party Disclosures SAS 54, Illegal Acts by Clients Prohibited Transactions SAS 54, Illegal Acts by Clients FASB ASC 450, Accounting for Contingencies SAS 82 and 99, Consideration of Fraud in a Financial Statement 121 Audit Party-In-Interest Transactions ERISA Section 3(14) Fiduciaries or employees of the plan Person providing services to the plan Employer whose employees are covered by the plan Person who owns 50% or more of such an employer or relatives of such persons 122 FASB ASC Related Party Disclosures Related parties are also Parties-in- Interest Related party transactions may not necessarily involve accounting recognition Related party transactions do not necessarily violate ERISA 123

42 ERISA section 406(a) Forbids certain transactions between the plan and parties-in-interest Sale, exchange or lease of property Loan or other extension of credit (includes untimely deposits to the trust of employee salary deferrals) Furnishing of goods, services or facilities Transfer of plan assets for the benefit of a party-ininterest Acquisition of employer securities or real property in violation of the 10 percent limitation 124 Party-In-Interest Transactions Impact the following audit areas: Planning and performing the audit to identify all material party-in-interest transactions Required disclosures Possible report modifications if a prohibited transaction has occurred 125 Related Party Transactions Existence of Parties-in-Interest Procedures for identifying, accounting and reporting such transactions Request names of parties-in-interest Review transactions with such parties Review prior year work papers containing transactions or inquire of predecessor auditors Review regulatory filings Inquiries of plan management regarding party-in-interest transactions Review agreements with service providers 126

43 Identifying Party-In-Interest Transactions Provide audit staff with names of related parties Review committee minutes Review correspondence with regulatory agencies Review invoices from law firms Look for large, unusual transactions or nonrecurring transactions Review conflict of interest statements obtained from plan management Review transactions with the plan s major service providers, investees, borrowers, etc. 127 Audit Implications for Prohibited Transactions Obtain an understanding of the transaction How it occurred Sufficiency of other information Inquire of management at a level above those involved Consult plan s ERISA counsel or other specialists Apply similar procedures as for related party transactions Auditor has a responsibility to deal with all prohibited transactions regardless of materiality 128 Prohibited Transactions Reporting Implications Financial impact of fines, penalties and receivables for money being paid back to the plan Adequacy of financial statement and supplemental schedule disclosures Contingencies may also need to be disclosed Consider the implications of the prohibited transaction in relation to other aspects of the audit Prohibited transactions must be disclosed on Schedule G, Part III of the Form 5500 Financial statement materiality does not apply to supplemental schedules 129

44 Late Deposits Not to be reported on Schedule G Late deposits recorded on Line 4a of the Form 5500 Reported on Supplemental Schedule 130 Audit Implications for Prohibited Transactions SAS No. 54, requires the auditor to be alert to prohibited transactions SAS No. 82 and 99, requires the auditor to assess and document the risk of material misstatement Auditor has the responsibility to deal with all prohibited transactions, regardless of quantitative materiality 131 DOL s Voluntary Correction Program Eligible for immediate relief from payment of certain excise taxed imposed by IRS Not required to report the corrected transaction as nonexempt on supplemental schedules of Form 5500 Full compliance with the program will result in the DOL s issuance of a No Action Letter and no imposition of penalties on the plan sponsor 132

45 Prohibited Transactions Audit implications of prohibited transactions: Reliability of management s representations Impact on specific control procedures Assure that appropriate plan management is adequately informed of prohibited transactions Include in SAS 114 and 115 letters 133 Plan s Tax Status Plan financial statements generally do not have accrued income taxes or a provision for income tax as plans are granted special tax status Audit Objectives Is the trust qualified under the Internal Revenue Code Is plan operating in compliance with the plan document Do any transactions impact plan qualification Recording of asserted or unasserted claims UBIT impact of FASB ASC Required disclosures are now in the audit guide Any uncertainties Open tax years 134 Plan s Tax Status Audit Procedures Review IRS determination letter Review current and subsequent plan amendments Inquire about plan s operations or changes which may impact tax status including compliance testing Review results of other audit work for impact on tax status 135

46 Commitments, Contingencies, Administrative Expenses and Completion Procedures Audit Guide Chapter Learning Objectives As a result you should be able to plan and perform appropriate audit procedures with respect to commitments and contingencies, administrative expenses and audit completion procedures for a defined contribution plan and defined benefit plan 137 Professional Standards SAS 12, Inquiry of a Client s Lawyer Concerning Litigation, Claims and Assessments SAS 85, Client Representations FASB ASC 440 and 450, Commitments and Contingencies SAS 99, Consideration of Fraud in a Financial Statement audit SAS 103, Audit Documentation SAS 114, Communication with Those Charged with Governance SAS 115, Communicating Internal Control Related Matters Identified in an Audit FASB 165, Subsequent 138 Events

47 Commitments and Contingencies Audit Procedures Discuss possible issues with plan sponsor or third party administrator Review meeting minutes for contingent liabilities Review plan sponsor financial statements Analyze legal expenses for contingencies Obtain a client representation letter Inquire concerning any investigations by regulatory authorities Inquiry letter to plan s counsel 139 Legal Letters Letter should be sent when management has consulted legal counsel Should be sent near the end of field work or an updated letter may be required Generally should be sent to ERISA counsel Inquiry regarding litigation, claims or assessments and plan qualification issues Obtain audit inquiry letter from in-house counsel if applicable If no consultation include in management representation letter Legal letter should follow example in Audit Guide 140 Administrative Expenses Audit Objectives Expenses in accordance with plan agreement Properly classified and recorded Audit Procedures Are expenses properly authorized Expenses in accordance with service contracts Fees comply with service provider agreements 141

48 Subsequent Events Review committee meeting minutes through report date Supplemental legal letter Review of any interim plan financial statements Review the plan sponsor s financial statements Inquire of client of any subsequent events 142 Types of Subsequent Events Type 1 Type 2 Examples Mergers Termination Spin-offs 143 Plan Representations Plan amendments Omissions from participant data Acceptance of actuarial assumptions Whether the plan is qualified under the IRC Existence of party-in-interest transactions Investments valued at fair value Timely deposits 144

49 Responsibility to the Form 5500 Extends to the financial information in the Form 5500-Schedule H No obligation for other information on the Form 5500 Read Form 5500 for material inconsistency with audited financial statements (Schedules A, C, D, H and SB/MB) Materially inconsistent information should be revised If not revised, consider explanatory paragraph or withdrawal from engagement 145 Other Considerations Plan mergers Terminating plans Changes in service providers Actuaries Record keepers Auditors 146 Communications with those Charged with Governance SAS 114, The Auditors Communication with Those Charged with Governance requires communication regarding The auditors responsibility under GAAS An overview of the planned scope and timing of the audit Significant findings from the audit such as Uncorrected misstatements Risks of fraud identified Judgments as to quality of the plans accounting principles Significant difficulties encounter during the audit Disagreements with management, if any 147

50 Internal Control Related Matters SAS 115, Communicating Internal Control Related Matters Identified in an Audit Must be a written communication Should be made not later than 60 following the report release date Communicate significant deficiencies and material weaknesses 148 Questions???? 149 Reporting and Disclosure Requirements Audit Guide Chapters 2, 3 and 13 Appendix D & E 150

51 Learning Objectives As a result you should be able to understand the financial statement reporting and disclosure requirements with respect to benefit plans and the reporting required for the Form Reporting and Disclosure Requirements Authoritative Literature Required Financial Statements Financial Statement Disclosure Requirements ERISA and DOL Reporting Requirements 152 Defined Contribution Pension Plans Statement of Net Assets Available for Plan Benefits Statement of Changes in Net Assets Available for Plan Benefits 153

52 Defined Benefit Pension Plans Statement of Net Assets Available for Plan Benefits Statement of Changes in Net Assets Available for Plan Benefits Information regarding the actuarial present value of accumulated plan benefits Information regarding year-to-year change in accumulated plan benefits 154 Defined Benefit Health & Welfare Plans Statement of Net Assets Available for Plan Benefits (can be combined with the statement of benefit obligations) Statement of Changes in Net Assets Available for Plan Benefits (can be combined with the statement of changes in benefit obligations) Information regarding plans benefit obligations including the actuarial present value of accumulated plan benefits Information regarding year-to-year change in benefit obligations including accumulated plan benefits 155 Disclosure Requirements A brief general description of the plan agreement, including its contribution, vesting and allocation provisions, disposition of forfeitures and benefit provisions the year A description of significant plan amendments adopted during the year and the effect of such amendments on net assets if significant either Individually or in the aggregate. Policy regarding the purchase of insurance contracts that have been excluded from plan assets and the income from those contracts for the year 156

53 Disclosure Requirements The federal income status of the plan if a favorable determination letter form the IRS has not been obtained or maintained. ERISA plans require disclosure of information concerning whether or not a tax ruling or determination letter has bee obtained Investments that represent 5% or more of total net Investments pledged to secure debt of the plan as well as a description of the provisions regarding the release of such investments from the pledge and the amounts of investments released from the pledge in the last period 157 ERISA and DOL Reporting Requirements Comparative Statement of Net Assets Available for Plan Benefits Description of accounting principles Variances from GAAP Differences between financial statements and Form 5500 Supplemental schedules Additional information attached to the Form Form 5500 Reporting Supplemental Schedules--All part of Schedule G except 4a, 4i and 4j Part I Schedule of Loans or Fixed Income Obligations in Default or Classified as Uncollectible Part II Schedule of Leases in Default or Classified as Uncollectible Part III Nonexempt Transaction 159

54 Supplementary Schedules Schedule H, line 4a-Schedule of Delinquent Participant Contributions (include participant loans) Schedule H, line 4i-Schedule of Assets (Held at End of the Year) Schedule H, line 4i-Schedule of Assets (Acquired and Disposed of Within the Plan Year) (schedule rarely required) Schedule H, line 4j-Schedule of Reportable Transactions For participant directed transactions this schedule is not required 160 Supplemental Schedules SAS 118 and 119 Changes effective for 2011 plans but can early adopt Wording changes to the Audit opinion related to supplemental schedules. 161 Example Financial Statements and Footnote Disclosures Audit Guide Appendix D and E 162

55 Questions???? 163