When the number of all eligible employees, retirees, separated participants, and beneficiaries of deceased participants is at least 100 as of the first day of a plan year, an audit of both defined contribution and benefit plans is required. Once you’ve verified that an audit is necessary, you’ll need to determine which type of audit is needed ~ a full scope audit or a limited scope audit. To decide the type of audit, you need to know who holds the Plan’s investments ~ an insurance company, a bank, or a trust company.
Limited Scope Audit
If the regulated institution that holds the Plan’s investments certifies that the investment information is not only complete, but also accurate, then a limited scope audit is allowed. When performing a limited scope audit of the financial statements, it’s not necessary to audit any investment information that was prepared and certified by a state or federally chartered and regulated bank or insurance carrier. If your Plan receives a certification from a broker-dealer or an investment company, it won’t qualify for the limited scope exception because broker-dealers and investment companies aren’t qualified to certify that the investment information is accurate and complete. If a CPA is hired to perform a limited scope audit, the accounting professional cannot give an unqualified opinion on the Plan’s financial statements because the CPA has not been able to perform sufficient work to form an overall opinion on the financial statements. This is referred to as a Disclaimer of Opinion; the Department of Labor accepts a Disclaimer of Opinion for a limited-scope audit. While it’s not uncommon to have multiple certifications if more than one insurance company, trustee, or custodian holds investments, limited scope audits cannot be performed for plans that are registered and are filing with the SEC. Thus, when a limited scope certification is not obtained or is not allowed, then it’s necessary for a full scope audit.
Full Scope Audit
When an auditor is secured to perform a full scope audit, everything in the Employee Benefit Plan is subject to audit testing; thus, in a full scope audit, the audit work is actually performed on the investments. Some of the audit procedures may encompass sending a confirmation to each of the custodians, trustees or insurance companies to verify that the investments actually exist and to identify their ownership. With a full scope audit, you are also required to perform audit procedures on the valuation of investments, on the investment transactions, and on the investment income (loss) at the plan level.
While the level of audit procedures for investments varies in a limited scope audit and in a full scope audit, it is necessary that a Plan’s financial statements contain all the disclosures that are naturally required by generally accepted accounting principles. An independent audit reviews and measures the adequacy and efficacy of a Plan’s internal controls. A good audit will affirm not only that a Plan’s financial statements were subjected to an independent examination, but also that the operating processes are in good order.
If you’re unsure as to whether your plan requires an audit and if it does, whether it needs a full scope audit or a limited scope audit, contact Ernst Wintter & Associates LLP. As a leader in the industry, our firm understands the intricacies of employee benefit plans and can thus offer you value-added services that go above and beyond an audit report.