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What does your Plan Auditor Do?

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.)

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What does your Plan Auditor Do?

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  1. What does your Plan Auditor Do? By Michael Lawrance, CPA August 14, 2013

  2. KPMG LLP • The views in this presentation do not necessarily reflect that of KPMG LLP or any of its subsidiaries or affiliates.

  3. 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)

  4. 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.

  5. 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.)

  6. 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

  7. 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)

  8. Planning – Plan Sponsor • Events that can effect the plan • Plan termination • Plan merger/spin-off • Mass layoffs • Potential partial plan termination

  9. 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)

  10. 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

  11. Substantive Procedures • The procedures mentioned are an illustrative but not exhaustive list of procedures performed during a standard 401(k) plan audit

  12. Substantive Testing – Significant Accounts • Contributions • Employee • Employer • Benefit Payments • Investments

  13. 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

  14. 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

  15. 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

  16. 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

  17. Substantive Testing - Contributions • Reconcile Employee and Employer Contributions from Payroll to Record keeper / Custodial reports • Check remittances for timeliness

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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.)

  23. Questions?

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