Is This the End of the Limited Scope Audit?
In July, the AICPA Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 136 – Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. These new standards will go into effect for the 2020 plan year audits (i.e., audit work conducted in 2021).
The standard aims to provide transparency to readers of ERISA plan financial statements and to clarify the audit procedures required for ERISA Section 103(a)(3)(C) audits, which is the new terminology replacing the ERISA limited scope audits conducted today. But is there an actual difference between the two or is this simply a rebranding?
The answer is yes, there’s a small difference. Currently, limited scope audits allow auditors to rely on the plan trustee’s certification of investments and related activity to narrow the scope of the audit. As a result, the required procedures over investment activity are significantly scaled-down and the auditor’s report contains language that disclaims an opinion due to the activity covered by the certification which has not been audited.
ERISA Section 103(a)(3)(C) audits are similar in that auditors may still rely upon a trustee’s certification to reduce the required testing of investment activity; however, the elimination of these procedures is not viewed as a scope limitation because there is still work being done to audit the investments. Obtaining and vetting the trustee’s certification is the audit procedure that covers investment activity, so it is no longer deemed to be a scope limitation. In turn, the new audit opinion for an ERISA Section 103(a)(3)(C) audit will be considered an unmodified opinion, without disclaimer.
SAS 136 also clarified the requirements for using a trustee certification to allow for an ERISA Section 103(a)(3)(C) audit. The standard now requires plan sponsors to acknowledge their fiduciary responsibility for assessing whether the requirements are met for an ERISA Section 103(a)(3)(C) audit to be conducted. There are also new audit procedures required for investments in addition to obtaining a valid trustee certification.
Aside from the elimination of the limited scope audit and introduction of the ERISA Section 103(a)(3)(C) audit, plan sponsors can expect other enhancements to their plan audits:
- Those charged with governance will be required to receive more communication related to reportable findings from the audit.
- Plan management will be asked by the auditor to include additional written representations regarding their fiduciary responsibilities.
- Plan Sponsors will be required to submit a full and substantially completed draft of the Form 5500 to their auditor before an opinion may be issued. (NOTE: This is a big change as previously many plans, particularly those that file with the SEC on Form 11-K, complete their audits long before their 5500 is completed. Be sure to carefully coordinate this with the preparer of your form 5500.)
- The audit opinion will have significant formatting changes. The charges are primarily to the placement of the key pieces of the auditor’s opinion, but there will also be additional language that describes plan management’s responsibilities for the audit.
James E. Merklin?>
CPA/CFF, CFE, CGMA, MAcc
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