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Audits of 401(k) Plans

Author/Moderator: Deloitte & Touche LLP, under the direction of Alice Wunderlich, CPA, Tamara M. Anderson, CPA, Karen T. Caprio, CPA, Phyllis Dunn, CPA, and Patricia C. Miller, CPA / Tamara M. Anderson, CPA
Publisher: AICPA
Availability: In Stock
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Description

Over 400,000 benefit plans have 401(k) features, making it vital that CPAs know the audit requirements and the latest developments affecting them. Focus on every aspect of how to audit a 401(k) plan and prepare financial statements that satisfy ERISA and SEC requirements.

Objectives: 
  • Understand the requirements for 401(k) audits as distinguished from audits of other types of employee benefit plans
  • Recognize new developments affecting 401(k) audits
  • Plan and conduct 401(k) audits more efficiently and effectively

Prerequisite:  Knowledge of ERISA and IRS requirements for benefit plans.

Table of Contents

  • Chapter 1 - Introduction and Background
    • Learning Objectives
    • Introduction
    • Background Information
    • Operation and Administration
    • Accounting Records
    • Reporting Standards
    • Governmental Regulations
    • Reporting and Disclosure Requirements under ERISA
    • SEC Form 11-K Filing Requirements
    • Audit Requirements
    • Limited-Scope Audits
    • Other Considerations
      • Late Remittance of Employee Contributions
      • Forfeitures
      • Guaranteed Investment Contracts, Stable Value Funds, and Synthetic Guaranteed Investment
        Contracts
      • Reporting of Investment Contracts for Defined Contribution Plans (SOP 94-4) and Reporting
        of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies
        Subject to the AICPA Investment Company Guide and Defined-Contribution Health and
        Welfare and Pension Plans (FSP AAG INV-1 and SOP 94-4-1)
      • Accounting and Reporting of Certain Defined Contribution Plan Investments and Other
        Disclosure Matters (SOP 99-3)
      • Limit on Employer Stock for 401(K) Plans
      • Limited-Scope Certifications
      • Non-Readily Marketable Securities
      • Investment Expenses
      • Soft Dollars
    • Questions
  • Chapter 2 - Planning
    • Learning Objectives
    • Introduction
    • Pre-engagement Activities
      • Audit Scope
      • Engagement Letter
      • Full-Scope vs. Limited-Scope Audit
    • Audit Planning
      • Communication With Those Charged With Governance
      • The Auditor's Assessment of Risk
      • Considering Whether Testing in the Plan Sponsor Audit Can Be Used in the 401(k) Plan Audit
    • Communication and Coordination
    • Understanding the Plan and its Environment, Including its Internal Control
      • Information Gathering
    • Audit Documentation
    • Preliminary Analytical Review Procedures
    • Audit Team Brainstorming Meeting
      • Plan Management Characteristics and Integrity
      • Overall Commitment to Accurate Financial Reporting
      • Control Environment
      • Management Structure
      • Impact of Information Technology
      • Audit Committee
      • Nature of the Plan
      • External Influences That Might Impact the Plan
      • Financial Results
      • Nature of the Audit Engagement
      • Business Relationships and Related Parties
      • Engagement History and Client Relationships
    • Internal Control Structure
    • Consideration of Fraud
      • Fraudulent Financial Reporting
      • Misappropriation of Assets
    • Plan's Use of Third-Party Service Organizations
    • Party-in-Interest Transactions
    • Plan's Use of Voice Response or Internet Recordkeeping System
    • Accounting Estimates
    • Going Concern Considerations
    • Questions
  • Chapter 3 - Internal Control Structure
    • Learning Objectives
    • Introduction
    • Understanding Internal Control
    • The Components of Internal Control
      • Control Environment
      • Risk Assessment
      • Control Activities
      • Information and Communication Systems
      • Monitoring
    • Acquiring Knowledge of the Controls
    • Assessing Control Risk
    • Multiemployer-Sponsored Plans
    • Plan's Use of Third-Party Service Organizations
      • Service Auditor Reports
      • Limited-Scope Audits
      • User Controls
      • Different Service Auditor Reports on Different Operations
      • Importance of Period Covered by Service Auditor Report
      • Effect of Exceptions
      • Unavailability of Service Auditor Report
    • Plan's Use of Voice Response and Internet-Based Recordkeeping Systems
    • Documentation
    • Communicating Control Deficiencies
    • Questions
  • Chapter 4 - Auditing the Statement of Net Assets Available for Benefits
    • Learning Objectives
    • Introduction
    • New Accounting Guidance
    • Listing of Investments
    • Valuation of Investments
    • Investment Options
      • Units Participation in a Master Trust
      • Mutual Funds
      • Common or Commingled Trust Funds
      • Pooled Separate Accounts
      • Self-Directed Accounts
    • Audit Objectives
    • Audit Procedures
    • Discretionary vs. Nondiscretionary Trusts
    • Investments in Master Trusts and Similar Vehicles
    • Investments in Registered Investment Companies (Mutual Funds) and Common/Commingled Trust Funds
      • Audit Procedures Where Assets Are Invested in Mutual Funds
      • Audit Procedures Where Assets Are Invested in Common/ Commingled Trust Funds
    • Investments with Insurance Companies
      • Pooled Separate Accounts
      • Self-Directed Accounts
      • Investment Contracts and SOP 94-4, as amended, Reporting and Accounting Requirements
      • Footnote Disclosures for GICs
      • Synthetic GICs
      • Audit Procedures for Assets Invested with Insurance Companies
      • Audit Procedures for Assets Invested with Pooled Separate Accounts
      • Audit Procedures for Assets Invested in Investment Contracts
    • Direct Filing Entities (DFE)
    • Participant Loans
    • Other Investments
    • Nonreadily Marketable Securities
    • Derivatives
    • Auditing Derivatives
      • Use of Specialists
      • Real Estate
      • Loans and Mortgages
    • Limited-Scope Auditing Procedures
    • Contributions Receivable
    • Cash Balances
    • Other Assets
    • Accrued Liabilities
    • Questions
  • Chapter 5 - Auditing the Statement of Changes in Net Assets Available for Benefits
    • Learning Objectives
    • Introduction
    • Investment Income
      • Audit Objectives
      • Suggested Audit Procedures
    • Limited-Scope Audit
    • Investment Expenses
    • Contributions from Employers
      • Audit Objectives
      • Suggested Audit Procedures
      • Forfeitures
    • Individual Participant Accounts
      • Contributions
      • Audit Objectives
      • Suggested Audit Procedures
    • Participant Eligibility
    • Contributions from Other Identified Sources
    • Withdrawals
    • Loans
      • Audit Objectives
      • Suggested Audit Procedures
    • Administrative Expenses
      • Audit Objectives
      • Suggested Audit Procedures
    • Questions
  • Chapter 6 - Other Auditing Considerations
    • Learning Objectives
    • Introduction
    • Plan Tax Status
    • Testing for Discrimination
      • Importance of Using Correct Compensation
      • Safe Harbor Methods
    • Audit Procedures Relating to Tax Status of Plan
    • Consequences of Violations
    • Failure to Pass Non-Discrimination Tests
    • Commitments and Contingencies
      • Representations from Plan Counsel
    • Subsequent Events
    • Representations from Plan Management
      • Sample Management Representation Letter
    • Form 5500
      • Form 5500 Filing Deadline
      • Agreement of Financial Statements to Form 5500
      • Financial Statements/Auditor's Report Issued Prior to Form 5500
      • The Form 5500
      • Supplemental Schedules
      • Summary of Recent Significant Changes to the Form 5500
      • Final Return/Report for a Terminated Plan
    • Terminating Plans
      • Decision to Terminate Made before Plan Year End
      • Decision to Terminate Made after Plan Year End
    • Plan Mergers
      • Disclosure in Financial Statements
    • Party-in-Interest Transactions
      • No Materiality Threshold in Prohibited Transactions
      • Events Considered Prohibited Transactions
      • Exempt Transactions
      • Procedures to Identify Parties-in-Interest
      • Implications of Prohibited Transaction Determination
    • Initial Audit of the 401(k) Plan
    • Form 11-K: The Sarbanes-Oxley Act of 2002
    • Communication With Those Charged With Governance
      • Significant Findings from the Audit
    • Questions
  • Chapter 7 - The Auditor's Report
    • Learning Objective
    • Introduction
    • Standard Report
    • Independent Auditor's Report
    • Unaudited Information in Supplemental Schedules
    • Modified Reports
      • Information Omitted from Supplemental Schedules
      • Information Omitted from a Supplemental Schedule - Full-scope Audit
      • Entire Schedule Omitted - Full-scope Audit
      • Decision to Terminate Plan
      • Schedule of Non-Exempt Transactions Omitted
    • Other Qualified Opinions
      • Departure from Accounting Principles Generally Accepted in the United States of America
      • Omitted or Incomplete Supplemental Schedule or Material Inconsistency – Limited-Scope Audit
    • Non-GAAP Basis Financial Statements
      • Independent Auditor's Report
    • Limited-Scope Reports
      • Independent Auditor's Report
      • Independent Auditor's Report
      • Independent Auditor's Report
    • Other Report Examples
      • Reports Filed Pursuant to the SEC Form 11-K
      • Limited-Scope Audit for Multiemployer-Sponsored Plan
      • Nonreadily Marketable Securities
      • Reporting on the Financial Statements of a Trust Established under a Plan
      • Multiple Plan Reporting
      • Reference to the Work of Other Auditors
      • Initial Audits of Existing Plans
    • Questions
  • Chapter 8 - Financial Statement Disclosures
    • Learning Objective
    • Introduction
    • Overview of Required Disclosures
    • General Description of Plan
      • Description of the Plan
    • Significant Accounting Policies
      • Summary of Significant Accounting Policies
    • Plan's Tax Status
    • Plan Termination
    • Master Trusts
    • Unit Value Disclosures
    • Excess Contributions Refundable
    • Benefit Claims Payable
      • Distributions Payable
    • Illustrative Financial Statements
      • 401(k) Plan Financial Statements
    • Risks and Uncertainties
      • Geographic Concentration of Investments
    • Reconciliation of Financial Statements to Form 5500
    • Plan Sponsor Uncertainty - Sponsor Going Concern
    • Subsequent Events
    • Plan Mergers and Terminations
    • Non-Exempt Transactions
    • Limited-Scope Disclosures
      • Information Certified by the Trustee (Unaudited)
    • Related-Party Transactions
    • Financial Instruments and Additional Investment Information
      • Authoritative Guidance
      • Fair Value Disclosure
    • Questions
  • Chapter 9 - Supplemental Schedules
    • Learning Objective
    • Introduction
    • Information for Supplemental Schedules from Trustee/Custodian
    • Mandatory Form of Supplemental Schedules
    • Absence of a Required Schedule or Omission of Required Data from Schedule
  • Chapter 10 - Ethics Focus: Accounting and Auditing
    • Ethics Overview
    • Recent Developments
    • Spotlight on Independence
    • Key Ethical Dilemmas
    • Addressing Ethical Dilemmas
    • Available Resources
  • Chapter 11 - Latest Development

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Excerpts

Chapter 1

Introduction and Background Learning Objectives

Upon completion of this chapter you should have

  • An understanding of the basic features of 401(k) plans.
  • An understanding of the general features of 401(k) plan operation and administration.
  • An understanding of the general reporting requirements for 401(k) plans.
Introduction

This course has been prepared to assist the independent qualified public accountant in accounting, auditing, and reporting on financial statements of 401(k) defined contribution retirement plans. This course will help the auditor identify the uniqueness of these types of audits.

Generally accepted auditing standards and generally accepted accounting principles apply in general to employee benefit plans. This course assumes that the user is generally knowledgeable in the field of accounting and auditing. Rather than discussing the broad application of those standards and principles, the course focuses primarily on the special issues involved in accounting, auditing, and reporting on financial statements of 401(k) employee benefit plans. The course does not discuss the application of all generally accepted accounting principles and auditing standards as they pertain to the auditing of general financial statements.

This course has been updated to reflect the following accounting and auditing standards.

  • In December 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) AAG INV-1 and SOP 94-4-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans, which provides guidance on the presentation and disclosure of fully benefitresponsive investment contracts. FSP AAG INV-1 and SOP 94-4-1 are effective for financial statements ending after December 15, 2006, with retroactive application to all prior periods presented. See Chapter 4 of this course for guidance on how to present and disclose these investment contracts as a result of this FSP.
  • In March 2006, the AICPA's Auditing Standards Board issued eight SASs (SAS Nos. 104-111) related to risk assessment. These SASs are effective for audits of financial statements for periods beginning on or after December 15, 2006 (with early adoption permitted).
  • In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands its discussion on financial statement disclosures regarding fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within these fiscal years, with earlier adoption encouraged, provided that the reporting entity has not issued any financial statements for that fiscal year, including interim financial statements. See Chapter 4 of this course for guidance on how to measure fair value for various investments and the necessary disclosures.

This course focuses on single-employer sponsored 401(k) plans. However, the course does include certain comments on multiemployer-sponsored plans. Multiemployer-sponsored 401(k) plans would be treated as single-employer plans for purposes of reporting to the regulatory agencies described in the following text.

Background Information

A 401(k) plan (sometimes called a cash-or-deferred arrangement or CDA) may be incorporated into a profit-sharing, stock bonus, thrift, or savings plan. A 401(k) plan gives participants the option of receiving a cash payment immediately (salary) from the employer (taxable) or having the cash contributed to the plan as contributions on the participant's behalf (tax deferred). Government and not-for-profit entities have 403(b) plans that are similar in nature to the 401(k) plans. While this course does not specifically address governmental plans, certain auditing procedures discussed herein might be helpful to the auditor of governmental plans. Beginning January 1, 2009, certain 403(b) plans (primarily those with 100 or more participants) have an audit requirement.

A 401(k) plan may be sponsored by a single employer, multiple employers, or under a multiemployer arrangement. The majority of 401(k) plans are single employer plans; however, you should be aware of the existence of multiemployer plans. The most basic distinction between single and multiemployer plans is how they are administered. Single employer plans are generally established and operated by the management of one employer or a controlled group of corporations, called the plan sponsor. In contrast, multiemployer plans are typically established through collective bargaining agreements negotiated between a group of employers (e.g., construction) and the union representing the employees. These plans are managed by a joint employer/union board of trustees.

The various types of defined contribution plans that 401(k) plans are typically part of are briefly described below. Such plans can permit employee contributions. The distinguishing characteristic of the plans is often how the sponsor contribution is derived or treated.

  • A profit-sharing plan is a defined contribution plan that is not a pension plan or a stock bonus plan. It is a plan in which the sponsor contributes money to participants' accounts either on a discretionary basis (i.e., not mandatory) or as a percentage of profits, compensation, or other factors. A profit-sharing plan must be designated as such in the plan document.
  • A stock bonus plan is a defined contribution plan in which employer contributions to the plan are normally made in the stock of the employer. If stated in the plan document, the participant may request to be paid in cash instead of employer stock.
  • A thrift or savings plan is a profit-sharing or stock bonus plan whereby participants make contributions to the plan from after-tax dollars. Employee contributions are often matched by the sponsor, either in whole or in part.

When participants elect to contribute to a 401(k) plan they agree to have a portion of their wages, before income taxes, contributed to specific investments. These contributions are taken out of their wages and invested in the investment option(s) offered by the plan and selected by the participant. Plans also may provide for after-tax contributions, or may offer a Roth 401(k) feature, in which contributions are made on an after-tax basis.

The pre-tax deductions that the participant makes are called deferrals and are generally calculated as a percentage of total compensation. In other words, for each payroll cycle, the stated percentage amount is deducted from the participant's gross income before taxes are withheld and this money is then invested in the 401(k) plan. The employee can change the deferral rates periodically as permitted by the plan document. Many plans now have automatic enrollment or the ability for the participant to change their contribution percentage via an online system.

Defined contribution plans require that a separate account be maintained for each participant. This provides the participant with information as to total dollars in his/her account and the allocation of those dollars among the various investment options. Each individual participant account is maintained within the plan. In a 401(k) plan, generally, participants direct the selection of investments in their account and bear the investment risk of their individual account. The value of a participant's account fluctuates according to (a) amounts contributed to the account by the sponsor and/or participant, (b) investment experience on such amounts, (c) participant-initiated withdrawals, (d) expenses, and (e) any forfeitures allocated to the account. Many plans permit a participant to withdraw a portion of his/her account in the form of a loan from the plan. Loans by participants are treated as assets of the plan. Withdrawals from the plan can be made according to the provisions of the plan, when an employee terminates employment, retires, or is eligible for a hardship withdrawal. In addition, certain plans allow for participants to borrow against their account in the form of a participant loan. (See Chapter 4,"Participant Loans" section, for further information.)

Under a defined contribution plan, the sponsor contribution rate is generally determined periodically at the discretion of the sponsor or by contractual agreement, or both. When a participant retires or withdraws from the plan, the amount allocated to the participant's account (i.e., the vested amount) represents the participant's accumulated benefits. Participants are always fully vested in the amount of their employee contributions. The vested amounts of a participant's account balance may be paid to the participant or used to purchase a retirement annuity. (Vesting will be discussed in more detail in Chapter 5, in the section"Contributions from Employers.")

Operation and Administration

A 401(k) plan is contributory, with contributions from both employers and participants or from participants only. Contributions from employers may be discretionary or may be required.

A defined contribution plan is established by the plan document and relevant plan provisions are detailed in the plan document. These provisions are established and maintained by the plan sponsor. They define such matters as age and service requirements, which must be satisfied to allow an employee to participate in the plan, vesting, and loans. They also identify the plan's fiduciary(ies), fiduciary responsibilities (those relating to maintaining control and management of the plan) and the delegation of fiduciary responsibilities in connection with the administration of the plan. A plan subject to the Employee Retirement Income Security Act of 1974 (ERISA) must be in writing. Sponsoring organizations, i.e., banks, insurance companies, and/or stock brokers, prepare and update standard plans called master or prototype plans that are available to a plan sponsor to enable them to establish a qualified plan by customizing a standard plan to meet the plan sponsor's needs. These standardized plans generally have IRS approval.

The named fiduciary is responsible for the general operation and administration of the plan in addition to identifying a plan administrator. The plan administrator of a single employer plan is usually an officer or other employee of the plan sponsor, while the plan administrator for a multiemployer plan generally is a board of trustees. The plan administrator reports directly to those charged with governance of the plan, which may be an oversight committee or the plan sponsor's board of directors or other management group. The fiduciary has responsibility to ensure that the plan is operating in accordance with the terms of the plan document, trust instrument, if any, and all applicable government rules and regulations. Generally, the fiduciary makes decisions regarding the interpretation of rights of the participants under the plan, how investments are to be managed, and the performance or the delegation of responsibilities for operating and administering the plan.

The ultimate responsibility for the oversight of the plan rests with the fiduciary. However, the plan's day-to-day administration (e.g., collecting contributions, paying benefits, managing cash and investments, loan administration, maintaining records, and the preparation of reports) is often assigned to various entities such as (a) the plan sponsor, (b) a trustee, such as a trust department of a bank or insurance company, (c) an investment advisor, (d) a third party administrator or recordkeeper, or (e) a person or persons designated as the plan administrator.

A plan usually has a trust instrument or agreement that details the authority and responsibilities of the trustee(s) and any investment advisors or managers. This document should include or be consistent with the plan's investment policy and therefore may restrict the investment options permitted by the plan. In addition, the trust agreement should describe the fees to be paid to the trustees, investment advisors, and managers for services provided to the plan. It also will describe who is responsible for payment of these services, i.e., the participants or the plan sponsor.

736142

Videocourse Details

NASBA Field of Study: Auditing
Level: Basic
Recommended CPE Credit: 10
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