Recent Developments of Statement on Auditing Standards Effecting Employee Benefit Plans
Over the past year there have been multiple Statement on Auditing Standards (SAS) that have been created and issued by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA). These SASs are established by the AICPA for CPAs to follow when conducting audits, some specifically for Employee Benefit Plans (EBP). These SASs are effective for audits of Plans that have Plan year ends on, or after, December 15, 2020.
While not an exhaustive detail for each of the new SASs, the below outlines some of the largest impacts to EBPs. They are divided between the impact to the auditor and Plan sponsor, and will be in effect for the Plan year audit that will take place in 2021 for the 2020 Plan year (ending on or after December 31, 2020):
SAS 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements (issued May 2019):
Plan sponsor impact: No significant impacts
Auditor impact:
Addresses the auditor’s responsibility to issue an appropriate report in circumstances when the auditor concludes that a modification to the auditor’s opinion on the financial statements are necessary (Section 705).
Addresses the communication of key audit matters in the auditor’s report and any other additional communication when the auditor is engaged to do so (Section 706).
SAS 135, Omnibus Statement on Auditing Standards – 2019 (issued May 2019):
Plan sponsor impact: No significant impacts
Auditor impact:
Enhances the audit quality by heightening the auditor’s focus on related parties and relationships with related parties, as well as significant unusual transactions.
SAS 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA (issued July 2019):
Overall impact: Audit performed pursuant to ERISA section 103(a)(3)(C) is no longer referred to as a “limited scope audit”, but now referred to as an “ERISA section 103(a)(3)(C) audit.” This SAS notes that an ERISA section 103(a)(3)(C) audit is unique to EBPs and is not considered a scope limitation, therefore the auditor would no longer issue a modified opinion (typically a disclaimer of opinion) due to information that is certified by a qualified institution. Instead, the report provides a two-pronged opinion that is based on the audit and on the procedures performed relating to the certified investment information. It provides an opinion on whether the information not covered by the certification is presented fairly, and an opinion on whether the certified investment information in the financial statements agrees to, or is derived from, the certification.
Plan sponsor impact:
Additional verbiage added to the management representation letter and audit engagement letter (and other communications as required) noting Plan management’s responsibilities for:
Maintaining a current Plan instrument (including all Plan amendments).
Administering the Plan.
Determining that the Plan’s transactions that are presented and disclosed in the financial statements are in conformity with the Plan’s provisions.
Maintaining sufficient records with respect to each of the participants and to determine the benefits due, or which may become due, to such participants.
Providing to the auditor, prior to the dating of the auditor’s report, a draft Form 5500 that is substantially complete.
Acknowledgement of Plan management that elects to have an ERISA Section 103(a)(3)(C) audit that management’s election of the ERISA Section 103(a)(3)(C) audit does not affect its responsibility for the financial statements.
Determining whether an ERISA Section 103(a)(3)(C) audit is permissible under the circumstances.
The investment information prepared and certified by the qualified institution as described in 29 CFR 2520.103-8 meets the requirements in 29 CFR 2520.103-5.
Certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.
Auditor impact:
Complete overhaul of the auditor’s report, including a change in verbiage for the change from a “limited scope audit” to an ERISA Section 103(a)(3)(C) audit.
New engagement acceptance requirements, which are covered above under the “Plan sponsor impact” of SAS 136.
Obtain and read the most current Plan instrument for the audit period, including effective amendments, as part of obtaining an understanding of the entity sufficient to perform risk assessment procedures.
Consider whether to test specific Plan provisions as part of risk assessment. Because of the nature of ERISA audits, it would be rare for the auditor, based upon the assessed risks of material misstatement at the relevant assertion level, not to test any relevant Plan provisions.
Requires that the auditor perform the procedures necessary to become satisfied that received and disbursed amounts (for example, employer or employee contributions and benefit payments) reported by the trustee or custodian were determined in accordance with the Plan provisions.
When designing and performing audit procedures, the auditor is required to consider relevant Plan provisions that affect the risk of material misstatement at the relevant assertion level for classes of transactions, account balances, and disclosures.
The auditor must also consider if management has performed the relevant IRC compliance tests, including but not limited to, discrimination testing, and has corrected or intends to correct failures, as applicable.
Auditor is required to evaluate whether prohibited transactions identified by management or as part of the audit have been appropriately reported in the applicable ERISA required supplemental schedules and whether items identified that are not in accordance with the criteria specified are reportable findings as defined in the EBP SAS.
The review of a draft Form 5500 is also required in order to identify material inconsistencies, if any, with the audited ERISA Plan financial statements prior to dating the auditor’s report. If the auditor identifies a material inconsistency, he or she should determine whether the audited ERISA Plan financial statements or the draft Form 5500 needs to be revised.
The auditor is required to make certain EBP-specific communications with management and/or those charged with governance concerning reportable findings (as defined in the EBP SAS). These findings must be communicated in writing to management and those charged with governance in a timely manner in accordance with the requirements in other relevant AU-C sections, as well as communicating with those charged with governance the auditor’s responsibility with respect to Form 5500, procedures performed relating to Form 5500, and the results of those procedures.
The SAS also addresses what the auditor should do when a material inconsistency between the draft Form 5500 and the ERISA Plan financial statements is identified or when the auditor becomes aware of a material misstatement of fact.
Additional steps must also be taken regarding the testing of investments held by the Plan that are not certified by a qualified institution.
When identified prohibited transactions have not been appropriately reported in the applicable ERISA-required supplemental schedules, the auditor is required to modify the opinion on the supplemental schedule, when the effect of the transaction is material based on the financial statements as a whole. They must also include additional discussion in the other-matter paragraph in the auditor’s report on the supplemental schedules describing the prohibited transaction if the effect of the prohibited transaction is not material to the financial statements. If the prohibited party-in-interest transaction is material and is also considered a related party transaction, and that transaction is not properly disclosed in the notes to the Plan financial statements, modification of the auditor’s opinion on the financial statements is required due to a departure from the applicable financial reporting framework.
SAS 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports (issued July 2019):
Plan sponsor impact: No significant impacts
Auditor impact:
This SAS clarifies the auditor’s responsibility to consider whether a material inconsistency exists between other information and the audited financial statements and to remain alert for indications that a material misstatement of fact exists.
Requires the auditor to remain alert for indications that a material inconsistency exists between the other information and the auditor’s knowledge obtained in the audit or the other information is otherwise misleading.
When the auditor has obtained all of the other information at the date of the auditor’s report, the auditor is to include a separate section in the auditor’s report with the heading “Other Information,” or other appropriate heading. The intent is to bring transparency to the auditor’s responsibilities with respect to other information.
This SAS is not applicable to the Form 5500.
SAS 138, Amendments to the Description of the Concept of Materiality (issued December 2019):
Plan sponsor impact: No significant impacts
Auditor impact: No significant impacts
Overall impact: The description of the concept of materiality has changed. The ASB’s current description of the concept of materiality is consistent with the definition of materiality used by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB). SAS No. 138 and SSAE No. 20 align the materiality concepts discussed in AICPA Professional Standards with the description of materiality used by the U.S. judicial system, the auditing standards of the Public Company Accounting Oversight Board (PCAOB), the U.S. Securities and Exchange Commission (SEC), and the Financial Accounting Standards Board (FASB). The ASB believes it is in the public interest to eliminate inconsistencies between the AICPA Professional Standards and the description of materiality used by the U.S. judicial system and other U.S. standard setters and regulators. The ASB believes that, because the revised definition is aligned with the FASB, the revised description is substantially consistent with current U.S. firm practices with respect to determining and applying materiality in an audit or attest engagement and, accordingly, the amendments are neither expected nor intended to change U.S. practice.
The revised description of materiality is as follows:
Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
Additional information regarding the SASs can be found on the AICPA’s website at:
And the companions, known as the 401k.9s