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April 1992

Planning an audit of an employee benefit plan. (Auditing)

by Picciurro, Michael H.

    Abstract- Adequate planning is essential to the successful conduct of any audit. In the audit of employee benefit plans, the need for extensive preparation is particularly important. The key steps that must be accomplished in the planning stage of such an audit would be developing a good understanding of the operating features of the plan, reviewing the reporting and disclosure requirements related to the plan, and obtaining enough information to determine key audit areas.

The initial planning for the audit should take place before or in conjunction with the auditor's consideration of the internal control structure and the preparation of the audit program. The objectives of the initial planning stage in the audit of an employee benefit plan should be to:

1. Develop an understanding of how the plan operates;

2. Identify current developments affecting the plan's operation; and

3. Obtain sufficient information to identify significant audit areas.

Understand How the Plan Works

The auditor must understand the specific operating characteristics of the plan. The auditor can gain this understanding through a review of plan documents and discussions with the plan administrator and other appropriate representatives of the plan. Documents that assist the independent auditor in understanding the plan's provisions and operations include:

* The plan's instrument, including amendments;

* The trust agreement;

* The summary plan description;

* The IRS letter of determination;

* Reports by plan's actuary;

* Annual return of Employee Benefit Plan (Form 5500);

* Prior years' financial statements;

* Minutes of meetings of the board of trustees or administrative committee;

* Insurance company reports;

* Insurance contracts; and

* Agreements with trustees, investment advisors and insurance companies.

Identify Current Developments

Affecting the Plan's Operation

Generally, this can be done through discussions with key members of the plan's management or staff and with the plan's actuary, legal counsel or other consultants. Also helpful is reference to various available sources of information. Of primary concern are developments that may cause potential auditing, accounting and reporting problems, including the following:

* Changes in plan provisions;

* Changes in accounting principle or estimates;

* Changes in actuarial methods or assumptions;

* Changes in key plan personnel, actuaries, trustees, investment advisors or others rendering services to the plan; and

* Changes in government regulations.

Also, to assist in identifying current developments affecting the plan's operations, the plan auditor should perform preliminary analytical procedures as required by SAS 56. Such a review of financial statement amounts and relationships assists the plan auditor in updating his or her understanding of factors influencing the environment in which the plan operates. The procedures include comparisons of current and prior financial condition and operating results and actual results to budget. The purpose of these procedures is to aid the auditor in identifying the overall potential for problems and to highlight areas of special risk before the audit programs are designed.

Obtain Sufficient Information to

Identify Significant Audit Areas

The early stages of planning ordinarily include obtaining sufficient information to identify the significant aspects of the audit. This is a continuation of the information-gathering process. The auditor should consider applying the following procedures to gather information for planning the audit.

1. Discuss with trustees, plan administrator, or other appropriate representative of the plan, the scope of the audit. Determine whether the scope of the audit will be restricted (limited scope audit).

2. Make inquiries of plan management concerning:

2 Whether the plan's financial statements will be prepared in conformity with GAAP or with another comprehensive basis of accounting permitted by ERISA;

* Investment assets held by outside custodians;

* Who maintains the plan's accounting records and participants' data;

* Extent to which computer applications are used;

* Preparation and use of interim financial statements;

* Preparation and use of budget;

* The plan's maintenance of a list of parties in interest as defined by ERISA Sec. 3(14); and

* The plan procedures for identifying reportable transactions as defined by ERISA.

The planning process involves the development of an overall strategy for the expected conduct of the audit. The nature, timing and extent of planning will vary according to the type of employee benefit plan, size and complexity of the plan's operations, and any restrictions that might be placed on the audit. The auditor should be familiar with ERISA, applicable sections of the IRC and related Department of Labor and IRS regulations and the potential effects on the plan.

In selecting particular substantive tests to achieve audit objectives, the auditor considers the assessment of control risk, the relative risk of errors or irregularities that would be material to the financial statements, and the expected effectiveness and efficiency of the tests. These considerations include the materiality of the items being tested, the kind and competence of available evidence, and the nature of the audit objective to be achieved.

The combination of the auditor's assessment of inherent risk and control risk and the results of substantive tests should be sufficient to provide a reasonable basis for the auditor's opinion.

A few areas of heightened audit risk in audits of employee benefit plans include:

* Determining the fair value of investments with no ready market;

* Determining prohibited transactions; and

* Estimating benefit obligations.

Planning is always a vital component of an audit, but it is especialy important with respect to employee benefit plans. Every auditor of an employee benefit plan should be familiar with the requirements of ERISA that apply to reporting and disclosure. It is at this planning stage that the auditor should update his or her understanding of the requirements. In March 1991 the AICPA published its revised audit and accounting guide for employee benefit plans. Chapter 5 of the guide provides the auditor with guidance on planning such an audit. Also, the AICPA issues audit risk alerts that focus on recent developments in the employee benefit plans area to provide auditors with overviews of current economic, industry, regulatory, and professional developments that they should be aware of as they plan their audits.

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