Knowing what to expect prior to the start of an employee benefit plan audit can help make the process quick and efficient. Whether your employee benefit plan is about to be audited for the first time or you are looking to improve upon the audit process from the prior year, consider these tips to prepare for an audit of your plan and maximize efficiencies. Achieving audit efficiencies means reducing your time and keeping your costs down, a goal easily attained with proper planning.
Be prepared to discuss with the audit team key policies and procedures that impact operation of the plan, any changes to such policies and procedures, any changes to the plan document, and any known or potential compliance issues. An understanding of these items early in the audit allows the audit team to easily identify and focus on risks pertinent to your plan. In addition, make the audit team aware of key plan resources available during the audit. Successful planning requires a solid understanding of the plan and good communication with the primary contact responsible for the overall audit process, including overseeing preparation of the plan’s financial statements and Form 5500, Annual Return/Report of Employee Benefit Plan.
Establish a single point of contact for the audit team. Designating a single person with whom the audit team communicates helps create a smooth and efficient process. This is often a member of the plan sponsor’s benefits or accounting department, generally whoever has primary responsibility for the administration of the plan. The designated contact can direct auditor requests internally, to the third party administrator (TPA) and other involved parties, as appropriate. This prevents overlapping or duplicate efforts and keeps the primary contact involved with all communications related to the plan audit.
Be familiar with the plan’s investments. The arrangement in which investments are held determines the scope of the audit (limited scope or full scope).The type and complexity of investments determines the extent of audit procedures and financial statement disclosures required. The planning stage is the time to gather required disclosure information about the plan’s investments from the plan’s custodian or investment advisors. This is especially important if the plan invests in alternative or hard-to-value investments.
Provide ready access to documents requested on the auditor’s request list, along with a draft of the plan’s financial statements, prior to the start of fieldwork. The auditor’s request list will typically include items such as updated plan documents or amendments, an employee census report, the annual auditor package from your TPA, activity-level internal control narratives, spreadsheet templates to summarize certain plan activity, and completed confirmation templates. Confirmations can be a relatively easy way to obtain audit evidence over certain demographic data and plan activity. The confirmation process can be done via email or paper requests. Participant confirmations tend to be most effective when sent early in the audit process and when the recipients are aware of the timing and importance of the document they will receive.
Be available to meet with the audit team to discuss key plan processes and controls at the activity level and plan level, as well as the plan’s information technology controls. The audit team will want to meet with those responsible for key plan processes and controls in order to understand the implementation of these controls.
Be ready to discuss any financial statement line items and footnote disclosures that need updating in the working draft of the plan’s financial statements. Involving the plan’s TPA in discussions with the audit team regarding the plan’s investments can help reduce or prevent back-and-forth communications between you, the audit team, and the TPA.
Be prepared with documents the audit team will need for tests of participant and plan-level data. Key testing areas include contributions, participant data, eligibility, an election not to participate, allocations to participant accounts, participant loans, benefit payments, and any other significant plan transactions during the year. Also, be ready with data regarding the plan’s nondiscrimination testing, forfeitures applied, and any prohibited transactions that may have occurred, such as late remittance of participant contributions to the plan. In the case of a full scope audit, investment valuation and transaction testing will be performed as well. Prior to leaving the field, the audit team will provide a comprehensive list of items required to wrap-up any open questions or testing and, together with you, will establish a timeline for completion of these.
Be available for any final questions as draft financial statements are reviewed and comments are accumulated for final edits by all parties. Adjusting journal entries and passed journal entries to the financial statements, if any, will be discussed. Along with finalizing the financial statements, final audit communications will be presented for review. This includes a management representation letter to be signed and returned to the audit team, as well as letters that discuss the audit process and any findings during the course of the audit. And lastly, the draft Form 5500 will be reviewed to ensure it agrees to the draft audited financial statements, prior to issuance of the audit report.
Work together with your plan’s auditor during the planning stage of the audit and inform them of the plan’s activity for the year being audited. Be prepared for the auditor’s onsite fieldwork and try to conclude the process as soon as possible after fieldwork. Prompt attention to questions that arise over the course of the audit will help complete the audit timely and maximize efficiencies.