Employee Benefit Plan Audits: AICPA Implements New Standards by | Aaron Slaughter

When a certified public accountant (CPA) con- ducts the annual audit of an employee benefit plan's financial statements, the CPA is required by the American Institute of Certified Public Accountants (AICPA) to follow ten generally accepted auditing standards.

CPAs rely on two key sources of information when con- ducting these audits.

1. Statements on Auditing Standards (SASs) issued by the Auditing Standards Board (ASB) of the AICPA. Each of these statements is referred to as an SAS and reflects AICPA's interpretations of accepted auditing standards.

2. AICPA auditing guides for independent auditors. For example, AICPA has published an extensive audit and accounting guide entitled Audit and Accounting Guide for Employee Benefit Plans.

In 2019 and 2020, ASB updated its interpretation of audit standards with the issuance of SAS No. 134-140. Some of the more significant updates contained in these statements include:

• Clarification of responsibilities between auditors and their clients
• Required disclosures on the most significant issues in performing the audit
• Refreshing the concept of materiality
• Additional guidance to auditors.

Due in part to the COVID-19 pandemic, AICPA delayed implementation of these new audit standards until plan years ending on or after December 15, 2021, although CPA firms are allowed to adopt these changes earlier.

These new auditing standards will have a significant im- pact on the audit of employee benefit plans, including financial statements and auditor reports. SAS No. 136, which is titled "Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to the Employee Retirement Income Security Act (ERISA)" will likely have the biggest impact.

Sample Auditor Report Below is a sample of an auditor's report for a defined benefit pension plan that reflects the new standards implemented by the American Audit- ing Standards Board of the American Institute of CPAs. Independent auditor's report to the preparation and fair presentation . Identify and assess the risks of material Appropriate addressee] Opinion of financial statements that are free from misstatement of the financial state- We have audited the financial statements material misstatement, whether due to ments, whether due to fraud or error, of XYZ Pension Plan, an employee benefit fraud or error. and design and perform audit proce- plan subject to the Employee Retirement In preparing the financial statements, dures responsive to those risks. Such Income Security Act of 1974 (ERISA). management is required to evaluate procedures include examining, on the which comprise the statements of net whether there are conditions or events, test basis, evidence regarding the assets available for benefits and of ac- considered in the aggregate, that raise amounts and disclosures in the financial cumulated plan benefits as of December substantial doubt about XYZ Pension statements. 31, 20X2 and 20X1 and of the related Plan's ability to continue as a going con- Obtain an understanding of internal statements of changes in net assets cern for [insert the time period set by the control relevant to the audit in order to available for benefits and of changes in applicable financial reporting framework]. design audit procedures that are appro- accumulated plan benefits for the year Management is also responsible for priate in the circumstances but not for ended December 31, 20X2 as well as the maintaining a current plan instrument, the purpose of expressing an opinion on related notes to the financial statements. including all plan amendments; adminis- the effectiveness of XYZ Pension Plan's n our opinion, the accompanying financial tering the plan; and determining that the internal control. Accordingly, no such statements present fairly, in all material plans transactions that are presented and opinion is expressed. respects, the net assets available for disclosed in the financial statements are Evaluate the appropriateness of ac- benefits and accumulated plan benefits in conformity with the plan's provisions, counting policies used, the reasonable- of XYZ Pension Plan as of December including maintaining sufficient records ness of significant accounting estimates 31, 20X2 and 20X1 and the changes in with respect to each of the participants to made by management and the overall its net assets available for benefits and determine the benefits due or which may presentation of the financial statements. changes in its accumulated plan benefits become due to such participants. Conclude whether, in our judgment, for the year ended December 31, 20X2 there are conditions or events, consid In accordance with accounting principles Auditor's responsibilities for the audit of the financial statements ered in the aggregate, that raise sub- generally accepted in the United States stantial doubt about XYZ Pension Plan's of America. Our objectives are to obtain reasonable assurance about whether the financial ability to continue as a going concern for Basis for opinion statements as a whole are free from ma- a reasonable period of time. We conducted our audits in accordance terial misstatement, whether due to fraud We are required to communicate with with auditing standards generally ac- or error, and to issue an auditor's report those charged with governance regarding, cepted in the United States of America that includes our opinion. Reasonable among other matters, the planned scope (GAAS). Our responsibilities under those assurance is a high level of assurance but and timing of the audit, significant audit standards are further described in the is not absolute assurance and therefore is findings and certain internal control- auditor's responsibilities for the audit of not a guarantee that the audit conducted related matters that we identified during the financial statements section of our in accordance with GAAS will always the audit. report. We are required to be independent detect a material misstatement when it Other matter-supplemental of XYZ Pension Plan and to meet our other exists. The risk of not detecting a material schedules required by ERISA ethical responsibilities in accordance with misstatement resulting from fraud is the relevant ethical requirements relating higher than for the one resulting from Our audits were conducted for the purpose of forming an opinion on thetakeaways . The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) has updated its interpreta- tion of accepted auditing standards for employee benefit plans. . The new statements on auditing standards change the form and content of the independent auditor's report of employee benefit plan financial statements. The report expands plan trustees' responsibility for financial statements as well as the auditor's responsibility forthe audit. . The concept of materiality is updated in the standards. The reader of the financial statements would consider a mis- statement or omission as significant if that matter should be corrected in the financial statements or if the matter must be brought to the attention of the reader of the financial state- ments by the plan auditor. . In multiemployer plan audits, the five high-risk areas that could lead to material misstatement in the financial statements are investments, contributions, benefits paid and denied, participant data and plan expenses. . SAS No. 136 "Forming an Opinion and Reporting Financial State- ments of Employee Benefit Plans Subject to ERISA" prescribes new performance requirements for audits of employee benefit plan financial statements and specifically addresses requirements applicable to multiemployer plans.to our audits. We believe that the audit error, as fraud may involve collusion, forg- evidence we have obtained is sufficient ery, intentional omissions, misrepresenta- financial statements as a whole. The and appropriate to provide a basis for our tions or the override of internal control. supplemental schedules of [identified title audit opinion. Misstatements are considered material of supplemental schedules and periods if, individually or in the aggregate, they covered] are presented for purposes of Responsibilities of management could reasonably be expected to influence additional analysis and are not a required for the financial statements part of the financial statements but are the economic decisions of users made on Management is responsible for the the basis of these financial statements. supplementary information required by preparation and fair presentation of the the Department of Labor regulations for financial statements in accordance with In performing an audit in accordance with reporting and disclosure under ERISA. accounting principles generally accepted GAAS, we: Such information is the responsibility of in the United States of America as well . Exercise professional judgment and management and was derived from and as for the design, implementation and maintain professional skepticism relates directly to the underlying account- maintenance of internal control relevant throughout the audit continued on next pageSample Auditor Report (continued) ing and other records used to prepare the financial statements. The In our opinion, the information in the accompanying schedules is information has been subjected to the auditing procedures applied in fairly stated, in all material respects, in relation to the financial audits of the financial statements and certain additional procedures, statements as a whole, and the form and content are presented in including comparing and reconciling such information directly with conformity with the Department of Labor's Rules and Regulations the underlying accounting and other records used to prepare the for Reporting and Disclosure under ERISA. financial statements, or with the financial statements themselves, and other additional procedures in accordance with GAAS. Informing our opinion on the supplemental schedules, we evalu- [ Signature auditor's firm] ated whether the supplemental schedules, including their form and content, presented in conformity with the Department of Labor's [City and state where the auditor's report is issued] [Date of the rules and regulations for reporting and disclosure under ERISA. auditor's report]