Audits of 401(k) Plans

301 Pages·2020·10.749 MB·English

by  Deloitte & Touche Consulting Group

A 401( ) P
UDITS OF K LANS
BY DELOITTE & TOUCHE, LLP
Notice to readers
Audits of 401(k) Plans is intended solely for use in continuing professional education and not as
a reference. It does not represent an official position of the American Institute of Certified Public
Accountants, and it is distributed with the understanding that the author and publisher are not
rendering legal, accounting, or other professional services in the publication. This course is
intended to be an overview of the topics discussed within, and the author has made every attempt
to verify the completeness and accuracy of the information herein. However, neither the author
nor publisher can guarantee the applicability of the information found herein. If legal advice or
other expert assistance is required, the services of a competent professional should be sought.
You can qualify to earn free CPE through our pilot testing program.
If interested, please visit https://aicpacompliance.polldaddy.com/s/pilot-testing-survey.
© 2018 Association of International Certified Professional Accountants, Inc. All rights reserved.
For information about the procedure for requesting permission to make copies of any part of this
work, please email [email protected] with your request. Otherwise, requests should be
written and mailed to Permissions Department, 220 Leigh Farm Road, Durham, NC 27707-8110
USA.
ISBN 978-1-119-72203-8(Paper)
ISBN 978-1-119-61502-6 (ePDF)
ISBN 978-1-119-66596-0(ePub)
ISBN 978-1-119-72220-5 (oBook)
Course Code: 733853
AFKP GS-0418-0B
Revised: October 2019
Table of Contents

Chapter 1 1-1
Introduction and Background 1-1
Background information 1-3
Operation and administration 1-6
Accounting records 1-8
Reporting standards 1-10
Governmental regulations 1-11
Audit requirements 1-12
Reporting and disclosure requirements under ERISA 1-16
SEC Form 11-K filing requirements 1-17
ERISA limited-scope audits 1-19
Chapter 2 2-1
Planning 2-1
Pre-engagement activities 2-3
Audit planning 2-6
Communication and coordination 2-10
Understanding the plan and its environment, including its internal control 2-11
Audit documentation 2-13
Preliminary analytical review procedures 2-14
Audit risk factors 2-15
Internal control structure 2-21
Consideration of fraud 2-22
Plan’s use of third-party service organizations 2-29
Party in interest transactions 2-30
Plan’s use of voice response or internet recordkeeping system 2-32
Accounting estimates 2-33
Going concern considerations 2-34
Chapter 3 3-1
Internal Control Structure 3-1
Understanding internal control 3-4
The components of internal control 3-6
Acquiring knowledge of the controls 3-9
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Assessing control risk 3-10
Plan’s use of third-party service organizations 3-11
Plan’s use of voice response and internet-based recordkeeping systems 3-16
Documentation 3-17
Communicating control deficiencies 3-18
Chapter 4 4-1
Auditing the Statement of Net Assets Available for Benefits 4-1
Accounting guidance 4-3
Listing of investments 4-4
Valuation of investments 4-5
Investment options 4-6
Audit objectives 4-8
Audit procedures 4-9
Investments in master trusts and similar vehicles 4-11
Investments in registered investment companies (mutual funds) and common
or commingled trust funds 4-13
Investments with insurance companies 4-15
Direct filing entities (DFE) 4-20
Other investments 4-21
ERISA limited-scope auditing procedures 4-24
Contributions receivable 4-26
Notes receivable from participants receivable 4-27
Cash balances 4-29
Other assets 4-30
Accrued liabilities 4-31
Chapter 5 5-1
Auditing the Statement of Changes in Net Assets Available for Benefits 5-1
Investment income 5-3
ERISA limited-scope audit 5-7
Investment expenses 5-8
Contributions from employers 5-9
Individual participant accounts 5-12
Participant eligibility 5-17
Contributions from other identified sources 5-18
Withdrawals 5-19
Loans 5-20
Administrative expenses 5-22

© 2018 Association of International Certified Professional Accountants. All rights reserved. Table of Contents 2
Chapter 6 6-1
Other Auditing Considerations 6-1
Plan tax status 6-2
Testing for discrimination 6-7
Consequences of violations 6-8
Failure to pass nondiscrimination tests 6-9
Commitments and contingencies 6-10
Subsequent events 6-12
Representations from plan management 6-14
Illustrative attachment to management representation letter 6-18
Form 5500 and supplemental schedules 6-21
Information for supplemental schedules from trustee or custodian 6-28
Terminating plans 6-32
Plan mergers 6-35
Party in interest transactions 6-36
Initial audit of the 401(k) plan 6-41
Form 11-K: The Sarbanes-Oxley Act of 2002 6-44
Communication with those charged with governance 6-47
Chapter 7 7-1
The Auditor’s Report and Financial Statement Disclosures 7-1
The auditor’s report 7-4
Standard report 7-7
Additional communications: Emphasis-of-matter and other-matter paragraphs 7-10
Modified reports 7-12
Non-GAAP basis financial statements 7-14
Reports filed pursuant to the SEC Form 11-K 7-16
ERISA limited-scope reports 7-21
Financial statement disclosures 7-24
Appendix A A-1
ERISA and Related Regulations A-1
Appendix A A-3
Glossary Glossary 1
Index Index 1

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Solutions Solutions 1
Chapter 1 Solutions 1
Chapter 2 Solutions 4
Chapter 3 Solutions 6
Chapter 4 Solutions 8
Chapter 5 Solutions 10
Chapter 6 Solutions 12
Chapter 7 Solutions 17
© 2018 Association of International Certified Professional Accountants. All rights reserved. Table of Contents 4
Chapter 1
Introduction and Background
Learning objectives
After completing this chapter, you should be able to do the following:
Recognize the basic features of 401(k) plans.
Identify the general features of 401(k) plan operation and administration.
Identify 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 them 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.
© 2018 Association of International Certified Professional Accountants. All rights reserved. 1-1
This course focuses on single-employer sponsored 401(k) plans. However, 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.

© 2018 Association of International Certified Professional Accountants. All rights reserved. 1-2
Background information
A 401(k) plan 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) or 457(b) plans that are similar in nature to
the 401(k) plans. Although this course does not specifically address governmental plans, certain auditing
procedures discussed herein might be helpful to the auditor of governmental plans. Certain 403(b) plans
(primarily those with 100 or more participants) have an audit requirement.
Multiemployer plan considerations:
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 (such as construction) and the union representing the employees.
These plans are managed by a joint employer or union board of trustees.
The various types of defined contribution plans that 401(k) plans are typically part of are briefly described
in the text that follows. 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 (as defined in the Internal
Revenue Code) or a stock bonus plan. It is a plan in which the sponsor contributes money to participants’
accounts either on a discretionary basis (that is, 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.
A money purchase pension plan is a defined contribution pension plan whereby employer
contributions are based off of a predetermined formula that is not related to profits and the plan is
designated as a pension plan by the plan sponsor.
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.
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