401(k) Sponsors Beware: A DOL Limited-Scope Audit is Not Really “Limited”

March 18, 2014

Is your employee benefit plan participant count causing you to become dangerously close to needing an audit? Have you just received your compliance testing results from your record-keeper and realized that your benefit plan requires an audit this year? Your first response may be to panic (because who doesn’t panic at the word “audit”?). Then you find out that your plan will be subject to a limited-scope audit rather than a full-scope audit. Whew! Luckily, your custodian provides certified trust statements, eliminating the need for the auditor to perform investment valuation and investment purchase and sales testing. So, what else could the auditors really test in a benefit plan? The reality may surprise you!

While a limited-scope audit may scale back the scope of the audit and reduce the amount of testing to be performed during fieldwork, the audit procedures are not reduced as significantly as you might expect. A limited-scope audit still requires a substantial amount of testing to be performed. Fieldwork will consist of an in-charge auditor and one or two staff accountants who will test contributions, distributions, notes receivable from participants and expenses paid from the plan. These tests of plan transactions are outlined in the AICPA Audit & Accounting Guide for Employee Benefit Plans and will be performed regardless of the scope of the audit.

The only procedures that are reduced in a limited scope audit are the testing of investment valuation, investment income and investment activity.  Not performing this testing only saves a few hours, especially when the investments held are readily marketable. Also, even though investments might not be tested in a limited-scope audit, the auditor still needs to review and evaluate the extensive footnote disclosures on investments that are required in the financial statements. Also be aware that the audit file and the financial statements are all subject to the same amount of first partner and quality control review regardless of whether the audit is a full or limited-scope audit.

While a limited-scope audit does reduce the overall time and procedures for a benefit plan audit, it may not reduce them as much as a plan sponsor would expect. Be aware that a limited scope audit is a real audit, and plan sponsors should expect their personnel, payroll and plan records to be scrutinized.

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