The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, including Amendments Addressing Disclosures in the Audit of Financial Statements. The standard is effective for reporting periods ending on or after December 15, 2021.
SAS 136 adds certain performance requirements for Employee Retirement Income Security Act of 1974 (ERISA) plan financial statement audit. It also changes the form and content of the auditor’s report for employee benefit plans that are subject to ERISA. As part of the standard, there are new requirements in all phases of an ERISA plan audit, including engagement acceptance, risk assessment and response, communication with those charged with governance, performance procedures and reporting.
While many of these items have been present in our standard audit procedures or widely assumed to be implied, the emphasis now is on documenting and communicating within the phases noted above. So, how do these impact the plan sponsor?
With the new standard, the auditors need to obtain the agreement from management that it acknowledges and understands their responsibility for various items:
- Maintaining a current plan instrument (document), including all plan amendments
- Administering the plan and determining that its transactions are presented and disclosed in the ERISA plan financial statements and are in conformity with the plan’s provisions
- Maintaining sufficient records with respect to each participant (including to determine the benefits due or which may become due)
In addition, if the election is for an ERISA Section 103(a)(3)(C) audit (previously known as a limited scope audit), make sure:
- An ERISA Section 103(a)(3)(C) audit is permissible.
- The investment information is prepared and certified by a qualified institution.
- Certification meets the requirements.
- Certified investment information is appropriately measured, presented and disclosed in accordance with applicable financial reporting framework.
Draft 5500 needs to be provided to the auditor prior to the dating of the auditor’s report. In addition, note that management will be required to confirm these responsibilities at the conclusion of the audit (common to be included in the Management Representation Letter).
Communication with management or those charged with governance
At the conclusion of the audit, the auditor will communicate the following in writing:
- Description of the reportable finding with sufficient information to understand the context of the finding
- Explanation of potential effects of the reportable findings on the financial statements or to the plan
The auditor will not issue a written communication stating that no reportable findings were identified during the audit.
With the changes in SAS 134 and SAS 136, ultimately this means some significant changes in a new auditor’s report that looks different, and substantially longer, from what plan sponsors are accustomed to receiving in prior years. The goal of the new auditor’s reports is to improve the quality of ERISA plan audits, improve auditor performance and enhance the value and transparency of the report.
The new reports will now communicate the auditor’s opinion, basis for the opinion, management’s responsibilities, auditor responsibilities and, when applicable, the scope of an ERISA Section 103(a)(3)(C) audit and/or report on supplemental information. With all of these additional items that need to be included in the opinion, the opinion for your 2021 audited financial statements could be four pages compared to two pages for prior year reports.
The opinion paragraph will be presented first, unless the audit is an ERISA Section 103(a)(3)(C) audit. If the audit is an ERISA Section 103(a)(3)(C) audit, the first paragraphs will include verbiage regarding the ERISA Section 103(a)(3)(C) audit noting that the audit did not extend to any statements or information related to the assets held for investment of the plan and that a certification was obtained from a qualified institution.
Following the opinion paragraph will be the Basis for Opinion paragraph. It includes a statement indicating that the auditor is required to be independent of the plan in order to meet the auditor’s ethical responsibilities.
If there is a going concern or key audit matters that the auditor should disclose, these paragraphs would be included after the Basis for Opinion paragraph. If there is not a going concern or no key audit matters that the auditor feels should be disclosed, no paragraphs would be added to the opinion.
The Responsibilities of Management for the Financial Statements and Auditor’s Responsibilities for the Audit of the Financial Statements paragraphs are next. While these paragraphs were previously included in the old auditor’s reports, in the new auditor’s reports they are substantially expanded with specific responsibilities listed. The responsibilities of both parties are thoroughly listed in the opinion compared to prior years when the responsibilities were fairly general.
If there are supplemental schedules that need to be included with the financial statements, there will be a few paragraphs related to the schedules included in the auditor’s report after the Auditor’s Responsibilities for the Audit of the Financial Statement paragraph.
The guidance provided by the ASB shows two reports could be issued in this year of transition for when there is an ERISA Section 103(a)(3)(C) in the current year and a limited scope audit in the prior year. There would be one auditor’s report for the current year financial statement audit and the auditor’s report for the prior year financial statement would be included.
The AICPA provides an option to issue one report in this year of transition and just refer to the prior year report in an other-matter paragraph in the current year report.
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