If your retirement plan has more than 100 participants, you are generally required to have the plan’s financial statements audited by an independent certified public accountant and submitted to the Department of Labor as part of the filing of Form 5500. As a plan’s administrator, you may choose to have your auditor perform either a full or limited scope audit, depending on the unique conditions of the plan. The Department of Labor will allow for a limited-scope exemption only if the 29 CFR 2520.103-8 guidelines for Reporting and Disclosure are met.
Certain institutions such as brokerage firms and investment companies are generally not able to qualify for the limited scope audit exemption; however they can establish an independent trust company, which may be organized in a way to meet the requirements of the Department of Labor.
The limited scope exemption was initially started because of a belief by Congress that any assets regulated by banks and insurance carriers were already subject to governmental audits and regulation, and therefore less risky than assets without oversight.
Full Scope vs. Limited Scope: What’s the Difference?
Full Scope: When an auditor performs a full-scope audit, all material items in the financials are subject to examination. All significant investments as well as the returns on those investments will be tested. Full scope audits require that the auditor provide an opinion on the complete set of financial statements after the audit has been completed.
Limited Scope: A limited scope audit is limited to certain operations and accounts, and can be performed when a plan’s investments have been previously certified for both accuracy and completeness by a bank or insurance company. A certification that addresses accuracy or completeness, but not both, does not meet the limited scope guidelines of the Department of Labor. Since the costs of an audit are usually directly related to the time it takes for completion, limited scope audits will usually save a company money and time.
Ultimately, it’s up to the plan’s sponsor to know which audit is the best option for their plan, and whether or not they qualify for a limited scope audit. A high-quality and well-performed limited scope audit can provide many of the benefits of a full scope audit, while saving the sponsor significant amounts of time and money. As the plan administrator, you will want to consider both the peace of mind a quality audit offers and the cost savings a limited scope audit offers, in making the right choice for your plan.