In our recent post, “Is Your Employee Benefits Plan Audit Full or Limited Scope?”, we discussed the differences between a full and limited-scope audit of a plan’s financial statement. The Employee Retirement Security Act of 1974 (ERISA) requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series).
The Department of Labor determined that a plan’s administrator may direct an independent auditor to perform a limited-scope audit of financial statements in the case that investments held by a qualified institution is subject to annual examination by state or federal agency. The qualified institution must then certify as to both the completeness and accuracy of the required information. A plan’s administrator is liable for determining that all requirements for a limited-scope audit are met.
What does a limited-scope audit mean for a company?
When an auditor is instructed to complete a limited-scope audit for your plan’s financial statement, it is usually because investments are held and certified to by a qualified financial institution. Therefore, the auditor is exempt from the following regarding plan investments:
- Testing the accuracy and completeness of investment information provided by their certified financial institution. Investments held by a certified financial institution are bound by periodic examination by a state or federal agency and, therefore, are already disclosed.
- Obtaining insight into the internal control processes over investments.
- Determining the control risk of the institution’s assets held and the investment transactions carried out.
The auditor is not relieved of responsibility for detecting obvious, material errors that would normally be noticed through careful observation. But, it should be noted that due to lack of appropriate audit information obtained on investments, the independent auditor would be unable to express an in opinion on the financial statements.
However, if a plan has separate investments not held by a certified financial institution, these investments do not qualify under the limited-scope umbrella and they are subject to a full-scope audit.
Why do administrators opt for limited-scope audits?
As it is up to your plan’s administrator, upon meeting all qualifications, it is important to understand why and if a limited-scope audit is best for your company. Inherently, a limited scope audit prevents duplication of efforts for your independent auditor, in that the CPA does not need audit data coming from a trusted fiduciary. Since, a limited scope audit requires less information from your independent auditor a prime reason for choosing one is saving time and effort. In most situations, the less time, and effort you require from your independent auditor the lower the audit fee might be.
If qualified, a well performed limited scope independent audit can provide many of the benefits of a full scope audit while saving time and money. It is extremely important for the plan’s administrator to thoroughly inspect that all qualifications are met. As the plan’s administrator, you will want to consider all options when it comes to making the right choice for your plan.