Audit Risk Alert -  - ebook

Audit Risk Alert ebook

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The increasing complexity of employee benefit plan auditing and increased focus by the DOL have resulted in significant pressure for CPAs and firms performing EBP audits. To help CPAs meet the challenge of performing quality audits in this unique and complex area, the AICPA has developed this alert to assist in identifying current sources of risk within EBP audit engagements. A targeted discussion on new developments, issues auditors may face in their current audits, as well as a look at what's in the pipeline that may affect their engagements is provided. Updates include: * FASB ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) * FASB ASU No. 2015-10, Technical Corrections and Improvements * FASB ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (part I) Fully Benefit-Responsive Investment Contracts, (part II) Plan Investment Disclosures, (part III) Measurement Date Practical Expedient * FASB ASU No. 2017-06, Employee Benefit Plan Master Trust Reporting * FASB ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

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Notice to Readers

This Audit Risk Alert (alert) replaces Employee Benefit Plans Industry Developments—2016.

This alert is intended to provide auditors of employee benefit plan financial statements with an overview of recent economic, industry, regulatory, and professional developments that may affect the audits and other engagements they perform. It also can be used by plan management and plan sponsors to address areas of audit and accounting concern.

This publication is an other auditing publication, as defined in AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (AICPA, Professional Standards). Other auditing publications have no authoritative status; however, they may help the auditor understand and apply generally accepted auditing standards.

In applying the auditing guidance included in an other auditing publication, the auditor should (using professional judgment) assess the relevance and appropriateness of such guidance to the circumstances of the audit. The auditing guidance in this document has been reviewed by the AICPA Audit and Attest Standards staff and published by the AICPA and is presumed to be appropriate. This document has not been approved, disapproved, or otherwise acted on by a senior technical committee of the AICPA.


2017 Employee Benefit Plan Audit Risk Alert Task Force

Bertha Minnihan, Task Force ChairTheresa Kluk Banka Mark Blackburn Sandi Carrier Kriste DeAngelo Monique Elliott Judy Goldberg Josie Hammond Marilee Lau David Leising Dennis Polisner Mark Ritter Deborah L. Smith Wendy Y. Terry Beth Thompson David Torrillo Diane M. Walker Diane M. Wasser Michele M. Weldon

The AICPA gratefully acknowledges those members of the Auditing Standards Board, the AICPA Technical Issues Committee, and the AICPA Employee Benefit Plans Audit Risk Alert Task Force who helped identify the interest areas for inclusion in this alert. The AICPA also gratefully acknowledges the contributions of the Office of the Chief Accountant, the Employee Benefits Security Administration, and the U.S. Department of Labor (DOL).

AICPA Staff Diana G. Krupica Lead Technical ManagerMember Learning and Competency


The Audit Risk Alert Employee Benefit Plans Industry Developments is published annually. As you encounter audit or industry issues that you believe warrant discussion in next year’s alert, please feel free to share them with us. Any other comments you have about the alert also would be appreciated. You may email these comments to A&[email protected]



How This Alert Helps You

Economic and Industry Developments

The Current Economy

Hot Topics


Auditing Standards Board Employee Benefit Plan Auditor Reporting Project

Accounting Issues and Developments

Readily Determinable Fair Value

Disclosures When a New FASB Codification Update Is Issued

FASB ASU No. 2015-07,

Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

FASB ASU No. 2015-12,

Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (part I) Fully Benefit-Responsive Investment Contracts, (part II) Plan Investment Disclosures, (part III) Measurement Date Practical Expedient

FASB ASU No. 2017-06, Employee Benefit Plan Master Trust Reporting

FASB ASU No. 2016-01—Financial Instruments Changes in Disclosure Requirements

FASB ASU No. 2016-19, Technical Corrections and Improvements

Auditing Issues and Developments

Electronic Information

Trends in Legal Action

Limited-Scope Certifications: Plan Administrator's Responsibilities

New Auditing Standard on Going Concern

Employee Benefit Plan Guide Update

11-K Filers

Name of the Engagement Partner

Reorganization of PCAOB Auditing Standards

Defined Benefit Pension Plans

Spot Rate Approach: Applicability for Plans Reporting under FASB ASC 960

Mortality Table

Accumulated Plan Benefits

Multiemployer Pension Reform Act of 2014 Benefit Suspension

Pension Risk Management

Participant Data and Frozen Plans

Maintaining Pertinent Records

Terminating Plans

Health and Welfare Benefit Plans

Economic and Demographic Assumptions

Other Assumptions

Retiree Reimbursement Account/Arrangement

Audit Quality

Tools to Further Audit Quality

Preparing for Peer Review

Recent Pronouncements

Recent Auditing and Attestation Pronouncements and Related Guidance

Recent Accounting Standards Updates

Recently Issued Technical Questions and Answers

Regulatory Developments—DOL

DOL ERISA Advisory Council Activities

2016 Form 5500 Annual Report

DOL Letters to Employee Benefit Plan Auditors Rounds Out Communication Plan to Help Improve Audit Quality

Change in Leadership within the Office of the Chief Accountant

Regulatory Developments—IRS

Determination Letters Downsizes

Employer Profit-Sharing Contributions

Changes in the Employee Plans Compliance Resolution System

IRS Audit Trends

Puerto Rico Plans

IRS Announces 2017 Plan Limits

Proposed Form 5500 Changes

IRS Extends Nondiscrimination Relief for Closed DB Plans

Partial Annuities

Expanded Missing Participant Program

IRS "Top Ten" List of Most Common Retirement Plan Issues

On the Horizon

Auditing and Attest Pipeline

Proposed Revised Mortality Tables

Employee Benefit Plan Resources

AICPA Employee Benefit Plan Audit Certificate Programs


Continuing Professional Education


Member Service Center


AICPA Online Professional Library: Accounting and Auditing Literature

Codified Clarity Standards

Financial Reporting Center of

Industry Conferences

Appendix A—Additional Internet Resources

Appendix B—Health and Welfare Plans




Table of Contents










































































How This Alert Helps You

.01 This Audit Risk Alert (alert) helps you plan and perform your employee benefit plan audits and also can be used by plan management and plan sponsors to address audit and accounting concerns. It provides information to assist you in achieving a more robust understanding of the business, economic, and regulatory environments in which your clients operate. This alert is an important tool to help you identify the significant risks that may result in the material misstatement of financial statements and delivers information about emerging practice issues and current accounting, auditing, reporting, and regulatory developments. For developing issues that may have a significant effect on the employee benefit plan industry in the near future, the "On the Horizon" section provides information on these topics.

.02 It is essential that the auditor understand the meaning of audit risk and the interaction of audit risk with the objective of obtaining sufficient appropriate audit evidence. Auditors obtain audit evidence to draw reasonable conclusions on which to base their opinion by performing the following:

Risk assessment procedures

Further audit procedures that comprise

— tests of controls, when required by generally accepted auditing standards (GAAS) or when the auditor has chosen to do so, and

— substantive procedures that include tests of details and substantive analytical procedures

.03 The auditor should develop an audit plan that includes, among other things, the nature and extent of planned risk assessment procedures, as determined under AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AICPA, Professional Standards). AU-C section 315 defines risk assessment procedures as the audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control; and to identify and assess the risks of material misstatement (whether due to fraud or error) at the financial statement and relevant assertion levels. As part of obtaining the required understanding of the entity and its environment, in accordance with paragraph .12 of AU-C section 315, the auditor should obtain an understanding of the relevant industry, regulatory, and other external factors, including the applicable financial reporting framework. This alert assists the auditor with this aspect of the risk assessment procedures and further expands the auditor’s understanding of other important considerations relevant to the audit.

Help Desk: See the new AICPA Audit Guide Assessing and Responding to Audit Risk in a Financial Statement Audit for further information regarding identifying high-risk audit areas. This Audit Guide can be obtained through

Economic and Industry Developments

The Current Economy

General Discussion

.04 Recognizing that economic conditions and other external factors relevant to an entity and its environment constantly change, it is important for auditors to evaluate whether changes have occurred since the previous audit that may affect their reliance on information obtained from their previous experience with the entity. These changes may affect the risks and risk assessment procedures applicable to the current year’s audit.

.05 When planning an audit, auditors need to understand the economic conditions facing the industry in which an entity operates, as well as the effects of these conditions on the entity itself. These external factors—such as interest rates, availability of credit, consumer confidence, overall economic expansion or contraction, inflation, and labor market conditions—are likely to have an effect on an entity’s business and, therefore, its financial statements. Considering the effects of external forces on an entity is part of obtaining an understanding of the entity and its environment.

.06 The year 2016 was marked by steadily increasing employment rates, lackluster wage growth, an increase in long-term interest rates, and a continuing suppression of the price of crude oil. After the 2016 national elections in November, the U.S. stock market hit record high levels.

.07 Over the past few years, the Federal Reserve has decreased the target for the federal funds rate more than 5.0 percentage points from its high of 5.25 percent prior to the financial crisis, to less than 0.25 percent, where it remained until December 2015. After a long period of anticipation, at its December 2015 meeting, the Federal Reserve increased the target federal funds rate from 0.25 to 0.5 percent. At its December 2016 meeting, the rate was increased from 0.5 percent to 0.75 percent, and further increases are anticipated. The reasons cited for the decision to take action include the following:

The unemployment rate has continued to decline.

Household spending has continued to advance at a moderate rate.

Economic activity has continued to expand at a moderate pace.

The inflation rate has increased but remains at an acceptable level, up to 2 percent.

Employee Benefit Plan Considerations

.08 Part of obtaining an understanding of the entity and its environment is considering how external forces affect an employee benefit plan. This consideration allows the auditor to plan and perform the audit to address risks identified. A new perspective with each audit is helpful as economic conditions and trends in the employee benefit plan industry may create additional risks of material misstatement that did not previously exist or did not have a material effect on the audit of the employee benefit plan in prior years.

.09 The following are challenges or trends that have occurred over the past few years that may be important for auditors to consider when gaining an understanding of the industry, in light of the current economic environment:

Uncertainty in the regulatory environment as a result of the new Administration and the change in leadership within the DOL

Increases in mergers, spin-offs, and acquisitions causing challenges when planning audits

— Documentation of the related terms are not always clear and consistent between the plans, as it relates to the effective date of the transaction and the appropriate period to record the transfer of the applicable net assets to the successor plan.

— This can lead to inconsistent reporting of the transaction for both plans involved. Additional audit procedures related to the balances being transferred into the plan may need to be performed.

— See paragraph 2.133 of the AICPA Audit and Accounting Guide

Employee Benefit Plans

(guide) for considerations related to opening balances and completeness of participant information related to plan transfers into the plan.

Continued downsizing of companies leading to a full or partial plan termination

— A partial termination may occur during one plan year or over several plan years and may be overlooked by plan sponsors.

— As a result, the affected participants may not be made fully vested and receive their full benefit.

— If a plan is terminating, and the liquidation of the plan is deemed to be imminent before the end of the plan year, plan sponsors should prepare the financial statements on the liquidation basis of accounting in accordance with FASB

Accounting Standards Codification


(ASC) 205-30,

Liquidation Basis of Accounting


Challenge for plan sponsors to locate certain participants when attempting to pay benefits due to the increased number of plan mergers and acquisitions

— Plan sponsors should be aware that the DOL has issued guidelines in Field Assistance Bulletin (FAB) No. 2014-01 outlining the minimum steps required to locate a participant.

Instances in a profit-sharing plan or a plan with a profit sharing feature, where no employer contributions have been made in at least three of the prior five consecutive years

— This may result in a possible complete discontinuance of contributions whereby full vesting is required in order to preserve a plan’s tax qualified status.

— See the "

Employer Profit-Sharing Contributions

" section of this alert.

Challenges for plan sponsors of employee stock ownership plans (ESOP) include maintaining accurate records of stock allocations, release of shares upon debt satisfaction and reporting of the accurate fair value of employer stock

Release of the Society of Actuaries (SOA) Mortality Improvement Scale MP-2016 which may result in a decrease in the obligation

— See the "

Mortality Table

" section of this alert.

In anticipation of the upcoming prescribed IRS table, consideration by plan sponsors to offer retirees, not yet receiving benefits, and vested employees, similar lump-sum buy-out windows offered to terminated vested participants in certain Defined Benefit Pension Plans (DB plans) as part of de-risking

— See the "

Proposed Revised Mortality Tables

" section of this alert.

Challenges in maintaining accurate and complete census data for aging DB plans, especially in instances of lost demographic data due to plan sponsors undergoing business combinations or divestitures, and changes in actuaries and other service providers

— See the "

Maintaining Pertinent Records

" section of this alert.

Increases in the number of participating employers withdrawing from multiemployer plans, resulting in underfunded obligations and possible legal action related to withdrawal liabilities

Increase in excessive fee lawsuits involving the number of investment offerings and related fees resulting in additional risks

— See the "

Trends in Legal Action

" section of this alert.

Changes to plan investment options as plan sponsors review their plan investments in response to the requirement imposed in October 2016 by the SEC as part of money market fund reform whereby institutional funds not classified as government money market funds became subject to floating net asset value (NAV) versus $1.00 NAV

Improper valuation of real estate investments resulting from lack of obtaining annual appraisals or misapplication of fair value measurement

Increases in hard-to-value investments not properly recorded at fair value as of the reporting date, due to the use of inappropriate valuation methodologies, mathematical errors in the application of the methodologies, or inaccurate inputs

Significant modifications to the determination letter program for individually designed plans by the IRS including determination letters for individually designed plans being limited to initial plan qualification and qualification upon termination

— Many plan sponsors are moving their plans from individually designed plans to a prototype or volume submitter plan.

— It is important to make sure that the appropriate and intended provisions are selected.

— See the "

Determination Letters Downsizes

" section of this alert.

Existence of controlled groups and affiliated service groups that are overlooked when performing annual compliance testing resulting in possible testing failures, audit adjustments, and loss of tax qualified status

For limited-scope audits, certifications that may not be acceptable, that may be from organizations unable to certify, or that may not cover all of the assets (held by the plan for investment purposes) for the entire period

— See the "

Limited-Scope Certifications: Plan Administrator's Responsibilities

" section of this alert.

Lack of proper plan oversight throughout the year may cause instances where plan provisions are improperly applied resulting in possible adjustments to the financial statements, particularly regarding failure to use the proper definition of compensation in the calculation of contributions, for a defined contribution retirement plan (DC plan), and for the calculation of benefit for a DB plan

In the current environment, many participants are working beyond their normal retirement date

— It is important for plan sponsors to be diligent in following the plan provisions regarding the minimum required distribution rules.

— Such a failure may unfavorably affect the plan’s tax status.

Hot Topics


.10 According to the 2016 Employee Retirement Income Security Act of 1974 (ERISA) Advisory Council report, cyber threats include data breaches whereby sensitive, protected, or confidential data have potentially been viewed, stolen, or used by someone unauthorized to do so. Individuals, organizations, and industries are susceptible to cyber threats, including employee benefit plans and their service providers. Common cyber risks to employee benefit plan participants include identity theft, privacy breaches, and theft of assets. The cost of a breach, which includes detecting the extent of the breach, recovering the data, and restoring technological systems, can be substantial.

.11 Cyber threats cannot be eliminated, but they can be managed. Employee benefit plans often maintain and share sensitive employee data and asset information across multiple unrelated entities as a part of the employee benefit plan administration process. Because employee benefit plans are regulated by ERISA, it is important for anyone who interacts with the plan to be particularly aware of the effect that breaches have on participants and beneficiaries and the associated rights and duties of plan fiduciaries and service providers arising under ERISA.

Help Desk: