EBPAQC Auditor Communications: Best Practices and Common Pitfalls Live Forum

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EBPAQC Auditor Communications Best Practices
and Common Pitfalls Live Forum

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EBPAQC Live Forum Auditor Communications
Best Practices and Common Pitfalls

• November 10, 2010

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Panelists

• Marilee Lau
• Marilee Lau CPA
• Carl Kampel
• Ellin and Tucker, Chartered

• Bob Lavenberg
• BDO USA, LLP
• Debbie Smith
• Grant Thornton LLP

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Introduction

• Bob Lavenberg, CPA
• BDO USA, LLP
• Chair
• EBPAQC Executive Committee

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Objectives

• Present best practices tips and common
  deficiencies related to
• Engagement Letters
• Management Representation Letters
• Provide an overview of SAS 114 and SAS 115
  Communications
• Discuss various example control deficiencies
  under different scenarios

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Engagement Letters

• Marilee Lau,
• CPA

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Engagement Letters

• Establish an understanding with the client in
  accordance with AU 311
• Document the contractual duties agreed to by the
  auditor and the client
• Explain the auditors and the clients
  responsibilities
• Explain the nature of services to be rendered by
  the auditor and establish that financial
  statements are the responsibility of the client
• Helps avoid misunderstandings with the client

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Common Errors

• Letter not properly addressed
• Letter not sent or obtained before work commences
• Scope of audit incorrect
• Type of plan is incorrect
• Schedule names or inclusion is incorrect
• Trustee/custodian not properly identified

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Common Errors, Continued

• Form 5500/electronic filing not addressed
• Non-attest services not addressed
• Heading on page 2-6 not changed from prior client
  template
• Information in ( ) not addressed
• Tailoring for specific situations (e.g., SEC
  11-Ks, outsourcing, use of experts, non CPAs)

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Management Representation Letters

• Debbie Smith, CPA
• Partner
• Grant Thornton LLP

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Management Representation Letters

• Auditor required to obtain written
  representations from management as part of a
  financial statement audit performed in accordance
  with GAAS
• Representations are audit evidence, but are not a
  substitute for application of auditing procedures
  necessary to express an opinion
• AU 333 lists specific representations that should
  be obtained
• If management refuses to furnish written
  representations that auditor believes are
  necessary it may constitute a scope limitation

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Common Errors

• Poor tailoring- not specific to plan type, scope
  of audit (full vs. limited), etc.
• Contradictory- with other audit evidence and/or
  financial statement disclosures
• Doesnt cover all financial statements and
  periods covered by auditors report
• Incorrectly dated- should be dated as of the date
  of the auditors report
• Not signed by appropriate individuals (e.g.,
  those responsible for financial and operating
  matters)

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Overview of SAS 114 and SAS 115 Communications

• Carl Kampel, CPA
• Partner
• Ellin and Tucker, Chartered

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Overview

• Statement on Auditing Standards No. 114, The
  Auditors Communication With Those Charged With
  Governance (AU 380)

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Beginning of the Audit

• The auditors responsibility under generally
  accepted auditing standards (GAAS)
• Responsible for expressing an opinion on the
  financial statements or explanation of
  limitations of the auditors ability to express an
  opinion
• The planned scope and timing of the audit

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Beginning of the Audit, Continued

• Approach to internal control
• Service provider controls
• User (plan sponsor) controls
• Risk assessment
• Division of responsibilities
• Financial statements and notes plan sponsor
• Auditors report auditor
• Materiality

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End Of The Audit

• Qualitative aspects of accounting policies,
  practices, estimates and disclosures
• Any serious difficulties in completing the audit
  or disputes with management
• Unavailability of expected information
• Restrictions imposed by management

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End Of The Audit, Continued

• Qualitative aspects of accounting policies,
  practices, estimates and disclosures
• Any serious difficulties in completing the audit
  or disputes with management
• Unavailability of expected information
• Restrictions imposed by management

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Overview

• Statement on Auditing Standards
• No. 115, Communicating Internal Control Related
  Matters Identified in an Audit
• (AU 325)

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Communications

• Auditors are required to obtain an understanding
  of internal control and may become aware of
  deficiencies, which will be communicated to those
  charged with governance
• Deficiencies in internal control A deficiency
  in internal control exists when the design or
  operation of a control does not allow management
  or employees, in the normal course of performing
  their assigned functions, to prevent, or detect
  and correct misstatements on a timely basis

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Form of Communications

• With those charged with governance
• Internal control related matters

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Required Communications

• Significant deficiencies a significant
  deficiency is a deficiency, or a combination of
  deficiencies, in internal control that is less
  severe than a material weakness, yet important
  enough to merit attention by those charged with
  governance
• Material weaknesses a material weakness is a
  deficiency, or combination of deficiencies, in
  internal control, such that there is a reasonable
  possibility that a material misstatement of the
  Plans financial statements will not be
  prevented, or detected and corrected on a timely
  basis

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Example Control Deficiency 1

• Plan sponsor does not have the ability to
  prepare or review the financial statements

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Example Control Deficiency 2

• Plan sponsor has outsourced the administration
  functions of the plan with no oversight by
  management

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Example Control Deficiency 3

• SAS No. 70 report with significant testing
  exceptions that are not mitigated by controls at
  the plan sponsor

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Example Control Deficiency 4

• Lack of controls when changing service providers
  and ensuring proper information has been
  transferred to the new service provider

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Example Control Deficiency 5

• For plan mergers, the recording of net
  appreciation and transfer amounts may be
  incorrect due to timing of the accounting for the
  merger

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Example Control Deficiency 6

• Improper valuation of investments, especially
  alternative investments

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Example Control Deficiency 7

• Plan management does not have the ability
  (methodology and process) to determine
  reasonableness of actuarial assumptions

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Example Control Deficiency 8

• IBNR is not accurately calculated or recorded

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Example Control Deficiency 9

• Benefit payments are not calculated in
  accordance with plan documents

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Example Control Deficiency 10

• Lack of performance of tax compliance testing
  such as discrimination testing or lack of taking
  appropriate corrective action when errors are
  found in such testing and other operational errors

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Example Control Deficiency 11

• Prohibited transactions such as timeliness of
  employee contributions or improper transactions
  with parties-in-interest and fiduciaries

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Resources

• EBPAQC Plan Advisory, Understanding Auditor
  Communications
• EBPAQC SAS No. 115 Tools and Resources
• Examples of Internal Control Communications for
  Employee Benefit Plans
• Summary of SAS No. 115 Requirements
• SAS No. 115 Frequently Asked Questions

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Question and Answer Session
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Coming Events Mark Your Calendars!

• Upcoming EBPAQC Live Forum Webinars
• Designated Partner Live Forum2011, January 19,
  2011, 100-300 pm ET
• Managers Supervisors Live Forum2011, January
  26, 2011, 100-300 pm ET
• 11-K Audits Live Forum, March 16, 2011, 100-300
  pm ET
• Upcoming AICPA Conferences
• December 13-14, 2010, EBP Accounting, Auditing
  and Regulatory Update, Omni Shoreham Hotel,
  Washington, DC
• May 2-4 2011, National Conference on Employee
  Benefit Plans, Aria, Las Vegas, NV

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Wrap Up

• Consider using the
• EBPAQC
• Member-to-Member Forum

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Thanks for Participating!