As we discussed in the first post in our 3-part 401(k) plan audit blog series, companies that have an employee benefit plan with 100 or more participants are required by ERISA (the Employee Retirement Income Security Act of 1974) to have an annual audit by an independent public accountant. However, in many cases plan managers may choose to engage in a limited-scope audit instead of a full-scope audit. In this last post in our series on 401(k) audits, we’ll discuss the differences between limited scope and full scope audits, and how to tell which is right for your company.
Full Scope vs. Limited Scope
During a full scope audit, everything in the plan is subject to testing, from contributions and benefit payments to the valuation of investments and related earnings, for a period of one year. With this information, auditors provide an opinion on whether the plan’s financial statements are presented fairly in accordance with generally accepted accounting principles (GAAP).
Similarly, a limited scope audit covers a one-year period and all plan operations, however does not include a formal audit of the investment year-end balances and investment income, which are provided by an outside third party. During a limited scope audit, auditors are not able to express a formal opinion on the company’s financial statements, because significant financial information is included in those investment balances and income.
Who Qualifies for a Limited Scope Audit?
To determine whether you can opt for a limited scope audit, you’ll need to establish who holds your investments. There are only three institutions qualified to certify the accuracy and completeness of your investment information—a regulated trust company, a bank, or an insurance company. If your investments are held by one of these three institutions, you may be allowed a limited scope audit.
The plan administrator, and only the plan administrator, can instruct the auditor not to perform any auditing procedures on the certified investment information—therefore limiting the scope of the audit work.
If the all of the plan’s investments are not held by a qualified institution that can certify the accuracy and completeness of the investment information, the plan must undergo a full-scope audit.
In both cases, your auditor may identify errors and provide recommendations to improve plan management, internal controls, and operations, submitted in internal control or management letters.
If you’re not sure which type of audit your company requires, or if you have additional questions about 401(k) audits, leave a comment below or feel free to contact me directly. I’m happy to help!