The Employee Retirement Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit as part of the plan sponsor’s obligation to file a Form 5500.
Financial statement audits provide an independent, third-party opinion to participants, plan management, the Department of Labor (DOL), and other interested parties that the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits.
The overall objectives of the plan auditor under professional standards are to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error and to report on the financial statements in accordance with his or her findings. In addition, the DOL requires the independent auditor to offer an opinion on whether the DOL-required supplemental schedules attached to the Form 5500 are presented fairly in all material respects, in relation to the financial statements.
To accomplish these objectives, the auditor plans and performs the audit to obtain reasonable assurance that material misstatements, whether caused by error or fraud, are detected.
The auditor assesses the reliability, fairness and appropriateness of the plan’s financial information as reported by plan management, by:
- Testing evidence supporting the amounts and disclosures in the plan’s financial statements and Department of Labor (DOL)-required supplemental schedules
- Assessing the accounting principles used and significant accounting estimates made by management
- Evaluating the overall financial statement presentation to form an opinion on whether the financial statements are free of material misstatement
In conducting a plan audit, the auditor has a responsibility to perform procedures with respect to the provisions of ERISA and DOL and IRS regulations that have a direct effect on the determination of material amounts and disclosures in the financial statements.
As part the auditor’s consideration of the plan’s compliance with laws and regulations, the auditor is required to make certain inquiries and review correspondence with the DOL and IRS. The auditor also considers the effect of the transaction on the financial statements.