Documentation of Use of an Actuarial
Report in an Audit of a Defined Benefit
Pension Plan’s Financial Statements
PLAN NAME:
PLAN YEAR END:
CLIENT NUMBER:
Note:
This non-authoritative tool is intended to assist CPAs auditing the financial statements of defined benefit pension employee benefit plans.
AU-C section 500, Audit Evidence (AICPA, Professional Standards) addresses the auditor’s responsibilities when information to be used as
audit evidence has been prepared using the work of a management’s specialist. AU-C section 500 defines a management’s specialist as an
individual or organization possessing expertise in a field other than accounting or auditing whose work in that field is used by the entity
(plan) to assist the entity (plan) in preparing the financial statements. For an employee benefit plan, a management’s specialist would include
an actuary used to determine accumulated plan benefits for financial reporting purposes in accordance with FASB ASC 960, Plan
Accounting—Defined Benefit Pension Plans.
This tool is designed to assist auditors in documenting their procedures and findings related to their review of actuarial reports prepared for
plan management that are used as audit evidence in their defined benefit pension plan audits. It is not intended to be used as an audit program
or to provide authoritative guidance and should be tailored to the firm’s employee benefit plan audit practice and the circumstances of the
individual plan audit. Auditors should refer to AU-C section 500 to determine the audit requirements when using the work of an actuary hired
by the plan as audit evidence in their defined benefit employee benefit plan audits. It does not address considerations the auditor would make
when using the work of an actuary in accordance with AU-C section 620, Using the Work of an Auditor’s Specialist, to obtain sufficient
appropriate audit evidence.
The tool is not intended for use in the audit of a defined benefit health and welfare plan, but may be tailored by the firm for use in those
audits.
Section I – Actuary’s Competence, Capabilities, and Objectivity
NAME OF ACTUARY
AU-C section 500 requires the auditor to evaluate the competence, capabilities, and objectivity of an actuary whose report will be used as
audit evidence in the audit of a defined benefit pension plan. Matters relevant to evaluating the competence, capabilities, and objectivity of an
actuary include whether the actuary's work is subject to technical performance standards or other professional or industry requirements (for
example, ethical standards and other membership requirements of a professional body or industry association, accreditation standards of a
licensing body, or requirements imposed by law or regulation).
Information regarding the competence, capabilities, and objectivity of the actuary came from the following source(s) (check all that apply):
Personal experience with previous work of that actuary
Discussions with the actuary
Discussions with others who are familiar with the actuary’s work
Knowledge of the actuary’s qualifications, professional reputation, membership in a professional body or industry association, license
to practice, or other forms of external recognition (e.g., Fellow of the Society of Actuaries (FSA), Fellow of the Canadian Institute of
Actuaries (FCIA), Associate of the Society of Actuaries (ASA), or Enrolled Actuary (EA))
Published papers or books written by the actuary
An auditor’s specialist that assists the auditor in obtaining sufficient appropriate audit evidence with respect to information produced
by the actuary
Other
Competence and Capabilities:
Other matters relevant in the auditor’s consideration of the actuary’s capabilities and competence include the actuary’s experience and length
of time in the profession, area of specialty (for example, an actuary may specialize in property and casualty insurance but have limited
expertise regarding pension calculations) and the competency of the actuary with respect to the accounting requirements of ASC 960.
Document the details and findings of the auditor’s consideration of the sources checked above, and include any supporting documentation.
Examples of procedures could include reviewing on-line sources of such information such as the Society of Actuaries website, where the
auditor may look up an actuary’s credentials and areas of expertise/experience (www.actuarialdirectory.org/searchdirectory). If no
information that addresses the actuary’s competence and capabilities can be found, document that finding, the implications on the audit, and
how the requirements of AU-C section 500 are being met.
Objectivity:
There may be many potential threats to an actuary's objectivity (for example, self-interest. familiarity, self-review, and intimidation threats).
Safeguards may reduce such threats and may be created either by external structures (for example, the profession, legislation, or regulation of
the actuary) or by the work of the actuary's environment (for example, quality control policies and procedures). In addition, circumstances
may affect the significance of the threats and safeguards (for example, threats such as intimidation threats may be of less significance to an
actuary engaged by the entity than to an actuary employed by the entity, and the effectiveness of safeguards such as quality control policies
and procedures may be greater). Because the threat to objectivity created by being an employee of the entity will always be present, an
actuary employed by the plan sponsor cannot ordinarily be regarded as being more likely to be objective than other employees of the plan
sponsor.
Interests and relationships that may affect the objectivity of an actuary engaged by the plan sponsor include financial interests, business and
personal relationships, and provision of other services.
Document the auditor's consideration of potential threats to the actuary's objectivity (including discussions with plan management and other
methods of identifying threats), any applicable safeguards that may reduce identified threats (including any professional requirements that
apply), and your evaluation of whether the safeguards are adequate.
Section II – Benefit Information Date
Under ASC 960, the actuarial present value of accumulated plan benefits may be presented as of the beginning or the end of the plan year,
however, an end-of-year benefit information date is considered preferable.
What benefit information date does the plan use for reporting purposes?
Beginning of year
End of year
Is the benefit information date used by the plan consistent with the date used in the prior year?
Yes
No
Document the plan auditor’s conclusion about the appropriateness and consistency of the benefit information date used.
Section III – Objectives, Scope of Work, and Assumptions Used
The auditor is required by AU-C section 500 to obtain an understanding of the work of an actuary used as a management's specialist and
evaluating the appropriateness of the information in the actuarial report that is relevant to the plan’s financial statements, as the report may be
prepared for multiple purposes. The information that is used in preparing the plan’s financial information is the accumulated plan benefit
information prepared in accordance with FASB ASC 960. Other information not relevant to the plan audit that also may be included in the
report includes a valuation used for determining the IRS funding requirement and information about the pension obligation and expense that
will be reported in the plan’s sponsor’s financial statements in accordance with FASB ASC 715, Compensation—Retirement Benefits.
The calculations should reflect all benefits specified in the plan document (in Plan Provisions below, the auditor will consider recent plan
amendments), and should be made in accordance with the requirements of ASC 960. Accumulated plan benefits should reflect the benefits
accrued to date, based on service and salary to date. The calculations will incorporate various assumptions, including but not limited to those
regarding mortality, retirement rates, turnover, and interest rates.
If, as discussed earlier, information related to the plan, plan sponsor, and IRS funding requirements is all included in one report, the report
typically—but not always—will include a section specific to ASC 960 assumptions. However, in some cases all assumptions will be
presented in one place, and the auditor is required to determine which are applicable to the ASC 960 calculations (for example, future salary
projections may be included, but are not relevant to the ASC 960 calculations). If calculations are performed using an end of year valuation
date, that information often will be presented in a separate report.
Actuarial Standards of Practice (ASOPs) promulgated by the Actuarial Standards Board, which sets standards for appropriate practice for the
U.S., identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASOPs require
disclosure by the actuary of the rationale used in selecting significant assumptions used in the valuation of accumulated plan benefits. This
disclosure of the actuary’s rationale may be found in the valuation report itself or it may be in a separate document. If in a separate document,
the valuation report should refer the user to that document. This information is a valuable resource for auditors to use in gaining an
understanding and evaluating the appropriateness of the assumptions used by the actuary.
In some cases it may not be clear what information in the report is relevant for determining the ASC 960 calculations. In such cases,
document the procedures performed by the auditor to determine the information that is relevant to the plan for financial reporting purposes
(for example, discussions with the actuary who prepared the report or an in-house actuary, and review of the written agreement between the
plan sponsor and the actuary if one exists).
The actuary also must consider any findings, such as operational errors, that might affect the determination of accumulated plan benefits.
Document the auditor’s consideration of whether all operational errors or other findings that may affect the determination of accumulated
plan benefits have been communicated to and considered by the plan actuary, including discussions with the actuary and any procedures
performed, and the auditor’s conclusions, and include any supporting documentation.
Plan Provisions:
The provisions of plan instruments normally deal with such matters as eligibility to participate, entitlement to benefits, funding, operation and
administration of plan provisions, identification of the plan’s named fiduciary and allocation of responsibilities among those who also serve
in the capacity as fiduciaries for control and management of the plan, and delegation by fiduciaries of duties in connection with
administration of the plan. Many of these plan provisions are relevant to the determination of the actuarial present value of accumulated plan
benefits.
The plan instrument is amended or restated from time to time for changes to provisions or to conform to new regulatory requirements.
Certain plan amendments affect accrued benefits. Per ASC 960, those plan amendments adopted after the benefit information date are not
recognized currently. However, ASC 960 requires certain disclosures for significant amendments that occur after the benefit information date
but before financial statement date. Amendments adopted prior to the benefit information date are recognized when adopted even if effective
date is in the future. The following table summarizes when plan amendments should be included in the actuarial present value of accumulated
plan benefits.
Effective Date
Amendments Adopted Within Reporting
Year
Amendments Adopted After the Reporting
Year
Effective date within the
reporting year
Effect of amendment should be included in
the actuarial present value of accumulated
plan benefits presented as of the end of the
reporting year
Effect of amendment should not be included in
the actuarial present value of accumulated plan
benefits presented as of the end of the
reporting year
Effective date after the
reporting year
Effect of amendment should be included in
the actuarial present value of accumulated
plan benefits presented as of the end of the
reporting year
Effect of amendment should not be included in
the actuarial present value of accumulated plan
benefits presented as of the end of the
reporting year
If the benefit information is as of the beginning of the year, the date of the benefit information in the actuarial report may not match the date
at which net assets are presented. For example, for financial statements presented as of December 31, 20X2, and December 31, 20X1, the
actuarial valuation will be as of January 1, 20X2. For the benefit information to match the statement of net assets available for benefits, the
present value of accumulated plan benefits should be presented as of December 31, 20X1 (one day earlier). Typically, this will not cause a
material misstatement unless there was a plan amendment that was adopted on or after January 2, 20X2, with a January 1, 20X2 effective
date. In that situation, the effect of the amendment should be removed.
Document the auditor’s evaluation of the actuary’s consideration of plan provisions—including plan amendments—relevant to determining
the actuarial present value of plan benefits, including how you obtained your understanding of the plan’s provisions and any procedures
performed in determining the appropriateness and completeness of the provisions considered, and the auditor’s conclusions, and include any
supporting documentation.
Mortality Assumptions:
There are several mortality tables that are commonly used in ASC 960 calculations (RP 2014, RP 2000, 1994 UP, 1994 GAM, and 1994
GAR). In addition, actuaries use projection scales (MP 2014, Scale AA, or Scale BB), in conjunction with the mortality tables to bring the
mortality experience to a more current level. ASC 960 does not require the use of a particular mortality table and/or projection scale. Rather,
it requires that the assumptions used, including mortality, represent a best estimate of the plan's future experience solely with respect to that
individual assumption. However, if the decision is made to use an older table, or to use no projections or older projections, the plan should
provide substantial support for that decision.
It should be noted that some mortality tables generally are considered out of date, including the 1983 GAM, UP 1984, and 1971 GAM,
except in rare instances such as plans that cover individuals in dangerous professions where the mortality rate is higher. There also has been
an increase in in the use of generational tables, especially for larger plans.
The above considerations apply only to valuation assumptions—they do not apply to mortality tables that are used in connection with plan
provisions. For example, mortality tables commonly are used in plans to determine how a life annuity is to be converted to an alternate form
of benefit such as a joint and survivor annuity. In this context there is no right or wrong table since the table used is not a valuation
assumption. However, the mortality table being used for such purposes may not be appropriate for use in valuing plan benefits.
Document the mortality table and, if applicable, projection scale used by the actuary in the ASC 960 calculation and the support provided
regarding the selection of a mortality table and projection scale, any procedures performed by the auditor in determining the appropriateness
of the information used, and the auditor’s conclusions regarding the appropriateness of the mortality table and projection scale used, or why a
projection scale was not used and include any supporting documentation.
Retirement Assumptions:
The plan’s retirement assumptions include a rate presented for each year (commonly beginning at age 55 and extending through age 65 or
later, such as age 70, with “bumps” at common retirement ages, such as age 62 and 65). ASC 960 requires that the retirement rate
assumptions used should represent a best estimate of the plan's future retirement rates. As such, they should reflect the plan provisions and
plan's experience. For example, if the plan provides for subsidized early retirement benefits for participants at age 60, then the retirement
assumptions should reflect a “bump” in retirements at age 60. A single retirement age may be appropriate if early retirement benefits are
approximately actuarial equivalent.
Document the considerations by the auditor in determining the appropriateness of the retirement rates used and the auditor’s conclusions
regarding the appropriateness of the retirement rates and include any supporting documentation.
Turnover Assumptions:
As accumulated plan benefits are based only on benefits accrued to date and vested benefits cannot be forfeited, the plan’s turnover
assumptions affect only non-vested accrued benefits subject to forfeiture upon termination of employment. ASC 960 requires that the
turnover assumptions used in determining the obligation for non-vested benefits accrued to date should represent a best estimate of the plan's
future turnover rates. As such, they should reflect the plan provisions and plan's experience.
Document the considerations by the auditor in determining the appropriateness of the turnover rates used in determining the obligation for
non-vested benefits accrued to date and the auditor’s conclusions regarding the appropriateness of the turnover rates, and include any
supporting documentation.
Benefit Election Assumptions:
In determining the accumulated plan benefits, assumptions regarding participant elections often are necessary. If the plan provides for a
lump-sum option, estimates of the number of people who will elect a lump sum benefit and those who will elect an annuity are made. ASC
960 requires that the election assumptions used should represent a best estimate of the plan's future benefit payment elections. As such, they
should reflect the plan's experience and future expectations.
Document the considerations by the auditor in determining the appropriateness of the election assumptions used, and the auditor’s
conclusions regarding the appropriateness of the election assumptions and include any supporting documentation.
Interest Rate Assumptions:
For purposes of calculating the present value of accumulated plan benefits, ASC 960 provides two options for the interest rate used to
discount future benefits: either the long-term expected rate of return on plan assets (often the same rate or a similar rate used to calculate the
ASC 715 expected return on plan assets which is used to calculate pension expense; as this is a long-term assumption, it is not expected that
there would be a great deal of fluctuation from year-to-year), or the settlement rate (rate to currently settle benefits, it likely is the same as the
discount rate used under ASC 715 (i.e., the rate used to discount the obligations, which is determined based on observable data in the
financial markets at the measurement date); generally volatility and variations in this rate from year-to-year are expected). (Note: The PPA
funding rates are not appropriate for use as a long-term expected rate of return on plan assets, as it is based on historical rates rather than the
current rate.). The option selected should be used consistently from year-to-year; a change from one option to the other may be considered a
change in accounting principle.
If the long-term expected rate of return is used, various factors are considered in estimating rates to be used, including rates of return
expected from investments currently held or available in the marketplace; rates of return expected from the reinvestment of actual returns
from those investments; and the investment policy of the plan, including the diversity of investments currently held and expected to be held
in the future.
If the plan allows lump-sum distributions, an interest rate assumption used to calculate projected lump sums is necessary. For cash balance
plans, the interest crediting rate assumption is used to project the nominal account balance to retirement. This may be a fixed rate, such as
5.0%, as defined in the plan provisions or the rate could be based on a financial index, in which case an assumption is needed.
Document the rate used to discount future benefits, considerations by the auditor in determining the reasonableness of the rates used, whether
the rate used is consistent with the rate used in the prior year, which option the rate is based on, and whether the option used is consistent
with the prior year even if the rate itself has changed, and the auditor’s conclusions regarding the appropriateness of the rate used and include
any supporting documentation.
Section IV – Census Data
The actuary uses various census data, such as the classification of plan participants (active employees, terminated vested employees,
participants receiving benefit payments); demographic data (date of birth, hire date, termination date, salary, gender); participant eligibility;
and compensation rates. It is important that complete and accurate census data be used in the actuary’s calculations as the use of incorrect or
incomplete data can result in a material misstatement of the plan’s accumulated plan benefits. This means, for example, that the census data
must reflect the accurate number of employees covered; the amount of compensation as defined in plan provisions; the number of participants
who are eligible to participate in the plan; accurate demographic data; and accurate participant classification. In addition, the actuarial report
must reflect data that is appropriate for the plan’s year end. For example, if the plan uses a beginning of year benefit information date the
actuary should use census data as of the end of the prior year, but if the plan uses an end of year benefit information date the census data used
should be as of the end of the plan year under audit.
Document the auditor’s consideration of the completeness, accuracy, and appropriateness of the census data used by the actuary in
determining the actuarial present value of plan benefits, including any procedures performed in determining the completeness, accuracy, and
appropriateness of the data and the results of participant data testing performed, and the auditor’s conclusions, and include any supporting
documentation.
Section V – Conclusion
Has the auditor obtained sufficient evidence to determine that the information produced by the actuary is sufficiently reliable (including
whether it is accurate, complete, and sufficiently precise and detailed for the auditor's purposes) to be used as audit evidence?
Yes
No
Include any additional comments.
Prepared by:
Date:
Reviewed by:
Date: