By
Michael Lawrance, CPA
August 13, 2014
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The views in this presentation do not
necessarily reflect that of KPMG LLP or any of
its subsidiaries or affiliates.
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understanding how to differentiate between
the different types of investments in an
employee benefit plan
understanding the basic investment procedures
in a full scope audit
understanding the basics of how to audit hardto-value investments
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Limited scope – ERISA Section 103(a)(3)(c );
investment information certified by a bank or
similar institution or by an insurance carrier
that is regulated supervised, and subject to
periodic examination by a state or federal
agency. (generally, the trustee or custodian of
the plan)
Full scope – Auditor issues an opinion which
includes the assertions for investments.
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Registered Investment Companies (a.k.a.
Mutual Funds)
Common/collective trusts
Pooled separate accounts
It can be difficult to distinguish between these
investment types.
The form of investment matters.
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Registered Investment Companies (a.k.a.
Mutual Funds)
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Registered with the SEC
Sold to the general public
Pools money from various investors to purchase
securities
Classified by primary investments (fixed income,
equity, money market).
Redeemable by investors daily
Generally, not traded on an exchange (those that
trade on an exchange are called ETF’s)
Reported on Part I, c(13) on the Form 5500
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Common or commingled trust
SEC does not regulate. Regulated by states and/or
other federal agencies
 Not sold to the public (retail investors) directly
 Pools money from numerous plans to purchase
securities
 May have a name that appears identical to a mutual
fund, which is the primary underlying investment
 Maintained by bank or trust company
 Reported on Part 1, c(9) of Form 5500
 Generally, lower fees than a mutual fund
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Pooled Separate Accounts
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SEC does not regulate
Not sold to the public (retail investors) directly
Pools money from numerous plans to purchase securities
(pooled separate account)
May have a name that appears identical to a mutual fund,
which is the primary underlying investment
Maintained by an insurance company
Not commingled with other assets or the insurance entity
for investment purposes.
Reported on Part 1, c(10) of Form 5500
Generally, lower fees than a mutual fund
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The procedures mentioned are an illustrative
but not exhaustive list of procedures performed
during a standard 401(k) plan full scope audit
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Confirmation of investments
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Confirm the existence of the units/shares (mutual
fund vs. common commingled trust vs. pooled
separate account)
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Roll-forward Investment Balances
Perform or obtain a roll-forward of the beginning
investment balance to the ending balance
considering (purchases, sales, gains/losses)
 Purchases – will include contributions; exchange in;
re-invested income, etc.
 Sales – will include distributions; exchange out;
expenses, etc.
 Don’t forget exchange in/out (often the same
number with an opposite sign)
 Addresses the completeness of investments
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Purchases
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Obtain a detail of purchases that shows trade
amount, trade date, and security name (preferably
with a cusip)
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Verify the reasonableness of the stated information
for a sample by comparing such to the opening &
closing balance of the security traded for the
specified trade dates.
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This establishes the reasonableness of the cost
information.
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Sales
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Obtain a detail of sales that shows trade amount, cost,
trade date, and security name (preferably with a cusip)
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Verify the reasonableness of the stated information for a
sample by comparing such to the opening & closing
balance of the security traded for the specified trade
dates.
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Re-compute the gain/loss on sale
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This supports the accuracy of realized gains.
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Price Testing:
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Obtain a detail of investment holdings at year end
which indicates the number of units/shares and
price
Compare the price listed to the closing price per a
pricing source for the security for the specified date
Pricing sources include: Yahoo!Finance, IDC,
Bloomberg, Reuters, etc.
This supports the valuation of investments and in
conjunction with the purchase testing supports the
accuracy of the unrealized gains/losses of
investments.
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Common or commingled trust; Pooled separate
accounts – Audited financial statements are
generally available
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Obtain the audited financial statements and compare
the audited unit value to the price listed by the
trustee
Analytics may be performed if the audit date and the
plan reporting date differ
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Test the existence and valuation of the
underlying securities of the investment vehicle.
Obtaining the information to do so may be
easier said than done. Scope limitations can
result.
Remember materiality when applying
procedures.
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Presentation:
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Agree investment balances from certified
custodial/trustee statements to the financial
statements
Determine whether the Fair Value Level disclosures
for investments in the financial statements are
appropriate
 Make sure that the categories used are indicative of
nature and risk (e.g., growth funds, income funds)
 Be careful with classification of “Asset Allocation” for
target date funds
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Generally include but are not limited to, hedge
funds, private equity funds, real estate funds,
venture capital funds, offshore fund vehicles,
etc.
Existence – Confirm with hedge fund &/or
examine legal documents
Valuation –
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Understand management’s process to develop fair
value estimates
Obtain audited financial statements
Review transactions at or near the balance sheet date
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May require the use of a valuation specialist to
determine a reasonable range of fair value.
Audit evidence may be obtained by valuation
specialists employed by the audit firm
Audit evidence may be obtained by valuation
specialists employed by an individual or
organization outside the audit firm
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AICPA Employee Benefits Plan Guide
AICPA Investment Companies Guide
AICPA Audit Guide Special Considerations in
Auditing Financial Instruments
AICPA Practice Aid Alternative Investments –
Audit Considerations, a Practice Aid for Auditors