Full Scope Audit or Limited Scope Audit- Which One and Why?

When planning for an audit of your 401(k) or other retirement plan, you might question if a full scope audit or limited scope audit should be conducted.  It is important to determine if your plan requires an audit, and know your options. Failure to comply with audit requirements can lead to a host of long-term complications for your business.

Is an Audit Required for My Company’s Retirement Plan?

Retirement plans are subject to U.S. Department of Labor and IRS regulations. For the protection of investors, these agencies ensure that they are appropriately managed. Generally, qualified benefit plans with 100 or more eligible participants, as of the first day of a plan year, require an audit. Each employee who is eligible to contribute to the plan is treated as an eligible participant, whether they contribute or not. Retirees and separated participants, along with the beneficiaries of deceased participants who are receiving benefits, or are entitled to receive benefits, are also treated as eligible participants. The regulations surrounding 401(k) audits are strict and complex. Non-compliance can lead to expensive fines and litigation. Trusting an experienced auditor to advise you throughout the audit process is essential to avoiding complications.

Full vs. Limited Scope Audit – Which is right for me?

Limited Scope Audits

To qualify for a limited scope audit, an insurance carrier or bank must act as the trustee or custodian for the plan. This entity must be state or federally chartered and regulated, supervised and subject to examination. The trustee must also certify to the accuracy and completeness of any investment information. A limited scope audit works well for some. They usually come along with lower fees and fewer areas subject to audit testing. It’s important to note that the accounting firm that is charged with performing a limited scope audit cannot give an unqualified opinion on the plan’s financial statements. An unqualified opinion is an independent auditor’s report that your financials are fair and accurately presented. Reports that accompany limited scope audits are referred to as a Disclaimer of Opinion.

Full Scope Audits

In a full scope audit, audit work is performed on the plan’s investments. Procedures include sending confirmations to the custodian, trustee or insurance company to verify ownership of investments, along with the valuation of investments, investment transactions and investment income. The accounting firm performing the full scope audit, will provide an independent auditor’s opinion on the plan’s financial statements. The independent auditors’ report, financial statements and required schedules are filed with the Department of Labor. This is due on the last day of the 7th calendar month after the end of the plan year, unless an extension is requested. It is vital for small to mid-size businesses to plan for the appropriate full or limited scope audit of their 401(k) plan. Contact Ernst Wintter & Associates LLP at (925) 933-2626 to discuss your audit questions and determine which option is best suited for the unique needs of your business.