11K Audit Live Forum

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11-K Audit Live Forum
March 23, 2006
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Welcome to the 2006 11-K Audit Live Forum
Val Bitton Deloitte Touche, LLP
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Todays Presenters

• Val Bitton, CPA
• Partner
• Deloitte Touche LLP

• Bill LeRoy,
• Partner
• BDO Seidman, LLP

• Michele Weldon, CPA
• Partner
• Pricewaterhouse-Coopers, LLP

• Mike Fitzpatrick, CPA
• Partner
• Ernst Young, LLP

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Program Format

• Speakers will provide a brief discussion of each
  topic
• Participants may submit questions at any time via
  email through the Center mailbox at
  ebpaqc_at_aicpa.org
• Questions will be answered at the end of the
  program

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Program Objectives

• This program is designed to
• Identify practice issues related to audits of
  plans that file on Form 11-K with the SEC
• Provide you with the opportunity to hear and
  discuss best practices related to 11-K audits
• Allow you to ask questions regarding your firms
  11-K audit practice

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Mike FitzpatrickErnst Young, LLP
Reporting
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Overview of SEC Rules and Regulations

• Form S-8 Requirements
• Form 11-K Requirements
• Form 8-K Requirements
• Exemptions
• Consents
• Reference to PCAOB Standards
• Blackout Periods

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Form S-8 Requirements

• To Register employer stock to be issued pursuant
  to an employee benefit plan
• To Register participants interest in a plan if
• Plan is both voluntary and contributory and
• Not managed by an insurance company (separate
  account) or a bank (common trust fund) or
• A single-employer plan in which employee
  contributions are invested in employer securities

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When is Form 11-K Required?

• For Annual Reports of Employee Stock Purchase,
  Savings and similar plans, interest in which
  constitutes securities registered under
  Securities Act of 1933
• Existing plan which is adding employer securities
• New Plan which includes employer securities
• Resources
• AICPA Audit Risk Alert
• AICPA EBP Audit Guide Chapter 12

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Filing Requirements

• Due Dates
• 90 days after the end of the fiscal year of the
  Plan
• Plans subject to ERISA within 180 days after the
  end of the fiscal year of the Plan
• Late filingsExtension requirements
• Effect on Registrant
• 12b-25 Extension request for 15 calendar days

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Financial Statements and Schedules

• SEC-Format Section 15(d)
• Article 6A of Regulation S-X
• ERISA Format
• Full Scope Audit required
• Limited Scope is not acceptable
• Prior year limited scope audit-
• Upgrade of prior year audit required
• Modified cash basis of accounting is acceptable

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Exemptions

• From Audited Financial Statements
• Less than 100 participants and filing in
  accordance with ERISA
• Unaudited financial statements would be included
  in the filing
• Beware of stock-bonus plans which are not ERISA
  plans

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Consent of Independent Auditors

• Requirement that auditors consent to the use of
  their report in a 1933 Act registration
  statement
• Should be dated as close to the filing date as
  possible but not earlier than 3-5 days
• Consents are addressed only to the client

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Consents

• Consent of Independent Registered Public
  Accounting Firm
• The Plan Administrator of the
• XYZ, Inc. 401 (k) Plan
• We consent to the incorporation by reference in
  the Registration Statement (No. 333-000606) on
  Form S-8 of XYZ, Inc. of our report dated May 24,
  200X, with respect to the statements of net
  assets available for benefits of XYZ, Inc. 401
  (k) Plan as of December 31, 200X, and 200Y, the
  related statements of changes in net assets
  available for benefits for the years then ended,
  and the related supplemental schedules as of
  December 31, 200X, which report appears in the
  December 31, 200X annual report on Form 11-K of
  XYZ, Inc. 401(k) Plan.
• City, State
• Date

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Unique Circumstances

• Change in Auditors
• Two consents are needed
• Impact on opinions
• Additional audit procedures required

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Form 8-K Requirements

• Change in auditors
• If required, due in 4 business days
• May require two Form 8-Ks
• Dismissal of current auditor and appointment of
  new auditors
• Should have client obtain SEC legal advise
• Letter responding to statements made in Form 8-K,
  if filed
• Separate letter requirement if no Form 8-K filed
• Form 5500 Schedule C requires reporting of
  changes in auditors and actuaries and reason for
  the change.

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Letter from Predecessor Auditor

• Mr. John Doe
• Chief Financial Officer
• XYZ Corporation
• Anytown, USA
• Dear Mr. Doe
• This is to confirm that the client-auditor
  relationship
• between XYZ Corporation (Commission File
• Number x-xxxx) and Audit Firm has ceased.
• Very truly yours,
•   /s/ Audit Firm
• cc   Office of the Chief Accountant  

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PCAOB Standard No. 1 References to PCAOB Standards

• Title of audit report
• Report of Independent Registered Public
  Accounting Firm
• Must refer to standards of the Public Company
  Accounting Oversight Board (United States) and no
  longer can refer to GAAS.
• SEC will reject filings if GAAS is referred to
• DOL Regulations require reference to GAAS
• DOL will accept dual references
• Could reject filings if the only reference is to
  PCAOB standards

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Example Wording 11-K Filing with the SEC

• We conducted our audits in accordance with
  standards of the Public Company Accounting
  Oversight Board (United States). Those standards
  require that we plan and perform. . . . .
• Reports filed with the DOL should refer to GAAS

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AICPA Audit Interpretations

• Interpretation No. 17 of SAS No. 58
  Clarification in the Audit Report of the Extent
  of Testing of Internal Control Over Financial
  Reporting in Accordance with Generally Accepted
  Auditing Standards (Issued June 2004) Following
  only AICPA standardsnot adopted or approved by
  the PCAOB
• Does not affect Limited Scope opinions

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Example Wording for a Full Scope Audit Filed with
the DOL

• We conducted our audits in accordance with
  standards generally accepted in the United States
  of America. Those standards require that we plan
  and perform the audit to obtain reasonable
  assurance about whether the financial statements
  are free of material misstatement. An audit
  includes consideration of internal control over
  financial reporting as a basis for designing
  audit procedures that are appropriate in the
  circumstances, but not for the purpose of
  expressing an opinion on the effectiveness of the
  Plans internal control over financial reporting.
  Accordingly, we express no such opinion. An
  audit also includes examining, . . . .

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Audit Interpretations

• Interpretation No. 18 of SAS No. 58 Reference to
  PCAOB Standards in an Audit Report of a Non-
  Issuer
• Audit conducted under both standards
• Dual Reporting for both PCAOB standards and GAAS
  as well as a disclaimer on internal control.
• Does not apply to Plans that file 11-Ks as these
  plans are considered issuers

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Example Wording for Non-Issuer

• We conducted our audit in accordance with
  generally accepted auditing standards as
  established by the Auditing Standards Board
  (United States) and in accordance with the
  auditing standards of the Public Company
  Accounting Oversight Board (United States).
  Those standards require that we plan and perform
  the audit to obtain reasonable assurance about
  whether the financial statements are free of
  material misstatement. The Plan is not required
  to have, nor were we engaged to perform, an audit
  of its internal control over financial reporting.
  Our audit included consideration of internal
  control over financial reporting as a basis for
  designing audit procedures that are appropriate
  in the circumstances, but not for the purpose of
  expressing an opinion on the effectiveness of the
  Plans internal control over financial reporting.
  Accordingly we express no such opinion. An
  audit also includes . .. .. .

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Blackout Periods

• Section 306-Insider Trades During Pension Fund
  Blackout Periods
• Executives can not exercise and cash out their
  employee stock options and sell other issuer
  securities acquired through the companys equity
  compensation plans during a pension fund blackout
  period
• Corporate issue but plan auditors should be aware
  of rules

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DOL Blackout Regulations

• DOL has additional regulations related to
  blackout periods with penalties for the Plan
  Sponsor
• 401(k) Plans must provide 30 day advance notice
  to participants
• Reason for blackout
• Start and end dates
• Description of rights being suspended
• Statement advising participants to evaluate their
  investments with this in mind
• Penalties of 100/day per participant
• DOL has been reviewing and assessing penalties

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Bill LeRoyBDO Seidman, LLP
Auditor Independence
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Auditor Independence Issues

• Independence Rules and Partner Rotation Rules
• SEC Prohibited Services

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Independence and Partner Rotation Rules

• Independence Rules
• Plan and Plan Sponsor
• - SEC
• - Department of Labor
• During performance of audit
• And for the period covered by the financial
  statements
• Potential problem in accepting new engagements
• DOL Considering Revising Independence Rules
• Partner Rotation Rules
• Five Years for Engagement Concurring
• Five Year Cooling Off Period

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SEC Prohibited Services

• To Plan
• Bookkeeping
• Preparation of Financial Statements
• If Client not Qualified-Another CPA Firm
• To Plan Sponsor
• Services to Plan Sponsor OK (if not auditing the
  Plan Sponsor) as long as it does not involve the
  Plan)
• e.g.- 404 work OK but not with payroll

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Michele WeldonPricewaterhouseCoopers, LLP
Other Audit Considerations

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Other Audit Considerations

• Engagement Letters
• Representation Letters
• Impact of 404 on Plan Audits
• Required Communications
• Investments

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Engagement Letters

• Special considerations for 11-Ks
• Addressee
• Reference PCAOB and GAAS standards
• Confirm pre-approval requirements met
• Auditor responsibility to communicate with plan
  oversight entity
• EDGAR
• Release and indemnification
• Other plans for public company sponsors

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Representation Letters

• Special Considerations for 11-Ks
• Single letter for both opinions
• Update for consent date, if later
• Update for GAAS opinion release date
• Representation re significant deficiencies in
  internal controls
• Signatories

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Impact of 404 on Plan Audits

• Plans that file Form 11-K are not required to
  comply with Sarbanes-Oxley Section 404
• For all EBP audits integrated audit and 404
  reporting requirements increased focus on SAS 70s
• More service providers issuing Type II SAS 70s,
  particularly payroll service providers
• Change in year-end, away from 12/31
• Exceptions, carve-outs, qualifications more
  common
• For public company sponsors plan oversight,
  payroll and plan operations potentially within
  404 scope
• Documentation, testing and evaluation of systems
  relevant to plan audit
• Consider impact on audit strategy ? may be more
  opportunities for controls reliance approach

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Required Communications

• Authoritative Guidance
• SEC Regulation S-X Rule 2-07
• SAS 61 AU 380
• AS 2

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To Whom Should Auditor Report?

• Party responsible for plan oversight equivalent
  to an audit committee
• Plan oversight entity (preferred)
• In absence of oversight entity, alternatives
• Plan Sponsor Audit Committee
• Plan Administrator

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What Should be Communicated?

• SAS 61/AU 380 communications
• Additional requirements
• Auditors responsibility under GAAS and PCAOB
  standards
• Critical accounting policies and alternative
  treatments within GAAP
• Independence
• Fees
• Material written communications

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When Should Communications Be Made?

• Prior to issuance of financial statements
• Material weaknesses and significant deficiencies,
  in the design or operation of the accounting and
  internal control systems to
• Management
• Designated oversight body
• Prior to filing form 11-K
• Additional required communications
• SAS 61 communications generally combined in same
  document
• Dated the same date as opinion or consent
• Oral communications allowed if documented
• Date of communication
• Individuals involved
• Items discussed

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11-K Investment Considerations

• Proper categorization of pooled investment
  vehicles
• Mutual funds, common/collective trust funds, or
  insurance company pooled separate accounts
• Unitized Accounting
• Recordkeeping convention, not an investment
  entity
• Generally adds liquidity to long-term investment
  to facilitate daily participant transactions
• Gives look and feel of mutual fund to a pool of
  investments owned directly by the plan
• Company common stock funds, separate accounts,
  GICs
• Synthetic GICs fund owns underlying investments
  wrapper contracts

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Audit Documentation
Val Bitton Deloitte Touche, LLP
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Audit Documentation

• Required Audit Documentation under PCAOB Standard
  No. 3
• Nature and Extent of Documentation Required
• Significant Documentation Matter
• Definition Significant Findings or Issues
• Completing and Retaining

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Documentation Requirements of PCAOB Auditing
Standard No. 3

• Prepare documentation in sufficient detail to
  provide a clear understanding of its purpose,
  source, and the conclusions reached
• Examples of audit documentation include memos,
  confirmations, correspondence, audit programs,
  rep letters
• Audit documentation may be in the form of paper,
  electronic files or other media
• Organize documentation to provide a clear link
  to the significant findings or issues (discussed
  in more detail later)
• Auditor must document procedures performed,
  evidence obtained, and audit conclusions reached
  on relevant financial statement assertions

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Nature and Extent of Documentation Required

• Audit documentation must contain sufficient
  information for an experienced auditor to
• Understand the procedures performed, evidence
  obtained, and conclusions reached
• Determine who performed the work (and the date
  the work was performed), and who reviewed the
  work (and the date of review)

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Nature and Extent of Documentation Required

• Auditor MUST HAVE written documentation oral
  evidence alone does not constitute sufficient
  evidence that the procedures were performed
• Demonstrate that the underlying accounting
  records agree/reconcile with the financial
  statements
• Make reference to the items documented in a
  central repository (independence, training, etc.)

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Nature and Extent of Documentation Required

• Audit Implications
• Requires clear and comprehensive documentation
• Signed-off program steps generally will not be
  sufficient documentation
• Applies to the auditor and specialists
• Requires coordination between audit and tax
  engagement team members

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Significant Documentation Matter

• Defined
• Possible restatement for correction of an error
  affecting revenue, net income, or net worth
• Identification of possible fraud or illegal acts
• Disagreements or differences in professional
  judgment
• Subsequent discovery of facts (i.e., subsequent
  to issuance of our report) existing at the date
  of our report that might have affected such
  report
• Significant expansion from originally planned
  audit scope
• Whistle-blower letters relating to the
  financial statements, financial accounting, or
  other matters covered by our audit opinion
• Documentation Requirements
• Keep everything

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Definition Significant Findings or Issues

• Significant Findings or Issues
• Selection, application, and consistency in
  accounting principles, including related
  disclosures
• Accounting for complex or unusual transactions
• Significant accounting estimates and
  uncertainties, including related management
  assumptions
• Significant modification of planned auditing
  procedures
• Material misstatements or omissions in the
  financial statements
• Significant deficiencies or material weaknesses
• Audit adjustments that are material, either
  individually or in the aggregate (whether or not
  recorded by management)

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Definition Significant Findings or Issues
(contd)

• Significant Findings or Issues
• Disagreements among members of the engagement
  team or others consulted on the engagement about
  final conclusions reached on significant
  accounting or auditing matters
• Circumstances that cause significant difficulty
  in applying the auditing procedures that we
  considered necessary
• Significant changes in the assessed level of
  audit risk for particular audit areas and our
  response to those changes
• Any matters that could result in a modification
  to our report

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Definition Significant Findings or Issues
(contd)

• Documentation Requirements
• Document significant findings or issues, actions
  taken to address them, and the basis for
  conclusions reached
• Include information that is inconsistent with or
  contradicts the final conclusion and resolution
  of such information
• Needs to be documented in the Summary Memorandum
• Audit Implications
• Need to capture and thoroughly document this
  broad category of issues

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Completing and Retaining

• Complete all auditing procedures and obtain
  sufficient evidence prior to issuing the report
• For any information changed after report
  issuance, document the date of the change, who
  made the change, and the reasons for the change
• Do not delete or discard any items after
  archiving
• Complete and archive the final set of
  documentation within 45 days of issuing the
  report
• Retain for seven years from
• Report issuance date (completed engagements)
• Engagement cessation (terminated engagements)

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What Happens When the 5500 Is Filed More than 45
Days After the Report Date?

• Audit documentation must not be deleted or
  discarded after the completion date however
  information may be added
• Added documentation (in this case the 5500 and
  the review thereof) must indicate the date the
  information was added, the name of the person who
  prepared the additional documentation and the
  reason for adding it

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Questions?ebpaqc_at_aicpa.org
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Wrap Up

• Thanks for joining us today for the 11-K Live
  Forum
• We welcome any additional feedback on todays
  live forum. Send comments to the Center mailbox
  at ebpaqc_at_aicpa.org.
• Visit the Center Online Forum to interact with
  other members on 11-K and other issues.
• Remember to register for the upcoming free 2006
  Live Forum for in-charges to be held on April 26
  from 300-500pm Eastern Time
• AICPA EBP Conference May 8-10 in Baltimore,
  Maryland
• Watch for details of AICPA EBP webcasts Form
  5500 Q A and Audit Risk Alert

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Thank You For Participating!