When a 401(k) or other retirement plan requires an annual audit, a plan administrator may have a choice to engage an audit firm to perform a full-scope audit or a limited scope audit of the financial statements. To be qualified for a limited scope audit, a bank or insurance carrier must act as a trustee or custodian for the plan, be state or federally chartered and be regulated, supervised and subject to periodic examination by a state or federal agency. Additionally, the trustee or custodian must certify as to the accuracy and completeness of the investment information.
There are definitely some benefits to only receiving a limited scope audit. The main benefits can include lower audit fees and fewer areas subject to audit testing. For example, when an auditor is engaged to perform a full-scope audit, everything in the plan is subject to audit testing. However, when performing a limited scope audit of the financial statements, the auditor need not perform any auditing procedures with respect to investment information prepared and certified by the qualified trustee or custodian. Note that the limited scope exemption applies only to investment information including investments, investment income, and related expenses, and potentially participant loans. With a limited scope audit, the auditor will continue to test participant data, including the allocation of investment income/losses to individual participant accounts, contributions, benefit payments and other information that was not certified.
When it is time to issue the audited financial statements, the CPA who is hired to perform a limited scope audit cannot give an unqualified opinion on the plan’s financial statements. The CPA’s opinion is called a Disclaimer of Opinion because the CPA has not been able to do sufficient work to form an overall opinion on the financial statements. However, the Department of Labor will accept a Disclaimer of Opinion for a limited scope audit with no penalties.
By Ryan G. Wojdacz, CPA