Audit

Employee Benefit Plan Audits

by Jeremy Myers, CPA

Senior Audit Manager at Atchley & Associates, LLP

 

We are getting closer to the time of the year that human resource professionals in every industry are putting together their employee benefit plan’s census to start the process of filing their annual IRS Form 5500.  Depending on the size of your plan, you may file as a small plan or a large plan.  Plan sponsors can review their prior year Form 5500 which details the number of participants at year end. If that number is greater than 100, then you are likely to file as a large plan.  When filing as a large plan, your employee benefit plan is required to be audited by an independent auditor and that audit must be filed with your Form 5500.

Filing Deadlines

For plans with December 31st year end, IRS Form 5500 has a normal filing deadline of July 31st which is extendable to October 15th using Form 5558.

Employee Benefit Plan Audit Requirements

Once a benefit plan reaches 100 or more eligible participants at the beginning of the plan year, the plan is considered to be a large plan and an audit is required.  Eligibility is defined by the plan adoption agreement and is unique to each plan; it does not matter if the employee decides to enroll in the plan or not.

  • 80-120 Rule – There is a specific exemption for plans that have between 80-120 eligible plan participants at the beginning of the plan year to file their Form 5500 the same way it was filed in the previous year. With the 80-120 rule, plans can defer the audit requirement until the plan reaches more than 120 eligible plan participants.  A plan cannot change between a large plan to a small plan unless the plan begins the year with under 100 eligible participants.

Type of Audit – Full-Scope or Limited-Scope

There are two types of audits, Full-Scope or Limited-Scope, based on the certification of plan investments and loan balances.  If the investments are certified by the TPA, typically the Trustee who holds the investments, under 29 CFR 2520.103-8 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, the audit qualifies as a Limited-Scope Audit.  Limited-Scope Audits allow the auditor to rely on the certified investment statements and not perform additional procedures on those investments or loans.  Full-Scope Audits also include an audit of the investment and loan transactions.

What a Limited-Scope Audit Covers

The most common audits are Limited-Scope Audits and we typically test/verify information related to the employees of the plan sponsor(s).  An audit typically consists of the following steps:

  • Insuring that eligibility of participants was determined properly
  • Testing employee and employer contributions for both value and timing in accordance with the plan document and the Department of Labor (DOL) timing guidelines
  • Verifying that loans and distributions were made in accordance with plan documents and vesting schedules
  • Verifying that earnings allocated to plan participants are in line with overall plan investment performance
  • Insuring that the Form 5500 reconciles with the audit, although we do not prepare/provide assurance on the Form 5500, we do review it to insure the required information is presented

Benefits of an Audit

In the case of benefit plan audits, as these can be required once you meet the eligibility criteria mentioned above, I’d like to highlight the benefits you will receive in addition to meeting the DOL requirements:

  • Assurance that your plan is operating in accordance with DOL requirements.
  • If contributions are not being made properly, we can help plan sponsors determine additional funding requirements.
  • We are not the DOL and we will help your plan stay in compliance to limit the impact of a DOL audit.
  • We can make suggestions to help management improve their internal controls, processes, and documentation around plan activities.
  • If forfeitures can be used to pay plan expenses, the audit qualifies to be paid out of the forfeiture account.

If you have any additional questions about Employee Benefit Plan Audits, please feel free to reach out to Jeremy Myers, CPA, Audit Senior Manager via email jmyers@atchleycpas.com or directly at (512) 590-7587.

 

How to conduct a year-end risk assessment

Auditors assess their clients’ risk factors when planning for next year’s financial statement audit. Likewise, proactive managers assess risks at year end. A so-called “SWOT” analysis can help frame that assessment.

Typically presented as a matrix, this analysis of strengths, weaknesses, opportunities and threats provides a logical framework for understanding how a business runs. It tells what you’re doing right (and wrong) and predicts what outside forces could impact cash flow in a positive (or negative) manner.

Internal factors

SWOT analysis starts by identifying strengths and weaknesses from the customer’s perspective. Strengths represent potential areas for boosting revenues and building value, including core competencies or competitive advantages. Examples might include a strong brand image, a loyal customer base or exceptional customer service.

It’s important to unearth the source of each strength. When strengths are largely tied to people, rather than the business itself, consider what might happen if a key person suddenly left the business. To offset key person risks, consider:

  • Purchasing life insurance policies on key people,
  • Initiating noncompete or buy-sell agreements, or
  • Implementing a formal succession plan designed to transition management to the next generation.

Weaknesses represent potential risks and should be minimized or eliminated. They might include high employee turnover, weak internal controls, unreliable quality or a location with poor accessibility. Often weaknesses are evaluated relative to the company’s competitors.

Outside influences

The next part of a SWOT analysis looks externally at what’s happening in the industry, economy and regulatory environment. Opportunities are favorable external conditions that could increase revenues and value if the company acts on them before its competitors do.

Threats are unfavorable conditions that might prevent your company from achieving its goals. Threats might come from the economy, technological changes, competition and increased regulation. The idea is to watch for and minimize existing and potential threats.

Need help?

Contact us for help putting your company’s risk framework together. We can guide you on how to use SWOT analysis to evaluate 2017 financial results and plan for the future.

© 2017

DOES YOUR PARTNERSHIP OR LLC AGREEMENT NEED TO BE AMENDED BY DECEMBER 31, 2017?

by Harold F. Ingersoll, CPA/ABV/CFF, CVA, CM&AA

Partner at Atchley & Associates, LLP

 

Partnerships and many LLCs file partnership income tax returns.  As a result of the Bipartisan Budget Act of 2015 (“BBA”), the IRS has new audit rules for entities that file partnership income tax returns beginning January 1, 2018.  These audit rules significantly change the regime that currently governs partnership tax audits, assessments and collections.

The condensed version of the changes is, in the past when a partnership was audited, the IRS pushed the adjustments through to the partners of the partnership who were partners in the year under audit.  The new rules allow the IRS to charge the tax, due to audit adjustments, directly to the partnership and the current partners.

Your first thought may be, why could this be a problem?  Well, let’s assume you bought into a partnership in 2017, and shortly thereafter the partnership is audited by the IRS for 2015 and there is an adjustment that causes there to be more taxes paid.  Under the new rules you would likely be paying the tax for the partners that were owners in 2015.

To solve this problem, you can make changes to your partnership or LLC member agreement.  Partnerships with 100 or fewer partners that meet certain other requirements may be eligible to elect to opt out of these rules.  For partnerships or LLCs that qualify for this “opt out”, the partnership agreements could be modified to make the “opt out” mandatory.

Another change with the BBA is the term of “Tax Matters Partner” is eliminated.  The new term is “Partnership Representative”.  The partnership or LLC agreement could be changed to reflect how the Partnership Representative will be selected, removed or replaced.  You may also consider limiting the Partnership Representative’s authority over certain tax matters, such as extending a statute of limitations or settling the dispute.

There is also a new election labeled the “Push Out Election”.  As it sounds this allows the partnership or LLC to push out any audit adjustments to prior year partners.  This election is not automatic and must be elected within 45 days of receiving the final notice of partnership adjustment.  The requirement to make this election can be documented in the partnership or LLC agreement.

The IRS has put us on notice that we can expect to see more partnership and LLC audits than in the past.  Consulting your advisors about the issues raised in the BBA will leave you prepared for any audit in which your partnership may be involved.

 

 

 

Grant Funding and the Benefit of Single Audits

by Jeremy Myers, CPA

Audit Senior Manager at Atchley & Associates, LLP

 

Austin has a growing population of non-profit organizations who receive grant funds, which can be federal or state sourced and can come in many different sources: Grants, Loans, usages of land, and food / other commodities.  While the receipt of these funds helps organizations meet the needs of the community and reach their missions/goals, there are a number of other requirements that organizations may face.

Grant Monitoring and Reporting

Once an organization receives grant funds, they are typically subject to monitoring from the grantor.  Most grant contracts include either optional or required monitoring.  This monitoring can be performed by the granting agency or by a third party that the granting agency hires to perform monitoring.  This would be in addition to any reports required by the grantors to fill out.  Grant Reporting can range from monthly reimbursement requests, quarterly or annual performance reporting, or cost reports.

Necessary Non-Grant Funding

Many of the non-profit organizations in Austin have to review the requirements of the grant funds they receive and their own ability to meet those requirements.  These requirements may have limitations on both on a time and financial basis.  While organizations will want to receive grant funding, they have to look at the time required to fill out any reporting, keeping records of how the funds were spent, detailed records of those helped, and any necessary hiring and training of the staff to fulfill the grant’s purpose.  Also many grants do not cover some of these necessary items and the organization may not have the resources on its own to cover the costs of running programs in which the grant does not specifically allow.  Non-profits typically have to depend on public support to fill in the gaps the grants do not cover.

Requirements for Uniform Guidance Audit

If an organization who receives federal or state grant funding and expends $750,000 or more, in one year, of federal or state funding (looking at just federal or just state funds, not combined) is required to have an audit under Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements of Federal Awards, also known as Uniform Guidance.  For example, if an organization receives a $1,000,000 grant from the Department of Health and Human Services and spends $600,000 in year 1 and $400,000 in year 2 – this organization would not be required to have an audit under Uniform Guidance.  But if that same organization spends $800,000 in year 1 and $200,000 in year 2, they would meet the requirements to have an audit performed under Uniform Guidance.  The main trigger is spending the funds, not receiving the funds, which under the accrual method of accounting means that you will need to account for those expense incurred but not reimbursed during the organization’s fiscal year.  If you are unsure if the funds you have received are subject to Uniform Guidance, you should inquire to the granting agency and look for Catalog Of Federal Domestic Assistance (CFDA) numbers associated with the grant you have received.  Each grant should be tracked by their CFDA numbers as that number will be how the grant funds are presented on the Schedule of Expenditures of Federal or State Awards (SEFA or SESA).

Benefits of a Single Audit

If an organization is subject to a Uniform Guidance audit, then it would be required to go under a full financial and Uniform Guidance audit, also known as a Single Audit.  The term “Single Audit” is used to refer to the idea that an organization would only have to go through one audit versus multiple monitoring by different grantors and could meet any requirements from outside lenders.  The benefits of having a Single Audit performed are:

  • Your organization will have met the requirements of receiving federal or state funding
  • Having an objective view of your organization’s internal controls over both financial and grant programs,
  • Your organization will have audited financial statements that they can use to obtain future funding from both public sources and if necessary from financial institutions.
  • Making sure that your organization is using industry best practices across all aspects of the organization, not just grant or financial reporting
  • Grantors may choose to rely on the results of the Single Audit, the organization may save time from going through additional monitoring.
  • Since one firm can perform a Single Audit, it can be performed in conjunction with your financial audit, there is some dual purpose testing that can be performed that would bring efficiency to the entire Single Audit process.
  • Finally, all Single Audits are uploaded to the Federal Audit Clearinghouse (https://harvester.census.gov/facweb/) and organizations fulfill the requirements of making their financial statements available to the public and to their current and future grantors.

 

If you have any additional questions about Single Audits or requirements under Uniform Guidance, please feel free to reach out to Jeremy Myers (JMyers@atchleycpas.com).

Business owners: When it comes to IRS audits, be prepared

If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.

Catching the IRS’s eye

Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

Response measures

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors.

More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS selects you for an audit, our firm can help you:

  • Understand what the IRS is disputing (it’s not always crystal clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.

© 2017

3 financial statements you should know

Successful business people have a solid understanding of the three financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). A complete set of financial statements helps stakeholders — including managers, investors and lenders — evaluate a company’s financial condition and results. Here’s an overview of each report.

1. Income statement

The income statement (also known as the profit and loss statement) shows sales, expenses and the income earned after expenses over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

2. Balance sheet

This report tallies the company’s assets, liabilities and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which the book value of assets exceeds liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your liabilities exceeds the value of the assets, your net worth will be negative.

Public companies may provide the details of shareholders’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement

This statement shows all the cash flowing into and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Although this report may seem similar to an income statement, it focuses solely on cash. It’s possible for an otherwise profitable business to suffer from cash flow shortages, especially if it’s growing quickly.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. To remain in business, companies must continually generate cash to pay creditors, vendors and employees. So watch your statement of cash flows closely.

Ratios and trends

Are you monitoring ratios and trends from your financial statements? Owners and managers who pay regular attention to these three key reports stand a better chance of catching potential trouble before it gets out of hand and pivoting, when needed, to maximize the company’s value.

© 2017

FAQs about agreed upon procedures

An agreed upon procedures (AUP) engagement uses procedures similar to an audit, but on a smaller and limited scale. Here’s how a customized AUP engagement differs from an audit and can be used to identify specific problems that require immediate action.

How do AUPs compare to audits?

The American Institute of Certified Public Accountants (AICPA) regulates both audits and AUP engagements. But the natures of these two types of accounting services are quite different. When a CPA firm performs an audit, its client is the company. With an AUP engagement, the client is typically the company’s lender or another third party — a fact that usually alleviates potential conflicts of interest.

Another key difference is that of responsibility. Audits require CPAs to provide a formal opinion on whether the company’s financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

On the other hand, CPAs make no formal conclusions when performing AUPs; they simply act as finders of fact. It’s the client’s responsibility to draw conclusions based on the CPA’s findings.

AUP engagements may target specific financial data (such as accounts payable, accounts receivable or related party transactions), nonfinancial information (such as a review of internal controls or compliance with royalty agreements), a specific financial statement (such as the income statement or balance sheet) or even a complete set of financial statements.

When do you need AUPs?

AUPs boast several advantages over audits. They can be performed at any time during the year — not just at year end. And because you have the flexibility to choose only those procedures you feel are necessary, they can be cost-effective.

Lenders may, for example, request an AUP engagement, if they have doubts or questions about a borrower’s financials — or if they want to check on the progress of a distressed company’s turnaround plan. Or a business owner may decide to hire a CPA to perform an AUP engagement, if he or she suspects that the CFO is misrepresenting the company’s financial results or the plant manager is stealing inventory. These engagements can also be useful in mergers and acquisition due diligence.

Who can help?

An AUP engagement can be used to dig deeper into financial results and identify specific problems that require immediate action. We can help you customize an AUP engagement that can identify problems and resolve issues quickly and effectively.

© 2017

Use qualified auditors for your employee benefit plans

Employee benefit plans with 100 or more participants must generally provide an audit report when filing IRS Form 5500 each year. Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits.

Select a qualified auditor

ERISA guidelines require employee benefit plan auditors to be licensed or certified public accountants. They also require auditors to be independent. In other words, they can’t have a financial interest in the plan or the plan sponsor that would bias their opinion about a plan’s financial condition.

But specialization also matters. The more training and experience that an auditor has with plan audits, the more familiar he or she will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. Examples of audit areas that are unique to employee benefit plans include contributions, benefit payments, participant data, and party-in-interest and prohibited transactions.

Ask questions

Employee benefit plan audits are a matter of more than just compliance. The auditor’s report highlights any problems unearthed during the audit, which can serve as a springboard for improving plan operations. The conclusion of audit work is a good time to ask such questions as the following:

  • Have plan assets covered by the audit been fairly valued?
  • Are plan obligations properly stated and described?
  • Were contributions to the plan received in a timely manner?
  • Were benefit payments made in accordance with plan terms?
  • Did the auditor identify any issues that may impact the plan’s tax status?
  • Did the auditor identify any transactions that are prohibited under ERISA?

Experienced auditors can also suggest ways to improve your plan’s operations based on their audit findings.

Protect yourself

Employee benefit plan audits offer critical protection to plan administrators and employees. Your company can’t afford to skimp when it comes to hiring an auditor who is unbiased, experienced and reliable. Contact us for more information on hiring a plan auditor.

© 2017

Are you ready for audit season?

It’s almost audit season for calendar-year entities. A little preparation can go a long way toward facilitating the external audit process, minimizing audit adjustments and surprises, lowering your audit fees in the future and getting more value out of the audit process. Here are some ways to plan ahead.

The mindset

Before fieldwork begins, meet with your office team to explain the purpose and benefits of financial statement audits. Novice staff members may confuse financial audits with IRS audits, which can sometimes become contentious and stressful. Also designate a liaison in the accounting department who will answer inquiries and prepare document requests for auditors.

Reconciliation
Enter all transactions into the accounting system before the auditors arrive, and prepare a schedule that reconciles each account balance. Be ready to discuss any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves or percentage of completion.

Check the schedules to reveal discrepancies from what’s expected based on the company’s budget or prior year’s balance. Also review last year’s adjusting journal entries to see if they’ll be needed again this year. An internal review is one of the most effective ways to minimize errors and adjusting journal entries during a financial statement audit.

Work papers
Auditors are grateful when clients prepare work papers to reconcile account balances and transactions in advance. Auditors also will ask for original source documents to verify what’s reported on the financial statements, such as bank statements, sales contracts, leases and loan agreements.

Compile these documents before your audit team arrives. They may also inquire about changes to contractual agreements, regulatory or legal developments, additions to the chart of accounts and major complex transactions that occurred in 2016.
Internal controls

Evaluate internal controls before your auditor arrives. Correct any “deficiencies” or “weaknesses” in internal control policies, such as a lack of segregation of duties, managerial review or physical safeguards. Then the auditor will have fewer recommendations to report when he or she delivers the financial statements.

Value-added
Financial statement audits should be seen as a learning opportunity. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also engenders a sense of teamwork between your office staff and external accountants.

© 2016

Tips for efficient year-end physical inventory counts

The basics

Inventory includes raw materials, work-in-progress and finished goods. Your physical inventory count also may include parts and supplies inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at the lower of cost or market value.

Estimating the value of inventory may involve subjective judgment calls, especially if your company converts raw materials into finished goods available for sale. For example, the value of work-in-progress inventory includes overhead allocations and, in some cases, may require percentage-of-completion assessments.

A moving target

The inventory count gives a snapshot of how much inventory is on hand at year end. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value, it’s essential that business operations “freeze” while the count takes place.

Usually, it makes sense to count inventory during off-hours to minimize the disruption to business operations. Larger organizations with multiple locations may be unable to count everything at once. So, larger companies often break down their counts by physical location.

Proactive planning

Planning is the key to minimizing disruptions. Before counting starts, management can:.

  • Order (or create) prenumbered inventory tags,
  • Conduct a dry run to identify roadblocks and schedule workers,
  • Assign workers to count inventory using two-person teams to prevent fraud,
  • Write off any unsalable items, and
  • Precount and bag slow-moving items.

If your company issues audited financial statements, your audit team will be present during the physical inventory count. They aren’t there to help count inventory. Instead, they’ll observe the procedures, review written inventory processes and cutoffs, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

Beyond the count

When the inventory count is complete, it’s critical to investigate discrepancies between your computerized accounting records and physical inventory counts. We can use this information to help you evaluate how to stock items more efficiently and safeguard against future write-offs due to fraud, damage or obsolescence.

© 2016