By Michael Lawrance, CPA August 13, 2014

 The views in this presentation do not necessarily reflect that of KPMG LLP or any of its subsidiaries or affiliates.

 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 hard- to-value investments

 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.

 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.

 Registered Investment Companies (a.k.a. Mutual Funds)  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

 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

 Pooled Separate Accounts  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

 The procedures mentioned are an illustrative but not exhaustive list of procedures performed during a standard 401(k) plan full scope audit

 Confirmation of investments  Confirm the existence of the units/shares (mutual fund vs. common commingled trust vs. pooled separate account)

 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

 Purchases  Obtain a detail of purchases that shows trade amount, trade date, and security name (preferably with a cusip)  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.  This establishes the reasonableness of the cost information.

 Sales  Obtain a detail of sales that shows trade amount, cost, trade date, and security name (preferably with a cusip)  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.  Re-compute the gain/loss on sale  This supports the accuracy of realized gains.

 Price Testing:  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.

 Common or commingled trust; Pooled separate accounts – Audited financial statements are generally available  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

 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.

 Presentation:  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

 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 –  Understand management’s process to develop fair value estimates  Obtain audited financial statements  Review transactions at or near the balance sheet date

 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

 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