In accordance with FASB Accounting Standards Codification (ASC) Topic 0715, Retirement Benefits, the fair value of assets held by a sponsor’s pension plan impacts the amounts reflected as assets or liabilities on the sponsor’s balance sheet on a dollar-by-dollar basis. In addition, the fair value of the investments held by the plan may be required to be disclosed based on the categories (Level 1, 2, or 3) in ASC 0820, Fair Value Measurements and Disclosures.
As reflected in MCAP Section 0740, Auditing Pension Costs, the auditor’s objective is to obtain sufficient appropriate audit evidence that the pension cost determinations and disclosures have been made in conformity with generally accepted accounting principles (GAAP), and one of the specific audit procedures performed to achieve this objective is to test the existence and valuation of funded plan assets. Much of the audit evidence obtained by the auditor when auditing pension costs is obtained via confirmation with the plan actuary. Although the actuary plays an important role in the determination of pension costs, the auditor cannot rely solely on the actuary's judgment as to whether the requirements of GAAP, including FASB ASC 0820, have been complied with. Specifically with respect to the fair value of plan assets, although the plan’s actuarial report and/or the confirmation received from the actuary reflects an amount for “fair value” of plan assets, most actuarial reports or confirmations disclaim responsibility for that number as the fair value amount was simply provided to the actuary for use in the actuary’s calculations. Thus, an actuarial confirmation reflecting an amount for fair value of plan assets generally does not provide sufficient appropriate audit evidence with respect to the valuation and presentation and disclosure assertions related to the plan assets.
Auditors should also bear in mind that AU Section 9332.01 - .04, Auditing Investments in Securities Where a Readily Determinable Fair Value Does Not Exist, indicates that “…simply receiving a confirmation from a third party, either in aggregate or on a security-by-security basis, does not in and of itself constitute adequate audit evidence with respect to the valuation assertion.” As part of fulfilling its responsibility, the plan sponsor needs to establish an accounting and reporting process for determining that the fair value measurements and disclosures are in accordance with GAAP. The auditor’s responsibility with respect to auditing the fair value of plan assets is to:
- Understand the plan sponsor’s process for determining fair value measurements and disclosures and the relevant controls, and assessing risk
- Test the plan sponsor’s fair value measurements and disclosures
- Evaluate conformity of fair value measurements and disclosures with GAAP
To facilitate an efficient and effective approach to auditing the fair value of plan assets, engagement teams are reminded that many times the Firm audits both the plan sponsor’s financial statements and the pension plan itself. The Firm’s audit of the pension plan itself will entail appropriately extensive audit procedures designed to address whether the plan’s financial statements (and investments) are measured and disclosed in accordance with GAAP. The audit procedures employed by the Firm’s pension plan engagement team will naturally be more robust than those required to audit the fair value of pension plan assets appearing in the plan sponsor’s financial statements. As such, the engagement team auditing the plan sponsor’s financial statements should consult with the engagement team auditing the pension plan itself to coordinate, to the greatest extent possible, the timing of audit procedures employed to audit the fair value of plan assets and to ensure that unnecessary redundancy in audit procedures is avoided.
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