Audit Sampling and Your 401(k)
If you have just identified that your 401(k) plan needs an audit, after you have engaged a plan auditor and they begin work, one of the first items they will mention is the need for supporting information for their “samples”. If you are not familiar with audit terminology you may be wondering, what is a sample and why does that matter to my plan?
For a selected type of transaction, the auditor will review the total number of transactions available (called the “population”), and based upon their analysis of the population, they will select a few items for further review (called “testing”). The items selected for testing are called sample items. Testing a sample assists the auditor in verifying the accuracy and completeness of all the items in the total population.
There are various ways in which your auditor may select the sample. Methods include:
- Random sampling (in which every item has an equal chance of selection) or;
- Attribute sampling (in which the population is segregated based upon characteristics of the items, and sampling occurs from these different groupings of transactions).
In either case, the auditor is using a statistically-based process to verify the precision of the information they are reviewing. If errors are found in the testing of the sample data, the auditor may be required to add items to their testing. They may require “replacement” test items or an additional sample of several test items.
In all cases, you should work with your auditor to provide the requested information or explain why it is not available or not applicable for a test item. Failure to provide the required information could require the auditor to issue a scope limitation in their audit opinion. These audits do not have “clean” opinions and can cause regulators such as the Department of Labor or IRS to issue penalties against you, the Plan Sponsor or the 401(k) plan itself.
At Summit CPA, we specialize in retirement plan audits. If you would like to discuss our audit process in more detail or need an audit, contact our office at (866) 497-9761 to schedule an appointment. We can help you navigate the world of the 401(k) audit as proficiently as possible. We also offer off-site assistance and flat-fee pricing so there are no surprises when the job is complete.