Full Scope Audit

[Guest scott34]

Background: We have a client that has a 401k plan in which the only trustees are the owner of the company and the CFO. It is a discretionary trust that has its investments (mutual funds) with American Funds. American Funds will not ceritfy the investments as being complete and accurate and thus we are not able to do a limited scope audit. American Funds states that they are only the recordkeeper of the plan and not a trustee. They only issue certification letters were they are acting as the plan's directed trustee.

Question: If plan is going to go through a full scope audit and investments are going to be tested what will the trustees of the plan (owner and CFO) have to provide? They have no records of investments besides what american funds provides in their trust report. Whose interal controls would be tested, the trustees or american funds?

[BG5150]

Would it be possible to use American's SAS70 as testing of its internal controls?

[Guest scott34]

We have a copy of their SAS 70 but it looks like, according to the audit procedures for a discretionary trust, the SAS 70 should be from the trustee.

[movedon]

I don't think the scope of the audit has anything to do with SAS 70s and controls. If no one can/will certify the accuracy of the trust statements, the audit will be full scope. The auditors will request information they need from the Trustee, who may then need to request it from American Funds.

[K2retire]

Would it be possible to use American's SAS70 as testing of its internal controls?

I am told that a SAS70 specifically excludes assets for which the fund company is neither the trustee nor the custodian. If American is acting solely as recordkeeper, their SAS70 is not likely to be helpful.

[Bill Presson]

I'm assuming the assets are held in one of American Funds programs (direct or connect). If so, how is American Funds (or one of their subs) not a custodian that can certify the assets?

[Kevin C]

Only certain types of institutions can issue a certification that will allow a limited scope audit. See the Schedule H instructions for line 3b for a description and cites. It sounds like American Funds can not issue a certification, but the trust company they use when they are directed trustee can issue a certification. Of course, using a trust company generally means more fees.

[Guest scott34]

Kevin, you are exactly right. Capital Bank and Trust is American Funds' trust company but our client did not set up their plan to have them as the trustee.

This is why we are having such a difficult time figuring out how to approach the full scope audit.

[K2retire]

I'm assuming the assets are held in one of American Funds programs (direct or connect). If so, how is American Funds (or one of their subs) not a custodian that can certify the assets?

Bill, coming from a banking background I always thought that whoever held the assets was a custodian. And to my way of thinking the mutual fund company clearly holds the assets. But apparently this is like so many other terms in this industry that has a specific meaning that may be different than the common usage of the word.

[Bill Presson]

I'm assuming the assets are held in one of American Funds programs (direct or connect). If so, how is American Funds (or one of their subs) not a custodian that can certify the assets?

Bill, coming from a banking background I always thought that whoever held the assets was a custodian. And to my way of thinking the mutual fund company clearly holds the assets. But apparently this is like so many other terms in this industry that has a specific meaning that may be different than the common usage of the word.

I understand, but I would push American Funds a bit harder before giving up.

[Guest scott34]

Our client has been in contact with American Funds and is trying to get them to certify, but they have not had any luck.

I have a copy of the Recordkeeping Services Agreement between American funds and our client and in it it specifically states "Neither the Service Provider or any of its affiliates, ......shall have any authority , control or responsibility that would render it, or cause it to be deemed to be, an administrator, fiduciary or custodian of the Plan or be in possession or control of plan assets or plan records....."

[Guest Dell]

First, better plan on a full scope audit.

You will want the recordkeepers SAS 70 (hopefully a Type II). The earlier statement that if American is only the recordkeeper "their SAS 70 is not likely to be helpful" doesn't make sense from an audit perspective. Talk to your auditor, you will need to test the recordkeepers controls wether they are a trustee, custodian or neither; and the SAS 70 helps. You will have to test valuations separately, but that shouldn't be too tough.

[K2retire]

First, better plan on a full scope audit.

You will want the recordkeepers SAS 70 (hopefully a Type II). The earlier statement that if American is only the recordkeeper "their SAS 70 is not likely to be helpful" doesn't make sense from an audit perspective. Talk to your auditor, you will need to test the recordkeepers controls wether they are a trustee, custodian or neither; and the SAS 70 helps. You will have to test valuations separately, but that shouldn't be too tough.

I agree that it doesn't make sense. But I work for a competing fund company and our SAS70 specifically excludes recordkeeping services for retirement plans. What OP is being told by American Funds goes along with that.

[Guest scott34]

The SAS 70 we have from Captial Bank & Trust, which American Funds is a subsidiary of, includes testing of the retirement plan's recordkeeping services.

[Guest Dell]

I see what you are saying, no SAS 70 is available covering the items needed.

My point was that you need to gain an understanding of the controls at the recordkeeper, whether that is a trustee, custodian, or someone else. I took the earlier post to say that since American was "only" the recordkeeper their SAS 70 was not helpful. If no SAS 70 is available, that complicates things but doesn't change the requirements.