Plan investments, valuation and the certifying institution

• Identify how common plan investments are measured and disclosed
• Design procedures for investments in a full-scope audit
• Separate certified investment information from information the auditor must audit
• Evaluate hard-to-value investments and service organization evidence

What plans hold and how it is measured

Plan investments are measured at fair value under ASC 820 with a few plan-specific exceptions:

• Mutual funds and listed securities: fair value from quoted prices, Level 1.
• Common or collective trust funds and pooled separate accounts: often measured at net asset value per unit as a practical expedient, and excluded from the fair value hierarchy table with a reconciling line.
• Fully benefit-responsive investment contracts in a defined contribution plan: measured at contract value, the relevant measure for participants who transact at contract value.
• Participant loans: presented as notes receivable from participants, not as investments.
• Hard-to-value assets: real estate, limited partnerships, private equity, employer stock that is not publicly traded and insurance contracts, which need specific valuation evidence.

Full-scope procedures

In a full-scope audit the auditor obtains evidence over existence, valuation, presentation and investment income:

• confirm holdings with the trustee or custodian, or use the custodian's SOC 1 report plus confirmation of balances;
• for Level 1 assets, agree prices to independent sources;
• for NAV-measured funds, obtain the fund's audited financial statements, evaluate the auditor's opinion, consider the timing difference from the plan's year-end and test redemption activity near year-end;
• for Level 2 and Level 3 assets, evaluate the valuation method and inputs, considering AU-C 540 on estimates and the need for a specialist;
• recompute investment income and test realized and unrealized gains for a sample of funds; and
• tie investments to Schedule H line 4i and to the financial statement disclosures, including the fair value hierarchy table.

When there is a certification

In a 103(a)(3)(C) audit, the certified investment information is not audited, but the auditor still compares it to the financial statements and schedules, reads the disclosures for conformity with the framework and evaluates management's assessment of the certifying institution. Two traps:

1. Partial certification. A bank may certify only assets it holds. A limited partnership held outside the trust, or a guaranteed investment contract with an unaffiliated insurer, is not covered by the bank's certification. The contract needs its own certification from the insurer, and anything left uncertified must be audited.
2. Certification that omits information. A certification of asset values does not cover investment income or the fair value hierarchy classification unless it says so. Read it.

Management is responsible for the disclosures even when the values are certified, including the hierarchy and NAV disclosures.

Service organizations

Custodians and recordkeepers process the plan's investment transactions. Use their SOC 1 reports for controls over custody, pricing and income allocation, and map the complementary user entity controls to the sponsor. Read the subservice organization section: many recordkeepers carve out a custodian. See the SOC 1 bridge letters guide.

Common file mistakes

• NAV-measured funds tested only by agreeing to the trustee statement, with no look at the fund's audited statements.
• Non-certified assets in a 103(a)(3)(C) audit left untested.
• Fair value hierarchy table built from the certification with no evaluation of classification.
• Employer stock in a private company valued from management's number with no valuation report.

Meadowbrook Utilities Savings Plan: splitting the investment population