SMSF Auditing Explained

SMSF Auditing & the Role of a SMSF Auditor

The financial reports of a Self-Managed Superannuation Fund (SMSF) must undergo an audit in accordance with the Superannuation Industry (Supervision) Act 1993 (SISA) and accompanying Superannuation Industry (Supervision) Regulations (SISR). An SMSF audit consists of two parts:

• a financial audit (Part A)
• a compliance audit (Part B)

The financial reports generally include the fund’s statement of financial position as at 30 June, the operating statement, a summary of significant accounting policies and other explanatory notes.

The Australian Taxation Office (ATO) regulate SMSFs to ensure the financial reports are presented fairly in all material respects, in accordance with the accounting policies described in the notes to the financial report (financial audit) and to ensure compliance with the SISA and SISR (compliance audit).

A SMSF auditor must be registered as an approved self-managed super fund auditor. The Australian Securities & Investment Commission (ASIC) is the body which regulates registration of a person wanting to be registered as an “approved SMSF auditor”. The auditor must also comply with the auditing standards made by the Auditing and Assurance Standards Board.

The ASIC website provides a register of approved SMSF auditors.

How often must My SMSF Audit be Undertaken?

The SISA and SISR requires the financial reports and operations of a SMSF to be audited annually. The SMSF annual return (SAR) cannot be lodged until the annual audit report has been issued. The audit report is not required to be lodged with the fund’s SAR.

What Happens if My SMSF does not have a Financial and Compliance Audit?

Failure to complete an audit means the SMSF trustee is unable to lodge the SAR which combines tax and regulatory returns.

The SIS Act and the Tax Act can enforce administrative fines for late submissions, which may escalate into more severe penalties and potentially compel the fund to dissolve if it continues to neglect the submission of its SAR. If the SAR is more than two weeks overdue, the ATO changes the fund’s status on the Super Fund Lookup site from ‘complying’ to ‘regulation details removed’. The fund’s status is updated on the first business day of the following month after the SAR is submitted and is accessible the next day. In the meantime, APRA-regulated funds are prohibited from processing rollovers to the SMSF, and many clearing houses may reject employer contributions. While the status continues to be listed as ‘regulation details removed’ rollovers between SMSFs or to an SMSF can result in delays or possible rejections.

The ATO will reject the lodgment of the SAR if the auditor details or the date the audit was completed are not included. Furthermore, penalties and other sanctions may be applied to a trustee, auditor or tax agent/fund administrator of a SMSF who makes a fraudulent declaration affirming the audit was conducted, especially if they misuse an auditor’s registration and other details.

What is Auditor Independence?

A crucial factor when looking for SMSF Audit Services is that they must be based on an impartial external party. The independence of a SMSF auditor is required under the SISA and SISR as well as by the auditor’s professional body.

An auditor is required to have independence of mind and independent in appearance.

The code of ethics specifically excludes an SMSF auditor from undertaking an audit in relation to the following:

• a partner with the audit firm is a trustee/member of the SMSF
• immediate family of the auditor is a trustee/member of the SMSF
• the auditor has a close personal or material business relationship with a trustee/member of the SMSF
• the auditor has reciprocal auditing arrangement ie each auditor audits each other’s SMSF
• the auditor’s firm has a management responsibility for the SMSF
• the auditor, their staff or their firm provides administration services to the SMSF such as preparation of the financial statements or bookkeeping. An exception applies to services which are routine or mechanical with appropriate safeguards put in place.

The ATO are concerned about the following:

• auditor independence
• failure to bring immaterial breaches to the trustee’s attention ie separation of assets
• reporting reportable contraventions to the ATO
• insufficient evaluation of evidence obtained ie market valuation of unlisted assets
• unsigned documents and insufficient documentation

The ATO may refer the auditor to ASIC who can impose various sanctions including imposing a condition on an auditor’s registration, suspending, cancelling an auditor’s registration or disqualifying a person from being an approved SMSF auditor.

Can My Accountant Also Act as My Auditor for My SMSF?

Generally, no except if the preparation of the financial statements, member reports and tax return are routine or mechanical services.

Historically, the traditional model included the provision of accounting services to an SMSF whilst a separate arm of the same organisation undertook the SMSF audit with controls in place to ensure the separation of duties and independence of the auditor.

However, updated independence requirements set out in APES 110 Code of Ethics for Professional Accountants (including independence Standards) changed the auditing landscape. The updated code was effective on 1 January 2020 but the ATO allowed for a transitional period until 1st July 2021 before undertaking enforcement activity.

It is important to understand what routine or mechanical services are.

A SMSF trustee is responsible for all decisions made in relation to the coding of all cash and non-cash transactions undertaken by the fund. Routine and mechanical services would not apply to an accountant selecting the accounting software, setting up automatic data feeds for the trustee, coding of transactions or establishing the general ledger, checking the information has been correctly coded or it is accurate.

Services which are considered routine and mechanical include the following administration services as outlined in APES 110 Code of Ethics:

• Word processing services.
• Preparing administrative or statutory forms for client approval.
• Submitting such forms as instructed by the client.
• Monitoring statutory filing dates and advising an Audit Client of those dates.

However, the provision of routine and mechanical services by an accountant/administrator would be relatively unusual as their role is to provide accounting and tax assistance and can often also involve tax planning and advice, tax calculations of current and deferred tax liabilities (or assets) relating to the financial statements, assist in tax disputes, investment and strategic advice (if licensed) and advice on what the contribution caps are and the tax consequences of allocating contributions to members.

What is an Approved SMSF Auditor?

An approved SMSF auditor needs to be registered by the ASIC and must:

• be a natural person who is an Australian resident.
• hold prescribed qualifications which can include a degree, diploma or certificate in accounting and also includes studies in auditing
• have prescribed practical experience at least 300 hours of work auditing self managed superannuation funds under the direction of an approved SMSF auditor in the 3 years immediately before applying to be an approved SMSF auditor
• have passed a competency exam conducted by ASIC
• is capable of performing the duties of an approved SMSF auditor
• is unlikely to contravene the obligation of an approved SMSF auditor
• is a fit and proper person

To continue to be fully compliant the SMSF auditor must:

• complete 120 hours of continuing professional education over 3 years
• comply with ongoing obligations of the ASIC competency standards
• comply with the independence standards
• comply with the relevant Australian auditing standards and assurance engagement standards
• continue to hold an up-to-date policy of professional indemnity insurance

What is a Compliance Audit?

The fund auditor has to gather sufficient external evidence to support compliance with the SISA and SISR. The audit report includes specific sections and regulations which must be audited. The emphasis is on related party transactions and to ensure the SMSF’s investments are made with the sole purpose of maintaining the fund to provide benefits for the retirement of its members or beneficiaries if the member dies before retirement.

What is a Financial Audit?

When auditing SMSF the auditor has to gather sufficient external evidence to support that the assets and the liabilities stated in the signed financial reports actually existed at 30th June, are materially stated and legally held by the fund. The audit also reviews if the income derived, and the expenses incurred by the fund in a financial year are at arm’s length.

When Auditing an SMSF What does an SMSF Auditor do?

The auditor engages with the SMSF trustee to undertake audit services and gathers evidence to support their findings. The auditor sets out the engagement in a formal letter. A SMSF auditor must be appointed by the trustees at least 45 days before the due date of the fund’s lodgment of their SAR. An independent audit report must be issued within 28 days after the SMSF trustee or, in practice, their SMSF Accountant has provided all necessary documents.

The auditor issues a management letter to the trustee to notify them of any breaches they found whilst undertaking the audit and requests the trustee to rectify it. If any of the breaches are material and result in a Part A (financial audit) or a Part B (compliance audit) qualification a qualified audit report may be issued. A qualified audit report is provided to the trustees and is not lodged with the ATO, but it is noted in the fund’s SAR and the trustee must also include if the Part B qualification has been rectified. Additionally, an auditor must lodge an Auditor’s Contravention Report (ACR) for more serious reportable breaches of SISA or SISR identified during the audit within 28 days of the audit’s completion directly with the ATO.

It is always best practice for the trustee to work with the SMSF auditor and their accountant or administrator to rectify the breaches identified during the audit. The ATO take into account the actions taken by the trustee which can limit the penalties if the ATO is satisfied that the trustee genuinely made a mistake and puts processes into place to avoid breaches in the future.

Audit Considerations of a Reportable ACR in Relation to Rollover of Member Benefits

One of the major ATO concerns is a member receiving benefits before they are entitled to them. It is crucial that an auditor obtains evidence that a member rollover from their SMSF to another SMSF or APRA fund has been received by the receiving fund and not get diverted into the member’s hands. SuperStream must be used to rollover benefits to another fund with some minor exceptions which include rolling to or form a non-complying fund, in-specie rollovers and internal rollovers.

Under SuperStream the payment standards under the SISR dictate that the transfer of a rollover must be done within 3 business days after receiving all the information required to process the request. The auditor must report the failure of the transferring fund to comply with the payment standard in an ACR where any of seven criteria is met. An example of one of the seven criteria includes a financial threshold test where the total value of all contraventions is greater than $30,000. A lot of rollovers would meet this specific threshold and may be reportable.

There is no real mischief when the timeframe fails due to problems with the SuperStream system. However, the auditor has no discretion and must report the breach to the ATO via an ACR.

What Audit Documentation Does the Auditor Require?

The auditor reviews the establishment documents of the fund such as the governing rules and any updates, trustee minutes, declarations, investment strategy as well as the signed financial reports for that financial year. Depending on the specific circumstances of the fund, the auditor may need additional documents as audit evidence, though this is not a complete list.

• copy of signed rental agreements
• external evidence to support the rental terms and conditions when the tenant is a related party
• bank statements to show the title and to confirm the bank balance and possibly any large or unusual cash transactions
• pension documentation
• life insurance certificates
• contract of purchase for a property
• external evidence to support valuation of property
• signed financials of unlisted unit trust or unlisted company
• external evidence of the valuation in relation to the unlisted trust or company
• bank statement for the unlisted trust/company to verify the existence and valuation of the asset
• confirmation of employer and member contributions
• loan contracts and other documents in relation to limited recourse borrowing arrangement (LRBA)
• contract notes or other evidence of listed equities and the shareholder number or the chess number so the existence and value can be verified externally

Key Takeaways

• an auditor who conducts an SMSF audit must be an approved registered SMSF auditor
• a SMSF auditor conducts an audit to ensure the fund is compliant with superannuation laws and regulations as well as ensuring assets and liabilities of the fund are fairly presented in the fund’s financial reports
• a self managed super fund audit must be conducted annually
• audit work includes gathering required information to support the findings in an independent SMSF audit
• the financial records of a SMSF include statement of financial position as at 30 June, the operating statement, a summary of significant accounting policies and other explanatory notes
• a SMSF auditor must ensure their independence is not compromised
• accounting firms should ensure they do not conduct audits for their client’s SMSF where they also prepare the fund’s financial statements and provide tax advice

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