It sounds pretty straightforward.
Every SMSF must have an annual SMSF audit to check the validity and accuracy of its financial statements and its compliance with superannuation legislation (SIS Act) and regulations (SISR).
The basic SMSF audit requirements for SMSF trustees are to
The SMSF auditor must
As with many things SMSF, it can be more complicated than it looks.
So let’s look at some of the details and why it might be essential to depend on professionals and get personal financial advice to ensure that your SMSF meets the requirements.
SMSF trustees or their tax agents cannot submit their annual tax returns until the SMSF audit has been completed.
However, the Australian Taxation Office (ATO), as the regulator for SMSFs, sees a broader purpose for self-managed superannuation fund audits:
The audit is therefore constructed to ensure compliance with the law and safeguard retirement income. The ATO encourages auditors and fund trustees to quickly identify and rectify actual and potential breaches and “self-report” rather than wait for the ATO to investigate.
The Australian Securities and Investments Commission (ASIC) regulates SMSF accountants and auditors. However, for the annual financial and compliance audit, the ATO takes on the role of the auditor of the auditors, making sure that SMSF auditors meet the required standards.
There are many SMSF audit requirements for an SMSF auditor.
ASIC registers approved SMSF auditors, sets competency requirements (ASIC Class Order [CO 12/1687]), and maintains a register of approved auditors.
Standards are set by several professional bodies:
The APES 110 Code of Ethics for Professional Accountants includes the requirements for an auditor to be independent and objective and maintain professional scepticism and integrity. An updated Code was issued in November 2018 and became effective on 1 January 2020.
The APESB, in association with professional accounting bodies in Australia, also published the fifth edition of the “Independence Guide” in May 2020. It has a chapter dedicated to SMSF audits and provides practical scenarios of the types of independence challenges auditors face in implementing the APES 110 Code.
Simply put, independence for an SMSF auditor means that there can be no financial interest in the SMSF, nor any personal or business relationship with fund members or trustees.
For example, an auditor cannot audit
In addition, with effect from June 2021, an auditor or auditing firm cannot provide both accounting and auditing services to the same client.
There are no exceptions for individual auditors, sole practitioners, and their staff.
However, there may be an exception for auditing firms.
They must show that
This could happen, for example, if the trustee provided a trial balance as the basis for the preparation of financial statements or if the task was just to post transactions to the general ledger after the trustee had coded them. A firm could have someone not involved with the audit process undertake these tasks or have an independent reviewer for the audit work or other services.
Auditors may face threats to independence when dealing with SMSFs because they are small clients, and relationships are often personal or long-standing.
The ATO is also likely to look closely at other relationships – such as the sources of referral of audit work, the volume of work received from one source, or auditors that audit each others’ SMSF clients.
From 1 June 2021, the new format for the independent auditor’s report, NAT 11466, requires auditors to attest to their independence. This version must now be used for all reports, even for SMSF audits for a financial year before 2021.
Auditors are given detailed instructions on planning, conducting, and reporting a self-managed super fund audit.
The ATO instructions to auditors, taken together, can be very useful for SMSF trustees, administrators, and financial advisers.
Everyone knows what will be audited and how actions will be interpreted.
Therefore, they can be alert throughout the year to ensure that they don’t make mistakes that could lead to negative audit opinions or qualified audits. They also know due dates and the documents and supporting information to submit so that auditors have sufficient evidence.
Although SMSFs must comply with all of the SIS Act and Regulations, the ATO lists specific sections that must be audited for compliance. It also has a set of tests to decide whether there has been a contravention that the auditor should report.
Table 1A itemises sections from the SIS Act. Breaches to these sections are generally reportable.
Table 1A: List of reportable sections of the SIS Act
| Section | Section title | Section | Section title |
|---|---|---|---|
| S17A* | SMSF definition | S83 | In-house assets – prohibition on further acquisition |
| S35C(2)* | Trustee to provide documents to the auditor | S84 | In-house asset rules must be complied with |
| S52(2)(d) or R4.09A | Separation of assets | S85 | In-house assets – prohibition of avoidance schemes |
| S62* | Sole purpose test | S103* | Minutes and records |
| S65 | Lending or providing financial assistance to members or their relatives | S104A* | Trustee declaration |
| S66 | Acquisition of assets from related parties | S109 | Investments to be maintained on an arm’s length basis |
| S67 | Borrowing by the fund | S126K* | Disqualified persons not to be trustees |
| S82 | In-house assets – exceeding in-house assets ratio |
*Contraventions with no monetary value
Table 1B gives the list of SIS Regulations to be audited and reported if contravened.
Table 1B: List of reportable regulations of the SISR
| Regulation | Regulation title | Regulation | Regulation title |
|---|---|---|---|
| R4.09* | Investment strategy | R7.04 | Acceptance of contributions |
| R4.09A | Separation of assets | R8.02B | Valuation of assets |
| R5.08 | Minimum benefits | R13.14 | Charges over assets of the fund |
| R6.17 | Restriction on payment of benefits | R13.18AA | Investment in collectables and personal use assets |
*Contraventions with no monetary value
A contravention arises from an “event” which is either
One action can be a contravention of several sections or regulations.
For example,
During the year under audit, Trustee Mark takes a loan of $10,000 from the fund to settle personal debts and has started to repay the loan, but without interest. He would contravene S65 (making loans to members) and S109 (non-arm’s-length transactions).
The monetary value of the contravention would be $10,000 (the amount of the loan) + interest against S65 (say $400) + another $400 (against S109) = $10,800.
The audit would record the highest amount owing at any point during the financial year.
If Mark cannot pay back the loan in full during the current FY, the contraventions would be repeated in the next year’s audit with the reduced amount plus interest.
Auditors need “sufficient appropriate audit evidence” to reduce the risk of an inappropriate audit opinion – and potential claims from trustees who suffer losses as a result. The ATO will also be looking at the audit file for proof that auditors have indeed interrogated SMSF compliance.
The first documents are Audit Engagement Letters, appointing the auditors and setting out the terms and conditions of the two audits. They must be signed by trustees and auditors – not by administrators or accountants who manage funds.
Trustees must submit a Trustee Representation Letter to indicate that they have approved and take responsibility for the fund’s financial statements. The letter also indicates that the trustees believe that the fund has complied with super laws.
Auditors may expect other confirmations from trustees in the representation letter – for example, that signed trustee declaration documents, meeting minutes, and member or beneficiary reports are kept on file for at least ten years.
Audit documentation for the financial audit will depend on the complexity of the fund and the investments it has made. It will include
The auditor will express an opinion on whether the financial statements are presented fairly and without misstatements within an appropriate reporting framework.
Some common problems for financial audits include
Part of the compliance audit is to check on documents held by SMSF trustees.
Auditors will want copies of
More information about these documents can be found here.
If the auditor wants further information, fund trustees must supply it within 14 days.
The auditor completes the Independent Auditor’s Report (IAR).
In this report, the auditor will consider whether there are material or significant breaches, breaches that have been repeated or left unrectified for more than a year, and errors or misstatements.
The auditor must contact the SMSF trustees and provide a Management Letter outlining any actual or potential contraventions. This can happen during the audit so that trustees can immediately rectify them or plan to do so.
Not all contraventions must be reported. Where reporting criteria have been met, the auditor must submit an Auditor Contravention Report (ACR) to the ATO and copy the fund trustees within 28 days of completing the audit. Auditors can submit reports electronically or in paper format.
One of the SMSF audit requirements is for an auditor to report any concerns about the overall financial situation of the SMSF and any risk that it will not survive as a going concern.
Any contraventions that have not been rectified in the reporting year will be added to the following year’s audit report, provided trustees can correct them.
For example, if the infringement is that the SMSF did not keep appropriate minutes for the year (a breach of S103), this cannot be rectified in retrospect and would be mentioned in year one but not again.
On the other hand, if the contravention is that the SMSF bank account is in the member’s name and not in the name of the SMSF (a breach of S52(2)(d) and R4.09A), this can be rectified and will appear in audit reports until it is.
SMSF Engine does not do SMSF audits. We provide accounting and SMSF administration services to SMSF trustees, accountants, and financial advisers who manage SMSFs.
If you use our Daily or Daily Plus administration services, we have done all the upfront work for you and significantly reduced the risk of a qualified audit.
We will ensure that you have the correct financial statements and supporting documents for the financial audit. We will monitor transactions throughout the year and alert you to possible compliance issues.
We outsource all SMSF audits to a panel of highly competent, independent, and approved auditors, including Baumgartner Superannuation. You can find their ASIC registration details here.
The SMSF audit cost can be bundled with our administration or be standalone.
You can also use our portal to connect to and deal directly with an auditor. You can create the audit job, upload source documents, and send and receive communications. This service is included in the SMSF audit fees.
