Compliance advice: How to avoid the pitfalls

Read the fine print and avoid the traps.

Careful attention to detail throughout the audit process, from planning to workpaper preparation, will help auditors avoid some common traps.

With self-managed superannuation funds (SMSFs) becoming increasingly popular in Australia, auditors play a vital role in ensuring that trustees are meeting their responsibilities and that funds are compliant.

Even with the competency standards and the soon-to-be implemented registration process through the Australian Securities and Investments Commission (ASIC) to which SMSF auditors must adhere, there are some common traps.

Audit planning

Whether you are auditing an SMSF or a multinational organisation, the initial phase of audit planning is essential. The planning process helps the auditor obtain sufficient appropriate evidence, assists in keeping the audit costs at a reasonable level and outlines the direction the audit will take. There are audit standards that detail planning requirements, but the common trap is the belief that because most SMSFs are non-reporting entities, there is no need to abide by the standards.

Despite generally being non-reporting, sufficient time should still be spent on the planning process, as this will determine the direction. You should ensure due consideration is given to:

  • Audit acceptance if this is the first time you are auditing the fund (consider ethical clearance received from the previous auditor and prior year audit reports and management letters)
  • Scope of the audit including considering  the trust deed, relevant legislation, trustee minutes, the fund’s investment strategy
  • Whether you are independent and can perform the audit
  • Relevant regulatory requirements 
  • Fraud
  • Investments that may have higher risks associated with them, such as limited recourse borrowing arrangements, related unit trusts, collectables and personal use assets
  • Competency and knowledge of the trustees
  • Record-keeping by the trustees
  • Planning should not be seen as a quick, one-off function at the start of the audit. Items may arise through the process mean it needs to be revisited.

Risk assessment

Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment provides details of the auditor’s responsibility to assess the risk of material misstatement in the financial statements. A common trap is to simply use an audit program (containing checklists and forms to tick off).

While these checklists are very useful, some auditors rely too heavily on them and forget about their obligations to consider risk.

The following should be considered when assessing the risk of a SMSF audit:

  • Changes and updates to legislation that impact SMSFs
  • Past experience of the SMSF client
  • The types of investments an administrator’s clients commonly make
  • The administrator’s experience in preparing financial statements, including software
  • The relationship the administrator has with other providers, such as solicitors, banks and brokers
  • Remember not to get lost in the detail. Considering the bigger picture will assist in appropriate risk assessment.

Insufficient audit evidence

Having completed the audit planning and risk-assessment for the SMSF, ASA 500 Audit Evidence requires that the auditor obtain sufficient appropriate audit evidence on which to base the opinion. Many SMSF auditors fall into the trap of simply accepting the documentation trustees provide, even though it may not be appropriate evidence.

A common example is bank statements printed off the internet, which do not include any bank or distinguishing fund details.

The auditor should remember that audit evidence is more reliable when:
  • It is obtained from an independent source
  • Controls are operating effectively
  • It is obtained directly by the auditor
  • It is in documentary form (in writing)
  • It comprises original documents
The more of these the auditor can collate, the more likely appropriate audit evidence will be obtained to enable the auditor to prepare an audit opinion that meets legislative requirements.

Inadequate workpapers

Having collected and assessed the appropriateness of the audit evidence obtained, the auditor needs to ensure workpapers are prepared, documenting the findings. Someone not involved in the audit should be able to gain an understanding of the file by reviewing the workpapers, which should tell a story of the dealings within the SMSF.
A good place for auditors to start is to use one of the SMSF audit programs available. This will at least provide a good basis for what should be tested in the audit process and as these items are tested, they can be collated into an audit file.

Common compliance breaches

While it is important to consider at a minimum, all of the sections and regulations included on the audit opinion, there are some sections more commonly breached by trustees. These include the in-house asset provisions and providing financial assistance to members. While reasonably new, the potential to breach the limited recourse borrowing arrangements and the new collectable and personal use asset provisions is also high.
 
Brenda Hutchinson is a partner at TAG Financial Services.

September 2020
September 2020

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