Your essential SMSF auditor checklist

Conducting a quality SMSF audit demands sufficient time, resources and access to relevant expertise.

Auditors of self-managed superannuation funds (SMSFs) have been in the regulatory spotlight since 2013, when registration became a requirement under the government’s Stronger Super reforms.

Although they have produced a more professional, specialised SMSF auditor body, the Australian Taxation Office (ATO) is still finding independence, audit quality and competency problems in its compliance reviews.

Here are five key actions all SMSF auditors should take to effect quality audits and manage reputational risks.

1. Obtain a report from the ATO on which SMSFs have used your SAN

The ATO has warned auditors that misuse of an approved SMSF auditor number (SAN) continues to be an issue and has referred several tax agents to the Tax Practitioners Board (TPB) as a result.

Misuse of SANs is possible as SMSF trustees or their advisers provide details of their auditor directly to the ATO, including their SAN. They are also required to report the date the audit was completed and the outcome of the compliance audit in the SMSF annual return (SAR). 

However, the SAR does not have to be shown to – or agreed with – the auditor prior to lodgement. As such, there have been instances where the SAN and related auditor details have been provided by an SMSF when the auditor had not been formally engaged to conduct an audit. 

The ATO can provide approved SMSF auditors with a list of SMSFs which have reported their SAN in the SAR. This enables the auditor to follow up with the ATO on any cases where they did not conduct the audit. 

The measure will also help SMSF auditors manage any reputational damage from association with an SMSF which has not, in fact, been audited and may contain undetected contraventions. 

You can request a list from the ATO of SMSFs that have you listed as the approved SMSF auditor on the SAR for any specified year by emailing (include your name and SAN) ATOSMSFauditorteam@ato.gov.au

Assistant commissioner SMSF segment at the ATO, Dana Fleming, says: “We urge auditors who find their SAN has been misused to lodge a complaint with the ATO. 

“That way, we can investigate and take appropriate action, which may include referring the matter to the Tax Practitioners Board.”

2. Contact the SMSF trustee directly

Speaking directly to the client is essential in any audit. In the case of an SMSF, it is easy to overlook who the actual client is, as typically the auditor is engaged by the SMSF’s accountant or tax agent on behalf of the SMSF trustee. 

If the trustee is not financially literate, they rely heavily on their accountant. Lack of direct contact with the SMSF trustee makes it difficult to know your client and properly understand risks relevant to the audit. 

This was clearly demonstrated in the recent Cam & Bear Pty Ltd v McGoldrick court case where the auditor had no contact with the trustee, who was unaware that amounts reported as cash in the financial statements were unsecured loans unlikely to be recovered by the fund. 

As a result, the auditor was required to compensate the SMSF for 90 per cent of its losses for failing in his duty of care to bring this to the trustee’s attention. 

Contact with the trustee would (or should) have at least highlighted risks arising from the trustee’s reliance on the adviser with respect to the investments and enabled a conversation regarding the SMSF’s investments and whether they accorded with the investment strategy.

Professional Development: Audit of SMSFs: designed to help you understand the requirements surrounding the audit of SMSFs.

3. Don’t rely on accountants, tax agents or SMSF trustees’ representations alone

While responses to enquiries or written representations from SMSF trustees or their accountants or tax agents is evidence, you still need to consider if that evidence is reliable. 

A trustee or adviser’s responses alone, even if they are written, do not provide sufficient appropriate evidence and because of this, you need to refer to other sources. 

The Cam & Bear legal case is an example of an auditor relying entirely on the SMSF adviser’s verbal assurances and a failure to obtain other evidence on the valuation and classification of “cash” balances, which in that instance was an unsecured loan to a company in deficit. 

However, a trustee or their adviser’s responses to enquiries or written representations constitute a starting point, rather than the entire basis for an auditor’s opinion. 

Related article: 6 warning signs the ATO uses when monitoring SMSF auditors

SMSF auditors must obtain sufficient appropriate evidence that is both relevant and reliable. Although an SMSF may be a small entity, the investments still carry risks and are generally of critical importance to the trustees’ retirement. 

Therefore, do not underestimate the importance of your role in safeguarding retirement savings. 

4. Charge an adequate fee

Conducting a quality audit demands sufficient time, resources and access to relevant expertise. The fee needs to allow you to do a thorough job and obtain further evidence when necessary. 

While an SMSF audit can be a straightforward engagement, such as when the SMSF is in accumulation phase and holds investments which are publicly quoted, it still needs to establish whether the SMSF has complied with 20 sections of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and 12 regulations of the SIS Regulations. 

Further, many SMSFs have more complex circumstances and their investments may not be so readily valued.

Regardless, you still need to satisfy the requirements of Auditing and Assurance Standards, which involves not only understanding your client and gathering sufficient appropriate evidence but also documenting procedures as a basis for your report. 

In addition, you must consider whether an Auditor Contravention Report (ACR) needs to be submitted to the ATO. This is based on the ATO’s reporting criteria, which applies different thresholds to the materiality which has been determined for the audit. 

If the fee is too low and has been fixed, you will be under pressure to cut corners.

5. Obtain evidence on every material item

When conducting the audit, obtain sufficient appropriate evidence on each assertion that presents a material risk for the amounts in financial statements, whether they be valuation of a property, classification of unlisted investments or existence of and rights over collectables. 

In addition, sufficient appropriate evidence is needed on each compliance requirement, such as sole purpose or prohibition on lending to a member or relative. 

Australian Auditing Standards state: “Irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures for each material class of transactions, account balance, and disclosure.”

In short, the audit needs to follow a rigorous process and be clearly documented. It must adequately support your opinion on both the financial statements in Part A and compliance in Part B of your report. 

As the ATO’s Dana Fleming puts it, “a cursory review of the SMSF won’t meet the ATO’s expectations if the auditor is subject to a compliance review”.   

Claire Grayston CPA is Policy Adviser - Audit and Assurance at CPA Australia

Read next: The risks of three-year SMSF audits


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