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Help! My SMSF audit report has been qualified

All SMSF financial statements are required to undergo an annual audit. The thought of or the reality of receiving a ‘bad’ or ‘qualified’ audit report for your SMSF can be a scary prospect. But unless you have deliberately done something really wrong, it shouldn’t be cause for panic. Understanding what happens when an audit is undertaken and what the auditor’s responsibilities are might help ease any anxiety.

An auditor’s responsibility

When conducting an SMSF audit, an auditor is essentially undertaking two types of audit. One is a financial audit where they are literally looking at the numbers reported in the financial statements. An auditor must form an opinion as to whether the numbers reported are correct and give a fair representation of the financial state of the fund.

The second type of audit is a compliance audit where they are required to form an opinion on whether the SMSF has complied with superannuation laws. While auditors can report on any matters they believe to be relevant, the pro forma audit report itself is supplied by the Australian Taxation Office (ATO) and requires auditors to specifically sign off on sections of the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (SISR)

Three levels of audit reporting

An auditor can report their findings from the audit in three ways.

The first is a management letter, given to the trustees only.

The second is through the auditors’ report, again given to trustees only. All SMSF trustees will be issued an auditors’ report which will be either qualified or unqualified.

The third method of reporting is directly to the ATO, using an Auditor Contravention Report (ACR).

Management letters

Auditors are required to provide their SMSF trustee clients with a management letter at the conclusion of the audit. In addition to addressing any major issues, the management letter can be an opportunity for the auditor to raise any minor concerns about the fund that didn’t necessarily warrant a qualification or an ACR. Do not ignore any issues raised by the auditor or you may find a qualification the following year. For the most part, however, they are a good indicator of where difficulties may arise during the next 12 months and can help trustees comply with their obligations.

What does ‘qualified’ mean?

When an auditor finds no breaches or errors in the SMSF, they will issue an unqualified audit report. When a breach or misstatement is identified, they may qualify the report depending on whether it is material or not. The auditor will typically make a statement saying that they have formed the opinion that the SMSF is complying except for the breach/misstatement identified.

On occasion, an auditor may qualify an audit report even when there are no breaches or misstatements identified. This could be because they are unable to verify or confirm some aspect of the fund. For example, they may not be able to confirm the opening balances of a new SMSF client’s financials if previous years’ financials are not provided, or they may not be able to form an opinion on the value or existence of a particular asset. In these cases, even though an audit report may be qualified, it does not necessarily mean that the trustees have failed to comply with their legal obligations.

Qualified report and Auditor Contravention Reports.

Not all qualifications of audit reports will be reported to the ATO.

If an auditor qualifies an audit report, they then make an assessment based on ATO guidelines as to whether an ACR needs to be lodged with the ATO. In most cases, an ACR will be lodged where there is a material, significant, repetitive or unrectified (from previous years) breach or misstatement. In other words, details of financial or compliance breaches will generally only be reported to the ATO where the auditor believes they are significant enough to warrant reporting or the ATO requires them to.

If you receive a qualified audit report and no ACR has or will be lodged, it should be taken as a very serious warning that should the breach remain unrectified or occurs again, the following years audit report will not only be qualified again but will likely result in an ACR being lodged as well.

It is worth noting however that regardless of whether an auditor lodges an ACR with the ATO, the SMSF’s annual return is required to be lodged by the trustee (or their tax agent) with a notification as to whether or not an audit report has been qualified.

Materiality

Generally, when auditors are looking at a particular issue, they will be assessing its materiality. In most cases, they will not be overly concerned with minor amounts or issues. If they find an error, they will make an assessment of whether or not it matters, in the grand scheme of things. They will look at an error or breach in the context of other breaches, the value of the fund, the percentage of the breach of total assets, and whether it is a repetitive or unrectified breach.

Don’t panic

A qualified audit report is not necessarily cause for alarm. Look at the underlying causes of the qualification and seek assistance from the auditor and/or your professional accountant as to how to rectify the breach so next year’s audit report won’t be qualified.

Tips on making the audit go easy

  • Provide your auditor with all the relevant information prior to commencement of the audit. Most auditors are able to provide a checklist of the documentation required.
  • If your auditor asks for further information in writing, you are legally required to provide it within 14 days.
  • If you think there is a problem with the fund, talk to your accountant and/or auditor. A good auditor will assist you to sort it out.
  • Don’t wait until the last minute to engage an auditor. You need to allow them time to conduct the audit. Remember, an SMSF annual return can’t be lodged until after the audit has been completed.
  • If you know there is a problem, seek to rectify it as soon as you can. There is a much better chance of a good outcome with the ATO if the auditor can report a breach as being rectified already.
  • Check any major decisions on investments, changes to the SMSF structure or membership, payment of benefits or change in circumstances with your accountant BEFORE actioning them. This will ensure that all SMSF activity is undertaken in compliance with the law.

 

Liz Westover is Head of Superannuation at Chartered Accountants Australia and New Zealand. This article is general education only and professional advice should be sought for personal circumstances.

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7 Comments

Clare

April 11, 2016

I am an ASIC Approved Auditor and audit on average 120-200 pages of documentation for each client (including the trust deed, and audit cannot be completed without it). We certainly do a lot more than check the bank statement. Depending on the complexity of investments, we may need to order title searches (to ensure properties haven't been RE-mortgaged), check all relevant paperwork has been provided, signed, check new legal obligations are covered off each year and a plethora of other things depending on the client, whether in pension/accumulation phase etc. It is quite a lot of work! Having said that, $2100 is a ridiculous amount to pay. Look for an accountant/auditor that has fixed prices so you know what you are getting. We charge a fixed rate for 2015 audits of $395. No hidden costs.

Sam Naidu

October 10, 2015

AUASB has just issued revised Guidance Statement GS 009 on Auditing SMSFs.

Ramani

October 10, 2015

Stefy

I assume that the auditor does not also prepare your accounts, trustee resolutions. Even then, $ 2100 seems steep. Shop around, please.
I am also concerned that all your investments are in bank deposits. Even with taxfree status, your returns should be in low single digits. Review the strategy, please.

stefy

October 09, 2015

I am a trustee of an SMSF of which I am the sole member. I am over 60, in pension mode, with the whole assets being held in bank term deposits. Last year I paid $2100 for my audit/tax return. I cant imagine an audit being simpler. Am I being ripped off?

SCO

March 29, 2016

That seems quite high for a fund with only term deposits!!

Ramani

October 09, 2015

To Garry M:
As in any other audited entity, the responsibility for the financial statements as well as compliance rests with the directors. Auditors (can only) sample data to test major areas and do so within their materiality bounds. An unqualified report is no more a clean chit preempting a subsequent regulatory issue (by ATO for SMSFs, not ASIC as you state) than an ECG report is a guarantee against later heart attack. ATO requirements need not be materiality-bound, and they change based on observed risks. On top, the cost of performing such a comprehensive test annually would be prohibitive on well-run funds.

I am however troubled by any auditor who never asked for the trust deed (think a preacher without the Bible) or investment strategy (this is communion to the un-baptised). If in APRA, I would mandate an increased prudential margin over the central estimate of the PI liabilities!

The broader article is valuable, as long as trustees do not abdicate their above responsibilities. No cure against self-inflicted harm.

There are a few aspects of the current audit regime worth commenting on:

1. Auditors require time - in years - to know their client risk profile and attitude. In the initial years, a novice auditor is literally 'taught' by the client who also pays the student.
2. Auditors have no special expertise in compliance (other than binary 'yes' / 'no' tests).
Their role can only be rationalised on the basis they are better than using lawyers who will smother you with disclaimers requiring further legal advice!
3. The purpose of audit is fuzzy risk management to avoid future problems rather than the current post mortem, limited by samples and materiality. The attributes required transcend the audit profession, and involve chartered financial analyst and actuarial expertise. Given super's importance to national economy, we operate on the smell of an oily rag here (or faith). The auditor monopoly merits a review.
4. Given ageing, dominant trustees and complex legal and tax rules, the fitness and propriety tests for SMSF trustees is missing. Just take each trustee into a room and quiz him / her on the SMSF.
5. Like driving, beyond a certain age (70?) the ongoing competence of each trustee must be verified annually. Failure of a SMSF due to declining mental faculties is not victimless being a problem of only the members. It affects the taxpayer (who funds the concessions and pays the unfunded age pension).

Now that everything is on the reform table, the policy makers will feast on my additional dishes on the buffet!

Garry M

October 09, 2015

I have been an SMSF trustee for about 20 years and the accountant gets the audit done every year and I just sign a bunch of papers once a year. If an ASIC audit later finds out the fund audits are remiss for some reason, I would just claim against the accountant/auditor and their PI would pay up.

· All the auditors do (as far as I know) is just check the bank statements and CommSec statements. Nothing more. (they have never asked to see the Trust Deed or investment program, etc).

· But I guess it becomes relevant for those who do things like own cars and paintings in their super fund (and there are many thousands, including many friends of mine)


 

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