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.