News / Feb 15, 2022

SMSF Audit Requirements – The Essential Guide

Mark Phillips
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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 

  • Appoint an approved, independent SMSF auditor within 45 days of the date for their annual return to the Australian Taxation Office (ATO)
  • Provide whatever documentation the auditor requests within 14 days
  • Submit the fund’s audited annual return to the ATO and pay any associated tax obligations

The SMSF auditor must 

  • Carry out the two components of the audit (financial and SIS compliance)
  • Provide an independent auditor’s report (IAR) to the trustees within 28 days of receiving all their documentation
  • Record reportable irregularities in an Auditor Contravention Report (ACR) and submit it to the ATO

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.

The ATO and the SMSF Audit

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:

  • Audits support individual SMSFs in the management of their retirement savings
  • They underpin the health of the SMSF sector as a whole

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. 

Appointing an Independent Approved SMSF Auditor

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:

  • Australian Auditing Standards (ASAs) for financial audits
  • The Auditing and Assurance Standards Board (AUASB) for compliance audits 
  • The Accounting Professional & Ethical Standards Board (APESB)
  • Chartered Accountants Australia and New Zealand (CA ANZ), including the regulations for Specialisation in Self Managed Superannuation Funds (CR6A)

New Rules for Auditor Independence

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

  • Their own or a family member’s SMSF
  • An SMSF where a partner within their firm is a member or trustee

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 

  • Their accounting or bookkeeping role was “routine or mechanical”
  • It required no management responsibility and minimal professional judgement, and 
  • They took appropriate steps to reduce threats to their independence.

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 independenceThis version must now be used for all reports, even for  SMSF audits for a financial year before 2021.

smsf audit requirements

Undertaking an SMSF Financial and Compliance Audit

Auditors are given detailed instructions on planning, conducting, and reporting a self-managed super fund audit. 

For example, 

What Are SMSF Audit Requirements for Trustees?

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.

Complying With the SIS Act and Regulations

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

SectionSection titleSectionSection title
S17A*SMSF definitionS83In-house assets – prohibition on further acquisition
S35C(2)*Trustee to provide documents
to the auditor
S84In-house asset rules must be complied with
S52(2)(d) or R4.09ASeparation of assetsS85In-house assets – prohibition of avoidance schemes
S62*Sole purpose test S103*Minutes and records
S65Lending or providing financial
assistance to members or their relatives
S104A*Trustee declaration
S66Acquisition of assets from related partiesS109Investments to be maintained on an arm’s length basis
S67Borrowing by the fund S126K*Disqualified persons not to be trustees
S82In-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

RegulationRegulation titleRegulationRegulation 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

Identifying contraventions

A contravention arises from an “event” which is either 

  • An action taken by a trustee that is prohibited (e.g., buying assets from a relative) or 
  • Inaction from a trustee (e.g., not providing documents to the auditor on time)

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.

What Documents Do You Need for SMSF Audits?

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.

Audit Engagement Letters

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.

Trustee Representation Letter

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. 

Financial Reports

Audit documentation for the financial audit will depend on the complexity of the fund and the investments it has made. It will include

  • Balance sheet
  • Income statement
  • Bank statements (or data links to the bank)
  • Member statements
  • Investment documents (e.g., shares, dividends, contract notes, property documents, rental statements)

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

  • A lack of audit evidence of asset valuations, particularly against market value. 
  • Incorrect tax calculations if non-arm’s-length transactions have been undertaken
  • Incorrect classification of investments, or 
  • Incorrect allocation of contributions, leading to knock-on problems with concessional caps.

Other Relevant Documentation

Part of the compliance audit is to check on documents held by SMSF trustees. 

Auditors will want copies of

  • The signed Trust Deed
  • Consent to act as trustee and member applications
  • Trustee Declaration (for SMSFs set up after 1 July 2007)
  • Minutes of meetings
  • Investment strategy
  • Actuarial certificate  
  • Pension documentation if the fund is in pension mode
  • Life insurance certificates for members (if applicable)
  • ASIC annual return (for Corporate Trustees) 

More information about these documents can be found here

If the auditor wants further information, fund trustees must supply it within 14 days.

What Happens After the SMSF Audit?

The auditor completes the Independent Auditor’s Report (IAR).

  • Part A gives the auditor’s opinion of how accurately and correctly the fund’s financial statements were presented. 
  • Part B reports on compliance with the SIS Act and SIS Regulations.

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.

How SMSF Engine Can Help with Your SMSF Audit Requirements

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.

Contact SMSF Engine

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