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The role of auditors: An SMSF essential

Auditors play a crucial role in the compliance regime of self managed superannuation funds (SMSFs). The legislation that  governs the SMSF sector requires that accounts, statements and all compliance needs of an SMSF be audited every year by an “approved auditor”.

Further, this auditor must be a third party that operates “at arm’s length” to the SMSF being audited. Failing to have an audit completed can lead to punishing penalties being imposed by the regulator (the Tax Office) as well as risk having your fund deemed non-compliant and losing its tax concessions.

You cannot lodge your SMSF annual return until you have had your SMSF audited. This is because you need information from the audit report to complete the regulatory information in the return. The first step is to appoint an SMSF auditor. What you
need to do is:

  • check the auditor you intend to appoint is registered with the Australian Securities and Investments Commission (ASIC). ASIC will issue approved SMSF auditors with an SMSF auditor number – otherwise known as SAN – which you will need to fill out your annual return. Even though you may have previously used the same auditor, double check that they are
    registered
  • contact the auditor early to allow sufficient time to conduct the audit (and for this office to have enoughtime to lodge the SMSF annual return on time onyour behalf).

Some of the criteria that must be satisfied by an auditor are that they:

  • must be independent and show freedom from bias,
    personal interest and association
  • must not be a trustee or member of the fund
  • must not have prepared accounts and statements for the SMSF
  • must not be a relative or close associate.

Before an SMSF auditor can start an audit however, you (or this office on your behalf) must provide information about your accounts and transactions for the previous financial year as well as statements and forms. Any additional information requested by your SMSF auditor must be provided within 14 days. Below are examples of what you should have on hand in
case your auditor wants to have a look:

  • minutes of all meetings for a minimum of 10 years (or since the establishment of the fund if it is less than
    10 years old) with details of all major decisions made including:
    – asset purchases
    –  commencement of pensions
    –  appointment of new members, and
    –  review of investment strategy
  • accounting records for a minimum of five years (or since the establishment of the fund if the fund is less than five years old)
  • signed trustee declarations
  • proper accounting records such as statement of financial position and an operating statement
  • copy of trust deed
  • election or notice to be a regulated fund
  • trustee representation letter which is a statement by the trustees that to the best of their knowledge, they have approved and taken responsibility for the correct presentation of the financial statements
  • investment strategy that gives consideration to risk, return, liquidity and diversification
  • financial report on the fund, and
  • working papers including copies of all relevant documents that are important in providing evidence that support your findings and opinion.

Once they have all the relevant documentation, some of the compliance issues that your auditor will keep an eye out for are:

  • was the fund maintained for the “sole purpose” of providing benefits to either members on retirement or dependants (in the case of a member’s death)?
  • does the fund meet the definition of an “SMSF” and has it chosen to be a regulated fund?
  • does the trust deed and character of investments reflect this?
  • does the fund have an investment strategy that complies with investment restrictions?
  • did the fund give financial assistance to a fund member or relative?
  • are the fund’s SMSF assets separate from those held by trustees personally?
  • do trustees adhere to contribution and benefit payment standards?
  • were any assets sold, and was this at market value?
  • do trustees carry out administrative obligations?

More broadly, your auditor is required to:

  • examine your fund’s financial statements
  • assess your fund’s overall compliance with the super law
  • provide you with an audit report by the day before you are required to lodge your SMSF annual return, and
  • provide you with their SAN as it will be required to be disclosed on the annual return.

After the process is finalised, be sure that your auditor provides you with the following documents:

  • a letter of audit engagement – confirms the appointment of the auditor by you and the scope of the audit to be conducted
  • audit working papers – documents that record the planning, nature, timing and extent of the procedures of the audit process
  • a management letter or audit finalisation report – provides a summary of the audit findings
  • a copy of final, signed financial report of the fund and relevant accounting records that support the statements for the income year under review, and
  • a copy of the audit report on the approved form – this includes the auditor’s opinion and qualifying remarks if any (you should keep copies of this for at least seven years).

Note that an audit is required even if no contributions or payments are made in the income year. It is worth noting however that when it comes to an annual return, the Tax Office’s system will not accept one if at the end of the financial year, the SMSF has no assets or no members unless that is the year the fund is wound up.