Financial report audit
Planning financial report
Understanding the business
When conducting an SMSF audit, the auditor should obtain a basic understanding of the SMSF which includes the:
• Nature of its administration and investments;
• Trust structure
• Parties involved in the trusteeship and management of the SMSF; and
• Related parties of the members and trustees.
Gaining this preliminary understanding of the SMSF will allow the auditor to review the trust deed and verify whether:
• The trust deed was executed properly.
• The SMSF was established with a individual trustees, a corporate trustee, or to pay a pension.
• The SMSF has current trustees who are appropriately empowered.
• The SMSF’s trust deed complies with the SISR and SISA and any changes to these.
• The powers to pay benefits and accept contributions in the form permitted by the SISR and SISA.
SMSFs are usually small entities, whose members are related and control is managed by only a few individuals at most. There is often little opportunity to implement adequate segregation of duties under these circumstances. As a result, the auditor can assess an SMSF’s compliance framework and control environment as ineffective. In this case, the auditor will not be able to rely on internal controls as an effective means of reducing substantive testing.
In response to these conditions, an auditor may be required to design and implement further audit procedures which are entirely or primarily substantive procedures.
In order to comply with ASA 250, an SMSF auditor is required to consider whether the fund has committed any previous breaches of the SISR or SISA, and whether there are any unresolved issues with the ATO (including outstanding correspondence). Any matters identified as such will have an impact on the auditor’s assessment of the compliance framework, as well as the overall risk assessment.
Services organisations may be used to provide investment management services and other services to SMSFs.
Such services may relate to:
• Property management.
• Asset management (including Private Equity and Hedge fund management).
• Investment administration, including fund administration/fund accounting.
• Superannuation member administration.
Should this be the case, the auditor will need to assess the impact of these services on identified risks.
Identification of risk
There are several major areas of risk which must be considered when auditing an SMSF, including:
• Contributions (ensuring that they have been correctly calculated, possess the correct preservation status, are allocated to members during the appropriate period and are treated correctly in regards to tax purposes);
• Investments (ensuring that they exist and are valued correctly, as well as being appropriately timed, represented, and owned);
• Benefits (ensuring that the calculation of amounts paid is correct and in accordance with the trust deed in order to ensure that no unrecorded benefits are payable);
• Revenue (ensuring that revenue is being properly accounted in accordance with accounting policies).
Communication with third parties
Auditors may be required to communicate with a number of third parties in order to understand the business and obtain sufficient audit evidence. These third parties may include fund administrators, actuaries, and investment managers. The timing of this communication should be coordinated so that all background information can be assessed before the nature, timing, and extent of audit procedures are to be determined. At the year’s end, information such as confirmation of investments will be required.
There are several specific SMSF details which should also be documented in audit plans. Responses to identified risks may depend on the following factors:
• The complexity and size of the SMSF.
• Whether the SMSF was a complying fund in previous years.
• Whether the SMSF is an accumulation fund or a defined benefit fund.
• The level of trustee knowledge and involvement in the SMSF’s operations.
• Whether or not the SMSF is self-administered or administered by a service organisation.
• The range and nature of investments held by the SMSF and whether they are managed internally or externally.
• Whether or not service auditor’s reports are available for services provided by third-party service organisations.
• Whether or not the employer-sponsor is also a client of the auditor or the firm hired to prepare the accounts.
• The potential for compliance issues, and the confirmation of any previous compliance issues.
• The due date for lodgement with the ATO of the SMSF’s Annual Return.
Audit plans require annual review to ensure that they are updated to reflect current circumstances relating to the SMSF and any changes in legislation which could affect the SMSF.
Financial information to be prepared/basis for preparation
Many SMSFs are required to prepare an operating statement and a statement of financial position.
It is recommended that this statement be included by a trustee, though this is not mandatory. There are minimum mandatory financial statement disclosure requirements (APES 205):
• A statement of specific purpose which financial statements have been prepared for;
• A statement detailing that financial statements are special purposes statements;
• A statement of the accounting policies used in the preparation and presentation of the financial statements.