“There are both Part A and Part B qualifications. Part A represents a financial statement inaccuracy, a financial error, financial misstatement, and that is quite different to Part B, where we've got a compliance breach, compliance obligations not being met,” La Spada said.

“It's really important that when you are talking with your auditor, and they're referring to a qualified audit, you understand which one they are referring to. They may be talking about both, but in the event that it's only one, it is important to understand what that entails.”

La Spada said the focus of a Part A qualification are financial statement inaccuracies and include incorrect asset valuations or incomplete financial records. These may impact ATO assessments indirectly and trustees may have to supply more financial statements or a re-audit may be required.

Part B qualifications focus on compliance with SMSF laws and regulations and relate to legal and regulatory breaches. They include breaches of SIS provisions, related-party transactions, sole purpose test breaches and are directly reportable to the ATO via an auditor contravention report if they are significant. Additionally, they have the potential for penalties or enforcement actions by the ATO.

“For Part A qualifications, examples of those would be if the fund financial statements are presented with a misstatement or an asset may not be valued correctly, but if a fund has breached the in-house asset rules, they have a loan to a member or they fail to meet the sole purpose test that is a Part B qualification,” he said.

“The difference between the two is with a Part A that necessarily isn't reported to the ATO. What does happen when you have a Part A qualification is that, as the tax agent, when you are completing the tax return for the fund, you must tick a box that says, ‘Part A is being qualified’. However, the ATO is not made aware of what Part A qualification has come about.”

With a Part B qualification, he continued, it is reported to the ATO and an auditors’ contravention report is provided with detail of the qualification.

“They're vastly different in terms of the degree of penalties that can result from a Part A or Part B. We know with Part B, the penalties are a lot more harsh and a lot more strict, and there's a lot more options in terms of the types of penalties that can arise,“ he said.

“It could be something as simple as an education direction, or something a little bit more serious like a penalty or fine or maybe an enforceable undertaking.”

He added that market valuation is now a focus of the ATO and incorrect asset valuations appear in the financials, which is a Part A qualification and could potentially be a “roadblock” in the audit process.

“Given that it could also be a breach of regulation 8.02B of the SIS Act, there is also the potential that it could fall into the Part B category as well,” he warned.

“Trustees are required to value all assets at market value under Regulation 8.02B, so if you are failing to do that, it is both a Part A and A Part B qualification.”