Professional & Legal Obligations

It’s a legislative requirement to have an SMSF audited annually. And an SMSF audit can be a long drawn out affair when there’s a lack of understanding and unrealistic expectations regarding the audit process.

There’s a wide variety of circumstances that arise from the Auditing standards, SIS and ATO requirements that dictate what is required at audit and why.

There are over 30 auditing standards that apply to auditing an SMSF and 29 sections and regulations of the SIS legislation that must be audited.

SMSF auditors are also required to report on contraventions that may have occurred, are occurring or may occur in the future. And when an SMSF auditor finds compliance breaches, they must apply a series of 7 tests that determines whether a fund is reported to the ATO through an auditor contravention report (ACR).

Terms of Engagement Letters

The Terms of Engagement Letter (TOE) is an essential agreement between the auditor and the trustee as set out under ASA 210 Agreeing the Terms of Audit Engagements and ASAE 3100 Compliance Engagements. The TOE sets out, amongst other things, the scope of the audit and each party’s roles and responsibilities during the audit.

Where the SMSF accountant is the primary source of contact instead of the trustee, it is best practice to issue a separate TOE.  The reason is that these parties work together in a different capacity which requires additional protections and security, such as stating that all audit evidence provided to the auditor will be in an unaltered form.

Getting the TOE right is in the best interests of the trustee, the accountant and the SMSF auditor, as it will help to avoid misunderstandings and ensure that these relationships are clearly defined. That’s why it’s critical to have a signed TOE on file before the audit starts.

There’s A Mistake in the Annual Return

During the audit, SMSF auditors will ask for many documents to gain insight and knowledge into the operations of a fund to ensure regulatory compliance. It is only the financial statement and operating statement, however, that gets audited and signed off by the auditor.

Auditing anything else is outside the scope of the TOE and not the responsibility of the auditor.

Most SMSF auditors, however, will value add their service by providing feedback on other matters, such as where a question on the tax return is missed or where the member preservation and taxation components are incorrect on the member statements.

Opinion Shopping

Signing the TOE forms a contract between the parties, and once the audit commences there is no turning back. Once a compliance breach is identified, the trustee can’t “opinion shop” and switch to another auditor for an unqualified audit opinion.

Apart from the fact that the original SMSF auditor is obligated to finalise their audit opinion under the auditing standards, opinion shopping causes pressure on SMSF auditors in general and impairs auditor independence.

As a result, there have been situations where the lodged annual return has indicated a clear audit report with an ACR lodged by an “unrelated” auditor.

SMSF Adviser Liability

The accountant relies on the SMSF Auditor to ensure that the audit of their clients’ superannuation funds has been undertaken professionally and in a compliant manner.   

If an SMSF Auditor fails to follow the standards and takes shortcuts, they are not only exposing themselves to potential lawsuits but also their accounting clients.  As it is the accounting clients who recommend that the trustees use a particular SMSF Auditor, the trustees would have recourse to the accountant if the recommended SMSF Auditor did not do their job correctly.  

It’s only a matter of time before an SMSF adviser is nominated in a lawsuit where the auditor has fallen short of their professional obligations.

Conclusion

An SMSF auditor is bound by professional and legal obligations that stipulate what they will and won’t check during an audit.  Important documents, such as the TOE letter, exist to reinforce the roles and responsibilities of all parties involved.

SMSF auditors mitigate risk by acting in a matter that is widely accepted as being competent and professional. The secret is also in understanding the construct under which an SMSF audit is conducted, and that all professionals take appropriate steps to work with care, skill and diligence in line with their obligations.

Shelley Banton, head of technical, ASF Audits