The ATO’s approach

The ATO has said reporting Part A qualifications will assist them in risk profiling the SMSF population and will also be one of the factors considered when auditing an SMSF. In reality, the ability to glean any discernible patterns or trends given the nature of Part A qualifications will be difficult.

Most importantly, the ATO has said they will not look to take compliance action on Part A qualifications for the 2019 year. Given there’s a good chance that what is required to be reported will change for the SMSF annual return in 2020, this could be a flash in the pan for the industry.

What is a Part A qualification?

The auditing standards require SMSF auditors to form an opinion as to whether the financial report is prepared in accordance with the applicable reporting framework. An SMSF auditor will modify their opinion by qualifying Part A of the audit report where they conclude that the financial report as a whole is not free from material misstatements.

The main types of Part A qualifications include:

First-year audits

Reason: Unable to obtain audit evidence on the opening balances

Audited platforms

Reason: Inability to obtain audit evidence on underlying investments reported via a platform

Fund assets at purchase cost

Reason: Assets not valued at market value

Market value uncertain

Reason: Inability to obtain sufficient audit evidence to support market value

Non-arm’s length income

Reason: Tax calculation materially incorrect as non-arm’s length income identified

No bank statements

Reason: Cannot form an opinion on true and fair position of the fund at year-end or the bank transactions

Investments incorrectly classified

Reason: Classification of assets on the financial statements are not in accordance with applicable accounting standards

Rollovers in not supported by evidence

Reason: Unable to confirm the nature of the receipt

Why have Part A qualifications increased?

The SMSF industry has already seen the ramifications of neglecting to qualify Part A of the audit report due to a material misstatement in the Baumgartner case. This resulted from the auditor failing to investigate the nature of unsecured loans and unit trust investments held by the fund and not enquiring as to the existence and verification of the assets.

There was no documentation on file in relation to these high-risk investments, and the auditor failed in their duty to communicate with the trustee. He was subsequently found negligent for failing to identify incorrect classifications, misstatements and other facts and circumstances to the plaintiff’s attention by way of notation or qualification in the audit reports. 

Qualifying opening balances

An SMSF auditor may face difficulties with initial audit engagements in obtaining sufficient appropriate audit evidence for opening balances. The auditor’s objective is to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement. The auditor cannot express separate opinions on each element of the financial report.

SMSF auditors must determine whether the prior period’s closing balances have been correctly brought forward to the current period, as well as ensure there is sufficient evidence on file to support the opening balances. In other words, are the opening balances correct?

Giving this part of the audit a green tick means effectively undertaking an audit on the prior-year audit, which is why some SMSF auditors typically qualify Part A of the audit report.

How to avoid qualifying opening balances

To avoid an opening balance Part A Qualification, the auditor must test the cash account and all material assets and liabilities.

The comparatives on the current year financial statements must be checked to the closing balances from prior-year financial statements. Where the amounts do not agree, an audit query must be raised.

Additionally, member opening balances and preservation components from the prior year are checked; the cost bases of assets have to be reviewed; any carry-forward tax and capital losses from the previous annual return are tested; and the auditor must evaluate the prior-year Trustee Declarations and Audit Report and ensure they are signed correctly.

Where this preliminary work is undertaken, the SMSF auditor can avoid issuing a Part A qualification on opening balances. It should be noted that in accordance with ASA 710, an “Other Matter” paragraph is required for all funds with respect to the comparatives.

Qualifying platforms

The auditor will issue a Part A qualification where an SMSF invests in an audited platform and they are unable to obtain audit evidence. In accordance with the Auditing Standards, the SMSF auditor is required to obtain an understanding of each platform to determine the level of testing needed at the individual fund level.

Where a GS007/Type 2 Audit Report is available on the design, implementation and effectiveness of controls for the platform, ASA 402 states that auditors are still required to complete substantive testing to ensure there is sufficient appropriate audit evidence relating to material balances and transactions of the fund.

The audit requirements for platforms can be summarised as follows:

Assets custodially held

Audit Report on Controls (Type 2 only)

• Unable to obtain sufficient appropriate audit evidence
• Qualified audit opinion (Ref: ASA 402 / GS009)

No Audit Report

• Unable to obtain sufficient appropriate audit evidence
• Qualified audit opinion or disclaimer of opinion

Assets individually held

Audit Report on Controls (Type 2 only)

• Perform testing at a fund level OR testing at a platform level
• Unmodified audit opinion

No Audit Report

• Perform testing at a fund level*
• Unmodified audit opinion

*If sufficient appropriate audit evidence is not provided, a qualified audit opinion will be required

Conclusion

While Part A qualifications have risen mainly due to the successful litigation against two SMSF auditors for losses experienced by the funds, it’s still a complicated and challenging task for SMSF auditors.

Issuing a Part A qualification is not a foregone conclusion, and the audit opinion must be substantiated by the audit evidence, or lack thereof, in the audit file.

The good news is there have been loud whispers within the industry that the requirement to inform the ATO about the more common Part A qualifications may be removed from the 2020 SMSF annual return.

And let’s be honest, it’s not such a big deal in 2019 anyway.

Shelley Banton, head of technical, ASF Audits