SMSF audit report
The Audit Report for my SMSF has been qualified
What does that mean? Should I be worried?
All SMSFs trustees are required to appoint an approved auditor to audit the operations of their fund each year. This annual audit must include both a financial audit and compliance audit.
The auditor is required to report their findings to the trustees in the form of an audit report. The audit report consists of two parts, Part A and Part B. The consequences of receiving a qualified audit report are quite different, depending on whether it is a Part A or Part B qualification.
Part A of the audit report covers the financial audit and requires the auditor to form an opinion whether, in all material respects, the fund’s financial statements present fairly the financial position of the fund and the results of its operations for the year.
In conducting the financial audit, the auditor will seek to obtain sufficient and appropriate evidence that the assets and liabilities of the fund:
- exist and are clearly owned by the fund (or are obligations of the fund in the case of liabilities),
- are appropriately valued in the financial statements according to relevant accounting standards and Australian Taxation Office (ATO) requirements,
- are appropriately classified in the financial statements according to relevant accounting standards, and
- no material assets or liabilities have been excluded.
Where an auditor does not feel that the fund’s financial statements fairly represent the financial position of the fund (in all material respects), he/she will issue a Part A audit qualification. Part A qualifications are often issued in situations where the auditor is unable to accurately determine:
- the existence of a fund asset without physically inspecting the asset (eg gold and silver bullion), and/or
- the value and recoverability of a fund asset without formally valuing the asset or auditing the entity in which the fund has invested (eg shares in unlisted companies, units in private unit trusts, unsecured loans).
In a number of recent court decisions auditors have been found liable for investment losses suffered by SMSF trustees because the non-recoverability of those investments had not been brought to the attention of the trustees. As a result of these decisions, we expect it will be more common for auditors to qualify Part A of their audit report where the fund’s assets extend beyond the typical cash at bank, term deposits, listed shares, managed funds and real property, in the hope of protecting themselves from future litigation.
If you receive a Part A qualification for your fund, there is no need to panic. It is not reportable to the ATO and generally no immediate action is required. However, it is important that you:
- make sure you understand the reason for the qualification, and
- make your own assessment of the continued appropriateness of the fund’s investments.
Part B of the audit report covers the compliance audit and requires the auditor to form an opinion whether, in all material respects, the trustee has complied with particular provisions of the Superannuation Industry (Supervision) Act and Regulations. Where an auditor believes the trustees have materially breached one of these reportable provisions, he/she will issue a Part B audit qualification.
The existence of a Part B audit qualification must be reported to the ATO on the fund’s SMSF Annual Return and the auditor may also have lodged an Auditor Contravention Report with the ATO.
Failing to comply with the Superannuation Industry (Supervision) Act and Regulations can result in the fund being found non-complying and losing its concessional tax treatment. Trustees can also be fined or even imprisoned. However, the Commissioner is able to exercise its discretion and overlook breaches where trustees have inadvertently broken the rules, the breaches have been rectified and steps have been put in place to make sure they do not happen again.
For this reason, if you receive a Part B qualification for your fund, it is important that you:
- make sure you understand the reason for the qualification (eg what provision did you breach),
- if not already remedied, immediately take action to remedy that breach, and
- make sure you understand the rules so that breaches of this nature do not reoccur in the future.
The information provided in this document, including any tax information is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. The views expressed in this publication are solely those of the author; they are not reflective or indicative of QAS’s position and are not to be attributed to QAS. They cannot be reproduced in any form without the express consent of the author.