Each year, every SMSF needs to be looked over by an auditor. They do two things – check that the fund’s financial statements are accurate (the “financial audit”) and look for areas where the trustees might not have complied with the super rules (the “compliance audit”). They provide a report to confirm they’ve done these things and, if they find problems, they’ll issue what’s known as a “qualified” report. Certain problems (eg high risk areas) need to be reported to the ATO in what’s known as an “auditor contravention report” (or ACR).
Getting audited each year is compulsory – SMSFs can’t lodge their annual income tax return with the ATO until it’s been done.
A clean audit report means the auditor didn’t find any material issues of concern.
Very few trustees go out of their way to do the wrong thing when it comes to their SMSF and so most hope for a clean bill of health from their auditor. That’s definitely a good thing. But it’s worth understanding what that really means.
It doesn’t mean the auditor examined every single aspect of your super fund. Your auditor is only looking for material issues. This means they may only look at a sample of your fund’s transactions. A lot of the skill of audit lies in knowing how to find the “right” sample that gives them the best chance of spotting a problem.
There are also some things the auditor can’t easily check and so will rely on statements from you. You may have been asked to sign a “trustee representation letter” for your SMSF – this is essentially you making these statements to the auditor. For example, you’re not eligible to be the trustee of your SMSF if you’ve been convicted of certain criminal offences. The auditor will ask you to confirm you haven’t done these things.
When it comes to the financial audit, the auditor isn’t checking all of the tax calculations – that’s your tax agent’s job. The auditor will look more closely if they think your SMSF’s tax is materially wrong but they largely leave the question of what’s tax deductible and what’s not to whoever is preparing your fund’s tax return.
The auditor will do some work to verify that your fund actually owns all the assets appearing on your financial statements. That’s why you might be asked to prove the right name (ie the trustee of your SMSF) is on your fund’s bank account, your investment accounts and title deeds etc. The auditor will also take steps to check these assets really exist. With shares, property etc it’s not that difficult but other more unusual assets can be trickier. For example, does your fund really own that gold, artwork or crypto? You’ll often be asked for extra proof!
The auditor will also want to make sure the fund’s assets are appropriately valued in the financial statements. Again, this is easy where the fund owns cash, shares, managed funds etc as values are readily available. But more questions will be asked in the case of property or investments in unlisted entities.
Audit reports are divided into two parts – helpfully named Part A (the financial audit) and Part B (the compliance audit).
Sometimes your fund will receive a qualified Part A report simply because the auditor wants to highlight there are certain things they haven’t checked.
For example, anyone who moves from one auditor to another will often find the auditor will issue a Part A qualification because they can’t check last year’s numbers to make sure the starting point for this year’s audit was right. They will rely on the fact that the previous auditor has done their job.
Other times you’ll receive a Part A qualification because your fund holds investments via platforms or wrap accounts. In this case, the auditor can’t necessarily check what your fund owns because they have to rely on the systems of the wrap provider.
Of course, a more serious Part A qualification would be your auditor stating they didn’t feel your financial statements were right at all. Perhaps they think you’ve materially misstated the value of your assets, or they have genuine concerns your fund doesn’t have legal title to the investments you think it owns.
If you receive a Part A qualification, there is no need to panic. But it’s important:
Often it’s the Part B qualifications that are more concerning – that’s where the auditor is highlighting your fund has broken one of the super rules in some way. Sometimes, the ATO also needs to be told about the problem in an ACR. This might be because of the particular rule which was broken, the amount of money involved, or whether it’s happened before.
No-one likes being told they’ve done the wrong thing but it’s important you:
For example, one of the things super funds can’t do is let their bank accounts be overdrawn. If this happens to your fund, make sure you always have enough cash in your super fund’s bank account to cover regular transactions including fees, and if necessary, cancel any overdraft facility.
In extreme cases, breaking the super rules can mean more tax for your fund. You can also be fined or even sent to jail. But the ATO is able to overlook breaches if they were due to an innocent mistake, they’ve been fixed and steps have been put in place to make sure they don’t happen again.
Sometimes auditors find things they think you should fix but they’re not serious enough to report via a qualified audit report or an ACR. These are another thing to pay attention to – if you don’t fix it, you might see an ACR next time.
Annual SMSF audits are a fact of life. And the role of the auditor is really to report back to the ATO so they can be confident people with SMSFs are following the law and deserving of their tax concessions. Don’t be surprised to be asked to prove things or give extra information – there will be a reason.