In focus: SMSF auditors crucial to super health

Jan McCallum

This article was current at the time of publication.

More than one million Australians rely on an independent SMSF auditor to sign off on the funds that will see them into retirement.

While many establish an SMSF so they can make their own investment decisions, they are bound by rules intended to not only protect their savings but to maintain public faith in the superannuation system.

SMSF auditors play a critical role in assuring the health and integrity of the sector, says Kellie Grant, Director of Approved SMSF Auditors at the ATO’s SMSF Regulatory Branch.

She says auditors must have a high standard of competency and independence “so that governments and the public have confidence that their audits are helping protect the retirement savings of millions of Australians”.

The ATO’s regular auditor compliance program provides the sector with information on what the regulator is looking for and any compliance issues it finds.

“At the core, we want to see sufficient and appropriate audit evidence on the auditor’s files and evaluation of that evidence documented in the audit file,” Grant explains. 

She says this tells the ATO how the auditor has relied on the evidence to form an opinion on whether the fund’s financial statements are free from material misstatement and whether it has complied with super laws.

This year’s program found some common issues that are on the ATO’s radar. 

Arm’s length transactions in superannuation funds

If a fund receives rent from residential or commercial property that it leases, the auditor should obtain evidence that a market rent is being charged. This could be from online sources listing rents on similar properties in the area.

Importantly, residential property can only be leased to unrelated parties, whereas commercial property may be leased to related parties, provided it is on arm’s length terms.  The ATO expects further scrutiny when the fund leases commercial property to members.

It also looks for evidence on fund loans and wants to see that the auditor has asked for the loan agreement to check that the loan is genuine – the relationship between the fund and borrower – and that it has been executed on commercial terms along with repayment of interest and security.

Market value evidence

Grant says it is important to ensure “robust” documentation to support asset valuations.

“We are starting to see some evidence in audit files that a fund’s assets have been valued at market value – but generally not enough so that it is supportable and objective as per our Guide to Valuing SMSF Assets.”

The ATO wants to see why the auditor has concluded that the evidence provided by the trustees is sufficient.

In the case of property, a council rates notice would not be sufficient. The auditor could use recent comparable sales in the area. 

If they are relying on a previous valuation provided by an independent qualified valuer, they should obtain objective and supportable data to show the market value remains current. They should ask about changes in the past year, such as property improvements.

If assets are complex and hard to value, a qualified valuer can be called in, particularly if a large proportion of the fund is invested in the asset.

If the auditor cannot obtain evidence that is supportable and objective, “they should qualify the audit report and lodge an auditor contravention report where the reporting criteria are met”, Grant says.  

Verifying charges over assets

Auditors are expected to have proof that there is no charge over an asset. For property, this can be demonstrated with an annual title search. 

However, Grant says some auditors who are relying instead on trustee representations or assume that because an asset is subject to a limited recourse borrowing arrangement (LRBA), the nature of the charge is already known.

But she says, the risk with this approach is that, without a current title search, the auditor will not know whether the trustee placed an additional charge over the asset.  

Limited recourse borrowing arrangements

By reviewing the loan agreement, the auditor gains evidence that the loan is “limited in recourse”. 

If the ATO comes knocking, it will want to see from the auditor’s notes that they saw the loan agreement and have evidence that the loan is a complying LRBA.

SMSF signed financial statements

The latest ATO reviews found many audit files with unsigned financial statements. 

“This could be because the auditor carried out their audit on draft financials and had not received a copy of the signed financials prior to signing their audit report,” Grant says.

Auditors need to get a copy of the signed financial statements before they complete and sign off their report “as we would expect to see these included in the audit file”.

The auditor’s report should not be signed off on a date prior to when the financial statements are signed. 

Grant says auditors need to take the time to gather evidence when completing an SMSF audit, and she points out that there is considerable information on the ATO website to help, including the SMSF auditor professional requirements pages for auditors and the ATO auditor compliance checklist at What we look for when auditing an SMSF auditor.

The lowdown on SMSFs

• Australia has 3860 registered SMSF auditors. 
• There are more than 646,000 SMSFs.
• More than 1.1 million Australians are members of an SMSF. 
• SMSFs hold more than A$1 trillion of assets.
• The sector’s biggest asset holdings are listed shares (27%), cash and term deposits (16%), unlisted trusts (13%) and non-residential property (11%).
• SMSF auditors must be registered with the Australian Securities and Investments Commission (ASIC) and meet Continuing Professional Development (CPD), Personally Identifiable Information (PII) and independence requirements.
• SMSF auditors cannot audit a fund if they or a close relative are a fund member. Information on auditor independence can be found here.