Why SMSF in-house audits are on the regulators’ radars

Jan McCallum

Accountants and auditors play a vital role as guardians of the superannuation system, and regulators are paying close attention to how the nation’s 653,000 self-managed superannuation funds (SMSF) are audited.

There is concern about audit files that do not demonstrate the auditor has identified and evaluated independence threats or shown how those threats have been addressed, says CPA Australia’s Head of Professional Standards Melissa Read.

“SMSF auditors need to be thinking more clearly about documentation expectations, what they need and what they will be asking for, so they don’t have to go to-and-fro gathering information.”

She suggests auditors send a checklist of requirements with the letter of commencement each year, to set expectations and give the trustee notice to gather and organise evidence to support the audit.

CPA Australia Audit and Assurance Lead Tiffany Tan recalls, in her practice, sending clients a list with requirements for them to tick off, so documentation is ready when she starts the audit. “This is about prepping your clients even before you commence audit fieldwork,” she notes.

In-house auditing of SMSFs

In-house auditing, where one team in the firm prepares the fund’s financial statements and another does the audit, is technically allowed if the accounting services are “routine or mechanical,” or do not require any professional judgement by the accountant.

Regulators have indicated a preference for full separation. The Australian Securities and Investments Commission (ASIC) took action against 28 SMSF auditors in the first six months of this financial year, disqualifying two after finding they continued auditing funds where financial statements were prepared by staff in their own firms. In January, ASIC announced it has increased the scrutiny of in-house audits.

If auditors contend the financial statement preparation is routine or mechanical, they must provide evidence of this on the audit file, says Kellie Grant, Director of Approved SMSF Auditors at the SMSF Regulatory Branch of the ATO. 

Are the accounting services routine or mechanical?

Auditors can ask these questions:

1. Do trustees hold all the information and make the decisions? If an accountant puts the trustee-prepared information into a trial balance, the trustee must approve the work and retain responsibility for it. 
2. If depreciation is calculated, has the trustee considered the valuation and the life span of the asset and the accounting policy for it?
3. Who codes the fund transactions? Does the trustee have the knowledge and ability to do the coding?

An SMSF business owner may use their firm’s bookkeeper to code the transactions, which would normally satisfy an auditor, but Grant says she has rarely seen such evidence on an audit file.

She says auditors conducting in-house audits need to show how they have assessed that the financial statement preparation was routine or mechanical and provide evidence in their audit file that they have confidence in the information supplied.

The ATO will want to see an independence assessment on the audit file detailing how issues about independence have been considered and dealt with.

“It is not enough to just assert it was routine or mechanical,” she says.

The routine or mechanical exception was always intended to be for rare cases, and Grant says the decline in in-house audit numbers shows more practitioners are deciding it is easier to step out of the space.

“It should be a difficult exception to meet.”

Tiffany Tan says APES 110 sets a high threshold on independence for the profession.

“There is a misconception that the auditor independence requirements of the code do not need to be applied to SMSF audit clients, largely because of their relative size.”

She notes in-house auditing is not prohibited for routine or mechanical SMSF audits, although the situation is not ideal because of the perception about independence, which concerns regulators.

For SMSF audits, firms with both administration and audit functions must demonstrate independence beyond simple team separation. Under APES 110, in‑house SMSF audits are only permissible in limited circumstances where accounting work is strictly routine or mechanical and SMSF trustees retain responsibility for all judgements. Otherwise, the firm must choose between providing accounting services or acting as auditor.

Checklist for SMSF accountants and auditors:

• Have decisions about independence been documented and how robust is the documentation?
• Are you familiar with the ATO’s compliance approach for SMSF auditors?
• Have you obtained sufficient and appropriate audit evidence on which you based your conclusions, and have you documented these?
• Have your files ever been peer-reviewed by a colleague? It is another way to ensure evidence and opinions are robust.
• Refer to the ATO if required and use the many resources on its website. 

On in-house audits:

• How did the auditor demonstrate and document that they can perform an in-house audit?
• What safeguards are in place to maintain independence? 
• What evidence is provided to show the financial statement preparation is routine or mechanical?