Learn about the SMSF Audit Process

Self-Managed Super Fund (SMSF) audits are central to the viability of the entire SMSF system. So much so that the ATO has come out and stated:

“SMSF auditors have a critical role in maintaining the health and integrity of the sector through the annual audit”

And who you use to audit your SMSFs is crucial.

It can have a big impact on the integrity and performance of the SMSF, and in an era of ever-increasing ATO vigilance, can avoid a black mark against it. [1]

However, SMSFs were almost an afterthought to the Super Guarantee Charge introduced by the Keating government in 1992. An instrument initially devised to act as a defined benefit pension alternative.

Little did anyone realise that by 2023 SMSFs would become a major superannuation vehicle with 606,217 SMSFs managing A$889.5 Billion, or 18.7% of total superannuation funds under management.

And driving this popularity?

SMSFs give individuals more control over where their superannuation is invested and how it is managed. In the asset classes the trustees believe will best deliver them the financial independence and long-term prosperity in their golden years.

To give them the money and freedom to enjoy a happy retirement.

Yet to quote Ben Parker in Spiderman, “with great power comes great responsibility” and the Australian Tax Office (ATO) are watching.

To ensure that the SMSF complies with the regulatory requirements and that they are assured that the money is correctly deployed to provide for retirement and not siphoned off elsewhere.

SMSF audits are central to that compliance check.

They are an independent cross-check that all is as it should be, and SMSF auditors have legally enforced reporting obligations to the ATO if there are any breaches.

SMSF Audit Process Overview

The audit process is a rigorous and forensic examination of the fund’s financial matters. To ensure it complies with the regulatory standards set by the Superannuation Industry (Supervision) Act 1993 (SISA), the Superannuation Industry (Supervision) Regulations 1994 (SISR). That it conforms to myriad court rulings.

It comprises six steps:

1. Data collection and verifying cross-check

The SMSF Auditor will review financial statements, all transactions including purchases, sales and member contributions, and regulatory filings.

They will want to examine investment documents including the Investment Strategy to ensure its stated intents matches the asset mix. That there are documented minutes to show that due consideration has been given to insurance for members of the fund.

The Trust Deed, is it current?

Your SMSF auditor will cross-reference this against supporting minutes that have recorded changes and that they were agreed. They will also look to external data sources.

2. The critical importance of valuations

The amount of money held in SMSFs is subject to strict and complex restrictions depending on the stage it is in (accumulation or pension). There are significant consequences if those limits are exceeded. Financial penalties, penalty tax rates and if the breaches are egregious then the ATO can order that the SMSF be closed.

All of which makes asset valuations important and vexatious. Listed assets like share and government bonds are easy to verify, residential property can be checked via websites like www.realestate.com.au and www.openagent .com.au.

However unlisted assets, private equity investments, cryptocurrency and collectables are notoriously hard to value.

This is further exacerbated by the ATO’s test of objective and supportable data, which any lawyer could drive a truck through.

Nonetheless, your SMSF auditor will want to see valuations for all assets and if they are concerned you can expect a host of caveats on the Audit Report.

3. Identifying Risks to the SMSF Audit

There are several potential risks that the SMSF could be exposed to, and that the audit checks against. Risks that could expose the audit to material breaches and fines:

Meeting contribution and benefit payment rules.
Ensuring the Trust Deed is still current
Checking that the stated investment strategy is diversified and being implemented.
Related party transactions.
The visibility of the investment management controls where it is outsourced to a third party.

All of which need to be checked and if necessary mitigated.

4. Remedying Breaches

A proactive auditor will then recommend remedies to any breaches identified in the SMSF Audit. To rectify any non-compliance and minimise potential penalties or sanctions.

Depending on the severity, material nature and frequency of the breaches the auditor may well have to report the breaches to the ATO.

The consequences of which would have a material impact for the trustees.

5. SMSF Performance Improvement

Occasionally the auditor will identify and recommend actions that could improve the operational efficiency, investment performance or governance framework of the SMSF.

To optimise its long-term performance and ensure it meets its primary purpose: the financial independence and long-term prosperity of trustees in their golden years.

Note: these are suggestions made to the accountant administering the fund and are a point for discussion with the trustees. They are not mandatory and will not affect the final audit report.

6. Audit Report

Based on the findings, the auditor prepares a report detailing the compliance status of the SMSF, highlighting any issues or discrepancies identified during the audit.

In most cases the auditor will expand on ways to rectify any issues identified in the audit and provide guidance on ways to prevent occurrences of the issues going forward.

So that the trustees can improve the compliance of the fund going forward and keep the ATO on-side.

SMSF Auditor Requirements

Central to the success of the SMSF Audit for trustees are the following auditor requirements:

Independence

The SMSF auditor must be independent and impartial, ensuring objectivity in the audit process.

This has been formally codified in APES 110 - Code of Ethics as produced by the Accounting Professional & Ethical Standards Board Limited (APESB).

The ATO and all three of the accounting professional bodies are red hot on this one. So much so that since July 2021 (when APES 110 came into effect) and July 2023, over 1,130 SMSF Auditors left the industry.

A lot were deregistered for a lack of independence, professionalism or competency. The rest left because it was all getting to hard as rising industry standards expectations and vigilance made the industry unviable.

Professionalism

Auditors are expected to adhere to professional standards prescribed by regulatory bodies. At a bare minimum, an SMSF Auditor must:

be registered with ASIC as an approved SMSF Auditor and comply with those requirements annually.
have a valid SMF Auditor Number (SAN)
meet ongoing obligations under SIS Act 1993, and SIS Regulations 994.
comply with relevant auditing and assurance standards issued by Auditing and Assurance Standards Board (AUASB) and as stipulated in s128F of the SIS Act.
meet the reporting requirements as stipulated in NAT 11466 and NAT 11239.
keep up to date with continuing professional development requirements
hold professional indemnity insurance.

An exacting set of standards beyond what the rest of their industry peers must meet. It’s tough.

Competence

It’s also important that your SMSF Auditor has the necessary skills, knowledge, and experience to conduct thorough audits of SMSFs.

That might sound almost trivial and to be expected of any professional, but Super is:

one of the most complex areas of tax law in the country, and when you consider that Australia has some of the most complex and over-reaching tax laws in the world – that’s hectic.
Dynamic, with ever-expanding updates to regulations, guidelines and court rulings to keep on top of.

It’s hard enough for a full time SMSF Auditor manage; so when choosing one to work with it’s a good idea to find out if they are a full-time specialist or if SMSF audits are just one of a portfolio of services they offer, as an accountant and qualified auditor.

This is not to disparage part-time SMSF Auditors but rather to draw attention to the ever-increasing burden of compliance and regulatory oversight of SMSF audits.

A word on communication

As with all relationships effective communication can make things much easier at a time in which deadlines loom large.

Audits are the last port of call in the annual SMSF administration process and can often be under tight time constraints.

Have all your documents ready and be open and candid about any issues pertaining to your client’s SMSF.

It will make everything faster and easier.

The last thing you want is to be caught in a backwards and forwards between the SMSF auditor and the trustees.

Conclusion

SMSF audits are critical to ensure the integrity, compliance, and sustainability of self-managed superannuation funds.

By understanding the audit process, key requirements, and auditing procedures, SMSF trustees and the accountants administering their SMSFs can effectively navigate their compliance obligations.

All of which is focussed on delivering to their original purpose: safeguard their retirement savings for the future.

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[1] Since the drive to SMSF Auditor independence initiated by the ATO and the professional bodies of the accountants, hundreds of SMSF Auditors have either left the industry, been deregistered, or are undergoing corrective oversight.

In March 2024 over 16,500 trustees were being scrutinised by the ATO over asset valuations, and more than 1,000 SMSF Auditors were associated with this high-risk population. TriSuper Auditors was not one of them.