The conceptual framework
For each audit engagement, an approved SMSF auditor must apply the conceptual framework set out in the CodeExternal Link when assessing independence. In broad terms, this involves:
- identifying any threats to independence
- evaluating whether those threats are at an acceptable level
- addressing any threats that are not at an acceptable level.
Threats to independence generally fall into one or more of the following categories:
- self-interest – the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behaviour
- self-review – the threat that an auditor will not appropriately evaluate the results of a previous judgment made, or an activity performed by the auditor or another member of their firm (or employing organisation), on which the auditor will rely when forming a judgment as part of performing an audit
- advocacy – the threat that an auditor will promote a client’s or employing organisation’s position to the point that the auditor’s objectivity is compromised
- familiarity – the threat that due to a long or close relationship with a client, or employing organisation, an auditor will be too sympathetic to their interests or too accepting of their work
- intimidation – the threat that an auditor will be deterred from acting objectively because of actual or perceived pressures (including attempts to exercise undue influence over the auditor).
When evaluating independence threats, auditors must decide whether the same conclusions would be reached by a reasonable and informed third party, having regard to the facts and circumstances of the case. The test is an objective one requiring professional judgment.
Auditors need to address any threats that are not at an acceptable level by either:
- eliminating the circumstances, including interests or relationships, that are creating the threats
- applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level
- declining or ending the audit engagement (or the engagement for other services that is creating the threats).
Scenarios giving rise to independence threats
A number of scenarios in the SMSF context will always give rise to independence threats.
In some cases, the only way to address these threats is for an auditor to decline or end the audit engagement or the engagement for other services that is creating the threats. This is because the circumstances creating the threats cannot be eliminated and no safeguards can be applied to reduce the threats to an acceptable level.
An auditor cannot audit an SMSF in any of the following circumstances:
- the auditor is a trustee or director of a corporate trustee or member of the fund (or both)
- an immediate family member (spouse or equivalent, or dependant) of the auditor is a trustee or director of a corporate trustee or member of the fund (or both)
- the auditor's firm (or network firm) has assumed a management responsibility for the fund
- the auditor, their staff, or their firm (or network firm) provides accounting or bookkeeping services to the fund (including preparing the financial statements). This is unless the service is 'routine or mechanical' and appropriate safeguards are applied
- a sole practitioner (or their employees) provides accounting or bookkeeping services to the fund, even if the services are ‘routine or mechanical’
- a partner of the auditor's firm (or network firm) is a trustee or director of a corporate trustee or member of the fund (or both)
- the auditor has a close business relationship with a trustee or director of a corporate trustee or member of the fund (or both). This is unless any financial interest is immaterial, and the business relationship is insignificant
- the auditor is involved in a reciprocal auditing arrangement in which 2 auditors agree to audit each other’s SMSF.
This is because the above circumstances are either strictly prohibited under the Code, or there are no safeguards that can be applied in practice to reduce independence threats to an acceptable level.
Independence threats also arise in situations where an auditor:
- has a close family member (parent, child or sibling who is not an immediate family member) who is a trustee or director of a corporate trustee or member of the fund (or both)
- has a close personal relationship with a trustee or director of a corporate trustee and or member of the fund. The phrase 'close personal relationship' is not defined in the Code but it refers to an individual who is not an immediate or close family member
- belongs to a firm that is reliant on one referral source for all or a large proportion of the firm's total fees, or the fees generated by the firm from an SMSF audit client represent a large proportion of the revenue of a partner or office of the firm.
- provides advice (such as financial, investment or taxation advice that goes beyond just preparation of the fund's tax return) to the trustee(s) of the fund being audited
- audits an SMSF client in circumstances where either they, their staff or their firm (including network firm) provide other non-assurance services to the fund
- enters into a reciprocal auditing arrangement whereby 2 auditors (who are also accountants) prepare the financial statements for a number of SMSFs and agree to audit each other's clients.
In each of these circumstances, the auditor will need to evaluate whether any threats are at an acceptable level and address those threats by taking appropriate action.