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  • Audits on the top 100 SMSF auditors

    As part of our self-managed super funds (SMSFs) compliance program we review the top 100 auditors who between them audit 33% of the total population of SMSFs, representing around $186 billion in assets.

    Each of these auditors audit more than 500 funds a year and on average audit 1,500 SMSFs. We audit this group to seek assurance that this large proportion of SMSFs receive a proper and adequate audit and that this group of auditors are meeting their statutory obligations.

    A particular focus of a top 100 SMSF auditor compliance review is to understand and gain assurance about the methods, processes and controls in place that allow the SMSF auditor to sign off on a large number of audits annually.

    At the end of the 2018–19 financial year we completed reviews on 51 of the top 100 auditors, looking at three to five SMSF audit files for each of these auditors. Results of those reviews were as follows:

    No further action – 10 auditors

    We found 10 auditors to be fully compliant and no further action was necessary. Their audit files contained all relevant working papers and sufficient appropriate evidence to support their opinions formed in relation to the financial and compliance audit.

    Education outcome – 36 auditors

    There were 36 auditors who required further education which they received by letter.

    Deficiencies across this group included:

    • 23 auditors who failed to obtain sufficient appropriate evidence to verify the funds compliance with the super laws including
      • Market valuations from trustees for unlisted units in trusts. One auditor had just relied on a declaration from the trustee as to the value of the unlisted unit which was not objective and supportable data.
      • Evidence for limited recourse borrowing arrangements (LRBAs), including failing to obtain the loan agreement or bare trust deed.
      • Sufficient valuation evidence for collectibles including insurance.
       
    • In some cases the auditor stated that they had obtained relevant evidence but failed to adequately document their evaluations of the evidence in the audit file such that we could be satisfied they had appropriately formed an opinion on the fund’s compliance with the relevant super laws. In particular, evaluations were lacking in relation to
      • loan agreements. This meant we were unable to ascertain whether the auditor had properly verified the parties relationship and whether the terms of the loan were arm's length and being complied with.
      • lease agreements. This meant we were unable to ascertain whether the lease was to a related or unrelated party and whether rent was being paid to the fund at market rates.
       
    • Seven auditors did not have signed financial statements on their audit files. It's a requirement for trustees under section 35B of the Superannuation Industry (Supervision) Act 1993 (SISA) to sign the financial statements and an auditor should ensure this is done before forming an opinion on the fund’s compliance with the relevant super laws.
    • Four auditors failed to retain a signed engagement letter or trustee representation letter on at least one of the three to five audit files we reviewed. Some had these documents but had failed to update them to ensure they covered all the sections of the super laws and regulations that the auditor needs to verify the trustee has complied with.
    • Four auditors had also failed to identify that the SMSF’s assets were not in the correct name. For example, a few funds had the name of the property in an individual trustee's name on behalf of the fund rather than in the name of the corporate trustee on behalf of the fund. While this is not a breach of regulation 4.09A of Superannuation Industry (Supervision) Regulations 1994 (SISR), we would expect the auditor to bring this to the trustee’s attention, possibly by way of a management letter. It’s important that trustees ensure their SMSF assets are held under the correct title to protect the fund’s assets.
    • Two auditors had identified immaterial breaches of section 67 (fund bank account had gone into overdraft) and regulation 4.09 (fund had failed to invest in accordance with the percentages stated in its investment strategy), but failed to bring this to the trustees' attention. Although these contraventions did not require the independent auditors report to be modified and did not meet the Auditor/actuary contravention report (ACR) reporting criteria, under section 129 of SISA the auditor must inform the trustee of any contraventions that may have occurred in relation to the fund. This could have been achieved by issuing a management letter to the trustee.

    Voluntary deregistration – three auditors

    Three auditors voluntarily deregistered once we commenced our audit.

    ASIC referrals – two auditors

    Two auditors were referred to ASIC because they had failed to obtain sufficient appropriate audit evidence to verify the fund’s compliance with the relevant super laws.

    ASIC has since imposed conditions on the registration of one of the auditors under section 128D and we're awaiting an outcome of the referral with respect to the other auditor.

    Conclusion

    Auditors play an integral role in helping protect SMSF members’ retirement benefits and must comply with their statutory obligations and complete proper and adequate audits.

    Apart from the two auditors we referred to ASIC, the deficiencies identified in the remaining top 100 auditor population who received education did not warrant a referral to ASIC. However, we're concerned that some auditors failed to obtain sufficient appropriate audit evidence or failed to evaluate the evidence in order to demonstrate how the auditor arrived at their opinion on the financial and compliance audit.

    We're also concerned with the number of unsigned financial statements we found and the lack of other documents that should be on the audit file, such as a signed trustee representation letter, engagement letter and in some cases, a management letter.

    Auditors who received an education outcome will continue to be monitored and will be reviewed in another two to three years. If we find they've failed to improve their auditing processes, they may be referred to ASIC for further action.

    On 24 September 2019 we published our auditor checklist which contains a comprehensive list of the types of documents and evidence we expect to see an auditor obtain when conducting the annual SMSF financial and compliance audit.

    We hope to complete the remaining 49 top 100 auditor reviews by the end of this financial year.

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      Last modified: 12 Dec 2019QC 60943