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  • Our compliance approach to the new Independence Guide and in-house SMSF audits

    The new Independence Guide (Fifth Edition, May 2020) makes it clear that auditing firms will need to overcome several hurdles when performing in-house audits of self-managed super funds (SMSFs), to meet the requirements of the restructured APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code).

    In June 2020 we published an article on the new Independence Guide (the Guide) and how it addresses in-house audits. Some firms might think they can perform audits and assurance services as well as non-assurance services such as preparation of the fund’s accounts, as long as they have separate accounting and auditing divisions reporting to different partners.

    This practice of separating the auditing from the accounting or advice services to conduct in-house audits in the same firm, is sometimes referred to as Chinese Walls or ethical walls. However, the Code and Guide now make it clear that in-house audits will not meet the independence requirements of the Code except in very limited circumstances.

    According to the Code, there are three hurdles that need to be overcome before this practice can be acceptable:

    1. The first hurdle is a firm or network firm shall not assume a management responsibility for an audit client (para R600.7). There are examples of management responsibilities at paragraph 600.7A3 of the Code. These include preparation of the financial statements, as well as other advice or decisions that might be made with respect to the fund’s compliance with the super laws. They are typically activities or decisions which involve the exercise of professional judgment.
      To avoid assuming a management responsibility when providing non-assurance services to an audit client, the firm must be satisfied that the SMSF trustee makes all judgments and decisions that are the proper responsibility of management (para R600.8).
    2. The second hurdle is a firm or network firm who is looking to provide an audit to a client that is not a Public Interest Entity such as a SMSF, accounting and bookkeeping services including preparing financial statements on which the firm will express an opinion, cannot do so unless the services are routine or mechanical (para R601.5).
    3. The third hurdle is, even where the firm can demonstrate they did not take on management responsibilities for the audit client and the preparation of the financial statements were routine or mechanical in nature, the firm must address any threats that are not at an acceptable level (para R601.5).

    Independence threats can arise when a firm or network firm undertakes management responsibilities on behalf of a SMSF, and the audit is performed in-house. Since many trustees hand over the management of their fund to their administrator or accountant rather than make all judgments and decisions themselves, most firms will find it difficult to get over the first hurdle. Trustees cannot simply approve everything after the fact.

    Therefore, regardless of how simple the fund’s investments may be, or whether those investments are on data feeds, the auditor will not be able to conduct the audit for a client of the same firm if they have assumed management responsibilities for the trustee.

    To demonstrate a firm has not assumed management responsibilities for the trustee, the firm must document and provide sufficient appropriate evidence on the audit file showing the trustee has the suitable skills, knowledge and experience to remain responsible at all times, for the accounting and compliance decisions of the SMSF. We will want to confirm the trustee's ability to do so, and ensure they have a clear understanding of their responsibilities compared to those of the firm.

    If the firm is unable to demonstrate the trustee's ability to take on management responsibility, then the auditor, their staff or their firm are unable to prepare the financial statements and audit them. If the firm can demonstrate the trustee's ability to take responsibility, for example, the trustee has an accounting or similar qualification, then the auditor needs to have evidence on the file that the second hurdle has been overcome – that is the preparation of the financial statements was routine or mechanical and the firm has addressed any threats that aren’t at an acceptable level.

    Evidence of the preparation of the financial statements being routine or mechanical must demonstrate the trustee approved the records and entries in the trial balance that the auditor’s firm then used to prepare pro-forma financial statements. We may contact trustees to confirm their understanding of their fund’s transactions and compliance with Superannuation Industry (Supervision) Act 1993 (SISA) legislation.

    Our approach to compliance with this independence issue during the 2020–21 income year is to provide support and guidance to assist auditors comply with the requirement of the new Code. This will give firms time to consider if a restructure of their firm or audit engagements is necessary. When restructuring or making changes to their audit engagements, firms need to ensure they avoid creating another independence issue such as entering into reciprocal arrangements.

    However, for audits completed after 1 July 2021, firms will need to comply with the new Code. This includes audits they have completed for 2020–21 and future financial years and any audits that need to be completed for earlier financial years. If we find firms are breaching this independence standard after 1 July 2021, we may refer the auditor to the Australian Securities and Investments Commission (ASIC) for further action.

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      Last modified: 14 Oct 2020QC 63994