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  • Reciprocal auditing arrangements

    A major risk that relates to the performance of approved SMSF auditors is auditor independence.

    Blatant independence breaches such as auditing your own SMSF or those for close family members have attracted our attention in the past. More recently we have broadened our focus to include other less obvious independence risks. One such area of concern is in relation to auditors who enter into reciprocal auditing arrangements.

    A reciprocal arrangement arises where two auditors with their own SMSFs agree to audit each other’s funds. The threat to independence is akin to the scenario of a two partner practice in which one partner is asked to audit an SMSF where the other partner is a trustee.

    Responses to a recent ATO survey suggested that some auditors believed that independence risks arising from such reciprocal auditing arrangements could be safeguarded against. It is the view of ATO and ASIC that there are no safeguards that can reduce the threats to independence arising from this type of arrangement.

    Another reciprocal arrangement which raises independence concerns is where two professional accountants who are also SMSF auditors and prepare the accounts for a number of SMSFs, enter into an arrangement to audit each other’s clients’ SMSFs. Safeguards could include ending the reciprocal arrangement or spreading these referrals to a number of different SMSF auditors to minimise reliance on this source for SMSF audits.

    When applying Accounting Professional and Ethical Standard (APES) 110 Code of Ethics for Professional Accountants, potential threats to independence in a reciprocal audit arrangement may include:

    • Self-interest threat – an SMSF auditor may be influenced to vary their audit opinion or not report a contravention if they perceive this will influence the outcome of the audit on their own fund or if they fear a potential loss of business as a result.
    • Familiarity threat – an SMSF auditor having a close relationship with, or a high regard for, the other auditor may be influenced to ignore certain issues or to undertake a cursory and inadequate SMSF audit.
    • Intimidation threat – intimidation due to other auditor’s knowledge or their industry contacts may influence the auditor to not report certain issues and to apply less scrutiny to the audit.

    Approved SMSF auditors who continue to engage in reciprocal auditing arrangements will be subject to increased scrutiny. Referral to ASIC may result if we consider SMSF auditors have failed to meet the independence requirements.

      Last modified: 07 Dec 2018QC 57580