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  • SMSF auditors: new Independence Guide and the Commissioner’s focus for 2020–21

    The Accounting Professional & Ethical Standards Board (APESB), in collaboration with the three Professional Accounting Bodies, Chartered Accountants Australia and New Zealand (CAANZ), CPA Australia and the Institute of Public Accountants (IPA), recently published a new and updated Independence Guide – Fifth Edition, May 2020 (the Guide). The Guide incorporates changes to the restructured APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the restructured Code), which became effective on 1 January 2020 and is mandatory for audits and reviews in Australia.

    There are changes to the Guide that SMSF auditors must familiarise themselves with in Chapter 8. In particular, as a result of the restructured Code, the Guide now makes it clear that an SMSF auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements for the SMSF unless it is a routine or mechanical service (paras R600.7, 600.7 A1, 600.7 A3, R600.8, 601.4 A1, R601.5 and 601.5 A1 of the restructured Code). The firm must also address any threats created by providing such services that are not at an acceptable level (R601.5(b)).

    Services that are ‘routine or mechanical in nature’ require little or no professional judgement and examples are listed in para 601.4 A1 of the restructured Code. When monitoring whether the preparation of accounts by the auditor’s firm is routine or mechanical under the new standard, the Commissioner will expect to see appropriate evidence on the auditor’s file that the SMSF trustees took responsibility for the financial statements and had sufficient knowledge, skills and experience to do so (R600.8). For example, this evidence could consist of trustee coded transactions and approved trustee entries in the trial balance that the auditor’s firm then use to prepare pro-forma financial statements. Auditors shouldn’t assume that copies of signed financial statements and trustee representation letters amount to audit evidence that meet this requirement.

    Even where the preparation of the financial statements is routine or mechanical, the Commissioner and the Australian Securities and Investment Commission (ASIC) as reasonably informed third parties require the auditor to use safeguards to reduce the self-review threat to an acceptable level (Section 4.3 and 8.4 of the Guide). These safeguards could consist of using professionals who are not audit team members to prepare the financial statements or having someone review the audit work who was not involved in preparing the financial statements (para 601.5 A1).

    The Guide also includes other practical examples relating to the following scenarios which auditors should look at to ensure they are not breaching the independence standards in the restructured Code:

    • ‘the books’ are prepared by the auditor
    • the accounting firm acts as the registered tax agent and/or auditor
    • auditors who audit an SMSF where the auditor was previously a consultant/partner or employee of the firm
    • relationships between auditors and referral sources, including
      • auditing multiple SMSF clients of an administration firm
      • auditor doing SMSF audits for an accounting firm where the principal is related to the auditor
      • reciprocal auditing arrangements relating to auditors who audit each other’s fund and auditors auditing each other’s SMSF clients
      • concentration of referral sources in regional areas
      • firms offering financial planning services
      • auditors ‘contracting out’ accounting work for an SMSF client
      • auditors who have a long association with SMSF clients.

    During the 2020–21 financial year, the Commissioner will write to auditing firms where our data indicates that the auditor could also be auditing financial statements prepared by the same firm to assist auditors comply with the requirements under the restructured Code.

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      Last modified: 24 Jun 2020QC 63029