News & Insights | Heffron

The Audit Report for my SMSF has been qualified. What does that mean? Should I be worried?

Written by Lyn Formica | Sep 23, 2024 11:16:26 PM

All SMSFs trustees are required to appoint an approved auditor to audit the operations of their fund each year. This annual audit must include both a financial audit and compliance audit.

The auditor is required to report their findings to the trustees in the form of an audit report. The audit report consists of two parts, Part A and Part B. The consequences of receiving a qualified audit report are quite different, depending on whether it is a Part A or Part B qualification.

 

Part A

Part A of the audit report covers the financial audit and requires the auditor to form an opinion whether, in all material respects, the fund’s financial statements present fairly the financial position of the fund and the results of its operations for the year.

In conducting the financial audit, the auditor will seek to obtain sufficient and appropriate evidence that the assets and liabilities of the fund:

  • exist and are clearly owned by the fund (or are obligations of the fund in the case of liabilities),
  • are appropriately valued in the financial statements according to relevant accounting standards and Australian Taxation Office (ATO) requirements,
  • are appropriately classified in the financial statements according to relevant accounting standards, and
  • no material assets or liabilities have been excluded.

Where an auditor does not feel that the fund’s financial statements fairly represent the financial position of the fund (in all material respects), they will issue a Part A audit qualification. Part A qualifications are often issued in situations where:

  • the auditor is unable to accurately determine the existence of a fund asset without physically inspecting the asset (eg gold and silver bullion),
  • fund assets are held via platforms and wrap accounts (because the fund auditor isn’t auditing the platform or wrap itself), and/or
  • the auditor is unable to determine the value and recoverability of a fund asset without formally valuing the asset or auditing the entity in which the fund has invested (eg shares in unlisted companies, units in private unit trusts, unsecured loans).

Part A qualifications are quite common where a fund’s assets extend beyond the typical cash at bank, term deposits, listed shares, managed funds and real property.

More recently, the ATO has placed greater focus on the valuation of fund assets including actively targeting funds where asset values haven’t changed in the fund’s SMSF annual return for multiple years. Similarly, auditors are now seeking evidence from trustees each and every year to demonstrate the value of fund assets such as real property and investments in unlisted entities, and issuing a Part A qualification where sufficient evidence is not provided.

If you receive a Part A qualification for your fund, there is no need to panic. Whilst it will be noted to the ATO on the fund’s SMSF annual return, generally no immediate action is required. However, it is important that you:

  • make sure you understand the reason for the qualification,
  • make your own assessment of the continued appropriateness and recoverability of the fund’s investments, and
  • in the case of a qualification due to insufficient evidence of the market value of assets, take steps to ensure sufficient evidence will be able for next year’s audit.

 

Part B

Part B of the audit report covers the compliance audit and requires the auditor to form an opinion whether, in all material respects, the trustee has complied with particular provisions of the Superannuation Industry (Supervision) Act and Regulations. Where an auditor believes the trustees have materially breached one of these reportable provisions, they will issue a Part B audit qualification.

Note, not valuing assets at market value in the fund’s financial statements can lead to a Part B qualification.

The existence of a Part B audit qualification must be flagged to the ATO on the fund’s SMSF annual return and the auditor may also have lodged an Auditor Contravention Report with the ATO.

Failing to comply with the Superannuation Industry (Supervision) Act and Regulations can result in the fund being found non-complying and losing its concessional tax treatment. Trustees can also be fined or even imprisoned. However, the Commissioner is able to exercise its discretion and overlook breaches where trustees have inadvertently broken the rules, the breaches have been rectified and steps have been put in place to make sure they do not happen again.

For this reason, if you receive a Part B qualification for your fund, it is important that you:

  • make sure you understand the reason for the qualification (eg what provision did you breach),
  • if not already remedied, immediately take action to remedy that breach, and
  • make sure you understand the rules so that breaches of this nature do not reoccur in the future.