In-House SMSF Auditing Impossible Following ATO Guidance

In the most definitive announcement made by the ATO this year is the ATO's approach to the new independence guide and their approach to in-house SMSF audits. Following on from the changes to restructured APES110 Code of Ethics for Professional Accountants effective 1 January 2020, there has up until now been some confusion as to which funds accountants can audit internally. The confusion arose as accountants could potentially audit funds if they were of a routine or mechanical nature, with the introduction of data fed SMSF software packages such as BGL 360, Class or SuperMate. A large amount in some cases, all the transactions are loaded and journaled automatically with little or no professional judgement required. Many accountants have argued that for these funds with data feeds owing, simple investments would qualify as routine or mechanical and should be allowed to be audited internally. For the first time, the ATO has advised this is not enough, and these funds should be independently audited.

The ATO's three hurdles

The ATO outlined three hurdles that need to be addressed before a client can be audited internally.

The first hurdle a firm shall not assume management responsibility for an audit client

– 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.

– 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.

The second hurdle is a firm cannot audit where accounting and bookkeeping services have been provided unless the services are routine or mechanical.

– Evidence of the preparation of the financial statements being routine or mechanical must demonstrate that 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

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.

– 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.

In summary, the ATO has advised that only in the extremely rare case that one of your clients, possessing a bachelor's degree or equivalent, having provided the accountant with the trial balance and supporting journals can have their fund audited by an employee (behind glass walls) of your accountant. This is, of course, subject to a potential phone integration by the ATO on the production of their work. Who would put their client up to this much scrutiny?

So, it's clear if you are an accountant that audits internally you will need to outsource your audits from 1 July 2021.

Should you wish to choose an SMSF auditor other than PWG Audit to undertake your work, we suggest looking for the following attributes before deciding:

 What to look for in an SMSF auditor?

  • Good reputation and capacity
  • Technical Expertise
  • Quick Turnarounds
  • 100% Australian with strong data security

At PWG audit, we are always happy to discuss your current situation. Please feel to call Alex Swansson on 043 000 6982 or the Partners Wealth Group Audit team today, and we will be more than happy to help you.