October 2007
Audit of Self Managed
Superannuation Funds
charteredaccountants.com.au
Introduction
• Part 1
Conducting the Audit
– Regulatory Environment
– Client Acceptance and Retention
– Planning
– Controls Evaluation and Testing
– Substantive Testing
– Forming an Opinion
• Part 2
SIS Compliance problem solving
– Trust Deed
– Residency
– Sole Purpose
– Investments
– Benefits
– Contributions
– Tax
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Introduction
• Why are we here
– Managing risk in the practice
– Ensuring ATO expectations of auditors are met
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Regulatory Environment
• Ethical Pronouncements applicable to members of the
three Professional Accounting Bodies
• Accounting Standards
• Auditing Standards
• Superannuation Industry (Supervision) Act and Regulations
• Income Tax Assessment Act 1936/1997 and Regulations
• Corporations Act and Regulations
• ATO Guidance
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Regulatory Environment
• Ethical Pronouncements
– Must hold a practicing certificate
– Apply professional competency and due care
– Undertake appropriate education
• Financial Accounting
• Auditing
• Self Managed Superannuation Funds
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Regulatory Environment
• Accounting Standards
– Special Purpose Financial Reports (AAS25) (AASB101)
• Operating Statement (AASB 118)
• Statement of Financial Position (AASB 110)
• Notes to the accounts (AASB 108)
– Fair Value Reporting
– Tax Effect Accounting (AASB 112)
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Regulatory Environment
• Auditing Standards
– 33 standards
– Key requirements
• Work papers must enable a peer to form the same
conclusions (ASA 230)
• Must consider the risk of fraud (ASA 240)
• Must consider controls (ASA 315)
• Analytical review (ASA 520)
• Engagement letters (ASA 210)
• Obtain representations from trustees (ASA 580)
• Management letters (ASA 260)
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Regulatory Environment
• Superannuation Industry (Supervision) Act
– Amended in 2007
– Audit report sets out sections and regulations to be
reported on
– Audit report is an approved form
– Auditor Contravention report an approved form
• Income Tax Assessment Act
– Used when auditing tax provisions
– Applicable tax rate
– Special Income
– Taxes on excess contributions
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Regulatory Environment
• Corporations Act
– No reporting obligations
– Sets out information required to be given to members
– Sets out advice restrictions
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Regulatory Environment
• ATO Guidance
– ATO IDs, Fact sheets, Rulings
• sole purpose,
• financial assistance to members
• trust distributions
– Not binding
– Useful as a tool to assess compliance
– Instructions for auditors NAT 16308-08 2007
• List of questions for auditor
• Does not cover all sections/ regulations
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Client Acceptance and Retention
ASA 210 “Terms of Audit Engagements”
• Is the fund an SMSF?
• Knowledge and skill
• Independence
• Documentation
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Client Acceptance and Retention
• Is the fund an SMSF?
– Does the fund meet the definition of an SMSF?
• Less than 5 members
• All members are trustees / all trustees are members
• Member is not an employee of another member
• Members not disqualified
– Convicted of an offence
– Civil penalty under SIS
– Undischarged bankrupt
– Disqualified by regulator
• No trustee is paid for services provided to the fund
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Client Acceptance and Retention
• Is the fund an APRA regulated fund?
– Has an approved trustee
– Formal election to be an APRA regulated fund
– Audit must be done by a registered company auditor
• Where the trustee definition is not met and the fund is not
APRA regulated
– Advise the client to update the trustee structure
– Notify the ATO of the change
– This is an audit qualification and ACR event
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Client Acceptance and Retention
• Knowledge and skill
– What assets has the fund invested in?
• Have the trustees invested in exotic assets?
• Are there assets which may be in-house assets?
• Are there investments in emerging products?
– Do you have the knowledge and skill to form an opinion
on any complex issues which may arise from unusual
asset classes?
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Client Acceptance and Retention
• Independence
– Identify threats
• Self interest threat
• Self review threat
• Advocacy threat
– Identify safeguards
• Those created by profession or legislation
• Those within the assurance client
• Those with the firms own systems and procedures
– Objective assessment
• Actual
• Perceived
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Client Acceptance and Retention
• Sample work paper statement for independence
– There is no financial relationship between the fund trustees and the
auditor. Therefore there is no self interest threat.
– The audit is conducted independent of accounts preparation and
the firm does not advocate any compliance, pension or tax
strategies. Therefore there is no self review or advocacy threat.
– There are no financial or business relationships between the firm
and the trustees. Therefore there is no familiarity threat.
– There is no evidence of actual or perceived threats from trustees.
Therefore there is no intimidation threat.
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Client Acceptance and Retention
• Documentation
– Client Details (Appendix 3)
– Engagement letter (ASA 210) (Appendix 4)
• Ongoing appointment v annual letter
– Ethical Clearance (APES 110. 210) (Appendix 6)
• Request
– Prior year accounts
– Prior year management letter
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Audit Planning
ASA 300 “Planning an Audit of a Financial Report”
• Review fund documentation
• Understand the funds operations
• Prepare a work program
• Determine an appropriate materiality level
• Documentation
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Audit Planning
ASA 315 “Understanding the Entity and Its Environment and
Assess the Risks of Material Misstatement”
• Review the fund documentation
– Trust deed
– Trustee minutes (if any)
– Fund correspondence (if any)
– Investment strategy
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Audit Planning
• Understand the funds operations
– Document controls (ASA 315) (ASA 330)
• Are bank reconciliations performed?
• Are persons other than the trustees signatories to the
accounts?
• Does one party control the accounts?
• Are electronic processes used to accept
transactions?
– Identify potential risks (ASA 315)
• Trustees business experiencing cash flow problems
• Trustees are divorcing
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Audit Planning
• Prepare a work program which achieves the audit objective
of :
– Ensuring the financial statements are not materially
misstated
– Ensuring the fund has complied with the relevant
sections of SIS in a material way
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Audit Planning
ASA 530 “Audit Sampling and Other Means of Testing”
• Determine an appropriate preliminary materiality level
– Consider audit risks
• Do samples need to be increased to compensate for
high risks?
• Do sample sizes enable material compliance
breaches to be identified
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Audit Planning
• Documentation
– Audit planning document
– Controls
– Risk Assessment
– Preliminary materiality level
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Controls Evaluation and Testing
• Controls need to address the risk that the assertions are
not met
• Evaluate the effectiveness of the controls identified
• Document findings
• Reliance on the work of others
• Document the risk assessment
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Controls Evaluation and Testing
ASA 330 “The Auditors Procedures in Response to Assessed
Risks”
• Controls need to address the risk that the assertions are
not met
– Assets of the fund do not exist
– Income is not remitted to the fund
– Trustees invest in assets not remitted to the fund
• Evaluate the effectiveness of the controls identified
– Do the controls reduce the risk of error in the information
– Do the controls enable you to place reliance on the work
of others
• Document findings
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Controls Evaluation and Testing
• Sample controls statement
– The fund is administered by XXX Accountants. The fund
administrator reconciles all bank transactions and
movements in asset holdings. This control ensures that
all cash and asset movements are identified. The
administrator also reviews the income expected to be
received from a review of the dividend history and other
external material.
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Controls and Evaluation Testing
ASA 402 Audit Considerations Relating to Entities Using
Service Organisations; ASA 600 Using the work of Another
Auditor
• Reliance on the work of others
• Investments in wrap accounts, IDPS
– Obtain audited financial statements of the product
– Obtain controls report
– Obtain investment and tax reports for the fund being
audited
– If this is unavailable, you are unable to rely on the
investment and tax reports produced by the investment
manager.
– Consider qualification to address audit risk
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Controls Evaluation and Testing
ASA 240 “The Auditors Responsibility to Consider Fraud in an
Audit of a Financial Report”
• The auditor must document the risk assessment
• This can be a simple statement
– The risk of fraud is reduced by the trustees ensuring
they are the signatories for all transactions. A review of
material transactions does not indicate the presence of
fraudulent transactions.
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Controls Evaluation and Testing
• Documentation
– Controls (Appendix 7)
– Risk Assessment (Appendix 7)
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Substantive Testing
•
•
•
•
Prepare a work program
Work papers
Accounts
Financial statement audit
– Assertions
– Common examples
– Analytical review
– Conclusion
• Compliance Audit
• Audit representations
• Documentation
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Substantive Testing
• Prepare a work program or obtain a relevant generic work
program
• Review to ensure that the work program covers:
– Any identified risk areas
– Trust deed requirements
– Steps to test financial statement assertions
– Steps to test funds compliance with the relevant
sections of the SIS Act
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Substantive Testing
ASA 230 “Audit Documentation”
• Work papers should cover
– The name of the client
– Year end
– Page reference
– Assertions
– Work steps
– Findings
– References to evidentiary documents
– Analytical review
– Conclusion
– Evidence of review (if applicable)
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Substantive Testing
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•
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Cash at Bank work paper example
Assertions
– Existence - risk that cash does not exist at year end
– Ownership - risk that cash is not owned by the fund
– Valuation - risk that cash is not recorded at an appropriate value Disclosure
- risk that cash is not appropriately disclosed
Work Program
1.Ensure administrator has all bank statements on file.
2.Take a copy and review reconciliation prepared by administrator.
3.Review the ageing of unpresented cheques and investigate any ‘old’ entries.
4.Vouch ownership of the bank accounts from the bank statement to the fund.
5.For material balances obtain direct confirmation of bank balance from
financial institution and check balance.
Analytical Review
Conclusion
– No Material Variances
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Substantive Testing
• Accounts
– Review accounts for compliance with accounting
standards
• May use either Statement of Financial Position,
Operating Statement
• Balance Sheet, Income Statement
– Ensure the audit report reflects the correct statements
• Notes
– Ensure they reference new accounting standards
– Ensure they reflect the principles adopted
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Substantive Testing
• New note disclosure for excess contributions
– No requirement to audit excess contributions
– Need to consider tax consequence
– Treat like surcharge for accounts i.e. cash
– Increase in age to accept deductible contributions to age
75
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Substantive Testing
Sample Disclosure
(x) Excess Contribution Taxes
Excess Contribution Taxes are recognised as an expense and liability when the
assessment notice is received from the member. The liability is extinguished when the
assessment is paid. No further excess contributions tax liability has been recognised at
balance date as the Trustee considers that it cannot be reliably measured.
Note X
Excess Contribution Taxes
Under the Income Tax Assessment Act 1997, an excess contributions tax will apply to
contributions made in excess of the specified caps. While the tax is assessed on the
individual in their personal capacity, the tax may be paid from the
member ' s fund balance either by compulsion or election depending on the
particular cap exceeded.
As stated in Note 1 excess contributions taxes are recognised as a liability when
assessments are received from members. No assessed excess contribution cap remains
unpaid at year end.
No additional excess contribution cap liability has been recognised at year end as the
Trustee considers that it cannot be reliably measured. They believe that there is
insufficient information available to provide a reliable indication of the future excess
contribution tax liability at year end due to the uncertainty arising from such factors as
the inability to identify the total contributions for a member.
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Substantive Testing
• Financial statement audit
– Gather evidence which tests the assertions for each
accounts balance (ASA 500 Audit Evidence)
– Examples of evidentiary document
• Bank statements / bank confirmation
• Share certificates
• Dividend advices
• Third party reports
• Draft tax return
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Substantive Testing
ASA 230 “Audit Documentation”
• Work steps
– These are the steps performed to ensure that the
balance is correct
– Each step should be completed with either:
• A reference to documentary evidence supporting the
findings
• A comment stating how the finding was determined
– E.g. Called share registry and spoke to Joe
Bloggs. Confirmed holding of 2000 BHP shares.
• Mark as not applicable
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Substantive Testing
Common Examples
• Cash at bank
– Confirmations required for material balances
– Alternative procedures can be used for non material
balances
• Original bank statements
• Review all transactions for reasonableness
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Substantive Testing
Common Examples
• Private trusts
– Existence and Ownership
• Ensure that the key assets of the trust exist
• Ensure that they are owned by the trustee
• Ensure they are not mortgaged to support the member
– Valuation
• Consider the value of underlying assets and liabilities
• Property
– Check the title with the Titles office
– Valuation
• Directors valuation acceptable
• Sworn valuation when paying benefits
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Substantive testing
• Analytical review
ASA 520 Analytical Procedures
– Perform a review of the balance to determine if it is
reasonable and adds to a picture of fairly stated financial
reports
– E.g. the fund has received a $300,000 contribution on
the 29 June 2007. Cash at bank reflects an increase in
the balance in line with this.
• Conclusion
ASA 230 Audit Documentation
– Conclude on whether the balance is fairly stated
– E.g. Cash balances are not materially misstated.
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Substantive Testing
• Compliance Audit
– Gather information which tests compliance with SIS
– Examples of evidentiary documents
• Financial information
• Minutes
• Representations
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Substantive Testing
ASA 580 “Management Representations”
• Audit Representations
– Gathered in writing via an audit representation letter
– Representation letter
• Obtained prior to concluding the audit
• Is tailored to suit audit findings
• Provides the auditor comfort over matters that cannot
be objectively tested without asking the trustee.
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Substantive Testing
• Documentation
– Work paper file containing
• Planning documentation
• Controls documentation
• Completed work program
• Lead schedules referencing the supporting
information or work performed
• Representations obtained from the client
• Final correspondence
• Signed audit reports
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Forming an opinion
• Audit report
• Financial statement qualifications
• Compliance breaches
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Forming an opinion
ASA 800 “The Auditor’s report on Special Purpose Audit
Engagements”
• Audit report is an approved form
• Amendments to increase scope
• All breaches to be reported to the ATO in the funds first
year
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Forming an opinion
ASA 701 “Modifications to the Auditor’s Report”
• Financial statement qualifications
• Two types of qualification
– Emphasis of matter
• Where there is uncertainty
• Additional disclosures
• Subsequent events
– Modified audit report
• Arises when there is one of the following occurring:
– Scope limitation
– Disagreement with trustees
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Forming an opinion
Material but not
extreme
Extreme Cases
(Modified)
Scope Limitation
Qualified
Disclaimer
Disagreement with
those charged with
governance
Qualified
Adverse
Conflict between
applicable financial
reporting frameworks
Qualified
Adverse
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Forming an Opinion
• SIS Compliance breaches
– Identify the section breached
– Quantify the breach
– Evaluate materiality
– Discuss findings with trustees
– Prepare the qualification wording and contravention
notice for material breaches
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Forming an opinion
SIS Compliance breaches
• Assessing materiality
– Guidance provided by the Institute of Chartered
Accountants in Australia
– Monetary Considerations
• What is the quantum of the breach
• Cause of the breach
– Frequency
• Has this occurred before
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Forming an opinion
SIS Compliance breaches
• Assessing materiality
– Time
• Was the time frame impacted by an unrelated third
party
• Was there a valid reason such as illness
– Other considerations
• Was the breach deliberate
• Did the trustees take action to resolve
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Forming an opinion
SIS Compliance breaches
• Processes for reporting and remedying material breaches
– Draft Audit Qualification
• Section breached
• Brief description of breach
• Statement of resolution
– Draft Contravention Notice
• Use audit qualification as guide for description
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SIS compliance problem solving
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Trust Deed
Residency
Sole Purpose
Opening balances
Investments
Contributions
Benefits
Reserves
Tax
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SIS compliance problem solving
Trust Deed
– Contribution section allows
• Contribution from person other than member and
employer if receiving co-contribution
• Contributions when not employed
– Benefits section allows
• Payment of pensions
• Does not require compulsory cashing
• Commutation of pensions
– Investments
• Are there any restrictions
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SIS compliance problem solving
– Allocation of earnings
• Does the deed specify a particular method
– Where the trust deed requires payment of a pension
• Start pension making one payment
• Commute to lump sum if allowed
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SIS compliance problem solving
• Residency
– Change to the two year reset rule
– Now ‘ordinarily test’
• Awaiting ATO interpretation
• Initial indication
– Two year absence
– Resident for tax purposes
– Meetings and decision making in Australia
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SIS compliance problem solving
• Sole purpose
– ATO draft ruling 2007 / D1
– Considers each investment
• Intention of the trustees - was the purpose of the
investment to gain a present benefit?
• Is the benefit incidental to the investment?
• Is the benefit provided on an arms length basis?
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SIS compliance problem solving
Opening Balances
• Obtain prior year audited accounts
• Obtain ethical clearance
• Operating statement
– Agree to prior year numbers
– Make inquiries about large or unusual items
• Statement of Financial Position
– Verify material holdings at beginning of period
– Consider a qualification on opening balances
– Gain an understanding about tax liabilities, creditors,
debtors
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SIS compliance problem solving
Investments
• Unit trusts
– Ensure that trust deeds are not hybrid trust deeds
– May not comply with SIS requirements
– Can acquire units in unrelated trusts from non-related
parties
– Non related trusts can acquire units from member
• Reg 13.22 complied with
• In-house assets up to 5% of fund assets
• Arms length unit price
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SIS compliance problem solving
• In-house assets
– A related trust is one where members and associates
have a fixed entitlement to more than 50% of the capital
or income
– A related company is one where members and
associates have:
• Sufficient influence
• A majority voting interest
– Investments in a related entity after 11 August 1999 are
in-house assets
– Changes to the ownership mix can make an existing
asset an in-house asset
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SIS compliance problem solving
• Additional investment in a company or trust acquired after
11 August 1999 may be exempt from the in-house assets
test
– Excluded by section 71D – reinvestment of earnings
prior to 1 July 2009
– Excluded by section 71E – limited to borrowing
outstanding at 11 August 1999
– Regulation 13.22 Trusts or companies
• No borrowing
• No investments in other entities
• No leases to related parties unless related to
Business real property
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SIS compliance problem solving
• Emerging Issues
– Contracts for difference
• Derivative product
• Look at the structure
• Cannot deposit assets with the provider
• Cannot place a charge over the funds assets
– ATO ID 2006/335
• Fund entered into contract to pay a third party monies
in exchange for return upon the sale of the acquired
asset by the related party
• The contract is an in-house asset
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SIS compliance problem solving
• Emerging Issues
– ATO ID 2006/261 – S66
• Acquisition of interest in afforestation arrangement
contravenes S66
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SIS compliance problem solving
• Investment strategy
– Is the strategy in writing?
– Are investments broadly consistent with the strategy?
• If not request trustees to update
– Are there investments in derivatives
• Installment warrants – request investment strategy
consider this as a separate item
• Other derivatives – Reg 13.15A requires trustees to
have a derivatives risk strategy
• ensure the strategy displays a knowledge of the risks,
returns and sets out the trustees management
processes
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SIS compliance problem solving
Contributions
• Does the member meet age restrictions
• Ensure cash received in the period
• Where there are excess contributions
i.e. over $1M or over $50 / 100K
– Was a refund paid in accordance with the deed /SIS
– ATO release advice
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SIS compliance problem solving
Benefits
• Pensions
– Underpayment
• Treat as a payable
• Pay amount in subsequent period
• Report material breaches
– Overpayment
• Treat as a Lump sum
• Report material breaches
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SIS compliance problem solving
• Members Minimum Benefits
– Review member statements
– Ensure calculation of crystallised component correct
– Ensure contributions are correctly allocated
– Ensure income is reasonable
– Ensure tax is reasonable
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SIS compliance problem solving
Crystallisation
• When must this be calculated
– Accumulation funds 30 June 2007
– Pensions for those over age 60 – 30 June 2007
– Pensions for those under age 60
• At attaining age 60
• When the pension is commuted prior to age 60
• Death prior to age 60
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SIS compliance problem solving
Crystallisation
• Information Issues
– Evidence of the members Eligible service period
– Details of the crystallisation calculation
– Evidence of members age
– Evidence of UPP
– Evidence of undeducted contributions made prior to
commencing the pension
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SIS compliance problem solving
• Reserves
– Uncertainty about treatment post 1 July 2007
– Investment Income reserves
• Must be distributed equitably between members of a
class
• Need to document a policy for distribution
• Need an investment strategy
• Cannot be used to equalise balances for divorce
• Income is taxed
– Pension reserves
• May be considered contributions when excess is
allocated to members
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SIS compliance problem solving
Tax
• Provision for income tax
– Is this consistent with the tax return
• Deferred income tax assets and liabilities
– Review the new recognition requirement
– Are the members over 60 is a tax asset or liability still
relevant
• Review note disclosures
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SIS compliance problem solving
• Special income (TR 2006/7)
– Self assessment
– Tax rate 47%
• Private company dividends
– Was the acquisition of shares an arms length transaction
– Were dividends paid identically for all shareholders
– Were dividends paid as cash rather than in-specie (i.e. issue of
additional shares)
• Trust Distributions
– Income received as a beneficiary of a fixed trust
– Taking advantage of personal or company tax rates
– Mechanism used to circumvent caps
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SIS compliance problem solving
• Matters to consider in the year ahead
• Draft rulings
– SMSFR 2007/ D1 Superannuation: the application of the sole
purpose test in section 62 of the Superannuation Industry
(Supervision) Act 1993 to the provision of benefits other than
retirement, employment termination or death benefits
– SMSFR 2007/ D2 Superannuation: giving financial assistance using
the resources of a self managed superannuation fund to a member
or relative of a member that is prohibited for the purposes of
paragraph 65(1)(b) of the Superannuation Industry (Supervision)
Act 1993
– SMSFD 2007 / D1 Superannuation: when is a dividend or trust
distribution 'received' before the end of 30 June 2009 for the
purposes of paragraph 71D(d) of the Superannuation Industry
(Supervision) Act 1993?
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SIS compliance problem solving
• Matters to consider in the year ahead
• 1 July 2008 audit changes
– Likely to be new audit report
– All breaches to be reported to ATO in the funds first year
– ATO to set reporting levels for breaches
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Questions
Contact:
Business Practice
Phone:
02 9290 5526
Email:
business_practice@icaa.org.au
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