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Trustee responsibility, professional judgement and the new rules for SMSF audit

A new Independence Guide for SMSF auditing has become mandatory for audits in Australia. The Guide incorporates changes to the restructured APES 110 Code of Ethics for Professional Accountants (including independence standards). One particular change in Chapter 8 is 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". Is SMSF accounting ever "routine and mechanical"? Services that are routine or mechanical in nature do not require professional judgement. However professional judgement is required to determine that professional judgement wasn't necessary for the preparation of the accounts! Indeed when monitoring whether the preparation of accounts by the auditor's firm is routine 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). The ATO says that such evidence could consist of trustee coded transactions and approved trustee entries in the trial balance. The ATO goes further to say that auditors should not assume that copies of signed financial statements and trustee representation letters amount to audit evidence that meet this requirement. In most cases, trustee responsibility to this extent is unlikely and therefore the firm would be unable to prepare both the financial statements and audit under the new Code. Independence Redefined The Code of Ethics has never been more clear and specific about what constitutes a breach of independence. It is not only preparing 'the books' by an audit firm, but also the accounting firm acting as both registered tax agent and/or auditor that raises a red flag. Retired accounting firm partners or consultants doing the audit? Not allowed. The Guide says that where the auditor was previously a consultant/partner or employee of the firm, he/she would not pass the independence test. In fact any strong relationship between auditors and referral sources threaten independence under the Code, including:

  1. auditing multiple SMSF clients of an administration firm

  2. auditor doing SMSF audits for an accounting firm where the principal is related to the auditor

  3. reciprocal auditing arrangements relating to auditors who audit each other’s fund and auditors auditing each other’s SMSF clients

  4. concentration of referral sources in regional areas

  5. auditors ‘contracting out’ accounting work for an SMSF client

  6. auditors who have a long association with SMSF clients.

Does your firm offer financial planning services? Accounting firms that offer financial planning services are not allowed to also conduct the audit for an SMSF, even with a Chinese wall. Full service firms offering both accounting and financial planning services must outsource audits to a genuinely independent SMSF auditor under the new Code.

If it's time for your firm to reconsider audit arrangements, we would be happy to talk with you. Saul SMSF offers a quality independent audit service that protects both your clients and your firm's brand reputation.

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