Audit of Self Managed Super Funds

Transcription

1 Audit of Self Managed Super Funds Supporting papers for DVD Presented by: Susan Orchard CA Susan Orchard Chartered Accountants

2 Disclaimer This paper represents the opinion of the author(s) and not necessarily those of the Institute of Chartered Accountants in Australia or its members. The Institute of Chartered Accountants in Australia owns the copyright in this document. The document must not be copied or made available to third parties, in whole or in part, in any form or by any means, without the prior written consent of The Institute. The contents are for general information only. They are not intended as professional advice - for that you should consult a Chartered Accountant or other suitably qualified professional. The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information in these papers.

3 Contents Chapter 1 Introduction... 5 Why are we here?... 5 Chapter 2 Regulatory Environment... 9 Ethical Pronouncements... 9 Accounting Standards Auditing Standards Superannuation Industry (Supervision) Act Income Tax Assessment Act Corporations Act ATO Guidance Chapter 3 Client Acceptance and Retention Does the fund meet the definition of an SMSF? Knowledge and Skill Independence Documentation Chapter 4 Planning Fund documentation Controls Risk Risk assessment and materiality Documentation Chapter 5 Controls Evaluation and Testing Reliance on the work of others Documentation Chapter 6 Substantive Testing Accounts Financial Statements Copyright The Institute of Chartered Accountants in Australia

4 Assertions Work steps Compliance Audit Representations Documentation Chapter 7 Forming an Opinion Financial Statement Opinions Compliance Opinions Documentation Chapter 8 SIS Compliance problem solving Trust deed Residency Sole Purpose Opening Balances Investments In house assets August 1999 and in house assets Contracts for difference Acquisition of an enforceable right Acquisition of assets from members Business real property used in not for profit business Investment Strategy Contributions Benefits Pensions Members minimum benefits Crystallisation Reserves Tax Copyright The Institute of Chartered Accountants in Australia

5 Special Income Appendix 1 Superannuation Fund Audit Process Appendix 2 Audit Competency Documents Appendix 3 Client information work paper Appendix 4 Sample Audit Engagement Letter Appendix 5 - Fund Audit Information Checklist Appendix 6 Ethical Clearance Appendix 7 Planning Documentation Appendix 8 Controls and Fraud Questionnaire Appendix 9 Audit Work Program Appendix 10 Audit File Contents Appendix 11 Quality Control Checklist Appendix 12 Section 129 Notice Appendix 13 - Trustee Representation Letter Appendix 14 Management Letter Appendix 15a Audit Report (no qualification) Appendix 15b Audit Report (qualification) Appendix 16 ATO Auditor Contravention Report Copyright The Institute of Chartered Accountants in Australia

6 Chapter 1 Introduction This paper will allow a reader to: Understand auditor obligations and reporting requirements Perform an audit under current regulatory requirements Understand auditing standards and procedures undertaken for a financial report and compliance audits Design an audit program that complies with audit requirements Minimise audit risk Why are we here? Managing risk in the practice Australia is becoming an increasing litigious society and as a result professionals are being held more accountable for their actions. While the auditing standards do not have force of law for the audit of self managed superannuation funds they are the standard by which a professional auditor is measured. The compliance with auditing standards will lead to improved audit documentation which meets the Institutes quality standards. Compliance with the quality standards will alleviate the risk of professional sanctions, applied by either the ATO or the Institute. The courts will look at the work of the auditor when determining if the loses experienced by a client have been exacerbated by the actions of the auditor. E.g the auditor had the information to identify a breach in the SIS Act however they had failed to do so. A failure to report the existence of the breach to the client resulted in a delay in rectification and increased penalties. The client may take an action to recover increased costs from the auditor. Where the auditor is using an appropriate program and following standards this circumstance is less likely to arise. Insurers are also far more aware of SMSF audits and the risks associated with auditors not performing a proper audit. As a result they have inserted clauses which expressly remove audit from standard coverage. Some practitioners may find they are not covered for the audit work they are performing increasing the firms exposure to litigation risk. Auditor contravention reports Extract from the speech by Michael D Ascenzo, Commissioner of Taxation, Australian Taxation Office, Self-Managed Super Fund Professionals Association of Australia (SPAA) National Conference, 7-9 March Copyright The Institute of Chartered Accountants in Australia

7 Approved auditors operate as a key integrity indicator in regulating self-managed superannuation funds by providing independent assurance that a fund is complying with its regulatory obligations. We have received over 10,000 Auditor Contravention Reports as at 31 December 2006 from 9,906 auditors since reporting commenced on 1 July The number of contraventions reported were more than 16,000. Of these about half were reported as unrectified (50.6% of total contraventions). Key contraventions are: loans made to a member or a relative (18%), assets not in the name of the fund (16%), breach of in-house asset rules (14%); documents requested by auditor were not provided (11%), borrowings by the SMSF for purpose not allowed by the legislation (9%), and breach of sole purpose test (8%). The ATO will be reviewing all auditor contravention reports and from the overall audit case load one third will be selected from this review. These audits may take the form of a phone call to the trustee, accountant or auditor requesting information about the breach and any rectification action taken. While other reviews will be more comprehensive. Further information is available in the ATO compliance program and in a Speech by Ian Read, Assistant Deputy Commissioner of Taxation for the ICAA Audit Conference - Wednesday 13 June 2007, Langham Hotel, Southbank. ATO views of SMSF auditors While most accountants are capable of performing the financial statement audit, the ATO has expressed concerns about the quality of the compliance audit. The case study below sets out some of the concerns that the ATO have with the work of auditors. In these examples the auditor did not use appropriate work papers for the compliance audit and hence did not identify breaches had occurred. The auditors knowledge did not lend itself to identifying the breach. In both examples the auditor was required to undertake not to perform audits until additional education was provided. While the ATO did not disqualify on the basis of independence the member was referred to their professional body for review. Copyright The Institute of Chartered Accountants in Australia

8 Case study extracted from speech by Ian Read, Assistant Deputy Commissioner of Taxation for the ICAA Audit Conference - Wednesday 13 June 2007, Langham Hotel, Southbank. There are some cases around auditors that concern us. The example I ll speak about today deals with breaches of the in-house asset rules and arm s length provisions but it is the auditor s conduct that I want to focus on. Contravening the in-house asset rules and arm s length provisions Investment in a related unit trust During an audit, we found a fund had invested in a related unit trust. This contravened the in-house asset rules and the arm s length provisions. The auditor did not detect the contraventions. When we reviewed the auditor and found no evidence or working papers to verify: an audit of the fund had taken place, including its financial statements, accounts or transactions an auditor contravention report or an audit report had not been completed, and the auditor s independence was questionable as he was the trustee s accountant, tax agent and business advisor. We referred the auditor to his professional association on the basis that he did not perform a proper and adequate audit. The auditor acknowledged the shortcomings of the audit and undertook training and provided us with professional training certificates as evidence of his improved understanding of the SIS Act and auditing requirements of self managed funds. Loan to a related company In another case involving two funds, we had a related company loan forestalling its liquidation with no loan repayment arrangement in place. The auditor admitted advising the trustees to do this knowing that it breached SISA in that in-house assets would exceed the 5% limit and that there would be a breach of the arms length rules. The audit reports for both funds were not qualified. Despite the auditor s overall 30 years of experience, our findings were the same as in the first example. We referred the auditor to the relevant professional association and entered into an enforceable undertaking with the auditor stating that the auditor could not perform any audits of SMSFs until relevant training was undertaken. The approved auditor also agreed to appoint an external provider to handle other SMSF audits in the interim. Copyright The Institute of Chartered Accountants in Australia

9 ATO Enforcement Action Extract from the speech by Michael D Ascenzo, Commissioner of Taxation, Australian Taxation Office, Self-Managed Super Fund Professionals Association of Australia (SPAA) National Conference, 7-9 March Superannuation compliance results to 31 December 2006 Last financial year we removed the complying status from 12 funds and have removed the complying status of four funds this year. This is not something we do lightly, it is a very serious step it will mean that there has been a serious breach of the rules. This financial year we have also disqualified nine trustees, had four funds wound up and accepted 72 undertakings from the trustee to rectify breaches. Approved Auditors Extract from the speech by Michael D Ascenzo, Commissioner of Taxation, Australian Taxation Office, Self-Managed Super Fund Professionals Association of Australia (SPAA) National Conference, 7-9 March We expect to review around 7% of approved auditors on an annual basis. We will examine the processes used by approved auditors where we have concerns about the auditors performance we will look more closely at the respective audited funds. Our review of an approved auditor, as part of our active compliance activities, will generally involve an examination of the working papers of one to three self managed superannuation funds audited by the auditor, where the self managed superannuation funds show indications of potential problems. We're particularly interested in the auditor's adherence to their professional standards; most importantly, we closely examine working papers for notations and evidence that the fund is operated in accordance with the superannuation laws. So far this year 22 high risk auditors have been identified for audit. These cases have been identified from SMSF cases completed in the last financial year and in the year to date. We have also asked six auditors who in our opinion have performance issues why they should not be referred to their professional association for disciplinary action. Some other auditors have advised us that they will no longer be undertaking audits of self managed funds. Copyright The Institute of Chartered Accountants in Australia

10 Chapter 2 Regulatory Environment There are a number of facets to the regulatory environment applying to the Audit of Self Managed Superannuation Funds. These are: Ethical Pronouncements applicable to members of the three Professional Accounting Bodies Auditing Standards Superannuation Industry (Supervision) Act and regulations Income Tax Assessment Act 1936 /1997 and regulations Corporations Act and regulations ATO guidance Ethical Pronouncements As Chartered Accountants we are required to comply with the Code of Ethics for Professional Accountants. 1 The code of ethics governs a number of areas relevant to auditors of SMSFs : Practicing as an accountant Independence Compliance with accounting and auditing standards Practicing as an accountant The accounting bodies require a person who is providing public accounting services to hold a certificate of public practice. This extends to the provision of audit services to SMSFs. Extracts from Members Handbook A member shall not, without the consent of the Board, practise as a public accountant unless he has been issued with a current certificate of public practice or his application therefore has been approved or he is exempt from the obligation to hold such a certificate. 2 "public accountant" means a natural person:- 1 APES 100 Preface 2 The Institute of Chartered Accountants in Australia By Laws Copyright The Institute of Chartered Accountants in Australia

11 (i) who maintains as a principal, whether on his own behalf or as a trustee and whether alone or with others, an office for the provision of one or more public accountancy services and who places that service or those services at the disposal of the community for remuneration, and not solely at the disposal of any individual, firm, trust or body of persons, corporate or unincorporate; or (ii) who is a shareholder in, or a director of, a body corporate which, whether on its own behalf or as a trustee and whether alone or with others, maintains an office for the provision of one or more public accountancy services and which places that service or those services at the disposal of the community for remuneration, and not solely at the disposal of any individual, firm, trust or body of persons, corporate or unincorporate, and who, as an officer or employee of such body corporate or otherwise, provides or participates in the provision of such service or services on behalf of such body corporate; or (iii) who is a beneficiary under a trust the trustee of which, whether alone or with others, maintains an office for the provision of one or more public accountancy services and places that service or those services at the disposal of the community for remuneration, and not solely at the disposal of any individual, firm, trust or body of persons, corporate or unincorporate, and who, as an officer or employee of such trustee or otherwise, participates in the provision of such service or services on behalf of such trustee. 3 "public accountancy services" means accounting, auditing, management consulting, taxation, financial management and insolvency services and such other services as the Board may from time to time determine to be "public accountancy services"; 4 Professional Competence and Due Care APES110 Code of Ethics for Professional Accountants. This standard is mandatory and sets out the requirements to act in a professional manner. Section 130 of the standard sets out the requirement to apply attain and maintain professional competence. This is achieved through the undertaking of training and education in relation to the areas in which the accountant is working. 3 Supplemental Royal Charter 4 Supplemental Royal Charter Copyright The Institute of Chartered Accountants in Australia

12 For an accountant working with self managed superannuation funds this education should include: Financial Accounting Auditing Superannuation Legislation In A2 The Institute of Chartered Accountants in Australia By-Laws Section 5 Professional Conduct, the Institute sets out the events which can lead to a disciplinary action. These include a failure to observe a proper standard of professional care, skill or competency when carrying out professional duties. Accounting Standards The application of accounting standards is mandatory for professional accountants. A self managed superannuation fund is not a reporting entity as the users of the information are the members / trustees who have access to the information. The accounts prepared are special purpose financial reports. AAS25 Financial Reporting by Superannuation Plans sets out a format of financial statements appropriate to superannuation funds. The application of this standard ensures compliance with: Operating Statement (AASB118) Statement of Financial Position (AASB110) Notes to the accounts (AASB108) The main changes associated with the introduction of AIFRS accounting standards relate to the following standards: Fair Value Reporting Each standard sets out the method of determining the fair value of the assets on hand. The fair value is the market value of the asset less the cost of disposal. This is generally an equivalent to Net Market Value reporting. Where the fund trustee chooses not to adopt this standard this should be disclosed in the notes to the accounts. This valuation method must be used when paying a benefit. AASB 112 Income Taxes This standard sets out the method of accounting for the tax effect of the movement in investments. This varies from the form standard in that it takes a Copyright The Institute of Chartered Accountants in Australia

13 balance sheet approach rather than the income approach. This will not result in a major change in the outcome. This standard also changes the disclosure of the balance to reflect Deferred Tax Assets and Liabilities in place of Provision for Deferred Income Tax and Future Income Tax Benefit. Where the fund trustee chooses not to adopt this standard this should be disclosed in the notes to the accounts. Auditing Standards While the application of auditing standards is not a legally enforceable requirement, the application of auditing standards is mandatory for professional accountants. 5 The audit of a self managed superannuation fund is an audit in accordance with the definition within the standards. This is an overview of the Auditing Standards as set out in the special audit edition of Accounting and Audit News Today. ons/accounting_auditing_news_today_ant/newsletterid=a ASA 100: the Preamble ASA 100 "Preamble to Auditing Standards" This very important Standard sets out the intentions of the AUASB as to how the Standards are to be understood, interpreted and applied. An auditor shall apply AUASB Standards in conjunction with paragraphs 1 to 49 of the ASA 100. Mandatory Requirements An auditor's obligations or mandatory requirements are those basic principles and essential procedures set out in bold-type within each Standard. Explanatory guidance Explanatory guidance: is to be used to improve knowledge and understanding of the scope and application of the basic principles and essential procedures (the mandatory requirements) may include practical examples to assist in understanding the application of mandatory requirements Applying AUASB Standards: professional judgement 5 APES 410 Conformity with Auditing and Assurance Standards Copyright The Institute of Chartered Accountants in Australia

14 AUASB Standards are principles-based and the auditor is expected to use professional judgement in light of the given circumstances in order to achieve the objectives of the audit, review or other assurance engagement. Applying AUASB Standards: ethics References to compliance with relevant ethical requirements are included in certain mandatory requirements and explanatory guidance paragraphs in AUASB Standards. Note that references in the Auditing Standards to compliance with the ethical standards effectively makes the ethical standards legally enforceable, notably independence. AUASB Drafting Approach: Words and Phrases It is essential to refer to paragraph 48 of ASA 100 to identify the correct meaning of particular words and phrases used in the Standards. Outline of the ASA Standards ASA 200 "Objective and General Principles Governing an Audit of a Financial Report" ASA 200 states that the objective of an audit of a financial report is to enable the auditor to express an opinion as to whether the financial report is prepared in accordance with an applicable reporting framework in all material aspects. ASA 210 "Terms of Audit Engagements" ASA 210 provides that the auditor shall agree on the terms of the audit engagement with the entity. The auditor shall record this in writing and forward it to the entity. When the audit engagement is undertaken pursuant to legislation, the minimum applicable terms are those contained in the legislation. ASA 220 "Quality Control for Audits of Historical Financial Information" ASA 220 requires the engagement team to implement quality control procedures that are applicable to the individual audit engagement. ASA 230 "Audit Documentation" ASA 230 requires auditors to prepare on a timely basis, audit documentation that provides: a sufficient and appropriate record of the basis for the auditor's report, and evidence that the audit was performed in accordance with Auditing Standards and applicable legal and regulatory requirements ASA 240 "The Auditor's Responsibility to Consider Fraud in an Audit of a Financial Report" ASA 240 states that auditors shall consider the risks of material misstatements in the financial report due to fraud. This is done in order to reduce audit risk to an acceptably low level whilst planning and performing the audit. Note that the Standard requires that the auditor ordinarily presumes that there are risks of fraud in revenue recognition, that are to be addressed via mandatory paragraphs 61, 65 and 119. ASA 250 "Consideration of Laws and Regulations in an Audit of a Financial Report" When designing and performing audit procedures and evaluating and reporting the results thereof, ASA 250 requires auditors to recognise that non-compliance by the entity with laws and regulations may materially affect the financial report. Copyright The Institute of Chartered Accountants in Australia

15 ASA 260 "Communication of Audit Matters with Those Charged With Governance" ASA 260 requires auditors to communicate audit matters of governance interest arising from the audit of the financial report with those charged with the governance of that entity. ASA 300 "Planning an Audit of a Financial Report" ASA 300 states that the auditor shall plan the audit so that the engagement will be performed in an effective manner. ASA 315 "Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement" ASA 315 requires auditors to obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial report whether due to fraud or error, and sufficient to design and perform further audit procedures. ASA 320 "Materiality and Audit Adjustments" ASA 320 requires auditors to consider materiality and its relationship with audit risk. ASA 330 "The Auditor's Procedures in Response to Assessed Risks" In order to reduce audit risk to an acceptably low level, ASA 330 requires auditors to determine overall responses to assessed risks at the financial report level, and to design and perform further audit procedures to respond to assessed risks at the assertion level. ASA 402 "Audit Considerations Relating to Entities Using Service Organisations" Under ASA 402, the auditor shall consider how an entity's use of a service organisation affects the entity's internal control, so as to identify and assess the risk of material misstatement and to design and perform further audit procedures. ASA 500 "Audit Evidence" ASA 500 states that the auditor shall obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion. The auditor is also required to use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. ASA 501 "Existence and Valuation of Inventory" ASA 501 requires the auditor to obtain sufficient appropriate audit evidence regarding the existence and valuation of inventory material to the financial report. ASA 505 "External Confirmations" ASA 505 require auditors to determine whether the use of external confirmations is necessary in obtaining sufficient appropriate audit evidence at the assertion level. In making this determination, the auditor shall consider the assessed risk of material misstatement at the assertion level and how the audit evidence from other planned audit procedures will reduce the risk of material misstatement at the assertion level to an acceptably low level. ASA 508 "Enquiry Regarding Litigation and Claims" ASA 508 requires the auditor to obtain sufficient appropriate audit evidence regarding: whether all material legal matters have been identified the probability of any material revenue or expense arising from such matters and the estimated amount thereof, and Copyright The Institute of Chartered Accountants in Australia

16 the adequacy of the accounting treatment of such matters including their disclosure in the financial report ASA 510 "Initial Engagements - Opening Balances" For initial audit engagements, ASA 510 requires auditors to obtain sufficient appropriate audit evidence that: the opening balances do not contain misstatements that materially affect the current period's financial report the prior period's closing balances have been correctly brought forward to the current period, or when appropriate, have been restated, and appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately presented and disclosed ASA 520 "Analytical Procedures" ASA 520 requires auditors apply analytical procedures as risk assessment procedures in order to obtain an understanding of the entity and its environment and in the overall review at the end of the audit. ASA 530 "Audit Sampling and Other Means of Testing" When designing audit procedures, ASA 530 provides that the auditor shall determine appropriate means for selecting items for testing so as to gather sufficient appropriate evidence to meet the objectives of the audit procedures. ASA 540 "Audit of Accounting Estimates" ASA 540 states that the auditor shall obtain sufficient appropriate audit evidence regarding accounting estimates. ASA 545 "Auditing Fair Value Measurements and Disclosures" The auditor shall obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with the entity's applicable financial reporting framework. ASA 550 "Related Parties" ASA 550 requires auditors to perform audit procedures designed to: obtain sufficient appropriate audit evidence regarding the: identification and disclosure in accordance with the applicable financial reporting framework, by those charged with governance and management of related parties and the effect of related party transactions that are material to the financial report, and reduce to an acceptably low level the risks of material misstatement in the financial report resulting from the existence of related parties and related party transactions ASA 560 "Subsequent Events" ASA 560 requires auditors to consider the effect of subsequent events on the financial report and on the auditor's report. ASA 570 "Going Concern" When planning and performing audit procedures and in evaluating the results thereof, the auditor shall under ASA 570, consider the appropriateness of management's use of the going concern assumption in the preparation of the financial report. Copyright The Institute of Chartered Accountants in Australia

17 ASA 580 "Management Representations" ASA 580 stipulates that the auditor shall endeavour to obtain appropriate representations from management. ASA 600 "Using the Work of Another Auditor" When the principal auditor uses the work of another auditor, ASA 600 requires the principal auditor to determine how the work of the other auditor will affect the audit. ASA 610 "Considering the Work of Internal Audit" ASA 610 requires the external auditor to assess the activities of the internal audit function and their effect on external audit procedures. ASA 620 "Using the Work of an Expert" When using the work of an expert, ASA 620 requires auditors to obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit. ASA 700 "The Auditor's Report on a General Purpose Financial Report" ASA 700 provides that the auditor's report shall contain a clear expression of the auditor's opinion on the financial report. Note the changes to the audit report wording approved by the AUASB on 27 June 2007, effective for audit reports signed and dated on or after 1 July Paragraph 33(a) is amended to reflect the responsibility of those charged with governance as "... establishing and maintaining internal controls..." (replacing "... designing, implementing and maintaining internal controls"). Paragraph 49A is added so that, when an entity, in accordance with AASB 101 "Presentation of Financial Statements" has included in the notes to the financial statements an explicit and unreserved statement of compliance with International Financial Reporting Standards (IFRS) and the auditor agrees with the statement of compliance, the auditor shall state that, in the auditor's opinion, the financial report complies with IFRS. ASA 701 "Modifications to the Auditor's Report" ASA 701 describes how the auditor's report wording is modified in the following situations: Matters that Do Not Affect the Auditor's Opinion o Emphasis of matter Matters that Do Affect the Auditor's Opinion o Qualified opinion o Disclaimer of opinion o Adverse opinion ASA 710 "Comparatives" ASA 710 stipulates that the auditor shall determine whether the comparatives comply in all material respects with the financial reporting framework applicable to the financial report being audited. ASA 720 "Other Information in Documents Containing Audited Financial Reports" The auditor shall under ASA 720, read the other information to identify material inconsistencies with the audited financial report. Copyright The Institute of Chartered Accountants in Australia

18 ASA 800 "The Auditor's Report on Special Purposes Audit Engagements" ASA 800 stipulates that the auditor shall review and assess the conclusions drawn from the audit evidence obtained during the special purpose audit engagement as the basis for an expression of opinion. This expression of opinion shall be clearly written in the report. ASRE 2410 "Review of an Interim Financial Report Performed by the Independent Auditor of the Entity" The auditor who is engaged to perform a review of an interim financial report shall perform the review in accordance with ASRE Applicable AUS Standards The following AUS standards were issued by the AUASB and have not yet been replaced by new material. Introduction AUS 106 "Explanatory Framework for Standards on Audit and Audit Related Services" AUS 108 "Framework for Assurance Engagements" AUS 110 "Assurance Engagements other than Audits or Reviews of Historical Financial Information" Audit Evidence AUS 522 "Audit Evidence Implications of Externally Managed Assets of Superannuation, Provident or Similar Funds" AUS 524 "The Auditor's Use of the Work of the Actuary and the Actuary's Use of the Work of the Auditor in Connection with the Preparation and Audit of a Financial Report" Specialised Areas AUS 804 "The Audit of Prospective Financial Information" AUS 806 "Performance Auditing" AUS 808 "Planning Performance Audits" AUS 810 "Special Purpose Reports on the Effectiveness of Control Procedures" Related Services AUS 902 "Review of Financial Reports" AUS 904 "Engagements to Perform Agreed-upon Procedures" Status of the AGS The following Auditing and Assurance Guidance Statements (AGS) are still in effect: AGS 1002 "Bank Confirmation Requests" AGS 1004 "Transitional Arrangements on Changes in Audit Appointments under the Corporations Act 2001" AGS 1006 "Expression of an Opinion on Internal Control" AGS 1008 "Audit Implications of Prudential reporting Requirements for Authorised Deposit-taking Institutions (ADIs) AGS 1014 "Privity Letter Requests" AGS 1016 "Audit and Review Reports on Half-Year Financial Reports of Disclosing Entities Under the Corporations Act 2001" AGS 1024" Life Insurance Act Audit Obligations" AGS 1026 "Superannuation Funds - Auditor Reports on Externally Managed Assets" AGS 1030 "Auditing Derivative Financial Instruments" Copyright The Institute of Chartered Accountants in Australia

19 AGS 1032 "The Audit Implications of Accounting for Investments in Associates" AGS 1036 "The Consideration of Environmental Matters in the Audit of a Financial Report" AGS 1038 "Access to Audit Working Papers" AGS 1040 "Franchising Code of Conduct" AGS 1042 "Reporting on Control Procedures at Outsourcing Entities" AGS 1046 "Responding to Questions at an Annual General Meeting" AGS 1048 "The Special Considerations in the Audit of Small Entities" AGS 1050 "Audit Issues Relating to the Electronic Presentation of Financial Reports" AGS 1052 "Special Considerations in the Audit of Compliance Plans of Managed Investment Schemes" AGS 1054 "Auditing Revenue of Charitable Entities" AGS 1056 "Electronic Commerce - "Effect on the Audit of a Financial Report" AGS 1058 "Auditing Mortgage Investment Schemes" AGS 1062 "Reporting in Connection with Proposed Fundraisings" AGS 1064 "Audit Implications of Prudential Reporting Requirements for General Insurers" AGS 1066 "Reporting by Auditors on Compliance with International Financial Reporting Standards" AGS 1068 "Audit Requirements for Australian Financial Services Licencees under the Corporations Act 2001" AGS 1070 "Special Considerations in the Audit of Risk Management Requirements for Registrable Superannuation Entities and Licencees" The following AGSs have been withdrawn: AGS 1010 "Audit Obligations of the Financial Institutions Scheme" AGS 1012 "Share Buy-Backs - Auditor's Report" AGS 1018 "IT Environments - Stand-Alone Personal Computers" AGS 1020 "IT Environments - On-Line Computer Systems" AGS 1022 "IT Environments - Database Systems" AGS 1028 "Uncertainty" AGS 1034 "Implications for Management and Auditors of the Year 2000 Systems Issue" AGS 1044 "Audit Reports on Information Provided Other than in a Financial Report" AGS 1060 "Computer Assisted Audit Techniques" Superannuation Industry (Supervision) Act The Superannuation Industry (Supervision) Act and Regulations (SIS Act) contain the main legislative provisions governing superannuation. This is not the sole source of legislation governing superannuation. Other legislation includes that governing the: Government co-contribution Superannuation Guarantee Charge Family Law Social Security Copyright The Institute of Chartered Accountants in Australia

20 Anti-money Laundering Bankruptcy Act The auditor is required to sign off on the funds compliance with a number of sections of the SIS Act. For the year ended 30 June 2007 these provisions are: Section 52(2)d - Monies and other assets must be kept separately from those of the trustee or employer sponsor. Section 52(2)e - Trustees must not enter into contracts that hinder performance of the trustee functions. Section 62 - The trustee(s) must ensure that the fund is maintained for the Sole Purpose of providing benefits to fund members upon their retirement, or their dependents in the case of the member s death before retirement. Investments are reviewed to ensure the fund is not providing financial assistance to members, unless allowed under the legislation. Preserved benefits must not have been paid before a condition of release has been met. Section 65 -The trustee or an investment manager of a regulated superannuation fund must not lend money, or give any other financial assistance to a member or relative of a member. Section 66 - The trustee or an investment manager of a regulated superannuation fund must not intentionally acquire an asset from a related party except in limited circumstances. A person must not intentionally enter into or carry out a scheme that has the effect of avoiding the general prohibition to the acquisition of assets from a related party. Section 67 - The trustee of a regulated superannuation fund must not borrow or maintain an existing borrowing of money. Sections 69-71E, 73-75, Subject to grand-fathering and transitional provisions, the trustee of a regulated superannuation fund must not make a loan to, invest in, or lease fund assets to a related party of the fund, including a related trust of the fund that causes the total in-house asset ratio to exceed specified limits. A person must not intentionally enter into or carry out a scheme that would have the effect of artificially reducing the market value ratio of a fund s in-house assets. Section The trustee must keep minutes of all meetings for at least 10 years. Section The trustee must notify the regulator of any significant adverse advents. Section The trustee or investment manager must not invest money unless the trustee or investment manager and the other party are dealing with each other at arm's length. Section The trustee must keep accounting records, and retain them for at least 5 years. Section The trustee must prepare the accounts and statements as is specified and they should be signed off. Copyright The Institute of Chartered Accountants in Australia

21 Section 113 (1A) - Trustee to make such arrangements as are necessary to enable the audit of accounts and statements and compliance with certain provisions of the SIS legislation. The Trustee to provide the auditor with any requested, in writing, documents within 14 days of the request. Section The trustee or responsible officer of a corporate trustee must not be a disqualified person. Regulation The Trustee must formulate an investment strategy giving regard to risk, return, liquidity and diversification. Regulation The trustee must ensure that a member's minimum benefits (as defined) in the fund are maintained in the fund until the benefits are cashed, rolled over or transferred as benefits of the member. Regulation Subject to the preservation rules, member s benefits in a fund may only be paid in prescribed circumstances. In addition, under certain prescribed circumstances benefits must be paid to members. Regulation A trustee may accept contributions only in specified circumstances. Regulation The Trustee must not recognise the assignment of a members superannuation interest. Regulation The Trustee must not recognise a charge over a members superannuation interest. Regulation The trustee must not give a charge over, or in relation to, an asset of the fund. The audit report must be in the approved form. The auditor is able to make minor changes to the approved form. However, these cannot reduce the scope of the report. The auditor contravention report is an approved form all breaches must be reported in the approved form to the Australian Taxation Office. Income Tax Assessment Act The Income Tax Assessment Act 1997 (ITA Act) is the legislation governing the taxation of superannuation funds. This act governs: Residency refer to discussion later in the paper Applicable tax rate refer to discussion later in the paper Special income refer to discussion later in the paper Tax on excess contributions refer to discussion later in the paper Copyright The Institute of Chartered Accountants in Australia

22 Corporations Act The Corporations Act (Formerly referred to as Financial Services Reform Act) contains the requirements for determining: Who can give financial advice on superannuation matters this is discussed in detail in the accountants industry guide. GuideFINAL.pdf Fund disclosure requirements - these relate to the provision of product disclosure requirements a discussion on these requirements and a checklist is available on pages 2 and 3 of the FSR for Superannuation Checklists document. annuation_checklists.pdf There are no audit reporting obligations with respect to this legislation. ATO Guidance The ATO issues guidance in the form of fact sheets, ATO IDs and other tax rulings. This is information is not binding on the ATO. However, it acts as a useful tool to assess compliance with the SIS Act and ITA Act. Examples of recent guidance include: 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? The ATO has also released instructions for auditors which set out the considerations for the compliance section of the audit. This does not cover all compliance sections in the audit report, However, it does give an indication of the ATO approach to compliance auditing. Copyright The Institute of Chartered Accountants in Australia

23 Chapter 3 Client Acceptance and Retention The acceptance and retention of a client is governed by the professional standards and ASA 210 Terms of Audit Engagements. The first step is to determine whether the audit is one that requires a registered company auditor or can a member of the Institute of Chartered Accountants in Australia perform the audit. Does the fund meet the definition of an SMSF? The key to a fund being a self managed superannuation fund is that it meets the definition of a self managed fund set out in Section 17A of the SIS Act. This section was amended in 2007 to enable the ATO to continue to regulate a self managed fund which fails to meet the definition of an SMSF unless an express election to be regulated by APRA has been made. Overview of S17A - Fund structure rules The permitted structure for a SMSF varies depending on the number of members, and whether the trustee of the fund is a company, or a group of individuals. For a SMSF with 2 to 4 members and individual trustees the basic definition is as follows: Every member of the fund must be a trustee of the fund, and every trustee of the fund must be a member of the fund. No member of the fund can be an employee of another member of the fund unless they are also a relative of that, or another, member of the fund. For a SMSF with 2 to 4 members and a corporate trustee the basic definition is as follows: Every member of the fund must be a director of the corporate trustee, and every director of the corporate trustee must be a member of the fund. No member of the fund can be an employee of another member of the fund unless they are also a relative of that, or another, member of the fund. For a SMSF with 1 member it must have one of the following trustee structures: A corporate trustee, and the member is the sole director of the corporate trustee. A corporate trustee, and the member is one of only two directors of the corporate trustee and the other director is either a relative, or a person who is not a relative and not an employee of the member. Two individual trustees, one of which is the member with the other being either a relative, or a person who is not a relative and not an employee of the member. The diagrams below will assist with the assessment of compliance. There are special rules to cover the situation where a member of the fund is under a legal disability. A legal disability is where the member is a child or is suffering a mental incapacity. Copyright The Institute of Chartered Accountants in Australia

24 Persons who cannot be a member of fund as they cannot overcome a legal disability are disqualified persons. A disqualified person is a person who: Has been convicted of an offence Has had a SIS civil penalty applied Is an undischarged bankrupt Has been disqualified by the regulator A trustee or the directors of a corporate trustee cannot receive remuneration for the performance of duties or services performed by the trustee in relation to the fund. Is the fund an APRA regulated fund? An APRA regulated fund must be audited by a registered company auditor. These are funds which have an approved trustee and have made an election to be regulated by APRA. An approved trustee is a company which is licensed by APRA to operate a superannuation fund. For e.g. Macquarie or ING. These funds have a trustee company appointed which are not fund members. Where the trustee definition is not met and the fund is not APRA regulated? Should the fund you are auditing fail to meet the definition of an SMSF you need to advise the client to rectify the situation as soon as practicable and lodge the appropriate notifications of the change with the ATO on form NAT 3036 Change of details for Superannuation Entities. Matters often identified are where: a company structure was changed to reflect a single director company without a review to determine if the company was a trustee company; a new member is added but not appointed as a director of the trustee company; a child member turns 18. The auditor must report contraventions of this section identified during the audit. Copyright The Institute of Chartered Accountants in Australia

25 6 6 Extracted from Taxpayers' DIY Superannuation, Chapter 1 - Small Superannuation Funds. Copyright The Institute of Chartered Accountants in Australia

26 7 7 Extracted from Taxpayers' DIY Superannuation, Chapter 1 - Small Superannuation Funds. Copyright The Institute of Chartered Accountants in Australia

27 Knowledge and Skill An accountant undertaking the audit of a self managed superannuation fund must display the knowledge and skill to undertake the audit of a self managed fund. This knowledge needs to cover all aspects of the audit including accounting standards, auditing standards and superannuation compliance. The knowledge requirement is an ongoing requirement and it is insufficient to rely on knowledge gained during the CA program. Members are expected to maintain this knowledge through undertaking formal training as well as unstructured training such as reading. Some auditors choose to limit the audits they undertake to those areas where they are comfortable dealing. E.g. declining to audit funds with exotic assets such as derivatives or emerging products which may require a detail compliance investigation. The mandatory standards being applied by the professional bodies are set out in the Audit Competency Document at Appendix 2. The ATO and the professional bodies will expect members to display an appropriate level of training and education when reviews are undertaken. Financial Accounting The minimum requirements are an understanding of the AASB accounting standards applicable to: o the valuation of assets o tax effect accounting o disclosure of financial information The more complex requirements will relate to the valuation of complex assets such as derivatives. Auditing The minimum requirements are an understanding of the AUASB auditing standards as set out in Chapter 2. Compliance The minimum requirements are an understanding of the Superannuation Industry (Supervision) Act and Income Tax Assessment Act applicable to self managed superannuation funds. This includes the rules relating to: Contributions Benefits Investments o In-house assets Copyright The Institute of Chartered Accountants in Australia

28 o Loans o Borrowings Record Keeping Sole Purpose Trustees o Structure o Residency Independence The APES 110 Code of Professional Conduct for Professional Accountants Section 290, sets out the requirement for an auditor to be independent. These standards are reflected in the discussion below and the flow chart available on the website indicated. Are you complying with the independence guidelines? Australian Taxation Office and the Institute's Quality Review Program results indicate that some members auditing Self-managed Superannuation Funds (SMSF) are not meeting the required standards particularly in the area of auditor independence. Some members may regard SMSF audits as small jobs where the strict rules about audit independence do not apply. It may be that members feel pressured by clients who do not understand the difference between tax and SMSF audits, and are unwilling to meet the expense of hiring one accountant for SMSF advice and another for the SMSF audit. Whatever the motivation, breaches of the standards are not acceptable and can have serious consequences. The costs of non-compliance Non-compliance could cost your clients money. A breach of the standards can result in the SMSF trustees losing the tax benefits of the SMSF structure and facing financial penalties. Members failure to meet the high standards expected of Chartered Accountants could force the Institute to pursue accreditation or to stipulate mandatory training and knowledge requirements. Failure to meet standards could also open the door to more intense scrutiny from the ATO and more prescriptive and costly regulation. What is independence? Members who audit SMSF funds need to follow the standard of independence set out in Professional Statement F1 Professional Independence. The principle that underpins these standards is best explained in paragraph ten of the statement: Copyright The Institute of Chartered Accountants in Australia