When conducting an audit, the last thing wanted for a Fund is to have a qualified audit report. To prevent this, guidance for the required documents is provided in the form of an audit checklist. Trustees are also informed regarding potential contraventions in the Fund and management letter during the audit process is given with ample time for the Trustee to resolve the issue raised. However, if all that fails, the last resort is to issue a qualified audit report. Depending on the breach, the audit report can be qualified under Part A which is a financial reporting issue or Part B which is refers to compliance breaches.
Part A Qualifications
At the end of an audit, the auditor is required to form an opinion and conclude if the financial reports are represented fairly in all material aspects. If the auditor is not satisfied that the Financial Statements are presented fairly and free from material misstatements, the auditor may qualify Part A of the Audit Report. This qualification may include the following:
| Qualification | Reason for Qualification |
|---|---|
| New audit engagement | Unable to obtain sufficient audit evidence on the opening balances |
| Audit investment platforms | Unable to obtain sufficient audit evidence on underlying investments reported through a platform |
| Market value uncertain or kept at cost | Unable to obtain sufficient audit evidence to support market value or the assets have been recorded at cost |
| Non-arm’s length transactions | Transactions were neither conducted on arm’s length nor commercial terms |
| No bank statements | Unable to form an opinion on the true and fair position of the Fund at year-end or the accuracy of bank transactions |
| Investments incorrectly classified | Classification of assets on the financial statements are not in accordance with applicable accounting standards |
| Rollovers is not supported by evidence | Unable to confirm the nature of the receipt |
Few possible reasons for Part A qualifications:
- Material misstatement of financial assets recorded – Ryan Wealth Holdings Pty Ltd vs Baumgartner [2018] NSWSC 1502 highlights that the auditor failed to obtain further audit evidence on the nature of the loan and whether the valuation of the loan is recorded at market value and whether the loan is recoverable. As a result, when performing an audit, sufficient audit evidence should be obtained to confirm the investment is correctly recorded at market value as required by the Tax Office. If not Part A of the audit report will be qualified.
- High risk investments – Usually, when a Fund invests in high-risk investments such as unlisted entities, unsecured loan or foreign investments, Trustee at times do not fully understand what documentation is required to support the existence, ownership, and valuation of these assets at year end. If sufficient audit evidence cannot be obtained (as required by the Tax Office) to confirm that the investment exists, owned by the Fund, Part A of the audit report will be qualified. Depending on the materiality of the investment, Part B of the audit report may also be qualified.
- Opening balances – When engaging a new audit, the auditor is required to determine whether the prior year’s balances have been correctly brought forward and whether these opening balances have been correctly audited and supported by sufficient audit evidence in prior year. The auditor’s objective is to provide a reasonable assurance about whether the financial report is free from material misstatement as a whole, not for each financial item of the financial report. As a result, Part A of the audit report is qualified for all new engagements. This qualification is not required to be reported on the Tax Return, as per the ATO. Please see here for more information, under question 6B.
- Investment Platform – Generally, when an SMSF invests shares via a portfolio such as Commsec or NabTrade, the auditor is expected to do a sample testing of shares held by the Fund to ensure these shares exist, correctly recorded, and valued appropriately. However, when a Fund invests via an investment portfolio such as Margaret Street Administration Service or Morgan Stanley, these shares are not directly held by the SMSF but via a custodian arrangement with the service provider. In such circumstance, a type 2 audit report on internal controls GS007 is required. This is to confirm the existence of internal controls at these service providers and ensure the controls operate effectively throughout the year to rely on the existence, valuation, and classification of assets. If the Fund invests via an investment portfolio that does not have a signed audit report on internal control at the service provider, Part A of the audit report will be qualified. Lastly, when SMSF invests in cryptocurrency via investment platforms such as Swyft, Coinspot or other providers, we have previously obtained information that they do not have an audit report on internal controls on their platforms. Due to the riskiness of this investment and how the industry is unregulated, part A of the audit report can be qualified. Please see below for the summary when will the audit report will be qualified on investment platforms:
| Audit Report on Controls (Type 2 only) | No Audit Report | |
| Assets held by a Custodian arrangement | Unable to obtain sufficient appropriate audit evidence | Unable to obtain sufficient appropriate audit evidence |
| Qualified audit opinion (Ref: ASA 402 / GS009) | Qualified audit opinion or disclaimer of opinion | |
| Assets held individually | Perform testing at a Fund level or testing at a platform level | Perform testing at a Fund level |
| Unqualified audit opinion | Unqualified audit opinion |
Please also see here for sample reports on internal controls from Margaret Street Administration Service and Morgan Stanley. Lastly, please also see here for a document issued by CPA on the Audit considerations relating to an SMSF using an investment management service organization in September 2023.
Part B qualifications
Depending on nature and materially of a breach, the auditor might be required to report these breaches to the ATO. Most common compliance breaches identified are relating to breaches in reference to related-party transactions, sole purpose test and borrowing. Once a breach has been identified and the contravention amount is above the reporting threshold, an Audit Contravention Report will be submitted to the ATO as part of the audit process. For more information on when an Auditor Contravention Report is lodged, please click on the button below:
Information on Audit Contravention Report
The Tax Office have recently reviewed and updated the Audit Contravention Report form. The form displays all necessary information needed to lodge a Contravention Report. The form below cannot be downloaded and used as the ATO have implemented Unique Identifiers on all paper forms for the NAT 11239. A copy of the Audit Contravention Report is listed here:
The Tax Office may contact Trustees directly to discuss any reported breaches and possible rectifications measures that Trustees need to action. If no steps are taken by Trustees to rectify the potential breaches, the ATO may impose penalties and conditions on the SMSF. Trustees need to ensure that the SMSF comply with ATO regulations. Our objective is to ensure an unqualified audit report is issued and we work closely with Trustees to resolve potential issues.
