Qualified Audit Report

When we conduct an audit, the last thing we want for a Fund is to have a qualified audit report.

We try to prevent this by providing guidance for documents required in the form of an audit checklist. We also communicate with the Trustees regarding potential contraventions in the Funds and we provide a management letter during the audit process with ample time given to the Trustees to resolve the issues raised. However, if all that fails, our last resort is to issue a qualified audit report. Depending on the breach, the audit report can be qualified under Part A on the financial report or Part B on the compliance requirements with the SISA and SISR. 

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 they are presented fairly and free from material misstatements, the auditor may qualify Part A of the Audit Report.

This qualification may include the following:

The most common reason that result in Part A qualification (financial audit) is when the auditor is unable to form an opinion on whether an investment in the fund exist, owned by the fund and correctly valued at market value at 30 June. For examples:

1. Material misstatement of financial assets recorded – Ryan Wealth Holdings Pty Ltd vs Baumgartner [2018] NSWSC 1502, the highlight of this was 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. 
   
   
2. 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. 
   
   
3. Opening balances – When engaging a new audit, the SMSF 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, we typically qualify Part A of the audit report for all new engagements. This qualification is not required to be reported on the Tax Return, per the ATO. Please see here for more information, under question 6B.
   
   
4. Investment Platform – There is more pressure on the auditor to confirm the existence of assets held via an investment platform where the investment platform is not a custodial arrangement. An example of this is the case about Melisa Caddick where the sign off auditors failed to independently verify the existence of underlying assets from the Commsec Portfolio to the share registry. As a result, there is a current class action against the SMSF auditors right now in the Supreme Court for loss of investments in SMSFs.
   
   When an SMSF invests shares via a portfolio such as Commsec, NabTrade where the shares are directly held by the fund via CHESS, the auditor is expected to do a sample testing of shares held by the Fund to ensure these shares exist, correctly recorded and correctly value. The share testing could be done by using the HIN and the postcode to confirm the shareholding of the SMSF directly with the share registry such as Computershare, Link Market. 
   
   However, when a Fund invests via an investment portfolio such as Margaret Street Administration Service, Morgan Stanley or Netwealth, these shares are not directly held by the SMSF but via a custodial arrangement with the service provider. In such circumstance, we will require a type 2 audit report on internal controls GS007 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, the auditor might consider qualifying Part A of the audit report. 
   
   Lastly, when SMSF invests in cryptocurrency via investment platforms such as Swyft, Coinspot and other providers, from experiences, these platforms do not have an audit report on internal controls on their platforms. Due to the high risk on this type of investment and the industry is not regulated, the auditor might consider qualifying Part A of the audit report.
   
   While Part A qualifications have risen mainly due to the successful litigation against two SMSF auditors for losses experienced by the funds, it’s still a complicated and challenging task for SMSF auditors, especially where the previous auditor has failed to understand the requirements.
   
   As SMSF auditors are required to issue Part A qualifications for custodially held platforms, more work needs to be done to ensure the ATO’s data matching is not compromised with redundant reporting in the SMSF annual return.
   
   Please see below for the summary when will the audit report will be qualified on investment platforms:

Please see here for sample reports on internal controls from Margaret Street Administration Service and Morgan Stanley

Please see here for sample reports on internal control on SOC type 1 (equivalent of GS007 report) for investment platforms that for foreign investments from Stake (via DriveWealth) and Interactive Broker.

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 the breach, we might be required to report these breaches to the ATO. Most common breaches we identify are relating to valuation of an asset, loan to members, definition of an SMSF, borrowing. Once the 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 process. For more information on the when Auditor Contravention Report is lodged, please click on the button below:

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. Please click on the button below to see the Auditor/Actuary Contravention Report form:

The Tax Office may contact the Trustees directly to discuss the reported breaches and possible rectifications measures that the Trustees need to complete. If no steps are taken by the Trustees to rectify the potential breaches, the ATO may impose further penalties and conditions on the SMSF. Trustees need to ensure that their Funds comply with the ATO regulations.

Our objective is to issue unqualified audit reports. We therefore work closely with Trustees to resolve potential issues. To engage us, please click on the button below:

For further guidance on engaging us to complete an Audit, please see here.