Auditors will red-flag loans lacking evidence

auditors loans evidence

SMSFs with loans that lack evidence of how they can be recovered are likely to be red-flagged by auditors seeking to protect themselves from legal action.

SMSFs with loans that have limited evidence about their recoverability have been warned the fund may receive a qualified audit or an audit contravention report (ACR) as SMSF auditors protect themselves from criticism from the courts, according to the head of an audit firm.

Tactical Super director Deanne Firth said the market valuation of loans by an SMSF was dependent on its recoverability and this evidence was not always easy to secure, leading auditors to state that absence in their report.

“Many people point to the loan agreement and that payments are being made, claiming those represent the value of the loan, but that is not necessarily the case,” Firth said during an online presentation hosted by the Institute of Financial Professionals Australia.

“Over the past couple of years I have made ACRs because I did not have sufficient evidence a loan was recoverable and saved myself potential liability because courts have taken to blaming auditors and we have ended up responsible by precedent.”

She cited two cases, one where a trustee loaned $800,000 to his business via a third party and the other where a loan was used to support a gambling addiction, as examples that loan documents and a track record of repayments were insufficient audit evidence.

In both cases additional questions were asked and an ACR lodged “as these kinds of things are a litigation nightmare for an auditor”, she said.

“The $800,000 is not recoverable now and because I asked the question about recoverability and was not able to get evidence, I protected myself as an auditor,” she said.

“Both of those funds had a loan document and it looked like the loan was being paid per the terms of the loan agreement, so I asked additional questions because all the loan document shows is there is a loan, it does not show you that it is recoverable.”

She noted it was not always possible for an SMSF to obtain evidence of the recoverability of a loan and in these cases materiality would be a consideration.

“If the size of the loan is material to the SMSF, we may do a contravention report, but if there are only a few years left on the loan and you can see by the time you have done the audit it is not as material, in those cases we will mention the loan in the management letter,” she said.

“Where it is material and there is insufficient evidence, but the trustees have explained what’s going on, I will state in the ACR they are comfortable that it’s recoverable but lacks evidence of that. This makes it clear that it’s not something the trustees have done wrong, but it’s just not enough evidence from the audit perspective.”

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