Renewed focus on quality required

Audit quality is the crucible by which SMSF auditors will be judged under the new Australian Securities and Investments Commission (ASIC)-based regulatory system. SMSF auditors are warned that ASIC will take a much stronger stand in relation to audit quality and many auditors will need to improve their policies and procedures to avoid the ire of the corporate regulator.

One need only look at ASIC’s recent concerns in relation to company audits to understand the new paradigm. ASIC chairman Greg Medcraft stated he was “disappointed” to see a further decline in audit quality. Medcraft noted that “audit firms need to increase their efforts to improve audit quality and the consistency of audit execution”.

The latest ASIC report into audit quality by registered company auditors (covering the 18 months to 30 June 2012) indicated that in 18 per cent of the 602 audit areas reviewed there was a failure to perform all the necessary procedures to give reasonable assurance that the audited financial report was not materially misstated.

ASIC identified three main areas of concern:

  • sufficiency and appropriateness of audit evidence obtained;
  • the level of professional scepticism exercised by the auditor;
  • extent of reliance put on other auditors and experts.
  • extent of reliance put on other auditors and experts.
  • details of the assets of the fund;

The Australian Taxation Office (ATO) has also identified concerns with issues of audit quality in the SMSF auditor sphere. Most notably the areas of ATO concern include:

  • auditors who are not sufficiently independent;
  • incomplete or non-existent working papers;
  • failure to identify or report contraventions.

Independence is fundamental to the success of any audit process. The auditor must not only be independent but have the appearance of independence. An independent auditor is more likely to be sceptical and thorough in their activities, while a lack of audit independence has been shown to correlate with a lack of professional scepticism and poor audit quality.

The Joint Accounting Bodies have updated their Independence Guide, which now includes a specific section for SMSF auditors. The guide addresses particular issues with regard to independence that exist in the SMSF audit world. In particular, it says an auditor cannot do the audit for a fund where the auditor or staff directly under them have significantly prepared the accounts for that fund.

As part of the new competency standards issued by ASIC, independence will be an issue the regulators can have regard to and if necessary deregister an auditor.

On another note, the ATO has discovered an unfortunate number of SMSF auditors who have provided insufficient audit working papers, and in some cases no working papers at all. Working papers are an important element in any audit. They show that procedures have been followed and document the evidence used. Poor audit papers are reflected in poor audit outcomes. Without adequate working papers the regulators cannot be sure appropriate standards have been applied and there is a significant risk of
audit failure.

Therefore, SMSF auditors will need to make sure they maintain detailed working papers of the audits they are undertaking. These audit papers should reflect the audit competency requirements as set by the Joint Accounting Bodies. These competencies form the basis of competency standards that will be adopted
by ASIC.

Some may see these competencies as excessive to the needs of an SMSF audit. However, an SMSF must be audited to the same standard as other audits and must meet the same standards. With these new competency standards having force of law, they are now legal requirements, not just professional requirements.

One of the purposes of the audit is to identify any non-compliance issues, and there is an obligation to report all contraventions in the first year of a fund and then all material contraventions to the ATO. Members of the fund should also be notified of any breaches and rectification action taken.

Failing to identify a breach that is clear indicates the audit has not been properly undertaken and raises questions about the capabilities and knowledge of the auditor. If the auditor is aware of the breaches but fails to identify them, then this shows a disregard for the audit requirements. In either case it is likely to be seen as a serious issue by the regulators.

In conclusion, SMSF auditors have to grasp that there has been more than a shift in the regulators. There has been a paradigm shift in emphasis as well. The days of doing a short-cut audit with minimum documentation are over. ASIC will take a much tougher line on audit quality than the ATO. The new audit competency requirements adopted by ASIC will also give the regulator greater powers to discipline for breaches of what some may see as administrative issues. SMSF auditors therefore have to review their processes and policies to make sure they don’t merely follow the audit requirements but document how they have done so.

Copyright © SMS Magazine 2020

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital