Before it became an ATO reporting requirement in the 2019 annual return, Part A qualifications were primarily ignored within the SMSF industry. Discussions centred mostly around compliance contraventions and whether an Auditor Contravention Report (ACR) was to be lodged with the ATO.
Part A qualifications are now required to be reported in the Annual Return, a result of the now-defunct 3 yearly audit cycle. Part A qualifications are no longer being ignored by SMSF advisers as they try to understand the impact on their SMSF clients, who are front of mind before the annual return has been lodged.
The ATO’s Approach
The ATO has said reporting Part A qualifications will assist them in risk profiling the SMSF population and will also be one of the factors considered when auditing an SMSF. In reality, the ability to glean any discernible patterns or trends given the nature of Part A qualifications will be difficult.
Most importantly, the ATO has said they will not look to take compliance action from Part A Qualifications. As the contents of what has to be reported in the SMSF annual return is updated annually, the ATO may find that keeping a handle on the quality of the data is difficult.
What is a Part A Qualification?
The auditing standards require SMSF auditors to form an opinion as to whether the financial report is prepared in accordance with the applicable reporting framework. An SMSF auditor will modify their opinion by qualifying Part A of the audit report where they conclude that the financial report as a whole is not free from material misstatements.
The main types of Part A qualifications include:
|Part A Qualification||Reason|
|First-year audits||Unable to obtain audit evidence on the opening balances|
|Audited Platforms||Inability to obtain audit evidence on underlying investments reported via a Platform|
|Fund assets at purchase cost||Assets not valued at market value|
|Market value uncertain||Inability to obtain sufficient audit evidence to support market value|
|Non-arm’s length income||Tax calculation materially incorrect as non-arm’s length income identified|
|No bank statements||Cannot form an opinion on true and fair position of the fund at year-end or the bank transactions|
|Investments incorrectly classified||Classification of assets on the Financial statements are not in accordance with applicable accounting standards|
|Rollovers in not supported by evidence||Unable to confirm the nature of the receipt|
Why Have Part A Qualifications Increased?
The SMSF industry has already seen the ramifications of neglecting to qualify Part A of the audit report due to a material misstatement in the Baumgartner case. This resulted from the auditor failing to investigate the nature of unsecured loans and unit trust investments held by the fund and not enquiring as to the existence and verification of the assets.
There was no documentation on file in relation to these high-risk investments, and the auditor failed in their duty to communicate with the trustee. He was subsequently found negligent for failing to identify incorrect classifications, misstatements and other facts and circumstances to the plaintiff’s attention by way of notation or qualification in the audit reports.
Qualifying Opening Balances
An SMSF auditor may face difficulties with initial audit engagements in obtaining sufficient appropriate audit evidence for opening balances. The auditor’s objective is to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement. The auditor cannot express separate opinions on each element of the financial report.
SMSF auditors must determine whether the prior period’s closing balances have been correctly brought forward to the current period, as well as ensuring there is sufficient evidence on file to support the opening balances. In other words, are the opening balances correct?
Giving this part of the audit a green tick means effectively undertaking an audit on the prior year audit, which is why some SMSF auditors typically qualify Part A of the audit report.
How to Avoid Qualifying Opening Balances
To avoid an opening balance Part A qualification, the auditor must test the cash account and all material assets and liabilities.
The comparatives on the current year financial statements must be checked to the closing balances from prior year financial statements. Where the amounts do not agree, an audit query must be raised.
Additionally, member opening balances and preservation components from the prior year are checked; the cost bases of assets have to be reviewed; any carry forward tax and capital losses from the previous annual return are tested and the auditor must evaluate the prior year Trustee Declarations and Audit Report and ensure they are signed correctly.
Where this preliminary work is undertaken, the SMSF auditor can avoid issuing a Part A qualification on Opening Balances. It should be noted that in accordance with ASA 710, an “Other Matter” paragraph is required for all funds with respect to the comparatives.
The auditor will issue a Part A qualification where an SMSF invests in an audited platform and they are unable to obtain audit evidence. In accordance with the Auditing Standards, the SMSF auditor is required to obtain an understanding of each Platform to determine the level of testing needed at the individual fund level.
The problem starts when SMSF auditors do not understand their professional obligations under the auditing standards and they incorrectly issue an unmodified audit report. Client expectations can be severely curtailed when there is a mismatch of reporting Part A qualifications between SMSF auditors.
Where a GS007/Type 2 Audit Report is available on the design, implementation and effectiveness of controls for the platform, ASA 402 states that auditors are still required to complete substantive testing to ensure there is sufficient appropriate audit evidence relating to material balances and transactions of the fund.
The audit requirements for platforms can be summarised as follows:
Report on Controls |
(Type 2 only)
|No Audit Report|
|Assets Custodially Held||Unable to obtain sufficient appropriate audit evidence |
Qualified audit opinion
(Ref: ASA 402 / GS009)
|Unable to obtain sufficient appropriate audit evidence |
Qualified audit opinion or disclaimer of opinion
|Assets Individually Held||Perform testing at a fund level OR Testing at a Platform level |
Unmodified audit opinion
|Perform testing at a fund level* |
Unmodified audit opinion
*If sufficient appropriate audit evidence is not provided, a Qualified Audit Opinion will be required
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.
Issuing a Part A qualification is not a foregone conclusion, and the audit opinion must be substantiated by the audit evidence, or lack thereof, in the audit file.
The good news is that there is no longer the requirement to inform the ATO about opening balances, one of the more common Part A Qualifications.
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.