All SMSF trustees must appoint an approved auditor to audit the operations of their fund each year. This annual audit must include both a financial audit and a compliance audit.
The auditor is required to report their findings to the trustees in the form of an audit report. The audit report consists of two parts, Part A and Part B.
Sometimes the auditor will “qualify” their audit. The consequences of receiving a “qualified audit” report are different, depending on whether it is a Part A or Part B.
Where an auditor does not feel that the fund’s financial statements fairly represent the financial position of the fund (in all material respects), they will issue a Part A audit qualification.
Part A qualifications are quite common where a fund’s assets extend beyond the typical cash at the bank, term deposits, listed shares, managed funds and real property.
For more in-depth discussion about this please read SMSFAdvisor article here.
If you receive a Part A qualification for your fund, there is no need to panic. Whilst it will be noted to the ATO on the fund’s SMSF annual return, generally no immediate action is required. However, it is important that you:
- make sure you understand the reason for the qualification,
- make your own assessment of the continued appropriateness and recoverability of the fund’s investments, and
- in the case of a qualification due to insufficient evidence of the market value of assets, take steps to ensure sufficient evidence will be able for next year’s audit.
Part B of the audit report covers the compliance audit and requires the auditor to form an opinion whether, in all material respects, the trustee has complied with particular provisions of the Superannuation Industry (Supervision) Act and Regulations. Where an auditor believes the trustees have materially breached one of these reportable provisions, they will issue a Part B audit qualification.
Note that not valuing assets at market value in the fund’s financial statements can lead to a Part B qualification.
Failing to comply with the Superannuation Industry (Supervision) Act and Regulations can result in the fund being found non-complying and losing its concessional tax treatment. Trustees can also be fined or even imprisoned. However, the Commissioner is able to exercise its discretion and overlook breaches where trustees have inadvertently broken the rules, the breaches have been rectified and steps have been put in place to make sure they do not happen again.
For this reason, if you receive a Part B qualification for your fund, it is important that you:
- make sure you understand the reason for the qualification (eg what provision did you breach),
- if not already remedied, immediately take action to remedy that breach, and
- make sure you understand the rules so that breaches of this nature do not reoccur in the future.
For more in-depth discussion about this please read SMSFAdvisor article here and most importantly discuss it with your SMSF accountant.