So, what is the real value behind Part A qualifications?
It is a question that warrants a comprehensive response, as evaluating each element is essential for understanding the rationale underpinning an SMSF auditor’s decision to issue a Part A qualification.
What is a Part A Qualification?
SMSF auditors perform a dual role when they undertake an audit, providing an opinion on the financial report of the SMSF (Part A of the audit report) and an opinion on the SMSF’s compliance with the SISA and SISR (Part B of the audit report).
Under the auditing standards, SMSF auditors are responsible for obtaining reasonable assurance that the financial report, taken as a whole, is free from material misstatement, whether caused by fraud or error.
Where the auditor identifies a material misstatement in the financial statements, they must qualify Part A of the audit report.
Any non-compliance with the Superannuation Industry (Supervision) Act 1993 (“SISA”) also requires SMSF auditors to assess the impact on the financial report, which could result in the material misstatement of the financial report and a Part A qualification.
Common examples of Part A qualifications include where the auditor cannot:
1. Obtain sufficient, appropriate audit evidence concerning opening balances; ASA 510 requires that the auditor’s report be modified.
2. Obtain sufficient appropriate audit evidence to support market value under Reg 8.02B, resulting in an uncertain market value of fund assets.
3. Confirm that non-arm’s length income (NALI) has been classified correctly, resulting in a material misstatement of the tax expense.
4. Verify whether assets are correctly classified in the financial statements in accordance with the applicable reporting framework, which may prompt the auditor to modify their opinion.
Industry Overview
The SMSF industry was unconcerned about Part A qualifications until the ATO made them a reporting requirement in the 2019 SMSF annual return (“SAR”), as a result of the now-defunct 3-yearly audit cycle.
Before then, discussions centred on compliance contraventions and whether an Auditor Contravention Report (ACR) had to be lodged with the ATO at all.
The ATO adopts a risk-based approach to SMSFs, meaning not all breaches need to be reported in the ACR.
By way of example, SMSF auditors must review:
1. Reg 5.03, which requires superannuation fund trustees to allocate investment returns in a fair and reasonable way to members’ accounts and,
2. Reg 1.06(9A), requiring pension payments to be made at least annually and to meet a minimum payment amount for purposes of Schedule 7
Both of these regulations are listed in Part B of the SMSF Independent audit report, which SMSF auditors sign, stating they have “undertaken a reasonable assurance engagement on fund compliance with these applicable provisions of the SISR”.
Interestingly, the ATO does not require SMSF auditors to report breaches of these rules, or of selected others, in an ACR. Still, they are required to document the impact of these regulations in their audit workpapers.
Similarly, while the auditing standards require SMSF auditors to qualify Part A of the audit report under their professional obligations, is it really necessary for the ATO to be informed about every Part A qualification in the SAR?
The reason is that SMSF accountants are questioning whether a Part A qualification is required as they try to understand the impact on their SMSF clients, who are top of mind before they lodge the annual return.
ATO Requirements
The ATO has stated that reporting Part A qualifications in the SMSF annual return assists in risk profiling the SMSF population and will be considered as one of the factors, but not the only factor, when it reviews an SMSF.
As the Regulator, the ATO also enforces the auditing standards which require SMSF auditors to test the assertions made in the signed financial reports about the:
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existence of assets, entitlements, and liabilities
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occurrence of transactions
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completeness of transactions, events and assets being recorded
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ownership, rights, and obligations the SMSF has for assets, entitlements and liabilities
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accuracy and valuation of data amounts recorded
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classification of relevant events to correct accounts
Other significant checks include correctly classifying income (for example, correctly reporting income as ordinary, statutory, exempt current pension income, arm’s length or non-arm’s length income); ensuring the fund has incurred any deductions claimed, any imputation credits, carried forward losses and other offsets attributable to the fund.
SMSF auditors are also required to ensure that contributions are correctly classified for tax purposes and that the SMSF complies with regulatory laws that may otherwise affect its ability to claim concessional tax treatment.
From the 2020 financial year onwards, tax agents do not have to report a Part A qualification of the audit report where it relates to insufficient audit evidence under Auditing Standard ASA 510 on opening balances.
The ATO stated that this was not a high-risk issue, but that all other Part A qualifications must continue to be reported.
