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The ATO has released its compliance approach to the new Independence Guide and in-house SMSF audits.
The new Independence Guide (Fifth Edition, May 2020) makes it clear that auditing firms will need to overcome several hurdles when performing in-house audits of self-managed super funds (SMSFs), to meet the requirements of the restructured APES 110 Code of Ethics for Professional Accountants (including Independence Standards).
In a notice published this week, the Australian Taxation Office explained that the practice of separating the auditing from the accounting or advice services to conduct in-house audits in the same firm, is sometimes referred to as Chinese Walls or ethical walls. However, the code and guide now make it clear that in-house audits will not meet the independence requirements of the code except in very limited circumstances.
The ATO outlined the three hurdles that need to be overcome before this practice can be acceptable:
Independence threats can arise when a firm or network firm undertakes management responsibilities on behalf of a SMSF, and the audit is performed in-house, the ATO pointed out.
"Since many trustees hand over the management of their fund to their administrator or accountant rather than make all judgments and decisions themselves, most firms will find it difficult to get over the first hurdle. Trustees cannot simply approve everything after the fact," said the ATO.
"Therefore, regardless of how simple the fund’s investments may be, or whether those investments are on data feeds, the auditor will not be able to conduct the audit for a client of the same firm if they have assumed management responsibilities for the trustee."
To demonstrate a firm has not assumed management responsibilities for the trustee, the ATO explained that the firm must document and provide sufficient appropriate evidence on the audit file showing the trustee has the suitable skills, knowledge and experience to remain responsible at all times, for the accounting and compliance decisions of the SMSF.
"If the firm is unable to demonstrate the trustee's ability to take on management responsibility, then the auditor, their staff or their firm are unable to prepare the financial statements and audit them," the ATO clarified.
"If the firm can demonstrate the trustee's ability to take responsibility, for example, the trustee has an accounting or similar qualification, then the auditor needs to have evidence on the file that the second hurdle has been overcome – that is the preparation of the financial statements was routine or mechanical and the firm has addressed any threats that aren’t at an acceptable level."
It noted that evidence of the preparation of the financial statements being routine or mechanical must demonstrate the trustee approved the records and entries in the trial balance that the auditor’s firm then used to prepare pro-forma financial statements.
"We may contact trustees to confirm their understanding of their fund’s transactions and compliance with Superannuation Industry (Supervision) Act 1993 (SISA) legislation," the ATO said.