Top Tips for SMSF Audit Documentation: Judgement & Reasoning

The fourth in a series of six blogs, authored by our Caseware Cloud SMSF Audit product content provider Sharlene Anderson and the Veritas Corp team. Sharlene focuses on a key SMSF Audit process for each of these blogs and recommends what to include in your documentation to ensure you complete and gather adequate evidence for a high quality, compliant audit.
SMSF audits are conducted in accordance with Australian auditing standards and standards on assurance engagements. The documentation requirements of the standards are exhaustive. It is vitally important that each audit file can stand alone and support both compliance with the standards and the audit opinions. If a procedure or test is not documented, the auditor has no evidence that it was performed. If an audit file should be called into question, and this can happen at professional body Q & A review as well as litigation by clients, the auditor with a well-documented, compliant audit file will have much firmer ground to stand upon.

Disclaimer  This paper represents the opinion of the author(s). The contents are for general information only.  They are not intended as professional advice – for that you should consult a suitably qualified professional. Veritas Corp expressly disclaims all liability for any loss or damage arising from reliance upon any information in this paper.

Part 4: Expressing Judgement and Reasoning in Audit Working Papers

SMSF auditors utilise professional judgement during the course of every audit. The purpose of this section is to highlight the need to document the decision-making process and conclusion. It would usually be difficult, several years after the fact, for an auditor to explain why a judgment was made without having documented the reasoning. ASA 230 requires sufficient documentation to enable an experienced auditor to understand significant matters arising during the audit, the conclusions reached thereon, and the significant professional judgements made in reaching those conclusions.
A few examples follow:

1. Independence – An accounting firm refers you a significant number of audits. One of those is the SMSF of a director of that firm. This may create a self- interest threat, a familiarity threat and intimidation threat. The threats should be identified and documented in the planning phase and consideration given to whether the threats are at an acceptable level or whether safeguards, such as having another SMSF auditor review your audit file, are required and are in place.
2. Audit Evidence – The fund has a bank account with $200,000, representing 29% of fund assets. You have been provided scanned copies of the bank statements. In this example, you would need to consider whether or not to obtain a bank audit certificate. Our own procedures would require the Certificate to be obtained. However, if an auditor was to not require a Certificate they should document on the audit file the reasons a third party independent confirmation was not required. Such reasoning could include that the auditor had additional alternate evidence such as bank link or data feed for the account, a bank audit certificate from the previous year and that transactions have been tested and are supported by other documentation.
3. Sampling (I) – Reasons for reducing sample size should be documented. For example, for listed shares the auditor consider accepting a smaller sample of direct tests of share registry holdings if the portfolio report is provided from a financial institution. This reasoning should be documented.
4. Sampling (II) – If a sample of listed securities tested demonstrates exceptions in holding numbers, market values or incorrect holding names the auditor should increase the sample size to demonstrate the exceptions are not systemic. The judgement of how many additional samples are required and how they are to be selected should be documented. We have encountered SMSFs with large numbers of issuer sponsored holdings where it has been necessary to test every investment as the original and increased samples demonstrated the holdings were in various combinations of holding name and designators presenting ownership (Financial) and separation of fund assets (R4.09 SISR) issues.
5. Audit Evidence, Market Value – 2018 audit of SMSF has real property $850,000, 26% of total fund assets. The most recent independent valuation evidence is dated January 2017, some 18 months old at report date. In our professional opinion, it is not sufficient to apply some unwritten 3-year rule on valuations and simply reference the booked value to the valuation and move on. The audit file must document the reasoning as to whether or not the property is booked at market value.
6. Lodgement of Auditor Contravention Report – In the 2017 financial year, a fund bank account is overdrawn by $270 due to insufficient funds to cover a life insurance premium. The overdraft is corrected after four days and a small bank fee and interest charge are applied. The auditor considers the matter immaterial and does not qualify the audit report. The auditor adheres to section 129 of SISA and reports the matter in writing to the trustee in the Management Letter issued 14 May 2018.
   When conducting the 2018 audit it is discovered the bank account was overdrawn again from 15 May 2018 to 17 May 2018 by $20. Strict reading of the ATO ACR reporting criteria would identify this second overdraft as a failure of Test 3 Trustee Behaviour Test. ‘Have the trustees previously received advice of a contravention that they have breached again’ and thereby require a contravention report to be lodged. However, the auditor is reluctant to issue a contravention report for a $20 overdraft for two days. If a contravention report is not issued the auditor should ensure full reasoning for the judgment is recorded on file. Simply stating it is trivial is not sufficient. Appropriate reasoning may involve examining how the 2017 Management Letter was delivered to the trustee to identify if they were informed about the 2017 breach before the 2018 overdraft occurred. A second appropriate line of reasoning could be if, for example, the 2018 debit balance was caused by a bank audit certificate fee charged which the trustee was not expecting and represents an unpaid invoice as opposed to a borrowing by the fund.
7. Section 66 Compliance – A SMSF acquires Iraqi Dinar banknotes from a related party for the market value of $5,000. This is an interesting issue as whilst section 66 allows for accepting money (including foreign currency) from a related party it does not expressly provide for acquiring foreign currency from a related party and neither does the section 66 ruling SMSFR 2010/1 expressly comment on this matter. In a case like this, the auditor should always bear in mind the requirement to consider whether a breach may have occurred. The auditor should document the reasoning for the judgement as to whether or not a breach may have occurred and if yes the appropriate audit action (Management Letter/ Qualify/ACR).
8. Non-arm’s length income – where an SMSF has an LRBA arrangement with a related party loan and the terms of the loan sits just outside of the ATO safe harbour guidelines. If the auditor is to accept that the loan is still on arm’s length terms the reasoning for the judgment should be clearly documented on the file.

How CasewareCloud SMSF Audit can help

The easy to use Document Manager available within Caseware Cloud SMSF Audit software, allows you to upload and store documents. Use the Placeholder Function to create reminders of documents that still need to be obtained for the SMSF engagement file – our Queries Document can allow you to efficiently request that evidence from your clients, from within the engagement. Easily carryforward documents/evidence for one year to another – another timesaver.

You might also like to view:
Top Tips for SMSF Audit Documentation: The Engagement LetterTop Tips for SMSF Audit Documentation: The Audit PlanTop Tips for SMSF Audit Documentation: The Management Letter