1. charteredaccountants.com.au October 2007 Audit of Self Managed Superannuation Funds

2. 2 Slide 2 of 97 Introduction Part 1 Conducting the Audit –Regulatory Environment –Client Acceptance and Retention –Planning –Controls Evaluation and Testing –Substantive Testing –Forming an Opinion Part 2SIS Compliance problem solving –Trust Deed –Residency –Sole Purpose –Investments –Benefits –Contributions –Tax

3. 3 Slide 3 of 97 Introduction Why are we here –Managing risk in the practice –Ensuring ATO expectations of auditors are met

4. 4 Slide 4 of 97 Regulatory Environment Ethical Pronouncements applicable to members of the three Professional Accounting Bodies Accounting Standards Auditing Standards Superannuation Industry (Supervision) Act and Regulations Income Tax Assessment Act 1936/1997 and Regulations Corporations Act and Regulations ATO Guidance

5. 5 Slide 5 of 97 Regulatory Environment Ethical Pronouncements –Must hold a practicing certificate –Apply professional competency and due care –Undertake appropriate education Financial Accounting Auditing Self Managed Superannuation Funds

6. 6 Slide 6 of 97 Regulatory Environment Accounting Standards –Special Purpose Financial Reports (AAS25) (AASB101) Operating Statement (AASB 118) Statement of Financial Position (AASB 110) Notes to the accounts (AASB 108) –Fair Value Reporting –Tax Effect Accounting (AASB 112)

7. 7 Slide 7 of 97 Regulatory Environment Auditing Standards –33 standards –Key requirements Work papers must enable a peer to form the same conclusions (ASA 230) Must consider the risk of fraud (ASA 240) Must consider controls (ASA 315) Analytical review (ASA 520) Engagement letters (ASA 210) Obtain representations from trustees (ASA 580) Management letters (ASA 260)

8. 8 Slide 8 of 97 Regulatory Environment Superannuation Industry (Supervision) Act –Amended in 2007 –Audit report sets out sections and regulations to be reported on –Audit report is an approved form –Auditor Contravention report an approved form Income Tax Assessment Act –Used when auditing tax provisions –Applicable tax rate –Special Income –Taxes on excess contributions

9. 9 Slide 9 of 97 Regulatory Environment Corporations Act –No reporting obligations –Sets out information required to be given to members –Sets out advice restrictions

10. 10 Slide 10 of 97 Regulatory Environment ATO Guidance –ATO IDs, Fact sheets, Rulings sole purpose, financial assistance to members trust distributions –Not binding –Useful as a tool to assess compliance –Instructions for auditors NAT 16308-08 2007 List of questions for auditor Does not cover all sections/ regulations

11. 11 Slide 11 of 97 Client Acceptance and Retention ASA 210 “Terms of Audit Engagements” Is the fund an SMSF? Knowledge and skill Independence Documentation

12. 12 Slide 12 of 97 Client Acceptance and Retention Is the fund an SMSF? –Does the fund meet the definition of an SMSF? Less than 5 members All members are trustees / all trustees are members Member is not an employee of another member Members not disqualified –Convicted of an offence –Civil penalty under SIS –Undischarged bankrupt –Disqualified by regulator No trustee is paid for services provided to the fund

13. 13 Slide 13 of 97 Client Acceptance and Retention Is the fund an APRA regulated fund? –Has an approved trustee –Formal election to be an APRA regulated fund –Audit must be done by a registered company auditor Where the trustee definition is not met and the fund is not APRA regulated –Advise the client to update the trustee structure –Notify the ATO of the change –This is an audit qualification and ACR event

14. 14 Slide 14 of 97 Client Acceptance and Retention Knowledge and skill –What assets has the fund invested in? Have the trustees invested in exotic assets? Are there assets which may be in-house assets? Are there investments in emerging products? –Do you have the knowledge and skill to form an opinion on any complex issues which may arise from unusual asset classes?

15. 15 Slide 15 of 97 Client Acceptance and Retention Independence –Identify threats Self interest threat Self review threat Advocacy threat –Identify safeguards Those created by profession or legislation Those within the assurance client Those with the firms own systems and procedures –Objective assessment Actual Perceived

16. 16 Slide 16 of 97 Client Acceptance and Retention Sample work paper statement for independence –There is no financial relationship between the fund trustees and the auditor. Therefore there is no self interest threat. –The audit is conducted independent of accounts preparation and the firm does not advocate any compliance, pension or tax strategies. Therefore there is no self review or advocacy threat. –There are no financial or business relationships between the firm and the trustees. Therefore there is no familiarity threat. –There is no evidence of actual or perceived threats from trustees. Therefore there is no intimidation threat.

17. 17 Slide 17 of 97 Client Acceptance and Retention Documentation –Client Details (Appendix 3) –Engagement letter (ASA 210) (Appendix 4) Ongoing appointment v annual letter –Ethical Clearance (APES 110. 210) (Appendix 6) Request –Prior year accounts –Prior year management letter

18. 18 Slide 18 of 97 Audit Planning ASA 300 “Planning an Audit of a Financial Report” Review fund documentation Understand the funds operations Prepare a work program Determine an appropriate materiality level Documentation

19. 19 Slide 19 of 97 Audit Planning ASA 315 “Understanding the Entity and Its Environment and Assess the Risks of Material Misstatement” Review the fund documentation –Trust deed –Trustee minutes (if any) –Fund correspondence (if any) –Investment strategy

20. 20 Slide 20 of 97 Audit Planning Understand the funds operations –Document controls (ASA 315) (ASA 330) Are bank reconciliations performed? Are persons other than the trustees signatories to the accounts? Does one party control the accounts? Are electronic processes used to accept transactions? –Identify potential risks (ASA 315) Trustees business experiencing cash flow problems Trustees are divorcing

21. 21 Slide 21 of 97 Audit Planning Prepare a work program which achieves the audit objective of : –Ensuring the financial statements are not materially misstated –Ensuring the fund has complied with the relevant sections of SIS in a material way

22. 22 Slide 22 of 97 Audit Planning ASA 530 “Audit Sampling and Other Means of Testing” Determine an appropriate preliminary materiality level –Consider audit risks Do samples need to be increased to compensate for high risks? Do sample sizes enable material compliance breaches to be identified

23. 23 Slide 23 of 97 Audit Planning Documentation –Audit planning document –Controls –Risk Assessment –Preliminary materiality level

24. 24 Slide 24 of 97 Controls Evaluation and Testing Controls need to address the risk that the assertions are not met Evaluate the effectiveness of the controls identified Document findings Reliance on the work of others Document the risk assessment

25. 25 Slide 25 of 97 Controls Evaluation and Testing ASA 330 “The Auditors Procedures in Response to Assessed Risks” Controls need to address the risk that the assertions are not met –Assets of the fund do not exist –Income is not remitted to the fund –Trustees invest in assets not remitted to the fund Evaluate the effectiveness of the controls identified –Do the controls reduce the risk of error in the information –Do the controls enable you to place reliance on the work of others Document findings

26. 26 Slide 26 of 97 Controls Evaluation and Testing Sample controls statement –The fund is administered by XXX Accountants. The fund administrator reconciles all bank transactions and movements in asset holdings. This control ensures that all cash and asset movements are identified. The administrator also reviews the income expected to be received from a review of the dividend history and other external material.

27. 27 Slide 27 of 97 Controls and Evaluation Testing ASA 402 Audit Considerations Relating to Entities Using Service Organisations; ASA 600 Using the work of Another Auditor Reliance on the work of others Investments in wrap accounts, IDPS –Obtain audited financial statements of the product –Obtain controls report –Obtain investment and tax reports for the fund being audited –If this is unavailable, you are unable to rely on the investment and tax reports produced by the investment manager. –Consider qualification to address audit risk

28. 28 Slide 28 of 97 Controls Evaluation and Testing ASA 240 “The Auditors Responsibility to Consider Fraud in an Audit of a Financial Report” The auditor must document the risk assessment This can be a simple statement –The risk of fraud is reduced by the trustees ensuring they are the signatories for all transactions. A review of material transactions does not indicate the presence of fraudulent transactions.

29. 29 Slide 29 of 97 Controls Evaluation and Testing Documentation –Controls (Appendix 7) –Risk Assessment (Appendix 7)

30. 30 Slide 30 of 97 Substantive Testing Prepare a work program Work papers Accounts Financial statement audit –Assertions –Common examples –Analytical review –Conclusion Compliance Audit Audit representations Documentation

31. 31 Slide 31 of 97 Substantive Testing Prepare a work program or obtain a relevant generic work program Review to ensure that the work program covers: –Any identified risk areas –Trust deed requirements –Steps to test financial statement assertions –Steps to test funds compliance with the relevant sections of the SIS Act

32. 32 Slide 32 of 97 Substantive Testing ASA 230 “Audit Documentation” Work papers should cover –The name of the client –Year end –Page reference –Assertions –Work steps –Findings –References to evidentiary documents –Analytical review –Conclusion –Evidence of review (if applicable)

33. 33 Slide 33 of 97 Substantive Testing Cash at Bank work paper example Assertions –Existence - risk that cash does not exist at year end –Ownership - risk that cash is not owned by the fund –Valuation - risk that cash is not recorded at an appropriate value Disclosure - risk that cash is not appropriately disclosed Work Program 1.Ensure administrator has all bank statements on file. 2.Take a copy and review reconciliation prepared by administrator. 3.Review the ageing of unpresented cheques and investigate any ‘old’ entries. 4.Vouch ownership of the bank accounts from the bank statement to the fund. 5.For material balances obtain direct confirmation of bank balance from financial institution and check balance. Analytical Review Conclusion –No Material Variances

34. 34 Slide 34 of 97 Substantive Testing Accounts –Review accounts for compliance with accounting standards May use either Statement of Financial Position, Operating Statement Balance Sheet, Income Statement –Ensure the audit report reflects the correct statements Notes –Ensure they reference new accounting standards –Ensure they reflect the principles adopted

35. 35 Slide 35 of 97 Substantive Testing New note disclosure for excess contributions –No requirement to audit excess contributions –Need to consider tax consequence –Treat like surcharge for accounts i.e. cash –Increase in age to accept deductible contributions to age 75

36. 36 Slide 36 of 97 Substantive Testing Sample Disclosure (x) Excess Contribution Taxes Excess Contribution Taxes are recognised as an expense and liability when the assessment notice is received from the member. The liability is extinguished when the assessment is paid. No further excess contributions tax liability has been recognised at balance date as the Trustee considers that it cannot be reliably measured. Note X Excess Contribution Taxes Under the Income Tax Assessment Act 1997, an excess contributions tax will apply to contributions made in excess of the specified caps. While the tax is assessed on the individual in their personal capacity, the tax may be paid from the member ' s fund balance either by compulsion or election depending on the particular cap exceeded. As stated in Note 1 excess contributions taxes are recognised as a liability when assessments are received from members. No assessed excess contribution cap remains unpaid at year end. No additional excess contribution cap liability has been recognised at year end as the Trustee considers that it cannot be reliably measured. They believe that there is insufficient information available to provide a reliable indication of the future excess contribution tax liability at year end due to the uncertainty arising from such factors as the inability to identify the total contributions for a member.

37. 37 Slide 37 of 97 Substantive Testing Financial statement audit –Gather evidence which tests the assertions for each accounts balance (ASA 500 Audit Evidence) –Examples of evidentiary document Bank statements / bank confirmation Share certificates Dividend advices Third party reports Draft tax return

38. 38 Slide 38 of 97 Substantive Testing ASA 230 “Audit Documentation” Work steps –These are the steps performed to ensure that the balance is correct –Each step should be completed with either: A reference to documentary evidence supporting the findings A comment stating how the finding was determined –E.g. Called share registry and spoke to Joe Bloggs. Confirmed holding of 2000 BHP shares. Mark as not applicable

39. 39 Slide 39 of 97 Substantive Testing Common Examples Cash at bank –Confirmations required for material balances –Alternative procedures can be used for non material balances Original bank statements Review all transactions for reasonableness

40. 40 Slide 40 of 97 Substantive Testing Common Examples Private trusts –Existence and Ownership Ensure that the key assets of the trust exist Ensure that they are owned by the trustee Ensure they are not mortgaged to support the member –Valuation Consider the value of underlying assets and liabilities Property –Check the title with the Titles office –Valuation Directors valuation acceptable Sworn valuation when paying benefits

41. 41 Slide 41 of 97 Substantive testing Analytical review ASA 520 Analytical Procedures –Perform a review of the balance to determine if it is reasonable and adds to a picture of fairly stated financial reports –E.g. the fund has received a $300,000 contribution on the 29 June 2007. Cash at bank reflects an increase in the balance in line with this. Conclusion ASA 230 Audit Documentation –Conclude on whether the balance is fairly stated –E.g. Cash balances are not materially misstated.

42. 42 Slide 42 of 97 Substantive Testing Compliance Audit –Gather information which tests compliance with SIS –Examples of evidentiary documents Financial information Minutes Representations

43. 43 Slide 43 of 97 Substantive Testing ASA 580 “Management Representations” Audit Representations –Gathered in writing via an audit representation letter –Representation letter Obtained prior to concluding the audit Is tailored to suit audit findings Provides the auditor comfort over matters that cannot be objectively tested without asking the trustee.

44. 44 Slide 44 of 97 Substantive Testing Documentation –Work paper file containing Planning documentation Controls documentation Completed work program Lead schedules referencing the supporting information or work performed Representations obtained from the client Final correspondence Signed audit reports

45. 45 Slide 45 of 97 Forming an opinion Audit report Financial statement qualifications Compliance breaches

46. 46 Slide 46 of 97 Forming an opinion ASA 800 “The Auditor’s report on Special Purpose Audit Engagements” Audit report is an approved form Amendments to increase scope All breaches to be reported to the ATO in the funds first year

47. 47 Slide 47 of 97 Forming an opinion ASA 701 “Modifications to the Auditor’s Report” Financial statement qualifications Two types of qualification –Emphasis of matter Where there is uncertainty Additional disclosures Subsequent events –Modified audit report Arises when there is one of the following occurring: –Scope limitation –Disagreement with trustees

48. 48 Slide 48 of 97 Forming an opinion Material but not extreme Extreme Cases (Modified) Scope LimitationQualifiedDisclaimer Disagreement with those charged with governance QualifiedAdverse Conflict between applicable financial reporting frameworks QualifiedAdverse

49. 49 Slide 49 of 97 Forming an Opinion SIS Compliance breaches –Identify the section breached –Quantify the breach –Evaluate materiality –Discuss findings with trustees –Prepare the qualification wording and contravention notice for material breaches

50. 50 Slide 50 of 97 Forming an opinion SIS Compliance breaches Assessing materiality –Guidance provided by the Institute of Chartered Accountants in Australia –Monetary Considerations What is the quantum of the breach Cause of the breach –Frequency Has this occurred before

51. 51 Slide 51 of 97 Forming an opinion SIS Compliance breaches Assessing materiality –Time Was the time frame impacted by an unrelated third party Was there a valid reason such as illness –Other considerations Was the breach deliberate Did the trustees take action to resolve

52. 52 Slide 52 of 97 Forming an opinion SIS Compliance breaches Processes for reporting and remedying material breaches –Draft Audit Qualification Section breached Brief description of breach Statement of resolution –Draft Contravention Notice Use audit qualification as guide for description

53. 53 Slide 53 of 97 SIS compliance problem solving Trust Deed Residency Sole Purpose Opening balances Investments Contributions Benefits Reserves Tax

54. 54 Slide 54 of 97 SIS compliance problem solving Trust Deed –Contribution section allows Contribution from person other than member and employer if receiving co-contribution Contributions when not employed –Benefits section allows Payment of pensions Does not require compulsory cashing Commutation of pensions –Investments Are there any restrictions

55. 55 Slide 55 of 97 SIS compliance problem solving –Allocation of earnings Does the deed specify a particular method –Where the trust deed requires payment of a pension Start pension making one payment Commute to lump sum if allowed

56. 56 Slide 56 of 97 SIS compliance problem solving Residency –Change to the two year reset rule –Now ‘ordinarily test’ Awaiting ATO interpretation Initial indication –Two year absence –Resident for tax purposes –Meetings and decision making in Australia

57. 57 Slide 57 of 97 SIS compliance problem solving Sole purpose –ATO draft ruling 2007 / D1 –Considers each investment Intention of the trustees - was the purpose of the investment to gain a present benefit? Is the benefit incidental to the investment? Is the benefit provided on an arms length basis?

58. 58 Slide 58 of 97 SIS compliance problem solving Opening Balances Obtain prior year audited accounts Obtain ethical clearance Operating statement –Agree to prior year numbers –Make inquiries about large or unusual items Statement of Financial Position –Verify material holdings at beginning of period –Consider a qualification on opening balances –Gain an understanding about tax liabilities, creditors, debtors

59. 59 Slide 59 of 97 SIS compliance problem solving Investments Unit trusts –Ensure that trust deeds are not hybrid trust deeds –May not comply with SIS requirements –Can acquire units in unrelated trusts from non-related parties –Non related trusts can acquire units from member Reg 13.22 complied with In-house assets up to 5% of fund assets Arms length unit price

60. 60 Slide 60 of 97 SIS compliance problem solving In-house assets –A related trust is one where members and associates have a fixed entitlement to more than 50% of the capital or income –A related company is one where members and associates have: Sufficient influence A majority voting interest –Investments in a related entity after 11 August 1999 are in-house assets –Changes to the ownership mix can make an existing asset an in-house asset

61. 61 Slide 61 of 97 SIS compliance problem solving Additional investment in a company or trust acquired after 11 August 1999 may be exempt from the in-house assets test –Excluded by section 71D – reinvestment of earnings prior to 1 July 2009 –Excluded by section 71E – limited to borrowing outstanding at 11 August 1999 –Regulation 13.22 Trusts or companies No borrowing No investments in other entities No leases to related parties unless related to Business real property

62. 62 Slide 62 of 97 SIS compliance problem solving Emerging Issues –Contracts for difference Derivative product Look at the structure Cannot deposit assets with the provider Cannot place a charge over the funds assets –ATO ID 2006/335 Fund entered into contract to pay a third party monies in exchange for return upon the sale of the acquired asset by the related party The contract is an in-house asset

63. 63 Slide 63 of 97 SIS compliance problem solving Emerging Issues –ATO ID 2006/261 – S66 Acquisition of interest in afforestation arrangement contravenes S66

64. 64 Slide 64 of 97 SIS compliance problem solving Investment strategy –Is the strategy in writing? –Are investments broadly consistent with the strategy? If not request trustees to update –Are there investments in derivatives Installment warrants – request investment strategy consider this as a separate item Other derivatives – Reg 13.15A requires trustees to have a derivatives risk strategy ensure the strategy displays a knowledge of the risks, returns and sets out the trustees management processes

65. 65 Slide 65 of 97 SIS compliance problem solving Contributions Does the member meet age restrictions Ensure cash received in the period Where there are excess contributions i.e. over $1M or over $50 / 100K –Was a refund paid in accordance with the deed /SIS –ATO release advice

66. 66 Slide 66 of 97 SIS compliance problem solving Benefits Pensions –Underpayment Treat as a payable Pay amount in subsequent period Report material breaches –Overpayment Treat as a Lump sum Report material breaches

67. 67 Slide 67 of 97 SIS compliance problem solving Members Minimum Benefits –Review member statements –Ensure calculation of crystallised component correct –Ensure contributions are correctly allocated –Ensure income is reasonable –Ensure tax is reasonable

68. 68 Slide 68 of 97 SIS compliance problem solving Crystallisation When must this be calculated –Accumulation funds 30 June 2007 –Pensions for those over age 60 – 30 June 2007 –Pensions for those under age 60 At attaining age 60 When the pension is commuted prior to age 60 Death prior to age 60

69. 69 Slide 69 of 97 SIS compliance problem solving Crystallisation Information Issues –Evidence of the members Eligible service period –Details of the crystallisation calculation –Evidence of members age –Evidence of UPP –Evidence of undeducted contributions made prior to commencing the pension

70. 70 Slide 70 of 97 SIS compliance problem solving Reserves –Uncertainty about treatment post 1 July 2007 –Investment Income reserves Must be distributed equitably between members of a class Need to document a policy for distribution Need an investment strategy Cannot be used to equalise balances for divorce Income is taxed –Pension reserves May be considered contributions when excess is allocated to members

71. 71 Slide 71 of 97 SIS compliance problem solving Tax Provision for income tax –Is this consistent with the tax return Deferred income tax assets and liabilities –Review the new recognition requirement –Are the members over 60 is a tax asset or liability still relevant Review note disclosures

72. 72 Slide 72 of 97 SIS compliance problem solving Special income (TR 2006/7) –Self assessment –Tax rate 47% Private company dividends –Was the acquisition of shares an arms length transaction –Were dividends paid identically for all shareholders –Were dividends paid as cash rather than in-specie (i.e. issue of additional shares) Trust Distributions –Income received as a beneficiary of a fixed trust –Taking advantage of personal or company tax rates –Mechanism used to circumvent caps

73. 73 Slide 73 of 97 SIS compliance problem solving Matters to consider in the year ahead Draft rulings –SMSFR 2007/ D1 Superannuation: the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 to the provision of benefits other than retirement, employment termination or death benefits –SMSFR 2007/ D2 Superannuation: giving financial assistance using the resources of a self managed superannuation fund to a member or relative of a member that is prohibited for the purposes of paragraph 65(1)(b) of the Superannuation Industry (Supervision) Act 1993 –SMSFD 2007 / D1 Superannuation: when is a dividend or trust distribution 'received' before the end of 30 June 2009 for the purposes of paragraph 71D(d) of the Superannuation Industry (Supervision) Act 1993?

74. 74 Slide 74 of 97 SIS compliance problem solving Matters to consider in the year ahead 1 July 2008 audit changes –Likely to be new audit report –All breaches to be reported to ATO in the funds first year –ATO to set reporting levels for breaches

75. 75 Slide 75 of 97 Questions Contact: Business Practice Phone: 02 9290 5526 Email:business_practice@icaa.org.aubusiness_practice@icaa.org.au