October 2007

1. October 2007 Audit of Self Managed Superannuation Funds

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

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

4. 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. 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. 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. 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. 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. Regulatory Environment • Corporations Act • No reporting obligations • Sets out information required to be given to members • Sets out advice restrictions

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

12. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Audit Planning • Documentation • Audit planning document • Controls • Risk Assessment • Preliminary materiality level

24. 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. 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. 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. 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. 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. Controls Evaluation and Testing • Documentation • Controls (Appendix 7) • Risk Assessment (Appendix 7)

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

31. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Substantive Testing • Compliance Audit • Gather information which tests compliance with SIS • Examples of evidentiary documents • Financial information • Minutes • Representations

43. 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. 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. Forming an opinion • Audit report • Financial statement qualifications • Compliance breaches

46. 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. 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. Forming an opinion

49. 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. 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