The investments of a SMSF may include:
- Listed securities;
- Fixed rate securities such as government, semi-government or corporate bonds, loans (secured or unsecured) and mortgages;
- Variable rate and discount securities such as bank bills, promissory notes or floating rate notes;
- Hybrid securities which have both interest and equity components, such as convertible notes or converting preference shares;
- Managed products such as units in managed funds, managed investment schemes, pooled superannuation trusts (PSTs) and insurance policies;
- Unlisted investments including shares and units in widely held entities;
- Unlisted investments including shares and units in closely held or related entities;
- Derivatives such as futures, options and warrants;
- Assets subject to limited recourse borrowing arrangements;
- Real property; and
- Collectables and personal use assets such as artwork, antiques, wine and recreational boats.
Investments may be domestic, international or a combination of both and may be held by a custodian, the individual trustees or a corporate trustee.
The audit assertions for auditing a SMSF’s investments are:
- Existence – obtaining evidence that the investment exists.
- Rights and obligations (ownership) – obtaining evidence that the investments are owned directly or beneficially by the SMSF.
- Completeness – obtaining evidence that investments owned by the SMSF are recorded in the accounts.
- Accuracy, valuation and allocation – obtaining evidence that investments are valued in accordance with the accounting policies adopted, allocated to the correct account and disclosed fairly in accordance with the stated policies.
Audit risks to be considered in relation to auditing investments may include, but are not limited to:
- over or understatement of investment values, including compliance with the SISR in valuing investments at market value; and
- investments not beneficially owned by the SMSF.
The audit procedures relating to investments will vary depending on the administration and management arrangements adopted by the trustee, the type of investments held and the trustee structure that holds the assets. The auditor exercises professional judgement in determining the appropriate auditing procedures.
Existence and Ownership
In auditing the existence of SMSF’s assets, the auditor may either physically inspect the assets or examine documentation supporting their existence. The documentation may also verify ownership. If assets are registered in the name of the trustee, corporate trustee or custodian, the auditor also obtains audit evidence that the SMSF is the beneficial owner and that the assets are being held on behalf of the SMSF. Evidence of beneficial ownership may include an acknowledgement of trust or equivalent document.
The auditor confirms that material investments of the SMSF have been recorded at the correct amounts and in the correct period. The auditor reviews supporting documentation to confirm that no material asset of the SMSF has been excluded. This may extend to obtaining investment schedules from previous years and examining them for changes and movements and reconciling the schedules with purchase and sale transactions for the current period to confirm that material movements in investments have been recorded. The auditor may also obtain representations from the trustee that they have provided a full disclosure of all assets of the SMSF and made available all records relating to those assets.
Valuation and Allocation of Assets
As the SMSF’s financial report is generally a special purpose financial report, the trustee chooses the financial reporting framework under which the SMSF reports. The trustee exercises their discretion when determining the most appropriate market value to be applied to each investment of the SMSF. Under ASA 800, the auditor’s responsibility is to form an opinion regarding fair presentation in accordance with the identified financial reporting framework or identified basis of accounting. Under ASA 540, the auditor is required to obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with the SMSF’s applicable financial reporting framework. The auditor evaluates whether the valuation method employed is consistent with the financial reporting framework adopted and the policies described in the accounting policy notes, whether the method of measurement is appropriate in the circumstances and does not result in misleading information and that the method adopted has been applied consistently.
The auditor obtains an understanding of the trustees’ rationale for selecting the basis of determining market value and exercises professional judgement in assessing whether the basis is appropriate given the nature of the asset and the financial and investment markets in which the SMSF operates. The auditor obtains sufficient appropriate audit evidence to support the trustees’ rationale for determining the market value of each asset class.
It is not the role of the auditor to value the assets. The role of the auditor is to check that assets have been reported at market value, and assess and document whether the basis of establishing market value is reasonable and the valuation is reasonable in light of the SISA, SISR, and ATO guidelines. The working papers normally include the audit evidence for the testing of the fund’s investments and record how the auditor reached their conclusions regarding any particular asset. The auditor assesses the risks of material misstatement of the asset values, designs and performs audit procedures and documents conclusions in response to the assessed risks.
A material misstatement of the SMSF’s financial report results in the member’s interests being misstated, which has implications for the calculation of a number of important thresholds, including:
- the member’s total superannuation balance (TSB), which is the key metric for eligibility for a range of superannuation planning opportunities;
- the valuation of retirement phase pensions and their recording in the member’s transfer balance account (TBA). Every individual has a personal transfer balance cap (TBC) which limits the amount of capital that can be utilised for retirement phase income streams. The TBA is used to manage the individual’s TBC and is measured based on the market value of transactions that occur as debits and credits within the account; and
- the value of a member’s death benefit. Material misstatement in the financial report of a SMSF when a member dies can lead to a delay in the payment of the proceeds.
SMSFs may invest directly in unit trusts, listed securities, PSTs or other investment products for which market prices are published and readily available. The auditor may verify that the unit price used is consistent with reference to cum-distribution or ex-distribution price and any accrual of income. For these investments, the product or unit is recorded as an asset in the records of the SMSF rather than the underlying investments.
Non‑monetary items, such as property and collectables, require alternative methods to arrive at market value. The auditor makes reference to the ATO’s Valuation guidelines for self‑managed superannuation funds in order to establish that the basis for determining market value is appropriate to meet the requirements of the ATO and the SISR.
Investments in unlisted companies or trusts may need further consideration by the auditor in order to obtain evidence that the valuation is appropriate. Difficulties may arise when the company or trust reports on an ‘at cost basis’. Where the investment is not subject to a valuation process, the auditor applies professional judgement to assess the likelihood of material misstatement of the SMSF accounts. Matters to be considered may include the following:
- length of time the SMSF has held the investment;
- evidence regarding the valuation methodology provided at the initial purchase and any subsequent additional investment by the SMSF;
- any third party sales or purchases of the investment during the SMSF’s holding period. This will require the SMSF trustee to liaise with the company CEO or the trustee of the trust to obtain supporting evidence of the methodology for striking the sales or purchase price. This request may be refused based on commercial sensitivities; and
- whether it is reasonable for the SMSF trustee to undertake a valuation of a fund asset - that is, whether they possess the requisite knowledge or expertise to undertake the valuation, or a low level of complexity is inherent due to the volume of publicly available market information to facilitate an informed valuation.
For example; if a SMSF asset comprises a strata title residential property in a major capital city where reasonable stock turnover occurs, the trustee may be able to use auction and other sales data to determine an appropriate valuation for the fund property. Alternatively, if a property is unusual and not subject to comparable sales, the trustee may not have the competency to undertake the valuation of the asset.
Where the SMSF has invested in a related trust or company, a review of the valuation methodology may reveal the instance of NALI, which requires a re-assessment of the calculation of the fund’s tax position.
Where the auditor is unable to form an opinion in assessing whether the valuation is in accordance with the financial reporting framework adopted, due to uncertainty, and no expert valuation can be obtained, the auditor considers modification of the auditor’s report, taking into account materiality and the risk of material misstatement. The auditor is required to report to the ATO in an ACR where there is a contravention or potential contravention of regulation 8.02B of the SISR. The SMSF’s annual return will report the Part A audit qualification.
To protect the value of their assets, SMSFs may obtain insurance cover over the assets. In auditing ownership and valuation of assets, the auditor obtains evidence that:
- the insurance exists;
- the SMSF is both the owner of the asset and the beneficiary of the policy;
- the premium is paid by the SMSF; and
- the cover is adequate and current.
With respect to investment properties, residential or commercial, circumstances may exist where the SMSF’s tenancy lease agreement stipulates that the tenant is required to pay for the insurance. In these cases, the auditor checks to see if the policy is up to date and the beneficiary of the insurance benefit is the SMSF and not the tenant.
IDPS and Other Service Organisations
The auditor of a SMSF may be able to rely on the annual investor statement and auditor’s report that is provided in relation to an IDPS or a service organisation’s report under ASAE 3402 and GS 007, as audit evidence of the operating effectiveness of controls over the services outsourced. However, the auditor may still be required to conduct substantive procedures for all material balances and transactions under ASA 330 to support their financial audit opinion. If the annual investor statement is a primary document for the preparation of the SMSF’s financial report, the risk assessment performed by the auditor may depend on whether a type 2 control report is provided and the level of assurance provided by the service organisation auditor.
The nature of the audit procedures required to obtain sufficient appropriate audit evidence regarding a SMSF’s investments managed by, or under a custodial arrangement of, an IDPS or another service organisation, are a matter for the auditor’s professional judgement in accordance with the assessed inherent risks in the SMSF.
Investments held by an IDPS operator under the investor’s holder identification number (HIN), rather than under a custodial arrangement, are able to be verified directly by the auditor, regardless of the location of the records (for example via the share registry for listed equities).
For investments for which recording of material balances or transactions are controlled by the service organisation, with accounting records maintained by the SMSF, and, the SMSF has access to the source documentation, the end of period statements and taxation summaries may be insufficient evidence in themselves. If coupled with evidence of the operating effectiveness of controls within the IDPS operator or service organisation, by a type 2 report, in addition to the confirmation of balances with the service organisation along with analytical review procedures of the SMSF’s investment activity, the auditor may be able to obtain sufficient appropriate evidence.
For a standalone investment mandate, where the IDPS operator or service organisation maintains the SMSF’s accounting records, including source documentation, implements investment decisions based on the mandate, and holds the investments on behalf of the SMSF under a custodial arrangement, the SMSF may maintain only limited independent accounting records, source documentation or banking records, in which case the SMSF relies on the service organisation’s reports as a basis for preparation of their financial report.
Audit evidence in these circumstances may include a service auditor’s report on the operating effectiveness of the controls at the IDPS or service organisation (a type 2 report) in conjunction with:
- performance of analytical procedures on the balances and transactions of the SMSF reported by the service organisation, such as comparison of investment returns with market indices or comparison of expected contribution rates and benefit payments with changes in assets managed by the service organisation;
- reconciliation of balances and transactions reported by the service organisation with records maintained by the SMSF; and
- confirmation of balances or transactions recorded on behalf of the SMSF from the service organisation.
Testing at the transaction level may include: valuation using independent sources, confirmation of contributions with employers, verification of benefit payments against members’ records, for example personal bank statements, verification of dividend and trust distributions against independent sources, and by obtaining copies of correspondence, including advice provided to the SMSF regarding portfolio positions.
It may not be possible to obtain sufficient appropriate audit evidence with respect to material balances or transactions of the SMSF controlled by the IDPS or service organisation, in which case either the auditor qualifies their opinion on the basis of a limitation of scope, or issues a disclaimer of opinion if the effects or possible effects are material and pervasive. In the case of a modified audit opinion, the methodology and the details of how the auditor reached their conclusion form a part of the audit working papers.
Collectables and personal use assets are defined in Regulation 13.18AA of the SISR.
See regulation 8.02B of the SISR.
See regulation 8.02B of the SISR.
See subsection 10(1) of the SISA.
IDPS operators provide investors with an annual tax statement to provide consolidated information about their investment portfolio and to assist them with the completion of their tax obligations.