In auditing the SMSF’s compliance with the requirements regarding establishment and operation of the SMSF, the auditor conducts testing to determine that:

1. the SMSF meets the definition of a SMSF;
2. the trustees are not disqualified persons;
3. the SMSF’s minutes and records are retained for at least 10 years;
4. the SMSF has and retains trustee declarations of duties signed by any new trustees after 30 June 2007 for at least 10 years;
5. the SMSF’s accounting records are kept and retained for five years;
6. annual financial reports have been prepared for the SMSF, either signed by two individual trustees, two directors of the corporate trustee or the sole director of the corporate trustee, and retained for five years along with the SMSF’s accounts;
7. the SMSF has not entered into any contract or act that may prevent or hinder the trustees from properly performing or exercising their powers and functions; and
8. an investment strategy which takes into account the risk, diversification, cash flows and liquidity of the SMSF has been formulated, given effect and reviewed regularly. The investment strategy must also consider if insurance is relevant to the members of the fund.

In addition, the auditor can expect the trustees to provide documents within 14 days that are requested in writing and are relevant to the preparation of the auditor’s report, as required under the SISA.^[137]

Definition of SMSF

To determine if the SMSF meets the definition of a SMSF,^[138] the auditor may conduct procedures including:

• examination of the fund’s governing rules, member applications and minutes of trustees’ meetings to identify the members and trustees and that they comply with the relevant legislation;
• a company search to ascertain if the directorship of a trustee company is consistent with the requirements of section 17A of the SISA;
• enquiry to identify members, employers and trustees and their relationships with one another;
• testing SMSF payments to ensure no payments have been made to the trustees for duties or services to the SMSF in their capacity as trustee. Section 17B of the SISA allows situations whereby a trustee and director of corporate trustees may be remunerated for their non-trustee duties or services; and
• obtaining trustee representations.

Disqualified Persons

An individual SMSF trustee is disqualified under the SISA^[139] if they are:

1. convicted of an offence in respect of dishonest conduct in any country;
2. the subject of a civil penalty order under SISA;
3. an insolvent under administration (includes an undischarged bankrupt under the Bankruptcy Act 1966); or
4. disqualified by the ATO.

A corporate trustee is disqualified if:

1. a responsible officer is a disqualified person; or
2. the company is in receivership, administration, provisional liquidation or has begun winding-up proceedings.

Ordinarily, the auditor verifies that the trustees are not disqualified by obtaining trustee representations to that effect. For new engagements, as well as periodically for continuing audits, the auditor seeks independent verification of the trustee status. The ATO publishes a disqualified trustee register, that is compiled from the Government Notices Gazette. The register is updated quarterly and lists individuals that have been disqualified since 2012.

In addition, ASIC provides details of persons disqualified from acting as corporate trustees. Auditors are able to search the banned and disqualified register on the ASIC website, for information about individuals who have been disqualified from involvement in the management of a company.

During the course of the audit the auditor remains alert to circumstances which may indicate that a trustee may be technically disqualified, such as personal financial difficulties or a trustee’s involvement in legal proceedings. In this case, the auditor may make enquiries such as checking the trustee’s details against the Australian Financial Security Authority’s National Personal Insolvency Index (NPII) that lists bankrupts, as well as the Bankruptcy Register Search (BRS), or other commercial databases providing record search facilities.

Maintenance and Provision of SMSF Records

The auditor obtains representations from the trustees that the minutes and records of meetings have been held for at least 10 years, that accounting records and financial reports have been retained for 5 years, that member or beneficiary reports have been retained for at least ten years, and that records of all changes to the fund trustee are up to date and for trustees appointed after 30 June 2007, they have signed and retained a trustee declaration for at least ten years.^[140]

The SISA requires that the records be kept in the English language or a form that is readily convertible to English^[141] and be kept in Australia (or another country if the Regulator gives approval for the records to be kept in another country). Generally, investment documentation in a foreign language required as audit evidence, is translated at the SMSF’s expense into English. This facilitates more efficient and effective auditing and quality control.

The auditor may request that the trustees provide documents required to conduct the audit. If trustees fail to provide the documents required within the specified time period, this is a compliance breach which, if material, should result in a qualified auditor’s report, provided a written request was made under subsection 35C(2) of the SISA and the documents were not supplied within 14 days. ATO reporting is also required if the information has not been provided to the auditor within 28 days of the auditor’s request for the information.

Contracts Restricting Trustees’ Functions and Powers

The auditor considers contracts entered into on behalf of the SMSF, the governing rules and any other arrangements in the light of the SISA’s prohibition on entering a contract or doing anything which prevents the trustees from, or hinders the trustees in, properly performing or exercising their functions and powers.^[142] The auditor may obtain representations from the trustees that no such arrangement has been entered into.

Investment Strategy

The SISR^[143] requires the trustees of a SMSF to formulate, regularly review and give effect to an investment strategy that has regard to all the circumstances of the SMSF, including:

• the risk involved in making, holding and realising, and the likely return from, the SMSF’s investments, having regard to its objectives and expected cash flow requirements;
• the composition of the SMSF’s investments as a whole, including the extent to which they are diverse or involve exposure of the SMSF to risks from inadequate diversification;
• the liquidity of the SMSF’s investments, having regard to its expected cash flow requirement;
• the ability of the SMSF to discharge its existing and prospective liabilities; and
• whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

Ordinarily, the investment strategy is documented in writing and the auditor assesses that the trustees have properly considered all the circumstances of the SMSF, however the auditor is not required to assess whether the investment strategy is adequate to meet the long term investment needs of the SMSF and the auditor states in their report that “no opinion is made on the investment strategy or its appropriateness to the fund members”.

In order to determine whether the trustees have given effect to the investment strategy, the auditor assesses whether the investments made during the period are invested according to the documented investment strategy as approved by the trustees. Case law provides further authority to the requirement for SMSF auditors to conduct their enquiries independently and to communicate any material matters to the trustee directly.^[144]

The auditor obtains evidence as to whether the trustees have reviewed or modified their investment strategy during the period to accommodate the SMSF’s changing needs and changes in the investment environment.

The frequency that a trustee should review the fund’s investment strategy in order to satisfy the requirements of regulation 4.09 of the SISR is not specified, and it is the role of the trustee to determine what is appropriate to meet the requirement. The expectation from the ATO is that this would be at least annually. The role of the auditor is to use professional judgement in determining if this requirement has been met.