Questions Trustees Ask Before Their First SMSF Audit
Your first SMSF audit can seem daunting, particularly if you have never dealt with the process before. What will the auditor ask for? Which documents do you need? Will they question your investment decisions? And what happens if something isn't quite right?
The good news is that an SMSF audit is generally straightforward when your records are complete and your transactions have been properly documented.
The most important thing to understand is that an audit is primarily about evidence. The auditor needs to establish that the assets and balances shown in your financial statements are genuine and that the fund has complied with superannuation and tax requirements.
A first-year trustee who understands this distinction can prepare much more effectively. Rather than worrying about whether the auditor agrees with every investment decision, the focus should be on having the right paperwork to support the fund's activities.
This guide answers the questions trustees commonly ask before their first SMSF audit, explains what the auditor will look for and outlines what you should know before appointing an auditor.
Why does an SMSF need an annual audit?
Every self-managed super fund must undergo an independent annual audit, regardless of its size or how many transactions it has undertaken.
The requirement is set out in the Superannuation Industry (Supervision) Act 1993. Trustees must appoint an approved SMSF auditor for each income year, and the audit must be completed before the fund's annual return is lodged.
There is no exemption for smaller or inactive funds. An SMSF holding only cash in a bank account still has an annual audit obligation.
What does the auditor actually check?
There are two distinct parts to an SMSF audit.
1. Financial audit
The financial audit examines whether the fund's financial statements fairly represent its financial position.
The auditor wants to establish that:
The assets recorded in the accounts actually exist.
Bank and investment balances are accurate.
Property and other investments have been valued appropriately.
Member balances and transactions are correctly recorded.
Income and expenses have been properly accounted for.
2. Compliance audit
The compliance audit examines whether the fund has operated within superannuation law.
This includes matters such as:
The sole purpose test.
Restrictions on loans and financial assistance to members.
In-house asset limits.
Contribution acceptance rules.
Pension payment requirements.
Investment strategy obligations.
Restrictions on acquiring assets from related parties.
It is possible for a fund to have accurate financial statements but still fail its compliance audit.
For example, the figures may be correct, but the fund may have made an impermissible loan to a member's business or failed to pay the required minimum pension.
Understanding the difference between these two parts of the audit helps trustees appreciate why the auditor asks for more than just bank statements and financial reports.
What documents will the auditor need?
This is usually the first major question from new trustees.
The auditor needs evidence to support the information in the financial statements and demonstrate that the fund has complied with its obligations.
Documents issued by independent third parties are particularly important. A spreadsheet prepared by the trustees may help explain a transaction, but it generally does not replace independent evidence such as a bank statement, shareholding confirmation or property title search.
For a first-year audit, the document request is usually more extensive because there is no previous audit file to rely on.
Commonly requested documents include:
Trust deed: The original signed trust deed and any subsequent amendments.
Trustee paperwork: Trustee consents to act and ATO trustee declarations for relevant members.
Bank records: Statements covering the full financial year for every fund bank account, including term deposits.
Listed investments: Shareholding statements, dividend statements and broker or CHESS holding statements.
Property records: Contracts of sale, title searches, rates notices and evidence supporting the property's market value.
Lease agreements: Copies of leases, particularly where property is rented to a related party, together with evidence of rent payments.
Investment strategy: The fund's signed investment strategy and evidence that it was reviewed during the year.
Contribution records: Details of contributions received, rollovers and any notices of intent to claim a personal contribution deduction.
Pension records: Pension commencement documents, relevant actuarial certificates and evidence of pension payments.
Trustee minutes: Signed minutes documenting significant decisions and the fund's financial statements.
For a newly established SMSF, the auditor will also want to see the establishment documents and evidence that the initial contribution or rollover was actually received by the fund.
If the fund was established partway through the year, the first audit period generally begins on the establishment date rather than 1 July.
Getting this paperwork organised from the beginning makes the first audit considerably easier. Our guide to setting up an SMSF in Australia explains the initial paperwork trustees need to consider.
What questions will the auditor ask me?
Auditors often send trustees a list of specific questions during the audit. These are not necessarily signs that something is wrong. They are designed to establish whether particular transactions and arrangements comply with the relevant rules.
Some common examples include:
Question from the auditor | What they are checking |
|---|---|
Is the residential property occupied by a member or relative? | Sole purpose and in-house asset requirements |
How was the property's market value determined? | Valuation requirements |
What is the relationship between the fund and this supplier or payee? | Related-party transactions and commercial arrangements |
Why is there a deposit in the bank account without supporting contribution records? | Contribution acceptance and member allocation |
Was the minimum pension paid before 30 June? | Pension payment requirements |
Has the investment strategy been reviewed this year? | Trustee investment strategy obligations |
The important thing is to provide evidence rather than simply explain what happened.
For example, if the auditor asks whether a property is leased on commercial terms, saying that the rent is fair may not be sufficient. They may want to see the lease, evidence of market rent and bank statements showing that the rent was actually paid.
An auditor's question is not an accusation. It is part of the process of gathering sufficient evidence to support their opinion.
Which SMSF assets attract the most attention?
Not all investments are equally difficult to audit.
Cash and listed shares are relatively easy to verify because independent records are readily available. Other assets require more supporting documentation and judgement.
Property
Property is one of the most common sources of audit questions.
The auditor will generally want to confirm:
The property is legally held by the SMSF or the appropriate holding trust.
Its market value is supported by suitable evidence.
The property is being used in accordance with superannuation law.
Any lease arrangements are properly documented.
Rent is being paid in accordance with the lease.
Residential property cannot generally be occupied or used by members or their relatives.
Commercial property can be leased to a related business where the property qualifies as business real property and the relevant requirements are met. The lease must be properly documented and conducted on commercial terms.
Our article on SMSFs holding commercial property explains how these arrangements work.
Unlisted investments and private loans
Investments in private companies, unit trusts and other unlisted entities can involve more complicated audit requirements.
The auditor may request:
Share or unit registers confirming the SMSF's ownership.
Financial statements for the underlying entity.
Evidence supporting the investment's market value.
Loan agreements and repayment records.
Documentation establishing whether related-party rules apply.
Where an SMSF invests in a related unit trust, the in-house asset rules may apply unless the relevant conditions for an exclusion are satisfied.
These arrangements should be reviewed carefully before the investment is made, rather than waiting until the annual audit.
Collectables and personal-use assets
SMSFs can invest in certain collectables and personal-use assets, including artwork, wine, classic cars and bullion, but additional restrictions apply.
Under the relevant superannuation regulations, trustees must consider requirements relating to storage, insurance, use and disposal.
The auditor may ask where the asset is stored, whether it is insured in the fund's name and whether a related party has used or enjoyed it.
For example, artwork owned by an SMSF cannot simply be displayed in a trustee's home for personal enjoyment.
Trustees considering adding gold to an SMSF portfolio should understand the storage and insurance requirements before purchasing the asset.
Does my accountant also conduct the audit?
This is another common question, and the answer is that the SMSF audit must be independent.
An approved SMSF auditor must meet the applicable independence and professional requirements. In particular, an auditor cannot simply audit financial information that they have prepared themselves where doing so creates an unacceptable self-review threat.
In practice, many accounting firms arrange for an independent external auditor to complete the audit.
Other relationships can also create independence problems, including where the auditor or a close family member has an interest in the fund, or where reciprocal audit arrangements exist between firms.
The important point for trustees is that the auditor must be independent of the work being audited.
The trustees remain responsible for appointing the auditor, even where their accountant or administrator coordinates the process.
Guidance Accounting's SMSF support packages can help coordinate the annual compliance process and independent audit arrangements. The auditor still forms their own opinion and reports any relevant contraventions to the ATO.
What should I ask before appointing an SMSF auditor?
Not all audit engagements are the same. Before appointing an auditor, it is worth asking a few questions to make sure they are suitable for your fund.
Consider asking:
Are you registered with ASIC as an approved SMSF auditor? You can check the auditor's registration through the ASIC register.
How much experience do you have with SMSFs like mine? An auditor who regularly deals with listed investments may have less experience with complex property or limited recourse borrowing arrangements.
How do you manage independence? Ask about relationships with the accountant preparing the financial statements and any referral arrangements.
What is your expected turnaround time? Find out how long the audit normally takes once all the required documents have been provided.
How do you handle potential breaches? Understand what happens if the auditor identifies a possible contravention during the audit.
Do you maintain professional indemnity insurance and undertake ongoing professional development? These are relevant professional matters to discuss.
You should also read the engagement letter carefully.
It should explain the scope of the audit, the responsibilities of the trustees, the auditor's reporting obligations and the fees involved.
Remember, the cheapest audit is not necessarily the best option. A thorough auditor may ask more questions, but that is part of protecting the fund and its members.
What happens if the auditor finds a breach?
Finding a compliance issue does not automatically mean the SMSF will be penalised or lose its complying status.
The auditor may qualify the audit report if they cannot obtain sufficient evidence or identify a problem with the fund's financial statements or compliance.
Separately, the auditor may be required to lodge an auditor contravention report with the ATO if the issue meets the relevant reporting criteria.
The ATO considers the circumstances and seriousness of the contravention when deciding what action to take.
Possible responses include:
An education direction.
A rectification direction.
An administrative penalty.
An enforceable undertaking.
Disqualification of a trustee.
In serious cases, the fund being made non-complying.
A non-complying SMSF can face particularly severe tax consequences, so trustees should take compliance issues seriously.
However, not every reported contravention results in a penalty. The nature of the breach, its value, whether it has been rectified and whether it has happened before can all be relevant.
If an issue is identified, trustees should obtain appropriate advice promptly and consider what corrective action is available.
Our guide to common SMSF compliance breaches explains the problems auditors frequently encounter.
When does the audit need to be completed?
The SMSF audit must be completed before the annual return is lodged.
This means trustees should not leave the audit until the last minute. The auditor needs the financial statements and supporting documents, which in turn depend on the fund's transactions being properly recorded and reconciled.
For first-year funds, the lodgment deadline is generally 28 February, although the applicable date should always be confirmed for the fund's circumstances.
Established funds may have different lodgment dates depending on their lodgment history and whether previous returns were lodged on time.
It is sensible to work backwards from the annual return deadline and allow enough time for the accountant to prepare the accounts, the auditor to complete their work and any outstanding questions to be resolved.
You can find more information in our guide to SMSF annual return deadlines and penalties.
Frequently Asked Questions
Can my accountant prepare the accounts and also be the auditor?
The audit must be independent. Where the accountant has prepared the financial statements involving significant judgement, auditing that work creates a self-review threat that cannot generally be adequately safeguarded.
The accountant can still prepare the accounts, maintain the records and communicate with the independent auditor.
How long does a first SMSF audit take?
It depends more on the completeness of the records than the size of the fund.
A straightforward fund with all documents supplied promptly may be audited relatively quickly. Missing property documents, unsigned investment strategies or incomplete related-party records can create delays.
Complex investments and borrowing arrangements can also require additional work.
Does an SMSF with no transactions still need an audit?
Yes. An SMSF must continue to meet its annual audit and lodgment obligations even if it has been inactive and holds only cash.
If the trustees no longer intend to operate the fund, they should consider whether it is appropriate to wind it up formally.
Who appoints and pays the SMSF auditor?
The trustees are responsible for appointing the auditor and ensuring the appointment is made within the required timeframe, generally at least 45 days before the annual return is due.
The audit fee is paid by the fund, provided the expense is properly incurred by the SMSF.
An accountant or administrator may coordinate the appointment, but the trustees remain legally responsible for the fund's obligations.
What does the ATO focus on during SMSF audits?
Areas that can attract attention include market valuations of unlisted and non-cash assets, related-party property arrangements, non-arm's-length income and expenditure, and illegal early access to superannuation.
Trustees should ensure that valuations are properly supported and that related-party transactions are documented and conducted in accordance with the rules.
Preparing for your first SMSF audit
Your first SMSF audit does not need to be a stressful experience.
The key is to keep good records throughout the year rather than trying to reconstruct everything when the auditor requests it.
Before the audit begins, make sure you can locate:
Your signed trust deed and establishment documents.
The fund's bank and investment statements.
Your current investment strategy and evidence of its review.
Contribution and rollover records.
Property, lease and valuation documents, where relevant.
Pension commencement and payment records, where applicable.
Trustee minutes and supporting documents for significant decisions.
If you are unsure whether your records are sufficient, speak with your SMSF accountant before the audit begins.
At Guidance Accounting, we help SMSF trustees manage their annual compliance obligations and prepare for the independent audit process.
If you are establishing your first SMSF or approaching your first annual audit, contact Guidance Accounting to discuss how we can help.
Good SMSF compliance starts with good record-keeping. The earlier you get organised, the smoother your first audit is likely to be.
Disclaimer: This article provides general information only and does not constitute financial, taxation or legal advice. SMSF rules and audit requirements can be complex and depend on individual circumstances. Trustees should obtain professional advice before making decisions about their fund. Legislative requirements and ATO guidance may change, so information should be checked against the rules applying at the relevant time.